In this issue of our India public affairs newsletter, Bipul Kiran Singh, public affairs and strategic communications adviser, writes on The Indian Economy - its performance and prospects and Amber Dubey, partner and head (aviation), KPMG in India, with assistance from Kunal Sinha, senior consultant, KPMG in India writes about AirAsia's Indian foray.
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2. 2
The Indian economy:
Performance and prospects
subsidies were rationalised earlier through a nutrient-based
scheme, last year the government boldly capped the number
of subsidised cooking gas cylinders, decontrolled petrol
prices and announced that diesel prices would be gradually
rationalised too. The decision was significant because the
petroleum subsidy alone had grown from 0.5% of GDP in 2010-
11 to 1% in 2012-13.
These measures will help reduce demand for oil. Given India’s
large oil import bill, it will positively impact the worrisome
current account deficit. The government has also taken several
measures to moderate gold demand, including higher import
duties.
The Direct Benefit Transfer scheme to transfer subsidies directly
to beneficiaries’ bank accounts using the Aadhaar platform will
help check leakages and better target subsidies. More than 300
million residents were enrolled for the Aadhaar card till March
and an additional 300 million are expected to be enrolled over
the next 18 months.
These figures and the political faceoff delaying reforms have
led to a downswing in investor sentiment. While there is very
little it could do about the global economic situation that is
partly responsible for lower growth, the government has been
focused on addressing domestic causes to the best of its
ability, given the pulls and pressures of democracy.
India negotiated the 2008 global economic
crisis well, and the financial and monetary
stimulus led to strong growth in 2009-10 and
2010-11. However, the boost to consumption,
coupled with supply-side constraints, led to
higher inflation. Consequently, monetary
policy was tightened, even as supply-side
issues remained unaddressed and external
headwinds increased. The consequent
slowdown, especially in 2012-13, left no
sector unaffected. Corporate performance
during the latter half of 2012-13 indicated
that growth of sales as well as profits
decelerated significantly1
.
The government has been making concerted efforts to address
the issues shackling growth. Subsidies, a politically sensitive
issue, are not only being reigned in, an effort is being made
to make them more focused so that fiscal consolidation does
not adversely impact deserving beneficiaries. While fertiliser
India’s economy continues to face many challenges, growth being the biggest. Growth
touched 5% for 2012-13, the lowest in a decade, but that is not the only worry. The
current account deficit continues to be at unsustainable levels of over 6% of GDP and
the combined fiscal deficit of the Centre and states hovers around a worrisome 10%.
Bipul Kiran Singh, public affairs and strategic communications adviser.
He also consults with MSL India
1
Reserve Bank of India. May 2013. Monetary Policy Statement 2013-14.
3. 3
Stalled investments continued to increase in 2012 because
of bottlenecks, including onerous environment and forest
regulations, inadequate availability and high prices of coal
and gas, and land acquisition problems. The CCI has made a
difference. It has already cleared investments worth $27 billion
and streamlined the process of granting environment and
forest clearances for mega projects.
Independent regulatory authorities for roads and coal, and for
rail tariff setting, have been announced.
However, there may be no quick answers to land acquisition
issues as the Land Acquisition, Rehabilitation and Resettlement
Bill is stuck in Parliament for the last two years. When approved,
while likely to make land acquisition more expensive, it may
make it fairer to those whose land would be acquired. It would
also bring greater clarity and reduce uncertainty, thereby aiding
investments.
After dithering for some months, India has liberalised the
foreign direct investment (FDI) regime in areas like multi- and
single-brand retail, and civil aviation. The finance minister has
set up a committee to remove the ambiguity in the definition
FDI and foreign institutional investment.
Wholesale Price Index inflation has been falling in recent
months with an average of 7.3% in 2012-13, down from 8.9%
the year before. However, food inflation, after a brief slowdown,
continues to be higher than overall inflation. Given the higher
weightage for food in the Consumer Price Index (CPI), CPI
inflation remains close to double digits, averaging 10.2% in
2012-13.
While inflation does not seem to be the biggest concern
now, there are pressures that could stoke it again. Inflationary
expectations remain elevated; suppressed inflationary
pressures from diesel price deregulation, electricity rate hikes,
coal price pooling, and reduced cooking gas subsidies may get
explicitly manifested. Finally, any demand recovery over 2013-
14 could start pushing up core inflation.
