Economy Matters December 2017

1
FOREWORD
DECEMBER 2017
T
he Union Budget 2018-19 is going to be the last full Budget of the incumbent government and
will be keenly watched for the twin provisions of driving investment and growth on the one
hand while maintaining fiscal discipline on the other. CII expects Budget 2018-19 to focus on
four key areas: investment revival, job creation, agricultural growth and the social sectors of education
and healthcare. CII has recommended that the government stick to fiscal prudence which in turn will
help in softening interest rates and boosting GDP growth in the near to medium-term. While a slippage
from the budgeted target of 3.2 per cent of GDP fiscal deficit for FY18 looks imminent now, an attempt
should be made to raise additional resources so as not to diverge from the targeted deficit level by a
large magnitude.
On the domestic front, the Indian economy is displaying nascent signs of recovery after navigating
through the economic disruptions caused by demonetisation and the implementation of GST. In this re-
spect, while the advance estimates of GDP growth give the impression of a downturn, in reality, growth
has bottomed out in the first quarter of the current year and is now on a recovery. It is possible that the
advance estimates will be revised up once more data is available for the third and fourth quarter of the
year. Additionally, several sectors have displayed a recovery in growth following the slowdown around
the initial period of the implementation of GST. At the present, much of the uncertainty generated by
the introduction of GST has eased even though some issues remain to be resolved. At the same time,
robust foreign investment flows, booming stock markets, burgeoning foreign exchange reserves and
stable macro-economic conditions have kindled hope and confidence among investors that the recov-
ery process is going to firm up in 2018.
As per the latest estimates of the World Bank, the global economic growth is expected to accelerate in
2018 as global trade and investment continue to recover along with firm commodity prices benefitting
the commodity exporting developing economies. More importantly, India is likely to reclaim its position
as the fastest growing economy from China in 2018, with growth expected to accelerate to 7.3 per cent
in the year. The World Bank highlighted that the growth potential of Indian economy is huge; however
it needed to take appropriate steps to boost its investment prospects.
Chandrajit Banerjee
Director General, CII

EXECUTIVE SUMMARY
ECONOMY MATTERS 4
FOCUS OF THE MONTH
Union Budget 2018-19 will be the first post-GST budget
of India. Being the last full Budget of the government, it
will be keenly watched for the twin provisions of driving
investment and growth on the one hand while maintain-
ing fiscal discipline on the other. There are several key
themes around which the forthcoming budget is likely to
revolve around. One such theme is likely to be de-stress-
ing the rural economy by formulating policies to lift the
rural incomes. Further, the beleaguered banking sector
which received a fresh stimulus in the form of recapi-
talisation plan announced by the government in October
2017 needs clarity regarding the finer details of the plan.
This is likely to be spelled out by the government in the
forthcoming budget. Additionally, there is also a pressing
needs for reviving investment in infrastructure projects
which would serve as a necessary precursor for boosting
GDP growth. Apart from these key themes, there are sev-
eral others which need urgent government intervention
in the forthcoming Union Budget. Sectoral experts pro-
vide an insight into these themes in this month’s Focus
of the Month.
DOMESTIC TRENDS
As per Central Statistical Organisation (CSO) advance es-
timates, the GDP for 2017-18 is expected to moderate to
6.5 per cent as compared to 7.1 per cent posted in 2016-
17. Gross Value Added (GVA) at basic prices is expected to
clock 6.1 per cent in the current fiscal as compared to 6.6
per cent in the last fiscal. Given these estimates, the GDP
growth is expected to move sharply from the 6 per cent
clocked in the first-half of FY18 to 7 per cent in the second
half, achieving which should not be much difficult given
a low base and waning of GST impact. The moderation
in GDP in the current fiscal is attributable mostly to the
transitory disruptions caused by the implementation of
the Goods and Services Tax (GST), and weak agricultural
growth. In some positive news for the economy, industri-
al output growth rose to a 25-month high of 8.4 per cent
in November 2017 from 2.0 per cent in October 2017 fol-
lowing a broad-based production uptick. Going forward,
we could see the uptick in industrial growth to broadly
continue owing to a slew of policy measures implement-
ed by the government. CPI inflation, meanwhile, rose to
5.2 per cent in December 2017, up from 4.9 per cent in
November 2017 partly on low base of last year. This is the
highest level of inflation in the last 17 months and was
driven by higher inflation in housing, food and personal
care & effects. On the external front, a sharper than ex-
pected rise in imports of gold, and pearls, precious and
semi-precious stones, amid a considerable decline in the
pace of growth of non-oil merchandise exports, bloated
the merchandise trade deficit to a three-year high of
US$14.9 billion in December 2017.
POLICY FOCUS
This section covers the major policy changes announced
by government/RBI in the month of December 2017-Janu-
ary 2018. Amongst the prominent policy news announced
during the month was that the Union Cabinet chaired by
the Prime Minister Narendra Modi has given its approv-
al for a slew of FDI reforms in sectors such as airways,
construction and retail. Further, in a significant develop-
ment, the GST Council has approved mandatory com-
pliance of e-way bill for intra-state movement of goods
from 1st
June, 2018. The Cabinet has also approved the
introduction of the Consumer Protection Bill, 2017, to
amend the Consumer Protection Act, 1986. The bill seeks
to enlarge the scope of the existing act and proposes
stricter actions against misleading advertisements and
food adulteration. The Companies (Amendment) Bill,
2017 which seeks to bring about major changes in the
Companies Act, 2013, has also been passed by the Rajya
Sabha in the winter session. Additionally, the Lok Sabha
has approved a bill to raise the maximum cess levied on
luxury cars from 15 per cent to 25 per cent. Moreover, in
order to make REITs (Real Estate Investment Trusts) and
InvITs (Infrastructure Investment Trusts) more attractive
to investors, markets regulator Securities and Exchange
Board of India (SEBI) has notified relaxed norms to allow
these trusts to raise funds by issuing debt securities. SEBI
has also recently formed a new department that will re-
view company filings for debt raising and address issues
that listed companies face in bankruptcy court.
GLOBAL NEWS
According to the latest issue of Global Economic Pros-
pects for 2018 released by the World Bank, the global
economic growth is expected to edge up to 3.1 per cent
in 2018 after posting a much stronger-than-expected
growth of 3 per cent in 2017, as the recovery in invest-
ment, manufacturing, and trade continued, and as
commodity-exporting developing economies benefitted
from firming global commodity prices. As per the World
Bank’s forecast, India’s growth is expected to pick up to
7.3 per cent rate in fiscal year 2018-19, from 6.7 per cent
in 2017-18. The World Bank highlighted that the growth
potential of Indian economy is huge; however it needs to
take steps to boost its investment prospects. In the US,
meanwhile, the Senate has approved a US$1.5 trillion tax
bill which provides permanent deep tax breaks to corpo-
rations and temporary tax cuts to individuals. The law will
create a single corporate tax rate of 21 per cent, begin-
ning in 2018, as compared to the current 35 per cent.

5
FOCUS OF THE MONTH
Pre-Budget Expectations: 2018-19
DECEMBER 2017
on paper to achieve in the current juncture, given slip-
pages on account of likely lower direct tax collection
due to weaker growth outlook, lower RBI dividend
transfer and excise duty cut on petrol and diesel effec-
tive October 2017. Though some slippage was expected
in view of the teething troubles in GST implementation,
but such temporary over-shooting of the fiscal defi-
cit target is passable as the long-term benefits which
would accrue from GST implementation outweigh the
temporary short-term deviation by a huge margin.
India needs to invest in human infrastructure to best
leverage its demographic dividend. At present the
government expenditure on social sector spending is
abysmally low. This needs to be rectified at the earliest
and what better opportunity than the Union Budget to
make a beginning in this direction. Additionally, there
is also a pressing need for reviving investment in infra-
structure projects which would serve as a necessary
precursor for boosting GDP growth. Pursuing reforms
in the power and electricity sector are also much need-
ed in the current milieu. Apart from these key themes,
there are several others which need urgent govern-
ment intervention in the forthcoming Union Budget.
Sectoral experts provide an insight into these themes in
this month’s Focus of the Month.
U
nion Budget 2018-19 will be the first post-GST
budget of India. Being the last full Budget of
the government, it will be keenly watched for
the twin provisions of driving investment and growth
on the one hand while maintaining fiscal discipline on
the other. There are several key themes around which
the forthcoming budget is likely to revolve around. One
such theme is likely to be de-stressing the rural econo-
my by formulating policies to lift the rural incomes. Ag-
riculture sector is expected to witness anaemic growth
in the current fiscal due to uneven spread of monsoons.
Hence, the livelihood of the farmers is under stress
which needs urgent intervention from the government
as still a significant proportion of population in agri-
culture dependent. Further, the beleaguered banking
sector which received a fresh stimulus in the form of
recapitalisation plan announced by the government in
October 2017 needs clarity regarding the finer details of
the plan. This is likely to be spelled out by the govern-
ment in the forthcoming budget.
Adhering to the ambitious fiscal deficit target of 3.2 per
cent of GDP for FY18 is something which looks difficult

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FOCUS OF THE MONTH
ECONOMY MATTERS
How can the Government Address the Issue of
Fiscal Deficit without Raising Taxes?
W
ith almost three weeks to go before the Un-
ion Budget 2018-19, there are hopes and ap-
prehensions about what is in store for the
economy and industry?
The Budget will be presented at a time when economic
growth has moderated. As per the Advance Estimates,
GDP growth is estimated to slow to 6.5 per cent in 2017-
18 from 7.1 per cent in the previous year. The secular
decline in gross fixed capital formation from a high of
34 per cent of GDP in 2011-12 to 26 per cent in 2017-18 is
another matter of concern. Hence, driving up the econ-
omy by stimulating investment and growth assumes
special significance.
However, maintaining fiscal prudence is also important.
With global rating agencies attaching high premium to
the fiscal numbers, a conservative fiscal deficit metric
helps attract foreign investment.
Besides, with rising global oil and commodity prices
fuelling inflationary expectations, a healthy fiscal bal-
ance becomes necessary. But, in the first eight months
of FY18, the fiscal deficit has touched 112 per cent of the
full-year target, raising concerns about whether the
government can meet the goal of 3.2 per cent of GDP
this fiscal.
The Budget has to perform a balancing act between
maintaining fiscal prudence and providing a growth
stimulus. This would imply addressing the issue of fis-
cal deficit without raising taxes. What are the available
options?
With tax revenues yet to stabilise following the im-
plementation of GST, it is important to consider other
options to augment revenue. The success of the disin-
vestment programme this year is an example. The lat-
est figures show that the government has garnered Rs
52,378 crore as against the target of Rs 72,500 crore for
the year. It is crucial that the government takes steps to
meet the target through strategic sale of PSUs. It could
also contemplate privatising dormant or idle assets of
major PSUs. This would not only result in efficient use
of resources but also generate revenue for the govern-
ment.
Further, the government should undertake a census
of land and other assets locked up in central and state
PSUs that have turned economically unviable and can-
not be revived. The same should be monetised or used
for affordable housing and other infrastructure projects
in urban areas.
Rationalising expenditure
It is also important to rationalise expenditure, for which
the government should continue with the Aadhaar-
enabled direct benefit transfer for food and fertilizers.
For fertilizers, it should push for direct benefit transfer
for all fertilizers so that the subsidy is delivered directly
to farmers. India could also consider setting up an in-
dependent fiscal council for strengthening the fiscal re-
sponsibility framework, as suggested by the IMF.
Given the macro-economic compulsions, some slippage
of the fiscal target is understandable. A flexible fiscal
policy would help address dynamic business situations
that may need greater public expenditure to spur de-
mand and growth. But, the government must ensure
that the overrun is kept to a minimum and fiscal pru-
dence is not compromised.
(This article first appeared in The Hindu dated 14th
January, 2018)

