ECONOMY MATTERS

FOREWORD
The G-20 Summit held at Brisbane, Australia saw a gathering of world leaders. A gamut of
decisions were taken on a range of measures that will help make the global economy more
resilient to future shockslike the recent global recessionand protect both business and
consumer interests. To protect against these shocks, the G20 decided to endorse measures
that would strengthen financial institutions, protect taxpayers from having to fund bailouts
if too big to fail financial institutions run into difficulty, address shadow banking risks, and
make derivative markets safer. It was decided that Sydney will now be home to a Global
Infrastructure hub, which will assist increasing global investment in infrastructure. Additionally, G20s commitment to deliver a plan to address tax avoidance called the Base Erosion and
Profit Shifting (BEPS) Action Plan was reiterated.
On the domestic front, despite the GDP slowing down in the second quarter of the current
fiscal, the first-half GDP figure of 5.5 per cent did seem to indicate that growth has sustainably
bottomed out. Deceleration in the second quarter was on expected lines, and growth could
have slipped further if it was not for surprisingly healthy performances by agriculture and
government spending components. Nevertheless, the H1 growth has placed the economy on
track to achieve our expectation of full year growth of 5.5-6.0 per cent given that the second
half is likely to be better. However, in order to provide a fillip to growth, it will be crucial for
the new government to implement the announced policy measures in right earnest. We are
already seeing a lot of pro-active reforms being considered by the government in areas of
labour, land and taxation, among others, which promote ease of doing business in India. An
accommodative monetary policy stance by the RBI will also help in cushioning growth.
Exports have played an increasingly important role in Indias economic growth in the last two
decades. Although, the pace of exports growth was punctuated twice by sharp slowdown in
world economy during 2008-09 and during the last two fiscal years, Indias trade prospects
have continued to grow over time. In the current fiscal, cumulative exports have grown by
4.7 per cent in the seven months so far. However, exports registered their first decline in this
fiscal in October 2014 due to global headwinds. For growth to reach a higher trajectory, its
pivotal that exports play an important role. The Foreign Trade Policy of the new government
which is expected to be put in place by early next year will help in this endeavour.

Chandrajit Banerjee
Director General, CII

OCTOBER - NOVEMBER 2014

OCTOBER - NOVEMBER 2014

EXECUTIVE SUMMARY
Sector in Focus- Make in India: Turning
Vision into Reality

Global Trends
After the 7.5 per cent growth in second quarter, GDP
growth in China for the July-September 2014 quarter
stood at 7.3 per cent from the year-ago period, slowest
since global financial crisis. It now risks missing its official
target for the first time in 15 years growth of 7.5 per
cent in 2014, adding to concerns of becoming a drag on
global growth. Central Banks world over are using ammunition at their disposal to ward off the dual problems
of deflation and slowing growth. Bank of Japan plans to
pump trillions of yens and expand its asset-buying program by 33 per cent in order to control deflation. In a
similar league, and somewhat desperately, the European
Central Bank intends to expand its balance sheet by 1 trillion euros (US$1.25 trillion). The Fed has indicated that
the benchmark interest rate would remain near zero and
it may hang onto the bonds for years, giving a QE-like
boost even after QE itself has been tapered out. Reduced
forecasts for economic growth worldwide and risk of deflation continue to trouble the policy makers.

The Indian manufacturing sector is a classic example of

an industry that has had great potential, but one that has
been systematically done in by political ineffectiveness,
entrepreneurial myopia and sheer ignorance of what it
takes to succeed. Over the last 20 years, Indian manufacturing has by and large grown at the same pace as our
overall economy. Our share of global manufacturing has
grown from 0.9 to 2.0 per cent during this period while
our GDP share has grown from 1.2 to 2.5 per cent. Despite
this en-couraging growth, however, the relative share
of manufacturing in the Indian economy has remained
unchanged, dashing hopes of an economy based on
manufacturing-led growth. In this context, the recently
announced Make in India policy by the new government
aims to push manufacturing growth to the next level. In
the recently concluded CII 13th Manufacturing Summit
2014, a report titled Make in India: Turning Vision into
Reality prepared by CII and BCG was released. We cover
the crucial ingredients required to make this vision into
reality as discussed by the report in this months Sector
in Focus.

Domestic Trends
Despite the GDP slowing down to 5.3 per cent in the second quarter of the current fiscal from 5.7 per cent in the
previous quarter, the first-half GDP figure of 5.5 per cent
did seem to indicate that growth has sustainably bottomed out. Deceleration in the second quarter was on
expected lines, and growth could have slipped further if
it was not for surprisingly healthy performances by agriculture and government spending components. The
latter may not be sustained for remaining months of the
year as government is likely to cut its spending in order
to rein in the fiscal deficit target for the year. Fiscal deficit
in the period April-October 2014 stood at 89.6 per cent
of the budgeted figure for the entire financial year. The
Index of Industrial Production (IIP) in first-half of the current fiscal (April-September) registered a growth of 2.8
per cent, compared to anaemic growth of 0.5 per cent
in the same period last year. Providing some cheer for
the economy, inflation is slowly and steadily coming near
the comfort levels of the central bank. Both CPI and WPI
based inflation moderated sharply to 5.5 per cent and 1.8
per cent respectively in October 2014, which, if sustained,
may help RBI to shift its focus from controlling inflation
to accelerating growth.

Focus of the Month - Trade : Policy &

Performance
India saw its foreign trade expand remarkably in the past
decade. Although, the pace of exports growth was punctuated twice by sharp slowdown in world economy during 2008-09 and during the last two fiscal years, Indias
trade prospects have continued to grow over time. In fiscal year 2003-04, Indias exports were worth US$64.0 billion. By 2013-14, they more than quadrupled to US$312.6
billion. In the current fiscal, cumulative exports have
reached US$189.8 billion in the first seven months of the
fiscal (April-October 2014) as compared to US$181.2 billion
in the same period last year, thus registering a growth
of 4.7 per cent. On a monthly basis, exports shrank for
the first time in seven months in October 2014, tempering hopes for an export-led recovery. Going forward, the
governments new foreign trade policy (2014-19) to rev
up exports is expected to be put in place by early next
year and will have a strong thrust on manufacturing to
bring it in sync with the Prime Minister Narendra Modis
Make in India goal. Given the importance of rejuvenating exports to have sustained growth, this month, the
focus is on the same. Eminent experts discuss the various nuances of having a trade policy in place which would
give adequate thrust to exports growth.
5

OCTOBER - NOVEMBER 2014

GLOBAL TRENDS

Chinas Economy Grows at a Sluggish Pace

in Q3 2014

The governments goal was for the economy to grow

about around 7.5 per cent in 2014. Policy makers have
stepped up their efforts to nurture economic growth

over past few months, including easing mortgage restrictions and accelerating infrastructure investment.

hinas economy grew at its slowest pace in more

While 7 per cent plus growth would be the envy of most

than five years in the third quarter, suggesting

countries, China has said it needs at least 7.2 per cent

that the governments targeted easing meas-

growth to create some 10 million jobs annually for its

ures to boost economic growth have not yielded ex-

huge population.

pected results. Gross domestic product growth for the

July-September quarter came in at 7.3 per cent from the

The worlds second-largest economy grew a seasonally-

year-ago period, after the 7.5 per cent growth in second

adjusted 1.9 per cent last quarter from the previous pe-

quarter. This is the slowest reading since the first quar-

riod, compared with the 1.8 per cent median estimate

ter of 2009, when Chinas growth rate slumped to 6.6

of analysts and 2 per cent in the second quarter. GDP in

per cent amid the global financial crisis.

January to September climbed 7.4 per cent, led by a 7.9

per cent expansion in services. While the growth figure

China now risks missing its official target for the first

for the agricultural industry stood at 4.2 per cent, the

time in 15 years, adding to concerns the worlds second-

secondary industry including mining and manufacturing

largest economy is becoming a drag on global growth.

ECONOMY MATTERS

grew 7.4 per cent.

GLOBAL TRENDS

While factory output rose 8.0 per cent in September

accounts for about a quarter of GDP when related in-

2014 from a year earlier, beating expectations for a 7.5

dustries such as steel, appliances and construction are

per cent increase and up from Augusts six-year low of

included. As China has relaxed property purchase credit

6.9 per cent, it was the sole positive update. Industrial

rules, property sales may pick up in the fourth quarter,

production also increased 0.91 per cent in September

but concerns regarding improvement in sectors like

from August, when it rose 0.2 per cent from preceding

heavy industry fuel the expectation that the economy

month. Fixed asset investment, a key driver of the Chi-

will continue to slow down.

nese economy, was weaker than expected. It climbed

16.1 per cent in the first nine months compared with the

Even though the inflation has cooled to a near five-year

same period a year earlier, compared with the median

low, highlighting sluggish domestic demand and a lack

estimate for 16.3 per cent growth and the 16.5 per cent

of pricing power for firms, the government maintains

pace in January-August period. Retail sales rose 11.6 per

that there is no danger that consumer prices would fall

cent in September from a year earlier, below predic-

in coming months.

tions of 11.8 per cent and down from previous months

Exports, one of Chinas few economic bright spots,

11.9 per cent. Meanwhile, property data for September

grew faster than expected in September. Growth in

showed that the slowdown deepened with real estate

combined exports and imports accelerated to 3.3 per

investment rising only 12.5 per cent in first nine months

cent in the first three quarters from a year earlier, up

compared a year ago, down from annual rise of 13.2 per

from 1.2 per cent in the first six months of the year. Al-

cent in first eight months.

though it is believed an unusually sharp increase in ship-

A weakening property market continued to weigh on

ments to Hong Kong may include transactions designed

broader activity in the third quarter, with revenue from

to circumvent Chinas strict capital controls.

property sales revenue and new construction tumbling

While authorities have offered a steady stream of aid

in the first nine months of 2014, blunting the impact of

to more vulnerable sectors of the economy, they have

earlier stimulus measures and a long-awaited pick-up in

ruled out massive stimulus as the country is still strug-

exports. Housing sales fell 10.8 per cent by value dur-

gling with a mountain of debt, the hangover from 4 tril-

ing the first nine months of this year. With house price

lion yuan (US$650 billion) of stimulus rolled out during

declines spreading to a record number of cities and new

the 2008-09 crisis. Government economists have said

construction tumbling, the government last month cut

that if growth looked like dropping below 7 per cent,

mortgage rates for some home buyers for the first time

authorities may take bolder and broader steps such

since the global financial crisis. Chinas property sector

7

OCTOBER - NOVEMBER 2014

GLOBAL TRENDS
as interest rate cuts. Low inflation gives policy makers

in the third quarter, the employment and inflation situ-

more leeway to continue pursuing an accommodating

ation were generally stable, meaning the economy was

monetary policy through the end of the year. Conse-

still operating in a reasonable range. Concerns were

quently, Central Bank of China cut its benchmark 1-year

raised on what conclusions the Chinese policymakers

deposit rate by 25 bps to 2.75 per cent, and reduced the

would draw from slowing growth: need to find other

1-year lending rate by 40 bps, to 5.60 per cent. It also re-

sources of growth or further trials to stimulate, even

laxed the ceiling on deposit rates and allowed Chinese

though the latter just reinforces the cycle that has pro-

banks to pay as much as 120 per cent of the benchmark

duced the distortions seen in the economy.

deposit rate, up from 110 per cent previously

Premier Li Keqiang has stated repeatedly that authoriThe International Monetary Fund on October 7, 2014

ties will tolerate growth slightly below target and rely

cut its outlook for global growth in 2015 to 3.8 per cent

more on reforms to generate new growth drivers as

from a July forecast of 4 per cent. The U.S. will expand

they try to reshape the economy so it is driven more

3.1 per cent next year, compared with 1.3 per cent for

by domestic consumption and less by exports and in-

the euro area and 0.8 per cent for Japan. China is pro-

vestment. Li said that a complex and changing exter-

jected to grow 7.1 per cent, its slowest since 1990, ac-

nal environment and large downward pressure posed

cording to IMF data.

difficulties for Chinas economy and that it would take

time for Chinas reformative measures to be fully effec-

The National Bureau of Statistics said that industriali-

tive. He has indicated that the leaderships bottom line

zation and urbanization will continue to drive Chinas

is maintaining employment to ward off social unrest, a

expansion. It recognized the economic slowdown due

policy priority. Li also said that China will launch major

to structural reforms in the nation, a sagging housing

investment projects in information networks, water

market and higher comparison figures from a year ago,

conservancy and environmental protection this year,

but noted that although economic growth had slowed

and pledged to policy adjustments made when needed.