Another consequence of the slowdown has been lower-than-
targeted tax and non-tax revenues. While the government
was able to achieve the revised estimate of 5.2% of GDP for
the fiscal deficit in 2012-13 from 5.7% a year earlier through
curbing expenditure as well as increasing revenues, the key
risk to the 4.8% target for 2013-14 are lower-than-budgeted
revenues from disinvestment and telecom spectrum sales
and spending on the food bill.
India has the potential to accelerate growth. Despite the
slowdown, India is likely to remain one of the faster-growing
nations2
. Among large countries, only China and Indonesia
grew faster in 2012-13. In 2013-14, only China is projected
to grow faster. But the fractured nature of Indian polity,
not expected to change even after the next parliamentary
elections, will make the reform process laborious. India’s
climb back to higher growth will be gradual.
The government is focusing also on reviving
investments. To fast-track projects and address supply-
side constraints, the Cabinet Committee on Investment
(CCI) was set up in January. Headed by the prime
minister and mandated to fast-track mega projects
worth more than Rs 1,000 crore ($200 million), its
functions include prescribing deadlines for the issue of
required approvals by ministries and taking decisions
on unduly-delayed projects.
The measures taken since July 2012 when P
Chidambaram took over as finance minister have
not only arrested the declining sentiment, but also
improved the situation. But much remains to be done
to steer India back to its 8%-9% growth rate.
Reflecting this assessment, India’s central bank, the
Reserve Bank of India, in its Mid-Quarter Monetary
Policy Review, cautiously reduced the repo rate by
25 basis points to 7.5% (and further to 7.25% in the
Monetary Policy Review in May) while keeping the
cash reserve ratio unchanged at 4%.
2
World Bank. April 2013. India Development Update
4. 4
AirAsia is expected to face challenges in executing its low-cost
base model in an environment characterised by high fuel prices,
high airport charges and a conservative regulatory framework.
Some of this may affect AirAsia’s key differentiators, like high
aircraft utilisation, low costs and strong ancillary revenues.
The carrier has also leant from its experience as a foreign
airline operating in India. It discontinued its long-haul low-cost
flights from Delhi, Mumbai and Hyderabad, presumably due
to high airport charges.
AirAsia India is expected to face teething troubles as it flies to
India’s interiors, but is expected to emerge as one of the top
three airlines in India in three to four years.
The airline's innovative business model, track record and tie-
ups with strong local partners make it a formidable player. We
are likely to witness a gory fight for supremacy in the Indian
skies in the next 12 months.
May the best airline win!
(The views expressed are personal)
Apart from bringing foreign capital to Indian carriers, the reform
was expected to give rise to one or two start-ups – between
a global airline and Indian partners. The first start-up off the
blocks was a joint venture between AirAsia, the Tatas and
Telestra Tradeplace. They recently received approval from the
Foreign Investment Promotion Board (FIPB) and have applied
to Ministry of Civil Aviation (MoCA) for a no-objection certificate.
AirAsiaentersthetroubledIndianaviationmarketasahighly
successfulairlinewithstrongIndianpartners.Thecompanyplans
tostartsmallandthengrow. Theirlow-costmodelisbuiltaround
highfocusonoperationalexcellence,singleaircraftconfiguration,
highutilisationrate(morethan12hrsofflyingperday),quick
turnaroundofaircraft,aggressivepricingandafocusontiers2and
3airportswherechargesarelow.TheirselectionofChennaias
theoperationalbaseseemslogicalsincemostofAirAsia’scurrent
flightstoMalaysiaandThailandfocusontrafficfromSouthIndia.
The choice of the Tata Group as a partner is interesting. All
airlines need tie-ups with companies providing catering, IT,
cars, buses, low-priced and premium hotels, a nationwide
distribution network, engineering services, etc. If there’s one
group providing all this under one roof, it’s the Tatas.
Thoughcompetitionisfierce,thecountry’spotentialpassengerbase
ofmorethan300millionmiddle-classpeopleislargelyuntapped.
Lastyear,barely58millionpassengersflewondomesticroutes.This
presentsasignificantgrowthpotential.India’sgrowingeconomy,
largemiddle-class,lowairtravelpenetrationandgrowing‘valueof
time’wouldbethekeygrowthdrivers.
