Economy Matters: July-August 2015

1
FOREWORD
JULY-AUGUST 2015
C
hina’s GDP held steady at 7 per cent in the second quarter despite signs of economic gloom.
However, there are enough ‘tell-tale’ signs on the horizon which indicate the rising stress in
the Chinese economy. The mid-August 2015 devaluation of the Yuan in a bid to boost its ex-
ports growth is one such sign. The after-effects of this event were felt in the global markets in the
subsequent days to come. Indian markets were no different. Yuan devaluation could hurt our export
competitiveness by making Chinese goods cheaper. Our exports are already under stress, recording
its eighth consecutive monthly decline in July 2015. Textiles and clothing – the two segments which
had already experienced sluggish growth due to global slowdown in demand are expected to face
further pressure as these sectors compete directly with China. However, in these adversarial times,
there are benefits to accrue for Indian economy in the form of cheaper commodities prices, which
promises to keep our ‘twin-deficits’ under check.
Moving over to domestic economy, impressive 7 per cent GDP growth at the onset of the first quar-
ter of the current fiscal, which is higher than 6.7 per cent experienced in the same period last year,
bolsters the perception that the economy is showing signs of a turnaround and is on the road to re-
covery. While there is a recovery in construction activity as well as trade, hotels, transport and com-
munication, the disaggregated numbers indicate some weakening in output of agriculture, mining
and manufacturing . On the expenditure side, a pick-up in private final consumption expenditure is
noteworthy even as a drop in government final consumption expenditure points towards efficiency
in containing unproductive government expenditure. However, the slow growth of capital formation
is a matter of concern.
Going forward, CII expects some pick-up in investments as the impact of measures taken by the
government towards de-clogging the project pipeline would be visible in the months ahead. At the
same time, the government should continue to push critical reforms and take pro-active steps to
effect simplification of procedures, ensure transparent and flexible tax system and work towards a
political consensus for ensuring early passage of GST, labour laws etc, which would rev up business
confidence and would help ramp up demand in the economy. On the monetary side, the RBI should
ease its monetary policy stance and cut interest rates in its forthcoming monetary policy. On balance,
in FY16, CII is projecting a base case of 7.8 per cent growth, given that there is some uncertainty
related to agricultural growth. However, in a more positive scenario, where agriculture grows at 3.0
per cent, industry at 7.0 per cent and services at 10.5 per cent, GDP growth is expected to come at
8.2 per cent.
Chandrajit Banerjee
Director General, CII

EXECUTIVE SUMMARY
ECONOMY MATTERS 4
Global Trends
The US Q2 2015 GDP was revised upwards to 3.7 per cent
on q-o-q basis (annualised), beating the market expecta-
tion of a 3.2 per cent q-o-q (annualised) expansion and
significantly higher than the advance estimate of 2.3 per
cent q-o-q (annualised). However, on year-on-year basis,
growth came lower at 2.7 per cent in the second quar-
ter as compared to 2.9 per cent in the previous quarter.
The increase in real GDP in the second quarter in annual-
ised terms reflected positive contributions from personal
consumption expenditures (PCE), exports, state and local
government spending, non residential fixed investment,
residential fixed investment, and private inventory invest-
ment. The strong growth number is in tandem with the im-
proved data prints seen moving into the second quarter.
Labour market recovery has shown significant improve-
ment (strong job gains and low unemployment) and con-
sumer spending has improved on average (despite mixed
data prints recently). However, tepid wage growth and
inflation continue to remain a hurdle.
Domestic Trends
GDP growth decelerated to 7.0 per cent in 1QFY16 from
7.5 per cent in the previous quarter, albeit tad higher than
the 6.7 per cent posted same period last year. However,
on gross value added (GVA at basic prices) basis, the first
quarter print came higher at 7.1 per cent as compared to
6.1 per cent in the previous quarter. Further, on the indus-
trial production front, growth inched up to 3.8 per cent
in the month of June 2015 as compared to 2.5 per cent in
the previous month. On the sectoral front, manufactur-
ing growth picked up sharply to 4.6 per cent as against 2
per cent in May 2015 and is the eighth consecutive positive
print. The recent spate of GDP and industrial production
data released reaffirms our view that the economy is show-
ing signs of a turnaround and is on the road to recovery.
Going forward, we expect some pick-up in investments as
the impact of measures taken by the government towards
de-clogging the project pipeline would be visible in months
ahead. Meanwhile, inflation, as measured by both CPI
and WPI, has continued to remain subdued, helped by the
benign crude oil prices. However, the eighth consecutive
monthly decline in merchandise exports in the month of
July 2015 remains a matter of concern. It partly reflects the
still depressed global demand.
Sector in Focus: Changing Rules of Indian
Power Sector-Empowering the Economy
Power is one of the most critical components of infra-
structure, affecting economic growth and the wellbeing of
nations. The existence and development of an adequate
power infrastructure is essential for the sustained growth
of the Indian economy. The Indian power system is the
fifth largest in the world and among the most complex.
With an annual electricity production of 1,031 billion units
(BU), it is among the top five power consumers across the
globe, and the demand is expected to touch 1,900 BU by
2020. Growth in industrial activities, population, economy,
prosperity and urbanisation, along with rising per-capita
energy consumption, has widened the gap of energy ac-
cess in the country. While almost 61 per cent of the power
generated is from coal, India is looking to alter the genera-
tion mix in the years to come, focusing on a low-carbon
growth strategy, although coal production continues to be
on the agenda of policymakers. In this context, CII in as-
sociation with its Knowledge Partner, PwC India released
a report on ‘Changing rules of Indian power sector: Em-
powering the economy’ against the backdrop of the Sixth
Edition of ‘Energy Conclave 2015: Transforming the Energy
Sector through Policy, Regulation and Technology’ organ-
ized by CII on 12th August, 2015 in Kolkata. The excerpts of
the report are covered in this month’s Sector in Focus.
Focus of the Month : Analysing India’s
Trade Performance
India stands to miss the export target of US$310 billion for
the current fiscal with shipments contracting for the eighth
consecutive month in July 2015. A slump in global demand
coupled with the Yuan devaluation making Chinese prod-
ucts cheaper, reducing the competitiveness of Indian
goods in the global market has worsened the prospects
of Indian exporters. While following a fairly stable trend
till 2014, trade balance has particularly worsened since De-
cember 2014. The share in exports of Petroleum Crude &
Products and Ores and Minerals has tumbled down, while
that of Textiles and Allied Products and Chemicals and
Related Products has improved. The exports of Machin-
ery and Electronics Items need immediate attention. The
share of Petroleum Crude & Products in total imports has
been contained since December 2014. While the share in
imports of Machinery rose marginally in the recent months
in tandem with the ambitious ‘Make in India’ campaign, it
needs to rise further in order to improve capital infrastruc-
ture in the country. The share in imports of Agri and Allied
Products also rose sharply in the recent months. According
to the government after a slowdown phase in the recent
past, India is now entering into a recovery phase. It how-
ever needs to immediately step in and chalk out a strategy
for giving a competitive edge to Indian exporters.

5
GLOBAL TRENDS
Emerging Troubles in Chinese Economy
JULY-AUGUST 2015
A
fter three decades of phenomenal growth
which led to the greatest poverty alleviation
program lifting more than 500 million peo-
ple out of poverty, China recorded its last double digit
growth of 10.4 per cent in 2010. Since then, the Chi-
nese economy has decelerated by almost 30 per cent.
Major downturn occurred in 2011 and 2012 when GDP
growth was recorded as 9.3 per cent and 7.7 per cent
respectively. The economic growth slowed down to 7.4
per cent in 2014 firmly ending the period of overheated
growth rate.

ECONOMY MATTERS 6
GLOBAL TRENDS
Current official statistics of China indicates that the
economy is growing at 7 per cent a year. However, it is
hard to believe the official figures as the data released
is often strategically manipulated and hence considered
unreliable.
There is ample evidence which indicates the stress Chi-
nese economy is going through. The following troubles
in China provide warning signs for the policymakers and
explain as to why the situation is worrisome.
I. Debt Binge
In an effort to revive the economy in the wake of 2008
crisis, the cost of borrowing was reduced in order to fas-
ten the pace of growth. As a consequence, today when
it comes to reckless money creation, China tops the list
because people started buying stocks using borrowed
money, the practice known as ‘trading on margin’.
Since rise in borrowing prepared the way for most fi-
nancial crisis in world history, the alarming rise in debt
levels serves as a warning sign for China.
II. Housing Slump
The falling property prices are one of the foremost rea-
sons for China’s declining economic growth. Private sec-
tor home prices fell in 68 of 70 cities according to data
Interest rates were aggressively cut once again in
response to the slowdown in economy in 2014; the
increased liquidity simply went to over-leveraged bor-
rowers. Naive borrowers like real estate developers,
local government etc could no longer repay their loans
as the money went into unprofitable projects. Hence,
the practice of margin trading was the very reason
why stock markets surged in mid-2014 even when the
economic growth was slowing and then collapsed sud-
denly out sizing the losses.
China’s total debt doubled within five years. China’s
debt to GDP ratio increased dramatically from 150 per
cent in 2008 to 282 per cent at present - the highest
among all emerging economies. Some cynical views
also anticipate that this borrowing binge will lead to
default by many Chinese property developers. Moreo-
ver, dollar debt may also increase in case the Fed finally
raises the interest rates.
released by National Bureau of Statistics. More than 60
million houses are empty waiting for the buyers. As an
attempt to stabilise the market, policymakers injected
liquidity in the market by cutting interest rates, but the
issues of liquidating the excess inventories remain un-
certain. Real estate sector accounts nearly one quarter
of GDP hence it is very important for the Chinese gov-
ernment to take steps in order restructure the sector
even if it suppress the short-term growth.

