ECONOMY MATTERS

FOREWORD

hinas GDP held steady at 7 per cent in the second quarter despite signs of economic gloom.
However, there are enough tell-tale signs on the horizon which indicate the rising stress in
the Chinese economy. The mid-August 2015 devaluation of the Yuan in a bid to boost its exports growth is one such sign. The after-effects of this event were felt in the global markets in the
subsequent days to come. Indian markets were no different. Yuan devaluation could hurt our export
competitiveness by making Chinese goods cheaper. Our exports are already under stress, recording
its eighth consecutive monthly decline in July 2015. Textiles and clothing the two segments which
had already experienced sluggish growth due to global slowdown in demand are expected to face
further pressure as these sectors compete directly with China. However, in these adversarial times,
there are benefits to accrue for Indian economy in the form of cheaper commodities prices, which
promises to keep our twin-deficits under check.

Moving over to domestic economy, impressive 7 per cent GDP growth at the onset of the first quarter of the current fiscal, which is higher than 6.7 per cent experienced in the same period last year,
bolsters the perception that the economy is showing signs of a turnaround and is on the road to recovery. While there is a recovery in construction activity as well as trade, hotels, transport and communication, the disaggregated numbers indicate some weakening in output of agriculture, mining
and manufacturing . On the expenditure side, a pick-up in private final consumption expenditure is
noteworthy even as a drop in government final consumption expenditure points towards efficiency
in containing unproductive government expenditure. However, the slow growth of capital formation
is a matter of concern.
Going forward, CII expects some pick-up in investments as the impact of measures taken by the
government towards de-clogging the project pipeline would be visible in the months ahead. At the
same time, the government should continue to push critical reforms and take pro-active steps to
effect simplification of procedures, ensure transparent and flexible tax system and work towards a
political consensus for ensuring early passage of GST, labour laws etc, which would rev up business
confidence and would help ramp up demand in the economy. On the monetary side, the RBI should
ease its monetary policy stance and cut interest rates in its forthcoming monetary policy. On balance,
in FY16, CII is projecting a base case of 7.8 per cent growth, given that there is some uncertainty
related to agricultural growth. However, in a more positive scenario, where agriculture grows at 3.0
per cent, industry at 7.0 per cent and services at 10.5 per cent, GDP growth is expected to come at
8.2 per cent.

Chandrajit Banerjee
Director General, CII

JULY-AUGUST 2015

JULY-AUGUST 2015

EXECUTIVE SUMMARY
Global Trends

nations. The existence and development of an adequate

power infrastructure is essential for the sustained growth

The US Q2 2015 GDP was revised upwards to 3.7 per cent

of the Indian economy. The Indian power system is the

on q-o-q basis (annualised), beating the market expecta-

fifth largest in the world and among the most complex.

tion of a 3.2 per cent q-o-q (annualised) expansion and

With an annual electricity production of 1,031 billion units

significantly higher than the advance estimate of 2.3 per

(BU), it is among the top five power consumers across the

cent q-o-q (annualised). However, on year-on-year basis,

globe, and the demand is expected to touch 1,900 BU by

growth came lower at 2.7 per cent in the second quar-

2020. Growth in industrial activities, population, economy,

ter as compared to 2.9 per cent in the previous quarter.

prosperity and urbanisation, along with rising per-capita

The increase in real GDP in the second quarter in annual-

energy consumption, has widened the gap of energy ac-

ised terms reflected positive contributions from personal

cess in the country. While almost 61 per cent of the power

consumption expenditures (PCE), exports, state and local

generated is from coal, India is looking to alter the genera-

government spending, non residential fixed investment,

tion mix in the years to come, focusing on a low-carbon

residential fixed investment, and private inventory invest-

growth strategy, although coal production continues to be

ment. The strong growth number is in tandem with the im-

on the agenda of policymakers. In this context, CII in as-

proved data prints seen moving into the second quarter.

sociation with its Knowledge Partner, PwC India released

Labour market recovery has shown significant improve-

a report on Changing rules of Indian power sector: Em-

ment (strong job gains and low unemployment) and con-

powering the economy against the backdrop of the Sixth

sumer spending has improved on average (despite mixed

Edition of Energy Conclave 2015: Transforming the Energy

data prints recently). However, tepid wage growth and

inflation continue to remain a hurdle.

Sector through Policy, Regulation and Technology organ-

Domestic Trends

the report are covered in this months Sector in Focus.

ized by CII on 12th August, 2015 in Kolkata. The excerpts of

GDP growth decelerated to 7.0 per cent in 1QFY16 from

Focus of the Month : Analysing Indias

Trade Performance

7.5 per cent in the previous quarter, albeit tad higher than
the 6.7 per cent posted same period last year. However,

India stands to miss the export target of US$310 billion for

on gross value added (GVA at basic prices) basis, the first

the current fiscal with shipments contracting for the eighth

quarter print came higher at 7.1 per cent as compared to

consecutive month in July 2015. A slump in global demand

6.1 per cent in the previous quarter. Further, on the indus-

coupled with the Yuan devaluation making Chinese prod-

trial production front, growth inched up to 3.8 per cent

ucts cheaper, reducing the competitiveness of Indian

in the month of June 2015 as compared to 2.5 per cent in

goods in the global market has worsened the prospects

the previous month. On the sectoral front, manufactur-

of Indian exporters. While following a fairly stable trend

ing growth picked up sharply to 4.6 per cent as against 2

till 2014, trade balance has particularly worsened since De-

per cent in May 2015 and is the eighth consecutive positive

cember 2014. The share in exports of Petroleum Crude &

print. The recent spate of GDP and industrial production

Products and Ores and Minerals has tumbled down, while

data released reaffirms our view that the economy is show-

that of Textiles and Allied Products and Chemicals and

ing signs of a turnaround and is on the road to recovery.

Related Products has improved. The exports of Machin-

Going forward, we expect some pick-up in investments as

ery and Electronics Items need immediate attention. The

the impact of measures taken by the government towards

share of Petroleum Crude & Products in total imports has

de-clogging the project pipeline would be visible in months

been contained since December 2014. While the share in

ahead. Meanwhile, inflation, as measured by both CPI

imports of Machinery rose marginally in the recent months

and WPI, has continued to remain subdued, helped by the

in tandem with the ambitious Make in India campaign, it

benign crude oil prices. However, the eighth consecutive

needs to rise further in order to improve capital infrastruc-

monthly decline in merchandise exports in the month of

ture in the country. The share in imports of Agri and Allied

July 2015 remains a matter of concern. It partly reflects the

still depressed global demand.

Products also rose sharply in the recent months. According

Sector in Focus: Changing Rules of Indian

Power Sector-Empowering the Economy

past, India is now entering into a recovery phase. It how-

to the government after a slowdown phase in the recent

ever needs to immediately step in and chalk out a strategy

Power is one of the most critical components of infra-

for giving a competitive edge to Indian exporters.

structure, affecting economic growth and the wellbeing of

ECONOMY MATTERS

GLOBAL TRENDS

Emerging Troubles in Chinese Economy

growth of 10.4 per cent in 2010. Since then, the Chinese economy has decelerated by almost 30 per cent.
Major downturn occurred in 2011 and 2012 when GDP

growth was recorded as 9.3 per cent and 7.7 per cent
respectively. The economic growth slowed down to 7.4

fter three decades of phenomenal growth

per cent in 2014 firmly ending the period of overheated

which led to the greatest poverty alleviation

growth rate.

program lifting more than 500 million peo-

ple out of poverty, China recorded its last double digit

JULY-AUGUST 2015

GLOBAL TRENDS
Current official statistics of China indicates that the

Interest rates were aggressively cut once again in

economy is growing at 7 per cent a year. However, it is

response to the slowdown in economy in 2014; the

hard to believe the official figures as the data released

increased liquidity simply went to over-leveraged bor-

is often strategically manipulated and hence considered

rowers. Naive borrowers like real estate developers,

unreliable.

local government etc could no longer repay their loans

There is ample evidence which indicates the stress Chi-

as the money went into unprofitable projects. Hence,

the practice of margin trading was the very reason

nese economy is going through. The following troubles

why stock markets surged in mid-2014 even when the

in China provide warning signs for the policymakers and

economic growth was slowing and then collapsed sud-

explain as to why the situation is worrisome.

denly out sizing the losses.

I. Debt Binge

Chinas total debt doubled within five years. Chinas

In an effort to revive the economy in the wake of 2008

debt to GDP ratio increased dramatically from 150 per

crisis, the cost of borrowing was reduced in order to fas-

cent in 2008 to 282 per cent at present - the highest

ten the pace of growth. As a consequence, today when

among all emerging economies. Some cynical views

it comes to reckless money creation, China tops the list

also anticipate that this borrowing binge will lead to

because people started buying stocks using borrowed

default by many Chinese property developers. Moreo-

money, the practice known as trading on margin.

ver, dollar debt may also increase in case the Fed finally
raises the interest rates.