AirAsia understands this. The airline recently stated that it
would rather work on opening new markets where there is no
connectivity in order to increase its market share. The carrier
categorically said that it would avoid Delhi and Mumbai,
presumably to avoid the high airport charges.
The arrival of AirAsia is expected to shake up the domestic
market, starting from South India. The airline is renowned for
its strategy of offering low-priced tickets to stimulate demand.
This is likely to lead to a price war and an increase in traffic
volumes but with lower yields per seat-km. The bet will survive
and we may see some mergers and acquisitions in the next 24
months. The consumer is expected to benefit hugely from the
increased competition. I hope that we don’t go back to the era
when market share was more important than profitability.
Amber Dubey, partner and head (aviation), KPMG in India, with assistance from Kunal
Sinha, senior consultant, KPMG in India
AirAsia’s India foray
In a landmark decision in September 2012, the Government of India decided to allow
foreign airlines to invest up to 49% in Indian carriers. All along, the industry’s demand
had been for around 26% of foreign direct investment (FDI) by foreign airlines. The
decision was a pleasant surprise.
5. 5
Policy Updates
Trade pact with Australia soon?
India and Australia are exploring the possibility of a free
trade agreement or a comprehensive economic cooperation
agreement covering goods, services, investments and related
matters. Discussions were held in the working groups on
goods, investment, services, legal and institutional matter,
sanitary and phyto-sanitary, technical barriers to trade,
customs procedures and trade facilitation. The negotiations
are under way and no timeframe has been fixed for the
signing of the agreement.
PDS computerisation on fast track
Computerisation of the Targeted Public Distribution System
is being implemented as a Mission Mode Project under the
National e-Governance Plan by the Central Government.
It has been taken up to ensure correct identification of
beneficiaries, distribution of commodities to the deserving,
elimination of bogus or duplicate ration cards, etc. It
would also enable timely availability of foodgrains at Fair
Price Shops, check leakages and diversion of foodgrains,
and introduce transparency and public accountability
in implementation. The government has initiated
implementation of Component-I of the scheme for end-
to-end computerisation of operations: digitisation of ration
cards and other databases, computerisation of the supply-
chain management, setting up of a transparency portal and a
grievance redressal mechanism.
Quality seed supply to farmers
For ensuring supply of quality seeds to farmers, the
Department of Agriculture and Cooperation is implementing
the Development and Strengthening of Infrastructure
Facilities for Production and Distribution of Quality Seeds
Scheme, under which assistance is provided for strengthening
and modernising seed infrastructure, upgrading the quality
of farm-saved seeds, production and distribution of quality
seeds, establishing ‘seed banks’ for ensuring availability in
contingent situations, and establishing and strengthening
quality-control infrastructure.
30,000 MW capacity target
The Ministry of New and Renewable Energy is targeting a
capacity addition of 30,000 MW during the 12th Plan period
(2012-17) from various renewable energy programmes such
as wind, small hydro, biomass and solar across India. The
government has formulated an Integrated Energy Policy (IEP)
covering all sources of energy, including renewable sources.
The IEP document gives a roadmap to develop energy supply
options and increase exploitation of renewable energy sources.
Flexible use of airspace okayed
The Cabinet Committee on Security cleared Flexible Use
of Airspace (FUA) by civil and military users, a matter that
had been unresolved for years. The primary objective is to
enhance airspace capacity, minimise delays, fuel conservation,
emission reduction and consumer benefit. Implementation of
FUA through efficient civilian-military coordination is essential
to foster traffic growth. FUA permits both military and civilian
users to efficiently utilise the airspace on a sharing basis to
gain optimum usage, thereby enhancing capacity and making
operations more efficient.
New drug price control process started
To implement the provisions of the National Pharmaceutical
Pricing Policy, 2012, the process of finalising a new Drug (Price
Control) Order has begun. The National Pharmaceutical
Pricing Authority is the implementing authority of the existing
Drug (Price Control) Order.
Telecom funding may get a leg up
The 12th Five Year Plan (2012-2017) has recommended that
the Telecom Finance Corporation be created as a vehicle
for the sector to access funds at competitive rates. It would
provide long- and short-term loans to telecom infrastructure
firms, service providers, equipment manufacturers, internet
service providers, etc.