Major Central Banks Inject Stimulus to Hasten Recovery

While conventional monetary policy has reached its

lowest value against the dollar in almost seven years,

zero lower bound, as far as interest rates are concerned,

it failed to boost exports as many Japanese manufac-

there is no consensus on the effectiveness of quantita-

turers had shifted production offshore during slow

tive easing. The worlds Central Banks are increasingly

growth period. Even before the decision, the BOJs

concerned that very low inflation will tip into outright

asset holdings were nearing 60 per cent the size of Ja-

deflation crushing fragile borrowers by raising the real

pans economy, over twice the relative levels reached

interest rate on their loans, which would load weak

by the Fed and the Bank of England. Japans sovereign

banks with a new round of defaults on loans.

debt is more than twice the size of the economy, the

highest ratio in the world, and the pension funds de-

A risky move by the Bank of Japan, in its bid to rid Japan

cision to move some of its assets away from Japanese

of deflation, to pump trillions more yen, jolted global

government bonds imply that the bond market will be

markets. The Bank would expand its asset-buying pro-

more dependent than ever on purchases by the Central

gram by 33 per cent and diversify from government

Bank. Japanese stocks and foreign stocks will each now

bonds to stocks and real-estate funds. It will be buying

take up 25 per cent of the funds holdings, up from 12

at a level well beyond what the Federal Reserve and

per cent each previously. The ratio for overseas bonds

other Central Banks have purchased in their stimulus

will rise to 15 per cent from 11 per cent. The Bank will

programs. As a result, even though the yen fell to its

ECONOMY MATTERS

triple the pace of its purchase of stock and property

GLOBAL TRENDS
funds, extend the average maturity of its bond holdings

reform which will support sustainable growth in long-

by three years to ten, and raise the ceiling of its annual

term. While aid to vulnerable sectors has been offered,

Japanese government bond purchases by 30 trillion yen

massive stimulus has been ruled out as the country is

to 80 trillion yen. The Banks board was deeply divided

still struggling with the hangover from 4 trillion Yuan

over the unprecedented measures due to concerns that

(US$650 billion) rolled out during the 2008-09 crises. As

the BOJ is underwriting Japanese politicians heavy bor-

growth has slowed this year, China has rolled out a se-

rowing, threatening to undermine the credibility of its

ries of targeted fiscal and monetary stimulus measures,

public finances, and the perceived independence of the

including stepped-up spending on railways, energy, and

Central Bank. The pension shift has also stirred contro-

public housing, expanded credit to farmers and private

versy as most global pension funds are paring back risk

businesses and more relaxed rules for the housing sec-

at this point and not adding it.

tor. The Bank plans to inject 200 billion Yuan (US$32.6

billion) into the banking system, following an earlier

In a similar league, and somewhat desperately, the Eu-

move to pump 500 billion Yuan into the countrys five

ropean Central Bank (ECB) is engineering a powerful

major state-owned banks. The prospects of weaker

monetary stimulus to jolt the flagging Euro zone econo-

growth may raise the chances of more aggressive policy

my, concerned by worrisomely low inflation that is both

steps such as cutting interest rates or reserve require-

a symptom and cause of the 18-nation euro currency un-

ments across the board, but the government may not

ions inability to achieve any sustainable growth at all. If

rush into action as the job market still appears to be

the current policies, which include some purchases of

holding up. Steps unveiled since April included reserve

corporate bonds, do not end the threat, the Bank would

requirement cuts for selected banks and faster invest-

alter the size, pace and composition of its purchases.

ment in railways and public housing. But much of their

At issue is whether it will follow its peers around the

broader impact may have been offset by the cooling

world in buying government bonds on a large scale. The

property market and tighter credit as banks grow more

ECB, in September, cut its main interest rate target to a

cautious about lending as the economy cools. Chinas

rock-bottom 0.05 per cent, and reduced its deposit rate

leaders have relaxed home-purchase controls and the

to minus 0.2 per cent, effectively charging banks for

Central Bank has pumped liquidity to lenders as they

leaving unused funds. It has been buying private-sector

seek to limit a property-induced slowdown. The govern-

loan assets since early October and has announced

ment has eschewed across-the-board interest rate cuts

longer-term low-interest loans to banks in an effort to

and signaled it will tolerate a weaker expansion, leaving

restart lending. The Bank intends to expand the size of

the economy headed for the slowest full-year growth

its balance sheet by 1 trillion Euros (US$1.25 trillion). Ex-

since 1990.

pectations that it will increase the supply of Euros in the

market led investors particularly as the Fed has begun

Even though the colossal strategy of U.S. Federal Re-

reining in its own bond-buying. The path to employ-

serve to buy immense piles of bonds in an extraordinary

ing wholesale bond-buying is not an easy one. There is

effort to restart a recession-deadened economy came

significant opposition to such a policy in Germany, for

to an end in October, after adding more than US$3.5

instance, apart from questions on whether the Euro

trillion to the Feds balance sheet an amount roughly

zone in which each country, rather than the bloc as

equal to the size of the German economy, it continued

a whole, issues bonds is the appropriate venue for

to pump support into the economy the old-fashioned

quantitative easing.

way, by holding its interest rates near zero. Currencies

and stock markets in emerging markets fell steeply in

Even as Japan and the EU embark on fresh rounds of

mid-January 2014, as investors prepared for U.S. inter-

quantitative easing to ward off deflation, the Peoples

est rates to rise, but markets rebounded while interest

Bank of China is holding the line against major stimu-

rates stayed low. According to Janet Yellen, the Fed

lus. Instead, it is instead taking a gritted-teeth approach

chair, the benchmark interest rate would remain near

accepting short-term pain as the price for structural

zero for a considerable time, and the Central Bank may

9

OCTOBER - NOVEMBER 2014

GLOBAL TRENDS
hang onto the bonds for years, which could give a QE-

the labor market has recovered further, is a massive

like boost even after QE itself has been tapered out. The

stimulus in itself, even in the absence of extraordinary

near-zero interest rates it plans to leave in place until

stimulus of massive bond purchases.

While global markets have been buoyant as a conse-

unexpected interest-rate cut by Chinas Central Bank

quence, interestingly, Central Banks themselves are less

and the European Central Banks decisions implying

confident, particularly given the extent to which eco-

that more monetary easing is needed reflect weakness,

nomic growth has repeatedly undershot their expecta-

not strength. This can be seen in the reduced forecasts

tions and forecasts. After all, monetary policy makers

for economic growth worldwide and, in the case of the

dont have the tools to remedy long-term neglect of

euro zone, signs that the region is on the verge of price

growth drivers such as infrastructure investment and

deflation. Not all Central Banks are increasing monetary

labor-market reforms; unbalanced demand patterns in-

stimulus. The U.S. Federal Reserve is likely to continue

volving a mismatch between the willingness and ability

diverging from the ECB and others, easing its foot off

to spend; and pockets of excessive indebtedness that

the accelerator. This will require adjustments that go

smother economic growth and new investments. That

beyond just dollar strengthening and that could cause

isnt the only thing worrying Central Banks. If anything,

volatility.

ECONOMY MATTERS

10

DOMESTIC TRENDS

Manufacturing Needs a Quality Boost

cess and can be extrapolated to include efficient supply

chains. Inculcating a culture of quality in the country so
as to meet the objectives of Zero Defect, Zero Effect requires a mindset change among the policy-makers and
industry alike in order to enhance national competitiveness in the global marketplace and succeed in manufacturing transformation.

India today has a large number of winners and recipients of internationally-acclaimed awards for business

significant innovation of the Make in India call

excellence. According to CII data, there are 21 awardees

by Prime Minister Narendra Modi, given on Au-

of the renowned Deming Prize and 238 Total Productiv-

gust 15, was the addition of Zero Defect, Zero

ity Maintenance (TPM) awardees of the Japan Institute

Effect. This translates into a manufacturing mission that

of Plant Maintenance (JIPM). Firms have also worked

is high on quality as also environmentally sustainable.

towards obtaining international energy and green rat-

In fact, the two goals are complementarya nations

ings, certifications covering quality, energy and environ-

development is sustainable only when the producers of

ment, and other well-known business excellence stand-

products and services deliver highest levels of quality,

ards.

at lowest cost, most efficiently, with minimum environ-

This drive for excellence has enabled gains in produc-

mental impact and most responsible use of resources.

tivity, quality, costs, operational efficiencies and con-

Quality is a holistic concept that goes beyond produc-

servation of critical natural resources. In training pro-

tion of high-class goods and services to encompass en-

grammes conducted by CII on Quality Management

tire processes and systems at the firm level and at the

Systems, we have seen production in participating

national level to maximise outcome, efficiency and pro-

firms going up by 50 per cent, quality levels increasing

ductivity at minimal cost. It extends to long-term busi-

by 80 per cent, cost of manufacturing coming down by

ness strategies for organisational excellence and suc-

5-8 per cent, and cost of maintenance being slashed by

11

OCTOBER - NOVEMBER 2014

30-50 per cent. A huge positive outcome has been zero

A range of areas need to be addressed to make industry

accidents, zero breakdowns and zero defects in the

competitive and quality-compliant. The use and adop-

companies which have gone through the TPM process.

tion of proven and time-tested quality tools and tech-

The high point is raised morale of employees as staff at

niques, green technologies, management systems, ex-

all levels is involved in kaizen or continuous improve-

cellence models, fundamental concepts and innovative

ment and innovation as well as in aligning to enterprise

approaches, and coordinated and time-bound process-

goals. Such quality interventions have helped enhance

es using a defined roadmap with clear outcomes will be

the image of Indian manufacturing and many of our

some of strategies that Indian industry would need to

companies have emerged as top-five producers of their

deploy. Industry would need support in terms of train-

product categories in the world. While this is a no mean

ing, consultancy and advisory services that would assist

achievement, there is still a long way to go for universal

firms in adopting these proven methodologies. Multi-

coverage in terms of scale and numbers of manufactur-

ple modes including awareness dissemination, person-

ing enterprises.

alised interventions, audits, assessments and cluster

mode would be required to achieve the twin goals and

A comprehensive initiative for expanding quality at-

build necessary internal capacities and capabilities for

tainments would aim to transform methodologies, pro-

vibrant and sustainable enterprises.

cesses and systems across the value chain. It would revitalise the use of manufacturing tools and techniques

CIIs Institute of Quality is the initiator of Indias first

while building a strong brand for India and its products

maturity assessment criteria ever on Zero Defect, Zero

and services, focusing both on the customer as well as

Effect, termed as the ZED Maturity Assessment Criteria.

on society as a whole. The endeavour of Zero Defect,

Evolved with the collaboration of the Quality Council

with a focus on the customer, would act towards zero

of India, this would bring out a ZED framework with

non-conformance and non-compliance. On the other

a maturity matrix to guide industry to commence and

hand, Zero Waste, Zero Effect, with a societal focus,

advance on quality attainments. Benchmarks would be

would focus on zero air pollution, zero liquid discharge,

established across focus sectors and products, which

zero solid waste and zero wastage of natural resources.

would enable Indias 1.1 million MSMEs to reference

This would converge the Make in India mission with the

themselves. Besides CII Institute of Quality, other CII

Swachh Bharat Abhiyan and stress minimising waste at

Centres of Excellence who will be actively participating

the industry level.

in this ZED movement would include CII-Avantha Centre

for Competitiveness for SMEs, CII-ITC Centre of Excel-

Strong and clear standards, identifying specific criteria

lence for Sustainable Development, CII-Sohrabji Godrej

for compliance towards Zero Defect and Zero Effect,

Green Business Centre, CII-Triveni Water Institute, CII-

need to be developed across diverse fields. Each cri-

Naoroji Godrej Centre of Excellence and CII Andhra

terion would be in the form of graded improvements

Pradesh Technology Development and Promotion Cen-

that would be demonstrable with the highest grade

tre.

corresponding to world-class maturity assessment criteria, and should include both enablers and results. This

The success of the Make in India mission would depend

would help Indian industry to measure itself against

heavily on the competitiveness of Indian enterprises,

global benchmarks and seek to evolve to its desired lev-

particularly MSMEs. Zero Defect, Zero Effect should

els of quality.

thus be developed as an additional mission in partnership with industry to support and assist companies.