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FOCUS OF THE MONTH
DECEMBER 2017
Opportunity to Make India Globally Competitive
T
he fifth Budget to be presented by Mr Jaitley in
February next year will be significant for many
reasons. India has witnessed the implementa-
tion of one of the most transformational indirect tax re-
forms, the Goods and Services Tax (GST). The economy
is also at a juncture where it has shown an optimistic
growth at 6.3 per cent for the second quarter as against
the 5.7 per cent low in the previous quarter. The manu-
facturing activity too has shown acceleration with a
growth at 7 per cent as against 1.2 per cent in the earlier
quarter. The growth numbers provide the confidence
that the macro-economic stability is entrenched and
that there is need for the next level of reforms that can
take the growth to a higher level. Finally, this will be the
last full budget before the next general elections in May
2019 and expectations are that it will bring in a lower
tax regime as promised earlier by the Finance Minister.
All these heightened aspirations come with the pres-
sure on the government for meeting the fiscal deficit
target of 3.2 per cent of GDP for the current year. More
so, when the government has exhausted 96 per cent of
its annual fiscal deficit target in the first seven months
of the fiscal year. This is way higher compared to 73 per
cent exhausted during the same period in the last fiscal
year. Rising crude prices and large farm loan waivers by
states have given rise to the concern about fiscal slip-
page for the Central Government from its budgeted tar-
get of 3.2 per cent of GDP for FY18 and for the combined
fiscal deficit of the Central and state governments. The
revenue projections from the GST remain unclear, par-
ticularly in view of the refunds and input tax credits to
be given out.
Like any reform of this magnitude, the implementa-
tion of GST has had its share of challenges. Businesses
have been grappling with transitional and implementa-
tion issues, for instance relating to continuation of area
based exemptions, transition of credit, and treatment
of stock to name a few. However, what is important is
that the government has been open to listening to the
taxpayers. Both the Centre and the State governments
have been receptive to the taxpayers’ concerns and
have taken all possible measures to address them and
smoothen the process of transition to GST.
The GST Council, at its 23rd
meeting held in November
this year, delivered the first major tranche of GST re-
forms by substantially pruning the number of items in
the 28 per cent rate category, from 227 to only 50 items.
This reform paves the way for India to evolve to three-
rate structure consisting of a core GST rate bracketed
by a merit rate and a demerit rate. The Council also
announced compliance-related reforms. In particular,
taxpayers with annual aggregate turnover up to Rs 1.5
crore have been allowed to file GSTR-1 on a quarterly
basis. An important implication of the comprehensive
list of items that were subjected to rate reduction is its
potential inflation-reducing effect at a time when infla-
tion has started to inch up again.
While some of the issues continue to plague the indus-
try, the Government is listening and taking the neces-
sary steps, where possible. Extension of time for filing
returns, postponement of e-way bills, the announce-
ment of the government’s intent to include petroleum
products in GST base and undertake a complete review

8
FOCUS OF THE MONTH
ECONOMY MATTERS
of the GST rates are examples of the positive steps be-
ing taken.
Another significant reform measure that the industry
looks forward to is the reduction in the corporate tax
burden. The combined burden of corporate tax and
dividend distribution tax on the Indian corporate sec-
tor is 46 per cent. And, even as the FM has promised to
reduce the tax burden to 25 per cent, globally the tax
rates are already moving lower in the range of 15-20 per
cent. The US has reduced the 35 per cent corporate in-
come tax rate to 20 per cent, with effect from 2019. The
United Kingdom proposes to reduce its corporate tax
rate of 20 per cent to 17 per cent in the next four years.
Even the competing jurisdictions such as Vietnam and
Thailand have a tax rate of 20 per cent.
The US tax reforms will have a domino impact on several
jurisdictions across the world. India too needs to shape
its domestic tax policies to sustain its global competi-
tiveness. The FM has promised a reduction in the corpo-
rate income tax rate to 25 per cent, to be accompanied
by the withdrawal of incentives. The Government has al-
ready withdrawn some of the incentives and laid down
the roadmap for phasing out the remaining ones. It is
now time that a reduction in the corporate tax rate be
announced, in line with the global trend. There is also
a need to rationalise the MAT and tax on distribution of
dividends to lower the overall burden on the taxpayers.
For the individual taxpayers, the basic exemption limit
of Rs 2.5 lakhs should be revised upwards to Rs 5 lakhs.
The tax rate for taxpayers in the income bracket of Rs 5
lakhs to Rs 10 lakhs should be reduced from the current
20 per cent to 10 per cent. A reduction in the tax bur-
den will help push consumption and demand by putting
more money in the hands of the taxpayers, particularly
in the lower and middle income groups.
The Government has taken many positive steps to bring
consistency in tax policy. Significant clarifications were
issued to bring clarity and certainty in taxation and
steps are being taken to improve ease of compliance
and improve dispute resolution. There are still some im-
portant aspects that need to be addressed.
Finance Bill, 2017 had introduced a new section (50CA)
to provide that where consideration for transfer of
share of a company (other than quoted share) is less
than the Fair Market Value (FMV), the FMV shall be
deemed to be the full value of consideration for com-
puting income under the head capital gains. There is a
need to provide a carve out for certain genuine transac-
tions such as transfer of shares amongst group compa-
nies as it does not lead to a third party transfer. Further,
the group transactions can be defined to include trans-
fer of shares between holding and subsidiary company
and transfer of shares between fellow subsidiaries. Ex-
emption should also be given for the transfer of assets
between relatives on account of family settlement or
otherwise. Further, the provisions should not apply to
a minority shareholder who do not hold have control or
management rights.
Another important issue is exemption from tax in the
case of any transfer of capital asset being shares held
in Indian company by amalgamating foreign company
to the amalgamated foreign company, as per the pro-
visions of section 47(via). In case of merger of Indian
companies, there is specific provision under section
47(vii) stating that such transaction would be exempt
in the hands of shareholder as well. However, similar
provision is absent in respect of merger of two foreign
companies though the main transaction of merger is ex-
empt under section 47(via) of the Act. In the absence
of explicit provision, Revenue may adopt taxable posi-
tion. Government should specify, through a legislative
amendment, that in the case of merger of two foreign
companies, exemption similar to that u/s 47(vii) is avail-
able to shareholders as well. The purpose of allowing
merger of foreign companies would be defeated with-
out extending similar exemption in the hands of share-
holders of amalgamating company.
In recent times, India has been considered as a hub for
carrying out R&D and other technical activities by the
Multi-National Enterprises (MNEs). India competes with
several other countries including Thailand, Malaysia,
China, Hungary, Indonesia, Brazil, Mexico, Russia, Viet-
nam and Singapore for investment in these areas. These
countries provide incentives to MNEs to set-up Global
R&D hub in their countries. CBDT’s Circular 06/2013 lists
down the conditions for a R&D development center to

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FOCUS OF THE MONTH
DECEMBER 2017
qualify as a contract R&D center with insignificant risks.
Economically significant functions involved in research
or product development cycle have to be performed by
the foreign AE through its own employees. The condi-
tions in Circular 6 act as a barrier to these companies to
scale up their Indian operations. The terms of Circular 6/
2013 need to be reworked to encourage multinationals
to move their key decision making to India, to move the
Indian R&D centres up the value chain.
Another significant dimension that needs attention
is the improvement in the current dispute resolution
mechanisms. The government has taken many positive
steps in this direction, but further measures are need-
ed. For instance, to improve the functioning of the Au-
thority for Advance Ruling (AAR), mandatory time limit
of 180 days from the end of month in which application
is filed should be prescribed for passing the AAR order,
after which the request will be deemed to have been ac-
cepted. Any adjournment leads to delay in getting the
ruling. It may be mandated that for purpose of seeking
adjournment for hearing fixed before AAR or issuing
report without providing at least 10 clear days before
hearing, prior approval of CCIT’s may be taken.
The global growth projected by IMF to be robust at 3.6
per cent in 2017 and 3.7 per cent in 2018 portends well
for India and would support demand for Indian exports.
The IMF’s latest projection of India’s growth at 7.4 per
cent in 2018 shows that India would overtake China
once again in 2018 and retain this position thereafter.
The forthcoming Budget should continue the themes of
ease of doing business and increasing investments, es-
pecially in infrastructure and rural development.
(Note: All data referred in the article is latest data available at the time of article submission)

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FOCUS OF THE MONTH
ECONOMY MATTERS
Expectations from the Union Budget 2018-19
The advent of winter and the Christmas season, her-
alds the commencement of the Annual Budget exer-
cise of the Central Government every year. Since last
year, the Budget Presentation date has been advanced
by one month so that all activities are initiated well in
time for the next financial year and the requirement
of vote on account is obviated. Accordingly, this year
also the Budget exercise has already commenced and
it is expected that the Finance Minister will present the
Budget around 1st
February 2018.
A very critical aspect of the Budget preparation is the
segregation of duties between the legislature, judiciary
and the executive. However, the analysis of the Annual
Budget over the years does reveal that changes in the
law have been effected to overcome the decisions of
our highly organized legal system, which, in a number of
instances have been done on a retrospective basis. This
anomaly has to be addressed on an urgent basis and
this will definitely result in a more complete and econo-
my – focussed Budget which will not carry the baggage
of amendments to the old law. In fact, a zero based ap-
proach to the Budget preparation will by itself result in
unleashing the Indian economy to greater heights in the
global arena.
The financial year 2017-18 was a very eventful and tumul-
tuous one. The fall out of the Government’s demoneti-
zation strategy of 8th
November 2016 continued partially
in this year. Further, the introduction of GST from 1st
July
2017 was a very revolutionary and bold step and it affect-
ed the various businesses alongwith the consequential
impact on GDP growth. However, the positive implica-
tions of GST are expected to finally start accruing in a
significant manner from financial year 2018-19 onwards
and GDP growth is expected to bounce back. Since, the
primary area of indirect taxation has already been cov-
ered through GST, the role of the Union Budget will be
fairly restricted this year. In fact, the GST Council is ac-
tively engaged in meeting every two / three months and
addressing the teething problems of GST including rate
rationalization (i.e. reduction in the number of slabs)
and quarterly return filing. Minor changes in customs
duty is also expected as a degree of rationalization and
also for ensuring that the same is in line with the GST
rates for various products. Further, the Government has
already announced the formation of a Committee for
drafting of a new Direct Tax Code and therefore major
changes are not expected in the realm of Income Tax. In
addition, a number of state elections are scheduled and
the Parliamentary elections are also due in mid-2019 and
therefore the budgetary changes are not expected to
be very material or transformational.
In the context of the above, the Union Budget is expect-
ed to primarily focus on rationalization of the Income
Tax rates and reduction / withdrawal of tax exemptions
and deductions as announced by the Government ear-
lier. In fact, the Government has already conducted vari-
ous interactions with industry for simplification of the
Tax Laws and reduction of tax disputes and based on
representations made earlier, it is expected that some
of the suggestions would get captured in the Budget.
Some of the overall recommendations on Direct Taxes
are given below:
1. Corporate Tax rates should be reduced for all cor-
porates whose rates have not been reduced in last
year’s Budget. In fact, it should be brought down to