7
GLOBAL TRENDS
JULY-AUGUST 2015
III. Devaluation of Yuan
China devalued its currency by 2 per cent on August
11th, to a three year low against dollar, an attempt to re-
vive country’s exports. This could however lead to more
harms than benefits. Firstly, China is already the world’s
largest exporter and is not expecting to gain more mar-
ket share. Moreover, export led growth has not been
the case from the past decade. Currency devaluation
will lead to only a marginal export growth because the
root cause of plummeting exports lies in the global
slowdown of demand. Secondly, currency devaluation
might trigger capital outflow due to volatility concerns
in the stock market. Earlier, investors centred their in-
vestment decisions around predictions for government
policy given a strong exchange rate.
IV. Rising Labour Costs
China, considered as the factory of the world is facing a
rise in labour costs. Wages are growing at a faster rate
compared to other countries with low manufacturing
costs. Since 2001, hourly manufacturing wages have
risen by an average of 12 per cent a year. Country’s one
child policy, introduced in 1979 has now started to bite
as cheap labour supply is shrinking fast. According to In-
ter China Consulting, a consultancy for companies doing
business in China, country has reached a turning point
where it could no longer be considered as low labour
cost production base. The dramatic increase in wages in
the past four years indicates that the country is running
out of surplus labour. Rising costs have also led to rise in
prices thereby increasing the consumer price inflation.
V. Plummeting exports
Chinese exports have been continuously falling since
November 2014. Exports fell by 8.3 per cent in July 2015
with the highest fall recorded in May 2015 when exports
dropped down by 20 per cent. Once the fastest growing
economy in the world, China lost its top position due
to worsening of exports led by subdued global demand
and overvalued currency. An attempt to restore com-
petitiveness and moving closer towards the flexible ex-
change rate regime, the country’s Central Bank took the
decision to devalue yuan by 2 per cent against the U.S
dollar, biggest devaluation in past two decades. How-
ever, there are bigger challenges other than exchange
rate for exporters like subdued domestic and global de-
mand along with rising labour costs at home.
VI. Demographic Challenges
China is already an aging society, aging faster than ex-
pected. So, the demographic advantage that China en-
joyed in its years of rapid growth is largely exhausted.
With substantial decline in young labour, demographic
fortunes have started to reverse. With shrinking work-
force, increase in productivity becomes imperative.
Hence, for China it is necessary to implement education
reforms to make workers more skilled with greater abil-
ity to innovate.

ECONOMY MATTERS 8
GLOBAL TRENDS
Impact on India
China is India’s top trading partner; the emerging trou-
bles in Chinese economy will undoubtedly have an im-
pact on India. Being the world’s second largest econo-
my, any distress in Chinese economy has the potential
of spill over effects on the rest of the world thereby
producing repercussions for India.
Rupee volatility is one of the concerns; devaluation of
Chinese currency has raised the demand for dollar and
hence causing depreciation of rupee. Some of the im-
pacts are:
• The fall in rupee would increase our import bill.
• This will lead the Central Bank to delay the cut in
interest rates, hence constraining the economic re-
covery of India.
• Increased possibility of currency war as both the
countries compete for a share in already subdued
global export market.
• Increased risk of Chinese goods being dumped in In-
dia at low prices or even below the cost of produc-
tion.
However, since our macroeconomic situation is strong
enough with adequate foreign exchange reserves in
place, the impact of cheaper yuan on rupee is consid-
ered temporary by the Finance ministry of India. Other
major concern is the impact on Indian exports. The ex-
port sector was already in stress with exports shrinking
from the past eight months. Although the general trend
calls for a boost in exports with depreciating currency,
but with global demand slowdown that case is very
unlikely. Devaluation of yuan has further eroded the
competitiveness for Indian exports by making Chinese
goods cheaper. Hence, Indian exporters will experience
a fall in their margins. Textiles and clothing are two seg-
ments which already experienced sluggish growth due
to global slowdown in demand will undergo further
pressure as these sectors compete directly with China.
Apart from the adverse effects, there are also some
benefits which India can reap:
• China is a major consumer of Copper, Aluminium,
and Steel. A fall in its commodity demand will re-
duce commodity prices, thus lowering the import
bill of India as it imports 3 billion dollar of copper
and copper products.
• China accounts for more than 10 per cent of crude
oil consumption. A fall in its demand will also cause
the prices of crude oil to fall.
• India can also take advantage of the rising labour
costs in China by implementing a right policy mix to
increase its global manufacturing share.
• One of the immediate advantages includes capital
inflow as the continuing volatility in China leads
investors to take a risk- off position. Hence Indian
stocks could find it easier to attract foreign institu-
tional investor money.

9
GLOBAL TRENDS
JULY-AUGUST 2015
The US Q2 2015 GDP was revised upwards to 3.7 per
cent on q-o-q basis (annualised), beating the market
expectation of a 3.2 per cent q-o-q (annualised) expan-
sion and significantly higher than the advance estimate
of 2.3 per cent q-o-q (annualised). However, on year-on-
year basis, growth came lower at 2.7 per cent in the sec-
The increase in real GDP in the second quarter reflected
positive contributions from personal consumption ex-
penditures (PCE), exports, state and local government
spending, non residential fixed investment, residential
fixed investment, and private inventory investment.
Imports, which are subtraction in the calculation of
GDP, increased. The acceleration in real GDP in the sec-
ond quarter reflected an upturn in exports, an accelera-
tion in PCE, a deceleration in imports, an upturn in state
and local government spending, and an acceleration in
non-residential fixed investment that were partly off-
set by decelerations in private inventory investment, in
federal government spending, and in residential fixed
investment.
The upward revisions to second-quarter GDP growth
also reflected the accumulation of US$121.1 billion worth
of inventories, US$11.1 billion more than previously es-
timated. That meant inventories contributed 0.22 per-
centage point to GDP instead of subtracting 0.08 per-
centage point as reported last month
The strong growth number is in tandem with the im-
proved data prints seen moving into the second quar-
ter. Labour market recovery has shown significant im-
provement (strong job gains and low unemployment)
and consumer spending has improved on average (de-
spite mixed data prints recently). However, tepid wage
ond quarter as compared to 2.9 per cent in the previous
quarter. Comparing growth figures over the first two
quarters, reaffirms the wearing off of transitory factors
(weather related) that weighed on Q1 2015 growth. The
Q1 2015 GDP growth stood at 0.6 per cent q-o-q (annu-
alised).
growth and inflation continue to remain a hurdle.
To be sure, US non-farm payrolls (NFP) increased by
215K in July. The June print was revised higher to 231K
(from 223K earlier). The May print was revised signifi-
cantly higher as well, taking the total May-June revi-
sions to +14K. Meanwhile, the less volatile three-month
average NFP print picked up to 235K. According to the
household survey data, the unemployment rate re-
mained steady at 5.3 per cent (its lowest level since May
2008). However, the U-6 unemployment rate (which is
a broader measure that includes part-time and discour-
aged workers) maintained its steadily declining trend
and fell to 10.4 per cent. Meanwhile, the labour force
participation rate remained unchanged at 62.6 per cent.
The improving growth scenario and labour market con-
ditions will keep the Fed on track for interest rate hike
in months to come. However, subdued inflation (both
PCE and CPI continue to lie well below Fed’s 2 per cent
inflation target) have reduced significantly the odds
of a September interest rate hike. Further, comments
by Fed official William Dudley and the relatively dovish
tone of the FOMC minutes (of July policy meeting) dim
the outlook of the same. Additionally, a December pol-
icy tightening will provide room for the Fed to gauge if
recent improvements are sustainable.
U.S. Second-Quarter GDP Growth Revised Higher

ECONOMY MATTERS 10
DOMESTIC TRENDS
Making the Great Digital Leap Forward
T
he Jan Dhan-Aadhaar-Mobile trinity along with
the e-commerce wave will fuel the innovation we
need
Most social transformations occur on the pretext of a
massive revolution, be it the industrial revolution or the
digital revolution. Riding on the backbone of Digital In-
dia, the Union government is committed to transform-
ing India into a digitally empowered, knowledge-based,
inclusive society.
The Digital India vision has placed technology at the
core of our lives. Speedy implementation of the Nation-
al Fibre Optic Network will enable more rural communi-
ties to benefit from the ecosystem of services that can
make governance more effective.
The trinity of Jan Dhan-Aadhaar-Mobile (JAM) points
towards a mobile-first, cloud-first India. The shift from
e-governance to m-governance will help India leapfrog
to the next level.
Going forward, the focus on new and emerging tech-
nologies like the Internet of Things (IoT) and Internet
of Everything (IoE) will help India transform into a land
of smart cities. One of the relatively recent additions to
the ICT space — e-commerce — is fuelling a new wave
of innovation. The collective set of developments in the
ICT arena will help India march along the road to devel-
opment.
Digital India launch took off with the promise of ₹4.5 tril-
lion investments and 1.8 million jobs. This is a time for
new initiatives, new mindsets, new processes and new
partnerships.
Towards Digitalising
A few suggestions may help to chart out the road to
Digital India. First, the identification of successful pilot
projects by the public and private sectors must be done