This article appeared in Financial Express dated 29th November 2014. The online version can be accessed from the following link: http://www.financialexpress.com/article/fe-columnist/manufacturing-needs-a-quality-boost/
ECONOMY MATTERS

12

DOMESTIC TRENDS

Q2 GDP Relatively Resilient Despite Expected

Slowdown
Despite the GDP slowing down to 5.3 per cent in the

ing components. The two key enablers of growth, viz,

second quarter of the current fiscal (2QFY15) from 5.7

industrial output and investment spending, however,

per cent in the previous quarter, the first-half GDP fig-

continued to disappoint. The H1 growth at 5.5 per cent

ure of 5.5 per cent did seem to indicate that growth has

has placed the economy on track to achieve our expec-

sustainably bottomed out. Deceleration in the second

tation of full year growth of 5.5-6.0 per cent given that

quarter was on expected lines, and growth could have

the second half is likely to be better. However, the mix

slipped further if it was not for surprisingly healthy

in growth needs to change in favour of investments go-

performances by agriculture and government spend-

ing ahead in order to move to a sustained path of higher

growth trajectory.

From the supply-side, industrial growth slowed to 2.2

In 2014, south-west monsoons were deficient at 12 per

per cent in Q2FY15 compared to 4.2 per cent in Q1FY15.

cent below normal with the North-east region being

Weakness was concentrated in the manufacturing sec-

significantly affected. Lower impact on rice production

tor where growth fell to 0.1 per cent compared to 3.5

provided a cushion to overall agricultural output. Servic-

per cent in the first quarter. Output growth in other seg-

es sector growth remained relatively resilient at 7.1 per

ments within industry - such as electricity and mining

cent in Q2FY15 as compared to 6.8 per cent in the quar-

(that were earlier providing support) too slowed. Out-

ter before. Community, social and personal services

put growth in electricity, gas and water supply slowed

component of services grew at a higher pace of 9.6 per

to 8.7 per cent in Q2FY15 compared to 10.2 per cent

cent in Q2FY15 from 9.1 per cent in the previous quarter,

in Q1FY15. Similarly, in the mining sector too, growth

a significant part of which includes government spend-

slowed to 1.9 per cent in Q2FY15 compared to 2.1 per

ing. However, the trade, hotels, transport component,

cent in Q1FY15. Contrary to previous expectations, ag-

which comprises a lions share of GDP at factor cost is

riculture growth was quite strong at 3.2 per cent in

showing gradual, but steady revival which bodes well

Q2FY15, compared to 3.8 per cent growth in Q1FY15.

for Indias employment scenario.

13

OCTOBER - NOVEMBER 2014

DOMESTIC TRENDS

concern was the flat rate of growth posted by investment spending in Q2FY15 from 7.0 per cent growth in
Q1FY15. The capital goods sector has continued to face
the wrath of sluggish investment. This builds a strong
case for cutting of interest rates by the RBI as pick-up
in investment is crucial for having a sustained improvement of growth in the medium-term. Additionally, support from external sector is waning and export growth
turned negative after four quarters of positive doubledigit growth presumably on account of muted global
growth. However, the sharp fall in crude prices will help
to somewhat offset the drag.

At market prices, however, GDP grew at 6.0 per cent in

Q2FY15, higher than 5.8 in Q1FY15. Private consumption
growth climbed higher to 5.8 per cent in Q2FY15, but
mainly pushed upwards by a low base of last year (2.8
per cent growth in Q1FY14). Government spending component also came in strong at 9.6 per cent, which explains the April-October fiscal deficit standing at almost
90 per cent of budgeted levels of the entire financial
year. Consequently, this run rate of spending cannot
be sustained over the second half of the year and will
moderate sharply as the government will start cutting
its spending to rein in the fiscal deficit target for the full
year. From the demand-side, what stood out as a major

Outlook
Despite the slowing down of GDP in the 2QFY15 owing to a steep decline in manufacturing output, the economy
does remain firm on the road to recovery as compared to the previous year. In order to boost the output in the
remaining quarters of the fiscal, the Centre should roll out proactive policies which would help revive investments
and address the bottlenecks plaguing the agriculture and industrial sectors, a stable and predictable taxation system, faster regulatory clearances and industry-friendly land acquisition and labour laws.
ECONOMY MATTERS

14

DOMESTIC TRENDS

Industrial Output Grows at a Higher Pace in September

2014
After remaining subdued for the last two months, in-

industrial output grew by 2.8 per cent in the first half

dustrial output growth accelerated to 2.5 per cent in

of the current fiscal as compared to 0.5 per cent in the

September 2014 from 0.4 and 0.5 per cent in July and

same period last year. The sequential momentum as

August 2014 respectively. After contracting for two

indicated by the movement in the seasonally-adjusted

consecutive months, manufacturing output improved

month-on-month series too showed that industrial out-

to 2.5 per cent in September 2014. Capital goods output

put growth improved in September 2014 (from -1.0 per

too moved to the positive territory after languishing in

cent in August 2014 to 2.0 per cent in September 2014).

the red for the last two months. On a cumulative basis,

In contrast to overall industrial output, the core sector

tion increased by 13.2 per cent. Refinery products out-

output moderated to 8-month low in September 2014

put grew by a modest 4.2 per cent, after falling for three

on the back of dwindling production of crude oil, ferti-

months. The crude oil industry also returned to growth

lizer and natural gas. The eight core industries comprise

after a gap of three months. Its output grew by 1 per

nearly 38 per cent of the weight of items included in the

cent in October 2014. The natural gas industry, howev-

Index of Industrial Production (IIP). In October 2014,

er, continued to register a fall in production for the 47th

however, core sector output accelerated to 6.3 per

consecutive month. Its output dropped by 4.2 per cent

cent. This is the highest growth recorded by the index

in October 2014. Production of cement and fertilisers

in the last four months. The growth came on a flat base.

declined too. Cement production declined by 1 per cent

The growth in October 2014 was driven by the coal and

and fertiliser production declined by an even steeper

the electricity industries. Both the industries recorded

pace of 7 per cent. Fertilisers production has been fall-

a double-digit growth in output during the month. Coal

ing for the last five months.

production rose by 16.2 per cent and electricity genera-

15

OCTOBER - NOVEMBER 2014

DOMESTIC TRENDS

On the sectoral front, output of the manufacturing sec-

0.7 per cent from 2.0 per cent in August 2014. Going for-

tor, which constitutes over 75 per cent of the index,

ward, we expect the electricity production growth to

grew by 2.5 per cent in September 2014 as compared

slow down further due to shortfall in coal supply. In ad-

to contraction to the tune of -1.3 per cent in the pre-

dition, the Supreme Court ruling on cancellation of coal

vious month. In terms of industries, fifteen (15) out of

blocks allocations to 214 mines could see mining sector

the twenty two (22) industry groups (as per 2-digit NIC-

growth decelerating further in the months to come.

2004) in the manufacturing sector have shown positive

From the use-based perspective, consumer goods pro-

growth during the month of September 2014 as com-

duction continued to remain in negative territory. The

pared to the corresponding month of the previous year.

major part of the contraction in consumer goods was

The industry group Electrical machinery & apparatus

primarily on account of sharp drop in consumer dura-

n.e.c. showed the highest positive growth of 29.9 per

bles by 11.3 per cent. Acute rainfall deficiency during

cent, followed by 19.1 per cent in Other transport equip-

the initial phase of the monsoon season (about 30 per

ment and 12.3 per cent in Basic Metals. On the other

cent average during June to August) has likely to have

hand, the industry group Radio, TV and communication

dented farm incomes and hence demand for consumer

equipment & apparatus recorded the highest negative

durables. The negative print for non-durables during

growth of (-) 43.8 per cent, followed by (-) 34.2 per cent

the month was also worrying. Moreover, the volatility in

in Office, accounting & computing machinery and (-)

capital goods continued, with the sectors output grow-

4.4 per cent in Chemicals and chemical products.

ing by 11.6 per cent in September 2014 after remaining in

The Supreme Court ruling on coal block allocations is fi-

the negative territory for the previous two consecutive

nally showing its adverse impact on electricity output.

months. Meanwhile, basic goods production slowed

Electricity output decelerated sharply to 3.9 per cent in

down to 5.1 per cent after remaining healthy at 9.2 per

September 2014 as compared to a healthy 12.9 per cent

cent in August 2014.

growth in the previous month. Mining output too slid to

ECONOMY MATTERS

16

DOMESTIC TRENDS

Outlook
The upturn in industrial production in September 2014 underpins the perception that the growth momentum is
positive for industry and the economy is showing early signs of revival based on the feel good factor and positive
investor sentiment. We hope that going forward, the tentative signs of revival would transform into a firm recovery as overall business confidence is looking up and there is optimism about the change in governance conditions
pertaining to the ease of doing business. A disaggregated analysis showed a robust growth in capital goods sector
indicating some pick up in investment as companies are contemplating expansion as business environment has
turned positive. However, consumer durables are still in the red as high interest rates have stymied demand.

Another Positive Print for Inflation in October 2014

WPI based inflation moderated sharply to 5 year low of

2014. This is the lowest core inflation recorded since the

1.8 per cent in October 2014 from 2.4 per cent in the pre-

beginning of the new CPI series. A significant decline in

vious month. The fall in WPI inflation was attributable to

crude oil prices globally contributed to the downward

all round moderation in all its sub sectors. CPI inflation

price pressures in transport and communication and

too fell to 5.5 per cent in October 2014 from 6.5 per cent

fuel CPI inflation. We expect the moderation in both

last month driven by a fall in food inflation (fell to 5.6

WPI and CPI inflation to give RBI the necessary legroom

per cent from 7.7 per cent in September 2014). Core CPI

to cut interest rates in its forthcoming monetary policy

inflation remained broadly unchanged falling slightly

in order to spur demand conditions in the economy.

from 6.0 per cent last month to 5.9 per cent in October

17

OCTOBER - NOVEMBER 2014

DOMESTIC TRENDS

Primary inflation moderated further to 1.4 per cent in

Brent crude prices, which is now trading at a two-year

October 2014 from 2.2 per cent in September 2014. Part

low. Inflation in petrol declined further to 7.0 per cent

of the moderation was driven by a high base of last

from -9.4 per cent in September 2014. In an interesting

year. Primary food inflation too eased to 2.7 per cent

development, in October 2014, government de-regulat-

from 3.5 per cent in the previous month. Notably, food

ed the price of diesel and announced a new price for do-

inflation has come down sharply in the last couple of

mestically-produced natural gas. The price of diesel, like

months, thanks to proactive steps taken by the govern-

petrol, would now stand linked to the market without

ment such as release of food grain stocks, low increase

any government intervention, with retail rates reflect-

in minimum support prices etc. Amongst primary food

ing price changes in the global market. The immediate

prices, the data showed that vegetable prices have

impact on diesel will be a reduction in prices by Rs 3.37

come down sharply to -19.6 per cent in October 2014

a litre.

from -14.9 per cent in September 2014. In contrast, in-

Manufacturing inflation eased further to 2.4 per cent in

flation in fruits has remained relatively firm at 19.3 per

October 2014 as compared to 2.8 per cent in the pre-

cent in the reporting month as compared to 20.9 per

vious month. Encouragingly, non-food manufacturing

cent in September 2014. Primary non-food inflation de-

or core inflation, which is widely regarded as the proxy

celerated sharply to -1.4 per cent in October 2014 from

for demand-side pressures in the economy, continued

0.5 per cent in the previous month. Amongst non-food

its downward trajectory as it moderated to 2.5 per cent

articles, inflation in fibres and minerals was the main

during the month as compared to 2.8 per cent in Sep-

driving force behind the moderation.

tember 2014. In the coming months, we expect core

Fuel inflation too decelerated sharply to 0.4 per cent in

WPI to hover around 3.0-3.5 per cent, RBIs comfort

October 2014 as compared to 1.3 per cent in the previ-

level for this inflation measure. Manufacturing food in-

ous month, benefitting from a favourable base effect.

flation too decelerated during the month.