6. 6
Primarily, there are three elements intended to
be controlled:
Anti-competitive agreements
Abuse of dominant position
Regulation of combinations likely to have an adverse
effect on competition.
On December 10, 2012, the government introduced the
Competition (Amendment) Bill in Parliament. The Bill aims
to modify certain provisions of the Act, as well as insert some
new provisions, to meet the evolving needs of industry. The
Bill still has to be debated and passed by both houses of
Parliament before it becomes law.
The substantive amendments proposed to the
Act:
Section 3 (4) states that if vertical agreements cause
or are likely to cause any appreciable adverse effect
on competition, they shall be deemed void. While this
provision makes reference to provision of services, the
illustrations mentioned therein only refer to “sale of
goods” and not to services. The Bill now aims to include
reference to “provision of services” in the explanation.
The Bill proposes to replace Section 4(1) with “no
enterprise or group, jointly or singly, shall abuse its
dominant position”. The objective is to include enterprises
or groups, related or unrelated, whether or not within the
same management, to fall within the ambit of Section 4.
In a significant judgment, the CCI imposed a penalty of $
114 million on DLF Ltd in the Belaire Owner’s Association
vs DLF Ltd and Others case. One ground was that DLF
allegedly abused its dominant position in the market by
imposing unfair conditions in its builder contracts. Other
real estate enterprises accused of indulging in similar
practices were not reprimanded since they did not singly
stand out as ‘dominant’ in the market. With the proposed
amendment, if all (or at least more than one) real estate
companies indulge in similar practices, they could
collectively be held in contravention of the Act.
The Bill proposes to modify Section 2(y) to include value
of sale of goods or services, excluding taxes levied.
Section 5 (b)(i) defines a group wherein two or more
enterpriseswhich,directlyorindirectly,areinapositionto
exercise26%ormoreofthevotingrightsinother
enterprises. This threshold was increased from 26% to
50% on March 2, 2011. Now, the Bill aims to bring the
Act in sync with the notification and revises the definition
of ‘group’ to include “two or more enterprises which,
directly or indirectly, are in a position to exercise 50% or
more of the voting rights in the other enterprise”. Also,
50:50 joint ventures continue to fall within its scope.
Sources: http://knowledgetoday.wharton.upenn.edu/2013/01/indias-
competition-law-raises-concerns-among-multinationals/, http://www.
mondaq.com/india/x/223500/Antitrust+Competition/Proposed+Amen
dments+In+The+Competition+Act+A+Positive+Step+Forward
Policy Roadmap
Competition (Amendment) Bill
After attaining independence, India adopted
policies comprising ‘command-and-control’
laws and regulations.
The Monopoly and Restrictive Trade Practices Act was passed
in 1969, replaced by the Competition Act, 2002, governed by
the Competition Commission of India (CCI). The Competition
Act was replaced by the Competition (Amendment) Act, 2007,
and again by the Competition (Amendment) Act, 2009. The
Act deals with the establishment, powers and functions as
well as the CCI’s adjudicatory functions.
7. 7
Rs 28,400 crore
Funds managed by the National Pension Scheme as of March
2, 2013. It has 44.93 lakh subscribers. The government is
easing withdrawal norms and providing tax incentives to make
it more attractive for small savers
24%
The stake sold by Jet Airways to Etihad for Rs 2,046 crore
$24 billion
Value of manufacturing projects stalled due to lack of
clearances
$500 million
Collective value of five deals struck this year in the renewable
energy sector, led by wind energy
12%
Rate at which the Indian IT services market is expected to
grow, according to Gartner, in 2013. It is expected to touch
$10.2 billion (Rs 55,590 crore)
Number View
$1.2 billion
Value of shares sold by India-dedicated funds and exchange
traded funds during the March quarter of 2013
$11 billion
Amount infused by foreign institutional investors in the equity
market in the first four months of this year
$814.3 billion
What global sales of connected devices like smartphones,
tablets and PCs are expected to touch, according to IDC. Sales
are expected to surpass 2.2 billion units
6.1%
World Bank’s scaled-down growth forecast for India, from 7%
projected six months ago for the current fiscal
51.0
HSBC Manufacturing Purchasing Managers’ Index for April
2013, down from 52.0 in March 2013. It is at its lowest since
November 2011
8. 8
Public Affairs Round-up
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