The Make in India initiative of the government which lays emphasis on domestic manufacturing, indigenization and import substitution, is expected to pave the way for making the Indian defence sector self-sufficient.Encouragingly, the Indian industry is now actively engagedand is partnering with the government in building a modern and best-in-class defence systems, equipment and components which should strengthen our forces and make the country more self-reliant. The formation of the Society of Indian Defence Manufacturers (SIDM) as an apex body of the Indian defence industry is critical in this regard. SIDM is expected to play a proactive role as an advocate, catalyst and facilitator for building the growth and capability of the defence industry in India. Given the rising importance of buttressing the Make in India programme for expanding the capacity of the Indian defence sector, in this issue of Economy Matters, a few SIDM office bearers and defence experts present their insights into this crucial topic.

2. 2ECONOMY MATTERS

3. 1
FOREWORD
APRIL 2018
T
he Government’s recent initiative to open the defence sector to private participation through the
Make in India programme is a landmark initiative which would be a gamechanger for the Indian
economy. At a time when more than 60 per cent of our defence requirements are met through
imports, incentivizing growth of the domestic industry would go a long way towards strengthening our
domestic capabilities, becoming self-reliant and help develop an internationally competitive industrial
base. At this juncture, when the defence industry in India is exploring the possibilities of forging strate-
gic partnerships with foreign original equipment manufacturers, the thrust on indigenization is a step
in the right direction as it would help Indian industry to align with the global defence supply chain and
emerge as a home market hub of defence sourcing.
On the domestic front, the outlook for growth has brightened with a slew of positive data prints re-
leased in the month of April 2018. Industrial production has remained healthy cushioned by the rising
trend in its two key sub sectors–manufacturing and capital goods. With the teething problems with
respect to GST implementation now receding, going forward, growth outlook is expected to be lifted
by tailwinds from the implementation of growth-friendly reforms. Inflationary pressures have remained
benign so far aided by falling food prices. However, in the months to come, we can expect some firming
up of CPI inflation, but this would stay within the Monetary Policy Committee’s (MPC) projected trajec-
tory. In view of the upside risks to the inflation outlook, RBI chose to maintain a status-quo in policy
rates with a neutral stance.
The US Federal Reserve hiked the key policy rate in March 2018 by a quarter-point in line with market
expectations. The rate hike was premised on strengthening of the labour market, strong economic re-
covery underway along with benign inflation outlook in the US. The rate hike by the Fed is likely to have
an impact onIndia’s financial market by influencing the portfolio flows which in turn will have a bearing
on the domestic exchange rate. The positive prognosis about the US growth outlook found a reflection
in the OECD’s latest growth forecast which has penciled in a strengthening of global growth for both
2018 and 2019. However, key short-term risks remain in the form of rising protectionism, winding down
of easy monetary policy and geo-political tensions among others.
Chandrajit Banerjee
Director General, CII

5. 3 APRIL 2018

6. EXECUTIVE SUMMARY
4ECONOMY MATTERS
FOCUS OF THE MONTH - Make in India:
Opportunities for the Defence Industry
The Make in India initiative of the government which
lays emphasis on domestic manufacturing, indigeniza-
tion and import substitution, is expected to pave the
way for making the Indian defence sector self-sufficient.
Encouragingly, the Indian industry is now actively en-
gaged and is partnering with the government in building
a modern and best-in-class defence systems, equipment
and components which should strengthen our forces
and make the country more self-reliant. The formation
of the Society of Indian Defence Manufacturers (SIDM)
as an apex body of the Indian defence industry is critical
in this regard. SIDM is expected to play a proactive role
as an advocate, catalyst and facilitator for building the
growth and capability of the defence industry in India.
Given the rising importance of buttressing the Make
in India programme for expanding the capacity of the
Indian defence sector, in this issue of Economy Mat-
ters, a few SIDM office bearers and defence experts
present their insights into this crucial topic.
DOMESTIC TRENDS
The Indian economy is on an uptrend currently, with the
Index of Industrial Production (IIP) remaining healthy
in February 2018, cushioned by healthy performances
by manufacturing and capital good sectors. Going for-
ward, we expect this positive trend to continue and
the overall economic growth is likely to get able sup-
port from this trend. The CII Business Confidence Index
(CII- BCI) for January-March 2018 quarter (Q4FY18) has
also continued to improve for the second consecutive
quarter, though the extent of improvement is only mar-
ginal. Inflationary pressures have also remained benign
on lower food prices. Though upside risks remain in
the form of the proposed change in Minimum Support
Prices (MSPs) and the second-round impact of House
Rent Allowance (HRA) revisions, nonetheless, due to
the prognosis of a normal monsoon this year we expect
CPI inflation to come within the RBI’s new target range
of 4.7-5.1 per cent for the first-half of the current fiscal.
Exports meanwhile, contracted for the first time in five
months in March 2018 amid concerns over global trade
and partly due to the high base of last year. However,
for FY18, exports have been able to cross the crucial
US$300 billion mark which translates into a healthy
growth of 9.8 per cent on a year-on-year basis. Going
forward, export growth is expected to be helped by ro-
bust global trade growth, though the rising protection-
ist policies would add to the uncertainty.
POLICY FOCUS
This section covers the major policy changes announced
by government/RBI in the month of March-April 2018.
Amongst the prominent policy news announced during
the month was that the Cabinet has approved the revi-
sion of energy norms under the new Urea Policy which
will ensure easy availability of urea to farmers through-
out the country. Government has also eased the envi-
ronmental clearances for buildings and construction
sector, with the threshold for construction projects
requiring environmental clearances from the Centre
doubling to 50,000 square metres of built-up area from
20,000 square metres. For boosting shipments, gov-
ernment has scrapped export duty on raw and refined
sugar from 20 per cent to Nil. A host of changes in the
GST compliance requirements has also been notified by
the government which will aid in streamlining the GST
related problems being faced by traders at present.
Further, the Securities and Exchange Board of India
(SEBI) has tightened the corporate governance norms
for listed companies by accepting most of the recom-
mendations of the Kotak Committee. In some bilateral
news, Hong Kong and Qatar have signed double taxa-
tion avoidance pact for the prevention of fiscal evasion
with respect to taxes on income. In an important move,
RBI has raised the debt investment limits for Foreign
Portfolio Investments (FPI) in G-secs to 5.5 per cent in
FY19 and 6.0 per cent in FY20. The Central Bank has also
tightened the reporting norms for the Liberalised Re-
mittance Scheme (LRS) under which an individual can
transfer up to US$2,50,000 abroad in a year.
GLOBAL NEWS
In its monetary policy meeting held in March 2018, the
US Federal Reserve chose to hike the federal funds
target rate by 25 basis points (bps) to a range of 1.50-1.75
per cent. The last rate hike was effected in December
2017. The rate hike was premised on the fact that the
labour market has continued to strengthen and that eco-
nomic activity has been rising at a moderate pace with in-
flation rate remaining benign so far. The Fed also revised
its growth forecast upwards for 2018 and 2019 for the US
economy, while the inflation forecast was kept broadly
unchanged. Going forward, the monetary policy stance
of US Fed is expected to remain accommodative. In other
global news, the Organisation for Economic Co-operation
and Development (OECD) released its interim economic
outlook, where it sees the world economy continuing to
strengthen to 3.9 per cent in 2018 and 2019 each from
3.7 per cent in 2017. New tax reductions and spending in-
creases in the United States and additional fiscal stimulus
in Germany would be the key factors behind the rise in
growth for the next two years.

7. 5
FOCUS OF THE MONTH
Make in India: Opportunities for the Defence
Industry
APRIL 2018
Additionally, it is also imperative that the Indian de-
fence manufacturers should expand capacity in order to
serve the defence sector. A stage is now reached when
government organisations including defence PSUs,
ordinance factories, key research establishments, the
armed forces and companies in the Indian private sec-
tor need to work in tandem to build a robust defence
manufacturing ecosystem in India. In this regard, the
formation of the Society of Indian Defence Manufac-
turers (SIDM), as the apex body of the Indian defence
industry, is critical. SIDM would play a proactive role
as an advocate, catalyst and facilitator for the growth
and capability building of the defence industry in India.
Given the rising importance of buttressing the Make in
India programme for expanding the capacity of the In-
dian defence sector, in this issue of Economy Matters,
a few SIDM office bearers and defence experts present
their insights into this crucial topic.
I
t is difficult for a modern nation to rise to its right-
ful place in the comity of nations unless it is strategi-
cally and militarily self-sufficient. Indeed, developing
an indigenous defence industry, which is both contem-
porary and world class, is crucial for meeting the twin
objectives of bolstering our defence preparedness as
well as creating additional jobs in the country. It is in
this context that the Government’s policy of promot-
ing indigenisation of the Defence Industry by leverag-
ing the ‘Make in India’ opportunity is a step in the right
direction. Encouragingly, the Indian industry is now
actively engaged and is partnering with the government
in building a modern and best-in-class defence systems,
equipment and components which should strengthen
our forces and make the country more self-reliant.