Fuel prices came off sharply tracking a fall in global

ECONOMY MATTERS

18

DOMESTIC TRENDS

Outlook
CII welcomes the drop in inflation based on both consumer and wholesale price. Over the next 1-2 months, headline CPI inflation could ease further due to a base effect from last fiscal, lower crude oil prices, revival of monsoon,
proactive measures taken by the government to keep food prices under control, and a stable currency. However,
factors such as improvement in demand conditions and rising geopolitical tensions reversing the current decline in
oil prices could derail this moderation in the coming months.

RBI Stays Put on Interest Rates

In its fifth bi-monthly monetary policy review held on

ances have moderated substantially since end-August.

2nd December, 2014, RBI maintained status quo on all

However, these interest rate impulses have yet to be

key rates citing uncertainty regarding strength of the

transmitted by banks into lower lending rates.

on-going disinflationary impulses, the pace of change

With this the repo rate stands at 8.0 per cent, the re-

of the publics inflationary expectations, as well as the

verse repo rate at 7.0 per cent, the marginal standing

success of the governments efforts to hit deficit tar-

facility (MSF) rate and the Bank Rate at 9.0 per cent.

gets. Moreover, the favourable base effect that is driv-

Additionally, the RBI will continue to provide liquidity

ing down headline inflation currently will likely dissipate

under overnight repos at 0.25 per cent of bank-wise

and inflation for December (data release in mid-Janu-

NDTL at the LAF repo rate and liquidity under 7-day and

ary) may well rise above current levels. As per RBI, some

14-day term repos of up to 0.75 per cent of NDTL of the

easing of monetary conditions has already taken place.

banking system through auctions while continuing with

The weighted average call rates as well as long term

daily one-day term repos and reverse repos to smooth

yields for government and high-quality corporate issu-

liquidity.

19

OCTOBER - NOVEMBER 2014

DOMESTIC TRENDS

RBI noted that liquidity conditions eased considerably

in Q3 of 2014-15 due to structural and frictional factors,
as well as the fine tuning of the liquidity adjustment
framework. With deposit mobilisation outpacing credit
growth and currency demand remaining subdued in relation to past trends, banks were flush with funds, leading a number of banks to reduce deposit rates. The main
frictional source of liquidity has been the large release
of expenditure/transfers by the government. In view of
abundant liquidity, banks recourse to the Reserve Bank
for liquidity through net fixed and variable rate term
and overnight repos and MSF declined from Rs 803 billion, on average, in Q1 to Rs 706 billion in Q2 and further
to Rs 476 billion in October-November 2014.

As per the RBI, economic activity appeared to have lost

some momentum in Q2, probably extending into Q3,
conditions congenial for a turnaround the softening
of inflation; easing of commodity prices and input costs;
comfortable liquidity conditions; and rising business
confidence as well as purchasing activity are gathering. These conditions could enable a pick-up in Q4 if
coordinated policy efforts fructify in dispelling the drag
on the economy emanating from structural constraints.
A durable revival of investment demand continued to
be held back by infrastructural constraints and lack of
assured supply of key inputs, in particular coal, power,
land and minerals. The success of ongoing government
actions in these areas will be key to reviving growth
and offsetting downside risks emanating from agriculture in view of weaker-than-expected rabi sowing
and exports given the sluggishness in external demand. Anticipating such success, the central estimate
of projected growth for 2014-15 has been retained at 5.5
per cent by RBI, with a gradual pick-up in momentum
through 2015-16.

In its review statement, RBI amply indicated that if the

current inflation momentum and changes in inflationary expectations continue, and fiscal developments are
encouraging, a change in the monetary policy stance
is likely early next year, including outside the policy review cycle.

Fiscal Deficit Rises to 89.6% of Budgeted in

April-October 2014
The fiscal deficit in the first seven months of the current

underpinned by rise in expenditure growth and contrac-

fiscal (April-October) stood at Rs 4.75 lakh crore which

tion in revenue growth. However on a monthly basis,

translates into 89.6 per cent of the budgeted figure for

fiscal deficit declined by 19.4 per cent to Rs.369.25 bil-

the entire financial year. The jump in fiscal deficit was

lion in October 2014 as compared to the same month a

ECONOMY MATTERS

20

DOMESTIC TRENDS
year ago. This was the lowest level of the deficit in the

Rs.456.81 billion, non-tax revenue collection fell by 4.1

last three months. Both, expenditure and non-debt re-

per cent to Rs.164.96 billion.

ceipts declined on a y-o-y basis in October 2014. How-

Total expenditure stood at Rs 9.6 lakh crore during

ever, a sharper fall in expenditure vis-a-vis non-debt re-

April-October 2014. This translates into 53.6 per cent of

ceipts led to the contraction in the fiscal deficit.

the budgeted targets for the current year. While non-

To be sure, while presenting the first budget of the

plan expenditure increased by 8.4 per cent to Rs.6.95

newly elected NDA government in July 2014, Finance

lakh crore, plan expenditure declined by 0.4 per cent to

Minster (FM), Mr Arun Jaitley had laid stress on fiscal

Rs.2.67 lakh crore. On a monthly basis, total expendi-

prudence, lowering the fiscal deficit target of 4.1 per

ture declined by 11.4 per cent to Rs.1 lakh crore in Octo-

cent of GDP for 2014-15 as compared to 4.6 per cent in

ber 2014. This decline was entirely on account of a sharp

2013-14. Notwithstanding, the current precarious state

compression in plan expenditure, which tanked by 35.2

of affair of government finances, the fiscal outlook

per cent to Rs.207 billion during the month. Non-plan

should brighten because of the fall in crude prices, but

expenditure declined slightly by 2.1 per cent to Rs.793.3

weak tax revenue growth and the slow pace of disin-

billion.

vestment suggest some uncertainty about the likely

The performance of the government finances has not

achievement of fiscal targets, and the quality of even-

been up to the mark in the fiscal so far. It would need

tual fiscal adjustment. The government, however, ap-

to tighten its purse strings and boost revenue growth in

pears determined to stay on course.

order to meet the fiscal deficit target for 2014-15. To be

The deficit touched almost 90 per cent of its annual tar-

sure, in order to lower the fiscal deficit to 4.1 per cent

get in the first seven months of the year itself mainly

of GDP in 2014-15, the government is betting on both

because of weakness in revenues. Total receipts stood

revenue and expenditure growth of 12.9 per cent as

at Rs 4.86 lakh crore during April-October 2014, which

compared to the revised estimates for 2013-14. In order

translates into only 38.5 per cent of the budgeted esti-

to achieve the revenue growth target, tax revenues,

mates for the full year. Mirroring the sluggish economic

which form around 80 per cent of total revenues, need

scenario, gross tax revenues growth too remained

to prop up. Moreover the nature of expenditure com-

weak. On a monthly basis, non-debt receipts declined

pression needs to be kept in mind as trimming of capital

by 6 per cent to Rs.631.1 billion in October 2014 on a y-

expenditure will further slow down the economic re-

o-y basis. While tax revenue declined by 6.7 per cent to

covery process.

21

OCTOBER - NOVEMBER 2014

TAXATION
Transfer Pricing in Income Tax and Customs Valuation of
Related Party Transactions Need for Harmonization

and services are transferred across borders within the

MNEs, transfer pricing becomes an important issue for
both the MNEs as well as for the income tax and customs authorities. Revenue administrations are naturally
concerned about transfer pricing as it influences both
the direct and indirect taxes. Price of goods in a crossborder transaction is the starting point for assessing
customs duties and for determining profits that arise
to each party for computing the income tax. The trans-

actions between related parties, as used in customs or

ransfer Pricing, a term used in the income tax

associate enterprises, as used in income tax are not al-

parlance, is a mechanism adopted by Multina-

ways subject to the same market forces as transactions

tional Enterprises (MNEs) for valuing the goods

between independent parties. As a result, the revenue

and services traded with their subsidiaries or associate

administrations are apprehensive that there is a poten-

companies situated in different tax jurisdictions. The

tial for under or overpricing of the goods, thus influenc-

income tax authorities use arms length principle in

ing the determination of customs duty and income tax.

terms of the international standard for transfer pricing,

There is another angle. A high transfer price reduces

as set out in the Organization for Economic Coopera-

the income tax liability, while low transfer price lowers

tion and Development (OECD) Transfer Pricing Guide-

the customs duty. Thus there lies an inherent conflict

lines, and the Model Tax Convention. Customs address-

of interest between the customs and the income tax

es the related party transactions through provisions

authorities. While the income tax authority may seek

as mandated by the World Trade Organization (WTO)

to stop diversion of profits to the exporting country by

agreement on customs valuation. The customs valua-

assessing lower transaction price on imports, the cus-

tion treatment of related party transactions has been

toms authority may prefer to determine a higher trans-

dealt with elaborately in articles 1.1 (d), 1.2 (a) & (b) and

fer price on the same imports so as to enhance the cus-

15 of the WTO valuation code. When goods, intangibles

ECONOMY MATTERS

22

TAXATION
toms duty. There could also be a case where the same

converge? And to what extent should they converge,

assesses declares a lower import value to customs to

and towards what standard? These are the challenging

pay less customs duty, while indicating a high transfer

questions on the issue of transfer pricing for the income

price for the same goods so as to minimize profit and

tax and customs authorities as well as the trading com-

pay less income tax.

munities all over the world.

The global business models of the MNEs are chang-

In response to these challenging questions, the World

ing continuously according to the business demands.