11
DOMESTIC TRENDS
JULY-AUGUST 2015
as best practices in the ICT space across the country.
The scaling up and rollout of these projects will provide
a fillip to Digital India.
Second, given India’s size and demographics, providing
digital reach to the people at the right price is one of
the most piquant issues we face. Bringing every citizen
on the digital backbone will increase empowerment
and inclusion. Reaching out to the 2.5 lakh villages as
envisaged in the plan will require intent, innovation and
investment. Increasing the pace of rural penetration,
internet and broadband penetration, and adoption of
the mobile in the socially relevant services of education,
healthcare, banking and financial services along with m-
governance will drive India a long way.
Third, it is crucial to achieve digital literacy for all citi-
zens. There is a need to create a common definition of
digital literacy, identify metrics and set clear targets and
specific milestones in order to develop a digital work-
force.
There has to be focus on content creation, awareness
and distribution. The public services must be digitised
so that citizens have easy access. It is important to sup-
port the self-employed and unorganised sector, as well
as public-private partnership.
Fourth, Aadhaar will play a crucial role in Digital India.
In order to leverage its true potential, the government
must enable policy frameworks to streamline usage of
Aadhaar, generate awareness on Aadhaar-based ser-
vices, enable innovations to increase uptake of Aadhaar
services and applications, and stress upon the adoption
of Aadhaar services.
Developing Business Models
Fifth, tackling structural issues and developing business
models for Digital India is important. The technology
projects should be driven on an outcome-based ap-
proach, the adoption of latest technology should be
prioritised, and there should be optimised usage of ex-
isting resources and a mechanism to share ideas. Inno-
vation and inclusiveness should be encouraged.
Sixth, strong demand-side fundamentals comprising
a burgeoning, upwardly mobile middle-class, high dis-
posable incomes and the evolution of an online mar-
ketplace model bode favourably for the growth of the
e-commerce sector in India, which is estimated to reach
US$24 billion in 2015 and scale US$100 billion before
2020.
The governments, both at the Centre and the State lev-
els, should work out favourable taxation policies and
regulatory frameworks, and an ICT infrastructure con-
ducive to attract investments.
India’s growth in the years ahead will be dependent on
the rate at which we transform digitally. Both, the gov-
ernment as well as the industry will have to play a key
role in the transformation process as the nature of the
technology is disruptive and high level innovation is re-
quired in the path ahead.
This article appeared in The Hindu Business Line dated July 24, 2015. Online version of the article can be accessed from:
http://www.thehindubusinessline.com/opinion/making-the-great-digital-leap-forward/article7461111.ece

ECONOMY MATTERS 12
DOMESTIC TRENDS
GDP growth decelerated to 7.0 per cent in 1QFY16 from
7.5 per cent in the previous quarter, albeit tad higher
than the 6.7 per cent posted same period last year.
However, on gross value added (GVA at basic prices)
basis, the first quarter print came higher at 7.1 per cent
as compared to 6.1 per cent in the previous quarter. The
nominal GDP and GVA at current market price showed a
steep decline in the quarter under review. The nominal
GDP slipped to 8.8 per cent in the first quarter from 13.4
per cent a year ago while the GVA growth rate nearly
halved to 7.1 per cent from 14 per cent last year.
It is worth noting that, GDP has undergone significant
changes in methodology and the base year has been
changed as well.
We at CII feel that the GDP growth at 7 per cent in the
1QFY16 is “impressive”, as it is higher than 6.7 per cent
experienced in the same period last year. It bolsters
On the supply side, agriculture growth improved to 1.9
per cent in 1QFY16 from a contraction to the tune of 1.4
per cent in previous quarter. However, these are early
days yet and full impact of a deficient monsoon will
be felt only in the second quarter. As per IMD, rainfall
deficiency stands at 12 per cent below the LPA till mid-
August. Industry GDP too grew a higher pace of 6.5 per
cent in the 1QFY16 as compared to 5.6 per cent in the
previous quarter. Growth in its sub-sector, manufactur-
ing however, came in lower at 7.2 per cent as compared
to 8.4 per cent a quarter ago. Higher interest rates have
had an adverse impact on the growth potential of the
the perception that the economy is showing signs of a
turnaround and is on the road to recovery. Going for-
ward, we expect some pick-up in investments as the im-
pact of measures taken by the government towards de-
clogging the project pipeline would be visible in months
ahead.
Looking ahead, the macro-economic prospects for the
Indian economy have improved considerably in the last
few months. GDP is estimated to inch up to 7.8 per cent
in FY16. There are a number of factors that can be at-
tributed to the initial signs of recovery in the economy.
Global crude oil prices remains low, thus helping to
partially offset the major stress points in the economy
namely inflation and twin deficits. To top it, a multi-
dimensional reform agenda enunciated by the govern-
ment has also reignited the ‘feel good’ factor which in
turn has raised the business prospects of the economy.
manufacturing sector. Electricity sector growth contin-
ued to remain sluggish on account of the stressed con-
ditions of state electricity boards as well as the diver-
gence between capacity and generation. GVA growth
in heavy weight services sector came in a tad lower at
8.9 per cent in 1QFY16 as compared to 9.2 per cent in
the previous quarter. The trade, hotels component of
services sector continued to remain on a robust footing
and clocked 12.8 per cent growth in the second quar-
ter of the current fiscal, which indicates consumption
based activity, may indeed have turned a corner.
GDP Growth in 1QFY16 Grows at an Impressive Rate

13
DOMESTIC TRENDS
JULY-AUGUST 2015
At market prices, private consumption expenditure
came in at 7.4 per cent in 2QFY16 as against 7.9 per cent
in the previous quarter. Although it is a slight downtick
but continues to be fairly robust and we believe this
should improve further in the medium-term when wage
growth improves, given that inflation pressures are
low. Gross fixed capital formation witnessed an uptick
to 4.9 per cent in the first quarter of the current fiscal
from 4.1 per cent posted in the previous quarter but
Going forward, in the short-run, growth will receive a
boost from the cumulative impact of economic reforms
and improved inflationary expectations. Therefore,
in FY16, CII is projecting a base case of 7.8 per cent
growth, given that there is some uncertainty related to
agricultural growth. However, in a more positive sce-
nario, where agriculture grows at 3.0 per cent, industry
remains way below its decadal average. Lowering of
interest rates will help to provide a fillip to investment
spending. Meanwhile, government spending is expect-
ed to assume crucial importance in spurring investment
spending as we expect significant improvement in pub-
lic capex expenditure in the coming quarters although
it remained muted at 1.2 per cent in the first quarter of
the current fiscal. The net external sector numbers re-
mained in negative territory as expected.
at 7.0 per cent and services at 10.5 per cent, GDP growth
is expected to be 8.2 per cent. Correspondingly, RBI ex-
pects GDP growth in FY16 at 7.6 per cent and Economic
Survey in a range of 8.1-8.5 per cent. However, risks to
growth in FY16 remain in the form of - 1) second consec-
utive year of weak monsoons, 2) further fall in exports
if global growth remains weak, and 3) reversal of the
fall in oil prices

ECONOMY MATTERS 14
DOMESTIC TRENDS
Output of eight core infrastructure sectors decelerated
to 3 per cent in June 2015 as compared to 4.4 per cent in
the previous month as production of crude oil and natu-
ral gas declined and electricity grew marginally. In part,
high base effect (core sector output grew by 8 per cent
in June 2014) was also responsible for the decreased
growth during the month. The cumulative growth of
the eight sectors, accounting for about 38 per cent of
the country’s industrial production, was 2.4 per cent in
the April-June 2015 period.
The coal sector grew at 6.3 per cent in June 2015 (as
against 7.8 per cent in May 2015 and 8.2 per cent in June
2014), while crude oil growth shrank by 0.7 per cent
Industrial production growth inched up to 3.8 per cent
in the month of June 2015 as compared to 2.5 per cent in
the previous month. On the sectoral front, manufactur-
ing growth picked up sharply to 4.6 per cent as against
2 per cent in May 2015 and is the eighth consecutive
positive print. The growth in manufacturing sector was
driven by consumer oriented sectors, though these are
(as against 0.8 per cent growth in May 2015 and a flat
growth in June 2014). Growth in natural gas production
contracted 5.9 per cent in June 2015 as against contrac-
tion of 3.1 per cent in May 2015 and 1.7 per cent in June
2014. Growth in the output of refinery products also
slowed to 7.5 per cent as against 7.9 per cent in May
2015 (but much higher than -0.1 per cent in June 2014),
while fertiliser production was up 5.8 per cent (against
1.3 per cent in May 2015 and -1 per cent in June 2014) and
steel output was higher at 4.9 per cent (as against 2.6
per cent in May 2015, but lower than 12 per cent in June
2014). Electricity production slowed to 0.2 per cent in
June 2015 (as against 5.5 per cent in May 2015 and 15.7
per cent in June 2014).
early days and consumption demand remains fragile.
Unseasonal rains earlier in the year resulting in lower
rural demand are weighing in on consumer goods. The
rainfall deficiency so far stands at 12 per cent of LPA.
In balance, in FY16, we expect industrial production to
grow at a higher rate as compared to the previous fiscal
on the back of improving global conditions and policy
aided domestic upturn.
IIP Growth Posts a Positive Surprise in June 2015

