Post on 02-Jun-2018
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ECONOMY MATTERS 2
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1
FOREWORD
OCTOBER - NOVEMBER 2014
The G-20 Summit held at Brisbane, Australia saw a gathering of world leaders. A gamut ofdecisions were taken on a range of measures that will help make the global economy more
resilient to future shockslike the recent global recessionand protect both business and
consumer interests. To protect against these shocks, the G20 decided to endorse measures
that would strengthen nancial institutions, protect taxpayers from having to fund bailouts
if too big to fail nancial institutions run into diculty, address shadow banking risks, and
make derivative markets safer. It was decided that Sydney will now be home to a Global
Infrastructure hub, which will assist increasing global investment in infrastructure. Addition -
ally, G20s commitment to deliver a plan to address tax avoidance called the Base Erosion and
Prot Shifting (BEPS) Action Plan was reiterated.
On the domestic front, despite the GDP slowing down in the second quarter of the currentscal, the rst-half GDP gure of 5.5 per cent did seem to indicate that growth has sustainably
bottomed out. Deceleration in the second quarter was on expected lines, and growth could
have slipped further if it was not for surprisingly healthy performances by agriculture and
government spending components. Nevertheless, the H1 growth has placed the economy on
track to achieve our expectation of full year growth of 5.5-6.0 per cent given that the second
half is likely to be better. However, in order to provide a llip to growth, it will be crucial for
the new government to implement the announced policy measures in right earnest. We are
already seeing a lot of pro-active reforms being considered by the government in areas of
labour, land and taxation, among others, which promote ease of doing business in India. An
accommodative monetary policy stance by the RBI will also help in cushioning growth.
Exports have played an increasingly important role in Indias economic growth in the last two
decades. Although, the pace of exports growth was punctuated twice by sharp slowdown in
world economy during 2008-09 and during the last two scal years, Indias trade prospects
have continued to grow over time. In the current scal, cumulative exports have grown by
4.7 per cent in the seven months so far. However, exports registered their rst decline in this
scal in October 2014 due to global headwinds. For growth to reach a higher trajectory, its
pivotal that exports play an important role. The Foreign Trade Policy of the new government
which is expected to be put in place by early next year will help in this endeavour.
Chandrajit Banerjee
Director General, CII
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3 OCTOBER - NOVEMBER 2014
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EXECUTIVESUMMARY
OCTOBER - NOVEMBER 2014
Global Trends
After the 7.5 per cent growth in second quarter, GDP
growth in China for the July-September 2014 quarterstood at 7.3 per cent from the year-ago period, slowest
since global nancial crisis. It now risks missing its ocial
target for the rst time in 15 years growth of 7.5 per
cent in 2014, adding to concerns of becoming a drag on
global growth. Central Banks world over are using am-
munition at their disposal to ward o the dual problems
of deation and slowing growth. Bank of Japan plans to
pump trillions of yens and expand its asset-buying pro-
gram by 33 per cent in order to control deation. In a
similar league, and somewhat desperately, the European
Central Bank intends to expand its balance sheet by 1 tril-
lion euros (US$1.25 trillion). The Fed has indicated that
the benchmark interest rate would remain near zero and
it may hang onto the bonds for years, giving a QE-like
boost even after QE itself has been tapered out. Reduced
forecasts for economic growth worldwide and risk of de-
ation continue to trouble the policy makers.
Domestic Trends
Despite the GDP slowing down to 5.3 per cent in the sec-
ond quarter of the current scal from 5.7 per cent in theprevious quarter, the rst-half GDP gure of 5.5 per cent
did seem to indicate that growth has sustainably bot-
tomed out. Deceleration in the second quarter was on
expected lines, and growth could have slipped further if
it was not for surprisingly healthy performances by ag-
riculture and government spending components. The
latter may not be sustained for remaining months of the
year as government is likely to cut its spending in order
to rein in the scal decit target for the year. Fiscal decit
in the period April-October 2014 stood at 89.6 per cent
of the budgeted gure for the entire nancial year. The
Index of Industrial Production (IIP) in rst-half of the cur-
rent scal (April-September) registered a growth of 2.8
per cent, compared to anaemic growth of 0.5 per cent
in the same period last year. Providing some cheer for
the economy, ination is slowly and steadily coming near
the comfort levels of the central bank. Both CPI and WPI
based ination moderated sharply to 5.5 per cent and 1.8
per cent respectively in October 2014, which, if sustained,
may help RBI to shift its focus from controlling ination
to accelerating growth.
Sector in Focus- Make in India: TurningVision into Reality
The Indian manufacturing sector is a classic example ofan industry that has had great potential, but one that has
been systematically done in by political ineectiveness,
entrepreneurial myopia and sheer ignorance of what it
takes to succeed. Over the last 20 years, Indian manufac-
turing has by and large grown at the same pace as our
overall economy. Our share of global manufacturing has
grown from 0.9 to 2.0 per cent during this period while
our GDP share has grown from 1.2 to 2.5 per cent. Despite
this en-couraging growth, however, the relative share
of manufacturing in the Indian economy has remained
unchanged, dashing hopes of an economy based on
manufacturing-led growth. In this context, the recently
announced Make in India policy by the new government
aims to push manufacturing growth to the next level. In
the recently concluded CII 13th Manufacturing Summit
2014, a report titled Make in India: Turning Vision into
Reality prepared by CII and BCG was released. We cover
the crucial ingredients required to make this vision into
reality as discussed by the report in this months Sector
in Focus.
Focus of the Month - Trade : Policy &Performance
India saw its foreign trade expand remarkably in the past
decade. Although, the pace of exports growth was punc-
tuated twice by sharp slowdown in world economy dur-
ing 2008-09 and during the last two scal years, Indias
trade prospects have continued to grow over time. In s-
cal year 2003-04, Indias exports were worth US$64.0 bil-
lion. By 2013-14, they more than quadrupled to US$312.6
billion. In the current scal, cumulative exports have
reached US$189.8 billion in the rst seven months of the
scal (April-October 2014) as compared to US$181.2 billion
in the same period last year, thus registering a growth
of 4.7 per cent. On a monthly basis, exports shrank for
the rst time in seven months in October 2014, temper-
ing hopes for an export-led recovery. Going forward, the
governments new foreign trade policy (2014-19) to rev
up exports is expected to be put in place by early next
year and will have a strong thrust on manufacturing to
bring it in sync with the Prime Minister Narendra Modis
Make in India goal. Given the importance of rejuvenat -ing exports to have sustained growth, this month, the
focus is on the same. Eminent experts discuss the vari -
ous nuances of having a trade policy in place which would
give adequate thrust to exports growth.
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ECONOMY MATTERS 6
GLOBALTRENDS
Chinas Economy Grows at a Sluggish Pace
in Q3 2014
Chinas economy grew at its slowest pace in more
than ve years in the third quarter, suggesting
that the governments targeted easing meas-
ures to boost economic growth have not yielded ex-
pected results. Gross domestic product growth for the
July-September quarter came in at 7.3 per cent from the
year-ago period, after the 7.5 per cent growth in second
quarter. This is the slowest reading since the rst quar-
ter of 2009, when Chinas growth rate slumped to 6.6
per cent amid the global nancial crisis.
China now risks missing its ocial target for the rst
time in 15 years, adding to concerns the worlds second-
largest economy is becoming a drag on global growth.
The governments goal was for the economy to grow
about around 7.5 per cent in 2014. Policy makers have
stepped up their eorts to nurture economic growth
over past few months, including easing mortgage re-
strictions and accelerating infrastructure investment.
While 7 per cent plus growth would be the envy of most
countries, China has said it needs at least 7.2 per cent
growth to create some 10 million jobs annually for its
huge population.
The worlds second-largest economy grew a seasonally-
adjusted 1.9 per cent last quarter from the previous pe -
riod, compared with the 1.8 per cent median estimateof analysts and 2 per cent in the second quarter. GDP in
January to September climbed 7.4 per cent, led by a 7.9
per cent expansion in services. While the growth gure
for the agricultural industry stood at 4.2 per cent, the
secondary industry including mining and manufacturing
grew 7.4 per cent.