11
FOCUS OF THE MONTH
DECEMBER 2017
25 per cent and surcharge and cess should be com-
pletely eliminated. This will help in stimulating sav-
ings and growth which in turn will help in increasing
the consequential tax base for greater investment
in future.
2. The introduction of Income Computation and Dis-
closure Standards (ICDS) has itself become a sub-
ject matter of excessive complications and disputes
specially in the context of the recent decision of the
Delhi High Court which has particularly highlighted
that various legal decisions of the High Courts and
the Supreme Court are being undone by the same
like foreign exchange gain/losses treatment, con-
cept of prudence in accounting, valuation of shares
in stock-in-trade etc. It is recommended that ICDS
be withdrawn/deferred for the time being.
3. The concept of Place of Effective Management
(POEM) for determination of residency of compa-
nies has also emerged as another potential area of
tax disputes and it may deter foreign enterprises
from investing in India. Since, the nation has the
potential of becoming the manufacturing hub for
various businesses in line with the Government’s
pronouncements, it may be advisable to defer the
same for consideration in the new Direct Tax Code.
4. The provisions for taxation in respect of Corporate
restructuring, digital economy transactions etc. in-
cluding liberal safe harbour provisions should be
drawn up in line with the principles introduced in
the progressive economies (like Singapore, Indone-
sia etc.) so that there is a greater degree of certain-
ty and tax disputes are reduced to the minimum. It
would be sensible to refrain from introducing major
changes in these areas and leave it aside for consid-
eration of the new DTC committee.
5. Personal tax rates should also be brought down to
address the impact of inflation and tax slabs should
be further rationalized to keep it in tandem with the
rates applicable in the developing world. Taxation
provisions for retired employees should be ration-
alized, especially in the context of falling interest
rates and increasing inflation. Moreover, suitable
tax relief should be provided to them in various are-
as like medical expenses including hospitalization, if
reimbursed by their employers, since the same are
currently taxed (unlike employee’s expenses which
are exempted).
6. Tax administration should be further digitized and
all assessment work should be made online to re-
duce the harassment of individuals and corporates.
7. Tax appeal procedures should be further stream-
lined since the Government is the major litigant in
the Tribunals and Courts and it should continually
review the strategy of contesting lower Court de-
cisions. This will help in cutting down tax disputes
and bring about more certainty.
The above measures will help in creating a degree of
buoyancy in the economy and spur the nation on the
path of accelerated growth and development.

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FOCUS OF THE MONTH
ECONOMY MATTERS
Industry Expectations from Union Budget 2018
T
he union budget 2017 was announced in the back-
drop of two of the government’s most radical
policy actions till date—Demonetization, which
had just been implemented and the Goods and Services
tax (GST), which was on the verge of being enacted.
The budget for 2018-2019 (expected to be announced
on February 1, 2018) would be eagerly awaited for mul-
tiple reasons. Firstly, this is the first budget post the
GST enactment. Secondly, the government, by now,
would have a fair idea on the effects of demonetiza-
tion (whether positive or negative!) on the economy.
Last, but not the least, this could be the current govern-
ment’s last full-fledged budget before it goes back to
the people of the country to seek fresh mandate.
Policy level expectations
The government’s focus areas over the past three years
has been to facilitate ease of doing business, promote
make in India, maximize employment generation and
build quality infrastructure in the urban and rural India.
The government is sure to be buoyed by the upgrade
provided by one of the well-known rating agencies with
respect to India’s business outlook. This is coupled with
the fact that India’s position in the ease of doing busi-
ness has improved by leaps and bounds. Considering
these positive developments, it is expected that the
budget would contain significant policy level changes to
provide the much-needed impetus to the core sectors
such as infrastructure, construction and manufacturing.
It is clear that the current slowdown in the economy
is being considered seriously by the government. The
Finance Minister (FM), in one of the pre-budget media
interactions, has made it clear that the focus of 2018
budget would be on development of infrastructure and
the rural sector. The former is critical for job creation,
while the latter is important for inclusive growth. The
government may even consider a substantial increase in
public spending considering the private investment has
not taken-off in the desired manner. It would be inter-
esting to see whether the FM altogether junks the path
of fiscal discipline temporarily or continues to walk a
tight rope to balance public spending with fiscal deficit.
The proposed accelerated push to the infrastructure
sector is certainly good news to the industry, consider-
ing the sector has been going through a sluggish phase
for the past few years. This indication also augurs well
for other sectors since infrastructure sector is the en-
gine to kick-start growth for other sectors.
Tax reform expectations
The industry would want that the government contin-
ues to push the twin initiatives of ‘ease of doing busi-
ness’ and ‘make in India’ through tax breaks and tax
structural reforms. In the past budgets, the government
has demonstrated its seriousness on these fronts by an-
nouncing a slew of changes. The industry expectation is
to smoothen the rough edges on some of the changes
made in the past as well as to announce new reforms.

13
FOCUS OF THE MONTH
DECEMBER 2017
Some of the expectations are on the following aspects:
• Reduction of tax rates – The budget of 2017 re-
duced the tax rate to 25 per cent on companies with
a turnover upto Rs 500 million. It is interesting to
note that large economies like the US and UK have
considered / are considering reduction in tax rates.
Considering the increasing global trend towards a
reduced rate, the Indian government may consider
a rate reduction for all taxpayers.
• Clarity with respect to the practical application of
General anti-avoidance rules (GAAR) – GAAR was
made applicable with effect from April 1, 2017. GAAR
can have far reaching implications on day-to-day ar-
rangements entered into by a taxpayer. Though the
government issued FAQs clarifying its position on
various aspects of GAAR, it would be useful to ad-
dress concerns on specific transactions highlighted
through industry representations.
• Enable tax neutral conversion of companies to
LLPs – LLP is emerging as a preferred form of con-
ducting business on account of the reduced level
of compliance burden. Accordingly, it is important
that either the conversion be made tax neutral or
the limits relating to turnover and value of assets be
enhanced in a significant manner.
• Investment allowance to manufacturing compa-
nies – For incentivizing the manufacturing sector,
investment allowance of 15 per cent was granted
for investments in new plant and machinery till
March 31, 2017. This deadline may be extended to
provide impetus to this sector. The threshold limit
of minimum investment of Rs 250 million may be re-
duced to benefit small and medium manufacturers.
• Extension of sunset clause to Power sector – Pow-
er sector is a key subset of the infrastructure sector
and requires significant investment. It is important
that the sunset clause for claiming tax holiday by
power generating companies be extended beyond
March 31, 2017.
• Revisit the provisions of equalization levy – This
could involve examining the possibility of entering
into agreements with other countries for credit of
this levy; clarify that this levy shall not be applica-
ble in cases where specified services are utilized for
the purpose of carrying on business outside India or
earning income from a source outside India.
• Unfinished agenda on Base Erosion Profit Shifting
(‘BEPS’) initiative – The government has been pro-
active in participating in this OECD global initiative.
It has been active not only in re-negotiating some
of the important tax treaties but also in bringing
changes to the domestic law so as to align with
the BEPS guidance. Some of the changes, basis the
BEPS Action Items, that can be expected is the in-
troduction of Controlled Foreign Company (CFC)
guidelines, rationalization of thin-capitalization pro-
visions to exclude guarantee by a related entity on
a third party loan or inclusion of guarantee solely
where the same is provided by a related non-resi-
dent, guidelines on interpretation of Mulitilateral
Instruments (MLI) with the existing treaty provi-
sions so that the taxpayers are adequately aligned.
• Rationalization of GST rates – The government has
been receptive to the demands of the industry by
reducing the peak GST rate on many items. The
industry has been representing to rationalize the
rates as well as the rate structure on commodities.
It would be a significant move if the budget ad-
dresses some of these requests.
• Clarity on anti-profiteering clause under GST – The
Finance Ministry has released anti-profiteering rules
providing an administrative framework, but not yet
defined a methodology by which this behavior is to
be explained. To ensure proper implementation of
the anti-profiteering provisions such that it ensures
passing on the benefits that accrue to the seller on
account of reduction in rate of taxes and/or benefit
of input tax credit, suitable clarifications should be
introduced.
Concluding remarks
The Industry has pinned high expectations from the up-
coming budget. It is expected to facilitate ease of doing
business and promote tax certainty. The expectations,
as usual, are sky-high and the overall mood seems to be
positive. How much of this gets fulfilled remains to be
seen.