15
DOMESTIC TRENDS
JULY-AUGUST 2015
On the sectoral front, growth of manufacturing sector,
which constitutes over 75 per cent of the index, more
than doubled to 4.6 per cent in June 2015 compared
with 2 per cent growth in the previous month. In terms
of industries, sixteen (16) out of the twenty two (22)
industry groups (as per 2-digit NIC-2004) in the manu-
facturing sector have shown positive growth during the
month of June 2015 as compared to the corresponding
month of the previous year. The industry group ‘Furni-
ture; manufacturing n.e.c.’ showed the highest positive
growth of 83.7 per cent, followed by 27.6 per cent in
‘Wearing apparel; dressing and dyeing of fur’ and 21.0
per cent in ‘Wood and products of wood & cork except
furniture; articles of straw & plating material’. On the
other hand, the industry group ‘Publishing, printing &
reproduction of recorded media’ grew at the highest
negative growth of (-) 11.4 per cent, followed by (-) 10.0
per cent in ‘Electrical machinery & apparatus n.e.c.’ and
(-) 8.7 per cent in ‘Radio, TV and communication equip-
ment & apparatus’.
In contrast, electricity output grew at a diminished rate
of 1.3 per cent in June 2015 as compared with robust
growth to the tune of 6 per cent in the previous month.
Mining output once again contracted by 0.3 per cent in
June 2015 after remaining in the positive territory for
four consecutive months. The recent auction of coal
mines by the government could provide some impetus
to coal production in the months to come.
On the use-based front, the volatility in capital goods
continued and components such as insulated rubber
cables subtracted a significant portion from the head-
line. Capital goods sector output contracted by 3.6 per
cent in June 2015, which does not augur well for the out-
look of investment demand in the economy. Consumer
goods recorded the highest growth rate since October
2012 at 6.6 per cent in June 2015. This was attributable
to a sharp increase in consumer durables growth to 16
per cent, which is the highest since February 2011. Non-
durables growth however, continues to remain muted.
Consumption is yet to pick-up decisively as the mixed
trend emerging from car sales data also shows. Growth
in domestic sales of automobiles averaged 1.3 per cent
for the first quarter, up slightly from 0.6 per cent in
the previous quarter, driven by higher passenger car
sales. On balance, we remain cautious about recovery
in consumption sector as sustainability of this outturn
is important. Going ahead, the progress of monsoons
becomes critical as it would have immediate bearing on
consumer goods especially non-durables. Notably, non
durables have a significant share in IIP at 21.4 per cent.
Basic and intermediate goods posted positive growth.

ECONOMY MATTERS 16
DOMESTIC TRENDS
Wholesale price index (WPI) extended its deflationary
trend for the ninth consecutive month and eased way
below expectation to -4.05 per cent for July 2015 as
compared to -2.4 per cent in June 2015 and 5.41 per cent
during the corresponding month of the previous year.
The decline in inflation was mainly on back of plunging
oil and manufacturing goods prices. Meanwhile, May
2015 WPI print too was revised down to -2.2 per cent
from -2.6 per cent. Sustained decline in WPI is good
news for corporate as WPI is input price for manufac-
turing process.
Retail inflation as measured by consumer price inflation
(CPI) dropped to 3.8 per cent in July 2015 from 5.4 per
cent in the previous month led by a steep plunge in food
inflation to 2.2 per cent from 5.5 per cent. In particular,
cereals inflation fell further to hit fresh record lows,
given the continued impact of Government measures.
The fall in price pressures in proteins (i.e. egg, meat and
fish) to 6.3 per cent as against prior of 7.0 per cent also
provided relief. However, pulses inflation remained el-
evated at 23 per cent, though government’s initiative to
increase imports has helped contain the price rise. Veg-
etables inflation contracted on account of base effect
however it remains a cause for concern as the sequen-
tial momentum has remained elevated over the last
month. The fall in food inflation is a welcome respite;
however the spatial distribution of rainfall still remains
weak (large food grain producing states such as Uttar
Pradesh, Punjab, Haryana and Maharashtra are reeling
under a rainfall deficiency of 24 to 30 per cent), which
could exert upside pressure on food prices, going for-
ward.
In some more positive news, core CPI inflation fell to 4.8
per cent in July 2015 – its first decline in 5 months. Much
Outlook
Rise in June 2015 industrial production numbers indicates that the industrial recovery is gathering pace based on
improved performance of manufacturing sector. Rise in IIP corresponds with the surge in indirect tax collections
during the month indicating some pick-up in demand in the economy. However, steep decline in the output of
capital goods sector has raised concerns indicating that new investments are still not happening. We are hopeful
that the initiatives taken by the government in terms of expeditious project clearances, simplification of proce-
dures and new investment announcements as well as the ‘Make in India’ initiative would improve the order book
position, revive demand and help effect a turnaround in the investment cycle, thereby providing impetus to capital
goods sector growth too.
Inflation Remains Subdued in July 2015

17
DOMESTIC TRENDS
JULY-AUGUST 2015
of this fall came from lower inflation in personal care ef-
fects, education and transport and communication seg-
Primaryproductscontinuedtofacedeflationtothetune
of -3.7 per cent in July 2015. Primary food articles which
had recorded inflation in June 2015, once again showed
deflation in the reporting month - to the tune of -1.1 per
cent. However, going forward, there are upside risks to
food inflation on the back of the expected fall in food
grain production due to unseasonal rainfalls in March
and April 2015 and weak spatial distribution of rainfall so
far. Further, primary non-food inflation moved into the
negative territory in July 2015, after recording inflation
in the previous month.
Deflation in fuel sector stood at -12.8 per cent in July
ments. In particular, transport services inflation slipped
back into negative territory amid benign international
crude prices.
2015 as compared to -10 per cent in the month before.
Both petrol and diesel too showed deflation during the
month. Benign crude oil prices have helped to keep fuel
prices in check in the last couple of months.
Manufacturing sector too posted deflation for the
fifth consecutive month in July 2015 to the tune of
-1.1 per cent as compared to -0.8 per cent in the previ-
ous month. Non-food manufacturing or core inflation,
which is widely regarded as the proxy for demand-side
pressures in the economy remained subdued at -1 per
cent during the month as compared to -0.9 per cent
during the previous month.

ECONOMY MATTERS 18
DOMESTIC TRENDS
Outlook
CII welcomes the fall in headline inflation. It reaffirms the moderation of inflation print which in turn would have a
beneficial impact on inflationary expectations. CII hopes this (easing inflation) would provide the requisite space to
RBI to continue with its rate easing cycle with a larger reduction in interest rates in its forthcoming monetary policy
announcement to provide a fillip to growth.
Exports Continue to Slide
Exports growth disappointed for the eighth consecutive
month, coming in at -10.3 per cent to US$23.14 billion in
July 2015 as against contraction to the tune of 15.8 per
cent in June 2015. Worryingly, there are fears that the
contraction maybe becoming chronic as the decline
in exports during the month came off a negative base
(exports contracted by -0.2 per cent in July 2014). Con-
traction remained widespread, with petroleum prod-
ucts, iron ore, oil seeds and cereals posting the steep-
est declines. Cumulatively, April-July 2015 saw exports
dropping to 15.2 per cent on-year compared with a 6.7
per cent rise in the same period last year. Meanwhile,
exports of tea, jute manufactures, handicrafts, drugs
and pharmaceuticals recorded positive growth during
the month. The overall weak export growth is indicative
of weak global demand as well as the sharp correction
in commodity prices. Crude oil exports plunged to 43.2
per cent, accounting for 87 per cent of the overall de-
cline in India’s exports, and were the main culprit in a
The consistent fall in exports has been exerting up-
ward pressure on the trade deficit. At US$12.8 billion,
merchandise trade deficit in July 2015 was lower than
the US$14.6 billion logged in the corresponding month
a year ago, but was still at an eight month high. In bal-
scenario of continuously falling oil prices. International
Brent crude oil prices softened further to US$56.6/bar-
rel in July 2015 from US$61.5/barrel in June 2015. Non-
oil exports, too, declined. Services sector exports, too,
fell by 1.6 per cent July 2015. With this, services exports
have declined for the fourth consecutive month.
Imports too contracted by 10.28 per cent in July 2015,
compared to prior month’s contraction of 13.5 per
cent. Gold imports rebounded in July to US$2.97 bil-
lion (growing at a healthy 62.2 per cent) as compared
to US$2.0 billion in June 2015, coming in above the av-
erage of US$1.5-2.0 billion witnessed since the removal
of the gold import restrictions. This trend is likely to be
maintained in the near future with the onset of festive
season in India. While crude oil imports declined by 35
per cent, non-oil, non-gold imports fell 0.7 per cent, sug-
gesting domestic demand had receded. Cumulatively
for April-July 2015, overall imports shrunk 12 per cent.
ance, India’s external sector outlook has improved and
the vulnerability has reduced considerably. The im-
provement in the external sector has come against the
backdrop of lower commodity prices, especially crude
prices.