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GLOBAL TRENDS
OCTOBER - NOVEMBER 2014
While factory output rose 8.0 per cent in September
2014 from a year earlier, beating expectations for a 7.5
per cent increase and up from Augusts six-year low of
6.9 per cent, it was the sole positive update. Industrial
production also increased 0.91 per cent in September
from August, when it rose 0.2 per cent from preceding
month. Fixed asset investment, a key driver of the Chi-
nese economy, was weaker than expected. It climbed16.1 per cent in the rst nine months compared with the
same period a year earlier, compared with the median
estimate for 16.3 per cent growth and the 16.5 per cent
pace in January-August period. Retail sales rose 11.6 per
cent in September from a year earlier, below predic-
tions of 11.8 per cent and down from previous months
11.9 per cent. Meanwhile, property data for September
showed that the slowdown deepened with real estate
investment rising only 12.5 per cent in rst nine months
compared a year ago, down from annual rise of 13.2 percent in rst eight months.
A weakening property market continued to weigh on
broader activity in the third quarter, with revenue from
property sales revenue and new construction tumbling
in the rst nine months of 2014, blunting the impact of
earlier stimulus measures and a long-awaited pick-up in
exports. Housing sales fell 10.8 per cent by value dur-
ing the rst nine months of this year. With house price
declines spreading to a record number of cities and newconstruction tumbling, the government last month cut
mortgage rates for some home buyers for the rst time
since the global nancial crisis. Chinas property sector
accounts for about a quarter of GDP when related in-
dustries such as steel, appliances and construction are
included. As China has relaxed property purchase credit
rules, property sales may pick up in the fourth quarter,
but concerns regarding improvement in sectors like
heavy industry fuel the expectation that the economy
will continue to slow down.
Even though the ination has cooled to a near ve-year
low, highlighting sluggish domestic demand and a lack
of pricing power for rms, the government maintains
that there is no danger that consumer prices would fall
in coming months.
Exports, one of Chinas few economic bright spots,
grew faster than expected in September. Growth in
combined exports and imports accelerated to 3.3 per
cent in the rst three quarters from a year earlier, up
from 1.2 per cent in the rst six months of the year. Al-
though it is believed an unusually sharp increase in ship-
ments to Hong Kong may include transactions designed
to circumvent Chinas strict capital controls.
While authorities have oered a steady stream of aid
to more vulnerable sectors of the economy, they have
ruled out massive stimulus as the country is still strug -
gling with a mountain of debt, the hangover from 4 tril-
lion yuan (US$650 billion) of stimulus rolled out during
the 2008-09 crisis. Government economists have said
that if growth looked like dropping below 7 per cent,
authorities may take bolder and broader steps such
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ECONOMY MATTERS 8
GLOBAL TRENDS
as interest rate cuts. Low ination gives policy makers
more leeway to continue pursuing an accommodating
monetary policy through the end of the year. Conse-quently, Central Bank of China cut its benchmark 1-year
deposit rate by 25 bps to 2.75 per cent, and reduced the
1-year lending rate by 40 bps, to 5.60 per cent. It also re-
laxed the ceiling on deposit rates and allowed Chinese
banks to pay as much as 120 per cent of the benchmark
deposit rate, up from 110 per cent previously
The International Monetary Fund on October 7, 2014
cut its outlook for global growth in 2015 to 3.8 per cent
from a July forecast of 4 per cent. The U.S. will expand
3.1 per cent next year, compared with 1.3 per cent for
the euro area and 0.8 per cent for Japan. China is pro-
jected to grow 7.1 per cent, its slowest since 1990, ac-
cording to IMF data.
The National Bureau of Statistics said that industriali-
zation and urbanization will continue to drive Chinas
expansion. It recognized the economic slowdown due
to structural reforms in the nation, a sagging housing
market and higher comparison gures from a year ago,
but noted that although economic growth had slowed
in the third quarter, the employment and ination situ-
ation were generally stable, meaning the economy was
still operating in a reasonable range. Concerns wereraised on what conclusions the Chinese policymakers
would draw from slowing growth: need to nd other
sources of growth or further trials to stimulate, even
though the latter just reinforces the cycle that has pro-
duced the distortions seen in the economy.
Premier Li Keqiang has stated repeatedly that authori-
ties will tolerate growth slightly below target and rely
more on reforms to generate new growth drivers as
they try to reshape the economy so it is driven moreby domestic consumption and less by exports and in-
vestment. Li said that a complex and changing exter-
nal environment and large downward pressure posed
diculties for Chinas economy and that it would take
time for Chinas reformative measures to be fully eec-
tive. He has indicated that the leaderships bottom line
is maintaining employment to ward o social unrest, a
policy priority. Li also said that China will launch major
investment projects in information networks, water
conservancy and environmental protection this year,and pledged to policy adjustments made when needed.
While conventional monetary policy has reached its
zero lower bound, as far as interest rates are concerned,
there is no consensus on the eectiveness of quantita-
tive easing. The worlds Central Banks are increasingly
concerned that very low ination will tip into outrightdeation crushing fragile borrowers by raising the real
interest rate on their loans, which would load weak
banks with a new round of defaults on loans.
A risky move by the Bank of Japan, in its bid to rid Japan
of deation, to pump trillions more yen, jolted global
markets. The Bank would expand its asset-buying pro-
gram by 33 per cent and diversify from government
bonds to stocks and real-estate funds. It will be buying
at a level well beyond what the Federal Reserve andother Central Banks have purchased in their stimulus
programs. As a result, even though the yen fell to its
lowest value against the dollar in almost seven years,
it failed to boost exports as many Japanese manufac-
turers had shifted production oshore during slow
growth period. Even before the decision, the BOJs
asset holdings were nearing 60 per cent the size of Ja-pans economy, over twice the relative levels reached
by the Fed and the Bank of England. Japans sovereign
debt is more than twice the size of the economy, the
highest ratio in the world, and the pension funds de-
cision to move some of its assets away from Japanese
government bonds imply that the bond market will be
more dependent than ever on purchases by the Central
Bank. Japanese stocks and foreign stocks will each now
take up 25 per cent of the funds holdings, up from 12
per cent each previously. The ratio for overseas bondswill rise to 15 per cent from 11 per cent. The Bank will
triple the pace of its purchase of stock and property
Major Central Banks Inject Stimulus to Hasten Recovery
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GLOBAL TRENDS
OCTOBER - NOVEMBER 2014
funds, extend the average maturity of its bond holdings
by three years to ten, and raise the ceiling of its annual
Japanese government bond purchases by 30 trillion yento 80 trillion yen. The Banks board was deeply divided
over the unprecedented measures due to concerns that
the BOJ is underwriting Japanese politicians heavy bor-
rowing, threatening to undermine the credibility of its
public nances, and the perceived independence of the
Central Bank. The pension shift has also stirred contro-
versy as most global pension funds are paring back risk
at this point and not adding it.
In a similar league, and somewhat desperately, the Eu-
ropean Central Bank (ECB) is engineering a powerful
monetary stimulus to jolt the agging Euro zone econo-
my, concerned by worrisomely low ination that is both
a symptom and cause of the 18-nation euro currency un-
ions inability to achieve any sustainable growth at all. If
the current policies, which include some purchases of
corporate bonds, do not end the threat, the Bank would
alter the size, pace and composition of its purchases.
At issue is whether it will follow its peers around the
world in buying government bonds on a large scale. TheECB, in September, cut its main interest rate target to a
rock-bottom 0.05 per cent, and reduced its deposit rate
to minus 0.2 per cent, eectively charging banks for
leaving unused funds. It has been buying private-sector
loan assets since early October and has announced
longer-term low-interest loans to banks in an eort to
restart lending. The Bank intends to expand the size of
its balance sheet by 1 trillion Euros (US$1.25 trillion). Ex-
pectations that it will increase the supply of Euros in the
market led investors particularly as the Fed has begunreining in its own bond-buying. The path to employ-
ing wholesale bond-buying is not an easy one. There is
signicant opposition to such a policy in Germany, for
instance, apart from questions on whether the Euro
zone in which each country, rather than the bloc as
a whole, issues bonds is the appropriate venue for
quantitative easing.
Even as Japan and the EU embark on fresh rounds of
quantitative easing to ward o deation, the Peoples
Bank of China is holding the line against major stimu-
lus. Instead, it is instead taking a gritted-teeth approach
accepting short-term pain as the price for structural
reform which will support sustainable growth in long-
term. While aid to vulnerable sectors has been oered,
massive stimulus has been ruled out as the country isstill struggling with the hangover from 4 trillion Yuan
(US$650 billion) rolled out during the 2008-09 crises. As
growth has slowed this year, China has rolled out a se-
ries of targeted scal and monetary stimulus measures,
including stepped-up spending on railways, energy, and
public housing, expanded credit to farmers and private
businesses and more relaxed rules for the housing sec -
tor. The Bank plans to inject 200 billion Yuan (US$32.6
billion) into the banking system, following an earlier
move to pump 500 billion Yuan into the countrys vemajor state-owned banks. The prospects of weaker
growth may raise the chances of more aggressive policy
steps such as cutting interest rates or reserve require-
ments across the board, but the government may not
rush into action as the job market still appears to be
holding up. Steps unveiled since April included reserve
requirement cuts for selected banks and faster invest-
ment in railways and public housing. But much of their
broader impact may have been oset by the cooling
property market and tighter credit as banks grow morecautious about lending as the economy cools. Chinas
leaders have relaxed home-purchase controls and the
Central Bank has pumped liquidity to lenders as they
seek to limit a property-induced slowdown. The govern-
ment has eschewed across-the-board interest rate cuts
and signaled it will tolerate a weaker expansion, leaving
the economy headed for the slowest full-year growth
since 1990.