8. 6
FOCUS OF THE MONTH
ECONOMY MATTERS
Execution Key for Defence Manufacturing in India
D
efexpo 2018, the biennial defence exhibition,
was held at Chennai from 11-14 April. It has been
nearly four years since the Make in India initia-
tive was announced by Prime Minister Narendra Modi.
Fundamentally, the initiative is meant to enhance manu-
facturing, attract investments, create jobs and increase
technical depth. But for defence, there is the added
criticality of achieving self-reliance for security.
The intensity and complexity of security challenges is in-
creasing due to the nexus between China and Pakistan.
With infrastructural improvements in Tibet, belliger-
ence on the Line of Actual Control has increased. Chi-
na’s military engagements with South Asian and Indian
Ocean region states have been increasing. There is a
continuing endeavour by Pakistan to push the envelope
of proxy war. Faced with such security threats, India
cannot afford to be 60-70 per cent import-dependent
for defence. Furthermore, the international communi-
ty expects India to be a net provider of security in the
Indian Ocean region. India is poised to become a US$5
trillion-dollar economy by 2025. Such economic growth
requires to be undergirded by strong security and un-
derpinned by the capability to project power in the bat-
tlespace, both physical and cognitive.
Close on the heels of Make in India, the Defence Pro-
curement Procedure (DPP) 2016 incorporated several
new provisions to achieve indigenization and promote
MSME (micro, small and medium enterprises). These
include the ‘Buy-Indigenously Designed Developed and
Manufactured’ as the most preferred category for pro-
curement, ‘Make II’ (private industry-funded design and
development opportunity for simpler requirements),
and reservations for MSME in Make I and II. Concomi-
tantly, there were policy interventions in the manage-
ment of offsets, an increase in foreign direct investment
(FDI) in defence from 26 per cent to 49 per cent and the
strategic partnership programme.
Even such forward-looking policies could not make the
impact that had been visualized. Past legacy and convo-
luted procedures kept process dominant over outcome.
In the past six months, with defence minister Nirmala
Sitharaman, a concerted drive is visible. With swift shut-
tles between the front line and industry, the minister
has made a spate of announcements like simplification
of Make II, two defence industrial corridors, and the
draft defence production policy 2018.
The Make II procedure has been simplified consider-
ably and timelines have been compressed. A refreshing
new feature is the provision for industry or individuals
to suggest suomotu proposals for potential Make II
projects. Projects up to Rs 3 crore are earmarked for
MSME. Now “acceptance of necessity” needs to be pro-
vided and projects commenced on priority for the vision
to be realized.
The draft defence production policy 2018 envisions In-
dia as one of the world’s top five defence producers by
2025, with self-reliance in 13 areas covering almost the
entire range of weapons and systems. A turnover of
Rs 1.7 trillion is visualized in defence by 2025, with

9. 7
FOCUS OF THE MONTH
APRIL 2018
Rs 70,000 crore being invested to create employment
for two-three million people. The export target has
been fixed at Rs 35,000 crore (US$5 billion) by 2025.
The FDI limit is proposed to be raised to 74 per cent
under the automatic route for “niche technologies”.
“Hackathons” are proposed to resolve problems, with
allocation of Rs 1,000 crore for 2018-22 and defence in-
novation hubs are proposed to encourage start-ups.
The draft defence production policy is a grand vision
document with unambiguous goals and objectives. This
ambitious policy needs to be backed by granular detail-
ing. Most important is continuity and scale for creating
viable business cases for the entire life cycle.
The numerous instances of RFP (Request For Proposal)
cancellations, discontinuation of schemes after months
of RFI (Request For Information) interactions in favour
of nominations to the public sector, leads to scepticism
in the private sector. As much as the public sector re-
quires boosting, the private sector needs encourage-
ment. The private sector needs assurance of orders to
build a business case for investment. To accomplish the
export targets, the Indian defence industry has to start
displaying capabilities in defence exhibitions across the
world. India has to conduct international professional
military competitions based on indigenously manufac-
tured defence equipment to establish credibility.
For the development of the two corridors, the policy
provides for 50 per cent assistance from the govern-
ment of India. The state governments and the industry
need to pitch in for the rest. For the ministry of defence,
separate allocations over and above defence budget es-
timates would be necessary. Provision for testing facili-
ties by industry needs to be supported by incorporating
third-party certification.
Defexpo 2018, for the first time, intends to project In-
dia’s defence manufacturing capabilities to the world.
The press release states that Defexpo 2018 will brand
India as a defence exporter of several defence systems
and components for all three services. While showcas-
ing the strengths of India’s substantial public sector,
it will also unveil India’s growing private industry and
spreading MSME base for components and sub-sys-
tems.
For Defexpo 2018, the defence production policy 2018
and Make in India to succeed, the process has to be sim-
plified and mindsets have to be changed to enable trust.
Organizational security for well-meaning decisions is an
imperative, of course with accountability for timelines.
(This article was first published in the Mint dated 2nd
April 2018)

10. 8
FOCUS OF THE MONTH
ECONOMY MATTERS
Maximising India’s Defence Potential
F
ew industry sectors can rev up the economic
growth engine quite like manufacturing. The pre-
sent government, having recognised this reality, is
pushing hard through its Make in India campaign to pro-
mote indigenous production and place the country on
the world map as a leading manufacturing destination.
This initiative is necessary to help realise India’s ambi-
tious plans to take growth in the manufacturing sector
from the current 17 per cent of GDP to 25 per cent over
the next decade and serve to create new job opportu-
nities that will harness the energies of the youth. The
Make in India programme promises to create oppor-
tunities to achieve this goal, albeit in the short run, by
building strong partnerships, ensuring transfer of tech-
nology and then building on them indigenously for the
long run.
However, no country can aspire to achieve regional
supremacy by remaining dependent on imports for ma-
jority of its defence & security needs. Thus, the concur-
rent push to ‘Design in India’ and ‘Digital India’ which
is imperative to indigenously design, engineer, develop
and manufacture one’s own defence necessities needs
to be at the core of our policy making and implementa-
tion. The Ministry of Defence (MoD) has implemented
this in the form of Buy Indian – IDDM (Indigenously De-
sign, Developed & Manufactured) category as the top
most category in the procurement decision tree.
India’s Defence Sector is a monopsony (existence of
a single buyer). The country’s defence procurement
has, historically, depended primarily on Government to
Government (G-to-G) relationships for Transfer of tech-
nology (ToT), and thus it was only consequential for
Ministry of Defence (MoD) to create and trust only
Government owned companies as production agencies.
In case of complex systems, the Defence Public Sector
Undertakings (DPSUs) remained as the prime contrac-
tors, supported by private players as tiered partners
who were also the development partners to Defence
Research and Development Organisation (DRDO). This
model with implicit handling and margin at the hands of
prime contractors, yielded lower financial efficacy.The
Government continued to make huge investments in
the public sector to create capacities and build a large
pool of skill sets. However, the Kargil war highlighted
gaps in our preparedness and underlined our contin-
ued dependence on imports to question the past rela-
tionships of trust. Review committees thereafter rec-
ommended involvement of private sector to leverage
their nimble footedness. The visible steps taken by the
current Government towards indigenising the defence
sector were through a series of policy initiatives such
as strategic partnership with the private sector, IDDM
Category, performance based acquisition enshrined
in the DPP 2016, granting Foreign Exchange Rate
Variation (FERV) for all Indian categories on par with
that for global categories, among others. Over the
past two and a half years, the import component has
shown a declining trend from its earlier print of 70 per
cent. With the targeted indigenous acquisition, India’s
imports are expected to drop further. The strong sup-
port and push from the Government towards defence
export and an active facilitation through the Ministry