19
DOMESTIC TRENDS
JULY-AUGUST 2015
RBI chose to keep the key policy rates unchanged in its
third bi-monthly monetary policy meeting held on Au-
gust 4th, 2015. The policy repo rate under the liquidity
adjustment facility (LAF) stands unchanged at 7.25 per
cent. Consequently, the reverse repo rate under the
LAF will remain unchanged at 6.25 per cent, and the
marginal standing facility (MSF) rate and the Bank Rate
at 8.25 per cent. The RBI indicated that the accommoda-
Regarding growth, the Central Bank was of the view
that the outlook for growth is improving gradually. RBI
in its policy document noted - “Favourable real income
effects could accrue from weaker commodity prices, in
particular crude oil, and a possible step-up in agricultur-
al activity if monsoon conditions continue to improve.
On the other hand, global growth projections for 2015
have generally been revised downwards and, there-
fore, the export contraction could become a prolonged
drag on growth going forward. Notwithstanding some
improvement in the state of stalled projects, supply
constraints continue to be binding and new investment
demand emanating from the private sector and the cen-
tral Government remains subdued. On an assessment
of the evolving balance of risks, the projected output
growth for 2015-16 has been retained at 7.6 per cent”.
tive stance of monetary policy will be maintained going
forward, though further policy actions will be condi-
tioned on favourable developments towards transmis-
sion, food inflation developments along with reforms
to debottleneck supply-side issues. Further, the start of
policy normalization by the US Fed will be watched. The
Central Bank is particularly worried about the greater
transmission of its front-loaded past actions, as further
rate cuts will be crucially contingent on it.
The Central Bank revised down Jan-Mar 2016 CPI pro-
jection by 0.2 per cent and indicated that risks around
6 per cent CPI projection for January 2016 are broadly
balanced. Elevated protein inflation and impact of ser-
vice tax hike on core CPI is a cause for concern, though
there is some relief expected from benign crude prices,
muted MSP hike and Government reform steps to tack-
le food inflation.
On balance, the RBI appears to indicate that the risks
highlighted towards inflation from monsoon and crude
in June 2015 policy have somewhat eased, though de-
velopments on this front need to be closely monitored.
Consequently, the Central Bank is in a wait and watch
mode towards room emerging for further accommoda-
tion.
RBI Stays Pat on Interest Rates

ECONOMY MATTERS 20
DOMESTIC TRENDS
CII’s Viewpoint
RBI’s decision to maintain the status quo on policy rates indicates a guarded approach towards monetary easing
to restrain inflationary expectations and is in alignment with market expectations. CII is of the view that the policy
of frontloading the interest rate cuts should have been allowed to continue as this would have sent a strong sig-
nal that the RBI aggressively addressing the growth risks in the economy accruing from weak demand conditions
which are holding back investments. CII expects that the spotlight would be shifted towards growth and RBI would
resume monetary easing in its next monetary policy when there would hopefully be much more clarity about the
inflation trajectory, the normalcy of monsoons and the possible Federal Reserve actions.
Rupee Depreciates Amidst Volatility
The recent devaluation of the yuan by China has led to
a weakness in the rupee against the dollar. Rupee has
weakened by close to 3 per cent by end-August 2015 as
compared to its end-July 2015 closing. There are con-
cerns that if the depreciation intensified, then a rate
cut by the Reserve Bank of India in September may be
China devalued the yuan by 2 per cent on 11th August
2015 to support the exports sector performance and
align the currency to market forces. The Central Bank
set its official guidance rate down nearly 2 per cent to
6.2298 yuan per dollar – its lowest point in almost three
years. Though the PBOC is describing the devaluation as
a one-off step to align the currency with market forces,
participants fears that China has entered into a com-
petitive devaluation and is likely to allow for steady de-
preciation in yuan. The volatility in the emerging Asian
currencies has increased and they have come under de-
preciation pressure. Rupee was no different. The rupee
has dropped by as much as 3.7 per cent in only a few
days since the Yuan devaluation on August 11. The yuan
devaluation has two fold impact on India’s external
sector performance. (i). It’s likely to worsen our trade
delayed as the Central Bank may not be comfortable
with the risk of capital flight looming large. However,
on a positive side, our vulnerability to an external shock
has considerably declined, given the ample foreign ex-
change reserves to combat the volatility in the rupee –
the Reserve Bank of India had close to US$354 billion in
foreign exchange reserves as of 14th August 2015.
balance with China and (ii). There is going to be loss of
export competitiveness.
In addition to the yuan devaluation, Rupee faces addi-
tional risk from the possibility of an interest rate hike
by US Federal Reserve in the coming months. However,
the impact from Fed rate hike might be limited, given
India’s improving growth-inflation mix and a low cur-
rent account deficit. In addition, an increase in foreign
exchange reserves to nearly US$354 billion (25 August
2015) compared with US$270 billion during the ‘taper
tantrum’ of July-August 2013 improves the ability to
defend the currency. In balance, we expect Rupee to
strengthen from its current lows in the coming few
weeks. However, over the medium-term, it’s expected
to remain range-bound.

21
SECTOR IN FOCUS
Changing Rules of Indian Power Sector:
Empowering the Economy
JULY-AUGUST 2015
Introduction
The energy sector in India has seen a transformational
change with progressive policy-level changes and ef-
fective implementation of directives. These changes
promise enormous opportunities for various stakehold-
ers and market players. However, deep thinking on vari-
ous aspects of policy and regulatory interventions and
their long term implications will help in taking informed
decisions and contribute in developing the sector. With
certainty in policy-level interventions, the economy is
bound to propagate and the demand for energy will in-
evitably surge.
Per capita electricity consumption of the country has
now crossed 1000 kilowatt-hour, but still far below the
average global consumption. As of June 2015, all India
generation capacity stood at 275 gigawatts (GW) with a
contribution of 69 per cent from thermal energy, 15 per
cent from hydro, 13 per cent from renewable and 2 per
cent from nuclear sources. Despite the efforts to gen-
erate more electrical energy by using multiple energy
sources, the country has recorded a shortage of 3.6 per
cent of demand in FY15.
In the recent past, the policymakers have initiated mul-
tiple steps towards improving the power sector output
and benefit consumers. These include the proposed
amendment to the Electricity Act, round-the-clock pow-
er supply, the Coal Mines Special Provision Ordinance,
coal auction and allocation, auction of natural gas, Inte-
grated Power Development Scheme, Deendayal Upad-
hyaya Gram Jyoti Yojana, aggressive renewable gen-
eration targets and massive transmission connectivity
plans.
Proposed provisions will modify the energy sourcing
mix, secure fuel for power generation, bring efficiency
and competition in the sector, enhance clean energy
generation, increase power supply to households, gen-
erate business and employment opportunities etc
In this context, the Confederation of Indian Industry
(CII), along with PricewaterhouseCoopers Private Lim-
ited (PwC) as a knowledge partner released a report on
‘Changing rules of Indian power sector: Empowering
the economy’ against the backdrop of the Sixth Edition
of ‘Energy Conclave 2015: Transforming the Energy Sec-
tor through Policy, Regulation and Technology’ held on
12th
August, 2015 in Kolkata. The main excerpts from
the report are covered in this month’s Sector in Focus.

ECONOMY MATTERS 22
SECTOR IN FOCUS
The Indian power system is the fifth largest in the world
and among the most complex. With an annual electric-
ity production of 1,031 billion units, it is among the top
five power consumers across the globe, and the de-
mand is expected to touch 1,900 BU by 2020.
The Indian Power Sector: Overview
While almost 61 per cent of the power generated is from
coal, India is looking to alter the generation mix in the
years to come, focusing on a low-carbon growth strat-
egy, although coal production continues to be on the
agenda of policymakers. India is dependent to a great
extent on imports. It features among the top five larg-
est importers of oil and is also the sixth largest importer
of petroleum products and liquefied natural gas (LNG)
worldwide. There has been a huge focus on increasing
the share of renewable sources based power genera-
tion in the last few years, with the government setting
aggressive and ambitious targets.
While the country continues to grapple with power
shortages, three states in the eastern region—West
Bengal, Odisha and Chhattisgarh—feature among
those with surplus power. These states could provide
the answer to the ones that are reeling under power
shortages, if they are provided the necessary transmis-
sion infrastructure and corridor.

23
SECTOR IN FOCUS
JULY-AUGUST 2015
As India’s demand grows, steps have to be taken to
ensure the concerns that impede the expansion of its
power sector. As a result of populist tariff schemes
exacerbated by aggregate technical and commercial
(AT&C) losses and operational inefficiencies, the financ-
es of the state discoms are becoming unhealthy with
huge outstanding debt.
Amendment to the Electricity Act
The Indian power sector has come a long way since the
laying down of the basic framework in 1910 right up to
the Electricity Act of 2003, which brought about neces-
sary changes to an evolving sector. The Act introduced
and brought provision on open access, power trading,
regional/national electricity market, independent sys-
tem operator, delicensing of generation, performance
based regulation, anti-theft etc. To govern the sec-
tor better and handle its requirement, the Electricity
Amendment Bill, 2014, is under consideration. The un-
ion cabinet approved amendments to the overarching
Electricity Act, 2003, through the Electricity Amend-
ment Bill, 2014, on 11 December 2014. The proposed
amendment will have a profound impact on the Indian
power sector. It touches upon different aspects of the
sector, right from segregation of carriage and content
to renewable energy and open access to tariff ration-
alisation and so on. The Bill also aims to infuse healthy
competition in each distribution area, and deals with
aspects pertaining to promotion of renewable energy,
open access, smart grid, ancillary services and so on.
The key intent behind the amendments is to allow
competition and better customer service without sig-
nificantly increasing tariff. Although the amendments
bring about measures aimed at infusing healthy com-
petition in the power supply and provide a boost to re-
newable energy based generation, some are still wary
of the legal ramifications of separating carriage from
content and its impact on the average consumer.