Even though the colossal strategy of U.S. Federal Re-serve to buy immense piles of bonds in an extraordinary
eort to restart a recession-deadened economy came
to an end in October, after adding more than US$3.5
trillion to the Feds balance sheet an amount roughly
equal to the size of the German economy, it continued
to pump support into the economy the old-fashioned
way, by holding its interest rates near zero. Currencies
and stock markets in emerging markets fell steeply in
mid-January 2014, as investors prepared for U.S. inter-
est rates to rise, but markets rebounded while interestrates stayed low. According to Janet Yellen, the Fed
chair, the benchmark interest rate would remain near
zero for a considerable time, and the Central Bank may
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ECONOMY MATTERS 10
GLOBAL TRENDS
hang onto the bonds for years, which could give a QE-
like boost even after QE itself has been tapered out. The
near-zero interest rates it plans to leave in place until
While global markets have been buoyant as a conse-
quence, interestingly, Central Banks themselves are less
condent, particularly given the extent to which eco-
nomic growth has repeatedly undershot their expecta-
tions and forecasts. After all, monetary policy makers
dont have the tools to remedy long-term neglect of
growth drivers such as infrastructure investment and
labor-market reforms; unbalanced demand patterns in-
volving a mismatch between the willingness and ability
to spend; and pockets of excessive indebtedness thatsmother economic growth and new investments. That
isnt the only thing worrying Central Banks. If anything,
the labor market has recovered further, is a massive
stimulus in itself, even in the absence of extraordinary
stimulus of massive bond purchases.
unexpected interest-rate cut by Chinas Central Bank
and the European Central Banks decisions implying
that more monetary easing is needed reect weakness,
not strength. This can be seen in the reduced forecasts
for economic growth worldwide and, in the case of the
euro zone, signs that the region is on the verge of price
deation. Not all Central Banks are increasing monetary
stimulus. The U.S. Federal Reserve is likely to continue
diverging from the ECB and others, easing its foot o
the accelerator. This will require adjustments that gobeyond just dollar strengthening and that could cause
volatility.
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DOMESTIC TRENDS
Manufacturing Needs a Quality Boost
OCTOBER - NOVEMBER 2014
A
signicant innovation of the Make in India call
by Prime Minister Narendra Modi, given on Au-
gust 15, was the addition of Zero Defect, ZeroEect. This translates into a manufacturing mission that
is high on quality as also environmentally sustainable.
In fact, the two goals are complementarya nations
development is sustainable only when the producers of
products and services deliver highest levels of quality,
at lowest cost, most eciently, with minimum environ-
mental impact and most responsible use of resources.
Quality is a holistic concept that goes beyond produc-
tion of high-class goods and services to encompass en-
tire processes and systems at the rm level and at the
national level to maximise outcome, eciency and pro-
ductivity at minimal cost. It extends to long-term busi-
ness strategies for organisational excellence and suc-
cess and can be extrapolated to include ecient supply
chains. Inculcating a culture of quality in the country so
as to meet the objectives of Zero Defect, Zero Eect re-
quires a mindset change among the policy-makers and
industry alike in order to enhance national competitive-
ness in the global marketplace and succeed in manufac-
turing transformation.
India today has a large number of winners and recipi-
ents of internationally-acclaimed awards for business
excellence. According to CII data, there are 21 awardees
of the renowned Deming Prize and 238 Total Productiv-
ity Maintenance (TPM) awardees of the Japan Instituteof Plant Maintenance (JIPM). Firms have also worked
towards obtaining international energy and green rat-
ings, certications covering quality, energy and environ-
ment, and other well-known business excellence stand-
ards.
This drive for excellence has enabled gains in produc -
tivity, quality, costs, operational eciencies and con-
servation of critical natural resources. In training pro-
grammes conducted by CII on Quality Management
Systems, we have seen production in participating
rms going up by 50 per cent, quality levels increasing
by 80 per cent, cost of manufacturing coming down by
5-8 per cent, and cost of maintenance being slashed by
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ECONOMY MATTERS 12
30-50 per cent. A huge positive outcome has been zero
accidents, zero breakdowns and zero defects in the
companies which have gone through the TPM process.The high point is raised morale of employees as sta at
all levels is involved in kaizen or continuous improve-
ment and innovation as well as in aligning to enterprise
goals. Such quality interventions have helped enhance
the image of Indian manufacturing and many of our
companies have emerged as top-ve producers of their
product categories in the world. While this is a no mean
achievement, there is still a long way to go for universal
coverage in terms of scale and numbers of manufactur-
ing enterprises.
A comprehensive initiative for expanding quality at-
tainments would aim to transform methodologies, pro-
cesses and systems across the value chain. It would re-
vitalise the use of manufacturing tools and techniques
while building a strong brand for India and its products
and services, focusing both on the customer as well as
on society as a whole. The endeavour of Zero Defect,
with a focus on the customer, would act towards zero
non-conformance and non-compliance. On the other
hand, Zero Waste, Zero Eect, with a societal focus,
would focus on zero air pollution, zero liquid discharge,
zero solid waste and zero wastage of natural resources.
This would converge the Make in India mission with the
Swachh Bharat Abhiyan and stress minimising waste at
the industry level.
Strong and clear standards, identifying specic criteria
for compliance towards Zero Defect and Zero Eect,
need to be developed across diverse elds. Each cri-
terion would be in the form of graded improvements
that would be demonstrable with the highest grade
corresponding to world-class maturity assessment cri-
teria, and should include both enablers and results. This
would help Indian industry to measure itself against
global benchmarks and seek to evolve to its desired lev-
els of quality.
A range of areas need to be addressed to make industry
competitive and quality-compliant. The use and adop-
tion of proven and time-tested quality tools and tech-niques, green technologies, management systems, ex-
cellence models, fundamental concepts and innovative
approaches, and coordinated and time-bound process-
es using a dened roadmap with clear outcomes will be
some of strategies that Indian industry would need to
deploy. Industry would need support in terms of train-
ing, consultancy and advisory services that would assist
rms in adopting these proven methodologies. Multi-
ple modes including awareness dissemination, person-
alised interventions, audits, assessments and clustermode would be required to achieve the twin goals and
build necessary internal capacities and capabilities for
vibrant and sustainable enterprises.
CIIs Institute of Quality is the initiator of Indias rst
maturity assessment criteria ever on Zero Defect, Zero
Eect, termed as the ZED Maturity Assessment Criteria.
Evolved with the collaboration of the Quality Council
of India, this would bring out a ZED framework with
a maturity matrix to guide industry to commence and
advance on quality attainments. Benchmarks would be
established across focus sectors and products, which
would enable Indias 1.1 million MSMEs to reference
themselves. Besides CII Institute of Quality, other CII
Centres of Excellence who will be actively participating
in this ZED movement would include CII-Avantha Centre
for Competitiveness for SMEs, CII-ITC Centre of Excel-
lence for Sustainable Development, CII-Sohrabji Godrej
Green Business Centre, CII-Triveni Water Institute, CII-
Naoroji Godrej Centre of Excellence and CII Andhra
Pradesh Technology Development and Promotion Cen-
tre.
The success of the Make in India mission would depend
heavily on the competitiveness of Indian enterprises,
particularly MSMEs. Zero Defect, Zero Eect should
thus be developed as an additional mission in partner-
ship with industry to support and assist companies.
This article appeared in Financial Express dated 29th November 2014. The online version can be accessed from the follow-
ing link: http://www.nancialexpress.com/article/fe-columnist/manufacturing-needs-a-quality-boost/
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DOMESTIC TRENDS
OCTOBER - NOVEMBER 2014
Despite the GDP slowing down to 5.3 per cent in the
second quarter of the current scal (2QFY15) from 5.7
per cent in the previous quarter, the rst-half GDP g -
ure of 5.5 per cent did seem to indicate that growth has
sustainably bottomed out. Deceleration in the second
quarter was on expected lines, and growth could have
slipped further if it was not for surprisingly healthy
performances by agriculture and government spend-
From the supply-side, industrial growth slowed to 2.2
per cent in Q2FY15 compared to 4.2 per cent in Q1FY15.
