Economy Matters, May 2014

MAY 20141
FOREWORD
UK’s economy picked up pace in the first quarter of the current year, growing by 3.1 per cent
on a y-o-y basis in the first quarter of 2014, as compared to 0.5 per cent in the previous quar-
ter. The recovery was mainly attributable to improvement in domestic demand drivers and
a low base. IMF in its recent economic update provided a rosy prognosis for UK’s economy.
Bank of England too raised its growth forecast for the year. Businesses across the UK are ex-
panding and creating jobs, hence increasingly sunny predictions for growth are a testament
to that.
Domestically, GDP (at factor cost) for the fourth quarter of last fiscal came in at 4.6 per cent
on a y-o-y basis taking the whole year’s growth to 4.7 per cent, lower than the advance es-
timates of 4.9 per cent. This is the second consecutive year of sub-5 per cent annual GDP
growth. GDP was weighed down by a multi-year low industrial growth to the tune of 0.4 per
cent. However, in the current fiscal, we expect GDP to grow in a range of 5.5-6.0 per cent,
under business-as-usual scenario. Growth is expected to pick-up aided by implementation of
stalled projects, debottlenecking of the mining sector, some recovery in industry on the back
of higher external demand, and moderating inflation giving legroom to the RBI to reduce in-
terest rates. In some good news for the economy, CPI inflation nudged down to 8.3 per cent
in May 2014 from 8.6 per cent in the previous month on the back of moderating food prices.
The easing of CPI inflation is in line with the RBI’s projected path, however, with the risks
looming large from the El Nino disturbance, upside pressure to CPI in the months to come,
cannot be ruled out.
In order to revive growth, strong measures are needed by the policymakers, some of which
need to be announced in the forthcoming Union Budget due next month. The important
measures needed for reviving growth have been highlighted by CII in its Pre-Budget Memo-
randum submitted to the Ministry of Finance. These measures relate to boosting agricultural
production, containing fiscal deficit, supporting investment in infrastructure, rejuvenating
manufacturing, creating facilitative climate for investments and tax reforms. In the current
issue’s Focus of the Month, experts give their viewpoint on some of these critical areas.
Chandrajit Banerjee
Director-General, CII

EXECUTIVE SUMMARY
ECONOMY MATTERS 4
Global Trends
The economic recovery in UK is fast gaining momentum.
UK real GDP grew by 3.1 per cent in y-o-y basis in the first
quarter of 2014 (1Q2014), as compared to 0.5 per cent in the
previous quarter, attributable to improvement in domestic
demand drivers and a low base. In some more good news
for the economy, UK’s 1Q2014 unemployment rate fell to a
five-year low of 6.8 per cent. Moving closer to India, as per
the World Bank’s latest bi-annual report on the South Asian
economies, the overall short and medium term outlook for
South Asia remains cautiously positive. Regional real GDP
growth in South Asia is ex¬pected to gradually increase from
4.8 per cent in 2013 to 5.2 per cent in 2014.
Domestic Trends
GDP (at factor cost) for the fourth quarter of last fiscal
came in at 4.6 per cent on a y-o-y basis taking the whole
year’s growth to 4.7 per cent, lower than the advance
estimates of 4.9 per cent. This is the second consecu-
tive year of sub-5 per cent annual GDP growth. GDP is
expected to recover to a range of 5.5-6.0 per cent in the
current fiscal on the back of expected improvement in
the domestic demand drivers. In some positive news
for the economy, CPI inflation eased to 8.3 per cent in
May 2014 from 8.6 per cent in March 2014, driven by low
food prices. Meanwhile, RBI maintained ‘status-quo’ in
its monetary policy review held on June 3rd, 2014. It
however did reduce the SLR by 50 bps. On the external
front meanwhile, for 2013-14 as a whole, CAD narrowed
sharply to US$32.4 billion (1.7 per cent of GDP) in 2013-
14 from US$87.8 billion (4.7 per cent of GDP) in 2012-13,
primarily due to a contraction in merchandise imports
coupled with a rise in service exports.
Corporate Performance
Indian firms showed signs of a recovery, as sales in the
fourth quarter of last fiscal (4QFY14) rose at the fastest
pace in six quarters and profit growth stabilized, spur-
ring investor optimism that the worst is over for corpo-
rate earnings. The net sales of companies (manufactur-
ing plus services) in the fourth quarter expanded by 9.3
per cent on a y-o-y basis, up from 4.0 per cent in the
comparable period last year. Both manufacturing and
services sectors have witnessed sharp acceleration in
sales growth in the fourth quarter. Our analysis is based
on the financial performance of 2250 companies (1507-
Manufacturing and 743 Services and excludes oil & gas
companies), using a balanced panel, extracted from
the Ace Equity database. The expenditure costs of the
firms, on an aggregate basis, moderated by 8.8 per cent
in the reporting quarter, as compared to 10.8 per cent
in the comparable time period last year. This led to im-
provement in the net profit of firms during the report-
ing quarter.
Sector in Focus: Ease of Doing
Business in India
India is one of the fastest growing economies in the
world. The high potential of the Indian market driven by
an emerging middle class, cost competitiveness and a
huge pool of talent makes it one of the most attractive
investment destinations. Yet, according to the World
Bank’s ‘Doing Business 2014’ report, India is ranked 134
out of 189 countries in the overall ease of doing busi-
ness. Concerned with India’s dismal rankings in World
Bank’s ‘Ease of Doing Business’, a survey-based report
on the prevailing business regulatory environment in
the country was undertaken by CII with the support
of KPMG. The study focused on few key parameters
of ‘Doing Business’ such as land acquisition, starting a
business, taxation and contract enforcement. In this is-
sue’s Sector in Focus, we present the key highlights of
the survey findings.
Focus of the Month: Reviving
Growth
After a dismal performance of economic growth in the last
two fiscals, averaging an anemic 4.6 per cent, the election of
a new government with a decisive mandate has brought har-
binger of hope for the economy. Economic growth slowed
down to 4.7 per cent in 2013-14, the second consecutive
year of sub-5 per cent annual GDP growth. Inflation remains
high along with stress on the fiscal front. Hence, in order to
revive growth, strong measures are needed by the policy-
makers, some of which need to be announced in the forth-
coming Union Budget due next month. The important meas-
ures needed for reviving growth have been highlighted by
CII in its Pre-Budget Memorandum submitted to the Ministry
of Finance. These measures relate to boosting agricultural
production, containing fiscal deficit, supporting investment
in infrastructure, rejuvenating manufacturing, creating fa-
cilitative climate for investments and tax reforms. In the
current issue’s Focus of the Month, experts give their view-
point on some of these critical areas.

MAY 20145
President Highlights Government’s
Agenda in His Address to the Parliament
- Manufacturing growth has been dismal over the
last couple of years, hence in order to improve the
situation; government will set up world class invest-
ment and industrial regions, particularly along the
Dedicated Freight Corridors and Industrial Corri-
dors spanning the country.
- Containing food inflation will be the topmost prior-
ity for the government. There would be an empha-
sis on improving the supply side of various agro and
agro-based products. Effective steps will be taken
to prevent hoarding and black marketing.
- Agriculture sector remains important to our econ-
omy given the high share of people dependent
on it for livelihood. Government will incentivize
the setting up of food processing industries and
also revamp the existing cooperative sector laws
to remove anomalies and lacunae. Additionally,
‘Pradhan Mantri Krishi Sinchayee Yojana’ with the
motto of ‘Har Khet Ko Paani’ will be launched.
- Government will create a policy environment which
is predictable, transparent and fair. It will embark
on rationalisation and simplification of the tax re-
gime to make it non-adversarial and conducive to
investment, enterprise and growth. Government
will make every effort to introduce the GST while
addressing the concerns of States. Reforms will be
undertaken to enhance the ease of doing business.
- For infrastructure development, a fast-track invest-
ment friendly and predictable PPP mechanism will
be put in place. Additionally, a fast, time-bound and
well monitored programme for execution of the
National Highways programme will be initiated, to
overcome the stagnancy of the past few years. De-
velopment of ports will also be a priority with the
government.
- In order to ease the stress coming on urban infra-
structure, government will build 100 Cities focussed
on specialized domains and equipped with world
class amenities. By the time the nation completes
75 years of its Independence, every family will have
a pucca house with water connection, toilet facili-
ties, 24x7 electricity supply and access.
- Government will strive to end the rural-urban di-
vide guided by the idea of Rurban; providing urban
amenities to rural areas while preserving the ethos
of the villages.
- Providing adequate jobs to the youth is impor-
tant for achieving inclusive growth. In this respect
the NDA government would adopt the motto of
“Har Haath Ko Hunar”, through which it will strive
to break the barriers between formal education
and skill development, and put in place a mecha-
nism to give academic equivalence to vocational
qualifications.
- The country needs a holistic health care system that
is universally accessible, affordable and effective. To
achieve this objective, government will formulate a
New Health Policy and roll out a National Health As-
surance Mission.
- Government will come out with a comprehensive
National Energy Policy and focus on development
of energy related infrastructure, human resource
and technology.
- Steps will also be taken to improve the working of
the federal structure of India. To achieve this, fora
like the National Development Council and the In-
ter-State Council will be reinvigorated. The Centre
will be an enabler in the rapid progress of States
through Cooperative Federalism.
Addressing the joint session of Parliament, President Shri Pranab Mukherjee
outlined the agenda of the new government pertaining to the social and eco-
nomic sector. The key highlights of his address are as follows:

ECONOMY MATTERS 6
GLOBAL TRENDS
UK Economy on the Mend
UK real GDP grew by 3.1 per cent in y-o-y basis in
the first quarter of 2014 (1Q2014), as compared
to 0.5 per cent in the previous quarter, attributable to
improvement in domestic demand drivers and a low
base. On q-o-q basis, UK real GDP grew by 0.8 per cent
in 1Q2014, unchanged from the first estimate which was
released in the last week of April 2014. Notably, this
was UK’s first fifth consecutive quarterly growth. The
economic recovery in UK is fast gaining momentum. In
its latest review released in April 2014, the Internation-
al Monetary Fund (IMF) said it expected the UK to be
the best-performing of the world’s largest economies
in 2014, with growth of 2.9 per cent for the year. The
independent Office for Budget Responsibility (OBR) of
UK predicts 2.7 per cent growth, and in February 2014
the Bank of England (BoE) raised its 2014 forecast to
3.4 per cent. Businesses across the UK are expanding
and creating jobs, hence increasingly sunny predictions
for growth are a testament to that. In some more good
news for the economy, UK’s 1Q2014 unemployment
rate fell to a five-year low of 6.8 per cent. The data print
was below the 7 per cent threshold announced by the
BoE in the guidance regarding the future path of mon-
etary policy it had provided in August 2013.