Customs Organization (WCO) and the OECD jointly

A globalised supply chain always aims to reduce costs

hosted two international conferences on transfer pric-

and increase efficiency with centralization of certain

ing and customs valuation, at the WCO headquarters in

functions, assets and risks in principal entities. In terms

Brussels in 2006, and 2007, at the initiative of Mr. Kunio

of UNCTAD report, eighty percent of global trade is

Mikuriya, then Deputy Secretary General, WCO. This au-

estimated to be linked to the international production

thor had the privilege to participate in both the confer-

networks of MNEs. Further, a substantial portion of in-

ences on invitation from the WCO.

ternational trade going up to 60 per cent takes place

In the first joint conference, the differences and simi-

within the MNE Groups. The OECD BEPS (Base Erosion

larities between two sets of rules applied by the two de-

Profit Shifting) report for G20 includes transfer pricing

as one of the six Key Pressure Areas.

partments were demonstrated on the basis of compari-

Thus, transfer pricing is no longer an issue for devel-

treat transfer pricing in accordance with their specific

oped countries only. It is becoming important for the

international standards. The conference also discussed

developing and emerging economies as well to man-

pros and cons of the desirability and feasibility of having

age transfer pricing well so that the revenue adminis-

converging standards for the two systems.

son between how income tax and customs authorities

trations may protect their tax base effectively, while at

Two schools of thought emerged. Those who were in

the same time avoiding double taxes. While both cus-

favour of convergence pointed out that a credibility

toms valuation and transfer pricing rules set standards

question did arise if two sets of rules on value deter-

for determining arms length or fair value of these

mination led to different answers to virtually the same

transactions, the international rules and guidelines are

question - what is the arms length / fair value for a

different in the customs and income tax domains, as explained before.

transaction. They further argued that convergence

would result in less compliance cost for the trade and

The trade and industry have voiced their concern about

less enforcement costs for the administrations. Those

the difficulty they face in satisfying the different regu-

from the other school of thought called for caution

latory requirements of both income tax and customs.

against convergence. They pointed out that the two

Their basic concern is that different rules and standards

systems are based on different principles while viewing

are applied by the two departments, and the absence

the valuation of imported goods. The transfer pricing

of coordinated efforts could also lead to double taxa-

principles in terms of the OECD guidelines are in many

tion that might create barriers to trade and investment.

ways different from the principles of customs valuation

In this background, the international trading commu-

treatment outlined by the WTO valuation agreement.

nity has been raising certain critical questions, some

Therefore, their advice was to focus more on dispute

of which are as follows: To what extent is it acceptable

resolution mechanisms to solve the questions that

to have different rules, merely because the policy ob-

might arise from the divergence in the two systems.

jectives of customs and income tax departments are

In the second joint conference held in May, 2007 the

different? How can one accept different answers from

conference went more into the nitty-gritty of exploring

two different authorities to the same question i.e. what

possible convergence. The conference recommended,

is the arms length price? Should both sets of rules

inter alia, for setting up of a focus group to suggest so23

OCTOBER - NOVEMBER 2014

TAXATION
lutions for harmonization of the two streams of valu-

goods and those of the OECD transfer pricing guide-

ation. At the conclusion of the conference, one found

lines. The commentary finally concluded that the use of

the message to be loud and clear - convergence is defi-

a transfer pricing study as a possible basis for examining

nitely desirable, and ways and means would have to be

the circumstances of the sale should be considered on

found to reach that goal.

a case by case basis, and that any relevant information

and documents provided by an importer may be utilized

As a follow-up to the second joint conference of May

for examining the circumstances of the sale. A transfer

2007, the focus group recommended, inter alia, that

pricing study could be one source of such information.

the technical committee on customs valuation (TCCV)

Obviously the said WCO document displayed cautions

at the WCO, which assists the members on various tech-

approach with respect to harmonization of the princi-

nical issues related to customs valuation may examine

ples laid down in the agreement and the guidelines.

the phrase circumstances of sale in Article 1.2 (a) of the

WTO valuation agreement in respect of its application

Nevertheless, it is a positive move, and a good be-

to transfer pricing situation. This was the first attempt

ginning has been made. It is now hoped that further

to build the bridge between OECD guidelines and WTO

analytical studies would show that the customs valua-

valuation agreement.

tion treatment of related party transactions and transfer pricing laws for associated enterprises do share

The TCCV at the WCO came out with a WCO instrument

common principles in many areas. Common meeting

commentary 23.1 titled examination of the expression

grounds can be found in the OECD arms length meth-

circumstances surrounding the sale under Article 1.2

ods of Comparable Uncontrolled Price (CUP) method,

(a) in relation to the use of transfer pricing studies.

Resale Price Method, Cost Plus Method, Transaction

The said commentary sought to provide guidance on

Profit Methods etc. and the methods laid down in the

the use of a transfer pricing study in determining the

articles 2,3,5, and 6 of the WTO valuation code. It has

customs value under Article 1.2 (a) of the agreement.

also to be realised that the OECD transfer pricing guide-

To elaborate, the said commentary provided guidance

lines constitute a body of rules that is appropriate to

in situations where TP Studies, prepared in accordance

supplement the related party provisions of the WTO val-

with the OECD transfer pricing guidelines are produced

uation code. It is however unfortunate that after show-

by importers as a basis for examining the circum-

ing the much required urgency in two consecutive years

stances surrounding the sale under Article 1.2 (a) of

of 2006 and 2007, both the OECD and the WCO seem

the agreement. The question that arose was whether

to have slowed down in finding the path for conver-

a TP Study prepared for tax purpose, and provided by

gence. There has not been any other joint OECD- WCO

the importer could be utilized by the customs admin-

conference on the subject to take this matter forward.

istration as a basis for examining the circumstances

There is no denying the fact that in the long-run, major-

surrounding the sale. The commentary observed that

ity of the stakeholders would find convergence to be

on one hand, a TP Study submitted by an importer may

definitely desirable. But there is a long and bumpy road

be a good source of information, if it contains relevant

ahead to make it feasible and there are many issues

information about the circumstances surrounding the

which would need to be settled before moving towards

sale. On the other hand, TP Study might not be relevant

convergence. The organizations like WTO, WCO, OECD

or adequate in examining the circumstances surround-

and APTF (Asia Pacific Tax Forum) must pursue the dia-

ing the sale because of the substantial and significant

logue in a proactive manner at least for harmonisation

differences which existed between the methods in the

of the two valuation treatments, if not for reaching the

agreement to determine the value of the imported

ultimate goal of convergence.

Mr. Sumit Dutt Majumdar is also the author of a book titled Customs Valuation - Law and Practice (2005), published
by Centax Publications

ECONOMY MATTERS

24

SECTOR IN FOCUS

Make in India : Turning Vision into Reality

In India, the number of jobs in the sector has also remained low over the last twenty years, increasing only
by 1.8 per cent per year from 37 and 53 million. This contrasts with the services sector, which has increased by
6.5 per cent per year during the same period, growing
its share of Indias labour force from 22 to 31 per cent
and now accounting for 150 million jobs (compared to
approximately 80 million in 1993).

he Indian manufacturing sector is a classic example of an industry that has had great potential,
but one that has been systematically done in
by political ineffectiveness, entrepreneurial myopia
and sheer ignorance of what it takes to succeed. Over
the last 20 years, Indian manufacturing has by and
large grown at the same pace as our overall economy.
Our share of global manufacturing has grown from
0.9 to 2.0 per cent during this period while our GDP
share has grown from 1.2 to 2.5 per cent. Despite this
encouraging growth, however, the relative share of
manufacturing in the Indian economy has remained
unchanged, dashing hopes of an economy based on
manufacturing-led growth. The sector accounted for 15
per cent of GDP in 1993, a rate that remains about the
same today. Meanwhile, several Rapidly Developing
Economies (RDEs) have increased their share of manufacturing to above 20 per cent of their GDP, in particular Thailand (34 per cent in 2012), China (32 per cent),
Malaysia (24 per cent), Indonesia (24 per cent) and the
Philip-pines (31 per cent).

In this context, the recently announced Make in India

policy by the new government aims to push manufacturing growth to the next level. In the recently concluded CII 13th Manufacturing Summit 2014, a report titled
Make in India: Turning Vision into Reality prepared
by CII and BCG was released. We cover the crucial ingredients required to make this vision into reality as
discussed by the report in this months Sector in Focus.

Current State of Manufacturing

Over the last five years, there has been a reversal of
sorts to this manufacturing trend, with Indian manufacturings share of GDP falling from 2.2 to 2.0 per cent
between 2009 and 2013, even as the countrys share of
global GDP grew from 2.2 to 2.5 per cent over the same
period. At the current rates of underperformance, the
sector will fall well short of the target set by the Nation-

25

OCTOBER - NOVEMBER 2014

SECTOR IN FOCUS
al Manufacturing Policy (NMP) of 2012. While the policy
set out plans for the sector to reach 25 per cent of GDP
and create 100 million additional jobs by 2022, the sec-

tors contribution to GDP has fallen from 16 to 15 per

cent, with fewer than five million incremental jobs having been added to the economy over the past five years.

While the historic performance of the manufacturing

increase the focus on innovation, including the

sector has been below par, with es-pecially poor results

launch of a INR 10,000 crores venture capital fund

over the past five years, the mood in India across the

dedicated to MSMEs; and

broader industrial sector has started to shift over the

past six months, thanks to election of a stable govern-

Actions to enhance skills and job creation in leading manufacturing sectors, including automobiles,

ment at the centre along with set of specific actions de-

chemicals and textiles.

signed to rejuvenate manufacturing announced by the

new government. At the forefront has been the Make

Making Make in India A Reality

in India campaign, which is aimed at creating 100 million jobs over the next decade and bringing manufactur-

at a more opportune time. The global economy is on the

ing up to 25 per cent of Indian GDP. Specifically, these

path to gradual, yet definitive recovery. The country has

include:

had a change of guard with a clear majority and whole-

hearted support. The overall mood is one of develop-

Investment to foster innovation and new technolo-

ment and progress. No wonder then, that the PMs call

gy development, including a USD 1.2 billion invest-

to action has received an overwhelming response from

ment to develop smart cities and the creation of a

both Indian and global industrialists and investors. To

USD 16 million development fund;

-

achieve a manufacturing led transformation, India

would need to undertake a well- planned and struc-

Actions to facilitate Foreign Direct Investment, in-

tured approach. Even as we go about fixing the basic

cluding an increase of the FDI cap to 100 per cent

factors around infrastructure, the ease of doing busi-

in railways and to 49 per cent in defence and insur-

ance;

ness in this country and related government policies,

Actions to foster project execution, including the

term goals of fostering technology and innovation.

reforms of approval and clearance requirements

The road to global leadership requires a structured ap-

and processes, including the rolling out of an online

proach across three levels:

there is a need to actively plan for and pursue long

system designed to speed up approvals for devel-

1. Revive manufacturing;

opment projects that might have environmental

impacts;
-

2. Gain global competitiveness;

New policies to facilitate the expansion of Mi-

3. Claim global leadership.

cro Small and Medium Enterprises (MSME) and

ECONOMY MATTERS

26

SECTOR IN FOCUS

Revive Manufacturing

infrastructure development. Today, we are left with

GETTING INFRASTRUCTURE EXECUTION

RIGHT

infrastructure in India have been marred by under-

a sorry state of transit systems and almost all pillars of

capacity and poor execution. The power sector is in an
abysmal state, with widespread capacity constraints

Infrastructure is the backbone of any economy, and is

since long and overdependence on non-renewable

arguably the single most important factor that sepa-

sources of energy. The transportation sector has been

rates the leaders from the laggards. The right infra-

crippled by poor quality of public transport, roads and

structure not only ensures an effective supply chain and

rolling stock in railways. The average operating speed

key inputs feeding into the manufacturing process,

of freight trains in India is around 25 km/hr, which is less

but also creates a seamless link across production hubs

than half of that in the US and Germany. Indian ports

and end marketsboth domestic and global.

have a turnaround time which is more than twice that of

China. The Indian road network is severely inadequate

Unfortunately, India lags behind in this key area. Over

for supporting a burgeoning economy. The real estate

the past few decades, while momen-tous growth rates

sector has suffered from large delays in projects and un-

have fuelled Indias emerging economic prowess, the

der-investments.

country has lacked the corresponding investment in

DRIVING LABOUR REFORMS

Unless this central issue of managerial confidence in

increasing workforce size is addressed, all plans for
manufacturing growth will be difficult to implement.
The government has started addressing this issue.
For example a unified Labour Identification Number
(LIN) for simplifying business regulations and securing
transparency and accountability in labour inspections
has been announced. The wage ceiling for Employees
Provident Fund (EPF) has been increased from INR
6,500 to INR 15,000. While these are indeed welcome
and much needed initiatives, still more reforms are required to truly unlock the potential of Indias vast human resources.

Employment growth during 2004-05 to 2011-12 clocked

only 0.5 per cent, compared to 2.8 per cent during the
period of 1999 to 2005. This situation will not change,
unless manu-facturing leaders feel more confident of
hiring and increasing the size of their firms. Today,
the average manufacturing leader is wary of increasing
the size of his permanent workforce, because of inability / difficulty in downsizing if required, and the significant managerial effort that goes into managing government authorities or unions. As a result, the proportion
of temporary and contract staff in the workforce is
very high. Also, man-ufacturers are open to outsourcing labour-intensive operations to SME suppliers who
would then suffer from lack of scalewhich would hurt
in the longer term.