Weakness was concentrated in the manufacturing sec-
tor where growth fell to 0.1 per cent compared to 3.5
per cent in the rst quarter. Output growth in other seg-
ments within industry - such as electricity and mining
(that were earlier providing support) too slowed. Out-
put growth in electricity, gas and water supply slowed
to 8.7 per cent in Q2FY15 compared to 10.2 per cent
in Q1FY15. Similarly, in the mining sector too, growth
slowed to 1.9 per cent in Q2FY15 compared to 2.1 per
cent in Q1FY15. Contrary to previous expectations, ag-
riculture growth was quite strong at 3.2 per cent inQ2FY15, compared to 3.8 per cent growth in Q1FY15.
ing components. The two key enablers of growth, viz,
industrial output and investment spending, however,
continued to disappoint. The H1 growth at 5.5 per cent
has placed the economy on track to achieve our expec-
tation of full year growth of 5.5-6.0 per cent given that
the second half is likely to be better. However, the mix
in growth needs to change in favour of investments go-
ing ahead in order to move to a sustained path of higher
growth trajectory.
In 2014, south-west monsoons were decient at 12 per
cent below normal with the North-east region being
signicantly aected. Lower impact on rice production
provided a cushion to overall agricultural output. Servic-
es sector growth remained relatively resilient at 7.1 per
cent in Q2FY15 as compared to 6.8 per cent in the quar-
ter before. Community, social and personal services
component of services grew at a higher pace of 9.6 per
cent in Q2FY15 from 9.1 per cent in the previous quarter,
a signicant part of which includes government spend-
ing. However, the trade, hotels, transport component,
which comprises a lions share of GDP at factor cost is
showing gradual, but steady revival which bodes wellfor Indias employment scenario.
Q2 GDP Relatively Resilient Despite Expected
Slowdown
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ECONOMY MATTERS 14
DOMESTIC TRENDS
At market prices, however, GDP grew at 6.0 per cent in
Q2FY15, higher than 5.8 in Q1FY15. Private consumption
growth climbed higher to 5.8 per cent in Q2FY15, but
mainly pushed upwards by a low base of last year (2.8
per cent growth in Q1FY14). Government spending com-
ponent also came in strong at 9.6 per cent, which ex-
plains the April-October scal decit standing at almost
90 per cent of budgeted levels of the entire nancial
year. Consequently, this run rate of spending cannotbe sustained over the second half of the year and will
moderate sharply as the government will start cutting
its spending to rein in the scal decit target for the full
year. From the demand-side, what stood out as a major
concern was the at rate of growth posted by invest-
ment spending in Q2FY15 from 7.0 per cent growth in
Q1FY15. The capital goods sector has continued to face
the wrath of sluggish investment. This builds a strong
case for cutting of interest rates by the RBI as pick-up
in investment is crucial for having a sustained improve-
ment of growth in the medium-term. Additionally, sup-
port from external sector is waning and export growth
turned negative after four quarters of positive double-digit growth presumably on account of muted global
growth. However, the sharp fall in crude prices will help
to somewhat oset the drag.
Outlook
Despite the slowing down of GDP in the 2QFY15 owing to a steep decline in manufacturing output, the economy
does remain rm on the road to recovery as compared to the previous year. In order to boost the output in theremaining quarters of the scal, the Centre should roll out proactive policies which would help revive investments
and address the bottlenecks plaguing the agriculture and industrial sectors, a stable and predictable taxation sys-
tem, faster regulatory clearances and industry-friendly land acquisition and labour laws.
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15
DOMESTIC TRENDS
OCTOBER - NOVEMBER 2014
After remaining subdued for the last two months, in-
dustrial output growth accelerated to 2.5 per cent in
September 2014 from 0.4 and 0.5 per cent in July and
August 2014 respectively. After contracting for two
consecutive months, manufacturing output improved
to 2.5 per cent in September 2014. Capital goods output
too moved to the positive territory after languishing in
the red for the last two months. On a cumulative basis,
In contrast to overall industrial output, the core sector
output moderated to 8-month low in September 2014
on the back of dwindling production of crude oil, ferti-
lizer and natural gas. The eight core industries comprise
nearly 38 per cent of the weight of items included in the
Index of Industrial Production (IIP). In October 2014,
however, core sector output accelerated to 6.3 per
cent. This is the highest growth recorded by the index
in the last four months. The growth came on a at base.
The growth in October 2014 was driven by the coal and
the electricity industries. Both the industries recorded
a double-digit growth in output during the month. Coal
production rose by 16.2 per cent and electricity genera-
industrial output grew by 2.8 per cent in the rst half
of the current scal as compared to 0.5 per cent in the
same period last year. The sequential momentum as
indicated by the movement in the seasonally-adjusted
month-on-month series too showed that industrial out-
put growth improved in September 2014 (from -1.0 per
cent in August 2014 to 2.0 per cent in September 2014).
tion increased by 13.2 per cent. Renery products out -
put grew by a modest 4.2 per cent, after falling for three
months. The crude oil industry also returned to growth
after a gap of three months. Its output grew by 1 per
cent in October 2014. The natural gas industry, howev-
er, continued to register a fall in production for the 47th
consecutive month. Its output dropped by 4.2 per cent
in October 2014. Production of cement and fertilisers
declined too. Cement production declined by 1 per cent
and fertiliser production declined by an even steeper
pace of 7 per cent. Fertilisers production has been fall-
ing for the last ve months.
Industrial Output Grows at a Higher Pace in September
2014
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DOMESTIC TRENDS
On the sectoral front, output of the manufacturing sec-
tor, which constitutes over 75 per cent of the index,
grew by 2.5 per cent in September 2014 as compared
to contraction to the tune of -1.3 per cent in the pre-
vious month. In terms of industries, fteen (15) out of
the twenty two (22) industry groups (as per 2-digit NIC-
2004) in the manufacturing sector have shown positive
growth during the month of September 2014 as com-
pared to the corresponding month of the previous year.
The industry group Electrical machinery & apparatus
n.e.c. showed the highest positive growth of 29.9 per
cent, followed by 19.1 per cent in Other transport equip-
ment and 12.3 per cent in Basic Metals. On the other
hand, the industry group Radio, TV and communication
equipment & apparatus recorded the highest negative
growth of (-) 43.8 per cent, followed by (-) 34.2 per cent
in Oce, accounting & computing machinery and (-)
4.4 per cent in Chemicals and chemical products.
The Supreme Court ruling on coal block allocations is -
nally showing its adverse impact on electricity output.
Electricity output decelerated sharply to 3.9 per cent in
September 2014 as compared to a healthy 12.9 per cent
growth in the previous month. Mining output too slid to
0.7 per cent from 2.0 per cent in August 2014. Going for-
ward, we expect the electricity production growth to
slow down further due to shortfall in coal supply. In ad-
dition, the Supreme Court ruling on cancellation of coal
blocks allocations to 214 mines could see mining sector
growth decelerating further in the months to come.
From the use-based perspective, consumer goods pro-
duction continued to remain in negative territory. The
major part of the contraction in consumer goods was
primarily on account of sharp drop in consumer dura-
bles by 11.3 per cent. Acute rainfall deciency during
the initial phase of the monsoon season (about 30 per
cent average during June to August) has likely to have
dented farm incomes and hence demand for consumer
durables. The negative print for non-durables during
the month was also worrying. Moreover, the volatility incapital goods continued, with the sectors output grow-
ing by 11.6 per cent in September 2014 after remaining in
the negative territory for the previous two consecutive
months. Meanwhile, basic goods production slowed
down to 5.1 per cent after remaining healthy at 9.2 per
cent in August 2014.
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DOMESTIC TRENDS
OCTOBER - NOVEMBER 2014
WPI based ination moderated sharply to 5 year low of
1.8 per cent in October 2014 from 2.4 per cent in the pre-
vious month. The fall in WPI ination was attributable to
all round moderation in all its sub sectors. CPI ination
too fell to 5.5 per cent in October 2014 from 6.5 per cent
last month driven by a fall in food ination (fell to 5.6
per cent from 7.7 per cent in September 2014). Core CPI
ination remained broadly unchanged falling slightly
from 6.0 per cent last month to 5.9 per cent in October
2014. This is the lowest core ination recorded since the
beginning of the new CPI series. A signicant decline in
crude oil prices globally contributed to the downward
price pressures in transport and communication and
fuel CPI ination. We expect the moderation in both
WPI and CPI ination to give RBI the necessary legroom
to cut interest rates in its forthcoming monetary policy
in order to spur demand conditions in the economy.