Since rise in borrowing prepared the way for most fi-

released by National Bureau of Statistics. More than 60

nancial crisis in world history, the alarming rise in debt

million houses are empty waiting for the buyers. As an

levels serves as a warning sign for China.

attempt to stabilise the market, policymakers injected

liquidity in the market by cutting interest rates, but the

II. Housing Slump

issues of liquidating the excess inventories remain uncertain. Real estate sector accounts nearly one quarter

The falling property prices are one of the foremost rea-

of GDP hence it is very important for the Chinese gov-

sons for Chinas declining economic growth. Private sec-

ernment to take steps in order restructure the sector

tor home prices fell in 68 of 70 cities according to data

ECONOMY MATTERS

even if it suppress the short-term growth.

6

GLOBAL TRENDS
III. Devaluation of Yuan

out of surplus labour. Rising costs have also led to rise in

prices thereby increasing the consumer price inflation.

China devalued its currency by 2 per cent on August

V. Plummeting exports

11th, to a three year low against dollar, an attempt to revive countrys exports. This could however lead to more

Chinese exports have been continuously falling since

harms than benefits. Firstly, China is already the worlds

November 2014. Exports fell by 8.3 per cent in July 2015

largest exporter and is not expecting to gain more mar-

with the highest fall recorded in May 2015 when exports

ket share. Moreover, export led growth has not been

dropped down by 20 per cent. Once the fastest growing

the case from the past decade. Currency devaluation

economy in the world, China lost its top position due

will lead to only a marginal export growth because the

to worsening of exports led by subdued global demand

root cause of plummeting exports lies in the global

and overvalued currency. An attempt to restore com-

slowdown of demand. Secondly, currency devaluation

petitiveness and moving closer towards the flexible ex-

might trigger capital outflow due to volatility concerns

change rate regime, the countrys Central Bank took the

in the stock market. Earlier, investors centred their in-

decision to devalue yuan by 2 per cent against the U.S

vestment decisions around predictions for government

dollar, biggest devaluation in past two decades. How-

policy given a strong exchange rate.

ever, there are bigger challenges other than exchange

IV. Rising Labour Costs

rate for exporters like subdued domestic and global demand along with rising labour costs at home.

China, considered as the factory of the world is facing a

VI. Demographic Challenges

rise in labour costs. Wages are growing at a faster rate

compared to other countries with low manufacturing

China is already an aging society, aging faster than ex-

costs. Since 2001, hourly manufacturing wages have

pected. So, the demographic advantage that China en-

risen by an average of 12 per cent a year. Countrys one

joyed in its years of rapid growth is largely exhausted.

child policy, introduced in 1979 has now started to bite

With substantial decline in young labour, demographic

as cheap labour supply is shrinking fast. According to In-

fortunes have started to reverse. With shrinking work-

ter China Consulting, a consultancy for companies doing

force, increase in productivity becomes imperative.

business in China, country has reached a turning point

Hence, for China it is necessary to implement education

where it could no longer be considered as low labour

reforms to make workers more skilled with greater abil-

cost production base. The dramatic increase in wages in

ity to innovate.

the past four years indicates that the country is running

JULY-AUGUST 2015

GLOBAL TRENDS

Impact on India
China is Indias top trading partner; the emerging troubles in Chinese economy will undoubtedly have an impact on India. Being the worlds second largest economy, any distress in Chinese economy has the potential
of spill over effects on the rest of the world thereby
producing repercussions for India.

calls for a boost in exports with depreciating currency,

but with global demand slowdown that case is very
unlikely. Devaluation of yuan has further eroded the
competitiveness for Indian exports by making Chinese
goods cheaper. Hence, Indian exporters will experience
a fall in their margins. Textiles and clothing are two segments which already experienced sluggish growth due
to global slowdown in demand will undergo further
pressure as these sectors compete directly with China.

Rupee volatility is one of the concerns; devaluation of

Chinese currency has raised the demand for dollar and
hence causing depreciation of rupee. Some of the impacts are:

Apart from the adverse effects, there are also some

benefits which India can reap:

The fall in rupee would increase our import bill.

China is a major consumer of Copper, Aluminium,

and Steel. A fall in its commodity demand will reduce commodity prices, thus lowering the import
bill of India as it imports 3 billion dollar of copper
and copper products.

This will lead the Central Bank to delay the cut in

interest rates, hence constraining the economic recovery of India.
Increased possibility of currency war as both the
countries compete for a share in already subdued
global export market.

China accounts for more than 10 per cent of crude

oil consumption. A fall in its demand will also cause
the prices of crude oil to fall.

Increased risk of Chinese goods being dumped in India at low prices or even below the cost of production.

India can also take advantage of the rising labour

costs in China by implementing a right policy mix to
increase its global manufacturing share.

However, since our macroeconomic situation is strong

enough with adequate foreign exchange reserves in
place, the impact of cheaper yuan on rupee is considered temporary by the Finance ministry of India. Other
major concern is the impact on Indian exports. The export sector was already in stress with exports shrinking
from the past eight months. Although the general trend

ECONOMY MATTERS

One of the immediate advantages includes capital

inflow as the continuing volatility in China leads
investors to take a risk- off position. Hence Indian
stocks could find it easier to attract foreign institutional investor money.

GLOBAL TRENDS

U.S. Second-Quarter GDP Growth Revised Higher

The US Q2 2015 GDP was revised upwards to 3.7 per
cent on q-o-q basis (annualised), beating the market
expectation of a 3.2 per cent q-o-q (annualised) expansion and significantly higher than the advance estimate
of 2.3 per cent q-o-q (annualised). However, on year-onyear basis, growth came lower at 2.7 per cent in the sec-

ond quarter as compared to 2.9 per cent in the previous

quarter. Comparing growth figures over the first two
quarters, reaffirms the wearing off of transitory factors
(weather related) that weighed on Q1 2015 growth. The
Q1 2015 GDP growth stood at 0.6 per cent q-o-q (annualised).

The increase in real GDP in the second quarter reflected

positive contributions from personal consumption expenditures (PCE), exports, state and local government
spending, non residential fixed investment, residential
fixed investment, and private inventory investment.
Imports, which are subtraction in the calculation of
GDP, increased. The acceleration in real GDP in the second quarter reflected an upturn in exports, an acceleration in PCE, a deceleration in imports, an upturn in state
and local government spending, and an acceleration in
non-residential fixed investment that were partly offset by decelerations in private inventory investment, in
federal government spending, and in residential fixed
investment.

growth and inflation continue to remain a hurdle.

The upward revisions to second-quarter GDP growth

also reflected the accumulation of US$121.1 billion worth
of inventories, US$11.1 billion more than previously estimated. That meant inventories contributed 0.22 percentage point to GDP instead of subtracting 0.08 percentage point as reported last month

The improving growth scenario and labour market conditions will keep the Fed on track for interest rate hike
in months to come. However, subdued inflation (both
PCE and CPI continue to lie well below Feds 2 per cent
inflation target) have reduced significantly the odds
of a September interest rate hike. Further, comments
by Fed official William Dudley and the relatively dovish
tone of the FOMC minutes (of July policy meeting) dim
the outlook of the same. Additionally, a December policy tightening will provide room for the Fed to gauge if
recent improvements are sustainable.

To be sure, US non-farm payrolls (NFP) increased by

215K in July. The June print was revised higher to 231K
(from 223K earlier). The May print was revised significantly higher as well, taking the total May-June revisions to +14K. Meanwhile, the less volatile three-month
average NFP print picked up to 235K. According to the
household survey data, the unemployment rate remained steady at 5.3 per cent (its lowest level since May
2008). However, the U-6 unemployment rate (which is
a broader measure that includes part-time and discouraged workers) maintained its steadily declining trend
and fell to 10.4 per cent. Meanwhile, the labour force
participation rate remained unchanged at 62.6 per cent.

The strong growth number is in tandem with the improved data prints seen moving into the second quarter. Labour market recovery has shown significant improvement (strong job gains and low unemployment)
and consumer spending has improved on average (despite mixed data prints recently). However, tepid wage
9

JULY-AUGUST 2015

DOMESTIC TRENDS

Making the Great Digital Leap Forward

The trinity of Jan Dhan-Aadhaar-Mobile (JAM) points

towards a mobile-first, cloud-first India. The shift from
e-governance to m-governance will help India leapfrog
to the next level.

Going forward, the focus on new and emerging technologies like the Internet of Things (IoT) and Internet
of Everything (IoE) will help India transform into a land
of smart cities. One of the relatively recent additions to
the ICT space e-commerce is fuelling a new wave
of innovation. The collective set of developments in the
ICT arena will help India march along the road to development.

he Jan Dhan-Aadhaar-Mobile trinity along with

the e-commerce wave will fuel the innovation we
need

Most social transformations occur on the pretext of a

massive revolution, be it the industrial revolution or the
digital revolution. Riding on the backbone of Digital India, the Union government is committed to transforming India into a digitally empowered, knowledge-based,
inclusive society.

Digital India launch took off with the promise of 4.5 trillion investments and 1.8 million jobs. This is a time for
new initiatives, new mindsets, new processes and new
partnerships.

The Digital India vision has placed technology at the

core of our lives. Speedy implementation of the National Fibre Optic Network will enable more rural communities to benefit from the ecosystem of services that can
make governance more effective.