14
FOCUS OF THE MONTH
ECONOMY MATTERS
Indirect Tax- Pre Budget Recommendations
T
he budget, to put it succinctly is a statement of
annual expenditures and revenues. The budget
has acquired a larger than life image since the
early 90s when radical policy reforms were announced
in the budget and formed part of the budget speech. It
is also important to note that unlike in earlier budgets,
the budget will not address GST issues as these would
be decided by the GST Council. Therefore, the budget
would largely deal with customs issues, and non GST in-
direct tax areas like duties on tobacco and petroleum.
On GST, the budget could make policy announcements
after prior consultation and agreement in the GST Coun-
cil. It would be useful if the budgets focus on two or
three broad schemes and identify and resolve important
issues related to these themes. Going forward into the
financial year 2018-19, the government has two major
worries one relating to turning around the investment
cycle and two the worrying position on the job front. In
addition it is important to also ease the process of pay-
ment of taxes, which is an important component of the
ease of doing business.
In this background, the indirect tax proposals must also
help in realising the government’s goals as identified
above. The first important suggestion relates to draw-
back. Hitherto, before the introduction of GST draw-
back rates reimbursed custom duties on inputs and
domestic taxes like excise and service tax paid on indig-
enously procured items used in the manufacture of ex-
port items. After the introduction of GST the drawback
rates have been fixed only to reimburse the custom du-
ties. This has affected Indian exports especially in the
manufacture of labour intensive products like textile,
leather, light engineering and pharmaceuticals. While
recently, some export incentives have been announced
like raising the reimbursement through Manufacturer
Export Incentive Scheme (MEIS) scripts and Service Ex-
port Incentive Scheme (SEIS), these have not fully re-
stored reimbursements available to pre GST levels. The
other factor looming large is that countries whose per
capita income has exceeded US$1000 for three consec-
utive years are not allowed to provide export incentives
other than drawback, for they are perceived to be not
in consonance with World Trade Organization (WTO)
laws. It is therefore very likely that many of the export
incentives may be subject to review by the WTO in the
future. Therefore, it’s extremely important that the
drawback scheme is liberalised and it reimburses both
the custom duties and the domestic CGST and IGST lev-
ies. This requires a legislative amendment of the Draw-
back Rules and the CGST and IGST laws. These would
need to be carried out in this year’s budget so that the
drawback committee can recommend composite rates
in the future which would cover both customs and CGST
levies and some embedded non GST central levies.
The second area to be tackled would require simplifica-
tion of customs issues which would ease the cost of im-
portation of goods. These should include the following:
• Facilitation of direct delivery from the ports with-
out going to the Internal Container Depots (ICDs).
• Simplification of special valuation procedures
which would exempt category of projects that are

15
FOCUS OF THE MONTH
DECEMBER 2017
revenue neutral from being subject to Special Valu-
ation Process (SVP).
• Definition of declared goods needs to be aligned to
incorporate the said goods procured for business
purposes.
• The concessional duty rate of 2 per cent be pre-
scribed for inter-state purchase of GST excluded
products against Form-C for businesses other than
those dealing in it.
• Customs/GST law be amended to avoid any dual
levy on the same supply.
The third area which the budget can address in the area
of indirect taxes is faster resolution of disputes. There
are large number of cases pending in various judicial
forums like the tribunals and high courts relating to
central excise, service tax and state VAT. The costs of
litigation are high both for the central and state govern-
ments and the companies. Quick resolution of these
cases where lakhs and crores of rupees are involved
would allow both the companies and the governments
to get involved in GST, without the burden of prolonged
involvement in legacy issues. As part of the budget an-
nouncements in consultation with the law ministry,
the commercial tax divisions recently created in the
high court need to be further strengthened. Additional
benches could also be created in the existing tribunal
to deal purely with legacy issues. High level bodies at
the state level headed by retired high court or Supreme
Court judge could be constituted to look at withdraw-
ing cases which are weak in law but have been mechani-
cally filed for revenue reasons. To provide clarity going
forward in the GST, there is a need for creation of Na-
tional Advance Ruling Authority so that it can reconcile
decisions of different State Advance Ruling Authorities.
Decisions of the national authority will need further
clarity on assessment matters to new companies plan-
ning their investments.
While the GST policy issues require discussion in the GST
council, the budget could provide clarity on the future
timelines for expanding the base of the GST. The ef-
fectiveness of GST would lie in covering the excluded
sectors like real estate, petroleum and electricity. The
inclusion of these sectors would reduce the quantum
of embedded taxes, and improve the competitiveness
of Indian industry and export sectors. The inclusion of
real estate will help clean up the land market and bring
greater transparency in the financial transactions be-
sides boosting revenues especially on the direct tax
side.
Finally, the budget should also put in place institutional
mechanisms to improve coordination between central
and state tax authorities and also provide forums for
trade to ventilate their non-policy grievances. The crea-
tion of state level GST secretariats registered under the
Societies Act could be created after an in principle ap-
proval from the GST Council. Creation of tax helpers on
the lines of the banking business correspondents could
help small businesses. There is already a precedence of
creating tax payer assistants for the service tax earlier.
These correspondents should also have basic knowl-
edge of computers and IT so that they can help the
taxpayers file their returns through their off-line utilities
developed by the GSTN. On the customs side, this role
is played by the custom house agents where there is
separate examination and rules for recruiting them. A
similar system could be conceived. Ease of paying taxes
will also help boost revenues for in many cases it is pro-
cedural complexity that prevents the small from filing
tax returns.
To sum up, the indirect tax proposals suggested above
would help in ease of doing business and through pro-
cedural simplifications also help mobilise tax revenues
by facilitating compliance.

16
DOMESTIC TRENDS
Economy Overview : Fiscal Health at a Glance
ECONOMY MATTERS

17
DOMESTIC TRENDS
DECEMBER 2017
W
e step into the New Year amidst indications
that the global economy is in a much better
shape than in the past. The US economy is
showingaturnaroundingrowthandtheEuroareaiswit-
nessing broad-based recovery. Besides, the Japanese
economy is indicating early signs of economic growth
while most developed and many emerging economies
have witnessed an upswing in economic activity. All this
bodes well for the sustainable and moderately higher
growth of the world economy in 2018.
On the domestic front, the Indian economy is showing
nascent signs of recovery having shrugged off the eco-
nomic disruptions caused by demonetisation and GST
implementation. GDP growth has quickened to 6.3 per
cent during July-September 2017-18 from the uninspir-
ing performance in the previous quarter. Several sec-
tors have exhibited a recovery in growth following the
slowdown around the initial period of the implementa-
tion of GST. Presently, much of the uncertainty gener-
ated by the introduction of GST has settled down even
though some issues remain to be resolved. At the same
time, benign inflation, robust foreign investment flows,
booming stock markets, burgeoning foreign exchange
reserves and stable macro-economic conditions have
ignited confidence among investors that the recovery
process would firm up in 2018.
With both domestic and global economy showing signs
of recovery, hopes have sprung anew that 2018 augers
well for the country. There are expectations that the
Indian economy would continue to show an improved
performance as our inherent strengths and the proac-
tive policy environment have spawned new growth op-
portunities. It is anticipated that India would return to
emerge as a bright spot in the prevailing world order
with GDP growth likely to accelerate to 7.5-8.0 per cent
in 2018 from a projected 6.7 per cent in 2017.
No doubt, the non-recovery of the private investment
cycle has been a major constraint which could sty-
mie domestic growth and prevent the economy from
achieving its full potential. To strengthen our recovery
Demo, GST No Downer, India in a Sweet Spot

18
DOMESTIC TRENDS
ECONOMY MATTERS
process, the private investment cycle needs to pick up.
The government has been playing a key role in this re-
gard and is working with the private sector to step up
investment.
In this context, the government’s recent move to un-
ravel a slew of incentives to facilitate investment ac-
tivity, such as the announcement of enhancing public
expenditure on infrastructure, boosting private invest-
ments and addressing the problem of delayed pay-
ments to the MSME sector is noteworthy. Besides, the
much-awaited government decision to recapitalise Pub-
lic Sector Banks (PSBs) would go a long way to revive
bank lending and facilitate job creation.
Taken together with the recently passed Insolvency
and Bankruptcy Code, and the move towards speedy
resolution of NPAs, bank should resume the lending
operations and pave the way for private investment re-
vival. Further, the Government has launched significant
programmes at the national level aimed at enhancing
public expenditure on roads and highways in a strate-
gic manner including port connectivity and border and
cross-border roads will have a big multiplier impact on
economic growth.
What is more, the implementation of GST is an out-
standing reform which has been successfully imple-
mented in 130 countries which is set to transform the
economic landscape of the country. The government is
also supporting new initiatives, focused on administra-
tive efficiency and ease of doing business which would
stimulate private investment, going forward. India has
achieved a quantum leap in its rank on the World Bank
Doing Business Report 2018 from 130 to 100. The latest
report validates the commitment of the government
to fast-tracking economic reforms, addressing red tape
and facilitating business, which it has undertaken in mis-
sion mode over the last three years.
Going forward, the manufacturing sector needs to
gather momentum for fostering growth with inclusion.
The salience of manufacturing in GDP needs to go up to
25 per cent by 2020 to augment growth and create jobs.
A boost to labour intensive sectors including services
would do much to aid job creation.
In the last three years, the share of manufacturing has
improved and this is primarily due to the ‘Make in India’
initiative. But we are much behind our neighbouring
countries such as Thailand, China, the Philippines and In-
donesia. We have to do a lot of catching up. A lot more
action is required from both the Centre and the States
to facilitate ease of doing business and also to persuade
the state governments to resolve issues relating to land
and labour.
At the macro-level, there are administrative reforms
that require attention. Some such reform measures in-
clude privatisation of state owned companies, bringing
down stake in public sector banks, corporatisation of
railways, rationalization of taxation, among others.
To conclude, India is in a sweet spot today and investor
confidence is growing. All this portends well for 2018.
We are optimistic about private investment reviving
which would set the path for improved growth in the
coming year.
(This article first appeared in The Asian Age on December 31st
, 2017)

19
DOMESTIC TRENDS
DECEMBER 2017
S
ince mid-2017, crude oil prices have climbed to a
three-year high. This is likely to have an adverse
impact on the Indian economy in 2018 with pass-
through implications for fiscal deficit, current account
deficit, inflation rates, and corporate bottom-lines.
Prices rose due to limits placed on production from
OPEC and Russia sources. The World Bank estimates
that the rebound in oil prices will be limited due to con-
tinued shale oil supply, renewable energy expansion,
and environmental concerns.
While the forecast for 2025 stays at around US$65 a bar-
rel, fluctuations are expected due to new supply sourc-
es or increased demand from large emerging econo-
Rise in oil prices
Crude oil prices collapsed between mid-2014 and early
2016 by some 70 per cent1
due to rapid increase in US
shale oil production and sagging global growth. Brent
crude prices have since increased from US$47 per barrel
to US$69.16 per barrel as of 11th
January 2018, a jump of
45 per cent.2
mies like India and China.
Fiscal deficit
India’s fiscal position improved greatly as a result of the
drop in oil prices. Government revenues from excise du-
ties, customs duties, and other sources related to the oil
and gas sector more than doubled from Rs 1.53 trillion in
2013-14 to Rs 3.35 trillion in 2016-17.3
Oil Price Rise and the Indian Economy in 2018
By: Ms. Sharmila Kantha
Principal Consultant, Confederation of Indian Industry
1
World Bank, Global Economic Prospects 2018, January 2018
2
Bloomberg Quint https://www.bloombergquint.com/markets/2018/01/12/petrol-diesel-prices-omcs-govt-keep-a-lid-on-fuel-prices-despite-
surge-in-brent-crude-oil
3
Livemint, 29 December 2017, http://www.livemint.com/Money/vd7m5q4RacXVQ5tr50ClEO/The-risks-to-fiscal-health-from-higher-oil-prices
html