11. 9
FOCUS OF THE MONTH
APRIL 2018
of External Affairs (MEA) have laid the foundation for
registering an exponential growth in exports. Having
said that, as a nation, we need to work hard and smart
and collaborate as ‘One India’ rather than make piece-
meal offerings to improve export volumes. To my mind,
the early implementation of ‘The Dhirendra Singh Com-
mittee’ report, which has recommended a strategic
partnership model in letter and spirit, will prove to be
a game changer in realising Make in India in India’s de-
fence sector.
Building indigenous capability is strategic and confers
India the ability to gain an edge over its adversaries in
the form of surprises through force multipliers. It also
positions India well for the export of complex Defence
Systems / Platforms. This national imperative puts an
increased focus on R&D to stay at the bow wave of lat-
est technology at all times. Today, none of the Indian
defence companies feature in the Top 2500 Global
List of R&D spenders. The private sector accounts for
roughly 35 per cent of India’s total R&D spending for
relatively small business volumes. To ensure defence in-
digenisation, Indian companies need to be encouraged
to innovate and keep pace with technology. The Gov-
ernment can provide sustained encouragement under
the strategic partnership policy as well as by offering ac-
celerated weighted tax incentives for targeted R&D in
defence to promote spending on development of prod-
ucts and services through in-house R&D, whether sold
domestically or exported. Such an approach is sure to
smoothen the path to build on from ‘Make in India’ to
‘Made in India’ and boost defence manufacturing.
SMEs/MSMEs and start-ups are often the bedrock of
innovation. As a nation we need to promote the gen-
eration of Intellectual Property through Make (I and II)
Programs by ‘trusting’ companies that have invested
in defence and gained maturity. The tiered value / sup-
ply chains under such indigenous programs generate a
multiplier impact on the economy and thus need to be
cleared at an accelerated pace.
It is my belief that the Indian defence industry has the
necessary capabilities in many major target segments
for indigenization. The hand-holding by MoD through a
trust-based model can help to establish the much need-
ed robust and vibrant defence industrial base in the
country. While many defence sector reforms have been
implemented, what remains to be done is implement-
ing concurrent action in four areas, viz. Faster Acquisi-
tion Cycles, leveraging Public Procurement Policy to
promote market differentiated higher indigenous con-
tent in the offering, pushing the Make in India agenda
through a series of measures – the most significant one
being the “Strategic Partnership” and Getting ‘Make’
programs on the way kick-started.
The Government also needs to increase the defence
budget allocation in line with the fiscal policy changes.
An increased allocation upward from the existing 1.65
per cent of GDP would not only enable building the
deficient needs across armed forces, but would also
contribute to increased GDP (higher than the spend)
through the multiplier effect, if the incremental money
is spent and is targeted towards indigenization of the
sector.

12. 10
FOCUS OF THE MONTH
ECONOMY MATTERS
Roadmap to Position India as a Defence
Manufacturing Hub
I
ndian aerospace and defence industry is at an in-
flexion point and is poised for robust growth. Even
though the defence sector was opened to the private
sector only a few years ago, rapid strides have been
made in indigenous manufacturing and absorption of
technology. Indian companies have developed a wide
range of design capabilities also.
Defence budgets worldwide are shrinking, forcing
global aerospace and defence majors to review their
strategies to be more cost competitive. Further, big
ticket defence purchases by India are on the cards. To
accommodate shrinking defence budgets and to win
contracts in India, global majors are now increasingly
looking for much more cost competitive but credible
options. This is where defence manufacturing in India
comes into the picture. And this is where partnerships
of global majors with competent Indian industry players
become extremely important.
Today, India has the dubious distinction of being the
largest defence equipment importer in the world. To
rectify this situation, Government has initiated a policy
shift towards ‘Make in India’—a strategic initiative that
will help in creating an indigenous production base for
the defence and aerospace industry in India. This is criti-
cal to our nation’s sovereignty.
Similarly, several other measures like the strategic part-
nership policy, streamlined licensing requirement, re-
solving the FERV (Foreign Exchange Rate Variation) etc.
have been announced by the Government so that pri-
vate sector is involved in high technology programmes
in the defence sector. This is indeed a transformational
step in the Indian defence sector.
It may be noted thatIndia hasalready matured in several
manufacturing and services sectors. We have become
a global hub for IT related services including design &
engineering services, automotive & auto component
manufacturing, production of generic drugs etc. Given
the strong competitive advantage of India, there is no
doubt that India can be a strong production base for de-
fence production in the coming future.
There are two reasons that the Indian defence manu-
facturers may focus on meeting our own defence equip-
ment demand before trying to address export require-
ments.
Firstly, any major export would require credibility to be
established in the market. This would be easier if Indian
Armed forces are already using equipment produced in-
digenously by Indian companies.
Secondly, we are all cognizant of the fact that defence
and aerospace industry is currently slowing down due
to major cuts in defence budgets across the globe per-
haps with the exception of South and West Asia. If one
looks at the established defence aircraft manufactur-
ers, many of their plants are functioning below capac-
ity. There are also few new programmes for manufac-
turing fighter aircrafts and helicopters globally. Thus, it
will be opportune for the Indian private industry to de-
velop capability while addressing Indian defence needs
and thereafter target the global market.

13. 11
FOCUS OF THE MONTH
APRIL 2018
Having looked at the policy canvas, it is evident that the
Indian private sector is at the threshold of rapid growth.
What should be the roadmap in short-mid-long-term
perspective to reduce imports & scale up exports and
position India as the defence manufacturing hub?
In the short-term, we have to bear in mind that while
the Government has a mandate to safeguard the coun-
try against the threat of war/aggression on one, two
or even two and a half fronts, it needs to be balanced
against competing demands from other sectors of the
economy—health, education, road, etc. Also, it is fair to
say that the Indian private industry is at an early stage
due to limited participation in defence production in the
past.
The above two factors necessitate an immediate focus
on upgrading of existing combat platforms indigenous-
ly. This will enhance the operational life of the in-service
equipment and allow the Government to prioritize the
procurements in years to come. Such a strategy will also
allow the companies to build and demonstrate their ca-
pabilities in a phase-wise manner.
One such example is the ongoing project of the BMP 2
Infantry Combat Vehicle upgradation. It should be
noted that this is for the first time, that Indian private
sector companies are in the fray to indigenously design,
develop and upgrade an existing platform. The early
implementation of this upgradation project will have
a multiplier effect and will also be an eye opener for
India’s capability.
In the next phase, when the budgetary outlay for new
projects are increased in the medium-term, focus should
be on products which have been proactively designed
and developed by Indian defence manufacturers and
which meet the requirements of the defence forces.
Such a strategy will ensure that the lead time taken to
design and develop a prototype for new products can
be significantly reduced. Armoured Light Specialist Ve-
hicle (ALSV) project, which is already in the trial phase
of the Army, is one such project in the medium-term.
This vehicle with some modifications can be adapted for
other roles and projects.
Another area which can be looked at is Radars and De-
fence electronics where there are requirements in the
medium-term. The Indian private sector players have
already demonstrated capabilities in this field. This ca-
pability needs to be further enhanced and supported by
the Government. Small arms manufacturing is another
area ripe for focus in the medium-term. Many Make II
programmes will ideally suit medium- term objectives.
In the long-term, the focus should be on making India a
hub for Defence & Aerospace manufacturing. Again In-
dian companies have demonstrated proactive capabil-
ity building in the Aerospace Industry. Some companies
have large state-of-the-art aero-structures manufactur-
ing plants. Such plants are supplying to major global
Original Equipment Manufactures (OEMs) like Airbus,
Boeing, SAAB etc. With the strategic partnership model
having been announced, it is only logical that helicop-
ters and fighter aircrafts start getting manufactured in
India. Assembly and production of guns is another po-
tential area.
With such a Make in India roadmap, one can be sure that
India will be transformed into a Defence and Aerospace
manufacturing hub catering not only to our needs but
exporting large and potent platforms globally. Both the
Indian private sector and our Government are earnestly
committed together in achieving this goal.