ECONOMY MATTERS

Towards Digitalising
A few suggestions may help to chart out the road to
Digital India. First, the identification of successful pilot
projects by the public and private sectors must be done
10

DOMESTIC TRENDS
as best practices in the ICT space across the country.
The scaling up and rollout of these projects will provide
a fillip to Digital India.

vices, enable innovations to increase uptake of Aadhaar

services and applications, and stress upon the adoption
of Aadhaar services.

Second, given Indias size and demographics, providing

digital reach to the people at the right price is one of
the most piquant issues we face. Bringing every citizen
on the digital backbone will increase empowerment
and inclusion. Reaching out to the 2.5 lakh villages as
envisaged in the plan will require intent, innovation and
investment. Increasing the pace of rural penetration,
internet and broadband penetration, and adoption of
the mobile in the socially relevant services of education,
healthcare, banking and financial services along with mgovernance will drive India a long way.

Developing Business Models

Fifth, tackling structural issues and developing business
models for Digital India is important. The technology
projects should be driven on an outcome-based approach, the adoption of latest technology should be
prioritised, and there should be optimised usage of existing resources and a mechanism to share ideas. Innovation and inclusiveness should be encouraged.
Sixth, strong demand-side fundamentals comprising
a burgeoning, upwardly mobile middle-class, high disposable incomes and the evolution of an online marketplace model bode favourably for the growth of the
e-commerce sector in India, which is estimated to reach
US$24 billion in 2015 and scale US$100 billion before
2020.

Third, it is crucial to achieve digital literacy for all citizens. There is a need to create a common definition of
digital literacy, identify metrics and set clear targets and
specific milestones in order to develop a digital workforce.

The governments, both at the Centre and the State levels, should work out favourable taxation policies and
regulatory frameworks, and an ICT infrastructure conducive to attract investments.

There has to be focus on content creation, awareness

and distribution. The public services must be digitised
so that citizens have easy access. It is important to support the self-employed and unorganised sector, as well
as public-private partnership.

Indias growth in the years ahead will be dependent on

the rate at which we transform digitally. Both, the government as well as the industry will have to play a key
role in the transformation process as the nature of the
technology is disruptive and high level innovation is required in the path ahead.

Fourth, Aadhaar will play a crucial role in Digital India.

In order to leverage its true potential, the government
must enable policy frameworks to streamline usage of
Aadhaar, generate awareness on Aadhaar-based ser-

This article appeared in The Hindu Business Line dated July 24, 2015. Online version of the article can be accessed from:
http://www.thehindubusinessline.com/opinion/making-the-great-digital-leap-forward/article7461111.ece
11

JULY-AUGUST 2015

DOMESTIC TRENDS

GDP Growth in 1QFY16 Grows at an Impressive Rate

GDP growth decelerated to 7.0 per cent in 1QFY16 from

the perception that the economy is showing signs of a

7.5 per cent in the previous quarter, albeit tad higher

turnaround and is on the road to recovery. Going for-

than the 6.7 per cent posted same period last year.

ward, we expect some pick-up in investments as the im-

However, on gross value added (GVA at basic prices)

pact of measures taken by the government towards de-

basis, the first quarter print came higher at 7.1 per cent

clogging the project pipeline would be visible in months

as compared to 6.1 per cent in the previous quarter. The

ahead.

nominal GDP and GVA at current market price showed a

Looking ahead, the macro-economic prospects for the

steep decline in the quarter under review. The nominal

Indian economy have improved considerably in the last

GDP slipped to 8.8 per cent in the first quarter from 13.4

few months. GDP is estimated to inch up to 7.8 per cent

per cent a year ago while the GVA growth rate nearly

in FY16. There are a number of factors that can be at-

halved to 7.1 per cent from 14 per cent last year.

tributed to the initial signs of recovery in the economy.

It is worth noting that, GDP has undergone significant

Global crude oil prices remains low, thus helping to

changes in methodology and the base year has been

partially offset the major stress points in the economy

changed as well.

namely inflation and twin deficits. To top it, a multi-

We at CII feel that the GDP growth at 7 per cent in the

dimensional reform agenda enunciated by the govern-

1QFY16 is impressive, as it is higher than 6.7 per cent

ment has also reignited the feel good factor which in

experienced in the same period last year. It bolsters

turn has raised the business prospects of the economy.

On the supply side, agriculture growth improved to 1.9

manufacturing sector. Electricity sector growth contin-

per cent in 1QFY16 from a contraction to the tune of 1.4

ued to remain sluggish on account of the stressed con-

per cent in previous quarter. However, these are early

ditions of state electricity boards as well as the diver-

days yet and full impact of a deficient monsoon will

gence between capacity and generation. GVA growth

be felt only in the second quarter. As per IMD, rainfall

in heavy weight services sector came in a tad lower at

deficiency stands at 12 per cent below the LPA till mid-

8.9 per cent in 1QFY16 as compared to 9.2 per cent in

August. Industry GDP too grew a higher pace of 6.5 per

the previous quarter. The trade, hotels component of

cent in the 1QFY16 as compared to 5.6 per cent in the

services sector continued to remain on a robust footing

previous quarter. Growth in its sub-sector, manufactur-

and clocked 12.8 per cent growth in the second quar-

ing however, came in lower at 7.2 per cent as compared

ter of the current fiscal, which indicates consumption

to 8.4 per cent a quarter ago. Higher interest rates have

based activity, may indeed have turned a corner.

had an adverse impact on the growth potential of the

ECONOMY MATTERS

12

DOMESTIC TRENDS

At market prices, private consumption expenditure

came in at 7.4 per cent in 2QFY16 as against 7.9 per cent
in the previous quarter. Although it is a slight downtick
but continues to be fairly robust and we believe this
should improve further in the medium-term when wage
growth improves, given that inflation pressures are
low. Gross fixed capital formation witnessed an uptick
to 4.9 per cent in the first quarter of the current fiscal
from 4.1 per cent posted in the previous quarter but

remains way below its decadal average. Lowering of

interest rates will help to provide a fillip to investment
spending. Meanwhile, government spending is expected to assume crucial importance in spurring investment
spending as we expect significant improvement in public capex expenditure in the coming quarters although
it remained muted at 1.2 per cent in the first quarter of
the current fiscal. The net external sector numbers remained in negative territory as expected.

Going forward, in the short-run, growth will receive a

boost from the cumulative impact of economic reforms
and improved inflationary expectations. Therefore,
in FY16, CII is projecting a base case of 7.8 per cent
growth, given that there is some uncertainty related to
agricultural growth. However, in a more positive scenario, where agriculture grows at 3.0 per cent, industry

at 7.0 per cent and services at 10.5 per cent, GDP growth
is expected to be 8.2 per cent. Correspondingly, RBI expects GDP growth in FY16 at 7.6 per cent and Economic
Survey in a range of 8.1-8.5 per cent. However, risks to
growth in FY16 remain in the form of - 1) second consecutive year of weak monsoons, 2) further fall in exports
if global growth remains weak, and 3) reversal of the
fall in oil prices
13

JULY-AUGUST 2015

DOMESTIC TRENDS

IIP Growth Posts a Positive Surprise in June 2015

Industrial production growth inched up to 3.8 per cent

early days and consumption demand remains fragile.

in the month of June 2015 as compared to 2.5 per cent in

Unseasonal rains earlier in the year resulting in lower

the previous month. On the sectoral front, manufactur-

rural demand are weighing in on consumer goods. The

ing growth picked up sharply to 4.6 per cent as against

rainfall deficiency so far stands at 12 per cent of LPA.

2 per cent in May 2015 and is the eighth consecutive

In balance, in FY16, we expect industrial production to

positive print. The growth in manufacturing sector was

grow at a higher rate as compared to the previous fiscal

driven by consumer oriented sectors, though these are

on the back of improving global conditions and policy

aided domestic upturn.

Output of eight core infrastructure sectors decelerated

(as against 0.8 per cent growth in May 2015 and a flat

to 3 per cent in June 2015 as compared to 4.4 per cent in

growth in June 2014). Growth in natural gas production

the previous month as production of crude oil and natu-

contracted 5.9 per cent in June 2015 as against contrac-

ral gas declined and electricity grew marginally. In part,

tion of 3.1 per cent in May 2015 and 1.7 per cent in June

high base effect (core sector output grew by 8 per cent

2014. Growth in the output of refinery products also

in June 2014) was also responsible for the decreased

slowed to 7.5 per cent as against 7.9 per cent in May

growth during the month. The cumulative growth of

2015 (but much higher than -0.1 per cent in June 2014),

the eight sectors, accounting for about 38 per cent of

while fertiliser production was up 5.8 per cent (against

the countrys industrial production, was 2.4 per cent in

1.3 per cent in May 2015 and -1 per cent in June 2014) and

the April-June 2015 period.

steel output was higher at 4.9 per cent (as against 2.6

The coal sector grew at 6.3 per cent in June 2015 (as

per cent in May 2015, but lower than 12 per cent in June
2014). Electricity production slowed to 0.2 per cent in

against 7.8 per cent in May 2015 and 8.2 per cent in June

June 2015 (as against 5.5 per cent in May 2015 and 15.7

2014), while crude oil growth shrank by 0.7 per cent

ECONOMY MATTERS

per cent in June 2014).