20
DOMESTIC TRENDS
ECONOMY MATTERS
Despite falling prices in 2014-16, the Government barely
lowered the price per liter for petrol for the market,
This surge in government revenues owing to oil price
decline helped it to take up a path of fiscal consolidation
while raising spending on infrastructure and social sec-
tor. Union excise duty revenues went up from Rs 1.70
trillion in 2013-14 to Rs 3.87 trillion in 2016-17 (Revised
Estimates), and gross tax revenues expanded from Rs
10.36 trillion to Rs 17.03 trillion.5
Every US$10 increase in the oil price for India is esti-
mated to lead to 0.1 per cent increase in fiscal deficit.
The slippage on account of this head would add up to
0.2 per cent if oil prices remain at the current level of
while increasing tax component from Rs 10.43 per liter
in September 2014 to Rs 21.48 per liter in September
2017.4
around US$69 per barrel.
The fiscal deficit is already constrained by the fall in
expected growth of gross value added to 6.5 per cent
as per CSO advance estimates. The government went
in for higher borrowings towards the end of 2017, al-
though there was a cut in demand in January 2018.
With added pressure on the revenue front owing to oil
price rise, the flexibility for the government in Budget
2018-19 is low and fiscal deficit is likely to stray from the
target of of 3 per cent.
4
Bloomberg Quint, 14 September 2017, https://www.bloombergquint.com/business/2017/09/13/crude-fell-by-half-but-your-fuel-bill-didnt-
heres-why
5
Budget documents, various years

21
DOMESTIC TRENDS
DECEMBER 2017
Current account deficit
India imports over 80 per cent of its oil requirements
and hence, the surge in prices adversely impacts its
trade deficit. The fall in 2014-16 had brought the Indian
current account deficit to 1.1 per cent of GDP for 2015-16
and 0.7 per cent for 2016-17. In the second quarter of
2017-18, the figure had climbed to 1.2 of GDP. 6
Oil imports stood at US$65.83 billion in April to Novem-
ber 2017-18, almost 23 per cent higher than in the same
period the previous year. In November, oil imports were
Inflation
The all-India consumer price index for fuel & lighting
went up by 7.9 per cent in November and December
20179
. This contributed significantly to a hike in the in-
flation rate to 5.21 per cent, the highest in 17 months.
Consumer price index has been climbing since June 2017
when it recorded at multi-year low, owing to both food
prices and crude oil price rise.
If crude oil continues to creep up, inflation is likely to
remain elevated. RBI forecasts that a rise to US$65
per barrel would raise India’s inflation rate by 30 basis
points and adversely impact growth in gross value add-
ed by 15 basis points10
.
RBI’s target inflation of 4 per cent over the medium-
term has already been crossed. It may be tempted to
39 per cent more than in November 2016, and this re-
sulted from increase in price per barrel by 35 per cent.7
Accordingly, the merchandise trade deficit for April-No-
vember 2017-18 at US$100 billion was about 50 per cent
higher than the previous year.
Going forward, it has been estimated that oil import
cost would go up from US$70 billion to US$81 billion if
crude oil stands at US$55 per barrel.8
The trade deficit
is likely to benefit from export growth and hence, the
impact of oil price rise on its print for 2017-18 may be
moderated.
raise interest rates, notwithstanding the fact that high-
er inflation is due to a large extent to rising oil prices
which is beyond the control of domestic demand and
supply conditions. Any hike in interest rates by RBI at
this stage would be short-sighted and unwarranted,
given that domestic demand continues to be subdued
and supply is still influenced by low capacity utilization.
Corporate performance
Data on corporate performance for the first half of the
year is skewed by introduction of GST which led to de-
stocking and other glitches. According to CII’s analysis,
growth rate of net sales in April-September FY18 of 900
manufacturing firms increased by about 9.2 per cent, a
jump from the previous year’s second half at 8 per cent.
6
RBI press release, June 15, 2017 https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=40768
7
Department of Commerce press release, 15 December 2017
8
Economic Times, 28 Dec 2017 https://economictimes.indiatimes.com/news/economy/foreign-trade/oil-import-bill-may-swell-15-to-81-billion-in-fy18/
articleshow/62276002.cms
9
Ministry of Statistics and Program Implementation press release 12 Jan 2018 http://mospi.nic.in/sites/default/files/press_release/CPI_PR_12jan18f.pdf
10
RBI Monetary Policy Report, October 2017

22
DOMESTIC TRENDS
ECONOMY MATTERS
The growth rate of total expenditure for these firms
also increased in the first quarter but declined in the
subsequent quarter. Profits after tax, which fell by over
34 per cent in the first quarter, saw a moderation in de-
cline to 10.5 per cent in Q2 FY18. Rise in expenses, in-
cluding raw material costs and interest outflow, could
be a cause for the contraction in profits.
It is difficult to estimate the rise of crude oil price rise
on corporate profits as these would be determined by
several factors including the impact of GST, demand,
and other commodity prices. However, the rise is bound
to place further pressure on corporate profitability if it
continues.
Conclusion
Steep contraction in crude oil prices between 2014-2016
had beneficial impact on the Indian economy’s macro
indicators, creating the space for fiscal rectitude. Al-
though in the last six months, oil prices have risen sub-
stantially, analysts are divided about the performance
in the future. This is dependent on several factors in-
cluding inventory and demand positions, US shale pro-
duction, and issues such as developments in Venezuela
and North Sea. Expectations are that oil will trade at
US$45-60 per barrel over 2018.
In India, while prices are determined every day, oil com-
panies have been reluctant to pass on the entire in-
crease to consumers.
As per Central Statistical Organisation (CSO) advance
estimates, the GDP for 2017-18 is expected to moder-
ate to 6.5 per cent as compared to 7.1 per cent posted
in 2016-17. Gross Value Added (GVA) at basic prices is
expected to clock 6.1 per cent in the current fiscal as
compared to 6.6 per cent in the last fiscal. Given these
estimates, the GDP growth is expected to move sharply
from the 6 per cent clocked in the first-half of FY18 to 7
per cent in the second half, achieving which should not
be much difficult given a low base and waning of GST
impact. The moderation in GDP in the current fiscal is
attributable mostly to the transitory disruptions caused
by the implementation of the Goods and Services Tax
(GST), and weak agricultural growth.
Agriculture growth expected to slow down
in FY18
As per the advance estimates, from the supply-side,
agriculture growth is estimated to moderate to 2.1 per
cent in FY18 from 4.9 per cent in FY17, impacted ad-
versely by a slowdown in the output for kharif crops.
Additionally, agriculture growth in FY18 is subjected to
an adverse base effect as growth was healthy in the last
fiscal following two consecutive drought years. To be
sure, rabi sowing has been almost 0.2 per cent lower till
January 5th
, 2018.
Streamlining of GST related uncertainties
likely to prop up manufacturing growth
Manufacturing growth is expected to slow down to 4.6
per cent in the current fiscal from 7.9 per cent in the last
year on account of the disruptions caused by GST im-
plementation. However, this slowdown is expected to
be temporary as going forward the streamlining of GST
related uncertainties is going to prop up manufacturing
sector’s growth. Services sector, on the other hand, is
estimated to exhibit a broad based improvement, with
growth improving to 8.3 per cent in FY18 from 7.7 per
cent in FY17. Both ‘Trade, Hotels, Transport, Communi-
cation & Services Related to Broadcasting’ and ‘Finan-
cial Services, Real Estate & Professional Services’ are
estimated to grow faster this fiscal as per the advance
estimates.
GDP Growth Expected to Moderate in FY18

23
DOMESTIC TRENDS
DECEMBER 2017
Consumption demand expected to witness
slowdown in FY18 albeit on a temporary ba-
sis
As per the advance estimates, from the demand-side,
private consumption expenditure is expected to mod-
erate to 6.3 per cent in 2017-18 as compared to 8.7 per
cent posted in the previous fiscal and remain the largest
contributor to GDP (55.7 per cent share). Notwithstand-
ing this moderation, private consumption demand is
expected to improve going forward on the back of low
interest rates, pay commission implementation by the
states and moderate inflation. Government consump-
tion expenditure growth is also expected to slow down
sharply to 8.5 per cent in the current fiscal as compared
to a robust 20.8 per cent growth in the previous year
mainly on a very high base. Rural pump priming to de-
stress the rural economy is expected to boost govern-
ment expenditure growth in the remaining quarters of
FY18.
In an encouraging sign, gross fixed capital formation
growth is expected to see improved growth to 4.5 per
cent in FY18 from 2.4 per cent growth in FY17, indicat-
ing an incipient trend in investment recovery. Invest-
ment demand is expected to see a mild revival on the
back of some push from government capex and FDI
investments. Exports growth is estimated to remain un-
changed in FY18 at 4.5 per cent from the levels seen in
FY17.

24
DOMESTIC TRENDS
ECONOMY MATTERS
The second advance estimates for the GDP print which
will be released on 28th
February, 2018 would be more
useful in judging actual impact rather than the first ad-
vance estimate print as this is just an extrapolation of
available data and is likely to be used as an indicator for
Union Budget purpose.
Outlook
While the advance estimates of GDP growth give the impression of a downturn, in reality, growth has bottomed
out in the first quarter of the current year and is now on a recovery. It is possible that the advance estimates will be
revised up once more data is available for the third and fourth quarter of the year. Investments are set to recover
with gross fixed capital formation expected to grow by 4.5 per cent in FY18 from 2.4 per cent in FY17. CII recom-
mends the Union Budget 2018-19 to stick to fiscal prudence which in turn will help in boosting GDP growth in the
near to medium-term.
Industrial output growth rose to a 25-month high of 8.4
per cent in November 2017 from 2.0 per cent in October
2017 following a broad-based production uptick. With
this data print, the cumulative growth for the first eight
months of the fiscal (April-November) FY18 stood at 3.1
per cent as compared to 5.6 per cent in the same period
Manufacturing sector growth accelerates
sharply; auguring well for the future trends
The manufacturing sector, which has the highest
weight at 77.6 per cent in overall IIP, saw its growth ac-
celerating to 10.2 per cent in November 2017 from an
anemic 2.2 per cent in the previous month. This surge
in manufacturing output could be indicative of de-clog-
ging of manufacturing activity after the government
simplified the GST refund rules. As many as 15 out of 23
industry groups in the manufacturing sector showed
last year. Going forward, we could see the uptick in in-
dustrial growth to broadly continue owing to a slew of
policy measures implemented by the government, like
the recent pruning of the number of items in the high-
est GST bracket along with the smoothening of teeth-
ing GST related issues.
positive growth in November 2017 as compared to the
corresponding period in 2016, led by pharmaceuticals,
computers and transport equipment. The growth of
the electricity sector showed a mild uptick to stand at
3.9 per cent in the reporting month as compared to 3.2
per cent in the preceding month. Mining sector growth
moved to the positive territory in November 2017.
Capital goods sector recovery bodes well for
the economy
According to use-based classification, capital goods
Industrial Growth Perks up to 25-Month High