MAY 20147
GLOBAL TRENDS
Real GDP growth in 1Q2014 was primarily driven by do-
mestic demand—personal consumption expenditure
(PCE) and investments (Gross Capital Formation, GCF).
PCE grew by 2.1 per cent on y-o-y basis in 1Q2014, as
against 2.2 per cent in the previous quarter. With this,
PCE has now increased for ten consecutive quarters.
PCE was supported by the housing market, which has
become the prime concern for policymakers recently.
Nevertheless, it is important to note that government-
From the supply-side, almost all the components of
GDP fared well. Agriculture grew by 1.8 per cent in the
1Q2014 as compared to a contraction to the tune of 2.4
per cent in the previous quarter. Manufacturing put up
one of its strongest performance and grew by 3.5 per
run Help-to-Buy (HTB) scheme has not had a significant
impact on housing prices, which have grown 13 per cent
since the beginning of 2013. GCF grew by a robust 10.4
per cent in 1Q2014 as compared to 4.1 per cent in the
previous quarter, helped by fixed investments (Gross
Fixed Capital Formation, GFCF) growing at a healthy
rate for the second consecutive quarter. GFCF grew by
8.5 per cent as compared to 8.8 per cent in the previous
quarter.
cent after moving into the positive territory in 4Q2013
and languishing in the negative territory for many quar-
ters before that. Service sector grew by 2.9 per cent,
helped by 5.1 per cent growth in its sub sector of ‘distri-
bution, hotels & catering’.

ECONOMY MATTERS 8
GLOBAL TRENDS
As far as inflation is concerned, the consumer price in-
dex (CPI) in the UK grew by 1.8 per cent on y-o-y basis
in April 2014, as against 1.6 per cent in March 2014. The
primary driver of higher inflation was ’transport‘—es-
pecially air and sea fares—wherein prices grew 1.6 per,
following a decline of 1 per cent in March. On the other
hand, prices of ‘food, beverages & tobacco (FBT)’ grew
at the slowest pace in eight years. Inflation in FBT stood
at 1.4 per cent in April 2014, almost half of that in March.
The increase in inflation in April 2014 could be attribut-
able mainly to rise in air and sea fares; hence this upturn
could be temporary, with inflation likely to remain un-
der 2 per cent this year, which also happens to be BoE’s
annual inflation target.
In its latest bi-annual report on South Asian economies,
World Bank, highlighted that the overall short and me-
dium term outlook for South Asia remains cautiously
positive. The report mentions that the external vulnera-
bilities were gradually giving way to domestic downside
risksasprimaryconcernforgrowthandmacroeconomic
stability. Hence, as previous regional economic updates
have argued, any positive development in growth will
depend on building buffers for macroeconomic stability,
strength¬ening the investment climate, and removing
infrastruc¬ture bottlenecks. As per the World Bank, in
line with the overall outlook on developing coun¬tries,
regional growth in South Asia is projected to gradu-
ally increase. As higher import demand and economic
growth in developed countries is expected to outweigh
adverse effects from potentially lower capital inflows,
regional real GDP growth in South Asia is ex¬pected to
gradually increase from 4.8 per cent in 2013 to 5.2 per
cent in 2014. The main pillars of this growth pro¬jection
will be solid pick up in gross fixed investment as well as
continued solid export growth.
In the report, World Bank highlights the economic
outlook of the key South Asian economies. As per the
World Bank, bol¬stered by a permanently more com-
petitive exchange rate (hence solid export growth) and
BoE in its monetary policy review held on 5th June 2014,
held the policy rates unchanged at 0.5 per cent, with
the expectation of raising the rates only gradually. In
the same vein, it may be worth adding that, productivity
(both per person and per hour worked) declined by 0.1
per cent on q-o-q basis in 1Q2014, which does not bode
well from long-term prospects. This is increasingly be-
coming a concern for the Monetary Policy Committee.
BoE assumes productivity to pick up soon, or else wage
growth, which is also expected to pick up, could be-
come inflationary. If so, the Bank might have to tighten
its monetary policy before 3Q2015, which is the market
consensus for the first rate hike.
progress towards clear¬ance of important investment
projects (hence continuing investment recovery), India
may see an acceleration of growth (in factor costs) in
FY2014 to 4.8 per cent, further to increase to 5.7 per
cent in FY2015 (or an equivalent of 5.6 percent in cal-
endar year 2014, at market prices). Pakistan is also ex-
pected to build further momentum to projected FY2014
growth of 4 per cent supported by less load shedding,
resilient remittance flows, manufacturing export per-
formance and a dynamic service sector, the multilateral
bank elucidates. In its report, World Bank further points
out that, Nepal will recover from a bad year (FY2013)
in terms of ag¬ricultural growth and budget execution,
and likely grow at around 4.5 per cent with strong re-
mittances addition-ally boosting consumption and ser-
vice sector growth. Sri Lankan real GDP growth too is
forecast to benefit from an increase in potential capac-
ity from new infrastructure investments and rebuilding,
hence potentially continuing to grow at 7.3 per cent of
GDP in 2014. Bhutan, as per the report, is expected to
grow at an impressive rate of 7.3 per cent in 2014 from
6.5 per cent in 2013 supported by ongo¬ing hydro and
industrial construction and commission¬ing, possible
lifting of the bans on imports, disbursements from India
to finance the 11th Five-Year-Plan, expansion in tourism
activities. In Maldives, real GDP growth stood at 3.7 per
Outlook for South Asia Remains on the Upside:
World Bank Report

MAY 20149
GLOBAL TRENDS
cent in 2013 and the outlook is positive, at 4.5 per cent
for 2014. Tourism demand is slowly picking up having a
positive impact on growth in the non- tourism sectors
too.
However, as per the World Bank report, two excep-
tions stick out: Afghanistan is expected to suffer from
con¬tinued uncertainty regarding transition as well
as lower agricultural output, hence, only projected to
grow at 3.2 per cent in 2014. However, in the medium
term, post tran¬sition growth may reach around 5 per
The World Bank report further highlights that despite
improvement in growth momentum across most of the
South Asian economies, there are formidable domestic
challenges in the form of financial sector vulnerabilities
and continued weakness in revenue collection. In other
words, to provide incentives for efficient invest¬ment –
both private and public – remains a necessary condition
for achieving faster and sustained growth in South Asia.
As the effects from external tapering grad¬ually wear
off, potential pressures that have built up in the finan-
cent during 2015 and 2016, conditional upon a relatively
stable security environment and agriculture as well as
mining driving the acceleration. Bangladesh is set to
pay the bill of political turmoil in terms of stagnating
private investment paired with lower consumption due
to decreasing remittance flows. Ultimately this leads to
subdued service sector and industrial activity, with real
GDP growth projected to come down to 5.4 per cent in
FY2014.
cial sectors in the recent past may threaten fi¬nancial
sector stability or prevent banks from efficiently inter-
mediating and boosting private investment and growth.
In addition, as inflation remains high, although with a
likely easing of pressures in the medium term, monetary
policy space remains constrained. Under this backdrop,
the South Asian economies would have to tread with
caution and should try to remove the internal domestic
constraints for giving a boost to economic growth as
external environment slowly starts turning favourable.

ECONOMY MATTERS 10
GLOBAL TRENDS
Other Global Developments During the Month
• Euro Zone GDP in the 1Q2014 grew by 0.9 per cent on y-o-y basis as compared to 0.5 per cent in the previous
quarter. The improved performance of the cohort was led by Germany. Elsewhere, economies were either
stagnant or continue to contract. The French economy has stagnated in recent quarters. In Italy and Nether-
lands, GDP in the opening quarter of 2014 was 0.5 per cent lower than a year ago. There are signs the Spanish
economy is beginning to improve, but it is a slow recovery, with GDP up by just 0.6 per cent in the first quarter
on year-earlier levels. There were significant falls in GDP in Portugal and Finland in the first quarter of the cur-
rent year.
• German real GDP grew by 2.3 per cent on y-o-y basis in Q1 2014, following 1.4 per cent growth in Q4—mark-
ing its highest growth in three years. The press statement released by Destatis (the official statistics agency)
states that one of the reasons for strong growth was extremely mild weather, which supported investment
in general and construction, in particular. The entire growth in real GDP in Q1 2014 was driven by domestic
demand, which was partly offset by negative contribution from net exports. The leading indicators, such as
PMIs, point to continued growth in Germany in Q2 2014.
• China’s factory sector turned in its best performance in five months in May 2014. The HSBC Flash China Manu-
facturing Purchasing Managers’ Index (PMI) recovered to 49.7 in May 2014 from April’s final reading of 48.1.
But the data is a touch below the 50-point level that separates a monthly growth in activity from a contrac-
tion, indicating that manufacturers actually experienced a slight drop in business.
• US non-farm payrolls (NFP) increased by 217K in May 2014, broadly in line with market consensus of 215K
increase. Although job addition in May 2014 was lower than in April (282K), the outcome was largely along
expected lines as April’s high reading was considered to partially reflect delayed hiring after a severe winter.
Thus, NFP has increased by an average of 214K in 2014 so far, compared to 2013’s average of 194K.
• As per the household survey, the unemployment rate in US remained flat at 6.3 per cent in May 2014, defying
market expectation of a rise to 6.4 per cent. However, the recent decline in the unemployment rate is partially
attributable to the persistent fall in the labour force participation rate (LFPR). The LFPR remained flat at a 35-
year low of 62.8 per cent in May.
• The unemployment rate in the UK fell to 6.6 per cent in the three months ending April 2014, as against 6.8
per cent in the previous rolling quarter (ending March 2014). Importantly, the number of unemployed people
declined 161K QoQ (346K YoY), as employment gained 350K QoQ (784K YoY) in the quarter ending April 2014.
For the first time in at least the past four decades, employment added more than 300K in a quarter. Conse-
quently, economic active population (or labour force participation) rate continued to rise.

MAY 201411
DOMESTIC TRENDS
GDP Remains Sluggish in FY14; Recovery on
Cards in FY15
GDP (at factor cost) for the fourth quarter of last fis-
cal came in at 4.6 per cent on a y-o-y basis taking
the whole year’s growth to 4.7 per cent, lower than the
advance estimates of 4.9 per cent. This is the second
consecutive year of sub-5 per cent annual GDP growth.
GDP was weighed down by a multi-year low industrial
growth to the tune of 0.4 per cent. Healthy agriculture
performance was the only bright spot. At market pric-
es, GDP came at 5.0 per cent in 2013-14 as compared to
4.7 per cent in the previous year. Private consumption
growth grew at respectable rate despite high interest
rates. Gross fixed capital formation contracted in the
fiscal while exports grew at a healthy rate. However,
in the current fiscal, we expect GDP to grow in a range
of 5.5-6.0 per cent, under business-as-usual scenario.
Growth is expected to pick-up aided by implementa-
tion of stalled projects, debottlenecking of the mining
sector, some recovery in industry on the back of higher
external demand, and moderating inflation giving leg-
room to the RBI to reduce interest rates.