14

DOMESTIC TRENDS

On the sectoral front, growth of manufacturing sector,

mines by the government could provide some impetus

which constitutes over 75 per cent of the index, more

to coal production in the months to come.

than doubled to 4.6 per cent in June 2015 compared

On the use-based front, the volatility in capital goods

with 2 per cent growth in the previous month. In terms

continued and components such as insulated rubber

of industries, sixteen (16) out of the twenty two (22)

cables subtracted a significant portion from the head-

industry groups (as per 2-digit NIC-2004) in the manu-

line. Capital goods sector output contracted by 3.6 per

facturing sector have shown positive growth during the

cent in June 2015, which does not augur well for the out-

month of June 2015 as compared to the corresponding

look of investment demand in the economy. Consumer

month of the previous year. The industry group Furni-

goods recorded the highest growth rate since October

ture; manufacturing n.e.c. showed the highest positive

2012 at 6.6 per cent in June 2015. This was attributable

growth of 83.7 per cent, followed by 27.6 per cent in

to a sharp increase in consumer durables growth to 16

Wearing apparel; dressing and dyeing of fur and 21.0

per cent, which is the highest since February 2011. Non-

per cent in Wood and products of wood & cork except

durables growth however, continues to remain muted.

furniture; articles of straw & plating material. On the

Consumption is yet to pick-up decisively as the mixed

other hand, the industry group Publishing, printing &

trend emerging from car sales data also shows. Growth

reproduction of recorded media grew at the highest

in domestic sales of automobiles averaged 1.3 per cent

negative growth of (-) 11.4 per cent, followed by (-) 10.0

for the first quarter, up slightly from 0.6 per cent in

per cent in Electrical machinery & apparatus n.e.c. and

the previous quarter, driven by higher passenger car

(-) 8.7 per cent in Radio, TV and communication equip-

sales. On balance, we remain cautious about recovery

ment & apparatus.

in consumption sector as sustainability of this outturn

In contrast, electricity output grew at a diminished rate

is important. Going ahead, the progress of monsoons

of 1.3 per cent in June 2015 as compared with robust

becomes critical as it would have immediate bearing on

growth to the tune of 6 per cent in the previous month.

consumer goods especially non-durables. Notably, non

Mining output once again contracted by 0.3 per cent in

durables have a significant share in IIP at 21.4 per cent.

June 2015 after remaining in the positive territory for

Basic and intermediate goods posted positive growth.

four consecutive months. The recent auction of coal

15

JULY-AUGUST 2015

DOMESTIC TRENDS

Outlook
Rise in June 2015 industrial production numbers indicates that the industrial recovery is gathering pace based on
improved performance of manufacturing sector. Rise in IIP corresponds with the surge in indirect tax collections
during the month indicating some pick-up in demand in the economy. However, steep decline in the output of
capital goods sector has raised concerns indicating that new investments are still not happening. We are hopeful
that the initiatives taken by the government in terms of expeditious project clearances, simplification of procedures and new investment announcements as well as the Make in India initiative would improve the order book
position, revive demand and help effect a turnaround in the investment cycle, thereby providing impetus to capital
goods sector growth too.

Inflation Remains Subdued in July 2015

The fall in price pressures in proteins (i.e. egg, meat and
fish) to 6.3 per cent as against prior of 7.0 per cent also
provided relief. However, pulses inflation remained elevated at 23 per cent, though governments initiative to
increase imports has helped contain the price rise. Vegetables inflation contracted on account of base effect
however it remains a cause for concern as the sequential momentum has remained elevated over the last
month. The fall in food inflation is a welcome respite;
however the spatial distribution of rainfall still remains
weak (large food grain producing states such as Uttar
Pradesh, Punjab, Haryana and Maharashtra are reeling
under a rainfall deficiency of 24 to 30 per cent), which
could exert upside pressure on food prices, going forward.
In some more positive news, core CPI inflation fell to 4.8
per cent in July 2015 its first decline in 5 months. Much

Wholesale price index (WPI) extended its deflationary

trend for the ninth consecutive month and eased way
below expectation to -4.05 per cent for July 2015 as
compared to -2.4 per cent in June 2015 and 5.41 per cent
during the corresponding month of the previous year.
The decline in inflation was mainly on back of plunging
oil and manufacturing goods prices. Meanwhile, May
2015 WPI print too was revised down to -2.2 per cent
from -2.6 per cent. Sustained decline in WPI is good
news for corporate as WPI is input price for manufacturing process.
Retail inflation as measured by consumer price inflation
(CPI) dropped to 3.8 per cent in July 2015 from 5.4 per
cent in the previous month led by a steep plunge in food
inflation to 2.2 per cent from 5.5 per cent. In particular,
cereals inflation fell further to hit fresh record lows,
given the continued impact of Government measures.

ECONOMY MATTERS

16

DOMESTIC TRENDS
of this fall came from lower inflation in personal care effects, education and transport and communication seg-

ments. In particular, transport services inflation slipped

back into negative territory amid benign international
crude prices.

Primary products continued to face deflation to the tune

of -3.7 per cent in July 2015. Primary food articles which
had recorded inflation in June 2015, once again showed
deflation in the reporting month - to the tune of -1.1 per
cent. However, going forward, there are upside risks to
food inflation on the back of the expected fall in food
grain production due to unseasonal rainfalls in March
and April 2015 and weak spatial distribution of rainfall so
far. Further, primary non-food inflation moved into the
negative territory in July 2015, after recording inflation
in the previous month.
Deflation in fuel sector stood at -12.8 per cent in July

2015 as compared to -10 per cent in the month before.

Both petrol and diesel too showed deflation during the
month. Benign crude oil prices have helped to keep fuel
prices in check in the last couple of months.
Manufacturing sector too posted deflation for the
fifth consecutive month in July 2015 to the tune of
-1.1 per cent as compared to -0.8 per cent in the previous month. Non-food manufacturing or core inflation,
which is widely regarded as the proxy for demand-side
pressures in the economy remained subdued at -1 per
cent during the month as compared to -0.9 per cent
during the previous month.

17

JULY-AUGUST 2015

DOMESTIC TRENDS

Outlook
CII welcomes the fall in headline inflation. It reaffirms the moderation of inflation print which in turn would have a
beneficial impact on inflationary expectations. CII hopes this (easing inflation) would provide the requisite space to
RBI to continue with its rate easing cycle with a larger reduction in interest rates in its forthcoming monetary policy
announcement to provide a fillip to growth.

Exports Continue to Slide

Exports growth disappointed for the eighth consecutive
month, coming in at -10.3 per cent to US$23.14 billion in
July 2015 as against contraction to the tune of 15.8 per
cent in June 2015. Worryingly, there are fears that the
contraction maybe becoming chronic as the decline
in exports during the month came off a negative base
(exports contracted by -0.2 per cent in July 2014). Contraction remained widespread, with petroleum products, iron ore, oil seeds and cereals posting the steepest declines. Cumulatively, April-July 2015 saw exports
dropping to 15.2 per cent on-year compared with a 6.7
per cent rise in the same period last year. Meanwhile,
exports of tea, jute manufactures, handicrafts, drugs
and pharmaceuticals recorded positive growth during
the month. The overall weak export growth is indicative
of weak global demand as well as the sharp correction
in commodity prices. Crude oil exports plunged to 43.2
per cent, accounting for 87 per cent of the overall decline in Indias exports, and were the main culprit in a

scenario of continuously falling oil prices. International

Brent crude oil prices softened further to US$56.6/barrel in July 2015 from US$61.5/barrel in June 2015. Nonoil exports, too, declined. Services sector exports, too,
fell by 1.6 per cent July 2015. With this, services exports
have declined for the fourth consecutive month.

The consistent fall in exports has been exerting up-

ance, Indias external sector outlook has improved and

ward pressure on the trade deficit. At US$12.8 billion,

the vulnerability has reduced considerably. The im-

merchandise trade deficit in July 2015 was lower than

provement in the external sector has come against the

the US$14.6 billion logged in the corresponding month

backdrop of lower commodity prices, especially crude

a year ago, but was still at an eight month high. In bal-

prices.

ECONOMY MATTERS

Imports too contracted by 10.28 per cent in July 2015,

compared to prior months contraction of 13.5 per
cent. Gold imports rebounded in July to US$2.97 billion (growing at a healthy 62.2 per cent) as compared
to US$2.0 billion in June 2015, coming in above the average of US$1.5-2.0 billion witnessed since the removal
of the gold import restrictions. This trend is likely to be
maintained in the near future with the onset of festive
season in India. While crude oil imports declined by 35
per cent, non-oil, non-gold imports fell 0.7 per cent, suggesting domestic demand had receded. Cumulatively
for April-July 2015, overall imports shrunk 12 per cent.

18

DOMESTIC TRENDS

RBI Stays Pat on Interest Rates

RBI chose to keep the key policy rates unchanged in its

tive stance of monetary policy will be maintained going

third bi-monthly monetary policy meeting held on Au-

forward, though further policy actions will be condi-

gust 4th, 2015. The policy repo rate under the liquidity

tioned on favourable developments towards transmis-

adjustment facility (LAF) stands unchanged at 7.25 per

sion, food inflation developments along with reforms

cent. Consequently, the reverse repo rate under the

to debottleneck supply-side issues. Further, the start of

LAF will remain unchanged at 6.25 per cent, and the

policy normalization by the US Fed will be watched. The

marginal standing facility (MSF) rate and the Bank Rate

Central Bank is particularly worried about the greater

at 8.25 per cent. The RBI indicated that the accommoda-

transmission of its front-loaded past actions, as further

rate cuts will be crucially contingent on it.