15. 13
DOMESTIC TRENDS
Economic Overview
APRIL 2018
Economic growth is recovering at a fast pace with able support provided by both demand and supply drivers. The
worst seems to be over for the economy and CII expects India’s GDP to grow at 7.3 – 7.7 per cent during 2018-19.
This is based on strengthening demand in the rural economy, including agriculture and non-farm activities, as well
as better global growth climate. There are some macro challenges like rising oil prices, but that would be more
than compensated by improving industrial performance.
On the external front, rupee weakened in March 2018 against the greenback from its previous month’s level as
crude oil prices rose along with a concomitant weakening of US dollar. Going forward, the recent spate of healthy
data prints including that of the GDP and industrial production are likely to boost portfolio flows into the economy
in the months to come which will help in the strengthening of the rupee against the US dollar. Merchandise ex-
ports meanwhile, declined for the first time in five months in March 2018 amid concerns over protectionist policies
of the US and geo-political tensions slowing global trade. Going forward, streamlining of GST related issues and
some change in GST rules by the government are expected to help exporters. Merchandise import growth too
decelerated to its 15-month low during the month on slower gold shipments. Merchandise trade deficit widened
on a sequential basis in March 2018 as import growth continued to outpace export growth.
The softening in inflation (both CPI and WPI) in the recent months has been underscored by a fall in food prices.
Going forward, the risks to inflation outlook are tilted to the upside with the second-round effect of the expected
changes in HRA by the state governments, spike in crude oil prices, proposed revisions to MSPs for kharif crops
and fiscal slippages exerting pressure on the inflation trajectory. Keeping these factors in mind, the Reserve Bank
of India (RBI) chose to keep the interest rates on hold in its monetary policy review held in the first week of April
2018. Yield on the benchmark 10-year G-sec has moderated in March 2018 due to the lower-than-expected borrow-
ing programme announced by the central government for 1HFY19. Non-food credit growth is slowly but steadily
recovering from the after-effects of demonetisation.

16. 14
DOMESTIC TRENDS
ECONOMY MATTERS
A
ided by the low base of last year, industrial out-
put growth remained healthy in February 2018
at 7.1 per cent which is in consonance with the
above 7 per cent growth posted in the previous three
months. The series of robust readings in the last four
months has strengthened the prognosis that the econ-
omy is on a mend. The cumulative growth for the first
eleven months of the fiscal (April-February) FY18 stood
at 4.2 per cent as compared to 4.6 per cent in the same
period last year. Looking ahead, we expect that indus-
trial performance would be on an upward trajectory
with both consumption and investment picking up pace
during the year.
Industrial Growth on a Firm Upward Trajectory

17. 15
DOMESTIC TRENDS
FEB-MAR 2018
Manufacturing sector remains the main
growth driver of IIP growth
At the sectoral level, the manufacturing sector re-
mained the main driver of industrial production, grow-
ing at 8.7 per cent in February 2018 compared to a prior
reading of 8.6 per cent in the preceding month. In the
last four months, industrial production has averaged
9.0 per cent, indicative of de-clogging of manufacturing
activity after the government simplified the GST refund
rules.
As many as 15 out of 23 industry groups in the manufac-
turing sector showed positive growth in February 2018
as compared to the corresponding period in 2017, led
by ‘Manufacture of other transport equipment’ (32.0
per cent), ‘Manufacture of machinery and equipment
n.e.c’ (26.9 per cent) and ‘Manufacture of motor vehi-
cles, trailers and semi-trailers’ (19.9 per cent). On the
other hand, the industry group ‘Other manufacturing’
showed the highest negative growth during the month.
Capital goods sector grows at its strongest
pace in over 27 months
According to use-based classification, an encouraging
development was that production in the capital goods
sector grew at its strongest pace in over 27 months at
20.0 per cent in February 2018 in part due to a favora-
ble base effect of last year. This was also the third con-
secutive month of double-digit growth in the sector
and augurs well for the revival of investment trends in
the economy. Growth in infrastructure & construction
goods also quickened to double-digit level of 12.6 per
cent in February 2018 as compared to a rise of 7.0 per
cent posted in the previous month, mainly due to the
low base of last year.
Consumer goods sector showing traction;
boding well for consumption trends
The output of consumer durables remained robust at
7.9 per cent in February 2018 as compared to 7.8 per
cent growth in the preceding month. Meanwhile,
growth in consumer non-durables decelerated to 7.4
per cent in the reporting month as compared to 11.0 per
cent posted in the previous month. One of the major
reasons behind this slowdown could be the unfavorable
‘base-effect’ as the sector grew by 10.4 per cent in the
same period last year. To be sure, the consumer non-
durables sector has been gaining traction since the start
of FY18, indicating that consumption demand is well on
its way to recovery

18. 16
DOMESTIC TRENDS
ECONOMY MATTERS
Core sector output slows down despite a
low base of last year
The output of eight core infrastructure sectors, which
carries 40.27 per cent weight in the Index of Industrial
Production (IIP), slowed down to 5.3 per cent in Febru-
ary 2018 as compared to 6.1 per cent growth posted in
the previous month despite the low base of last year.
Cement and steel sectors were the star performers of
the month suggesting that construction activities were
gathering pace in the economy. Output of crude oil and
natural gas stayed in the negative territory during the
month. On a cumulative basis, growth in April-February
FY18 stood at 4.3 per cent, down from 4.7 per cent in
the corresponding period last year.
The downward movement of the Consumer Price In-
dex (CPI) based inflation continued as it printed a five-
month low of 4.3 per cent in March 2018 as compared
to 4.4 per cent posed in the previous month mainly on
the back of lower food inflation. With this, the CPI infla-
tion for FY18 came at 3.6 per cent for FY18 as compared
to 4.5 per cent posted in FY17. This is 60 bps below the
RBI’s official inflation target of 4.0 per cent for FY18.
CPI food inflation moderated to 2.8 per cent in March
2018 as compared to 3.3 per cent posted in the previous
month. Amongst food items, inflation in vegetables and
protein based items slowed down as compared to Feb-
ruary 2018. Food inflation for FY18 stood at a low of 1.8
per cent as compared to 4.3 per cent in the year before.
Though CPI fuel & light inflation decelerated to 5.7 per
cent in the reporting month as compared to 6.9 per
cent in the month before, upside risks loom on the
horizon as global crude oil prices have started moving
northwards in the recent weeks. For FY18, fuel & light
inflation stood at a high of 6.2 per cent as compared
to 3.3 per cent in the year before. Inflation for the mis-
Outlook
The visible improvement in industrial output since November 2017 augurs well for the return of broad based re-
covery in industrial performance during the year. The rising trend in manufacturing growth also shows that the
underlying growth momentum is positive. What is encouraging is that the capital goods sector has posted robust
growth during the month backed by new orders and improved demand. CII believes that with the reform-oriented
measures announced in the Union Budget, it is only a matter of time that investment cycle witnesses an upturn and
industrial growth starts gathering momentum.
Inflationary Pressures Remain Benign

19. 17
DOMESTIC TRENDS
FEB-MAR 2018
cellaneous category came at a high of 5.2 per cent in
March 2018, with higher monthly momentum seen in
categories such as education, recreation and household
goods. Meanwhile, housing inflation continued to stay
elevated at 8.3 per cent, more-or-less unchanged from
its previous month’s levels, due to the impact of revi-
sion of house rent allowance paid to the government
employees.
Lower food prices push down WPI based in-
flation in March 2018
Wholesale price index (WPI) based inflation remained
unchanged at 2.5 per cent in March 2018 from the pre-
vious month on the back of deflation recorded in the
food basket of WPI. On a cumulative basis, average WPI
inflation in FY18 stood at 2.9 per cent as compared to 1.7
per cent recorded in FY17.
Primary articles inflation slows down on
broad-based deceleration
Inflation in primary articles slowed to a 9-month low
of 0.2 per cent in March 2018 as compared to 0.4 per
cent recorded in the previous month, attributable to
a broad-based moderation. Primary food inflation re-
corded a deflation to the tune of 0.3 per cent in the re-
porting month as compared to 0.9 per cent seen in the
previous month. Low food prices pushed primary infla-
tion lower to 0.3 per cent in FY18 as compared to 3.4 per
cent in FY17.
Fuel inflation move upwards marginally in
March 2018 on rise in petrol prices
Fuel inflation quickened marginally to 4.7 per cent in
March 2018 as compared to 3.8 per cent posted in the
previous month on high petrol prices. For FY18, fuel in-
flation stood at a high of 8.2 per cent as compared to
a deflation seen in FY17, mainly because of high global
crude prices. To be sure, Europe Brent spot prices rose
by 18.4 per cent on y-o-y basis in FY18 as compared to
FY17. In contrast, manufacturing inflation has remained
stable since January 2018. Manufacturing food inflation
has remained subdued since October 2017.