EASING DOING BUSINESS

Even after two decades of economic reforms, India has
been struggling to provide the right environment and fa27

OCTOBER - NOVEMBER 2014

SECTOR IN FOCUS
cilities for its businesses. The effort and time consumed
in India for starting a business, dealing with construction permits, gaining access to electricity, register-ing
property, paying taxes, enforcing contracts or resolving
insolvency is higher than most other countries.

ing Business reflects a similar story, where India sits at

the bottom of the pile at Rank 142. In addition to issues
related to domestic business infrastructure, the process of getting approvals for exports in India is quite
outdated and highly time consuming. The cost involved
in the process is higher than even in some developed
countries.

A study undertaken by the World Bank on Ease of do-

Gain Global Competitiveness

ATTRACTING INVESTMENT

BUILDING AN EXPORT ECO-SYSTEM

Industrial Production growth has high correlation with

FDI inflows. The effect of FDI on economic development
ranges from productivity increase to enabling greater
technology transfer. Higher FDI inflows are central for
India to transcend from 5-7 per cent growth to 10-12 per
cent growth. India currently fares poorly on FDI when
compared its global peers. On a per-capita basis, cumulative FDI equity inflows from April 2000 to April 2014
for India is just USD 183 compared to USD 2,017 and USD
1,531 for Mexico and China respectively.

Reviving the domestic manufacturing sector to better

cater to domestic demand is a critical but incomplete
solution. Countries successful in manufacturing have
also correspondingly boosted their share in global
trade. If India wants to become a preferred manufacturing hub, the government would need to create an
ecosystem for exports powered by policy reforms, investments and infrastructure.

DEVELOPING AN INFRASTRUCTURE WHICH

SUPPORTS EXPORT GROWTH

The Indian government has already started taking

steps in this direction to revive manufac-turing sector
growth. The recent move of the government to relax
the cap on FDI in the de-fence and construction sector
is a welcome step in this regard. Already we are witnessing early rewards. More changes like an increase in FDI
cap, and the elevated investor confidence due to the
new government are expected to cause FDI inflow to
cross USD 30 billion in 2013-14 as against USD 24 billion
in 2013-14.

There is an urgent need to develop export focused infrastructure in India. Under-capacity and mismanagement in Indias transit and power systems needs to be
addressed. To encourage global trade, ports would
require higher capacity and streamlined processes.
Their linkage to inland transportation for the seamless movement of goods also calls for an upgrade. The
development of industrial corridors and smart cities would provide a stimulus to the growth of a globally competitive manufacturing sector. Policy reforms
for simplifica-tion of tax regime and promotion of exports would further help boost Indias share in global
merchandise trade. Brand India would also need to be
strengthened across the globe for an increased acceptance and preference for Made in India products.
ECONOMY MATTERS

BETTING ON TECHNOLOGY AND

INNOVATION
Indias current standing on innovation and research is
not a desirable one. India has one-fifth the number of
researchers per million as compared to China and even
lesser proportion as compared to developed coun28

SECTOR IN FOCUS
tries (see below graph). High-technology exports from
India form less than seven per cent of the total exports, while for most other countries the number is in

mid-twenties. Indias number of patent applications and

R&D expenditure also stands nowhere close to that of
the developed countries.

The US has always led other countries in embracing

India will not be able to realise her true potential in

new technologies. To make shale gas revolution a huge

manufacturing unless there is tangible change in two

success, federal programs played an active role along

specific mindsets:

every phase of the innovation pipeline. China has also

Changing the Consumers Mindset About Made in In-

realised the need for innovation for sustaining its manu-

dia Products. Made-in-India products are not ranked

facturing sector growth. Chinese industries saw sys-

as high as products made in international locations. The

tematic transfer of technology after indigenisation was

so-called Made in China discount that the country suf-

promoted in the country. China now accounts for 24

fered with has also been systematically been done away

per cent share in the worlds high technology manufacturing compared to the US share of 27 per cent.

with. Addressing mindsets of Indian consumers first,

Claim Global Leadership

ceptance of Made-in-India goods.

and then international markets is critical to driving ac-

Once the foundation is built to revive manufacturing

Moving the Entrepreneurs Mindset from Medium-term

and competitiveness driven across key sectors, achiev-

Value Creation to Long-term Visionary Transforma-

ing global leadership will be a function of two aspects:

tion. According to a global study conducted by Egon

Zehnder, Indian businesses tend to think more short-

Global competitiveness once achieved needs to be ex-

term compared to their global counterparts. In such a

panded to more sectors to build the ecosystem in gen-

scenario, building structures and putting processes in

eral and also be defended aggressively. China is a per-

place take a backseat. Such a near sighted approach

fect example of a nation that first established its mark

inevitably takes a toll on their ability to invest in R&D,

as a cheap source for labour intensive, low technology

innovation, capability building and other such invest-

goods (for example, cotton-based base offerings in ap-

ments with long term payoffs. Addressing this mindset

parel), but has slowly made a mark for technology in-

and driving investments in capabilities that will have a

tensive, complex products as well (for example, aero-

longer-term payoff is critical to upgrading Indias per-

space, electronics, power equipment, etc.). This would

formance capabilities.

involve continuous investment in infrastructure and

technology.
29

OCTOBER - NOVEMBER 2014

SECTOR IN FOCUS

Conclusion
This is truly a time of great expectations for India, and this is probably the only time in recent past where our
odds of driving breakout growth in manufacturing are very high. We have a strong, pro-industry government,
global economy is picking up, and our core advantages are still strong and relatively unaffected from the global
slowdown. Having said that, there is a long journey ahead of us, one that starts with reviving the industry, and
then achieving global competitiveness followed by claiming global leadership. A good start has been made with
the government announcing its intent and making a few small yet important changes to improve manufacturing
sector. The next year is crucial to implementing the announcements well, and seizing the opportunity to make the
right investments at a company level.

ECONOMY MATTERS

30

FOCUS OF THE MONTH

Trade: Policy & Performance

fiscal year, the base effect is likely to turn favourable

as export growth fell sharply in the period November
2013-April 2014. Given that the Indian currency has remained broadly stable for the past few months, global
growth prospects have become an important variable
for exports. At a disaggregate level, engineering, petroleum and gems & jewellery which accounted for
58 per cent of total exports, contracted by (-) 9.2 per
cent, (-) 0.16 per cent and (-) 2.25 per cent respectively.

ndia saw its foreign trade expand remarkably in the

past decade. Although, the pace of exports growth
was punctuated twice by sharp slowdown in world
economy during 2008-09 and during the last two fiscal years, Indias trade prospects have continued to
grow over time. In fiscal year 2003-04, Indias exports
were worth US$64.0 billion. By 2013-14, they more
than quadrupled to US$312.6 billion. In the current fiscal, cumulative exports have reached US$189.8 billion
in the first seven months of the fiscal (April-October
2014) as compared to US$181.2 billion in the same period last year, thus registering a growth of 4.7 per cent.

Imports grew by 3.6 per cent in October 2014, a sharp

slowdown from 26 per cent growth registered during
September 2014. On a cumulative basis, imports grew
by 1.9 per cent during April-October 2014. In terms of
key imports, gold imports jumped to 106.3 tonnes (US$
4.2 billion) in October the highest monthly imports this
fiscal year, from 26 tonnes (US$1.1 billion) a year ago.
Higher demand spurred by the festive season and low
prices (Rs 1222.5/troy ounce vis-avis Rs 1316.2/troy ounce
a year ago) is likely to have led to the rise in imports of
the yellow metal. Meanwhile, the steep fall in crude prices during October 2014 led to 19 per cent contraction in
crude imports. Non-oil non-gold exports an indicator
of domestic demand continued to expand although
at a significantly slower pace compared to September.

On a monthly basis, exports shrank for the first time in

seven months in October 2014, tempering hopes for an
export-led recovery. Exports contracted by 5 per cent
on y-o-y basis to US$26.1 billion in October as against
2.7 per cent growth recorded in the previous month.
With the Japanese economy now in recession and the
Euro Zone flirting with one, overseas demand for Indian
exports has become a little uncertain. A high base effect of last year was also partly responsible for the contraction in exports in October 2014. For the rest of this
31

OCTOBER - NOVEMBER 2014

FOCUS OF THE MONTH

Merchandise trade deficit widened to US$13.4 billion in

October 2014 from US$10.6 billion a year ago, as gold
imports quadrupled on year-on-year (y-o-y) basis while
exports fell by 5 per cent. However, a 19 per cent fall in
oil imports due to lower crude oil prices helped to cap
the rise in trade deficit in October 2014. However, on a
cumulative basis, trade deficit narrowed to US$83.7 billion in April-October 2014 as against US$87.3 billion during the same period in the previous year.

policy which was due to be introduced in October 2014

has been delayed. When announced, it will include both
an annual plan and a five-year long-term policy. It will
focus on lowering transaction costs and reducing paper
work, in addition to encouraging exports of labour-intensive commodities to newer markets such as Russia,
Brazil and China. Exports of services will also get a legup.
Given the importance of rejuvenating exports to have
sustained growth, this month, the focus is on the same.
Eminent experts discuss the various nuances of having a trade policy in place which would give adequate
thrust to exports growth.

Going forward, the governments new foreign trade

policy (2014-19) to rev up exports is expected to be put
in place by early next year and will have a strong thrust
on manufacturing to bring it in sync with the Prime Minister Narendra Modis Make in India goal. The trade

ECONOMY MATTERS

32

FOCUS OF THE MONTH

Ease Process of Exports

t this juncture, the larger concern is to make

we anticipate thrust on consolidation of markets, prod-

the manufacturing sectors the prime movers

ucts, services and standards. Overall objective seems to

of Indias export push. During the past sever-

be to make made-in-India brands more attractive glob-

al years, the composition of Indias export basket has

ally. Besides, lesser emphasis on incentives would help

remained stubbornly rigid. The shares of engineering

to make Indian system even more WTO permissible.

goods and chemicals have been hovering around 20 per

Some of the encouraging developments have been the

cent and 13-14 per cent respectively, while two products

recent launch of Make in India campaign by Honble

groups, viz., POL and gems and jewellery have consist-

Prime Minister Narendra Modi on 25th September 2014.

ently accounted for nearly a third of Indias exports.

This is a big step forward, which would help to make

Moreover, Indian exporters face lot of constraints like

India a manufacturing hub, thereby boosting Indias

infrastructural bottlenecks, slowing down of world

export competitiveness. Economic multiplier effect of

demand, high cost of funds, low technology intensity,

manufacturing sector would also help to kick start eco-

scarcity of skilled and semi-skilled manpower, high in-

nomic revival and growth in services sector.

put costs, high transaction costs and stiff competition

from emerging economies.

Another factor which would upgrade export competitiveness is related to ease of doing business. It is inter-

Amidst such a backdrop and positive momentum cre-

esting to know that concerted efforts are in place to im-

ated by the new government, Indian industry eagerly

prove Indias position in ease of doing business, which

awaits for FTP announcement, since this policy an-

would essentially uplift the quality of Indian exports.

nouncement would not only provide strategic direction

to Indian exporters, but would also give useful hints on

One of the priority requirements of the industry is seek-

how to align firm level strategy with overall trade strate-

ing expansion in scope of SFIS (Serve for India Script)

gy. For this year, government has set a target of achiev-

by making it more tradable. Furthermore, there should

ing total exports worth US$500 billion in the current

be continuity of Chapter-3 Schemes and broadening the

financial year, with merchandise and services exports

coverage of schemes. Besides, FPS, FMS and MLFPS

around US$340 billion and US$160 billion, respectively.

benefit should be extended to exporters operating

in SEZs (Special Economic Zones). The FTP should lay

Recently, from the reliable sources from Ministry, we

greater emphasis on identification of markets, provid-

have got an impression that the new FTP is going to be

ing branding assistance and assessing need for free

quite different from the earlier ones. In the new policy,

trade agreement with particular countries.