OutlookThe upturn in industrial production in September 2014 underpins the perception that the growth momentum is
positive for industry and the economy is showing early signs of revival based on the feel good factor and positive
investor sentiment. We hope that going forward, the tentative signs of revival would transform into a rm recov-
ery as overall business condence is looking up and there is optimism about the change in governance conditions
pertaining to the ease of doing business. A disaggregated analysis showed a robust growth in capital goods sector
indicating some pick up in investment as companies are contemplating expansion as business environment has
turned positive. However, consumer durables are still in the red as high interest rates have stymied demand.
Another Positive Print for Ination in October 2014
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ECONOMY MATTERS 18
DOMESTIC TRENDS
Primary ination moderated further to 1.4 per cent in
October 2014 from 2.2 per cent in September 2014. Part
of the moderation was driven by a high base of last
year. Primary food ination too eased to 2.7 per cent
from 3.5 per cent in the previous month. Notably, food
ination has come down sharply in the last couple ofmonths, thanks to proactive steps taken by the govern-
ment such as release of food grain stocks, low increase
in minimum support prices etc. Amongst primary food
prices, the data showed that vegetable prices have
come down sharply to -19.6 per cent in October 2014
from -14.9 per cent in September 2014. In contrast, in-
ation in fruits has remained relatively rm at 19.3 per
cent in the reporting month as compared to 20.9 per
cent in September 2014. Primary non-food ination de-
celerated sharply to -1.4 per cent in October 2014 from0.5 per cent in the previous month. Amongst non-food
articles, ination in bres and minerals was the main
driving force behind the moderation.
Fuel ination too decelerated sharply to 0.4 per cent in
October 2014 as compared to 1.3 per cent in the previ -
ous month, benetting from a favourable base eect.
Fuel prices came o sharply tracking a fall in global
Brent crude prices, which is now trading at a two-year
low. Ination in petrol declined further to 7.0 per cent
from -9.4 per cent in September 2014. In an interesting
development, in October 2014, government de-regulat-
ed the price of diesel and announced a new price for do-
mestically-produced natural gas. The price of diesel, likepetrol, would now stand linked to the market without
any government intervention, with retail rates reect-
ing price changes in the global market. The immediate
impact on diesel will be a reduction in prices by Rs 3.37
a litre.
Manufacturing ination eased further to 2.4 per cent in
October 2014 as compared to 2.8 per cent in the pre-
vious month. Encouragingly, non-food manufacturing
or core ination, which is widely regarded as the proxy
for demand-side pressures in the economy, continued
its downward trajectory as it moderated to 2.5 per cent
during the month as compared to 2.8 per cent in Sep-
tember 2014. In the coming months, we expect core
WPI to hover around 3.0-3.5 per cent, RBIs comfort
level for this ination measure. Manufacturing food in-
ation too decelerated during the month.
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DOMESTIC TRENDS
OCTOBER - NOVEMBER 2014
In its fth bi-monthly monetary policy review held on
2nd December, 2014, RBI maintained status quo on all
key rates citing uncertainty regarding strength of the
on-going disinationary impulses, the pace of change
of the publics inationary expectations, as well as the
success of the governments eorts to hit decit tar-
gets. Moreover, the favourable base eect that is driv-
ing down headline ination currently will likely dissipate
and ination for December (data release in mid-Janu-
ary) may well rise above current levels. As per RBI, some
easing of monetary conditions has already taken place.
The weighted average call rates as well as long term
yields for government and high-quality corporate issu-
ances have moderated substantially since end-August.
However, these interest rate impulses have yet to be
transmitted by banks into lower lending rates.
With this the repo rate stands at 8.0 per cent, the re -verse repo rate at 7.0 per cent, the marginal standing
facility (MSF) rate and the Bank Rate at 9.0 per cent.
Additionally, the RBI will continue to provide liquidity
under overnight repos at 0.25 per cent of bank-wise
NDTL at the LAF repo rate and liquidity under 7-day and
14-day term repos of up to 0.75 per cent of NDTL of the
banking system through auctions while continuing with
daily one-day term repos and reverse repos to smooth
liquidity.
OutlookCII welcomes the drop in ination based on both consumer and wholesale price. Over the next 1-2 months, head -
line CPI ination could ease further due to a base eect from last scal, lower crude oil prices, revival of monsoon,
proactive measures taken by the government to keep food prices under control, and a stable currency. However,
factors such as improvement in demand conditions and rising geopolitical tensions reversing the current decline in
oil prices could derail this moderation in the coming months.
RBI Stays Put on Interest Rates
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ECONOMY MATTERS 20
DOMESTIC TRENDS
As per the RBI, economic activity appeared to have lost
some momentum in Q2, probably extending into Q3,
conditions congenial for a turnaround the softening
of ination; easing of commodity prices and input costs;
comfortable liquidity conditions; and rising business
condence as well as purchasing activity are gather-
ing. These conditions could enable a pick-up in Q4 if
coordinated policy eorts fructify in dispelling the drag
on the economy emanating from structural constraints.
A durable revival of investment demand continued to
be held back by infrastructural constraints and lack of
assured supply of key inputs, in particular coal, power,
land and minerals. The success of ongoing government
actions in these areas will be key to reviving growth
and osetting downside risks emanating from agricul-
ture in view of weaker-than-expected rabi sowing
and exports given the sluggishness in external de-
mand. Anticipating such success, the central estimate
of projected growth for 2014-15 has been retained at 5.5
per cent by RBI, with a gradual pick-up in momentum
through 2015-16.
RBI noted that liquidity conditions eased considerably
in Q3 of 2014-15 due to structural and frictional factors,
as well as the ne tuning of the liquidity adjustment
framework. With deposit mobilisation outpacing credit
growth and currency demand remaining subdued in re-
lation to past trends, banks were ush with funds, lead-
ing a number of banks to reduce deposit rates. The main
frictional source of liquidity has been the large release
of expenditure/transfers by the government. In view of
abundant liquidity, banks recourse to the Reserve Bank
for liquidity through net xed and variable rate term
and overnight repos and MSF declined from Rs 803 bil-
lion, on average, in Q1 to Rs 706 billion in Q2 and further
to Rs 476 billion in October-November 2014.
In its review statement, RBI amply indicated that if the
current ination momentum and changes in ination-
ary expectations continue, and scal developments areencouraging, a change in the monetary policy stance
is likely early next year, including outside the policy re -
view cycle.
The scal decit in the rst seven months of the currentscal (April-October) stood at Rs 4.75 lakh crore which
translates into 89.6 per cent of the budgeted gure for
the entire nancial year. The jump in scal decit was
underpinned by rise in expenditure growth and contrac-tion in revenue growth. However on a monthly basis,
scal decit declined by 19.4 per cent to Rs.369.25 bil-
lion in October 2014 as compared to the same month a
Fiscal Decit Rises to 89.6% of Budgeted in
April-October 2014
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21
DOMESTIC TRENDS
OCTOBER - NOVEMBER 2014
year ago. This was the lowest level of the decit in the
last three months. Both, expenditure and non-debt re-
ceipts declined on a y-o-y basis in October 2014. How-
ever, a sharper fall in expenditure vis-a-vis non-debt re-
ceipts led to the contraction in the scal decit.
To be sure, while presenting the rst budget of the
newly elected NDA government in July 2014, Finance
Minster (FM), Mr Arun Jaitley had laid stress on scal
prudence, lowering the scal decit target of 4.1 per
cent of GDP for 2014-15 as compared to 4.6 per cent in
2013-14. Notwithstanding, the current precarious state
of aair of government nances, the scal outlook
should brighten because of the fall in crude prices, but
weak tax revenue growth and the slow pace of disin -
vestment suggest some uncertainty about the likely
achievement of scal targets, and the quality of even-
tual scal adjustment. The government, however, ap-
pears determined to stay on course.
The decit touched almost 90 per cent of its annual tar-
get in the rst seven months of the year itself mainly
because of weakness in revenues. Total receipts stood
at Rs 4.86 lakh crore during April-October 2014, whichtranslates into only 38.5 per cent of the budgeted esti-
mates for the full year. Mirroring the sluggish economic
scenario, gross tax revenues growth too remained
weak. On a monthly basis, non-debt receipts declined
by 6 per cent to Rs.631.1 billion in October 2014 on a y-
o-y basis. While tax revenue declined by 6.7 per cent to
Rs.456.81 billion, non-tax revenue collection fell by 4.1
per cent to Rs.164.96 billion.