ECONOMY MATTERS 24
SECTOR IN FOCUS

25
SECTOR IN FOCUS
JULY-AUGUST 2015
The proposed amendments will require a well-thought-
out and strategic response by power supply compa-
nies as well as generation companies alike to meet the
emerging regulatory and power market provisions and
sector structure framework to maximise benefits and
mitigate business risks. Each of these ramifications are
discussed below.
Separation of Carriage and Content:
The Electricity Amendment Bill, 2014, proposes sig-
nificant reorganisation of the distribution and supply
framework. For a long time, distribution companies
have been responsible for power distribution as well
as power supply to the end consumer. The proposed
amendment envisages separation of power distribu-
tion from supply. This will, in a way, provide the con-
sumer with more options in terms of choosing a sup-
plier, as more than one supply licensee can share space
within a particular distribution area. The amendment
states that an appropriate commission may grant sup-
ply licences to two or more entities in the same area
of supply where one of the supply licensees must be
a government-controlled company. An intermediary
company is to be formed for taking over the existing
power purchase agreements and procurement arrange-
ments of the relevant distribution licensees on reorgan-
isation. To execute this, a transfer scheme is to be made
by state governments for segregation of content and
carriage businesses. However, this needs to effectively
address handpicking of consumers by the supply licen-
see, clearly defining the area of a supply licensee, define
the new entities’ functions and responsibilities, owner-
ship, treatment of existing power procurement com-
mitments, tariffs and subsidies, transfer of resources,
technical and financial loss allocation, etc.
Provide a Fillip to Generation from Renew-
able Energy Sources:

ECONOMY MATTERS 26
SECTOR IN FOCUS
The Electricity (Amendment) Bill, 2014, to a great ex-
tent, focuses on the changes concerning regulatory
provisions and the promotion of renewable energy. The
bill envisages that obligated entities can source electric-
ity from renewable energy source or any renewable en-
ergy instrument. One of the major perceived caveats of
the Electricity Act, 2003, was that there was no mandate
for meeting of renewable purchase obligation (RPO)
targets and, as a result, only a handful of obligated enti-
ties purchased renewable energy certificates (RECs) or
renewable power. This resulted in an increased supply
of RECs with very few takers. The proposed penalties
for noncompliance can force utilities to procure power
from renewable energy sources, thereby providing a
fillip to renewable energy generation. This generation
obligation mandates to establish a renewable energy
generation capacity and exempt open access consum-
ers procuring renewable energy from paying wheeling
and cross-subsidy surcharge. RGO envisaged for all coal
and lignite based power generation stations, wherein
all companies establishing coal or lignite-based gen-
eration capacities, are also required to generate power
from renewable energy sources with at least more than
10 per cent of thermal power installed capacity.
Open Access:
The provision for open access allows power consumers
with a load of 1 MW and above to enter into bilateral
agreements with a power supplier of their choice, leav-
ing them with more options to procure power. Despite
the open access clause in the Electricity Act, 2003, the
major stakeholder remained sceptical while most states
were wary of it and managed to dissuade consumers
from entering into them. The amendment also focuses
on improving open access to power producers and con-
sumers for easier access to transmission and distribu-
tion systems, thereby allowing for transmission of pow-
er across regions.
Tariff Rationalisation and Regulatory Com-
missions:
The distribution sector is grappling with a financial crisis
and tariffs are not reflective of the cost. This has led the
government to focus on provisions pertaining to tariff
policy. The amendment envisages enhanced powers to
regulatory commissions to initiate suo-motu proceed-
ings for tariff determination. Retail tariff set by ERCs will
be seen as the maximum tariff, with the suppliers being
given an option offer lower than the prescribed tariff.
The proposed amendments seek to empower the load
dispatch centre with the rights to penalise for any non-
compliance of its directives on power supply.
Coal Sector Developments
Following the deallocation of all but four coal blocks al-
located for captive and commercial mining, a number
of changes have been made in the regulatory scenario
governing the coal sector in India. The Government of
India enacted provisions enabling auction of coal mines
for captive and commercial mining. The objective is to
award coal assets in a transparent manner and to get
assets developed in timely manner. To meet these ob-
jectives, key legislative changes include the Coal Mines
(Special Provisions) Act, 2015 (earlier Ordinance), fol-
lowed by Rules and various orders and administrative
guidelines. The key changes brought in are summarised
below:
Regulatory Changes
On 21 October 2014, the central government promulgat-
ed the Coal Mines (Special Provisions) Ordinance, 2014,
now the Coal Mines (Special Provisions) Act, 2015, and
the Coal Mines (Special Provisions) Rules, 2014, were
framed under it to implement the Supreme Court order
and manage the coal mining sector. The government
has notified deallocated mines in three schedules:
• Schedule I, naming all 204 coal blocks, deallocated.
• Schedule II contained 42 of the 204 coal blocks
which are operating or ready to operate.
• Schedule III contained 32 of the 204 coal blocks
which have made progress towards development.
Later, 36 blocks were added in the list of Schedule III
blocks. Further, the Ministry of Coal approved a reverse
bidding process for the power sector, according to
which bidders are required to quote a bid price which is
at a discount to the ceiling price and the bidder with the

27
SECTOR IN FOCUS
JULY-AUGUST 2015
lowest bid price shall be the winner. Additionally, based
on the guidelines issued by the nominated authority, in
case the quoted bid price remains zero, then bidding
will be based on forward auction on the additional pre-
mium payable.
Auction Progress
Between December 2014 and April 2015, the govern-
ment conducted two rounds of coal auction for Sched-
ule II and Schedule III blocks, while third round of
auctions is going on. The government has auctioned/al-
lotted below mention blocks for the power sector: Out
of the total of 204 blocks to be auctioned or allotted,
51 are meant for power as end-use, in the eastern re-
gions that includes Jharkhand (23 blocks), West Bengal
(10 blocks) and Odisha (18 blocks). With the conclusion
of two rounds of auction, the following blocks were
auctioned in these states, categorised under Schedule
II and Schedule III, for the power sector.
The After-Effects
The price of coal from the auctioned coal block has no
correlation to the actual cost of production. Also, coal
blocks earmarked for the power sector were put up for
reverse auction, and awarded on the basis of the lowest
transfer price quoted by the bidder. The new provisions
provide for the replacement of coal price in the existing
Power Purchase Agreement (PPA) by the price quoted,
in case it results in fuel cost reduction, and therefore,
the entire process is expected to lower the final power
tariff.
Utilities Perspective
Considering the entire scenario of 204 blocks to be
auctioned, projects located closer to the mines will be
particularly able to offer better cost competitiveness.
Therefore, projects located in Jharkhand, West Bengal
and Odisha are expected to benefit considerably from
the new reform. The impact of coal auction on tariffs
will, however, be localised as the capacity auctioned
represents only 6 per cent of the existing thermal gen-
eration capacity across the country. On the contrary,
combining the peak capacities of the coal blocks allo-

ECONOMY MATTERS 28
SECTOR IN FOCUS
cated in the three states, an additional quantity of 25
million tonne of thermal coal will be added to the exist-
ing production from the two rounds of auction.
On comparing the bid prices against the cost of re-
placed fuel (including shortfall imported or bought on
e-auction) and the additional development cost to be
incurred, the internal rates of return of many winning
bids translate to below the risk-free rate. This is under-
standable for existing assets, but cannot attract new in-
vestment. Quite obviously, benefits from the decrease
in power tariffs will be passed on to the consumers,
with utilities not charging for fuel cost. Proposed re-
verse auction for the regulated sector actually lead to a
forward bidding above the reserve price payable, show-
ing aggressive biddings.
In the first round, the successful bids were in the range
of 470 INR per million tonne (MT) to 1,110 INR per MT in
the forward bidding, with the highest winning bid price
of 1,110 INR per MT quoted by Essar Power MP Ltd for
Tokisud North coal mine. Similarly, in the second round,
the successful bids were in the range of 302 INR per MT
to 704 INR per MT in the forward bidding, with the high-
est winning bid price of 704 INR per MT quoted by GMR
Chhattisgarh Energy Ltd for Ganeshpur coal mine.
However, the recent auction has still left some ques-
tions unanswered. One needs to critically assess in case
of auctioned blocks the quantum of actual benefits that
will be passed on to the consumer, considering that
while the coal extraction cost need not be paid, the cost
of handling and logistics all the way up to the power
plant will be built into the tariff. Therefore, regulators
are required to create some benchmark or formulae
to cap this cost. Further, in case of allocations of coal
blocks meant for power generation, the methodology
needs to be determined to capture fuel prices.
What’s Next?
With definite challenges of keeping the cost of fuel, i.e.
coal produced from the auctioned blocks, at minimum
levels by the new allottees, apart from project prepar-
edness, the need of the hour is to look again into the
existing mining practices prevailing in the country.
Certainly, major reforms need to be brought in, with
improvements in processes and technology as major
focus areas and workplace safety on the prime agenda.
A stringent project-level monitoring system needs to
be put in place to capture variances between the budg-
eted and actual progress made and standard operating
procedures (SOPs) need to be designed for taking im-
mediate actions whenever needed.
Cost control measures such as optimisation, improve-
ment in productivity, utilisation of existing resources,
stringent and accurate data monitoring system, which
we have been debating for long, need to take the front
seat to keep the operating cost at the lowest levels,
as these costs are not passed through to the utilities.
Besides these measures, project preparedness will also
play an important role. As part of project preparedness
itself, carrying out a ‘fatal flaw’ analysis at an early stage
may be advisable to capture the mitigating measures.
The role of the state in expediting approval and clear-
ance work for development and operation of the allo-
cated coal blocks will also be vital. Assistance in fast-
track processes will certainly be important for new
allottees, and primarily serve two purposes–follow the
timelines for project development, and commence pro-
duction to start generating cash flows for the project. In
conclusion, a scientific and collaborative approach will
be required for successful follow-up post the auction.
With two rounds already concluded, questions still re-
main on economic viability, speedy processes and the
passing on of actual benefits to consumers.Location