20. 18
DOMESTIC TRENDS
ECONOMY MATTERS
Merchandise export growth declined for the first time
in five months to 0.7 per cent in March 2018 as com-
pared to 4.5 per cent growth posted in the previous
month a mid concerns over global trade and US moves
to review a programme allowing duty-free imports of
goods. The contraction was partly also due to the high
base of last year. With this print, export growth has av-
eraged 9.8 per cent in FY18 to reach US$302.8 billion, a
substantial improvement over 4 per cent registered in
FY17. The reaching of the crucial figure of US$300 billion
for FY18 is an important morale booster for the exports
growth trajectory in India. Despite this, our export
growth is below potential and much more needs to be
done to rejuvenate exports in the current fiscal.
Export growth continues to remain sluggish
During March 2018, the major commodity groups show-
ing positive growth for exports over the corresponding
month of last year included—organic & inorganic chem-
icals (31.7 per cent), rice (20.9 per cent), cotton yarn
(14.2 per cent),drugs & pharmaceuticals (8.4 per cent),
& engineering goods (2.6 per cent).
Imports growth moderates to 15-month low
on slower gold shipments
Merchandise import growth moderated to a 15-month
low of 7.2 per cent in March 2018 as compared to 10.4
per cent in the previous month, aided by a continued
contraction in gold imports. However, for FY18, import
growth rose sharply by 19.6 per cent to US$459.6 billion
from a contraction of 0.17 per cent seen in FY17. Gold
imports contracted by close to 40 per cent in March
2018, as higher prices continued to curtail demand in
the world’s second-biggest consumer of bullion.
Oil imports remained high (US$11.1 billion), growing
by 13.9 per cent in March 2018, largely attributable to
a resurgence in crude prices. To be sure, the global
Brent prices ($/bbl) have increased by 27.9 per cent in
March 2018 on a year-on-year basis as per World Bank
commodity price data. For FY18, oil imports stood at
US$109.1 billion which translates into a 25.5 per cent
jump as compared to FY17.
Outlook
On retail inflation, CII notes the softening of the CPI inflation print on account of a downswing in food prices.
Though upside risks to CPI inflation remain on account of uncertainty over the proposed MSP increase, possible
second-round impact of HRA increases in the states, firming of crude oil prices, fiscal slippages amongst others;
the prognosis of a normal monsoon this year by the IMD will help in containing inflation within RBI’s projected
trajectory of 4.7-5.1 per cent for H1FY19.
Export Growth Remains a Pain Area

21. 19
DOMESTIC TRENDS
FEB-MAR 2018
Merchandise trade deficit widens in March
2018 on a sequential basis
Trade deficit widened to US$13.7 billion in March 2018 as
compared to US$12.0 billion in the previous month. On
Treading on expected lines, the Reserve Bank of India
(RBI) chose to maintain a status quo on the key inter-
est rates in its first bi-monthly monetary policy meeting
held on 5th
April 2018. The RBI’s decision to maintain a
status-quo in policy rates, even with a neutral stance,
is welcome. The policy takes a balanced view of the
recent economic developments and is supportive of
growth even while giving primacy to anchoring infla-
tionary expectations.
an annual basis, trade deficit in FY18 clocked US$156.8
billion, widening from US$108.5 billion over FY17, led by
higher imports. The contraction in gold imports over
the last few months has capped the trade deficit over
FY18, which would otherwise have been higher.
RBI’s monetary policy stance remains neu-
tral
Accordingly, the repo rate was kept unchanged at 6.0
per cent, reverse repo at 5.75 per cent and Marginal
Standing Facility (MSF) at 6.25 per cent. Five of the six
committee members supported the decision, with one
voting for a 25 basis points (bps) hike. The decision of
the Monetary Policy Council (MPC) was consistent with
Outlook
Going forward, the exports growth is expected to be cushioned by the streamlining of teething troubles arising out
of GST implementation. However, upside risks remain due to geo-political uncertainties and protectionist policies
in the advanced world. Imports meanwhile will continue to remain elevated as consumption spending of house-
holds will receive a shot in the arm from the 7th
pay commission handouts. The hardening of global crude prices
may also perk up imports. Consequently, the net balance between exports and imports growth will determine the
trajectory of the trade deficit.
RBI’s Move to Maintain Status quo is Welcome

22. 20
DOMESTIC TRENDS
ECONOMY MATTERS
The decision to hold the interest rates by RBI was based
on the uncertainty surrounding the inflation trajectory
in the future. The following factors have cast a veil on
the same and would need a close monitoring in the
coming months.
- Uncertain impact of the proposed rise in Minimum
Support Watch (MSP) on food prices
- Staggered impact of House Rent Allowance (HRA)
revisions and the possible second round pressures
of HRA revisions on overall inflation
- Impact of possible fiscal slippages
- Play out of the monsoons this fiscal
Despite the maintenance of status-quo on interest
rates, there has been a tightening of interest rates in
the banking sector. A few banks have raised their mar-
MPCrevisesCPIinflationestimatesdownwards
To be sure, the MPC’s view on inflation has softened
sharply from the policy in February 2018, with a down-
ward revision in projections supported by recent sharp
moderation in food prices. The CPI inflation forecast
was revised downwards to a range of 4.7-5.1 per cent
for H1FY19 as compared to 5.1-5.6 per cent forecasted
earlier. In addition, the forecast was revised down-
wards to 4.4 per cent in H2FY19 from 4.5-4.6 per cent.
Yet, given upside pressures, the MPC will stay vigilant
on the evolving inflation scenario. On the growth front,
the MPC expects GDP growth to clock 6.6 per cent in
FY18, strengthening further to 7.4 per cent in FY19, with
an additional boost coming from a recovery in exports
amid robust global growth.
ginal cost of lending rate (MCLR) by 10 to 20 bps in the
recent times due to the tightening of liquidity in the
banking system.
the neutral stance of monetary policy in consonance
with the objective of achieving the medium-term target
for consumer price index (CPI) inflation of 4 per cent
within a band of +/- 2 per cent, while supporting growth.
Outlook
CII is hopeful that with better clarity emerging on inflation, going forward, there would be a distinct softening of
the ‘neutral’ policy stance which would enable the RBI to give precedence to supporting and nurturing the nascent
economic recovery while negotiating the growth-inflation conundrum.

23. 21
DOMESTIC TRENDS
FEB-MAR 2018
The CII Business Confidence Index (CII- BCI) for January-
March 2018 quarter (Q4FY18) continued to improve for
the second consecutive quarter, after business senti-
ments had taken a hit, post the implementation of GST
in July-September 2017 quarter. However, this quarter
the improvement in the BCI has been marginal with the
index moving up from the level of 59.7 in the October-
December 2017 quarter to 60.0 in the January-March
2018 quarter. Nonetheless, it is pertinent to note that
the index still stands much above the level of 50, which
is an indicator of optimism in the business environment.
The respondents in the survey were asked to provide a
view on the performance of their firm, sector and the
economy based on their perceptions about the previ-
ous and current quarter. The CII-BCI was then construct-
ed as a weighted average of the Current Situations In-
dex (CSI) and the Expectation Index (EI).
The improvement in BCI in the January-March quarter
was majorly driven by an improvement in CSI which in-
creased to 56.7 from 54.7 in the previous quarter. The
EI, on the other hand, fell in the January-March 2018
quarter to the level of 61.7 from 62.2 in the previous
quarter. The dip in EI was mainly on account of a fall
in expectations about the performance in own activity
sector and company, while the respondents expected
an improvement in the overall economic situation.
In the survey, firms when asked to rank their concerns
in the coming six months, stated high commodity
prices, low domestic demand and fragile global eco-
nomic recovery and as their top concerns.
CII’s Business Outlook Survey Improves Marginally in
Q4FY18
Monsoon Seasonal Rainfall likely to be 96 per cent of the Long
Period Average
In some good news for the beleaguered rural sector, as per the first stage forecast of Southwest monsoon (June
to September) seasonal rainfall issued by Indian Meteorological Department (IMD) on 16th
April, 2018, the mon-
soon seasonal rainfall is likely to be 96 per cent of the Long Period Average (LPA) with an error of ± 5 per cent. IMD
is expected to come out with the next assessment on 15th
May, 2018 around the onset of monsoon over Kerala.
If the forecast of the IMD comes true then for the third consecutive year, India will have a normal monsoon. A
normal monsoon is important for accelerating economic growth, which slowed last year under the lasting impact
of demonetisation and disruptions due to implementation of the Goods and Services Tax (GST). Interestingly, as
per the private forecaster, Skymet Weather, monsoon 2018 is likely to be normal at 100 per cent as well (with an
error margin of +/-5 per cent) of the LPA.