ECONOMY MATTERS 12
DOMESTIC TRENDS
From the supply-side, agriculture grew at a robust 4.7
per cent in 2013-14 as compared to 4.5 per cent in the
previous fiscal on the back of good rainfall received last
year. However, as there are risks to rainfall this year on
account of El Nino concerns, agriculture growth will be
much lower in the current fiscal. Industrial growth dis-
appointed at a lacklustre 0.4 per cent in 2013-14 under-
From the supply-side, agriculture grew at a robust 4.7
per cent in 2013-14 as compared to 4.5 per cent in the
previous fiscal on the back of good rainfall received last
year. However, as there are risks to rainfall this year on
account of El Nino concerns, agriculture growth will be
much lower in the current fiscal. Industrial growth dis-
appointed at a lacklustre 0.4 per cent in 2013-14 under-
pinned by contraction in manufacturing and mining sec-
tor growth, keeping with the trend seen in the IIP index
as well. Construction growth was dismal at a mere 1.6
per cent in 2013-14. Services grew at a respectable 6.8
per cent in 2013-14 mainly on the back of healthy growth
in its sub category ‘financing, insurance, real estate &
business service’.
pinned by contraction in manufacturing and mining sec-
tor growth, keeping with the trend seen in the IIP index
as well. Construction growth was dismal at a mere 1.6
per cent in 2013-14. Services grew at a respectable 6.8
per cent in 2013-14 mainly on the back of healthy growth
in its sub category ‘financing, insurance, real estate &
business service’.

MAY 201413
DOMESTIC TRENDS
The results of the recently concluded 16th Lok Sabha
saw the Bharatiya Janata Party (BJP) winning absolute
majority, the first national party in the last 30 years to
do so. Along with its alliance partners, the National
Democratic Alliance (NDA) won a record 336 Lok Sabha
seats. This is the first time since 2004 that the ruling
coalition will command a majority in the Lok Sabha. At
a time when the economy has been struggling to come
out of the onslaught of slowdown, the absolute major-
ity which has been secured by the BJP under the leader-
ship of Shri Narendra Modi, will come in handy for tak-
ing bold policy decisions and ushering in a new era of
economic reforms in the country. Reforms are urgently
required to address investment revival and improve the
conditions for doing business across all major sectors
such as agriculture, manufacturing, mining, services
and infrastructure, to name a few. At the same time,
reforms are also required for strengthening social sec-
tors such as education, health, skill development and
governance.
With a decisive mandate that the BJP has achieved, the
new Government would be in a position to take tough
decisions that are urgently needed to revive economic
growth and create employment. Prudent macroeco-
nomic management, backed by a strong majority in the
Parliament, would help economy recover to at least 6.5
per cent GDP growth rate in 2014-15 as against an esti-
mated growth of 4.9 per cent in 2013-14. With a strong
thrust on economic reforms, it is possible for the GDP
growth rate to gallop back to around 8 per cent level
in the next two to three years. CII would partner with
policymakers for action on top issues:
• Introduction of GST – CII has suggested a compre-
hensive GST with a low rate and covering all goods
and services that would boost industry.
• Fiscal consolidation and containment of subsidies
– Industry would expect the Government to adhere
to fiscal deficit targets and bring out a roadmap for
achieving them.
• Containing inflation by addressing supply-side bot-
tlenecks – CII has called for better laws governing
marketing of perishables and other agricultural
products and greater investment by the private sec-
tor in cold chain, storage and marketing infrastruc-
ture in PPP mode.
• Promoting investment- From the point of view of
sending a clear message to the investor commu-
nity at large, CII recommends that the Government
should give an urgent attention to issues arising out
of the Land Acquisition Act and the new Companies
Act
• Monetary easing – CII strongly calls for reduction in
the repo rate by 100 bps during the current year.
• Stable and competitive exchange rate – India needs
to guard against volatile short-term flows and pro-
tect its currency to promote exports.
• Mining – CII expects a strong intervention and co-
ordination to resolve multiple issues in the mining
sector relating to allocation of natural resources, in-
volvement of private sector and availability of fuel
for power sector.
Outlook
We expect GDP to recover to a range of 5.5-6.0 per cent in the current fiscal on the back of improvement in the
domestic demand drivers. With a stable government at the centre, growth is expected to receive an upshot. On the
policy front, we expect the Government to focus primarily on infrastructure investment, tackling high inflation es-
pecially for food and presenting a credible fiscal roadmap However, first half growth may still be slightly muted and
substantial recovery is only expected in the second half when the capex cycle is likely to show some improvement.
New Government at the Helm

ECONOMY MATTERS 14
DOMESTIC TRENDS
• PPP - An institutional mechanism to renegotiate the
terms of concession in Public Private Partnership
contracts in infrastructure could help resolve stuck
funds.
• Governance and administrative reforms – CII rec-
ommends expansion of e-governance to simplify
administrative processes and clearances. These
should help to improve and facilitate the environ-
ment for doing business.
• Promoting employment - Restructuring labour laws
including introduction of Fixed Term Employment
for industry to hire manpower on short term as-
Industrial production growth returned to the positive
terrain in April 2014 after remaining in the negative
territory for two consecutive months. In April 2014, it
stood at 3.4 per cent after contracting by 0.5 per cent
in the month before. The main drivers of growth were
electricity and capital goods sector. Manufacturing also
posted respectable growth rate, given its dismal per-
formance for most period last year. The improvement
in industrial output in April was expected as core sec-
tor output, which has a weight of 37.90 per cent in the
Index of Industrial Production (IIP), recorded a 4.2 per
cent increase in output during April 2014 as compared
to 2.5 per cent in the previous month. Coal production
increased 3.3 per cent, while the electricity generation
signments would help to create new jobs on a large
scale.
• Ease of Doing Business: CII is of the opinion that
India needs to move up significantly on the ease of
doing business index, on which India is ranked 134
out of 189 countries assessed by the World Bank.
The time bound target should be to reach top 10.
• One of the biggest issues that industry has had to
grapple with in the recent past has been retrospec-
tive taxation. CII would urge the new government
to ensure that no retrospective changes are made
to tax policies in the future
increased 11.2 per cent in April 2014 over April 2013. The
productionof fertilizer increased 11.1 per cent, while that
of steel and cement also galloped 3.1 per cent and 6.7
per cent in April 2014. However, the output of crude oil
declined 0.1 per cent, while that of the natural gas and
petroleum refinery also dipped 7.7 per cent and 2.2 per
cent in the reporting month. The sequential momentum
as indicated by the movement in the seasonally-adjust-
ed month-on-month series, too, showed that industrial
output growth accelerated in April 2014. For 2013-14 as a
whole industrial production had declined by 0.1 per cent
as compared to 1.1 per cent growth recorded in 2012-13
Industrial Output Grows at Fastest Pace in 13 Months

MAY 201415
DOMESTIC TRENDS
On the sectoral front, output of the manufacturing sec-
tor, which constitutes over 75 per cent of the index,
grew by 2.6 per cent in April 2014 as compared to de-
cline of 1.3 per cent in the previous month. In terms of
industries, fourteen (14) out of the twenty two (22) in-
dustry groups (as per 2-digit NIC-2004) in the manufac-
turing sector showed positive growth during the month
of April 2014 as compared to the corresponding month
of the previous year. The industry group ‘Electrical ma-
chinery and apparatus n.e.c.’ showed the highest posi-
tive growth of 66.0 per cent, followed by 9.6 per cent in
‘Machinery and equipment n.e.c.’ and 9.1 per cent in ‘To-
bacco products’. On the other hand, the industry group
‘Radio, TV and communication equipment & apparatus’
posted the highest negative growth of (-) 31.6 per cent,
followed by (-) 22.1 per cent in ‘Wearing apparel; dress-
ing and dyeing of fur’ and (-) 14.6 per cent in ‘Motor ve-
hicles, trailers & semi-trailers’. Mining sector, which had
turned the corner in the last couple of months, grew by
1.2 per cent in April 2014 as compared to 0.3 per cent
growth in the previous month. Electricity sector output
grew at a spectacular rate of 11.9 per cent in the first
month of the fiscal as compared to 5.4 per cent in the
previous month.
On the use based front, volatile capital goods segment
output, grew at a double-digit rate of 15.7 per cent in
April 2014 after remaining in the negative territory for
the last four months. The sector’s highest growth in the
last 9 months was partly attributable to a favourable
base effect of last year. Intermediate goods which reg-
istered steady growth for most part of last fiscal, con-
tinued its good performance in April 2014 too, growing
by 4.4 per cent. Basic goods too performed well and
grew by 6.8 per cent in April 2014. In contrast, consumer
goods, continued its dismal performance, contracting
for the seventh consecutive month in April 2014. Both
its sub-sectors- durables and non-durables contracted
in the reporting month. Consumer durables output
contracted in all the months of last fiscal, signalling the
depressed consumption demand in the economy. Con-
sumer non-durables, in contrast, posted steady growth
last year. Hence, its contraction in the first month of the
fiscal is a worrying trend.
Outlook
The return of industrial growth to the positive terrain is noteworthy and has rekindled the hope of industrial re-
covery which is critical to lift the economy and mark a return to the path of growth. What is encouraging is that all
the three major segments of industry viz mining, manufacturing and electricity posted positive growth. The double
digit growth of capital goods could mark a beginning of an upturn in investments backed by an improvement in
business sentiments and fast clearances of stalled projects. Going forward, CII expects that quick and proactive
government policies would return the ‘feel good’ factor and firm up growth.

ECONOMY MATTERS 16
DOMESTIC TRENDS
Wholesale prices-based inflation in May 2014 acceler-
ated to a five-month high of 6.0 per cent, driven up by
high food and fuel cost. The reading for March 2014 WPI
inflation was revised to 6.0 per cent from 5.7 per cent
earlier. Total food inflation (primary and manufacturing)
accelerated to 7.0 per cent in the May 2014 as compared
to 6.3 per cent in the previous month. In contrast, CPI
inflation eased to 8.3 per cent in May 2014 from 8.6 per
cent in April 2014. While rise in food inflation was one
of the reasons behind jump in WPI inflation, CPI infla-
tion eased due to moderation in its food inflation com-
ponent. To be sure, a drop in food inflation to 9.3 per
Primary inflation jumped to a five-month high of 8.6
per cent in May 2014 from 7.1 per cent in the previous
month. This was mainly attributable to an uptick of in-
flationary pressures in both its food and non-food com-
ponents. Primary food inflation accelerated to 9.5 per
cent from 8.6 per cent in April 2014. The volatility seen
in food inflation in the last couple of months is a matter
of concern as going forward, the prospects of El Nino
weather event occurring this monsoon season, threat-
ens to trigger lower production of summer crops such
as rice, sugarcane and oilseeds. Primary non-food infla-
tion too inched up to 4.9 per cent in May 2014 as against
3.1 per cent in the previous month. Likewise, inflation in
minerals jumped to twenty-month high of 8.8 per cent,
partly due to a low base effect of last year.
cent from 9.6 per cent earlier supported the drop in CPI.
Within food, cereal inflation fell to a 21-month low of 8.8
per cent. Meanwhile, fuel inflation dropped to a fresh
record low of 5.1 per cent. Core CPI inflation too decel-
erated to 11-month low of 7.7 per cent and is likely to be
a source of relief for the RBI. However, an enhanced
possibility of an El Niño in 2014 could push up CPI infla-
tion with the weight of agriculture-related articles ac-
counting for 50 per cent of the CPI. However, on the up-
side, inflation is likely to be capped as the lagged impact
of previous rate hikes seeps through and a strong base
effect from last year lowers headline inflation.
Fuel inflation accelerated to 10.5 per cent in May 2014
as compared to 8.9 per cent in the previous month. In-
flation in high-speed diesel moved up to 14.2 per cent
in May 2014 from 13.7 per cent in the previous month.
Inflation in petrol also galloped to twenty-eight month
high of 12.3 per cent in the reporting month. Going for-
ward, there is an impending threat of further increase
in fuel prices, if the government accepts recommenda-
tions of the Saumitra Chaudhuri Committee on Auto
Fuel Vision & Policy 2025, which has recommended that
the petrol and diesel prices be hiked by 75 paise a litre
each to upgrade fuel standards in the economy.
Manufacturing inflation increased marginally to 3.5 per
cent in May 2014 as compared to 3.2 per cent in the
previous month. Worryingly, non-food manufacturing
CPI Inflation Eases in May 2014, while WPI
Inflation Rises