29
FOCUS OF THE MONTH
Analysing India’s Trade Performance
JULY-AUGUST 2015
I
ndia stands to miss the export target of US$310 billion
for the current fiscal with shipments contracting for
the eighth consecutive month in July. Not only have
the exporters been hit by a slump in global demand,
but also the Yuan devaluation makes Chinese products
cheaper, reducing the competitiveness of Indian goods
in the global market along with worsening an already-
adverse trade balance with Beijing. Moreover, the fall in
the rupee is not helping either. According to Federation
of Indian Export Organizations president S.C. Ralhan,
“Such high volatility will not add to the competitive-
ness of exports as the volatile exchange rate cannot be
factored into prices, though it may increase the hedg-
ing cost for exporters. Only a small number of export-
ers who have not hedged their risks and received their
payments may get a windfall gain.” With weakness in
currencies across all the emerging markets, no unique
advantage accrues to India,” Anupam Shah, chairman
of the Engineering Export Promotion Council (EEPC) In-
dia, said. The government needs to immediately step in
and chalk out a strategy for giving a competitive edge
to Indian exporters. The below article investigates the
recent trends in Indian exports and imports while pro-
viding an insight into which commodities are fuelling
the crisis and the others that need attention.
A. General Trends in Trade
While following a fairly stable trend till 2014, trade bal-
ance has particularly worsened since December 2014.
From a deficit to the tune of US$9.1 billion in December
2014, the trade balance deteriorated to the lowest level
of deficit of US$12.8 billion in July 2015. Exports deceler-
ated from as much as US$26.1 billion in December 2014
to US$23.1 billion in July 2015. The lowest exports were
recorded in February 2015 when they stood at mere
US$21.9 billion, recording contraction to the tune of
10.3 per cent as compared to July 2014. The worst falls
were recorded in March and May 2015 when exports
contracted by 21.3 per cent and 20.2 per cent, respec-
tively, from comparable months in 2014. Overall, in all
the months from January 2015 to July 2015, exports wit-
nessed double-digit contraction in year-on-year terms.

ECONOMY MATTERS 30
SECTOR IN FOCUS
Imports displayed a cycling trend, while they decelerat-
ed otherwise, numbers picked up at each quarter end.
The lowest imports were recorded in February 2015,
when the imports stood at US$28.3 billion, a contraction
to the tune of 16.0 per cent as compared to February
Analyzing annual trends for the last five years, trade bal-
ance deteriorated to the highest deficit of US$190.3 bil-
lion in 2012-13. In 2011-12, a deficit to the tune of US$183.4
billion saw a fall in balance by an alarming 54.6 per cent.
In 2014-15 too, trade deficit remained at US$137.3 billion,
quite higher than the deficit level five years ago. Exports
displayed moderate improvement. From US$251.1 bil-
lion in 2010-11, exports rose to US$314.4 billion in 2013-14
and US$310.4 billion in 2014-15. However the growth in
2014. In July 2015, imports again climbed to December
2015 levels and stood at US$35.9 billion. Overall, except
April 2015, in all the months from January 2015 to July
2015, imports have witnessed double-digit contraction
in year-on-year terms.
the last three years has been unimpressive as compared
to impressive double-digit growth figures in 2010-11 and
2011-12. In 2014-15, exports saw a contraction to the tune
of 1.3 per cent as compared to the previous fiscal year.
Imports, which are subtracted from GDP, have risen
considerably in last five years. From US$369.8 billion
in 2010-11, imports scaled to US$447.7 billion in 2014-15.
Though past two fiscal years saw a minor contraction
in imports.

31
FOCUS OF THE MONTH
JULY-AUGUST 2015
B. Country-wise Trade Analysis
Analyzing the export profile geographically, since De-
cember 2014, there has not been much headway in ex-
ploring different avenues for exports. So, while in the
longer term (2010-15), countries such as United States
(12.0 per cent share), United Arab Emirates (11.5 per
cent share), China (5.1 per cent share), Singapore (4.2
per cent share) and Hong Kong (4.2 per cent share)
have been the favorite export destinations for the
country, in the recent months, too these countries have
been the popular export avenues. Further, the amount
of exports to the United States and United Arab Emir-
ates has superseded the rest by more than double.
Since December 2014, Hong Kong, Malaysia and Sri Lan-
ka have stood on the third spot as opposed to China in
the longer term trend.

ECONOMY MATTERS 32
FOCUS OF THE MONTH
A similar geographical analysis of the import reveals
the longer term (2010-15) favorite import sources as
China (11.8 per cent share), United Arab Emirates (7.2
per cent share), Saudi Arabia (6.7 per cent share), Swit-
zerland (5.8 per cent share) and United States (5.0 per
cent share). They continued to be top import sources in
the recent months as well. The amount of exports from
China is tremendous and supersedes even the country
at the second spot by more than double. In the recent
months, Switzerland and United States have figured in
the second and third positions by share in imports as
opposed to slightly lower rankings in the longer term.

33
FOCUS OF THE MONTH
JULY-AUGUST 2015
C. Commodity-wise Analysis
A commodity-wise analysis of the export profile has
striking revelations. The share of Petroleum Crude &
Products has tumbled down to 11-13 per cent since Janu-
ary 2015, as opposed to comprising of 19 per cent of ex-
ports in the longer term (2010-15). On the other hand,
export share of Textiles & Allied Products has improved
from 11 per cent in the longer run to 13-14 per cent in
the recent months. Similarly Chemicals & Related Prod-
ucts have shown a marked improvement from a share
of 9 per cent in the longer run and now comprise of
11-12 per cent in the recent months. Sectors such as
Gems & Jewellery and Agri & Allied Products have re-
mained fairly consistent in their export shares, though
the latter witnessed some deterioration in June-July
2015. Base Metals and Transport Equipment have also
shown improvement in their share of total exports by
one-two percentage points since December 2014. The
share of Machinery in total exports also showed a mi-
nor improvement. The already disappointing share of
Electronics Items, 3 per cent in the longer run, further
fell by one percentage point. While this sector has often
and again been identified as the one that needs innova-
tion in order to take on China, not much is being done
to that effect.
The share of Plastic & Rubber Articles remained fairly
moderate, while that of Leather & Leather materials
showed minor improvement to the tune of roughly 50
basis points. Ores & Minerals saw an alarming descent,
from 1.6 per cent in the longer run to mere 0.5-0.8 per
cent in the recent months. Marine Products continued
to have a fairly similar share and so did Paper & related
products and also Articles of Stone, Plaster, Cement,
Asbestos, Mica or Similar Materials; Ceramic Products;
Glass & Glassware, albeit with minor improvements.
The remaining sectors of Plantation, Optical, Medical
and Surgical Instruments, Sports Goods, Project Goods
and Office Equipment did not show any variations in
their share of total exports.
Apart from the above analysis of the variations in shares
of various commodities in total exports, an investiga-
tion into the growth trajectory of exports in the top five

ECONOMY MATTERS 34
FOCUS OF THE MONTH
sectors by share also reveals significant observations.
Petroleum Crude & Products witnessed a growth in
exports as high as 56 per cent in 2011-12, however this
tumbled sharply to single-digit growth figure in the fol-
lowing two fiscal years and ultimately a contraction to
the tune of 10 per cent in 2014-15. Contraction in exports
being as high as 46 per cent, 58 per cent and 48 per cent
in the months of April, May and June 2015 respectively
has indicted a continuation of the grim scenario in the
current fiscal year. Gems & Jewellery too witnessed a
contraction in the past three fiscal years tumbling from
a growth of 47 per cent in 2010-11. Textiles & Allied Prod-
ucts has fluctuated greatly in the last five years, display-
ing a contraction in 2012-13, though recovering to a 12
per cent growth in 2013-14, however in 2014-15 a dismal
near flat growth rate was seen. Looking into monthly
trends, both Gems & Jewellery and Textiles & Allied
Products exports have been witnessing contraction
since December 2014, albeit recovering marginally in
June-July 2015. Growth of exports in Agri & Allied prod-
ucts has tumbled steeply from 57 per cent in 2011-12 to
a contraction of 8.5 per cent in 2014-15. Since December
2014, the sector has been witnessing double-digit con-
traction. Chemicals & Related Products have also seen
a downfall in growth of exports over the last five fiscal
years, growing by as high as 30 per cent in 2011-12 and
as low as 3 per cent in 2014-15. In the recent months,
the growth has been highly fluctuating, with contrac-
tion seen since December 2014 except April-May 2015
period.
A similar commodity-wise analysis of the import profile
too had significant revelations. The share of Petroleum
Crude & Products in total imports has been contained
at 25-28 per cent since December 2014, going even as
low as 21-22 per cent in February-April 2015, as opposed
to a longer term (2010-15) share of 32 per cent. Import