Regarding growth, the Central Bank was of the view

The Central Bank revised down Jan-Mar 2016 CPI pro-

that the outlook for growth is improving gradually. RBI

jection by 0.2 per cent and indicated that risks around

in its policy document noted - Favourable real income

6 per cent CPI projection for January 2016 are broadly

effects could accrue from weaker commodity prices, in

balanced. Elevated protein inflation and impact of ser-

particular crude oil, and a possible step-up in agricultur-

vice tax hike on core CPI is a cause for concern, though

al activity if monsoon conditions continue to improve.

there is some relief expected from benign crude prices,

On the other hand, global growth projections for 2015

muted MSP hike and Government reform steps to tack-

have generally been revised downwards and, there-

le food inflation.

fore, the export contraction could become a prolonged

On balance, the RBI appears to indicate that the risks

drag on growth going forward. Notwithstanding some

highlighted towards inflation from monsoon and crude

improvement in the state of stalled projects, supply

in June 2015 policy have somewhat eased, though de-

constraints continue to be binding and new investment

velopments on this front need to be closely monitored.

demand emanating from the private sector and the cen-

Consequently, the Central Bank is in a wait and watch

tral Government remains subdued. On an assessment

mode towards room emerging for further accommoda-

of the evolving balance of risks, the projected output

tion.

growth for 2015-16 has been retained at 7.6 per cent.

19

JULY-AUGUST 2015

DOMESTIC TRENDS

CIIs Viewpoint
RBIs decision to maintain the status quo on policy rates indicates a guarded approach towards monetary easing
to restrain inflationary expectations and is in alignment with market expectations. CII is of the view that the policy
of frontloading the interest rate cuts should have been allowed to continue as this would have sent a strong signal that the RBI aggressively addressing the growth risks in the economy accruing from weak demand conditions
which are holding back investments. CII expects that the spotlight would be shifted towards growth and RBI would
resume monetary easing in its next monetary policy when there would hopefully be much more clarity about the
inflation trajectory, the normalcy of monsoons and the possible Federal Reserve actions.

Rupee Depreciates Amidst Volatility

The recent devaluation of the yuan by China has led to
a weakness in the rupee against the dollar. Rupee has
weakened by close to 3 per cent by end-August 2015 as
compared to its end-July 2015 closing. There are concerns that if the depreciation intensified, then a rate
cut by the Reserve Bank of India in September may be

delayed as the Central Bank may not be comfortable

with the risk of capital flight looming large. However,
on a positive side, our vulnerability to an external shock
has considerably declined, given the ample foreign exchange reserves to combat the volatility in the rupee
the Reserve Bank of India had close to US$354 billion in
foreign exchange reserves as of 14th August 2015.

China devalued the yuan by 2 per cent on 11th August

2015 to support the exports sector performance and
align the currency to market forces. The Central Bank
set its official guidance rate down nearly 2 per cent to
6.2298 yuan per dollar its lowest point in almost three
years. Though the PBOC is describing the devaluation as
a one-off step to align the currency with market forces,
participants fears that China has entered into a competitive devaluation and is likely to allow for steady depreciation in yuan. The volatility in the emerging Asian
currencies has increased and they have come under depreciation pressure. Rupee was no different. The rupee
has dropped by as much as 3.7 per cent in only a few
days since the Yuan devaluation on August 11. The yuan
devaluation has two fold impact on Indias external
sector performance. (i). Its likely to worsen our trade

balance with China and (ii). There is going to be loss of

export competitiveness.

ECONOMY MATTERS

In addition to the yuan devaluation, Rupee faces additional risk from the possibility of an interest rate hike
by US Federal Reserve in the coming months. However,
the impact from Fed rate hike might be limited, given
Indias improving growth-inflation mix and a low current account deficit. In addition, an increase in foreign
exchange reserves to nearly US$354 billion (25 August
2015) compared with US$270 billion during the taper
tantrum of July-August 2013 improves the ability to
defend the currency. In balance, we expect Rupee to
strengthen from its current lows in the coming few
weeks. However, over the medium-term, its expected
to remain range-bound.
20

SECTOR IN FOCUS

Changing Rules of Indian Power Sector:

Empowering the Economy

In the recent past, the policymakers have initiated multiple steps towards improving the power sector output
and benefit consumers. These include the proposed

Introduction

amendment to the Electricity Act, round-the-clock pow-

The energy sector in India has seen a transformational

coal auction and allocation, auction of natural gas, Inte-

change with progressive policy-level changes and ef-

grated Power Development Scheme, Deendayal Upad-

fective implementation of directives. These changes

hyaya Gram Jyoti Yojana, aggressive renewable gen-

promise enormous opportunities for various stakehold-

eration targets and massive transmission connectivity

ers and market players. However, deep thinking on vari-

plans.

er supply, the Coal Mines Special Provision Ordinance,

ous aspects of policy and regulatory interventions and

Proposed provisions will modify the energy sourcing

their long term implications will help in taking informed

mix, secure fuel for power generation, bring efficiency

decisions and contribute in developing the sector. With

and competition in the sector, enhance clean energy

certainty in policy-level interventions, the economy is

generation, increase power supply to households, gen-

bound to propagate and the demand for energy will in-

erate business and employment opportunities etc

evitably surge.

In this context, the Confederation of Indian Industry

Per capita electricity consumption of the country has

(CII), along with PricewaterhouseCoopers Private Lim-

now crossed 1000 kilowatt-hour, but still far below the

ited (PwC) as a knowledge partner released a report on

average global consumption. As of June 2015, all India

Changing rules of Indian power sector: Empowering

generation capacity stood at 275 gigawatts (GW) with a

the economy against the backdrop of the Sixth Edition

contribution of 69 per cent from thermal energy, 15 per

of Energy Conclave 2015: Transforming the Energy Sec-

cent from hydro, 13 per cent from renewable and 2 per

tor through Policy, Regulation and Technology held on

cent from nuclear sources. Despite the efforts to gen-

12th August, 2015 in Kolkata. The main excerpts from

erate more electrical energy by using multiple energy

the report are covered in this months Sector in Focus.

sources, the country has recorded a shortage of 3.6 per

cent of demand in FY15.
21

JULY-AUGUST 2015

SECTOR IN FOCUS

The Indian Power Sector: Overview

The Indian power system is the fifth largest in the world

five power consumers across the globe, and the de-

and among the most complex. With an annual electric-

mand is expected to touch 1,900 BU by 2020.

ity production of 1,031 billion units, it is among the top

While almost 61 per cent of the power generated is from

coal, India is looking to alter the generation mix in the
years to come, focusing on a low-carbon growth strategy, although coal production continues to be on the
agenda of policymakers. India is dependent to a great
extent on imports. It features among the top five largest importers of oil and is also the sixth largest importer
of petroleum products and liquefied natural gas (LNG)
worldwide. There has been a huge focus on increasing
the share of renewable sources based power generation in the last few years, with the government setting
aggressive and ambitious targets.
While the country continues to grapple with power
shortages, three states in the eastern regionWest
Bengal, Odisha and Chhattisgarhfeature among
those with surplus power. These states could provide
the answer to the ones that are reeling under power
shortages, if they are provided the necessary transmission infrastructure and corridor.

ECONOMY MATTERS

22

SECTOR IN FOCUS

As Indias demand grows, steps have to be taken to

ensure the concerns that impede the expansion of its
power sector. As a result of populist tariff schemes
exacerbated by aggregate technical and commercial

(AT&C) losses and operational inefficiencies, the finances of the state discoms are becoming unhealthy with
huge outstanding debt.

Amendment to the Electricity Act

power sector. It touches upon different aspects of the

sector, right from segregation of carriage and content
to renewable energy and open access to tariff rationalisation and so on. The Bill also aims to infuse healthy
competition in each distribution area, and deals with
aspects pertaining to promotion of renewable energy,
open access, smart grid, ancillary services and so on.