MAY 201417
DOMESTIC TRENDS
A considerably ‘dovish’ RBI in its second bi-monthly
monetary policy review held on June 3rd, 2014 Reserve
Bank of India (RBI) chose to keep the repo rate and cash
reserve ratio (CRR) unchanged at 8.00 per cent and 4.0
per cent respectively, however it did signal the possi-
bility of reduction in interest rates if the fall in inflation
amplifies during the year. Additionally, RBI reduced the
statutory liquidity ratio (SLR) of scheduled commercial
banks by 50 basis points from 23.0 per cent to 22.5 per
cent of their NDTL with effect from the fortnight begin-
ning June 14, 2014 apart from reducing the liquidity pro-
vided under the export credit refinance (ECR) facility
from 50 per cent of eligible export credit outstanding to
32 per cent with immediate effect. The reduction in SLR
is meant to free more resources of the banking sector
for onward lending which in turn will spur investment
and growth. But in the current scenario, when banks
are already investing in excess of the mandated SLR,
will this move help the markets, is a moot question to
ask (see Box I).
RBI in ‘Wait-and-Watch’ Mode; Keeps Policy Rates
Unchanged
Outlook
The easing of CPI inflation in May 2014 on the back of lower food prices is a great relief for the policymakers. Core
CPI inflation has also now decelerated to its 11-month low. However, with the danger of El Nino looming large
over the economy this year, a rise in food inflation in the latter part of the year cannot be ruled out. With the RBI
recently re-emphasising its intent to lower CPI inflation to 8 per cent by January 2015 and to 6 per cent by January
2016, RBI is expected to remain in a wait-and-watch mode for few more quarters.
or core inflation, which is widely regarded as the proxy
for demand-side pressures in the economy, inched up
to to 3.8 per cent during the month as compared to 3.4
per cent in April 2014. In the coming months, we expect
core WPI to hover around 3.0-3.5 per cent, RBI’s comfort
level for this inflation measure. Manufacturing food in-
flation showed a marginal uptick during the month.

ECONOMY MATTERS 18
DOMESTIC TRENDS
RBI in its policy mentioned that the lead indicators sig-
nal the continuation of sluggish economic activity in
the first quarter of the current fiscal. However, in view
of the decisive mandate obtained by the new govern-
ment, the hopes of implementation of some concrete
policy measures has risen, which in turn will aid the
uptick in aggregate demand during the course of the
year. In view of the evolving situation, RBI maintained
its growth forecast in a range of 5-6 per cent for 2014-15
with risks evenly balanced around the central estimate
of 5.5 per cent. Retail inflation measures by CPI on the
other hand still remains elevated due to high food pric-
es. CPI inflation excluding food and fuel has moderated
gradually since September 2013 although it is still ele-
vated. “El Nino effects, geo-political tensions and their
impact on fuel prices, and uncertainties surrounding the
setting of administered prices appear at this stage to
be balanced by the possibility of stronger government
action on food supply and better fiscal consolidation as
well as the pass through of recent exchange rate appre-
ciation”, RBI emphasised in the policy statement. RBI
also reiterated its commitment to keep the economy
on a disinflationary course, taking CPI inflation to 8 per
cent by January 2015 and 6 per cent by January 2016 .
Apart from stating its decision on the key interest rates,
the Central Bank announced the following policy meas-
ures as well:
- With a view to improving the depth and liquidity
in the domestic foreign exchange market, it was
decided to allow foreign portfolio investors to par-
ticipate in the domestic exchange traded currency
derivatives market to the extent of their underlying
exposures plus an additional US$10 million. Further-
more, it was also been decided to allow domestic
entities similar access to the exchange traded cur-
rency derivatives market.
- As a prudential measure, the eligibility limit for for-
eign exchange remittances under the Liberalised
Remittance Scheme (LRS) had been reduced to
US$ 75,000 last year. In view of the recent stability
in the foreign exchange market, it has been decided
to enhance the eligible limit to US$125,000 without
end use restrictions except for prohibited foreign
exchange transactions such as margin trading, lot-
tery and the like.
- At present, only Indian residents are allowed to
take Indian currency notes up to Rs 10,000 out of
the country. Non-residents visiting India are not
permitted to take out any Indian currency notes
while leaving the country. With a view to facilitat-
ing travel requirements of non-residents visiting
India, it has been decided to allow all residents and
non-residents except citizens of Pakistan and Bang-
ladesh to take out Indian currency notes up to Rs
25,000 while leaving the country.

MAY 201419
DOMESTIC TRENDS
The Reserve Bank of India’s move to reduce the Statu-
tory Liquidity Ratio (SLR) by 50 bps to 22.5 per cent in
its second bi-monthly review of monetary policy held
on June 3rd, 2014 caught many people by surprise. It
was purported to be a clear message by the RBI that
growth is a priority and this move would help availabil-
ity of capital, when credit demand recovers. The last
time, RBI tinkered with SLR was in July 2012, when it
was reduced by full 1 percentage points. But will this
SLR reduction really help in freeing up the commercial
bank’s money for lending to the productive sector?
This question particularly gains significance in the cur-
rent scenario, given that the commercial banks are al-
ready investing in government securities in excess of
the mandated SLR requirement and growth prospects
continue to remain subdued. Let us analyse this issue
in detail.
By definition, SLR is defined as the amount that the
commercial banks are required to invest in govern-
ment securities as a proportion of their net demand
and time liabilities. Chart-1 clearly shows that in the
charted time period, the actual SLR has always been
higher then the mandated requirement. The current
SLR in the banking system is already above 26 per cent
as of March 2014 as compared to the revised mandat-
ed requirement of 22.5 per cent. The main reason for
this is that banks are currently risk averse to lend to
the private sector, given sizeable jump in bank’s rising
non-performing loans (NPAs).
Outlook
RBI chose to increase the SLR in its second mid-quarter monetary policy review held on 3rd June, 2014. This move
of the RBI amply demonstrates that the spotlight has shifted back to growth while restraining inflationary pres-
sures in the economy. The announcement heralds a new beginning in which both the RBI and the government
would work in concert to push the growth agenda forward.
Going forward, CII advocates urgent supply-side responses which would improve the productivity of agriculture
and reduce the supply side bottlenecks in production and distribution. This would entail timely intervention to
release excess food stocks in the market, permit key food imports, dismantle the system of administered prices,
delisting perishables from APMC Act and creation of a Common Market for agricultural produce which would con-
tain inflation within the comfort zone of the RBI and help reduce policy rates.
Box I : RBI Reduces SLR- Will it Help the Market Now?

ECONOMY MATTERS 20
DOMESTIC TRENDS
India’s current account deficit (CAD) narrowed sharply
to US$1.2 billion (0.2 per cent of GDP) in fourth quarter
of 2013-14 from US$18.1 billion (3.6 per cent of GDP)
in same quarter of 2012-13 which was also lower than
US$4.2 billion (0.9 per cent of GDP) in Q3 of 2013-14.
The lower CAD was primarily on account of a decline in
the trade deficit as decline in imports was sharper than
that in exports. For 2013-14 as a whole, CAD narrowed
sharply to US$32.4 billion (1.7 per cent of GDP) in 2013-
To be sure, this move of RBI is expected to release
around Rs 40,000 crores into the system and ensure
that the liquidity pressures do not constrain the flow of
credit to the productive sectors of the economy. Net li-
quiditydeficit(repoless reverse repo balance)remained
Under the current backdrop, therefore, CII is of the
view that to release additional liquidity in the market
through SLR route, only reduction in SLR rate is not suf-
ficient. What also needs to be done is that the commer-
cial banks should be discouraged to park their liquidity
with RBI beyond a prescribed limit. A cap on SLR should
14 from US$87.8 billion (4.7 per cent of GDP) in 2012-13,
primarily due to a contraction in merchandise imports
coupled with a rise in service exports. Capital inflows at
US$48.8 billion – buffered by a surge in inflows under
foreign currency non-resident (FCNR) deposits - were
more than sufficient to finance the CAD, resulting in a
US$15.5 billion accretion to India’s foreign exchange re-
serves in 2013-14.
high, averaging Rs 42000 crore in 2013-14. However, in
the current fiscal, the deficit has narrowed sharply to
only Rs 8000 crore (till 5th June, 2014). Hence, the re-
lease of liquidity by reduction in SLR won’t be of much
help in the current scenario, when the liquidity deficit
has already declined sharply.
be fixed and the banks should be allowed to park only
up to 2 per cent higher than the prescribed rate. This
will help in freeing up more resources for the private
sector and address the problem of crowding out of pri-
vate borrowing by large government borrowings.
Current Account Deficit at 1.7% of GDP in 2013-14

MAY 201421
DOMESTIC TRENDS
On a BoP basis, merchandise exports declined by 1.3
per cent to US$83.7 billion in Q4 of 2013-14 as against an
increase of 5.9 per cent in Q4 of 2012-13. On the other
hand, declining trend in merchandise imports (on BoP
basis) continued in Q4 of 2013-14. Imports at US$114.3
billion moderated by 12.3 per cent in Q4 of 2013-14 as
compared with a decline of 1.0 per cent in Q4 of 2012-13.
Decline in imports was primarily led by a steep decline
in gold imports, which amounted to US$5.3 billion, sig-
nificantly lower than US$15.8 billion in Q4 of 2012-13. As
a result, the merchandise trade deficit (BoP basis) con-
tracted by about 33 per cent to US$30.7 billion in Q4 of
2013-14 from US$45.6 billion in the corresponding quar-
ter a year ago.
On a full year basis, merchandise exports grew by 3.9
per cent as compared to contraction to the tune of 7.2
per cent in imports in 2013-14. Export recovery and mod-
eration in imports led to a sharp improvement in the
trade deficit to US$147.6 billion in 2013-14 from US$195.7
billion in 2012-13. Services exports remained supportive.
After a muted 2012-13, services exports grew by 12 per
cent in 2013-14 led by the pickup in demand from US and
Euro zone, two of the largest market for India’s soft-
ware services. Hence, contraction in the trade deficit,
coupled with a rise in net invisibles receipts, resulted in
a sharp reduction of the CAD in 2013-14 as compared to
2012-13.