35
FOCUS OF THE MONTH
JULY-AUGUST 2015
of Gems & Jewellery displayed very fluctuating trends
with a share as low as 10 per cent in December 2014-Jan-
uary 2015 and as high as 22 per cent in March 2015, as op-
posed to a longer term trend of 17 per cent. Chemicals &
Related Products and Electronics Items showed a minor
rise in import share to the tune of one-two percentage
points in the recent months as compared to their long-
er run shares of 8 per cent and 7 per cent respectively.
While the share in imports of Machinery rose marginally
to 8-9 per cent in the recent months as compared to the
7 per cent it comprises of in total imports, in tandem
with the ambitious ‘Make in India’ campaign, it needs to
rise further in order to improve capital infrastructure in
the country. Base Metals too displayed a rise in its share
of imports by one-two percentage points as compared
to its longer term share of 5 per cent.
The share of Ores & Minerals stood at as much as 8 per
cent in January 2015 but declined to 4 per cent in July
2015, while in the longer run it comprises of 5 per cent of
total imports. Similarly Transport Equipment stood at as
much as 6 per cent in December 2015 but declined to 2
per cent in July 2015, while in the longer run it comprises
of 3 per cent of total imports. The share in imports of
Agri & Allied Products rose sharply in the recent months
to 4-5 per cent as opposed to constituting 3 per cent
share in the longer run. Plastic & Rubber Products dis-
played a minor rise by one percentage point. The import
share of Project Goods displayed fluctuations around its
longer run value. The shares in imports of sectors such
as Paper and Related Products, Textiles & Allied Prod-
ucts, and also Articles of Stone, Plaster, Cement, Asbes-
tos, Mica or Similar Materials; Ceramic Products; Glass
& Glassware, along with Plantation, Optical, Medical
and Surgical Instruments, Leather & Leather Products,
Sports Goods, office Equipment and Marine Products
remained largely invariant.

ECONOMY MATTERS 36
FOCUS OF THE MONTH

37
FOCUS OF THE MONTH
JULY-AUGUST 2015
The recent downtrend in oil prices has led to a signifi-
cant containment of the oil import bill. In 2014-15, the
value of imports in the Petroleum Crude & Products
sector stood at US$138.3 billion, a contraction by 16 per
cent over the previous fiscal year. In the recent months
of the current fiscal too, the sector has been witnessing
a contraction on the back of falling oil prices. The import
bill for the sector fell as low as US$6.1 billion in February
2015, a contraction to the tune of 55 per cent as com-
pared to the same month in the previous year. In Febru-
ary 2015, the price of WTI-Cushing Crude Oil had fallen
On September 3, 2015, Commerce & Industry Minister,
Shrimati Nirmala Sitharaman while addressing the Dia-
mond Jubilee celebrations of the Engineering Export
Promotion Council of India (EEPC India) in New Delhi
assured exporters that it will give top priority to devel-
oping modern infrastructure for boosting shipments
to overseas markets and spurring economic growth.
Noting that there was a need for India to move from
a low value exporter to a very high value exporter, the
to 50.58$/barrel while that of Brent Crude Oil stood at
58.10$/barrel. The prices fell to 47.82$/barrel and 55.89$/
barrel respectively in the subsequent month. Even in
July 2015, the latest month for which data is available,
the import bill stood at US$9.5 billion, contracting by 35
per cent over July 2014, while the prices of WTI-Cushing
Crude Oil and Brent Crude Oil stood at 50.90$/barrel and
58.10$/barrel respectively. WTI crude oil prices have
fallen below 50$/barrel in the month of August 2015.
This is expected to bring down the import bill further in
the months to come.
Commerce Minister exuded confidence that after a
slowdown phase in the recent past, India was now en-
tering into a recovery phase. With moderating inflation,
strong currency reserves, lower current and fiscal deficit
and stable tax policy, the prospects of Indian economy
appeared bright, according to the government, which
emphasized that to sustain a high growth rate, mas-
sive investments in infrastructure and human resources
capital of India would be required on a sustained basis.

ECONOMY MATTERS 38
SPECIAL FEATURE
E-linking Farmers with Markets
T
he government recently announced a country-
wide e-marketing platform for agricultural pro-
duce. This is expected to aid price discovery, pro-
vide greater returns to farmers, and ensure seamless
availability of agricultural commodities, thereby taming
price spikes. It would further enhance marketing effi-
ciency and eliminate rent-seeking practices. The Agri-
Tech Infrastructure Fund will be rolled out by the De-
partment of Agriculture & Cooperation with the Small
Farmers’ Agribusiness Consortium as the executing
arm. The scheme proposes to integrate 585 regulated
mandis across the country over 2015-16 to 2017-18.
An amount of R200 crore has been earmarked for the
scheme for two years, which includes provision for sup-
plying free software to states and Union Territories. The
cost of related hardware and infrastructure will also be
subsidised by the central government up to R30 lakh
per mandi (except private mandis). While there is no
state-specific allocation, states will need to meet cer-
tain prerequisites including a single licence to be valid
across the state, single-point levy of market fee and
provision for electronic auction for price discovery.
The scheme promises to benefit farmers by enhancing
prospects for marketing of produce; improved access
to market-related information and better price dis-
covery; access to a greater number of buyers through
transparent auction processes; and increased access to
markets through warehouse-based sales, thereby by-
passing the need to physically transport commodities.
It would also curb rent-seeking and ‘finger-touching’ or
call-out auction, thereby alleviating the stranglehold of
large wholesale traders and commission agents.
However, the scheme further needs to consider certain
policy and institutional changes. For instance, farmers
often do not sell their produce directly and this is typi-
cally done throughaggregators,transporters or traders.
Hence, intermediation might still continue, although in
a different form. Without the farmer’s actual participa-
tion in the e-auction through guaranteed access to the
e-platform, the opportunity for fair price realisation de-
spite a fair price discovery may be limited.

39
SPECIAL FEATURE
JULY-AUGUST 2015
Second, credit and advances for growing and harvest-
ing the crops are provided by the intermediaries and lo-
cal aggregators, often at hidden and exorbitant interest
rates. The farmers are thus locked-in with contracts and
are unable to exercise their freedom to sell. The access
to affordable credit would need to be addressed as well.
Also, mandis guarantee sale of commodities, particu-
larly fresh produce of any quality, which raises farmer
dependence on these markets. This may not be possible
through the e-platform, although increasingly buyers
are providing the necessary inputs to ensure that farm-
ers are able to grow the quality they are looking for.
Third, the scheme provides for warehouse facilities
which will be subject to investment. Despite the ware-
house receipt system, there has been little progress in
farmers’ access to warehousing.
According to a CII study on agriculture marketing, re-
forms beyond marketing and upgrading the existing
system are required to benefit farmers and consumers.
One, institutional arrangements for credit and insur-
ance are required to eliminate the grip of intermediar-
ies in the traditional mandis. Often farmers lack the re-
sources to travel distances to sell their produce in the
mandi and it makes more economic sense for someone
else in the chain to facilitate the transaction.
Two, although some state marketing boards have
moved towards simplifying multiple licensing, the cur-
rent licensing regime lends itself to a strong informal
economy where rent-seeking and malpractices are
prevalent, with discretion on issuance of licences resid-
ing with APMC authorities. States need to be guided
on the single licence system, with a fee structure that
makes up for potential revenue losses. Piloting of this
model in different production zones taking into account
the diversity of commodities, farmers and marketing
channels will be important to ensure the scalability and
replicability of this model.
Three, the e-platform needs to be backed up with moni-
toring of actual use and training of market staff due
to poor infrastructure in the mandi. Also, sorting and
grading facilities—critical to better price realisation for
farmers—did not exist in the markets surveyed in the
CII report. The facilitation and maintenance of these
platforms will require technical knowhow and hence
there is need to have the right human resources within
the mandi system. Four, payment settlement and mode
of payment are increasingly through cash transfers and
within a day to a month depending on the volume of
trade, debt, frequency and personal rapport between
market functionaries and farmers. Payment and settle-
ment terms will need to address these aspects.
Measures to ascertain that the e-platform actually con-
nects farmers with buyers and does not remain with the
traders and intermediaries will be critical to ensure that
fair price discovery translates into price realisation. This
will entail educating the farmers about the e-platform
and hand-holding them into the process.
While this scheme is for three years ending 2017-18, an
action plan on how to move beyond 585 markets needs
to be put in place. Also, with the current 585 markets
that will be integrated in a phased manner, the choice
of such markets and commodities to be included needs
to be drawn out. The challenge will lie with perishable
commodities.
The e-marketing platform will benefit farmers subject
to certain critical reforms that extend beyond market-
ing. It is definitely one of the models that will see their
way into the future of agriculture marketing, but other
models of direct linkages such as private markets need
to be encouraged to be able to connect maximum num-
ber of farmers with markets. Also, with increasing de-
mand and awareness about safe and quality food, it will
be imperative to ensure that farming practices conform
to higher food safety standards, and traceability along
the value chain will be critical. This will need private sec-
tor coming into the agricultural marketing space in a
major way and investing in the backend, thus creating
an enabling environment for such practices that cater
to consumer demand.
This article appeared in Financial Express dated 5th August 2015. The online version can be accessed from the following
link: http://www.financialexpress.com/article/fe-columnist/column-e-linking-farmers-with-markets/113852/

ECONOMY MONITOR
ECONOMY MATTERS 40

41
ECONOMY MONITOR
JULY-AUGUST 2015

ECONOMY MATTERS 42
ECONOMY MONITOR

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