Total expenditure stood at Rs 9.6 lakh crore during
April-October 2014. This translates into 53.6 per cent of
the budgeted targets for the current year. While non-
plan expenditure increased by 8.4 per cent to Rs.6.95
lakh crore, plan expenditure declined by 0.4 per cent to
Rs.2.67 lakh crore. On a monthly basis, total expendi-
ture declined by 11.4 per cent to Rs.1 lakh crore in Octo -
ber 2014. This decline was entirely on account of a sharp
compression in plan expenditure, which tanked by 35.2
per cent to Rs.207 billion during the month. Non-plan
expenditure declined slightly by 2.1 per cent to Rs.793.3
billion.
The performance of the government nances has not
been up to the mark in the scal so far. It would need
to tighten its purse strings and boost revenue growth in
order to meet the scal decit target for 2014-15. To be
sure, in order to lower the scal decit to 4.1 per cent
of GDP in 2014-15, the government is betting on both
revenue and expenditure growth of 12.9 per cent as
compared to the revised estimates for 2013-14. In order
to achieve the revenue growth target, tax revenues,
which form around 80 per cent of total revenues, need
to prop up. Moreover the nature of expenditure com -
pression needs to be kept in mind as trimming of capital
expenditure will further slow down the economic re-
covery process.
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ECONOMY MATTERS 22
TAXATION
Transfer Pricing in Income Tax and Customs Valuation ofRelated Party Transactions Need for Harmonization
Transfer Pricing, a term used in the income tax
parlance, is a mechanism adopted by Multina-
tional Enterprises (MNEs) for valuing the goods
and services traded with their subsidiaries or associate
companies situated in dierent tax jurisdictions. The
income tax authorities use arms length principle in
terms of the international standard for transfer pricing,
as set out in the Organization for Economic Coopera-
tion and Development (OECD) Transfer Pricing Guide-
lines, and the Model Tax Convention. Customs address-
es the related party transactions through provisions
as mandated by the World Trade Organization (WTO)
agreement on customs valuation. The customs valua-
tion treatment of related party transactions has been
dealt with elaborately in articles 1.1 (d), 1.2 (a) & (b) and
15 of the WTO valuation code. When goods, intangibles
and services are transferred across borders within the
MNEs, transfer pricing becomes an important issue for
both the MNEs as well as for the income tax and cus-
toms authorities. Revenue administrations are naturally
concerned about transfer pricing as it inuences both
the direct and indirect taxes. Price of goods in a cross-
border transaction is the starting point for assessing
customs duties and for determining prots that arise
to each party for computing the income tax. The trans -
actions between related parties, as used in customs or
associate enterprises, as used in income tax are not al -
ways subject to the same market forces as transactions
between independent parties. As a result, the revenue
administrations are apprehensive that there is a poten-
tial for under or overpricing of the goods, thus inuenc-
ing the determination of customs duty and income tax.
There is another angle. A high transfer price reduces
the income tax liability, while low transfer price lowers
the customs duty. Thus there lies an inherent conict
of interest between the customs and the income tax
authorities. While the income tax authority may seek
to stop diversion of prots to the exporting country by
assessing lower transaction price on imports, the cus-
toms authority may prefer to determine a higher trans-
fer price on the same imports so as to enhance the cus-
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23
TAXATION
OCTOBER - NOVEMBER 2014
toms duty. There could also be a case where the same
assesses declares a lower import value to customs to
pay less customs duty, while indicating a high transferprice for the same goods so as to minimize prot and
pay less income tax.
The global business models of the MNEs are chang-
ing continuously according to the business demands.
A globalised supply chain always aims to reduce costs
and increase eciency with centralization of certain
functions, assets and risks in principal entities. In terms
of UNCTAD report, eighty percent of global trade is
estimated to be linked to the international production
networks of MNEs. Further, a substantial portion of in-
ternational trade going up to 60 per cent takes place
within the MNE Groups. The OECD BEPS (Base Erosion
Prot Shifting) report for G20 includes transfer pricing
as one of the six Key Pressure Areas.
Thus, transfer pricing is no longer an issue for devel -
oped countries only. It is becoming important for the
developing and emerging economies as well to man-
age transfer pricing well so that the revenue adminis-
trations may protect their tax base eectively, while at
the same time avoiding double taxes. While both cus-
toms valuation and transfer pricing rules set standards
for determining arms length or fair value of these
transactions, the international rules and guidelines are
dierent in the customs and income tax domains, as ex-
plained before.
The trade and industry have voiced their concern about
the diculty they face in satisfying the dierent regu-
latory requirements of both income tax and customs.
Their basic concern is that dierent rules and standards
are applied by the two departments, and the absence
of coordinated eorts could also lead to double taxa-
tion that might create barriers to trade and investment.
In this background, the international trading commu-
nity has been raising certain critical questions, some
of which are as follows: To what extent is it acceptable
to have dierent rules, merely because the policy ob -
jectives of customs and income tax departments are
dierent? How can one accept dierent answers from
two dierent authorities to the same question i.e. what
is the arms length price? Should both sets of rules
converge? And to what extent should they converge,
and towards what standard? These are the challenging
questions on the issue of transfer pricing for the incometax and customs authorities as well as the trading com-
munities all over the world.
In response to these challenging questions, the World
Customs Organization (WCO) and the OECD jointly
hosted two international conferences on transfer pric-
ing and customs valuation, at the WCO headquarters in
Brussels in 2006, and 2007, at the initiative of Mr. Kunio
Mikuriya, then Deputy Secretary General, WCO. This au-
thor had the privilege to participate in both the confer-
ences on invitation from the WCO.
In the rst joint conference, the dierences and simi -
larities between two sets of rules applied by the two de-
partments were demonstrated on the basis of compari-
son between how income tax and customs authorities
treat transfer pricing in accordance with their specic
international standards. The conference also discussed
pros and cons of the desirability and feasibility of having
converging standards for the two systems.
Two schools of thought emerged. Those who were in
favour of convergence pointed out that a credibility
question did arise if two sets of rules on value deter-
mination led to dierent answers to virtually the same
question - what is the arms length / fair value for a
transaction. They further argued that convergence
would result in less compliance cost for the trade and
less enforcement costs for the administrations. Those
from the other school of thought called for caution
against convergence. They pointed out that the two
systems are based on dierent principles while viewing
the valuation of imported goods. The transfer pricing
principles in terms of the OECD guidelines are in many
ways dierent from the principles of customs valuation
treatment outlined by the WTO valuation agreement.
Therefore, their advice was to focus more on dispute
resolution mechanisms to solve the questions that
might arise from the divergence in the two systems.
In the second joint conference held in May, 2007 theconference went more into the nitty-gritty of exploring
possible convergence. The conference recommended,
inter alia, for setting up of a focus group to suggest so-
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ECONOMY MATTERS 24
TAXATION
lutions for harmonization of the two streams of valu-
ation. At the conclusion of the conference, one found
the message to be loud and clear - convergence is de-nitely desirable, and ways and means would have to be
found to reach that goal.
As a follow-up to the second joint conference of May
2007, the focus group recommended, inter alia, that
the technical committee on customs valuation (TCCV)
at the WCO, which assists the members on various tech-
nical issues related to customs valuation may examine
the phrase circumstances of sale in Article 1.2 (a) of the
WTO valuation agreement in respect of its applicationto transfer pricing situation. This was the rst attempt
to build the bridge between OECD guidelines and WTO
valuation agreement.
The TCCV at the WCO came out with a WCO instrument
commentary 23.1 titled examination of the expression
circumstances surrounding the sale under Article 1.2
(a) in relation to the use of transfer pricing studies.
The said commentary sought to provide guidance on
the use of a transfer pricing study in determining the
customs value under Article 1.2 (a) of the agreement.
To elaborate, the said commentary provided guidance
in situations where TP Studies, prepared in accordance
with the OECD transfer pricing guidelines are produced
by importers as a basis for examining the circum-
stances surrounding the sale under Article 1.2 (a) of
the agreement. The question that arose was whether
a TP Study prepared for tax purpose, and provided by
the importer could be utilized by the customs admin-
istration as a basis for examining the circumstances
surrounding the sale. The commentary observed that
on one hand, a TP Study submitted by an importer may
be a good source of information, if it contains relevant
information about the circumstances surrounding the
sale. On the other hand, TP Study might not be relevant
or adequate in examining the circumstances surround-
ing the sale because of the substantial and signicant
dierences which existed between the methods in the
agreement to determine the value of the imported
goods and those of the OECD transfer pricing guide-
lines. The commentary nally concluded that the use of
a transfer pricing study as a possible basis for examiningthe circumstances of the sale should be considered on
a case by case basis, and that any relevant information
and documents provided by an importer may be utilized
for examining the circumstances of the sale. A transfer
pricing study could be one source of such information.