24. 22
DOMESTIC TRENDS
ECONOMY MATTERS
Major share of the respondents (40 per cent)
expect GDP growth to range between 7.0-7.5
per cent in 2018-19.
A large proportion of the respondents (40 per cent)
anticipate the Indian economy to grow in the range of
7.0-7.5 per cent in 2018-19. Following closely, about 32
per cent of the respondents expect GDP growth to be
Majority of the respondents (52 per cent)
foresee inflation in the 4.0-5.0 per cent range
in 2018-19.
More than half of the respondents feel that inflation
will lie in the range of 4.0-5.0 per cent in 2018-19, which
is closely in line with the RBI’s projected CPI inflation
a tad lower, in the range of 6.5-7.0 per cent in the said
financial year. The expectation of a pick-up in econom-
ic activity in 2018-19 is largely in-line with the growth
projections of RBI (7.4 per cent) and other interna-
tional organizations like the IMF (7.4 per cent) and ADB
(7.3 per cent).
of 4.7-5.1 per cent in H1 2018-19 and 4.4 per cent in H2
2018-19. Though inflation has seen a downward trend in
the past few months, it still remains close to the RBI’s
targeted range and it may prompt the bank to retain its
status quo on policy rates in the upcoming monetary
policy review in June.

25. 23
DOMESTIC TRENDS
FEB-MAR 2018
Large proportion of the respondents (42 per
cent) feel that the government will meet its
fiscal deficit target in 2018-19.
Despite the fiscal slippage witnessed in the previous fi-
nancial year, a major share of the respondents (42 per
cent) still feel that the government will meet its fiscal
deficit target, budgeted at 3.3 per cent of GDP in the cur-
rent financial year. On the other hand, 27 per cent of the
respondents are of the view that the government will
overshoot its fiscal deficit target while 31 per cent are un-
sure about the final outcome.
Major proportion of the respondents feel
that the policy announcements in the Union
Budget 2018-19 have somewhat been in line
with their expectations and may help revive
economic growth to some extent.
Nearly half (48 per cent) of the respondents are of the
view that the provisions in the Union Budget 2018-19 met
their expectations to a certain extent. Closely enough,
around 42 per cent of the respondents feel that the
budget announcements fell short of their expectations.
On the budget’s impact on economic growth, a major
share of the respondents (40 per cent) feel that the
budget may somewhat help revive economic growth
while on the other hand, around 31 per cent feel that
the budget will have no impact on economic recovery. A
significant majority of the respondents (82 per cent) feel
that the current provisions in the budget will not lower
their tax burden while a large proportion (39 per cent)
feel that the budget announcements will not support the
revival in investment activity.
Large share of respondents (42.4 per cent)
expect capacity utilization in the 75-100 per
cent range in the Jan-Mar 2018 quarter
Around 42 per cent of respondents feel that capacity
utilization will be in the range of 75-100 per cent during the
Jan- Mar 2018 quarter as against 36 per cent of respond-
ents who were of the same opinion in the Oct- Dec 2017
quarter. It is interesting to note that a major share of the
respondents (42 per cent) are anticipating capacity utiliza-
tion in the 75-100 per cent range even as a large propor-
tion of them (43 per cent) experienced capacity utilization
levels of 50-75 per cent in the Oct-Dec 2017 quarter.
Majority of the respondents anticipate a status
quo on both domestic and international invest-
ment in Jan-Mar 2018
Around 61 per cent of the respondents plan to keep their
domestic investment plans on hold in the Jan-Mar 2018
quarter while more than three out of four respondents
(77 per cent) intend to maintain a status quo on their in-
ternational investment plans in the same quarter.
Though the trend in investment intentions has remained
consistent with the survey results of the previous
quarter, it is interesting to note that there is a marked
increase in the proportion of respondents anticipating
to maintain status quo on their investment plans in the
current Jan-Mar 2018 quarter.
While half of the respondents anticipate an
increase in sales in the Jan-Mar 2018 quarter,
an equal proportion anticipate no change in
new orders
Around 51 per cent of the respondents foresee an
increase in sales in the Jan-Mar 2018 quarter while 47
per cent experienced the same in the previous quarter.
Interestingly, however, 50 per cent of the respondents
feelthattheircountofneworderswillremainunchanged
in Jan-Mar 2018 quarter even though a majority of them
(52 per cent) witnessed an increase in order books in the
previous quarter.
Input costs, except cost of credit, are expect-
ed to increase in the Jan-Mar 2018 quarter.
Majority of the respondents anticipate an increase in the
cost of raw material (67.9 per cent), electricity and fuel
(52.6 per cent) and wages and salaries (53.3 per cent) in
the Jan-Mar 2018 quarter. At the same time, around 56
per cent of the respondents expect the cost of credit to
remain unchanged, in the said quarter.
More than half of the respondents (50.8 per
cent) feel profits will remain unchanged in
Jan-Mar 2018 quarter
About 51 per cent of the respondents expect profit levels
to remain unchanged in Jan-Mar 2018 quarter as com-
pared to 43.3 per cent who expected the same in the
previous quarter. Despite the anticipation of an improve-
ment in sales in the Jan-Mar quarter, the expectation of
an increase in input costs may have driven respondents
to anticipate no change in profits in the said quarter.

27. 25
POLICY FOCUS
POLICY FOCUS
APRIL 2018
1). Cabinet approves Revision of Energy
Norms under New Urea Policy
The Cabinet Committee on Economic Affairs on 21st-
March, 2018 has accorded the following approval to the
proposal of Department of Fertilizers:
(a) The Target Energy Norms under the New Urea
Policy-2015 (NUP-2015) for 11 urea units to be im-
plemented w.e.f. 1st
April, 2018.
(b) The extension of present energy norms with token
penalties, under the New Urea Policy-2015 for a fur-
ther period of two years for fourteen urea manu-
facturing units which failed to achieve the Target
Energy Norms.
(c) Three Naphtha based urea units are also allowed
the existing energy norms for another two years/
till gas pipeline connectivity is provided.
(d) The target energy norms as per NUP-2015 will be
continued for 5 years w.e.f. 1st
April, 2020.
The extension of present energy norms for a further
period of 2 years will ensure easy availability of urea
to farmers throughout the country. It will also help
to maximize the indigenous urea production and will
lessen the import of urea.
2). Environment ministry eases rules for
construction companies
The government, in a notification issued on 21st
March,
2018 has eased environmental clearances for build-
ings and construction sector, with the environment
ministry more than doubling the threshold for construc-
tion projects requiring environmental clearances from
the Centre to 50,000 square metres of built-up area
from 20,000 square metres. The projects will be able to
commence construction once the local authorities issue
the building permission incorporating a series of envi-
ronmental conditions. The building and construction
sector is governed under the Environmental Impact As-
sessment (EIA) notification 2006 under which any pro-
ject of more than 20,000 square metres requires Envi-
ronmental Clearance (EC).
3). Government scraps export duty on sug-
ar to boost shipments
The government on 20th
March 2018 has scrapped ex-
port duty of raw and refined sugar to boost shipments.
A notification issued by the Central Board of Excise and
The important policy announcements made by the Government/RBI in the month of March-April 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.