25
DOMESTIC TRENDS
DECEMBER 2017
grew at 8-month high of 9.4 per cent in November 2017
as compared to 6.6 per cent in the previous month.
Since this sector grew at an impressive rate inspite of
a high base of last year, it bodes well for the economy.
The growth trends of this sector will be closely watched
for deducing any conclusive evidence of revival in invest-
ment activity. The growth in the intermediate goods
sector moved higher to 5.5 per cent in November 2017
as compared to 0.2 per cent in the previous month. In a
positive sign for the economy, growth in the infrastruc-
ture & construction goods quickened to 13.5 per cent in
the reporting month as compared to 5.5 per cent in the
previous month mainly on a low base of last year.
Core sector output accelerates in November
2017
The output of eight core infrastructure sector which
carries 40.27 per cent weight in the Index of Industrial
Production (IIP), improved to 6.8 per cent in November
2017 as compared to 5.0 per cent in the previous month.
Steel and cement sectors were the star performers of
Consumer goods sector grows at an impres-
sive rate in November 2017
The output of consumer non-durables saw a phenom-
enal pickup to 23.1 per cent in November 2017 from 7.9
per cent growth in October 2017. This would have been
the result of both a low base of last year, as well as a
pruning of GST rates on several of these items in No-
vember, which may have boosted demand. The growth
of this sector has remained resilient in this fiscal so far.
Output of consumer durables sector moved into the
positive territory after a gap of two months in Novem-
ber 2017, possibly on pent-up festive demand.
the month. Steel and cement sectors production rose
sharply by 16.6 and 17.3 per cent respectively in the
reporting month as compared to an anemic growth
posted in the month before. In contrast, coal sector
production languished in the negative territory. On a
cumulative basis, April-November growth stood at 3.9
per cent, down from 5.3 per cent in the corresponding
period last year.

26
DOMESTIC TRENDS
ECONOMY MATTERS
Consumer price index (CPI) based inflation rose to 5.2
per cent in December 2017, up from 4.9 per cent in No-
vember 2017 partly on low base of last year. This is the
highest level of inflation in the last 17 months and driven
by higher inflation in housing, food and personal care
& effects. The sharp jump in housing inflation from 7.4
per cent in November 2017 to 8.3 per cent in December
2017 is reflective of the impact of the higher House Rent
Allowances (HRA) paid to the government employees.
Food inflation rose to 4.96 per cent in December 2017
from 4.3 per cent in the previous month due to higher
inflation seen in eggs, meat & fish, oils & fats and fruits,
but mainly driven by a sharp jump in vegetables’ infla-
tion which rose to 29.1 per cent from 22.5 per cent.
Going forward, food inflation is expected to stay be-
nign, but mild pressures could arise due to some short-
fall in rabi sowing so far (especially oilseeds and wheat).
In contrast, inflation in fuel & light category moderated
a bit to 7.9 per cent in December 2017 as compared to
8.2 per cent in the previous month. To be sure, during
December 2017, the prices for the Indian crude oil bas-
ket climbed up slowly by 18.1 per cent on y-o-y basis as
compared to 37.9 per cent increase in November 2017.
The Reserve Bank of India (RBI) has revised its CPI fore-
cast for H2FY18 to 4.3-4.7 per cent from 4.2-4.6 per cent.
We broadly expect CPI inflation to come within RBI’s
projected range for the second-half despite the loom-
ing upside risks to inflation in the form of high oil prices
and higher housing inflation.
Lower food prices push down WPI based in-
flation in December 2017
Wholesale price index (WPI) based inflation moderated
marginally to 3.6 per cent in December 2017 from 3.9
per cent in the previous month as inflation in the food
basket of WPI moderated. On a cumulative basis, aver-
age inflation in the first nine months of the current fiscal
(April-December) stood at 2.9 per cent as compared to
0.7 per cent recorded in the same period last year.
The key reason for the divergence between CPI and WPI
basket in December 2017 by 160 basis points stemmed
from the moderation in food component in WPI, while it
held up in CPI. To be sure, the weight of food in CPI is far
higher at 46 per cent than in WPI at 24 per cent.
Outlook
The economic revival taking place across sectors is now reflected in the November 2017 industrial production data
print, which grew at the highest rate since October 2015. The various reform measures initiated by the government
in the form of easing compliance norms for MSMEs, faster refund process for export oriented companies amongst
others have cushioned industrial output growth. We expect this recovery to continue and it is likely to be predomi-
nantly led by private consumption with some support from public capex and exports. Additionally, a favorable
base will also perk up industrial output in the next few months.
Divergence between CPI & WPI Rises

27
DOMESTIC TRENDS
DECEMBER 2017
Primary articles inflation slows down on
broad-based deceleration
Inflation in primary articles slowed down to 3.9 per cent
in December 2017 as compared to 5.3 per cent in the pre-
vious month, attributable to a broad-based moderation.
Primary food inflation decelerated to 4.7 per cent while
inflation in the minerals category also moved lower
from double-digit levels to 7.5 per cent in the last month
of the calendar year. Notwithstanding the moderation
in primary food inflation levels, the prices of vegetables
have continued to remain elevated especially of onions
and tomatoes.
Fuel inflation quickens in December 2017
as global crude oil prices continue to move
north
Fuel inflation inched up to 9.2 per cent in December
2017 as compared to 8.8 per cent in the previous month
partly due to low base of last year and partly due to
continued firming of global crude oil prices. In contrast,
manufacturing inflation remained stable at 2.6 per cent
from the previous month.

28
DOMESTIC TRENDS
ECONOMY MATTERS
Merchandise export growth slowed down to 12.4 per
cent in December 2017 as compared to an impressive
30.6 per cent in the previous month as the exporters
are facing some teething problems in getting refund
of Input Tax Credit (ITC). The latter however is a transi-
tory problem, which is expected to be resolved in the
months to come. Exports have been on a positive tra-
jectory since August 2016 to December 2017 with a dip
of 1.1 per cent in the month of October 2017.
The cumulative value of exports in April-December FY18
stood at US$223.5 billion as against US$199.5 billion in
the same period last year, thus registering a growth
rate of 12.1 per cent during the period. With three more
months remaining in this fiscal, there are bright chances
of exports reaching the US$300 billion target for the
year.
Considerable decline in the pace of growth
of non-oil exports
During December 2017, the major commodity groups of
export showing positive growth over the correspond-
ing month of last year included—engineering goods
(25.3 per cent), petroleum products (25.1 per cent),
gems & jewellery (2.4 per cent), organic & inorganic
chemicals (31.4 per cent), and drugs & pharmaceuticals
(6.9 per cent). Non-petroleum and non-gems & jewel-
lery exports grew at a lower clip of 12.1 per cent in De-
cember 2017 as compared to a healthy 27.4 per cent in
the month before.
Rising inward shipments of gold and pearls,
precious & semi-precious stones lifts import
growth in Dec-17
Merchandise import growth accelerated to 21.1 per cent
in December 2017 as compared to 19.6 per cent growth
posted in November 2017 partly on a low base of last year
and partly on sharper than expected rise in the imports
of gold and pearls, precious & semi-precious stones. Ma-
jor commodity groups of import showing high growth
in December 2017 over the corresponding month of last
year included— petroleum, crude & products (34.9 per
cent), electronic goods (19.2 per cent), pearls, precious &
semi-precious stones (93.9 per cent), gold (71.5 per cent),
and machinery, electrical & non-electrical (11.2 per cent).
On a cumulative basis, imports were valued at US$338.4
billion during the first nine months of the current fiscal
as compared to US$277.9 billion in the same period last
year, thus recording a growth of 21.8 per cent so far.
Outlook
CPI inflation accelerated in December 2017, driven mainly by higher inflation in housing and food. In contrast, WPI
inflation moderated a bit during the month. The rise in divergence between CPI and WPI inflation during the report-
ing month was mainly attributable to differences in the movements of the food basket of the two inflation indices.
Going forward, we can expect to see some moderation in CPI inflation if the reduced GST rates in a bulk of com-
modities are passed on to the consumers. As a result, we expect CPI inflation to come within the RBI’s prescribed
target range of 4.3-4.7 per cent for the second-half of the current fiscal.
Trade Deficit Widens Sharply on Rise in Gold Imports

29
DOMESTIC TRENDS
DECEMBER 2017
Current Account Deficit (CAD) for the second quarter of
FY18 (2QFY18) narrowed sharply to US$7.2 billion (1.2 per
cent of GDP) from US$15.0 billion (2.5 per cent of GDP) in
the previous quarter, but was substantially higher than
US$3.4 billion (0.6 per cent of GDP) in Q2 of 2016-17. The
reduction in CAD on a monthly basis was due to a lower
trade deficit, which stood at US$32.8 billion as compared
to US$41.9 billion in the preceding quarter. However, on
a cumulative basis, the CAD increased to 1.8 per cent of
GDP in H1 of 2017-18 from 0.4 per cent in H1 of 2016-17 on
the back of widening of the trade deficit. The trade defi-
cit increased to US$ 74.8 billion in the H1 of 2017-18 from
US$49.4 billion in the H1 of 2016-17.
Gold import growth records a sharp jump
The oil import bill slowed down marginally by 34.9 per
cent in December 2017 as compared to 39.1 per cent in
the previous month as the global Brent prices ($/bbl) in-
creased at a lower clip of 18.8 per cent in December 2017
on a year-on-year basis as compared to 34.7 per cent in
November 2017. It’s pertinent to note here that gold im-
ports which surged by a strong 71.5 per cent in December
2017 as compared to a decline by 25.9 per cent in the pre-
vious month, lent a considerable push to merchandise
imports growth during the reporting month.
Net transfers rise in 2QFY18 on the back of
robust private transfer receipts
The other components of the current account, namely,
net invisibles receipt was slightly lower at US$25.6 billion
in 2QFY18 as compared to US$26.9 billion in the previous
quarter. The sub-component of invisible receipt—net
services receipt increased on the back of a rise in net
earnings from software services and travel receipts. Net
transfers rose to US$15.6 billion in the second quarter,
mainly supported by robust private transfer receipts
which essentially represents remittances by Indians em-
ployed overseas. Bulk of the remittances to India came
from the Middle-East region which was buoyed by the
uptick in global crude oil prices in the last few months.
TradedeficitwidenssharplyinDecember2017
As merchandise imports grew at a higher pace than mer-
chandise exports during the month, the merchandise
trade deficit widened to a high of US$14.8 billion as com-
pared to US$13.8 billion in October 2017. The rising trade
deficit is a matter of concern and the import profile needs
to be analysed carefully to see whether imports would
augment domestic production or pose a challenge. On
a cumulative basis, trade deficit during the period April-
December FY18 stood at US$114.8 billion as compared to
US$78.4 billion posted in the same period last fiscal.
Outlook
A sharper than expected rise in imports of gold and pearls, precious and semi-precious stones, amid a considerable
decline in the pace of growth of non-oil merchandise exports, bloated the merchandise trade deficit to a three-year
high of US$14.9 billion in December 2017. Going forward, the exports growth is expected to be cushioned by robust
global trade growth and the streamlining of teething troubles arising out of GST implementation. Imports meanwhile
will continue to remain elevated as consumption spending of households will receive a shot in the arm from the 7th
pay commission handouts. Consequently, the net balance between exports and imports growth will determine the
trajectory of the trade deficit.
Current Account Deficit Narrows in 2QFY18