Obviously the said WCO document displayed cautions
approach with respect to harmonization of the princi-
ples laid down in the agreement and the guidelines.
Nevertheless, it is a positive move, and a good be-ginning has been made. It is now hoped that further
analytical studies would show that the customs valua-
tion treatment of related party transactions and trans-
fer pricing laws for associated enterprises do share
common principles in many areas. Common meeting
grounds can be found in the OECD arms length meth -
ods of Comparable Uncontrolled Price (CUP) method,
Resale Price Method, Cost Plus Method, Transaction
Prot Methods etc. and the methods laid down in the
articles 2,3,5, and 6 of the WTO valuation code. It hasalso to be realised that the OECD transfer pricing guide-
lines constitute a body of rules that is appropriate to
supplement the related party provisions of the WTO val-
uation code. It is however unfortunate that after show-
ing the much required urgency in two consecutive years
of 2006 and 2007, both the OECD and the WCO seem
to have slowed down in nding the path for conver-
gence. There has not been any other joint OECD- WCO
conference on the subject to take this matter forward.
There is no denying the fact that in the long-run, major-ity of the stakeholders would nd convergence to be
denitely desirable. But there is a long and bumpy road
ahead to make it feasible and there are many issues
which would need to be settled before moving towards
convergence. The organizations like WTO, WCO, OECD
and APTF (Asia Pacic Tax Forum) must pursue the dia-
logue in a proactive manner at least for harmonisation
of the two valuation treatments, if not for reaching the
ultimate goal of convergence.
Mr. Sumit Dutt Majumdar is also the author of a book titled Customs Valuation - Law and Practice (2005), published
by Centax Publications
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25
SECTOR IN FOCUS
Make in India : Turning Vision into Reality
OCTOBER - NOVEMBER 2014
The Indian manufacturing sector is a classic exam-
ple of an industry that has had great potential,
but one that has been systematically done in
by political ineectiveness, entrepreneurial myopia
and sheer ignorance of what it takes to succeed. Over
the last 20 years, Indian manufacturing has by and
large grown at the same pace as our overall economy.
Our share of global manufacturing has grown from0.9 to 2.0 per cent during this period while our GDP
share has grown from 1.2 to 2.5 per cent. Despite this
encouraging growth, however, the relative share of
manufacturing in the Indian economy has remained
unchanged, dashing hopes of an economy based on
manufacturing-led growth. The sector accounted for 15
per cent of GDP in 1993, a rate that remains about the
same today. Meanwhile, several Rapidly Developing
Economies (RDEs) have increased their share of manu-
facturing to above 20 per cent of their GDP, in particu -
lar Thailand (34 per cent in 2012), China (32 per cent),Malaysia (24 per cent), Indonesia (24 per cent) and the
Philip-pines (31 per cent).
In India, the number of jobs in the sector has also re-
mained low over the last twenty years, increasing only
by 1.8 per cent per year from 37 and 53 million. This con-trasts with the services sector, which has increased by
6.5 per cent per year during the same period, growing
its share of Indias labour force from 22 to 31 per cent
and now accounting for 150 million jobs (compared to
approximately 80 million in 1993).
In this context, the recently announced Make in India
policy by the new government aims to push manufac-
turing growth to the next level. In the recently conclud-
ed CII 13thManufacturing Summit 2014, a report titled
Make in India: Turning Vision into Reality prepared
by CII and BCG was released. We cover the crucial in-
gredients required to make this vision into reality as
discussed by the report in this months Sector in Focus.
Current State of Manufacturing
Over the last ve years, there has been a reversal of
sorts to this manufacturing trend, with Indian manu-
facturings share of GDP falling from 2.2 to 2.0 per cent
between 2009 and 2013, even as the countrys share of
global GDP grew from 2.2 to 2.5 per cent over the sameperiod. At the current rates of underperformance, the
sector will fall well short of the target set by the Nation-
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SECTOR IN FOCUS
al Manufacturing Policy (NMP) of 2012. While the policy
set out plans for the sector to reach 25 per cent of GDP
and create 100 million additional jobs by 2022, the sec-
While the historic performance of the manufacturing
sector has been below par, with es-pecially poor results
over the past ve years, the mood in India across the
broader industrial sector has started to shift over the
past six months, thanks to election of a stable govern-
ment at the centre along with set of specic actions de-
signed to rejuvenate manufacturing announced by the
new government. At the forefront has been the Make
in India campaign, which is aimed at creating 100 mil-lion jobs over the next decade and bringing manufactur-
ing up to 25 per cent of Indian GDP. Specically, these
include:
- Investment to foster innovation and new technolo-
gy development, including a USD 1.2 billion invest-
ment to develop smart cities and the creation of a
USD 16 million development fund;
- Actions to facilitate Foreign Direct Investment, in-
cluding an increase of the FDI cap to 100 per cent
in railways and to 49 per cent in defence and insur-
ance;
- Actions to foster project execution, including the
reforms of approval and clearance requirements
and processes, including the rolling out of an online
system designed to speed up approvals for devel-
opment projects that might have environmental
impacts;
- New policies to facilitate the expansion of Mi-
cro Small and Medium Enterprises (MSME) and
tors contribution to GDP has fallen from 16 to 15 per
cent, with fewer than ve million incremental jobs hav-
ing been added to the economy over the past ve years.
increase the focus on innovation, including the
launch of a INR 10,000 crores venture capital fund
dedicated to MSMEs; and
- Actions to enhance skills and job creation in lead-
ing manufacturing sectors, including automobiles,
chemicals and textiles.
Making Make in India A Reality
at a more opportune time. The global economy is on the
path to gradual, yet denitive recovery. The country has
had a change of guard with a clear majority and whole-
hearted support. The overall mood is one of develop-
ment and progress. No wonder then, that the PMs call
to action has received an overwhelming response from
both Indian and global industrialists and investors. To
achieve a manufacturing led transformation, India
would need to undertake a well- planned and struc-
tured approach. Even as we go about xing the basic
factors around infrastructure, the ease of doing busi-
ness in this country and related government policies,
there is a need to actively plan for and pursue long
term goals of fostering technology and innovation.
The road to global leadership requires a structured ap-
proach across three levels:
1. Revive manufacturing;
2. Gain global competitiveness;
3. Claim global leadership.
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SECTOR IN FOCUS
OCTOBER - NOVEMBER 2014
Revive Manufacturing
GETTING INFRASTRUCTURE EXECUTIONRIGHT
Infrastructure is the backbone of any economy, and is
arguably the single most important factor that sepa -
rates the leaders from the laggards. The right infra -
structure not only ensures an eective supply chain and
key inputs feeding into the manufacturing process,
but also creates a seamless link across production hubs
and end marketsboth domestic and global.
Unfortunately, India lags behind in this key area. Over
the past few decades, while momen-tous growth rates
have fuelled Indias emerging economic prowess, the
country has lacked the corresponding investment in
DRIVING LABOUR REFORMS
Employment growth during 2004-05 to 2011-12 clockedonly 0.5 per cent, compared to 2.8 per cent during the
period of 1999 to 2005. This situation will not change,
unless manu-facturing leaders feel more condent of
hiring and increasing the size of their rms. Today,
the average manufacturing leader is wary of increasing
the size of his permanent workforce, because of inabil-
ity / diculty in downsizing if required, and the signi-
cant managerial eort that goes into managing govern-
ment authorities or unions. As a result, the proportion
of temporary and contract sta in the workforce is
very high. Also, man-ufacturers are open to outsourc-ing labour-intensive operations to SME suppliers who
would then suer from lack of scalewhich would hurt
in the longer term.
infrastructure development. Today, we are left with
a sorry state of transit systems and almost all pillars of
infrastructure in India have been marred by under-capacity and poor execution. The power sector is in an
abysmal state, with widespread capacity constraints
since long and overdependence on non-renewable
sources of energy. The transportation sector has been
crippled by poor quality of public transport, roads and
rolling stock in railways. The average operating speed
of freight trains in India is around 25 km/hr, which is less
than half of that in the US and Germany. Indian ports
have a turnaround time which is more than twice that of
China. The Indian road network is severely inadequatefor supporting a burgeoning economy. The real estate
sector has suered from large delays in projects and un -
der-investments.