ECONOMY MATTERS 22
DOMESTIC TRENDS
The other twin deficit, fiscal deficit, stood at 4.5 per cent
ofGDPin2013-14,atadlowerthantheinterimbudgetes-
timates of 4.6 per cent. In actual terms, the fiscal deficit
stood at Rs 5.08 lakh crore in 2013-14 as against Rs 5.24
lakh crore projected in the revised estimate. Although
the deficit was contained at 4.5 per cent, the credibil-
ity of the numbers is questionable. Moreover, interest-
ingly, in the first 11 months of the last fiscal, government
was incurring an average monthly deficit of Rs 54,482
crore, however, in March 2014, it was able to notch up a
surplus of Rs 91,150 crore. Revenue deficit stood at 3.2
per cent of GDP in 2013-14. In order to impart credence
to the reduction of fiscal deficit, the incumbent govern-
ment would need to undertake numerous measures in
the form of fast tracking implementation of GST, imple-
menting PSU disinvestment and, addressing the sub-
sidy situation, amongst other measures.
Fiscal Deficit Stood at 4.5% of GDP in FY14
In the financial account, on net basis, both foreign di-
rect investment and portfolio investment recorded in-
flows in Q4 of 2013-14. While net inflow on account of
portfolio investment was US$9.3 billion, net FDI flow
was lower at US$0.9 billion. In contrast, on a full year
basis, net inflows under the capital and financial ac-
count (excluding change in foreign exchange reserves)
declined to US$48.8 billion in 2013-14 from US$89.0 bil-
lion in corresponding period of 2012-13 owing to lower
net FDI and portfolio flows, net repayment of loans and
trade credit & advances. Net FII inflows fell to US$5 bil-
lion (5-year low) in 2013-14 from US$27.6 billion in 2012-
13 and there were net outflows of US$5 billion on trade
credit and advances in last fiscal as compared to net in-
flows of $21.7 billion in the previous year. The decline in
trade credit was mainly due to lower inflows on account
of a sharp decline in merchandise imports in fiscal 2014.
Outlook
In the current fiscal, we expect the CAD to widen from its level seen in the previous year as restrictions on gold im-
ports, imposed since July 2013, are gradually withdrawn. The Reserve Bank of India (RBI) has already begun to take
steps in this direction by allowing large private gold importers to resume importing gold and permitting nominated
banks to give gold metal loans to jewellery manufacturers. Import of capital and consumption goods (non-oil, non-
gold imports) are also expected to rise this year as GDP growth picks up. Despite pressure from rising imports, the
upside to CAD is likely to be capped due to faster growth in exports led by a global recovery.

MAY 201423
DOMESTIC TRENDS
Total expenditure stood at Rs 15.63 lakh crore in 2013-
14 as against the original budget estimate Rs 16.65 lakh
crore.Theexpenditureestimatewaslaterreviseddown-
wards to Rs 15.90 lakh crore in the interim budget which
was presented in February 2014. There was squeezing
of both plan and non-plan expenditure in March 2014
number, which helped to contain fiscal deficit below the
revised estimates set out in the interim budget. But the
nature of expenditure compression would have to be
analysed in detail in order to pass any concrete judge-
ment about its durability. On the revenue side, revenue
collection stood at Rs 10.55 lakh crore in 2013-14, lower
than the revised estimates of Rs 10.65 lakh crore.
The government has chalked out a fiscal consolidation
roadmap under which the fiscal deficit needs to be
brought down 3 per cent of GDP by 2016—17. But in or-
der to achieve this target significant policy reforms are
needed in the forthcoming budget to be presented by
the new government in July 2014 in the form of imple-
mentation of GST, reducing subsides, propelling disin-
vestment etc.

ECONOMY MATTERS 24
CORPORATE PEFORMANCE
Net Sales Foretell a Recovery
Indian firms showed signs of a recovery, as sales in the
fourth quarter of last fiscal (4QFY14) rose at the fast-
est pace in six quarters and profit growth stabilized,
spurring investor optimism that the worst is over for
corporate earnings. The net sales of companies (manu-
facturing plus services) in the fourth quarter expanded
by 9.3 per cent on a y-o-y basis, up from 4.0 per cent
in the comparable period last year. The same on yearly
basis, however, witnessed only a marginal improve-
ment in the performance in FY14 when y-o-y growth in-
creased to 13.8 per cent from 13.4 per cent in FY13. Our
analysis is based on the financial performance of 2250
companies (1507- Manufacturing and 743 Services and
excludes oil & gas companies), using a balanced panel,
extracted from the Ace Equity database.
It is encouraging to note that both manufacturing and
services sectors have witnessed sharp acceleration in
sales growth in the fourth quarter. Manufacturing sec-
tor in the fourth quarter grew by 6.4 per cent as com-
pared 0.8 per cent in the same period last year, indicat-
ing that the downtrend is over. In yearly terms, the net
sales in manufacturing sector grew by 6.5 per cent in
FY14, down from 10.5 per cent. We expect further im-
provement in growth performance during the current
fiscal on the back of expectations that the new govern-
ment would introduce significant policy changes in or-
der to spur investment and revive growth.

MAY 201425
CORPORATE PEFORMANCE
The net sales of services sector in the fourth quarter
grew by 14.5 per cent, up from 10.4 per cent in the same
quarter previous year. Sustaining this momentum is
important even as the rupee has assumed an upward
trend against the US dollar and economic growth con-
tinues to remain restrained. On yearly basis, the servic-
es sector in FY14 registered a sharp increase in growth
of net sales to 22.7 per cent from 17 per cent in previous
year. Even though the growth of net sales of services
has been relatively impressive, the sector has shown a
sharp deterioration in expansion rate in last few years
and its revival is critical for facilitating the overall accel-
eration in economic growth.
The expenditure costs of the firms, on an aggregate ba-
sis, moderated by 8.8 per cent in the reporting quarter,
as compared to 10.8 per cent in the comparable time
period last year. Under its various heads, growth of raw
materials cost decelerated to 3.6 per cent over 4.5 per
cent in the same period last year. Growth in wages &
salaries showed an uptick. Total expenditure costs for
manufacturing sector also moderated to 4.1 per cent
in the fourth quarter of 2013-14 as compared to 6.0 per
cent in the same quarter last year. All the heads of ex-
penditure for manufacturing moderated during the
quarter. Total aggregate expenditure costs for services
sector decelerated sharply to 0.9 per cent in the report-
ing quarter as compared to 17.8 per cent in the same
quarter a year ago.
The performance analyzed in terms of Profit after Tax
(PAT) exhibits a sharp improvement in financial results
of companies at aggregate level in the fourth quarter
of the previous financial year. On an aggregate basis,
growth in PAT improved significantly to 11.7 per cent in
the fourth quarter as compared to contraction to the
tune of 10.3 per cent growth in the same quarter of last
year. This has been driven by sharp improvement in PAT
growth of services sector to 18.7 per cent as compared
to decline of 4.6 per cent in the same quarter previous
fiscal. PAT growth across the manufacturing sector
firms, however, was more subdued, standing at 5.8 per
cent in the fourth quarter of last fiscal as compared to
decline of 14.7 in the same quarter of previous year.
Healthy growth of PAT in the services sector during all
the four quarters of previous financial year helped the
sector to record 25.7 per cent growth in PAT on yearly
basis in FY14, compared to 15.3 per cent in FY13. How-
ever, manufacturing remains a major concern, which
saw its PAT growing merely by 3.4 per cent in FY14,
down from 8 per cent in FY13. Shrinking profit margin in
manufacturing, at a time when sector requires massive
investment for revival of growth, is not a good sign.
In sum, the performance of companies in terms of net
sales in both manufacturing as well as services sectors
showed an improvement in the fourth quarter of the
previous fiscal. However, how far this recovery will be
sustained remains to be watched. Further, while firms
at aggregate level have shown sharp improvement in
PAT in the fourth quarter as total expenditure costs
moderated.

ECONOMY MATTERS 26
SECTOR IN FOCUS
Ease of Doing Business in India
Introduction
India is one of the fastest growing economies in the
world. The high potential of the Indian market driven by
an emerging middle class, cost competitiveness and a
huge pool of talent makes it one of the most attractive
investment destinations. Yet, according to the World
Bank’s ‘Doing Business 2014’ report, India is ranked
134 out of 189 countries in the overall ease of doing
business. This places India lower than the other BRICS
(Brazil, Russia, India, China and South Africa) members
and highlights its relatively dismal performance among
other South Asian countries. In the World Bank survey,
India ranks lowly on most of the determinants of invest-
ment attractiveness — especially starting a business,
enforcing contracts, dealing with construction permits
and paying taxes. Problems in securing land, inadequate
infrastructure, power shortages, stringent labour laws,
tax regulations, lack of governance and transparency
and approval processes are critical issues in the country
that need to be addressed.
Concerned with India’s dismal rankings in World Bank’s
‘Ease of Doing Business’, a survey-based report on the
prevailing business regulatory environment in the coun-
try was undertaken by CII with the support of KPMG.
The study focused on few key parameters of ‘Doing
Business’ such as land acquisition, starting a business,
taxation and contract enforcement. The survey re-
sponses were elicited from 120+ executives, over half
of whom were business heads or higher. The respond-
ents were identified from across industries and states
to give an overall picture of business climate in India. In
this article, we present the key highlights of the survey
findings with regards to the key parameters outlined
before, viz, land acquisition, starting a business, taxa-
tion and contract enforcement.

MAY 201427
SECTOR IN FOCUS
A. Land Acquisition
Land acquisition is one of the critical aspects of doing
business. As per the findings of the survey, the lack of
an effective process has made land acquisition a com-
plex and time consuming procedure. Investors and
manufacturers need timely acquisition of contiguous
land to contain project cost escalation and project time-
lines. However, landowners are often wary of selling —
given the potential future price appreciation and non-
transparent price benchmarks. As a consequence, land
for industrial development is not as easily available as it
used to be earlier.

ECONOMY MATTERS 28
SECTOR IN FOCUS
The time taken for land acquisition is one of the major
obstacles. As per the survey, average time taken to ac-
quire land is 14 months although it is much more in sev-
eral cases. In addition, the number of departments to
be visited as well as the number of visits to each depart-
ment make the land acquisition process complex. High
costs and transaction fees add to the overall costs of
the land acquisition process.