30
DOMESTIC TRENDS
ECONOMY MATTERS
Foreign portfolio investments moderate,
while FDI inflows are steady in 2QFY18
Net capital account narrowed to US$16.4 billion in
2QFY18 as compared to US$25.8 billion in the previous
quarter mainly on lower portfolio investment. On a
cumulative basis, net capital account stood at US$42.1
billion in the first-half of FY18. One of the crucial com-
ponents of capital account—foreign portfolio invest-
ments (FPIs) reduced sharply to US$2.1 billion in the
reporting quarter as compared to US$12.5 billion in the
quarter before, on account of net sale in the equity
market. However, on a cumulative basis, portfolio in-
vestment recorded an impressive net inflow of US$14.5
billion during H1 of FY18 as compared with US$8.2 billion
in the same period a year ago. Going forward, given the
strong growth fundamentals of Indian economy, we
can expect FPI to see healthy inflows.
In contrast, net foreign direct investment (FDI) inflows
(a more durable type of investment) increased to
US$12.4 billion in the reporting quarter as compared to
US$7.2 billion in the previous quarter reflecting the fa-
vourable growth outlook. In other categories, banking
capital segment saw an anemic inflow of US$0.2 billion
in 2QFY18 mainly due to NRI deposit related inflows slid-
ing to US$0.7 billion during the quarter.
BoP surplus supported by robust FDI flows
In 2QFY18, there was an accretion of US$9.5 billion to
the foreign exchange reserves (on BoP basis) as com-
pared with US$11.4 billion in the preceding quarter. On
a cumulative basis, in H1 of 2017-18, there was an accre-
tion of US$20.9 billion to foreign exchange reserves.
Going forward
CAD is likely to be higher this fiscal as compared to the
last year amid rising trend in crude prices and pickup in
gold and non-gold imports. However, the external vul-
nerability is likely to remain contained on account of
robust FDI related flows. The other more volatile com-
ponent of capital inflows—net portfolio investments
are likely to remain fickle amid shift in the stance of the
global central banks.

32
POLICY FOCUS
POLICY FOCUS
ECONOMY MATTERS
1). Cabinet approves amendments in FDI
policy
The Union Cabinet chaired by the Prime Minister Shri
Narendra Modi gave its approval to the following
amendments in the Foreign Direct Investment (FDI) Pol-
icy in its meeting held on 10th
January, 2018. These are
intended to liberalise and simplify the FDI policy so as to
provide ease of doing business in the country. In turn, it
will lead to larger FDI inflows contributing to growth of
investment, income and employment.
(a). Single Brand Retail Trading (SBRT)
Extant FDI policy on SBRT allows 49 per cent FDI
under automatic route, and FDI beyond 49 per
cent and up to 100 per cent through government
approval route. It has now been decided to permit
100 per cent FDI under automatic route for SBRT. It
has been also decided to permit single brand retail
trading entity to set off its incremental sourcing of
goods from India for global operations during initial
5 years, beginning 1st
April of the year of the open-
ing of first store against the mandatory sourcing re-
quirement of 30 per cent of purchases from India.
(b). Civil Aviation
As per the extant policy, foreign airlines are allowed
to invest under government approval route in the
capital of Indian companies operating scheduled
and non-scheduled air transport services, up to the
limit of 49 per cent of their paid-up capital. Howev-
er, this provision was presently not applicable to Air
India, thereby implying that foreign airlines could
not invest in Air India. It has now been decided
to do away with this restriction and allow foreign
airlines to invest up to 49 per cent under approval
route in Air India subject to the conditions that:
i. Foreign investment(s) in Air India including
that of foreign Airline(s) shall not exceed 49
per cent either directly or indirectly.
ii. Substantial ownership and effective control of
Air India shall continue to be vested in the In-
dian National.
(c). Construction Development: Townships, Housing,
Built-up Infrastructure and Real Estate Broking
Services
The important policy announcements made by the Government/RBI in the month of December 2017- January 2018 are
covered in this month’s Policy Focus. Our endeavour through this section is to keep our readers abreast of the latest
happenings on the policy front so that they can take an informed decision accordingly.

33
POLICY FOCUS
DECEMBER 2017
It has been decided to clarify that real-estate brok-
ing service does not amount to real estate business
and is therefore, eligible for 100 per cent FDI under
automatic route.
(d). Power Exchanges
Extant policy provides for 49 per cent FDI under
automatic route in power exchanges registered un-
der the Central Electricity Regulatory Commission
(Power Market) Regulations, 2010. However, FII/
FPI purchases were restricted to secondary market
only. It has now been decided to do away with this
provision, thereby allowing FIIs/FPIs to invest in
power exchanges through primary market as well.
2). SEBI sets up department to address is-
sues firms face in bankruptcy court
The Securities and Exchange Board of India (SEBI) has
recently formed a new department that will review
company filings for debt raising and address issues that
listed companies face in bankruptcy court. This will lead
to greater government and regulatory focus on tackling
stressed assets. Among other things, the department
would also facilitate and resolve administrative issues
that companies undergoing insolvency typically face.
The department will also ease administrative hassles for
new filings and routine SEBI compliances for REITs (Real
Estate Investment Trusts) and InvITs (Infrastructure In-
vestment Trusts). There are steps planned to further
address mis-selling in mutual funds and these would be
announced in the coming months. SEBI is also consider-
ing whether the mutual fund quota could be increased
in Qualified Institutional Placements (QIPs) to increase
retail participation in equity markets.
3). GST Council clears e-way bill mechanism
for movement of goods
The GST Council has approved mandatory compliance
of e-way bill for intra-state movement of goods from
1st
June, 2018. The Council has fixed 1st
February, 2018
as the compliance date for inter-state movement of
goods. The e-way bill facility bill is available for trial run
from 16th
January, 2018. An e-way bill is required for
the movement of goods worth more than Rs 50,000.
When goods are transported for less than 10 km within
a state, the supplier or the transporter need not furnish
details on the GST portal. The e-way bill mechanism has
been introduced in the GST regime to plug tax evasion
loopholes.
4). Cabinet approves new Consumer Protection
Bill
Focused on faster redressal of consumer grievances
and to ensure stringent action against unfair trade prac-
tices, the Cabinet has approved the introduction of the
Consumer Protection Bill, 2017, to amend the Consumer
Protection Act, 1986. The bill seeks to enlarge the scope
of the existing act and proposes stricter actions against
misleading advertisements and food adulteration. The
amended act will provide for the setting up of a Central
Consumer Protection Authority, which will make way
for faster redressal of consumer complaints. It will also
take up class-action cases, raised by a group of consum-
ers with the same set of complaints. Consumer empow-
erment is one of the main components of the new Act.
On misleading advertisements, the bill provides for fine
and ban on celebrities. The bill also provides for penalty
and up to life term jail sentence in case of adulteration.
The new law will also provide for proper definition and
scope for e-commerce, and the rules regulating the sec-
tor.
5). Skill development scheme for textile sec-
tor approved
To help create more jobs in the labour-intensive textile
sector that has been hit by demonetisation and the
rollout of the GST, the Union cabinet has approved a
Rs 1,300 crore scheme that will impart skills to a mil-
lion people. The scheme, cleared in a cabinet meeting
chaired by Prime Minister Narendra Modi, will provide
demand-driven and placement-oriented skilling pro-
gramme across the textile value chain, an official state-
ment highlighted.
6). Parliament passes Companies Amendment
Bill by voice vote
The Companies (Amendment) Bill, 2017 which seeks
to bring about major changes in the Companies Act,
2013, was passed by the Rajya Sabha in the winter ses-
sion which closed on 5th
January, 2018. The amendment

ECONOMY MATTERS 34
POLICY FOCUS
seeks to strengthen corporate governance standards,
initiate strict action against defaulting companies and
help improve ease of doing business in the country. The
major changes which the bill seeks to bring about in-
clude the following:
- Simplification of the private placement process;
- Rationalization of provisions related to loans to di-
rectors;
- Replacing the requirement of approval of the
central government for managerial remuneration
above prescribed limits by approval through special
resolution of the shareholders;
- Aligning disclosure requirements in the prospectus
with the regulations made by SEBI;
- Providing for maintenance of register of significant
beneficial owners; and
- Making offence for contravention of provisions re-
lating to deposits as non-compoundable.
While rationalizing and simplifying certain provisions,
the bill also provides for stringent penalties in case of
non-filing of balance sheet and annual return every
year, which will act as deterrent to the shell companies.
7). Lok Sabha passes Insolvency and Bankruptcy
Code amendment bill
The Lok Sabha on 29th
December, 2017 passed the In-
solvency and Bankruptcy Code (Amendment) Bill 2017.
The bill replaces an ordinance seeking to bar wilful de-
faulters, defaulters whose dues had been classified as
non-performing assets (NPAs) for more than a year, and
all related entities of these firms from participating in
the resolution process. The bill has also diluted some of
the stringent provisions of the ordinance and seeks to
strike a balance in the trade-off between punishing wil-
ful defaulters and ensuring a more effective insolvency
process. The bill allows defaulting promoters to be part
of the debt resolution process, provided they repay the
dues in a month to make their loan account operation-
al and the resolution happens within the overall time
frame specified in the code. The bill also allows asset re-
construction companies, Alternative Investment Funds
(AIFs) such as private equity funds and banks to partici-
pate in the bidding process.
8). Lok Sabha passes bill for GST cess hike on
luxury cars to 25 per cent
The Lok Sabha on 27th
December, 2017 approved a bill
to raise the maximum cess levied on luxury cars from
15 per cent to 25 per cent, a move aimed at enhancing
central funds to compensate states for revenue loss
due to the implementation of the Goods and Services
Tax (GST). The bill seeks to replace the ordinance which
was issued in September 2017 to give effect to the deci-
sion of the GST Council. The ordinance provided for a
hike in the GST cess on a range of cars from mid-size to
hybrid variants and the luxury ones to 25 per cent. The
funds collected following hike in cess on luxury vehicles
will be used to compensate states for revenue loss on
account of implementation of GST. The GST Council,
which comprises state finance ministers, meets every
month and takes decision on rationalisation of taxes in
the backdrop of revenue collection.
9). UDAN: No GST on Viability Gap Funding
disbursement
The government has decided not to levy the GST tax
on disbursement of viability gap funding extended to
select airlines under the Regional Connectivity Scheme
(RCS). The objective is to make flying affordable for the
masses with airfares capped at Rs 2,500 per hour of
flight. The RCS, also known as UDAN (Ude Desh ka Aam
Nagrik), took off in early 2017 with five airline operators
being awarded 128 routes after the first round of bid-
ding process. According to a notification from the Min-
istry of Civil Aviation, disbursement of the viability gap
funding or government subsidy will be exempt from the
GST for a period of one year since the commencement
of RCS operations to any of the 13 airports, which have
been connected since the scheme came into effect.
10). SEBI notifies norms allowing REITs, In-
vITs to issue bonds
To make REITs (Real Estate Investment Trusts) and
InvITs (Infrastructure Investment Trusts) more attrac-
tive to investors, markets regulator Securities and Ex-
change Board of India (SEBI) has notified relaxed norms