The Indian power sector has come a long way since the
laying down of the basic framework in 1910 right up to
the Electricity Act of 2003, which brought about necessary changes to an evolving sector. The Act introduced
and brought provision on open access, power trading,
regional/national electricity market, independent system operator, delicensing of generation, performance
based regulation, anti-theft etc. To govern the sector better and handle its requirement, the Electricity
Amendment Bill, 2014, is under consideration. The union cabinet approved amendments to the overarching
Electricity Act, 2003, through the Electricity Amendment Bill, 2014, on 11 December 2014. The proposed
amendment will have a profound impact on the Indian

The key intent behind the amendments is to allow

competition and better customer service without significantly increasing tariff. Although the amendments
bring about measures aimed at infusing healthy competition in the power supply and provide a boost to renewable energy based generation, some are still wary
of the legal ramifications of separating carriage from
content and its impact on the average consumer.
23

JULY-AUGUST 2015

SECTOR IN FOCUS

ECONOMY MATTERS

24

SECTOR IN FOCUS

The proposed amendments will require a well-thought-

states that an appropriate commission may grant sup-

out and strategic response by power supply compa-

ply licences to two or more entities in the same area

nies as well as generation companies alike to meet the

of supply where one of the supply licensees must be

emerging regulatory and power market provisions and

a government-controlled company. An intermediary

sector structure framework to maximise benefits and

company is to be formed for taking over the existing

mitigate business risks. Each of these ramifications are

power purchase agreements and procurement arrange-

discussed below.

ments of the relevant distribution licensees on reorganisation. To execute this, a transfer scheme is to be made

Separation of Carriage and Content:

by state governments for segregation of content and

carriage businesses. However, this needs to effectively

The Electricity Amendment Bill, 2014, proposes sig-

address handpicking of consumers by the supply licen-

nificant reorganisation of the distribution and supply

see, clearly defining the area of a supply licensee, define

framework. For a long time, distribution companies

the new entities functions and responsibilities, owner-

have been responsible for power distribution as well

ship, treatment of existing power procurement com-

as power supply to the end consumer. The proposed

mitments, tariffs and subsidies, transfer of resources,

amendment envisages separation of power distribu-

technical and financial loss allocation, etc.

tion from supply. This will, in a way, provide the consumer with more options in terms of choosing a sup-

Provide a Fillip to Generation from Renewable Energy Sources:

plier, as more than one supply licensee can share space

within a particular distribution area. The amendment
25

JULY-AUGUST 2015

SECTOR IN FOCUS
The Electricity (Amendment) Bill, 2014, to a great ex-

policy. The amendment envisages enhanced powers to

tent, focuses on the changes concerning regulatory

regulatory commissions to initiate suo-motu proceed-

provisions and the promotion of renewable energy. The

ings for tariff determination. Retail tariff set by ERCs will

bill envisages that obligated entities can source electric-

be seen as the maximum tariff, with the suppliers being

ity from renewable energy source or any renewable en-

given an option offer lower than the prescribed tariff.

ergy instrument. One of the major perceived caveats of

The proposed amendments seek to empower the load

the Electricity Act, 2003, was that there was no mandate

dispatch centre with the rights to penalise for any non-

for meeting of renewable purchase obligation (RPO)

compliance of its directives on power supply.

targets and, as a result, only a handful of obligated enti-

Coal Sector Developments

ties purchased renewable energy certificates (RECs) or

renewable power. This resulted in an increased supply

Following the deallocation of all but four coal blocks al-

of RECs with very few takers. The proposed penalties

located for captive and commercial mining, a number

for noncompliance can force utilities to procure power

of changes have been made in the regulatory scenario

from renewable energy sources, thereby providing a

governing the coal sector in India. The Government of

fillip to renewable energy generation. This generation

India enacted provisions enabling auction of coal mines

obligation mandates to establish a renewable energy

for captive and commercial mining. The objective is to

generation capacity and exempt open access consum-

award coal assets in a transparent manner and to get

ers procuring renewable energy from paying wheeling

assets developed in timely manner. To meet these ob-

and cross-subsidy surcharge. RGO envisaged for all coal

jectives, key legislative changes include the Coal Mines

and lignite based power generation stations, wherein

(Special Provisions) Act, 2015 (earlier Ordinance), fol-

all companies establishing coal or lignite-based gen-

lowed by Rules and various orders and administrative

eration capacities, are also required to generate power

guidelines. The key changes brought in are summarised

from renewable energy sources with at least more than

below:

10 per cent of thermal power installed capacity.

Regulatory Changes

Open Access:

On 21 October 2014, the central government promulgat-

The provision for open access allows power consumers

ed the Coal Mines (Special Provisions) Ordinance, 2014,

with a load of 1 MW and above to enter into bilateral

now the Coal Mines (Special Provisions) Act, 2015, and

agreements with a power supplier of their choice, leav-

the Coal Mines (Special Provisions) Rules, 2014, were

ing them with more options to procure power. Despite

framed under it to implement the Supreme Court order

the open access clause in the Electricity Act, 2003, the

and manage the coal mining sector. The government

major stakeholder remained sceptical while most states

has notified deallocated mines in three schedules:

were wary of it and managed to dissuade consumers

from entering into them. The amendment also focuses

Schedule I, naming all 204 coal blocks, deallocated.

on improving open access to power producers and con Schedule II contained 42 of the 204 coal blocks

sumers for easier access to transmission and distribu-

which are operating or ready to operate.

tion systems, thereby allowing for transmission of power across regions.

Schedule III contained 32 of the 204 coal blocks

Tariff Rationalisation and Regulatory Commissions:

which have made progress towards development.

Later, 36 blocks were added in the list of Schedule III

The distribution sector is grappling with a financial crisis

blocks. Further, the Ministry of Coal approved a reverse

and tariffs are not reflective of the cost. This has led the

bidding process for the power sector, according to

government to focus on provisions pertaining to tariff

which bidders are required to quote a bid price which is

at a discount to the ceiling price and the bidder with the

ECONOMY MATTERS

26

SECTOR IN FOCUS
lowest bid price shall be the winner. Additionally, based

ule II and Schedule III blocks, while third round of

on the guidelines issued by the nominated authority, in

auctions is going on. The government has auctioned/al-

case the quoted bid price remains zero, then bidding

lotted below mention blocks for the power sector: Out

will be based on forward auction on the additional pre-

of the total of 204 blocks to be auctioned or allotted,

mium payable.

51 are meant for power as end-use, in the eastern regions that includes Jharkhand (23 blocks), West Bengal

Auction Progress

(10 blocks) and Odisha (18 blocks). With the conclusion

of two rounds of auction, the following blocks were

Between December 2014 and April 2015, the govern-

auctioned in these states, categorised under Schedule

ment conducted two rounds of coal auction for Sched-

II and Schedule III, for the power sector.

The After-Effects

Utilities Perspective

The price of coal from the auctioned coal block has no

Considering the entire scenario of 204 blocks to be

correlation to the actual cost of production. Also, coal

auctioned, projects located closer to the mines will be

blocks earmarked for the power sector were put up for

particularly able to offer better cost competitiveness.

reverse auction, and awarded on the basis of the lowest

Therefore, projects located in Jharkhand, West Bengal

transfer price quoted by the bidder. The new provisions

and Odisha are expected to benefit considerably from

provide for the replacement of coal price in the existing

the new reform. The impact of coal auction on tariffs

Power Purchase Agreement (PPA) by the price quoted,

will, however, be localised as the capacity auctioned

in case it results in fuel cost reduction, and therefore,

represents only 6 per cent of the existing thermal gen-

the entire process is expected to lower the final power

eration capacity across the country. On the contrary,

tariff.

combining the peak capacities of the coal blocks allo-

27

JULY-AUGUST 2015

SECTOR IN FOCUS
Whats Next?

cated in the three states, an additional quantity of 25

million tonne of thermal coal will be added to the existing production from the two rounds of auction.

With definite challenges of keeping the cost of fuel, i.e.

On comparing the bid prices against the cost of re-

levels by the new allottees, apart from project prepar-

placed fuel (including shortfall imported or bought on

edness, the need of the hour is to look again into the

e-auction) and the additional development cost to be

existing mining practices prevailing in the country.

incurred, the internal rates of return of many winning

Certainly, major reforms need to be brought in, with

bids translate to below the risk-free rate. This is under-

improvements in processes and technology as major

standable for existing assets, but cannot attract new in-

focus areas and workplace safety on the prime agenda.

vestment. Quite obviously, benefits from the decrease

A stringent project-level monitoring system needs to

in power tariffs will be passed on to the consumers,

be put in place to capture variances between the budg-

with utilities not charging for fuel cost. Proposed re-

eted and actual progress made and standard operating

verse auction for the regulated sector actually lead to a

procedures (SOPs) need to be designed for taking im-

forward bidding above the reserve price payable, show-

mediate actions whenever needed.

coal produced from the auctioned blocks, at minimum

ing aggressive biddings.

Cost control measures such as optimisation, improve-

In the first round, the successful bids were in the range

ment in productivity, utilisation of existing resources,

of 470 INR per million tonne (MT) to 1,110 INR per MT in

stringent and accurate data monitoring system, which

the forward bidding, with the highest winning bid price

we have been debating for long, need to take the front

of 1,110 INR per MT quoted by Essar Power MP Ltd for

seat to keep the operating cost at the lowest levels,

Tokisud North coal mine. Similarly, in the second round,

as these costs are not passed through to the utilities.

the successful bids were in the range of 302 INR per MT

Besides these measures, project preparedness will also

to 704 INR per MT in the forward bidding, with the high-

play an important role. As part of project preparedness

est winning bid price of 704 INR per MT quoted by GMR

itself, carrying out a fatal flaw analysis at an early stage

Chhattisgarh Energy Ltd for Ganeshpur coal mine.

may be advisable to capture the mitigating measures.