MAY 201429
SECTOR IN FOCUS
Land Acquisition- Key
Recommendations
1). Need for Simplification and Transparency
• Simplicity, transparency and speed should be intro-
duced in the land acquisition process. The delays
caused by bureaucracy need to be reduced
• Simplify administrative procedures by facilitating
single-window clearances, standardised documen-
tation and timely approvals. Failure to do so would
be automatically escalated to the industry minister
within a week of the lapse of the due date
• E-procedures will help improve land acquisition as it
aims to curb unethical practices and and complete
work within agreed timelines
• Lengthy land mutation and conversion processes
need to be simplified
• Government machinery needs to be more proactive
in handling land acquisition disputes
2). Promote Industrial Clusters
• Encourage the establishment of industrial clusters
of related industries, including large and small units
• Location viability in terms of infrastructure of the
industrial land should be studied before its acquisi-
tion
• Promote industry clusters through a well-defined
and targeted cluster development policy, owned
and driven by state and local governments:
- Identify suitable sectors for promoting clusters
based on the study of existing industries in the
state
- Industry centric infrastructure master plan
should be put in place. Ring roads with dry
ports and rail heads must be created to link to
the industrial corridors
- Simplify regulatory requirements, including
elimination of several compliances and intro-
duction of self-certifications
- State government can assume leadership role
in creating clusters and building capacity for
sustained development
- Draft sector-specific policies with input from
experts and industry leaders, to help create a
sound ecosystem
• Develop short-term fiscal incentives and ease tax
requirements to encourage rapid cluster develop-
ment
• Benchmark clusters and survey industry members
to understand critical infrastructure and facilities
required
• Facilitate access to funds by promoting linkages be-
tween industry and lending institutions
• Ensure access to quality and skilled manpower
through improved curriculum and university col-
laborations
• Create a government task force/ department for
overseeing cluster development
2). Land Value
• With respect to the Right to Fair Compensation and
Transparency in Land Acquisition, Rehabilitation
and Resettlement Act, 2013, a major concern with
the landowners is the possible undervaluation of
their land that might be below market rate. There
is a need to bring assurance in this regard.
• Introduce a market price-based pricing mechanism:
- Make landowners partners and share with
them the resources generated by projects
from the allocations
• Encourage partial or complete leasing of land (from
landowners) as opposed to an outright sale to sup-
plement acquisition efforts

ECONOMY MATTERS 30
SECTOR IN FOCUS
B. Starting a Business
The ease of starting a business is determined by how
easily the entrepreneur can comply with various proce-
dures required upon stat up. Starting a business in In-
dia requires a host of clearances & permits. The World
Bank’s ‘Doing Business 2014’ report ranks India as 179
among 189 countries on the ease of starting a business;
lower than other BRIC and MINT countries. Cumber-
some regulations can act as a curb on entrepreneurship
Obtaining business approvals and clearances is a time-
consuming procedure involving multiple procedures
and the cost incurred in the process is significantly high.
that may lead to increased informality and a smaller tax
base.
Approvals related to environment clearances, land
procurement, construction permits, industrial safety
permits and power connection are top five obstacles in
starting a business in India. As per the survey results,
about 50 per cent of the respondents have highlighted
major challenges in obtaining environmental clearanc-
es. More than one-third of the respondents rated land
approvals as the major obstacle in starting a business.
The survey showed that 85 per cent of respondents
were of the view that the time required for such clear-
ances is not reasonable.

MAY 201431
SECTOR IN FOCUS
Infrastructure is a key driver enabling investments,
growth and improving quality of life. Inadequate infra-
structure creates obstacles in starting a business. Mul-
A Comparison with Select Countries Highlights the Need for an Ease in Proce-
dures when Starting a Business
A closer look at the ease of starting a business in India in comparison to other countries suggests that the number of
procedures, time taken plus the cost incurred is significantly higher than other countries.
tiple visits to various departments and time taken for
getting approvals for new connections (water, sewer-
age and power) also pose major obstacles.

ECONOMY MATTERS 32
SECTOR IN FOCUS
C. Taxation
India fares poorly on the ‘Doing Business 2014’ paying
taxes indicators — total tax rate, the time to comply
and the number of payments. Of the 189 countries
studied, India ranks 158 in terms of overall ease in tax
payment. High tax rates emerged as one of the major
obstacles to operating and growing a business in India.
To encourage business start-ups, the process of obtain-
ing approvals and clearances should be expedited by
effectively implementing the single-window clearance
mechanism. In this respect, the following measures are
recommended for faster and simplified clearances and
approvals.
• Effective implementation of the single-window
clearance system for approvals related to starting
a business
• Single window agency should aim to co-ordinate
all legal approvals necessary for the setting up of a
business
• Decrease the time taken to grant approval. Escala-
tion to be done by a single-window clearance agen-
cy to the concerned authorities in case of delays
• Enforce time-bound approvals by introducing
‘deemed approvals’ in case of delays beyond pre-
scribed limit; investor may proceed with the imple-
mentation of the project
• Eliminate multiple processes and remove the need
to maintain several documents
• Make processes and approvals online. Introduce
the provision of online monitoring of application
forms to help applicants monitor their status at
various departments
• A single-window clearance from the Ministry of
Environment and Forests (MoEF) covering environ-
ment, CRZ, forest and wildlife to replace the cur-
rent system of separate clearances
• Strengthen coordination between Central Pollution
Control Board (CPCB)and the State Pollution Con-
trol Board (SPCB)
• Environment norms should be clearly defined and
implemented in a time bound manner
• Introduce e-governance and technology-based ini-
tiatives to simplify processes for industries
• Establish an Environment Compliance Assistance
Center (ECAC) in states to facilitate information ex-
change between regulators and industry and pro-
vide technical assistance to industries for fulfilling
compliance requirements
Recommendations for Faster and Simplified Clearances and Approvals

MAY 201433
SECTOR IN FOCUS
As per the survey findings with respect to challenges in
the direct tax regime, 90 per cent respondents believe
that the tax authorities are not proactive in promot-
ing investments. 60 per cent respondents feel that the
neutralisation of the tax decision by the Supreme Court
through a retrospective amendment is likely to have
damaging effect on investment sentiments. 92 per cent
As regards to the issues pertaining to indirect tax re-
gime, around 2/3rd of respondents find time taken for
respondents feel that there are challenges in transfer
pricing audit/assessment relating to distribution /agen-
cy and 85 per cent respondents find challenges relat-
ing to rendering of services including management and
other cross charges. 65 per cent respondents agreed
that companies are now willing to enter an advance
pricing agreement.
clearance and tax disputes resolution to be significant

ECONOMY MATTERS 34
SECTOR IN FOCUS

MAY 201435
SECTOR IN FOCUS
Taxation in India needs structural, operational and ad-
ministrative reforms; the burden of tax compliance
should be reduced besides enabling e-filing of all taxes.
• Enable e-filing of all taxes with uninterrupted ac-
cess to online services especially in rural areas
• Time-bound subsidies and tax exemptions should
be given to the units located in industrial areas,
food parks and agro-export zones
• The Goods and Services Tax (GST) proposes to sub-
sume all indirect taxes levied in the country but is
yet to be implemented. It could help address the
shortcomings in the existing indirect tax system like
tax cascading complexity and poor technological
infrastructure along with high cost of compliance
• Refund of VAT should occur automatically and in a
time-bound manner
• Clarify the non-availability of MAT for foreign com-
panies – need for certainty post-AAR rulings
• Introduce a feedback mechanism to obtain input
Taxation – Recommendations
from taxpayers on the tax regime
• There is a need for consistency in approach — uni-
form interpretation and application of the law and
judicial pronouncements
• There is a need to adopt a trust based approach
— avoid not well defined and onerous information
requests during assessments
• Increase stability in reporting —Avoid frequent
changes in the return format/other forms
• Development of a strong IT backbone
• Provide certainty and clarity on clauses. For exam-
ple, the tax holiday for the IT sector faces issues
while implementation due to ambiguity
• The function of tax administration should be dis-
tinct from that of an SBU, any ambiguity could lead
to undue arbitrary taxation claims
• The administration, for taxes, should adopt a con-
centrated, rather than fragmented, approach

ECONOMY MATTERS 36
SECTOR IN FOCUS
D. Contract Enforcement
Fair, speedy trials are essential for small enterprises
embroiled in disputes. If courts take a long time in re-
solving such disputes, small firms may not be left with
enough finances to continue doing business for a long
time. In such cases justice delayed may translate into
justice denied. At present, it could take several years for
a commercial litigation to get resolved. If a lawsuit aims
at seeking damages, it may stretch for 15 years to reach
resolution. There is a need to address such a pressing
issue. Though arbitration was proposed as a good and
Other Issues in Contract
Enforcement
• Legal processes around foreign judgements
A judgement/decree passed by a court of a country
which is not a ‘reciprocating territory , cannot be
enforced in India per se. A fresh suit has to be filed
in a high court that has jurisdiction over the Indian
judgement-debtor. Even for reciprocating territo-
ries, a foreign judgment/decree will not be enforce-
able in India if the court in India determines that:
- it has not been pronounced by a court of com-
petent jurisdiction;
- it has not been given on the merits of the case;
- it appears on the face of the proceedings to be
effective alternative to litigation, it has ended up being
more expensive and almost equally time consuming.
The time taken from filing a case to the final judgement
seems unreasonable to most respondents and poses
major obstacles. Also, a majority of respondents indi-
cated that the enforcement of judgements are not en-
forced as smoothly as the existing procedures assure.
Moreover, costs for engaging and retaining lawyers
along with other costs, during the interim stage and en-
forcement costs also pose significant challenges.
founded on an incorrect view of international
law or a refusal to recognise the law of India in
cases in which such law is applicable;
- the proceedings in which the judgment was
obtained are opposed to natural justice;
- it has been obtained by fraud;
- it sustains a claim founded on a breach of any
law in force in India.
• Reconstruction, mergers and amalgamations
The process of reconstruction, mergers and amal-
gamations of companies has been cumbersome
and time consuming. Though the Companies Act,
2013, has sought to rationalise it, the process re-
quires further streamlining to be more effective.