33

OCTOBER - NOVEMBER 2014

FOCUS OF THE MONTH

take time. Further, it is desired that sectors such as ser-

Considering the phenomenal contribution of SEZs

vices, project exports, and e-commerce, should get ad-

(nearly 25 per cent of Indias total exports), we are ex-

ditional benefits under the gambit of the new FTP.

pecting a decision on minimum alternate tax (MAT) and

dividend distribution tax (DDT), which would provide

Regarding the services sector, we also need to under-

relief to the SEZ units and developers. Interestingly, the

stand what other countries are doing to position their

government is also mulling the option of dual usage,

services competitively; there is also a requirement to

which would help SEZs to be used for manufacturing as

understand what the key takeaways for India are. Al-

well as for exporting purposes.

beit, the share of services in Indias GDP at factor cost

stood at 56.5 per cent in 2012-13, India ranks much be-

New FTP should also address the issues of heavy paper-

low the other countries when it comes to measuring

work and ease of processes for exporters. The key chal-

the contribution of the services sector as a percentage

lenge is that once a license is issued, it is to be provided

of GDP.

to customs, get it re-verified, and all these procedures

This article appeared in Financial Chronicle dated 25th October 2014.

ECONOMY MATTERS

34

FOCUS OF THE MONTH

Exports as a Growth Driver

he outcome of the recent Lok Sabha elections

ufacturing activity will surely migrate out, giving India a

was historic and unprecedented. A single party

unique opportunity. In services exports, Indias share is

voted with an absolute majority of seats means

3.2 per cent, although in the specific category of soft-

an end to the era of coalition politics, which was often

ware and offshore IT services its share is 22 per cent. In

associated with policy gridlock, or stalled economic re-

2010, the Commerce Ministry published a paper outlin-

forms. The government led by Prime Minister Narendra

ing a strategy to double Indias exports in three years,

Modi now faces a twin challenge, of carrying the huge

and then double Indias share of global exports by 2020.

burden of expectations, and of overcoming adverse

That strategy remains salient and is more relevant in the

macroeconomic conditions. The air is certainly filled

current context.

with optimism as signified by the stock market, and

Indias merchandise exports have evolved in two dis-

by the inrush of foreign portfolio capital. The priorities

tinct ways. In terms of share in overall exports, the

before the the new government are to reduce inflation

share of agri-and allied products, ores and minerals and

sharply, increase industrial investment and growth,

other commodities has moved in a range-bound fash-

help large scale job creation, restore fiscal health and

ion. However, there has been some perceptible shift

ensure that economic development benefits all, espe-

from the manufactured goods to the petroleum and

cially the poor.

crude products segment between FY03 and FY13. It is

The revival of economic growth requires a boost to

interesting to note that, together manufactured goods

manufacturing, increased spending in infrastructure,

and petroleum and crude products have accounted for

unclogging large stalled projects, and catalysing big and

81 per cent of overall exports in FY03 and FY13. Howev-

small entrepreneurs. Growth needs both domestic and

er, the share of manufactured goods has dropped from

external drivers. In this article, we focus on strategies to

76 per cent in FY03 to 61 per cent in FY13, which in turn

revive growth of exports. Even though the world econ-

has been taken over by petroleum and crude products.

omy is growing moderately, India can harvest global de-

Share of petroleum and crude products has risen con-

mand to at least double its share of world exports. Its

siderably, from 5.0 per cent in FY03 to 20.1 per cent in

share currently stands at a dismal 1.6 per cent of global

FY13. Thus, the evolution is towards more value-added

goods exports, whereas Chinas share is 11 per cent. Due

and more complex, engineering oriented products. But

to emerging labour shortage in China, the low cost man-

we still have very large underexploited potential in textiles.

35

OCTOBER - NOVEMBER 2014

FOCUS OF THE MONTH

The other distinct trend is that Indias top export des-

distinct change in trend highlighted earlier is inescap-

tinations have moved east. The Middle East and China

able. Along with increased trade integration with Asia,

are the top two trading partners, and exports to East

this shift of export direction away from America and Eu-

Asia are fast growing. As of FY13, share of Asia, in In-

rope may be attributed to the moderation in economic

dias exports rose to more than half (50 per cent), when

activity in these countries, which has caused import de-

compared with that in FY03 (42 per cent). While North

mand from these countries (i.e. exports from India and

America and Europe will remain important markets, the

others) to contract.

In this article, we identify four specific factors that are

2015. Chinas working-age ratio peaked in 2013 and will

relevant to boosting Indias exports.

continue to decline in the next few decades. However,

Indias demographic transition is presently well under-

1. Translating Indias Demographic Advantage into Productivity

way, and the age structure of the population is likely to

evolve favorably over the next two to three decades.
The democratic dividend could add 2 percentage points

The Japanese workforce has been shrinking since 1995,

to per capita GDP growth per annum, according to an

and the Korean workforce will start to decline beginning

ECONOMY MATTERS

36

FOCUS OF THE MONTH

estimate by the IMF. However, unemployment through

dividend. Though India can benefit from rising wages in

skill upgradation is what India will have to manage care-

China, it is important to consider Indias productivity dif-

fully in order to take advantage of this demographic

ferential with China, which depends on multiple factors

like the extent of automation and skills quality.

2. Emphasis on the Manufacturing Sector

reviving financial health of the power sector, and much

improved logistics. India needs to change the mix of

Share of manufacturing exports in total exports has

road and rail in domestic freight. The National Manufac-

gone down in the past decade (from 80 per cent in

turing Policy (NMP) aims to increase the share of manu-

2000 to 61 per cent currently). As a result, Indias share

facturing in GDP to 25 per cent, and all the ingredients in

in global manufacturing exports is a miniscule 1.4 per

the NMP are relevant to boosting exports.

cent, far behind Chinas 14.8 per cent. Poor infrastruc-

3. Improving Trade Facilitation Measures

ture, low FDI, Low R&D spending, tax policies and rising
input costs are some of the impediments to growth of

A powerful way to boost trade is by focusing on trade

manufacturing exports.

facilitation by improving both hard infrastructure

While in China, Brazil and South Africa, the manufactur-

ports, railways, roads, airports, and soft infrastructure

ing sector has grown at higher rates than the GDP, in

such as shipping, logistics, telecommunication and busi-

India, the share of manufacturing in GDP has stagnated

ness environment. Trade transaction costs play an im-

at 15 per cent and accounts for a mere 12 per cent of

portant role in decisions to participate in trade. Improv-

the workforce. Every job created in manufacturing has

ing trade facilitation measures now feature prominently

a multiplier effect, creating three jobs in the services

in the WTO. A World Bank study by Helble and Wilson

sector. Hence, it is clear that any boost to exports ba-

estimates that every dollar spent in aid-for-trade by the

sically needs a boost to manufacturing with particular

recipient countries on reforming trade policy and regu-

focus on boosting the small and medium enterprises.

lation (e.g. customs clearance, technical barriers, etc.),

This also calls for skill upgradation, increased spending

the countrys trade increases by US$697 dollars annual-

on R&D and enhanced infrastructure. The latter means

ly. Any country which wants to be an integral part of the

37

OCTOBER - NOVEMBER 2014

FOCUS OF THE MONTH

global value chain should try to work on all components

So far, the best performing component of trade facili-

of trade facilitation. It is, therefore, imperative for India

tation for India has been logistics, quality and compe-

to improve on these counts in order to boost exports.

tence and the worst has been the infrastructure.

4. Reviewing our Free Trade Agreements

in FY10 to US$9.9 billion currently. Similarly the trade

deficit with Japan also increased from US$3.5 billion in

Trade liberalisation has been a key feature of Indias eco-

FY11 to US$6.3 billion currently. With Korea the deficit

nomic reforms. In recent times, the country has actively

rose from US$5.2 billion to US$ 8.9 billion in the past

pursued free trade agreements (FTAs) with several ma-

three years. Since 2006, Indias exports to RTA partners

jor trading partners. Though it is still early to draw defi-

increased by 21 per cent per year, which is roughly the

nite conclusions about Indias FTAs with ASEAN, Japan

same as with other non-RTA countries. This calls for a

and Korea, we can clearly see that the trade deficit with

comprehensive review of trade agreements, and their

these countries has increased post FTAs. Indias trade

benefits in promoting Indias exports.

deficit with ASEAN trade increased from US$7.1 billion

ECONOMY MATTERS

38

FOCUS OF THE MONTH

Of course, this does not mean opting out of trade agree-

manufacturing sector, which, in turn, is the culmination

ments, nor does it mean reducing our engagement with

of action-plan outlined in the National Manufacturing

blocs like ASEAN or EU. But it does imply that going for-

Policy.

ward; the negotiations should incorporate features that

To conclude, net exports (i.e. exports minus imports)

will help exports, in light of the review of performance

of past FTAs.

have added roughly 5 to 7 per cent to Chinas GDP every

In addition to the four factors identified, several other

since we have always had a current account deficit. This

reforms will affect the success of export promotion.

has largely been due to Indias external energy depend-

The big one is the rollout of natiowide Goods and Ser-

ence, but it is also because of its underexploited export

vices Tax (GST), which will add 10 to 15 per cent to ex-

potential. In the coming years, this negative needs to

ports. This is basically due to cost reduction and efficien-

change to a positive balance. Policymakers have a key

cy gains. Ultimately, the success of exports is crucially

role in ensuring this. One of the immediate need is the

dependent on the strengthening of Indias domestic

implementation of the NMP, which would give a boost

year. By comparison Indias net exports are negative,

to manufacturing output.

(Research inputs for this article were provided by Prachi Priya. Views are personal)

39

OCTOBER - NOVEMBER 2014

FOCUS OF THE MONTH

Mega Trade Agreements and India

ing investor-to-state dispute settlement (ISDS) which

would permit investor companies to challenge local
laws in court 2.

major breakthrough has come about in the

WTO Doha Development Round with the
peace clause on foodgrain stocks to meet Indias requirements, which paved the way for implementation of the Trade Facilitation Agreement. While this
would substantially boost global trade, India also has to
consider the implications of upcoming trade and economic agreements that bring together influential trading nations under a single umbrella, also termed mega
trade agreements.

The Trans Pacific Partnership (TPP) talks began in 2010

among 12 countries on two sides of the Pacific Ocean
Australia, Brunei, Canada, Chile, Japan, Malaysia,
Mexico, New Zealand, Peru, Singapore, the US and Vietnam. These countries together comprise 37.5 per cent
of global GDP, 11.2 per cent of the world population, a
quarter of global trade and have a combined GDP of almost US$28 trillion. The pact aims at streamlining supply chains across the Pacific, improving market access
for members, lowering barriers to trade in goods and
services as well as investment and trade facilitation3 .

Perhaps the most significant of these mega-regionals

would be the Trans-Atlantic Trade and Investment Partnership, or TTIP, which includes the two largest global
economic entities of European Union and the US. The
two sides, comprising advanced economies, have an aggregate population of 800 million people and together
account for half of world GDP and a third of global trade
with bilateral trade at close to US$650 billion 1.

The Regional Comprehensive Economic Partnership

(RCEP) with ASEAN at the core along with its free trade
agreement partners, Australia, China, Japan, Korea, India and New Zealand, was announced in 2011 and was
ambitiously scheduled to be completed by 2015. The
deal would bring together 3.4 billion people or 45 per
cent of global population, in a single market with an estimated GDP of US$21.3 trillion4. The RCEP is expected
to cover trade in goods, trade in services, investment,
economic and technical cooperation, intellectual property, competition, dispute settlement and other issues.

According to the EU website, the potential agreement

- covering goods and services as well as investments could add as much as euro 120 billion (US$150 billion) to
the EU economy, euro 100 billion (US$125 billion) to the
US economy and an additional euro 100 billion (US$125
billion) to world GDP. EU estimates suggest that such an
economic pact would boost annual GDP by 0.5 per cent.
The website adds that the deal would tackle regulatory
issues and could also shape global rules on trade.