28. 26
POLICY FOCUS
ECONOMY MATTERS
Custom said that it has been decided to reduce export
duty on raw sugar, white or refined sugar from 20 per
cent to Nil. The sugar output of India, the world’s sec-
ond largest producer, is estimated to rise sharply to
29.5 million tonnes in the 2017-18 marketing year (Oc-
tober-September) from 20.3 million tonnes in the previ-
ous year.
4). Government unveils draft national for-
est policy
The Environment Ministry has unveiled a draft of the
new National Forest Policy (NFP) that proposes to
restrict “schemes and projects which interfere with
forests that cover steep slopes, catchments of riv-
ers, lakes and reservoirs, geologically unstable ter-
rain and such other ecologically sensitive areas”.“The
ecologically sensitive catchment areas shall be stabi-
lized with suitable soil and water conservation meas-
ures, and by planting suitable trees and grass like
bamboo,” the draft suggests. It also suggests setting
up of two national-level bodies—National Commu-
nity Forest Management (CFM) Mission and National
Board of Forestry (NBF)—for better management of
the country’s forests. National Forest Policy will be
an overarching policy for forest management, with
the aim of bringing a minimum of one-third of India’s
total geographical area under forest or tree cover.
5). Government notifies series of changes in
GST compliance requirements
The government on 28th
March 2018 has notified a series
of changes in the timelines of the compliance require-
ments under the Goods and Services Tax (GST). It gave
traders more time to file the tax return form to claim
transitional credit known as Tran-2. The new deadline
for filing the return disclosing the transitional credits
claimed by traders has been extended to 30 June from
31 March. Further, the deadline for filing the input ser-
vice distributor has also been extended to 31 May from
31 March. However, the government has reduced the
time for filing of GSTR-1 forms that provides details of
outward supplies. The due dates for filing of GSTR-1 for
the months of April, May and June have been signifi-
cantly curtailed from the previous 40 days.
6). SEBI beefs up corporate governance
norms for listed companies
The Securities and Exchange Board of India (SEBI) has
tightened the corporate governance norms for listed
companies by accepting most of the recommendations
of the Kotak Committee while also strengthening the
regulations for derivatives and algorithmic trading. The
following measures have been announced by SEBI:
(i) It has been decided to reduce the maximum num-
ber of directorship from 10 to seven in a phased
manner while expanding the eligibility criteria for
such directors.
(ii) The regulator has also enhanced the role of audit
committee along with the nomination, remuner-
ation and risk management committees of the
companies.
(iii) Listed companies will also be required to make
enhanced disclosures pertaining to related party
transactions and subsidiaries.
(iv) For equity derivatives, the regulator has decided
to move towards physical settlement for all stock
derivatives in a phased manner to “facilitate
greater alignment of cash and derivative market.
(v) For mutual funds, SEBI has brought down the cap
for expenses charged for each of the schemes.
The maximum limit has been reduced from 20 ba-
sis points of the daily net assets of the schemes
to 5 basis points.
Measures to strengthen the guidelines for algorithmic
trading include stock exchanges providing tick-by-tick
data feed free of cost to trading members, tweaking
the penalty framework to minimise orders that are way
off the mark and enhancing certain disclosure require-
ments for stock exchanges.
7). Commerce Ministry notifies exemption
from IGST, compensation cess under
advance authorisation, EPCG scheme
The Commerce Ministry has notified exemption from
IGST (Integrated Goods and Service Tax) and compensa-
tion cess for procurement under advance authorisation
and Export Promotion Capital Goods (EPCG) scheme
till 1st
October, 2018. Export Promotion Capital Goods
(EPCG) is an export promotion scheme under which an
exporter can import certain amount of capital goods
at zero duty for upgrading technology related with ex-

29. 27
POLICY FOCUS
APRIL 2018
ports. On the other hand, advance authorisation is is-
sued to allow duty free import of input, which is physi-
cally incorporated in the export product. The move is
aimed at giving relief to exporters, who are reeling un-
der stress with regard to claiming refund under GST.
8). India, Hong Kong sign double taxation
avoidance pact
India and Hong Kong on 19th
March, 2018 have entered
into a double taxation avoidance agreement, aiming to
facilitate investment flows between the both countries
and prevent tax evasion.“The agreement will stimulate
flow of investment, technology and personnel from
India to HKSAR (Hong Kong Special Administrative
Region) and vice versa, prevent double taxation and
provide for exchange of information between the two
contracting parties. It will improve transparency in tax
matters and help curb tax evasion and tax avoidance,”
the tax department said in a statement.
Investors will get an advantage of a lower withhold-
ing tax of 10 per cent on interest or royalties provided
they fulfil the main purpose test which broadly checks
that the transaction is not entered specifically to avoid
taxes. It also provides that gains from sale of shares of
a company deriving more than 50 per cent of its value
from property situated in a country will be taxed in that
country.
9). Cabinet clears India-Qatar double taxa-
tion avoidance treaty
The Union Cabinet chaired by Prime Minister Shri Nar-
endra Modi has given its approval for revision of the
Agreement between India and Qatar for the avoidance
of double taxation and for the prevention of fiscal eva-
sion with respect to taxes on income. The existing Dou-
ble Taxation Avoidance Agreement (DTAA) with Qatar
was signed on 7th
April, 1999 and came into force on 15th
January, 2000. The revised DTAA updates the provisions
for exchange of information to latest standard, includes
Limitation of Benefits provision to prevent treaty shop-
ping and aligns other provisions with India’s recent trea-
ties.
10). Government of India notifies revised
procedure for availing tax benefits for
“start-ups”
Government of India had launched the ‘Startup India’
initiative on 16th
January, 2016 to build a strong eco-sys-
tem for nurturing innovation and entrepreneurship. As
part of this initiative, the Department of Industrial Pol-
icy and Promotion (DIPP) has issued a notification con-
stituting a broad based Inter-Ministerial Board (IMB) to
consider applications of Startups for claiming of follow-
ing incentives of the Income Tax Act 1961 (here in after
referred as Act):
a. Exemption from levy of income tax on share pre-
mium received by eligible Startups under section 56
of the Act.
b. 100 per cent deduction of the profits and gains from
income of Startups for three out of seven consecu-
tive assessment years under 80 IAC of the Act.
11). Government launches digital platforms
for ease of export
Commerce Ministry has launched digital initiatives by
Export Inspection Council (EIC) for ease of export. EIC is
the official export certification body of the Government
of India and has launched this flagship project of Digi-
tal India Initiative to keep pace with changing dynamics
of the world. In order to continue the vision for cred-
ible inspection and certification and to strengthen the
confidence on Indian produce, three portals have been
developed to reduce transaction time and cost in a
transparent manner. To provide fast, efficient and trans-
parent services for ease of doing business in all sectors
the complete export food chain has been integrated in
this digital platform.
12). RBI raises debt investment limits for FPIs
across board
The Reserve Bank of India (RBI) has raised the debt in-
vestment limits for Foreign Portfolio Investors (FPIs)
across all segments, including central government se-
curities (G-secs). The revised FPI limits are as follows:
(i). The limit for FPI investment in Central Government
securities (G-secs) would be increased by 0.5 per
cent each year to 5.5 per cent of outstanding stock
of securities in 2018-19 and 6 per cent of outstand-
ing stock of securities in 2019-20.
(ii). The limit for FPI investment in State Development
Loans (SDLs) would remain unchanged at 2 per
cent of outstanding stock of securities.