MAY 201437
SECTOR IN FOCUS
In some cases where it was felt that justice could
have been served in a better way, courts in India
have intervened and provided relief to the Indian
contracting party, even where the parties to the
contract had agreed to have a provision for exclu-
sive non- India jurisdiction. As far as possible, this
should be avoided in order to retain the faith of
foreign contracting parties in the Indian judicial sys-
tem.
Contract Enforcement – Recom-
mendations
Reforms at all levels may be required for the enforce-
ment of contracts to be effective and efficacious
• Effectively implement an electronic case filing sys-
tem
• IT-intensiveproductivityimprovementprogrammes
can be implemented, in courts at all the levels, in-
cluding district courts. Though the process of e-fil-
ing of proceedings has been initiated in some high
courts, this could be the norm, instead of an excep-
tion. The process of e-court service of proceedings
has been initiated by the Supreme Court, however
it has yet to permeate to courts at all levels
• Savings from the implementation of e-court sys-
tems can be substantial and result from a reduction
in the use of paper, time spent in court, need for
storage space, as well as easy archiving of docu-
ments and a general streamlining of processes and
services
• Globally, the pace of contract enforcement is high
in economies that have e-filing facility
• Increasing the number of courts along won’t expe-
dite proceedings. There is also a need to establish
special tribunals for resolving commercial cases un-
der various acts for various levels of monetary lim-
its
• Moreover, the number of judges/ presiding officers
should be increased and they should be provided
with adequate infrastructure and manpower to fa-
cilitate effective functioning
• Instead of filing proceedings in court, alternative
dispute resolution (ADR) processes should be con-
sidered. ADR processes may require further stream-
lining and they should adhere to the specified time-
lines as far as possible.
Conclusion
The survey conducted across respondents in various business segments has highlighted a number of areas to im-
prove the business climate in India – particularly around land acquisition, starting a business, taxation and contract
enforcement. The recommendations presented in this report highlight the need for:
• Reform in Policy & Regulation
– Enhanced transparency in rules and processes around land acquisition, business approvals and taxation
– Simplification and clarification of rules and processes pertaining to taxation and business approvals
– Structural reform in the taxation system to reduce the number of levies, while simplifying them
– More flexible labour policy
– Creation of independent grievance redressal mechanisms
– Establishment of skill development centres in partnership with industry to develop relevant curriculum and
courses to enhance employability
– Promotion of industrial clusters for ease in land acquisition and business start-up
• Reform in Administration and Execution of policy
– Increased online processes for registrations and clearances
– Introduction of single window clearance systems with time bound decision making for business approvals
– Introduction of coordinated clearance systems e.g. for environmental clearances, to facilitate information
exchange between various ministry departments, regulators and industry
– Increasing number of courts & tribunals as well as alternative dispute resolution to enhance the ease of con-
tract enforcement

ECONOMY MATTERS 38
FOCUS OF THE MONTH
Reviving Growth
Economic growth slowed down to 4.7 per cent in 2013-
14, the second consecutive year of sub-5 per cent
annual GDP growth. This was led by the slowdown in
industrial production, which contracted by 0.1 per cent
in 2013-14 as compared to 1.1 per cent growth in 2012-13,
attributed to sluggish performance by manufacturing,
mining, capital and consumer goods. Industrial produc-
tion has been adversely impacted by slowing demand
- consumption as well as investment. In contrast to the
subdued growth scenario, inflation has remained above
the comfort level of RBI, though in the recent months,
some moderation has been witnessed, especially in WPI
inflation. In 2013-14, WPI inflation moderated to 6.0 per
cent as compared to 7.4 per cent in the previous fiscal,
while CPI inflation stood at 9.5 per cent as compared to
10.2 per cent in the previous fiscal.
On the external front, in 2013-14, the trade deficit nar-
rowed sharply, mainly attributable to the pace of ex-
ports outpacing imports during the year. In 2013-14,
merchandise exports grew by 4 per cent, while mer-
chandise imports contracted by 8.1 per cent. Mirroring
the sharp improvement in exports growth, India’s cur-
rent account deficit (CAD) narrowed sharply to US$32.4
billion (1.7 per cent of GDP) in 2013-14 from US$87.8 bil-
lion (4.7 per cent of GDP) in 2012-13. The other twin defi-
cit, fiscal deficit, stood at 4.5 per cent of GDP in 2013-14,
a tad lower than the interim budget estimates of 4.6 per
cent.
In sum, the economic recovery remains fragile due to
combination of domestic and external factors. Strong
measures are needed by the policymakers for reviv-
ing growth, some of which need to be announced in
the forthcoming Union Budget due next month. The
important measures needed for reviving growth have
been highlighted by CII in its Pre-Budget Memorandum
submitted to the Ministry of Finance. These measures
relate to boosting agricultural production, containing
fiscal deficit, supporting investment in infrastructure,
rejuvenating manufacturing, creating facilitative cli-
mate for investments and tax reforms. In this article,
we provide the key CII recommendations to boost each
of these areas.
(A). Boosting Agriculture Production
While agriculture’s share in India’s economy has pro-
gressively declined to less than 15 per cent due to the
high growth rates of the industrial and services sectors,
the sector’s importance in India’s economic and social
CII’s Key Recommendations

MAY 201439
FOCUS OF THE MONTH
fabric goes well beyond this indicator. Nearly, three-
quarters of India’s families depend on rural incomes
and majority of India’s poor are found in rural areas. In-
dia’s food security depends on producing cereal crops,
as well as increasing its production of fruits, vegetables
and milk to meet the demands of a growing population
with rising incomes. To do so, a productive, competi-
tive, diversified and sustainable agricultural sector will
need to emerge at an accelerated pace.
In the last fiscal, agriculture grew at an impressive rate
of 4.7 per cent backed by good monsoons. The impact
of monsoons on agricultural production is enormous
as despite a significant increase in area under irrigation
over the years, almost 55 per cent of total cultivable
land is still un-irrigated. The drought years of 2002-03
and 2009-10 saw food-grains production declining by
15 per cent and 7 per cent respectively. Additionally,
growth in food-grain production has lagged behind
population growth for the past 20 years. Over 1990 to
2010, food-grain production grew annually by 1.6 per
cent compared to an average annual population growth
of 1.9 per cent. Deficient monsoons tend to exacerbate
this demand-supply mis-match further. CII suggests the
following urgent measures to be taken in the short, me-
dium and long run in order to boost agriculture produc-
tion.
Short-term measures
• It is time to de-list fruits and vegetables from APMC
list to enable direct marketing of these commodi-
ties. Reforming Essential Commodities Act (ECA)
to enable free movement of agricultural commodi-
ties will help smoothen regional supply shortages.
These reforms are long overdue and only a strong
political will can help bring about these reforms,
which will be instrumental in reducing price spikes
and also bridging the gap between wholesale and
retail prices.
• Restrict procurement of buffer stock to meet emer-
gency and PDS requirements
• Simplify movement of grains by reducing the num-
ber of licenses required for movement of grain
across states
Medium and long-term measures
• Encourage Private sector participation through
partnerships. Private sector can play a meaningful
role in food grain management by partnering with
the public sector in procurement and storage of
grain.
• Create a “National Agriculture and Food Export
Mission” in select categories to actively promote
the export of select crops
• Impose stringent regulation and control on extrac-
tion of ground water
• Implement the Model Act (amended APMC Act) in
its true spirit across states
• Implement policy reforms to allow individuals / co-
operatives / industry to consolidate sizeable farm
lands by way of leasing to benefit from economies
of scale
• Formulate permissible leasing period and other
provisions such that these serve to incentivise the
lessee to invest in technology and other areas that
help improve the land
• Develop a national unified market for agricultural
commodities
• Develop Mega demand servicing and export hubs
to allow companies to procure, store, process and
export from a single location
(B). Containing Fiscal Deficit
Fiscal deficit stood at 4.5 per cent of GDP in 2013-14, a
tad lower than the interim budget estimates of 4.6 per
cent. In actual terms, the fiscal deficit stood at Rs 5.08
lakh crore in 2013-14 as against Rs 5.24 lakh crore pro-
jected in the revised estimate. Interestingly, the govern-
ment which incurred an average monthly deficit of Rs
54,482 crore in the first 11 months of last fiscal, could
notch up a surplus of Rs 91,150 crore in the last month
(March) of the fiscal. In order to adhere to the task of
reduction in fiscal deficit, the new government at the
Centre would need to undertake numerous measures
in form of fast tracking implementation of GST, imple-
menting PSU disinvestment and, addressing the sub-
sidy situation, amongst other measures.
The government has chalked out a fiscal consolidation
roadmap under which the fiscal deficit needs to be
brought down 3 per cent of GDP by 2016—17. But in or-
der to achieve this target, significant policy reforms are
needed in the forthcoming budget to be presented by
the new government in July 2014.

ECONOMY MATTERS 40
FOCUS OF THE MONTH
CII suggests the following policy recommendation for
fiscal consolidation.
• Draft a white paper on fiscal situation that will out-
line a roadmap for achieving FRBM targets after ac-
counting for one-off expenditure
• Address the subsidies situation. Make one-off pay-
ments. End the practice of rolling over subsidy pay-
ments
• Norms on sharing of fuel subsidies between gov-
ernment and upstream oil companies should be
clearly stated
• Restore quality of fiscal consolidation by boosting
capital expenditure Fast-track introduction of GST.
Center and state governments should work to-
wards introduction of legislation and institution of
IT platform so that GST can be introduced as early
as possible. CII believes that implementation of GST
would increase the GDP growth by 1.5-2.0 per cent
annually by way of simplifying compliance,, enhanc-
ing free flow of goods and services across states
and removing trade biases against Indian manufac-
tured products
• Implement PSU disinvestment systematically; strat-
egy required on restructuring/ privatization of loss-
making PSUs (Centre & state). At least Rs 50000
crores should be targeted in the balance part of the
fiscal.
• There are 67 sick PSUs, whose rehabilitation or
winding up proposals has been referred to the
Board of Reconstruction of Public Sector Enter-
prises. It is recommended that the government un-
locks the assets of these PSUs by monetizing land,
plant & machinery etc.
(C). Support Investment in
Infrastructure
Infrastructure development is a critical precursor for
facilitating higher overall investment. While infrastruc-
ture investment has gained significant momentum over
the last few years, the deficit continues to remain large.
Acceleration in infrastructure investment has signifi-
cant multiplier effect on the whole economy. Based on
projections provided in the Mid-Term Appraisal of the
Twelfth Plan, in order to attain a 9 per cent real Gross
Domestic Product (GDP) growth rate, infrastructure in-
vestment should be on average almost 10 per cent of
GDP (translating roughly into US$1 trillion) during the
12th Five Year Plan.
Availability of finances for such huge investment would
largely depend on the government’s ability to success-
fully increase reliance on the bond market as an alterna-
tive source of financing to bank loans and their ability
to implement fiscal consolidation as a means of freeing
up bank lending and reducing upward pressure on inter-
est rates. Emphasis on private sector participation and
policy / regulatory measures to attract private capital
cannot be undermined given the huge pressure on capi-
tal rationing and funding requirements. With this over-
view, we present the key measures suggested by CII in
order to boost investment in infrastructure.
• Fast-tracking clearance of stalled/stuck projects.
The agenda of the Cabinet Committee of Invest-
ment (CCI) which was formed during the tenure of