Unless this central issue of managerial condence in
increasing workforce size is addressed, all plans for
manufacturing growth will be dicult to implement.The government has started addressing this issue.
For example a unied Labour Identication Number
(LIN) for simplifying business regulations and securing
transparency and accountability in labour inspections
has been announced. The wage ceiling for Employees
Provident Fund (EPF) has been increased from INR
6,500 to INR 15,000. While these are indeed welcome
and much needed initiatives, still more reforms are re-
quired to truly unlock the potential of Indias vast hu -
man resources.
EASING DOING BUSINESS
Even after two decades of economic reforms, India has
been struggling to provide the right environment and fa-
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Gain Global Competitiveness
BUILDING AN EXPORT ECO-SYSTEM
Reviving the domestic manufacturing sector to better
cater to domestic demand is a critical but incomplete
solution. Countries successful in manufacturing have
also correspondingly boosted their share in global
trade. If India wants to become a preferred manufac -
turing hub, the government would need to create an
ecosystem for exports powered by policy reforms, in -
vestments and infrastructure.
DEVELOPING AN INFRASTRUCTURE WHICHSUPPORTS EXPORT GROWTH
There is an urgent need to develop export focused in -frastructure in India. Under-capacity and mismanage-
ment in Indias transit and power systems needs to be
addressed. To encourage global trade, ports would
require higher capacity and streamlined processes.
Their linkage to inland transportation for the seam-
less movement of goods also calls for an upgrade. The
development of industrial corridors and smart cit-
ies would provide a stimulus to the growth of a glob -
ally competitive manufacturing sector. Policy reforms
for simplica-tion of tax regime and promotion of ex -
ports would further help boost Indias share in global
merchandise trade. Brand India would also need to be
strengthened across the globe for an increased accept-
ance and preference for Made in India products.
ATTRACTING INVESTMENT
Industrial Production growth has high correlation with
FDI inows. The eect of FDI on economic development
ranges from productivity increase to enabling greater
technology transfer. Higher FDI inows are central for
India to transcend from 5-7 per cent growth to 10-12 per
cent growth. India currently fares poorly on FDI when
compared its global peers. On a per-capita basis, cumu-
lative FDI equity inows from April 2000 to April 2014
for India is just USD 183 compared to USD 2,017 and USD
1,531 for Mexico and China respectively.
The Indian government has already started taking
steps in this direction to revive manufac-turing sector
growth. The recent move of the government to relax
the cap on FDI in the de-fence and construction sector
is a welcome step in this regard. Already we are witness-
ing early rewards. More changes like an increase in FDI
cap, and the elevated investor condence due to the
new government are expected to cause FDI inow to
cross USD 30 billion in 2013-14 as against USD 24 billion
in 2013-14.
BETTING ON TECHNOLOGY ANDINNOVATION
Indias current standing on innovation and research isnot a desirable one. India has one-fth the number of
researchers per million as compared to China and even
lesser proportion as compared to developed coun-
cilities for its businesses. The eort and time consumed
in India for starting a business, dealing with construc-
tion permits, gaining access to electricity, register-ing
property, paying taxes, enforcing contracts or resolving
insolvency is higher than most other countries.
A study undertaken by the World Bank on Ease of do-
ing Business reects a similar story, where India sits at
the bottom of the pile at Rank 142. In addition to issues
related to domestic business infrastructure, the pro-
cess of getting approvals for exports in India is quite
outdated and highly time consuming. The cost involved
in the process is higher than even in some developed
countries.
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SECTOR IN FOCUS
OCTOBER - NOVEMBER 2014
The US has always led other countries in embracing
new technologies. To make shale gas revolution a huge
success, federal programs played an active role along
every phase of the innovation pipeline. China has also
realised the need for innovation for sustaining its manu-
facturing sector growth. Chinese industries saw sys-
tematic transfer of technology after indigenisation was
promoted in the country. China now accounts for 24
per cent share in the worlds high technology manufac-
turing compared to the US share of 27 per cent.
Claim Global Leadership
Once the foundation is built to revive manufacturingand competitiveness driven across key sectors, achiev-
ing global leadership will be a function of two aspects:
Global competitiveness once achieved needs to be ex-
panded to more sectors to build the ecosystem in gen-
eral and also be defended aggressively. China is a per-
fect example of a nation that rst established its mark
as a cheap source for labour intensive, low technology
goods (for example, cotton-based base oerings in ap-
parel), but has slowly made a mark for technology in -
tensive, complex products as well (for example, aero-
space, electronics, power equipment, etc.). This would
involve continuous investment in infrastructure and
technology.
India will not be able to realise her true potential in
manufacturing unless there is tangible change in two
specic mindsets:
Changing the Consumers Mindset About Made in In-
dia Products.Made-in-India products are not ranked
as high as products made in international locations. The
so-called Made in China discount that the country suf-
fered with has also been systematically been done away
with. Addressing mindsets of Indian consumers rst,
and then international markets is critical to driving ac -
ceptance of Made-in-India goods.
Moving the Entrepreneurs Mindset from Medium-termValue Creation to Long-term Visionary Transforma-
tion. According to a global study conducted by Egon
Zehnder, Indian businesses tend to think more short-
term compared to their global counterparts. In such a
scenario, building structures and putting processes in
place take a backseat. Such a near sighted approach
inevitably takes a toll on their ability to invest in R&D,
innovation, capability building and other such invest-
ments with long term payos. Addressing this mindset
and driving investments in capabilities that will have alonger-term payo is critical to upgrading Indias per-
formance capabilities.
tries (see below graph). High-technology exports from
India form less than seven per cent of the total ex-
ports, while for most other countries the number is in
mid-twenties. Indias number of patent applications and
R&D expenditure also stands nowhere close to that of
the developed countries.
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SECTOR IN FOCUS
ConclusionThis is truly a time of great expectations for India, and this is probably the only time in recent past where our
odds of driving breakout growth in manufacturing are very high. We have a strong, pro-industry government,
global economy is picking up, and our core advantages are still strong and relatively unaected from the global
slowdown. Having said that, there is a long journey ahead of us, one that starts with reviving the industry, and
then achieving global competitiveness followed by claiming global leadership. A good start has been made with
the government announcing its intent and making a few small yet important changes to improve manufacturing
sector. The next year is crucial to implementing the announcements well, and seizing the opportunity to make the
right investments at a company level.
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FOCUS OF THE MONTH
Trade: Policy & Performance
OCTOBER - NOVEMBER 2014
India saw its foreign trade expand remarkably in the
past decade. Although, the pace of exports growth
was punctuated twice by sharp slowdown in world
economy during 2008-09 and during the last two s -
cal years, Indias trade prospects have continued to
grow over time. In scal year 2003-04, Indias exports
were worth US$64.0 billion. By 2013-14, they more
than quadrupled to US$312.6 billion. In the current s-
cal, cumulative exports have reached US$189.8 billionin the rst seven months of the scal (April-October
2014) as compared to US$181.2 billion in the same pe -
riod last year, thus registering a growth of 4.7 per cent.
On a monthly basis, exports shrank for the rst time in
seven months in October 2014, tempering hopes for an
export-led recovery. Exports contracted by 5 per cent
on y-o-y basis to US$26.1 billion in October as against
2.7 per cent growth recorded in the previous month.
With the Japanese economy now in recession and the
Euro Zone irting with one, overseas demand for Indianexports has become a little uncertain. A high base ef-
fect of last year was also partly responsible for the con-
traction in exports in October 2014. For the rest of this
scal year, the base eect is likely to turn favourable
as export growth fell sharply in the period November
2013-April 2014. Given that the Indian currency has re-mained broadly stable for the past few months, global
growth prospects have become an important variable
for exports. At a disaggregate level, engineering, pe-
troleum and gems & jewellery which accounted for
58 per cent of total exports, contracted by (-) 9.2 per
cent, (-) 0.16 per cent and (-) 2.25 per cent respectively.
Imports grew by 3.6 per cent in October 2014, a sharp
slowdown from 26 per cent growth registered during
September 2014. On a cumulative basis, imports grew
by 1.9 per cent during April-October 2014. In terms of
key imports, gold imports jumped to 106.3 tonnes (US$
4.2 billion) in October the highest monthly imports this
scal year, from 26 tonnes (US$1.1 billion) a year ago.
Higher demand spurred by the festive season and low
prices (Rs 1222.5/troy ounce vis-avis Rs 1316.2/troy ounce
a year ago) is likely to have led to the rise