However, the recent auction has still left some ques-

The role of the state in expediting approval and clear-

tions unanswered. One needs to critically assess in case

ance work for development and operation of the allo-

of auctioned blocks the quantum of actual benefits that

cated coal blocks will also be vital. Assistance in fast-

will be passed on to the consumer, considering that

track processes will certainly be important for new

while the coal extraction cost need not be paid, the cost

allottees, and primarily serve two purposesfollow the

of handling and logistics all the way up to the power

timelines for project development, and commence pro-

plant will be built into the tariff. Therefore, regulators

duction to start generating cash flows for the project. In

are required to create some benchmark or formulae

conclusion, a scientific and collaborative approach will

to cap this cost. Further, in case of allocations of coal

be required for successful follow-up post the auction.

blocks meant for power generation, the methodology

With two rounds already concluded, questions still re-

needs to be determined to capture fuel prices.

main on economic viability, speedy processes and the

passing on of actual benefits to consumers.Location

ECONOMY MATTERS

28

FOCUS OF THE MONTH

Analysing Indias Trade Performance

dia, said. The government needs to immediately step in

and chalk out a strategy for giving a competitive edge
to Indian exporters. The below article investigates the

recent trends in Indian exports and imports while providing an insight into which commodities are fuelling

ndia stands to miss the export target of US$310 billion

the crisis and the others that need attention.

for the current fiscal with shipments contracting for

A. General Trends in Trade

the eighth consecutive month in July. Not only have

the exporters been hit by a slump in global demand,

While following a fairly stable trend till 2014, trade bal-

but also the Yuan devaluation makes Chinese products

ance has particularly worsened since December 2014.

cheaper, reducing the competitiveness of Indian goods

From a deficit to the tune of US$9.1 billion in December

in the global market along with worsening an already-

2014, the trade balance deteriorated to the lowest level

adverse trade balance with Beijing. Moreover, the fall in

of deficit of US$12.8 billion in July 2015. Exports deceler-

the rupee is not helping either. According to Federation

ated from as much as US$26.1 billion in December 2014

of Indian Export Organizations president S.C. Ralhan,

to US$23.1 billion in July 2015. The lowest exports were

Such high volatility will not add to the competitive-

recorded in February 2015 when they stood at mere

ness of exports as the volatile exchange rate cannot be

US$21.9 billion, recording contraction to the tune of

factored into prices, though it may increase the hedg-

10.3 per cent as compared to July 2014. The worst falls

ing cost for exporters. Only a small number of export-

were recorded in March and May 2015 when exports

ers who have not hedged their risks and received their

contracted by 21.3 per cent and 20.2 per cent, respec-

payments may get a windfall gain. With weakness in

tively, from comparable months in 2014. Overall, in all

currencies across all the emerging markets, no unique

the months from January 2015 to July 2015, exports wit-

advantage accrues to India, Anupam Shah, chairman

nessed double-digit contraction in year-on-year terms.

of the Engineering Export Promotion Council (EEPC) In29

JULY-AUGUST 2015

SECTOR IN FOCUS
Imports displayed a cycling trend, while they decelerat-

2014. In July 2015, imports again climbed to December

ed otherwise, numbers picked up at each quarter end.

2015 levels and stood at US$35.9 billion. Overall, except

The lowest imports were recorded in February 2015,

April 2015, in all the months from January 2015 to July

when the imports stood at US$28.3 billion, a contraction

2015, imports have witnessed double-digit contraction

to the tune of 16.0 per cent as compared to February

in year-on-year terms.

Analyzing annual trends for the last five years, trade bal-

the last three years has been unimpressive as compared

ance deteriorated to the highest deficit of US$190.3 bil-

to impressive double-digit growth figures in 2010-11 and

lion in 2012-13. In 2011-12, a deficit to the tune of US$183.4

2011-12. In 2014-15, exports saw a contraction to the tune

billion saw a fall in balance by an alarming 54.6 per cent.

of 1.3 per cent as compared to the previous fiscal year.

In 2014-15 too, trade deficit remained at US$137.3 billion,

Imports, which are subtracted from GDP, have risen

quite higher than the deficit level five years ago. Exports

considerably in last five years. From US$369.8 billion

displayed moderate improvement. From US$251.1 bil-

in 2010-11, imports scaled to US$447.7 billion in 2014-15.

lion in 2010-11, exports rose to US$314.4 billion in 2013-14

Though past two fiscal years saw a minor contraction

and US$310.4 billion in 2014-15. However the growth in

in imports.

ECONOMY MATTERS

30

FOCUS OF THE MONTH

B. Country-wise Trade Analysis

have been the favorite export destinations for the

country, in the recent months, too these countries have
been the popular export avenues. Further, the amount
of exports to the United States and United Arab Emirates has superseded the rest by more than double.
Since December 2014, Hong Kong, Malaysia and Sri Lanka have stood on the third spot as opposed to China in
the longer term trend.

Analyzing the export profile geographically, since December 2014, there has not been much headway in exploring different avenues for exports. So, while in the
longer term (2010-15), countries such as United States
(12.0 per cent share), United Arab Emirates (11.5 per
cent share), China (5.1 per cent share), Singapore (4.2
per cent share) and Hong Kong (4.2 per cent share)

31

JULY-AUGUST 2015

FOCUS OF THE MONTH

A similar geographical analysis of the import reveals

the recent months as well. The amount of exports from

the longer term (2010-15) favorite import sources as

China is tremendous and supersedes even the country

China (11.8 per cent share), United Arab Emirates (7.2

at the second spot by more than double. In the recent

per cent share), Saudi Arabia (6.7 per cent share), Swit-

months, Switzerland and United States have figured in

zerland (5.8 per cent share) and United States (5.0 per

the second and third positions by share in imports as

cent share). They continued to be top import sources in

opposed to slightly lower rankings in the longer term.

ECONOMY MATTERS

32

FOCUS OF THE MONTH

C. Commodity-wise Analysis

fell by one percentage point. While this sector has often

and again been identified as the one that needs innovation in order to take on China, not much is being done
to that effect.

A commodity-wise analysis of the export profile has

striking revelations. The share of Petroleum Crude &
Products has tumbled down to 11-13 per cent since January 2015, as opposed to comprising of 19 per cent of exports in the longer term (2010-15). On the other hand,
export share of Textiles & Allied Products has improved
from 11 per cent in the longer run to 13-14 per cent in
the recent months. Similarly Chemicals & Related Products have shown a marked improvement from a share
of 9 per cent in the longer run and now comprise of
11-12 per cent in the recent months. Sectors such as
Gems & Jewellery and Agri & Allied Products have remained fairly consistent in their export shares, though
the latter witnessed some deterioration in June-July
2015. Base Metals and Transport Equipment have also
shown improvement in their share of total exports by
one-two percentage points since December 2014. The
share of Machinery in total exports also showed a minor improvement. The already disappointing share of
Electronics Items, 3 per cent in the longer run, further

The share of Plastic & Rubber Articles remained fairly

moderate, while that of Leather & Leather materials
showed minor improvement to the tune of roughly 50
basis points. Ores & Minerals saw an alarming descent,
from 1.6 per cent in the longer run to mere 0.5-0.8 per
cent in the recent months. Marine Products continued
to have a fairly similar share and so did Paper & related
products and also Articles of Stone, Plaster, Cement,
Asbestos, Mica or Similar Materials; Ceramic Products;
Glass & Glassware, albeit with minor improvements.
The remaining sectors of Plantation, Optical, Medical
and Surgical Instruments, Sports Goods, Project Goods
and Office Equipment did not show any variations in
their share of total exports.
Apart from the above analysis of the variations in shares
of various commodities in total exports, an investigation into the growth trajectory of exports in the top five
33

JULY-AUGUST 2015

FOCUS OF THE MONTH

sectors by share also reveals significant observations.
Petroleum Crude & Products witnessed a growth in
exports as high as 56 per cent in 2011-12, however this
tumbled sharply to single-digit growth figure in the following two fiscal years and ultimately a contraction to
the tune of 10 per cent in 2014-15. Contraction in exports
being as high as 46 per cent, 58 per cent and 48 per cent
in the months of April, May and June 2015 respectively
has indicted a continuation of the grim scenario in the
current fiscal year. Gems & Jewellery too witnessed a
contraction in the past three fiscal years tumbling from
a growth of 47 per cent in 2010-11. Textiles & Allied Products has fluctuated greatly in the last five years, displaying a contraction in 2012-13, though recovering to a 12
per cent growth in 2013-14, however in 2014-15 a dismal

near flat growth rate was seen. Looking into monthly

trends, both Gems & Jewellery and Textiles & Allied
Products exports have been witnessing contraction
since December 2014, albeit recovering marginally in
June-July 2015. Growth of exports in Agri & Allied products has tumbled steeply from 57 per cent in 2011-12 to
a contraction of 8.5 per cent in 2014-15. Since December
2014, the sector has been witnessing double-digit contraction. Chemicals & Related Products have also seen
a downfall in growth of exports over the last five fiscal
years, growing by as high as 30 per cent in 2011-12 and
as low as 3 per cent in 2014-15. In the recent months,
the growth has been highly fluctuating, with contraction seen since December 2014 except April-May 2015
period.