35
POLICY FOCUS
DECEMBER 2017
to allow these trusts to raise funds by issuing debt secu-
rities. This would be allowed for REITs and InvITs which
are listed on the stock exchanges. Separately, to avoid
the potential conflict of interest, SEBI is considering
putting 10 per cent cross-shareholding cap in mutual
funds. The new measure may have an impact on the
shareholding pattern of UTI Asset Management Com-
pany. Under the proposal, any shareholder owning at
least 10 per cent stake in an AMC will not be allowed to
have a 10 per cent or more stake in another mutual fund
house operating in the country.
11). Insolvency bill eases rules for SME pro-
moters
A bill to replace an ordinance amending the Insolvency
and Bankruptcy Code offers promoters of Small and
Medium Enterprises (SMEs) undergoing insolvency pro-
ceedings a month’s window to repay overdue loans and
bid for their companies. This will be applicable where
these promoters are the sole bidders. The bill excludes
asset reconstruction companies, alternative investment
funds and banks from the definition of connected per-
sons, protecting these entities from becoming ineligible
for bidding. The bill also tweaks the language of the Or-
dinance to bar promoters or those in the management
or control of companies with over a year of NPAs from
bidding. It proposes a 30-day grace period for promot-
ers who had bid for companies undergoing insolvency
proceedings before the ordinance was promulgated on
23rd
November, 2017 barring them from doing so. The
bill also proposes to relax the norm for disqualifying a
promoter from bidding for a company undergoing in-
solvency resolution.
12). Government nod to revised concession
pact for public private partnership pro-
jects at ports
The Union Cabinet chaired by Prime Minister Narendra
Modi has approved amendments in the Model Conces-
sion Agreement to make the port projects more inves-
tor-friendly and make investment climate in the port
sector more attractive. The revised Model Concession
Agreement (MCA) includes providing an exit route to
developers by way of divesting their equity up to 100
per cent after completion of two years from the Com-
mercial Operation Date (COD), similar to the MCA pro-
visions of the highway sector. The amendments in the
MCA envisage constitution of the Society for Afford-
able Redressal of Disputes – Ports (SAROD- PORTS) as
the dispute resolution mechanism similar to provision
available in the highways sector.

36
GLOBAL TRENDS
Global Economy to Edge Up to 3.1 per
cent in 2018
ECONOMY MATTERS
A
ccording to the latest issue of Global Economic
Prospects for 2018 released by the World Bank,
the global economic growth is expected to
edge up to 3.1 per cent in 2018 after posting a much
stronger-than-expected growth of 3 per cent in 2017, as
the recovery in investment, manufacturing, and trade
continued, and as commodity-exporting developing
economies benefitted from firming global commodity
prices. To be sure, global growth accelerated markedly
in 2017, supported by a broad-based recovery across ad-
vanced economies and emerging market and develop-
ing economies (EMDEs).
However, slowing potential growth is a risk
for global growth in the long-term
Further, the multilateral bank also highlighted that 2018
is expected to be the first year since the global finan-
cial crisis which will be operating at or near full capacity.
However, this is largely seen as a short-term upswing.
Over the longer term, slowing potential growth—a
measure of how fast an economy can expand when
labor and capital are fully employed—is a big risk for
the global growth outlook. The slowdown in potential
growth is the result of years of softening productivity
growth, weak investment, and the aging of the global
labor force.
Advanced economies expected to witness
slower growth in 2018 as Central Banks wind
down their stimulus
As per the World Bank, the growth in advanced econo-
mies is expected to moderate slightly to 2.2 per cent in
2018 from 2.3 per cent in 2017, as Central Banks gradually
remove their post-crisis accommodation. The growth in
Emerging Market and Developing Economies (EMDEs)
as a whole is projected to strengthen to 4.5 per cent in
2018 from 4.3 per cent in 2017, as activity in commodity
exporters continues to recover.

37
GLOBAL TRENDS
DECEMBER 2017
Regional Summaries
1). East Asia and Pacific: Growth in the region is fore-
cast to slow down to 6.2 per cent in 2018 from an es-
timated 6.4 per cent in 2017. A structural slowdown in
China is seen offsetting a modest cyclical pickup in the
rest of the region. China grew at 6.8 per cent in 2017,
while in 2018 its growth is projected to moderate to
2). Europe and Central Asia: Growth in the region is
anticipated to ease to 2.9 per cent in 2018 from an es-
timated 3.8 per cent in 2017. Recovery is expected to
continue in the east of the region, driven by commod-
6.4 per cent. Stronger-than-expected growth among
the advanced economies could lead to faster-than-an-
ticipated growth in the region. On the downside, rising
geopolitical tension, increased global protectionism, an
unexpectedly abrupt tightening of global financial con-
ditions, and steeper-than-expected slowdown in major
economies, including China, pose downside risks to the
regional outlook.
ity exporting economies, counterbalanced by a gradual
slowdown in the western part as a result of moderating
economic activity in the Euro Area. Increased policy un-
certainty and a renewed decline in oil prices are the key
downside risks to growth of this region.

38
GLOBAL TRENDS
ECONOMY MATTERS
3). Latin America and the Caribbean: Growth in the re-
gion is projected to advance to 2.0 per cent in 2018, from
an estimated 0.9 per cent in 2017. Growth momentum is
expected to gather momentum as private consumption
and investment strengthen, particularly among com-
4). South Asia: Growth in the region is forecast to accel-
erate to 6.9 per cent in 2018 from an estimated 6.5 per
cent in 2017. Consumption is expected to stay healthy,
exports are expected to recover, and investment is on
track to perk up as a result of the policy reforms. While
the setbacks to reform efforts, natural disasters, or an
5). Middle East and North Africa: Growth in the region
is expected to jump to 3.0 per cent in 2018 from 1.8 per
cent in 2017. Reforms across the region are expected
to gain momentum, fiscal constraints are expected to
modity-exporting economies. Additional policy uncer-
tainty, natural disasters, a rise in trade protectionism in
the United States, or further deterioration of domestic
fiscal conditions could throw growth off course.
upswing in global financial volatility could slow growth
of the region. India’s growth is expected to pick up to
7.3 per cent rate in fiscal year 2018-19, from 6.7 per cent
in 2017-18. The World Bank highlighted that the growth
potential of Indian economy is huge; however it needs
to take steps to boost its investment prospects.
reduce as oil prices stay firm, and improved tourism is
anticipated to support growth among economies that
are not dependent on oil exports. However, continued
geopolitical conflicts and oil price weakness could set
back economic growth in the region.

39
GLOBAL TRENDS
DECEMBER 2017
6). Sub-Saharan Africa: Growth in the region is antici-
pated to pick up to 3.2 per cent in 2018 from 2.4 per cent
in 2017. Stronger growth in the region will depend on
a firming of commodity prices and implementation of
To conclude
While the growth prospects of the global economy re-
mains bright in 2018, the risks to the growth outlook
reforms. However, a drop in commodity prices, steep-
er-than-anticipated global interest rate increases, and
inadequate efforts to improve debt dynamics could set
back economic growth in the region.
remain tilted to the downside. A rise in geopolitical ten-
sions and rising protectionism are the two key risks to
growth. On the other hand, stronger-than-anticipated
growth could also materialize in several large econo-
mies which would further extend the global upturn.
On 22nd
December, 2017, the US Senate approved a
US$1.5 trillion tax bill which provides permanent deep
tax breaks to corporations and temporary tax cuts to in-
dividuals. The law creates a single corporate tax rate of
21 per cent, beginning in 2018, as compared to the cur-
rent 35 per cent. The overhaul is estimated to raise GDP
The projected increase in GDP during the budget window
results from an increase in both labor supply as well as in-
vestment. The capital stock for production is expected to
increase by 1.11
per cent, driven by reduced after-tax cost
of capital. Similarly, employment is projected to increase
by 0.61
per cent led by reduced effective marginal tax
levels by 0.81
per cent, according to the US Joint Com-
mittee on Taxation. The US treasury also projects that
the law will increase revenues by US$1.8 trillion over ten
years, more than paying for itself based on high growth
projections.
rates on wages. The advantages are, however, expected
to wither off post 2025. The additional income generated
by additional capital and labor—combined with the de-
creased tax liability—provides individuals with more dis-
posable income. The consumption is, thus, estimated to
increase by 0.61
per cent.
Sweeping US Tax Reform Tips Major Upheaval
1
Relative to baseline forecast level, on average over the budget window; Source: US Joint Committee on Taxation

40
GLOBAL TRENDS
ECONOMY MATTERS
Tax reform changes to make investment in
US attractive
In 2016, the tax-to-GDP ratio in US stood at 26.0 per cent
as compared to an OECD average of 34.3 per cent, re-
flecting a lower tax base. To some extent, under previous
law, base erosion occurred because firms attributed their
profits to low-tax countries. The law enacts a deemed re-
patriation of overseas profits at a rate of 15.5 per cent for
cash and equivalents and 8 per cent for reinvested earn-
ings. Changes in taxation of foreign activity are expected
to reduce the incentives for this profit-shifting activity,
thus resulting in a ‘low hanging fruit’ by an increase in the
US tax base, reversing US investment abroad and reduc-
ing the trade deficit.
Combined with state and local taxes, the statutory rate
will be 26.5 per cent, which is just under the weighted av-
erage for EU countries at 26.9 per cent. Tax reform could
reveal that the deterioration in US trade over the past
two decades has been more due to global tax arbitrage
than a decline in the US trade prowess. It is further likely
that many countries will be reassessing whether their
headline corporate tax rate positions them as an attrac-
tive place to work, invest and save.

Economy Matters December 2017

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Economy Matters December 2017