30. 28
POLICY FOCUS
ECONOMY MATTERS
(iii). The overall limit for FPI investment in corporate
bonds will be fixed at 9 per cent of outstanding
stock of corporate bonds. All the existing sub-cate-
gories under the category of corporate bonds will
be discontinued and there would be a single limit
for FPI investment in all types of corporate bonds.
(iv). No fresh allocation has been made to the ‘Long-
term’ sub-category under SDLs. Out of the existing
limit of Rs 13,600 crore for this sub-category, an
amount of Rs 6,500 crore has been transferred to
the G-secs category.
(v) The allocation of increase in G-sec limit over the
two sub-categories – ‘General’ and ‘Long-term’
– remains at the current ratio of 25:75. However,
based on an assessment of investment interest,
this ratio has been re-set at 50:50 for the year 2018-
19.
(vi). Coupon reinvestment by FPIs in G-secs, which was
hitherto outside the investment limit, will now be
reckoned within the G-sec limits.
13). Government allows thermal power gen-
cos to use renewables
The Power Ministry has allowed thermal power genera-
tion companies (gencos) the flexibility of using renewa-
ble energy sources to meet their contractual generation
obligations. The move is aimed at easing the complexi-
ties faced by electricity distribution companies (dis-
coms) to comply with the mandate of buying a certain
portion of electricity from renewable energy sources.To
meet Renewable Purchase Obligations (RPOs), discoms
must find suitable balancing power sources to support
the infirm nature of renewable energy, adding to their
existing financial stress.
14). Finance, petroleum ministers can now
award oil, gas blocks
The Cabinet Committee on Economic Affairs (CCEA)
has given the Finance and Petroleum Ministers the
power to award oil and gas exploration blocks to
successful bidders under the Hydrocarbon Exploration
Licensing Policy (HELP), a move that could fast-track
the process. Currently, awarding of blocks requires the
CCEA’s approval. Under HELP, exploration blocks are
to be awarded twice in a year. The Cabinet also made
changes in the Oil Fields (Regulation and Development)
Act, 1948, which would allow Coal India and its arms to
extract Coal Bed Methane (CBM) under its coal bearing
areas without applying for a separate licence. The gov-
ernment expects that the step would enhance the avail-
ability of the gas and reduce its supply-demand gap.
15). RBI tightens reporting norms of out-
ward remittances
The Reserve Bank has tightened reporting norms for
the Liberalised Remittance Scheme (LRS) under which
an individual can transfer up to US$2,50,000 abroad in
a year. In order to improve monitoring and also to en-
sure compliance with the LRS limits, it has been decided
to put in place a daily reporting system by Authorised
Dealers (ADs) banks of transactions undertaken by in-
dividuals under LRS, which will be accessible to all the
other ADs,” the RBI said in a notification.

31. 29
GLOBAL TRENDS
US Bites the Bullet and Hikes the Fed Rate
APRIL 2018
T
he US Federal Reserve, in its monetary policy
meeting held in March 2018, chose to hike the
federal funds target rate by 25 basis points (bps)
to a range of 1.50-1.75 per cent. The last rate hike was
effected in December 2017. The rate hike was premised
on the fact that the labour market has continued to
strengthen and that economic activity has been rising
at a moderate pace with inflation rate remaining benign
so far. Importantly, the job gains have been strong in
the recent months (averaging 240,000 per month over
the past three months) and the unemployment rate has
stayed low at around 4.1 per cent mark.

32. 30
GLOBAL TRENDS
ECONOMY MATTERS
2 more rate hikes seen in 2018 by the Fed
The Committee continues to see 3 rate hikes in 2018,
including the current one. During the first Press Confer-
ence, after taking over as the Fed Chairman, Mr Jerome
H.Powell, the new Federal Reserve Chair, stated that
the 3 rate hikes in 2018 were based on the current eco-
nomic trends but that is still subject to change if there
is any meaningful change in the broader economic tra-
jectory. The Dot Plot showed that the FOMC members
had revised their expectations upwards and this was
broadly due to the change in the composition of the
committee.
In the Summary of Economic Projections (SEP) that ac-
companied the statement, the Federal Open Market
Committee (FOMC) made the following changes:
I. Growth was revised upwards for 2018 and 2019 to
2.7 per cent and 2.4 per cent from 2.5 per cent and
2.1 per cent respectively. The upward revision in the
real GDP growth has been buttressed by the fact
that the economic outlook has strengthened in
recent months, cushioned by several factors such
as a stimulative fiscal policy, robust job gains, firm
global growth and accommodative financial condi-
tions among others.
II. Unemployment rate was revised significantly lower
to 3.6 per cent for 2019 and 2020. While for 2018, it
was revised marginally downwards to 3.8 per cent
from 3.9 per cent forecasted earlier.
III. However, the inflation forecasts have remained
broadly unchanged for 2018 and 2019.

33. 31
GLOBAL TRENDS
APRIL 2018
Inflation as measured by PCE remains benign
so far; below Fed’s 2 per cent target
Inflation has continued to remain below the 2 per cent
longer-run objective of the Federal Reserve for both
overall and core inflation. Overall consumer prices, as
measured by the price index for Personal Consumption
Monetary policy stance to remain accommo-
dative
To conclude, the stance of the monetary policy of the
Federal Reserve remains accommodative, thereby
supporting strong labour market conditions and a sus-
Expenditure (PCE), have increased by 1.6 per cent in the
12 months till February 2018. The core price index, which
excludes the prices of energy and food and is typically a
better indicator of future inflation, rose by 1.5 per cent
over the same period. Moreover, the survey-based
measures of longer-term inflation expectations have re-
mained little changed.
tained return to 2 per cent inflation. The FOMC expects
that the economic conditions will evolve in a manner
that will warrant further gradual increases in the fed-
eral funds rate. However, the actual path of the federal
funds rate will depend on the economic outlook as in-
formed by incoming data.
The Interim Economic Outlook for the Organisation for
Economic Co-operation and Development (OECD) was
released recently and it has forecasted that the world
economy will continue to strengthen in 2018 and 2019,
with global GDP growth projected to rise to 3.9 per
cent, from 3.7 per cent in 2017. To be sure, this is the
strongest outcome since 2011, with positive growth sur-
prises in the Euro area, China, Turkey and Brazil-driven
by factors such as stronger investment, a rebound in
global trade and higher employment which are helping
to make the recovery increasingly broad-based.
Global GDP Growth on an Upward Trajectory;
But Tensions are Rising

34. 32
GLOBAL TRENDS
ECONOMY MATTERS
Growth forecast have been revised upwards
from Nov-17 estimates
To be sure, the growth forecasts for 2018 and 2019 have
been revised upwards from 3.7 per cent and 3.6 per cent
growth respectively forecasted in the November 2017
edition of the OECD Economic Outlook Update. As per
the OECD, new tax reductions and spending increases
in the United States and additional fiscal stimulus in Ger-
many are the key factors behind the upward revision to
global growth prospects in 2018 and 2019.
However, short-term challenges loom on the
horizon
Over the short-term, challenges being faced by the
global economies include the faster-than-expected in-
terest rate hikes in advanced economies especially the
US as also the escalation of trade tensions in the form
of imposition of tariffs which would hinder free flow of
goods and services globally.
G-20cohortgrowthsettoaccelerateasperOECD
The G-20 cohort is expected to rise to 4.1 per cent and
4.0 per cent respectively in 2018 and 2019 from 3.8 per
cent in 2017. The growth projections by OECD of some
of the key G-20 economies has been summarised below:
US economy expected to turn around in 2018
& 2019
In the United States, as per the OECD, GDP growth is
projected to pick up to between 2.8-2.9 per cent over
2018-19 as compared to 2.3 per cent growth posted in
2017. Tax reductions and higher government expendi-
ture are expected to buttress the momentum in domes-
tic demand garnered from strong confidence, solid job
creation, past gains in household wealth and a rebound
in oil production.
Euro area economic growth also expected to
remain robust for the next two years
Growth in the Euro area is set to remain robust and
broad-based at between 2.1-2.3 per cent over 2018-19
as compared to 2.5 per cent posted in 2017. Accommo-
dative monetary and fiscal policies, improving labour
markets, pick up in investment and elevated levels of
business and consumer confidence are all helping to
provide a fillip to demand.
China’s economy growth set to soften from
its 2017 levels
Growth surprised on the upside to 6.9 per cent in China
in 2017, helped by a strong rebound in exports. But the
number is set to soften to 6.7 per cent in 2018 and just
below 6.5 per cent by 2019. Restrictive macroeconomic
and regulatory policies, decline in the working age pop-
ulation and high debt accumulation are stifling growth
in China.

35. 33
GLOBAL TRENDS
APRIL 2018
After temporary hiccups, growth expected
to show an uptick in India
Among the emerging economies, India’s growth is ex-
pected to strengthen to above 7 per cent in the next
two fiscal years, gradually recovering from the transi-
To conclude
With the global economies expected to post better
growth rates in 2018 and 2019 related to 2017, as per the
tory adverse impact of the rolling out the Goods and
Services Tax (GST) and demonetisation. As per OECD,
India is expected to grow at a faster pace of 7.2 per cent
and 7.5 per cent in FY19 and FY20 as compared with 6.6
per cent growth posted in FY18.
OECD estimates, the advanced and emerging market
economies both need to grab the window of opportu-
nity presented by a stronger global economy to boost
skills, jobs and incomes.

36. ECONOMY MONITOR
34ECONOMY MATTERS

37. 35
ECONOMY MONITOR
APRIL 2018