A similar commodity-wise analysis of the import profile

too had significant revelations. The share of Petroleum
Crude & Products in total imports has been contained

at 25-28 per cent since December 2014, going even as

low as 21-22 per cent in February-April 2015, as opposed
to a longer term (2010-15) share of 32 per cent. Import

ECONOMY MATTERS

34

FOCUS OF THE MONTH

of Gems & Jewellery displayed very fluctuating trends
with a share as low as 10 per cent in December 2014-January 2015 and as high as 22 per cent in March 2015, as opposed to a longer term trend of 17 per cent. Chemicals &
Related Products and Electronics Items showed a minor
rise in import share to the tune of one-two percentage
points in the recent months as compared to their longer run shares of 8 per cent and 7 per cent respectively.
While the share in imports of Machinery rose marginally
to 8-9 per cent in the recent months as compared to the
7 per cent it comprises of in total imports, in tandem
with the ambitious Make in India campaign, it needs to
rise further in order to improve capital infrastructure in
the country. Base Metals too displayed a rise in its share
of imports by one-two percentage points as compared
to its longer term share of 5 per cent.

2015, while in the longer run it comprises of 5 per cent of

total imports. Similarly Transport Equipment stood at as
much as 6 per cent in December 2015 but declined to 2
per cent in July 2015, while in the longer run it comprises
of 3 per cent of total imports. The share in imports of
Agri & Allied Products rose sharply in the recent months
to 4-5 per cent as opposed to constituting 3 per cent
share in the longer run. Plastic & Rubber Products displayed a minor rise by one percentage point. The import
share of Project Goods displayed fluctuations around its
longer run value. The shares in imports of sectors such
as Paper and Related Products, Textiles & Allied Products, and also Articles of Stone, Plaster, Cement, Asbestos, Mica or Similar Materials; Ceramic Products; Glass
& Glassware, along with Plantation, Optical, Medical
and Surgical Instruments, Leather & Leather Products,
Sports Goods, office Equipment and Marine Products
remained largely invariant.

The share of Ores & Minerals stood at as much as 8 per

cent in January 2015 but declined to 4 per cent in July

35

JULY-AUGUST 2015

FOCUS OF THE MONTH

ECONOMY MATTERS

36

FOCUS OF THE MONTH

The recent downtrend in oil prices has led to a significant containment of the oil import bill. In 2014-15, the
value of imports in the Petroleum Crude & Products
sector stood at US$138.3 billion, a contraction by 16 per
cent over the previous fiscal year. In the recent months
of the current fiscal too, the sector has been witnessing
a contraction on the back of falling oil prices. The import
bill for the sector fell as low as US$6.1 billion in February
2015, a contraction to the tune of 55 per cent as compared to the same month in the previous year. In February 2015, the price of WTI-Cushing Crude Oil had fallen

to 50.58$/barrel while that of Brent Crude Oil stood at

58.10$/barrel. The prices fell to 47.82$/barrel and 55.89$/
barrel respectively in the subsequent month. Even in
July 2015, the latest month for which data is available,
the import bill stood at US$9.5 billion, contracting by 35
per cent over July 2014, while the prices of WTI-Cushing
Crude Oil and Brent Crude Oil stood at 50.90$/barrel and
58.10$/barrel respectively. WTI crude oil prices have
fallen below 50$/barrel in the month of August 2015.
This is expected to bring down the import bill further in
the months to come.

On September 3, 2015, Commerce & Industry Minister,

Shrimati Nirmala Sitharaman while addressing the Diamond Jubilee celebrations of the Engineering Export
Promotion Council of India (EEPC India) in New Delhi
assured exporters that it will give top priority to developing modern infrastructure for boosting shipments
to overseas markets and spurring economic growth.
Noting that there was a need for India to move from
a low value exporter to a very high value exporter, the

Commerce Minister exuded confidence that after a

slowdown phase in the recent past, India was now entering into a recovery phase. With moderating inflation,
strong currency reserves, lower current and fiscal deficit
and stable tax policy, the prospects of Indian economy
appeared bright, according to the government, which
emphasized that to sustain a high growth rate, massive investments in infrastructure and human resources
capital of India would be required on a sustained basis.
37

JULY-AUGUST 2015

SPECIAL FEATURE

E-linking Farmers with Markets

cost of related hardware and infrastructure will also be

subsidised by the central government up to R30 lakh
per mandi (except private mandis). While there is no
state-specific allocation, states will need to meet certain prerequisites including a single licence to be valid
across the state, single-point levy of market fee and
provision for electronic auction for price discovery.
The scheme promises to benefit farmers by enhancing
prospects for marketing of produce; improved access
to market-related information and better price discovery; access to a greater number of buyers through
transparent auction processes; and increased access to
markets through warehouse-based sales, thereby bypassing the need to physically transport commodities.
It would also curb rent-seeking and finger-touching or
call-out auction, thereby alleviating the stranglehold of
large wholesale traders and commission agents.

he government recently announced a countrywide e-marketing platform for agricultural produce. This is expected to aid price discovery, provide greater returns to farmers, and ensure seamless
availability of agricultural commodities, thereby taming
price spikes. It would further enhance marketing efficiency and eliminate rent-seeking practices. The AgriTech Infrastructure Fund will be rolled out by the Department of Agriculture & Cooperation with the Small
Farmers Agribusiness Consortium as the executing
arm. The scheme proposes to integrate 585 regulated
mandis across the country over 2015-16 to 2017-18.

However, the scheme further needs to consider certain

policy and institutional changes. For instance, farmers
often do not sell their produce directly and this is typically done through aggregators, transporters or traders.
Hence, intermediation might still continue, although in
a different form. Without the farmers actual participation in the e-auction through guaranteed access to the
e-platform, the opportunity for fair price realisation despite a fair price discovery may be limited.

An amount of R200 crore has been earmarked for the

scheme for two years, which includes provision for supplying free software to states and Union Territories. The
ECONOMY MATTERS

38

SPECIAL FEATURE
Second, credit and advances for growing and harvesting the crops are provided by the intermediaries and local aggregators, often at hidden and exorbitant interest
rates. The farmers are thus locked-in with contracts and
are unable to exercise their freedom to sell. The access
to affordable credit would need to be addressed as well.

to poor infrastructure in the mandi. Also, sorting and

grading facilitiescritical to better price realisation for
farmersdid not exist in the markets surveyed in the
CII report. The facilitation and maintenance of these
platforms will require technical knowhow and hence
there is need to have the right human resources within
the mandi system. Four, payment settlement and mode
of payment are increasingly through cash transfers and
within a day to a month depending on the volume of
trade, debt, frequency and personal rapport between
market functionaries and farmers. Payment and settlement terms will need to address these aspects.

Also, mandis guarantee sale of commodities, particularly fresh produce of any quality, which raises farmer
dependence on these markets. This may not be possible
through the e-platform, although increasingly buyers
are providing the necessary inputs to ensure that farmers are able to grow the quality they are looking for.

Measures to ascertain that the e-platform actually connects farmers with buyers and does not remain with the
traders and intermediaries will be critical to ensure that
fair price discovery translates into price realisation. This
will entail educating the farmers about the e-platform
and hand-holding them into the process.

Third, the scheme provides for warehouse facilities

which will be subject to investment. Despite the warehouse receipt system, there has been little progress in
farmers access to warehousing.
According to a CII study on agriculture marketing, reforms beyond marketing and upgrading the existing
system are required to benefit farmers and consumers.
One, institutional arrangements for credit and insurance are required to eliminate the grip of intermediaries in the traditional mandis. Often farmers lack the resources to travel distances to sell their produce in the
mandi and it makes more economic sense for someone
else in the chain to facilitate the transaction.

While this scheme is for three years ending 2017-18, an

action plan on how to move beyond 585 markets needs
to be put in place. Also, with the current 585 markets
that will be integrated in a phased manner, the choice
of such markets and commodities to be included needs
to be drawn out. The challenge will lie with perishable
commodities.
The e-marketing platform will benefit farmers subject
to certain critical reforms that extend beyond marketing. It is definitely one of the models that will see their
way into the future of agriculture marketing, but other
models of direct linkages such as private markets need
to be encouraged to be able to connect maximum number of farmers with markets. Also, with increasing demand and awareness about safe and quality food, it will
be imperative to ensure that farming practices conform
to higher food safety standards, and traceability along
the value chain will be critical. This will need private sector coming into the agricultural marketing space in a
major way and investing in the backend, thus creating
an enabling environment for such practices that cater
to consumer demand.

Two, although some state marketing boards have

moved towards simplifying multiple licensing, the current licensing regime lends itself to a strong informal
economy where rent-seeking and malpractices are
prevalent, with discretion on issuance of licences residing with APMC authorities. States need to be guided
on the single licence system, with a fee structure that
makes up for potential revenue losses. Piloting of this
model in different production zones taking into account
the diversity of commodities, farmers and marketing
channels will be important to ensure the scalability and
replicability of this model.
Three, the e-platform needs to be backed up with monitoring of actual use and training of market staff due

This article appeared in Financial Express dated 5th August 2015. The online version can be accessed from the following
link: http://www.financialexpress.com/article/fe-columnist/column-e-linking-farmers-with-markets/113852/
39

JULY-AUGUST 2015

ECONOMY MONITOR

ECONOMY MATTERS

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ECONOMY MONITOR

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JULY-AUGUST 2015

ECONOMY MONITOR

ECONOMY MATTERS

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