The three trade agreements are notable not only because they embrace large and significant economies,
but also because they go beyond tariffs on goods. All
three promise to remove trade barriers in services and
facilitate cross-border investments. A WTO-plus ap-

Commencing in summer 2013, the negotiations were

to be completed by end of 2015. These are likely to be
delayed due to strong protests on the EU side regard1
2
3
4

Emmott, Robin and Blenkinsop, Philip Exclusive: Online protest delays EU plan to resolve US trade row Reuters, 26 November 2014
Ibid
www.dfat.au/fta/tpp/
www.dfat.au/fta/rcep

ECONOMY MATTERS

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FOCUS OF THE MONTH

proach has been taken in the TTIP and TPP to include
stipulations beyond existing rules.

phasizes new benchmarks for compliance with internationally-recognized fundamental labour rights and enforcement of labour laws. High levels of environmental
protection and IPR, especially on pharmaceuticals, are
also envisaged.

The EU and the US already enjoy low tariffs on traded

goods, hence the TTIP addresses behind-the-border
trade hurdles. Regulatory issues being negotiated include an ambitious agreement on sanitary and phyto-sanitary and technical barriers to trade. Regulatory
compatibility is envisaged in sectors such as chemicals,
automotives, ICT, pharma and medical appliances, and
more. Discussions on IPR, sustainable development,
government procurement, competition and SME participation are also on the table.

India would need to take a considered view on the implications of the emerging trade contours. Tables 1, 2 and
3 show the merchandise trade India enjoys with each
of the members of the proposed groupings. Aggregate
trade with TPP members in 2013-14 was of the order of
US$148 billion, with Indias exports at US$76 billion (24
per cent of its total exports) and imports at US$72 billion (16 per cent of the total imports). With TTIP, Indias
trade stood at US$163 billion accounting for almost 29
per cent of Indian exports at US$91 billion and US$72 billion worth of imports or 16 per cent. In RCEP, of which
India is a member country, the import levels are far
higher at US$125 billion or 28 per cent, while export levels are lower at US$62 billion or 20 per cent.

The Pacific trade deal, TPP, also looks at competition,

level playing field between investors and state-owned
enterprises, regulatory convergence, and legal and institutional issues. It talks about WTO-plus commitments
on conformity assessment procedures, international
standards and transparency. A key aspect is that it em-

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FOCUS OF THE MONTH

Implications for India

these countries with potential adverse impact on Indian

The US, Indias largest export destination, is leading

GVCs changing course depending on rules of origin,

both the TTIP and TPP negotiations and its goals are

which also may divert trade from India. India is already

largely viewed as being as much geopolitical as eco-

secluded from robust GVCs in items such as electronic

nomic, especially in the light of growing China footprint

equipment and machinery, and the new trade agree-

in Asia and delays under the WTO Doha round. This

ments could exacerbate this situation.

manufacturing exports. There is also the possibility of

dominant role means that standards and equivalence in

On the services side, the members of TTIP and TPP are

the TTIP and TPP would be close to US levels. Moreo-

likely to forge agreements on liberalization of cross-

ver, new standards for labour and environmental com-

border trade, including in sectors such as e-commerce,

pliance are likely to be introduced as also stricter regu-

financial services, and telecommunications. Mutual

lations for specific sectors and products. With such a

recognition of standards and certifications as well as

large chunk of world trade subjected to a higher level of

easier entry and work permits could also be part of the

standards, it is inevitable that global value chains (GVCs)

would be impacted down the line 5.

treaties. In this scenario, India would suffer from loss of

While the challenge from proposed lower or zero tar-

Indias services exports are centered largely on the IT

iffs may not be insurmountable for India, complying

and ITeS sector, and its engagement in key sectors like

with new, stricter regulatory norms would pose a huge

travel and tourism or financial services is limited.

markets for its services exports. It may be noted that

challenge for the country, which already faces multiple

Additionally, given the high co-relation between servic-

issues in meeting requirements for certifications and

es and manufacturing sectors, India could find itself also

assessments. Moreover, the emerging contours of the

losing ground in manufacturing GVCs as a result of the

IPR section, which appears to be beyond WTO, would

services agreements.

affect Indias access to technology while also hamper its

pharmaceuticals exports.

The agreements being negotiated for investment purposes pose a special challenge at a time when India is

A further implication for India regarding goods trade

keen to attract FDI. Special provisions regarding gov-

would be trade diversion. For example, the TPP in-

ernment procurement, competition, and state-owned

cludes emerging manufacturing economies such as

enterprises would seriously impact Indias index of

Malaysia and Vietnam. A lower tariff regime, particu-

attractiveness as an investment destination vis--vis

larly for textiles and garments, could shift demand to

5

Singh, Harsha V, Implications of the Trans Pacific Partnership (TPP) for India speech at Beijing, 21 July 2014 http://www.iisd.org/sites/default/
files/publications/implications_trans_pacific_partnership_tpp_india.pdf

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FOCUS OF THE MONTH

member nations of TTIP and TPP. A part of investment

cesses and systems to be better able to meet the chal-

that would have otherwise come to India would shift to

lenges emanating from the mega-trading agreements.

these member nations to take advantage of facilitative

The key would be for India to drive its manufacturing

investment agreements.

competitiveness relentlessly through targeted steps in

infrastructure construction, reducing transaction costs,

Moreover, Indian companies which are beginning to

and facilitating entrepreneurship.

make their presence felt in the global investment arena,

would find it difficult to compete with advanced econo-

A special effort would be required in the area of stand-

mies in other TTIP/TPP member countries.

ards and capacities to enable Indian industry to comply

with stricter norms and regulations. Apart from rolling

The RCEP includes several developing economies with

out a network of efficient institutions for providing nec-

similar challenges and India has a chance to channelise

essary testing and certifications, India must step up firm

negotiations in a direction that would meet its own de-

level competitiveness. This would entail a mix of train-

velopment compulsions. As this grouping includes the

ing, funding, and hand-holding to help enterprises build

vibrant East Asian GVCs, the RCEP would help India in-

up their productivity levels and compliance capacities.

tegrate better with proximate economies. India already

Real-time information on changes to standards for all

enjoys FTA and comprehensive economic partnership

products would also need to be provided in an acces-

agreements with ASEAN, Japan and Korea, and is ne-

sible format to firms.

gotiating an FTA with Australia. RCEP is expected to

bring more clarity into the current noodle soup bowl

While the mega-regional agreements undergo discus-

of Asian free trade agreements and could increase In-

sions, it is important for India to maintain the interest

dias preferential market access.

in the multilateral trading system. India is fortunate to

have a large market of interest to the world and should

Some Considerations

leverage this for enhanced market access in a rapidly

changing global trade arena.

Solutions to the trade conundrum would be long and arduous. India would need to restructure its internal pro-

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SPECIAL FEATURE

Dispute Resolution in Infrastructure: The Way Ahead

The most common issues leading to project overruns

are caused by delays in handing over land (right-ofway) to the contractor, by providing an encumbrance
free site. Even after the land is handed over to the contractor, there are interferences from the locals, who at
times create impediments to block site access, picketing, etc. At times the delays are due to late issuance
of approved designs by the client or client approval of
contractors design in a time-bound manner. Physical
conditions or on ground conditions, which differ from
the clients bid information report, or changes in the
bidding methodology, also lead to project overruns.

Present Scenario

Unanticipated weather conditions or natural calamities,

suspension of work by forest / environmental authori-

The problems with the current dispute resolution

ties, are few other critical reasons for delays in projects.

mechanism are manifold, which start with the contract

terms being invariably heavily loaded in the clients fa-

These instances lead to contractors entitlement to an

vor. Such contract terms contain many riders which

Extension of Time (EOT) and / or additional cost reim-

help alleviate the clients accountability for delays, and

bursement to the contractor. When client refuses to ac-

move the responsibility into the contractors court. Dur-

knowledge such entitlements at the appropriate time,

ing contract execution, the issue is further complicated

it leads to wrongful imposition of Liquidated Damages

by the clients (representatives / the engineer) refusal

(LDs) on the contractor by the client. Even where EOT is

to acknowledge and accept delay and deviation in the

granted to a contractor, the responsibility to issue the

works that occur due to the clients inability in fulfilling

EOT is not vested in clients project team, requiring cli-

its commitments.

ents board approval, which takes an inordinate amount

of time, sometimes years to issue the consent.

ECONOMY MATTERS

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SPECIAL FEATURE
These LDs and clients other unilateral deductions and/

ii. The client should be required to only apply the insertion to special conditions of contract (SCC) as
stipulated in Part 2 of FIDIC (Guidelines) and not
tamper / dilute or destroy clauses. FIDIC is balanced
and provides equal opportunity / risks between the
Parties.

or late payments result in cash-flow problems and

downturn in production. Another critical point leading
to delay in payments and often disputes, but not necessarily EOTs are the after effects of subsequent legislation. Although provided in the contract, reimbursing
the contractor, the client intentionally looks for loop-

iii. The numerous disclaimers within client current

standard conditions of contract should be dispensed with for future Bids / projects.

holes to not pay the contractor.

Though all contracts provide a dispute resolution
mechanism, this is often one sided in the clients favour

iv. Appointment of an independent engineer to administer the contract without client influence. The
independent engineer should not be a client employee.

- where the disputes are to be adjudicated by a sole arbitrator appointed by the client. Such arbitration is not
as per International norms, and the contractor cannot
be expected to receive a fair and just hearing. Even with

v. Land right of way should be acquired prior to issuance of the LOA, or at least in a time bound manner.

a fair constituted panel of three arbitrators, the process

is not time-bound and is invariably slow, often with the
client intentionally delaying the hearings.

vi. Client should be responsible to obtain all statutory

clearances prior to issuance of LOA to the contractor

The delay in the contractor receiving the awarded

amount most importantly rests with the fact that the client as a general practice challenges all awards through

vii. Amicable relationships with the local populace

should be managed and maintained.

courts. Many contracts also have the procedural formality that before invocation of arbitration, the claims
should to be processed through a formally constituted

viii. Design and drawing approvals should come in a

time bound.

(under the contract) Dispute Resolution Board (DRB)

or similar body. Also an amicable settlement is to be at-

ix. Contractors Interim Payment Certificates (IPCs)

should be released in a timely manner.

tempted prior to arbitration. However, to no avail that

an amicable settlement is reached since the decision /
recommendation of DRB findings are not mandatory on

x. Strict time bound stipulations on the constitution

of DRB (three members) who are independent and
have no conflicts of interest

either of the parties and the dissatisfied party then continues with the next step through full arbitration which
is a waste of time as it may run into several months.

xi. DRB decisions and awards are to be honored. If a

party is not satisfied with DRB award and wishes to
proceed to arbitration, the award shall be honored
by the parties and if carrying payment, then not less
than 80 per cent payment of the DRB Award should
be immediately released

Even if the contract terms are administered under International General Conditions of Contract e.g. Federation Internationale des Ingenieurs-Conseils (FIDIC),
this may also not be helpful to the contractor as client
puts his favourable slant on the same when writing the
special conditions of contract.

Way Forward
i.

xii. If the above decision of DRB/DAB/Pre-Arbitration

cannot be implemented by any client, then dispense with attempting resolution through DRB/
DAB/Pre-Arbitration or dispense with sole arbitrator for adjudication of disputed matters or with employers retired or serving officers being engaged on
any arbitration panel.

Standardized contract forms such as FIDIC General

Conditions of Contract (FIDIC 1987 or 1999 for building or engineering works and FIDIC 1999 plant and
design-build and EPC/Turnkey Projects.)

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SPECIAL FEATURE
xiii. Pre-award & Post-award interest rates should be
predefined / as per law of land.

In conclusion, the contract conditions need to be made

fair and honored by the client and realizable amounts
for additional works, unforeseen conditions and EOT

xiv. Government should amend Section 34 and 36 to

empower the civil court to pass suitable interim
reliefs in favor of successful claimants for enforcement of the award.

should be released to the contractor during the execution of the works, resulting in earliest possible completion of the project and less cost to the client / exchequer,
allowing the contractor to capably fulfill its commitments, without the perennial threat of litigation.

ECONOMY MATTERS

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ECONOMY MONITOR

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ECONOMY MONITOR

ECONOMY MATTERS

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CORPORATE SECTOR INDICATORS

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