MAY 201441
FOCUS OF THE MONTH
the previous government to unlock stalled infra-
structure projects needs to be carried further by
the new government. In this aspect, the following
measures are noteworthy:
- Fast-track stuck projects of greater than Rs
500 crore
- Identify 100 must do infrastructure projects
e.g. DMIC, Dedicated freight corridor, roads,
rail, airport modernization, high speed rail, ir-
rigation, housing and construction etc
- Leverage PPP opportunity in railways
- Ensure that projects are awarded to private
sector by first securing the key sovereign clear-
ances
- Set-up state level mechanisms similar to Pro-
ject Monitoring Group which would review and
monitor projects. Identify high impact projects
• Encourage PPP/private sector participation in In-
frastructure. The share of private investment in the
total investment in infrastructure rose from 22 per
cent in the 10th Plan (2002-2007) to 38 per cent in
the 11th Plan. The 12th Plan aims to raise it further to
9 per cent by FY17. In order to meet this ambitious
target, it’s pivotal to encourage PPP and private
sector participation in infrastructure. In this regard,
following measures are suggested:
- Set up an institutional mechanism to renegoti-
ate the terms of concession in PPP contracts to
salvage stranded investments through options
like re-bid, restructuring, renegotiation of con-
tracts, expropriation, et al
- Make provisions for award of Rs. 2 lakh crore
worth of projects on annuity basis to encour-
age private sector participation in infrastruc-
ture
- Under JNNURM – Phase II, create a framework
for facilitating investments through PPP across
urban infrastructure verticals, especially in Tier
– II & III cities
• Encourage investments in Infrastructure funds /
trusts. This will help in making the infrastructure
projects viable. In this regard, the following meas-
ures are suggested:
- Encourage investments in Infrastructure Debt
Funds (IDFs)
- Create an investment fund from cash surpluses
of PSUs for funding infrastructure
- Set up Tourism Infrastructure Fund with con-
tributions from central and state governments
to upgrade infrastructure, skills, transport con-
nectivity, etc
- Encourage promoters to convert debt into eq-
uity after ensuring project viability.
- Raise funds through issue of both dollar and
rupee denominated sovereign bonds from
overseas market and use it for financing infra-
structure
(D). Rejuvenating Manufacturing
Manufacturing sector in India has exhibited a sluggish
output growth. As against a desired growth of 12-14 per
cent, it has been able to record a growth of merely 6.5
per cent per annum since 1991, even in the backdrop
of several initiatives on economic reforms. This has
limited the capacity of the country to reach on to the
double-digit growth trajectory (in GDP) and unshackle
the employment potential. It is in this backdrop that the
previous government introduced the National Manu-
facturing Policy (NMP) with the primary aim of raising
the manufacturing share in GDP to 25 percent and fa-
cilitating generation of 100 million additional jobs in the
sector by 2022. Even as the NMP has not been imple-
mented in its true letter and spirit, the challenges to the
sector have been escalating by deepening slowdown
of the economy led by industrial production. In 2013-
14, manufacturing output contracted by 0.7 per cent as
against growth of 1.1 per cent in the year before. In this
regard, following measures are recommended for the
immediate recovery of the ailing sector.
• Address policy constraints to support investments
in manufacturing. Investment in manufacturing
sector has seen a secular decline for the last couple
of years. For the sector to see any meaningful up-
tick, the rate of investment in the sector needs to

ECONOMY MATTERS 42
FOCUS OF THE MONTH
improve. In this regard, the following measures are
recommended:
- Implement NMP on priority – set up a dedicat-
ed group to look into different aspects of NMP
and coordinate with ministries, state govern-
ments, and industry for each
- Push for policies like MMDR, National Steel
Policy, National Chemicals Policy etc to provide
an enabling framework for the sectors
- Encourage value addition in sectors such as
electronics, defence and capital goods.
- Incentivise indigenous technology. Examine
FTAs
- Continue eliminating pending structural / regu-
latory hurdles in the coal, iron-ore and fertilizer
sectors to reduce dependency on imports in
the medium and long term
- Assure fuel supply linkages to the power sec-
tor. Reserve coal block for the power sector.
Infuse competition in coal sector. Work on a
policy framework for fixing power tariffs
- Allow 25 per cent accelerated depreciation for
investments in plant and machinery for a pe-
riod of 3–5 years. This will help pre-pone invest-
ments without affecting revenues in the long
term
- Bring down the general rate of excise duty
from 12 per cent to 10 per cent across the
board. This can be reviewed when IIP for man-
ufacturing moves beyond 6 per cent consist-
ently for 3 months
- Extend short term stimulus provided in inter-
im budget 2014-15 to capital goods, consumer
goods etc to 31st March 2015
• Invite Foreign Capital to Set up Manufacturing for
Global Demand. For the manufacturing sector to
widen its horizon and cater to the foreign market,
it’s pivotal that the sector find alternative sources
of funds apart from domestic. In this regard, be-
sides attracting FDI, following measures are sug-
gested:
- Scale up expenditure on road shows and pro-
motional activities to showcase investment
opportunities in NIMZs
- Set up single national-level export promo-
tion agency for double-pronged strategy of
intensive marketing overseas and extensive
assistance to domestic exporters in market de-
velopment, information dissemination, FTAs,
competitiveness etc
- Offer Tax incentives for manufacturing sector –
on par with domestic companies
(E). Improving Investment Climate and
Ease of Doing Business
As has been discussed in the Sector in Focus too, India’s
ranks very low in the ease of doing business. Much
of the details have been discussed, hence we straight
away highlight CII’s key recommendations to improve
the investment climate.
• Streamlining the complex compliance process af-
fecting the ease of doing business
- Effect simplification of laws/procedures /main-
tain clarity and transparency around processes
and procedures by :
* Establishing Environment Comliance
Assistance Center in states to facilitate
information exchange
* Introducing concept of ‘deemed approvals’
* Introducing e-governance & technology
based initiatives to simplify processes
- Set up Task Force on simplification of admin-
istrative processes to take India to 50 rank in
World Bank Ease of Doing Business, with pri-
vate sector participation
- Expedite FIPB approvals
- Introduce self-certification and third party cer-
tification by MSMEs
- Adopt flexible exit policy on lines of Chapter 11
bankruptcy procedure of US

MAY 201443
FOCUS OF THE MONTH
• Labour Reforms
- Set up a task force to simplify and rationalize
labour laws
- Move towards a flexible labour policy. Create
a ‘social safety net’ to compensate workers ra-
tionalized during the production process. The
formula for providing a higher severance bene-
fit can be arrived at after a tripartite discussion
between all stakeholders’
(F). Tax Reforms
Implementing suitable tax reforms is the principal in-
strument to correct severe budgetary pressures. It
helps to improve the prospects of important sectors of
the economy like- boosting domestic demand drivers,
infrastructure development etc. In this regard, the fol-
lowing measures are recommended:
• Boosting Consumption and Investment Demand.
Reviving domestic demand drivers, viz, consump-
tion and investment demand is imperative for
charting any meaningful recovery in growth. Gross
fixed capital formation contracted in the last fiscal
on the back of weak industrial demand. In order to
boost these two components of demand, following
measures are suggested from the tax front:
- Reduce the effective corporate tax rate inclu-
sive of surcharge, cess and other levies to 25
per cent
- Bring down MAT rate to 10 per cent
- Increase personal income tax exemption limit
from Rs.2 lakhs to Rs.5 lakhs. Alternatively, link
basic exemption to cost of living index
- Remove surcharge and education cess for cor-
porate assessees and education cess for non-
corporate assesses
- Increase exemption limit for wealth tax to
Rs.5,00,000
- Strategic investments into the subsidiaries by
the holding company and investment as per
bidding/Joint Venture (JV)/regulatory/business
requirements should not be considered for
computing disallowance under section 14A
- Restore exemption under Section 10(23G) of IT
Act to incentivize investment in infrastructure
sector.
- Reduce the threshold limit provided in invest-
ment allowance
- Allow investment allowance to power and con-
struction sector companies
• Infrastructure Development
- Restore deduction under Section 80CCF of the
IT Act to boost infrastructure development
- Bonds issued by infrastructure companies
should be qualified under section 54EC of the
Act
- Exempt MAT for Infrastructure sector under
section 115JB. Alternatively, MAT rate applica-
ble for infrastructure projects should be sub-
stantially reduced to provide incentives result-
ing in improvement of returns to the investors
- The MAT credit should be allowed to be carried
forward without any time limit
- Unutilized MAT credit be allowed to be carried
forward and set off should be allowed accord-
ingly against the normal tax payable under the
DTC regime
To conclude, the new government would need to im-
plement the above stated measures in order to revive
growth which has fallen to its multi-year lows in the last
two years. Reviving growth is the panacea for solving
many problems which the economy is facing currently-
unemployment, inflation, poverty etc. We would want
the government should focus on the 3 “Cs” – Credibil-
ity, Continuity and Clarity. Government policies must
have credibility, government decisions must have con-
tinuity and the legislation must have clarity. Addition-
ally, it’s pivotal that proper implementation time-line is
charted by the government in order to avoid falling into
the trap of policy inertia.

ECONOMY MATTERS 44
FOCUS OF THE MONTH
Firstly, let’s set the context correctly. The govern-
ment has an unenviable task of walking a tightrope
between the diametrically opposite expectations of
the farmers for higher prices and the consumers for
lower prices. Given that the majority of our farmers are
small and resource-poor, and the consumers are largely
low or middle-income, the government cannot short-
change either constituency for the sake of the other.
In this backdrop, let’s recount the key actions taken by
the governments from time to time, and the limitations
of such actions, because of which the prices continue
to rise.
When the objective is to balance conflicting interests,
any government’s first strategy is to subsidise. Subsi-
dies on inputs like water, power, credit, and fertiliser
to keep the cost of production low; and then subsidies
on food itself by buying at high support prices from the
farmers and selling at lower prices to the poor consum-
ers through the public distribution system. No doubt,
subsidies have delivered the expectations to a large ex-
tent. But, given the fiscal position of the government,
this strategy is neither scalable nor sustainable beyond
a point. Once that point is reached, as we have now,
the subsidies strategy leaves both the farmers and the
consumers dissatisfied despite consuming massive
amounts of money. Additionally, the resultant market
distortion discourages the private investment in the
sector, and the value chains remain under-developed.
Another strategy that’s adopted is to import food prod-
ucts, or ban the exports in times of shortage. Given the
fleeting speed at which the international commodity
markets move, our responses are often too late. The
problem is further compounded by the weak market in-
telligence system the governments typically have, and
the complex logistics of the global trade. In times of
shortages, expectedly, the domestic prices are sky-high
while the crops are standing in the fields, raising the
price expectations of the farmers; then the import con-
signments usually arrive just about the time the farmers
are ready to harvest their crops, and the prices start fall-
ing like there is no bottom!
Imposing stock limits to prevent hoarding of farm pro-
duce is yet another measure that’s commonly used to
control prices. This action does soften the prices, but
only temporarily. However, because this measure can-
not actually increase the availability of food in the sea-
son as a whole, the prices do go up eventually. Besides,
since the government doesn’t distinguish between
hoarders and the genuine Agri Businesses / Food Pro-
cessors, such restraints render investments along the
supply chain and processing unviable, and the value
chain participants remain fragmented.
One can possibly refine these strategies a bit more,
viz. sharper targeting of subsidies, proactive imports
through real-time market intelligence etc., and keep the
prices under check a few weeks longer. The longer-term
food inflation cannot be truly tamed unless the key driv-
ers are appreciated and managed.
Why are the Food Prices Rising Unabated despite Sev-
eral Measures taken by the Government?

Economy Matters, May 2014

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