Economy Matters December 2016

1
FOREWORD
DECEMBER 2016
T
he forthcoming Union Budget will be presented against the backdrop of heightened expecta-
tions that the government would unravel reform-centric policies and action plan which would
rejuvenate our growth drivers and transform the economy. In 2017, industry expects a reform-
ist and visionary budget from the government. We would like to see a cut in corporate and personal
income tax rates accompanied by higher public investments for which the resources will be made avail-
able through various means such as disinvestment and asset recycling. The recent demonetisation of
high value notes is expected to yield an increase in tax revenue as well as an increase in the tax base.
Challenges such as slack domestic and global demand would need to be addressed, and urgent policy
action is needed so that the economy can achieve a sustained and inclusive growth of around 8 per
cent in the near future.
On the domestic front, the contraction in industrial output in October 2016 is a matter of concern. How-
ever, going forward, normal monsoons, which should improve rural demand, along with the lagged im-
pact of interest rate reductions and 7th pay commission handouts are expected to cushion demand in
the future and boost industrial activity. In a bright spot for the economy, both the inflation indices are
ebbing down, providing relief to the policymakers. The softening of CPI and WPI inflation is attributed
essentially to downward drift in the momentum of food prices assisted by favourable monsoon which
has led to record food-grain output in the kharif season. The fall in prices could also be partly reflective
of the demonetisation impact, which has led to lower demand in the economy due to a cash crunch.
The moderate inflation scenario has rightly facilitated the RBI decision to retain the accommodative
policy stance and will encourage RBI to further reduce rates.
US Federal Reserve expectedly raised interest rate by 25 bps in first week of December 2016 — its
first (and only) rate hike in 2016 and the second since the monetary policy normalization cycle began
in December 2015. The Federal Open Market Committee (FOMC) judged that in light of realized and
expected labour market conditions, as well as the progress on the inflation front, it was deemed ap-
propriate to hike the Fed Funds rate. Given the resumption of the normalisation process, future policy
moves are likely to be dependent on incoming data prints, which will remain critical. Any expansionary
fiscal stimulus from the incoming regime at the White House may spur inflation, and cause a faster pace
of rate hikes than anticipated.
Chandrajit Banerjee
Director General, CII

EXECUTIVE SUMMARY
ECONOMY MATTERS 4
Focus of the Month: Towards a
Growth-Oriented Budget
The forthcoming Union Budget will be presented
against the backdrop of heightened expectations that
the government would unravel reform-centric policies
and action plan which would rejuvenate our growth
drivers and transform the economy. No doubt, the
economy in general has done quite well in FY17 with a
normal monsoon heralding a bountiful crop harvest,
private consumption holding up well and sharp mod-
eration witnessed in inflation indices. However, with
economic growth expected to momentarily lose mo-
mentum in the second half of this fiscal on account of
the demonetization drive, there is widespread anticipa-
tion that the government will take bold and pragmatic
measures to mitigate and reverse the downside risks to
growth. What is more certain areas like weak private
sector investments, mounting NPAs and low credit off
take by industry also call for urgent policy action in or-
der that the economy achieves a sustained and inclusive
growth of 8 per cent and above in the near future.
Domestic Trends
Industrial output contracted in October 2016, declin-
ing by 1.9 per cent as compared to 0.7 per cent in the
previous month. Mining and manufacturing segments
remained a cause for concern with capital goods con-
tinuing to weigh on the headline print. However, go-
ing forward, normal monsoons, which should improve
rural demand, along with the lagged impact of interest
rate reductions and 7th pay commission handouts are
expected to cushion demand in future and boost in-
dustrial activity. There may be short-term disruptions
on account of government’s recent demonetisation
move as it impacts the cash based transactions, which
are a large part of the Indian economy. However, in the
medium-term the impact of this demonetisation will
be largely positive for economic growth. Meanwhile,
both WPI and CPI inflation moderated in November
2016, providing relief to the policymakers. The soften-
ing of CPI and WPI inflation was attributed essentially
to downward drift in the momentum of food prices as-
sisted by favourable monsoon which has led to record
food-grain output in the kharif season. The fall in prices
could also be partly reflective of the demonetisation im-
pact, which has led to lower demand in the economy
due to a cash crunch. The moderate inflation scenario
has rightly facilitated the RBI decision to retain the ac-
commodative policy stance and will encourage RBI to
further reduce rates.
Corporate Performance
The corporate results at the end of the second quarter
of fiscal year 2017 brought a reason for cheer for the
manufacturing sector which saw an improvement in
both its bottom-line and top-line. The sector, which was
buoyed by a significant fall in input costs following the
collapse of global commodity prices, registered a sharp
pickup in profitability growth in 2QFY17 as compared to
the same quarter a year ago. Worryingly, both bottom-
line and top-line of services sector firms continued to
remain weak so far. The analysis factors in the financial
performance of a balanced panel of 1670 manufactur-
ing companies (excluding oil and gas companies) and
948 service firms extracted from the CMIE’s Prowess
database.
Global Trends
In line with market expectations, US Federal Reserve
hiked its key Fed fund target rate by 25 bps to between
0.50-0.75 per cent in its monetary policy review meeting
held on December 14th, 2016. There were no dissenters
to this decision. The Federal Open Market Committee
(FOMC) judged that in light of realized and expected la-
bour market conditions, as well as the progress on the
inflation front, it was deemed appropriate to hike the
Fed Funds rate. The stance of monetary policy remains
accommodative, thereby supporting some further
strengthening in labor market conditions and a return
to 2 per cent inflation. Notably, the Fed commentary
has turned decidedly hawkish — with several referenc-
es to fiscal expansionary stance under the new Trump
administration and the resultant likelihood of a tighter
monetary policy.

5
FOCUS OF THE MONTH
Towards a Growth-Oriented Budget
DECEMBER 2016
1. Revive Investments
a) Accelerate PSU Disinvestment
• It is pivotal to raise funds from Public Sector Units
(PSU) divestment. In the Union Budget FY17, the
government had fixed the disinvestment target at
Rs 56,500 crore for 2016-17, out of which Rs 36,000
crore was to come from minority stake sale in
PSUs and Rs 20,500 crore from strategic sales. In
the first seven months of the current fiscal so far,
government has collected Rs 21,409.8 crore (which
amounts to 38 per cent of the total budgeted tar-
get) so far.
• By 31st
December 2017, government should try to di-
vest/ privatize 100 companies including the 74 iden-
tified by NITI Aayog. This is critical for the govern-
ment to meet its disinvestment target for the year.
b) Implement Kelkar Committee Recommendations
on Public Private Partnership (PPP)
• The key is dispute resolution with the many stuck
PPP projects. The government should target re-
dressal of all existing disputes in PPPs through dis-
pute resolution Mechanism by 31st December 2017.
T
he forthcoming Union Budget will be presented
against the backdrop of heightened expectations
that the government would unravel reform-cen-
tric policies and action plan which would rejuvenate our
growth drivers and transform the economy. No doubt,
the economy in general has done quite well in FY17 with
a normal monsoon heralding a bountiful crop harvest,
private consumption holding up well and a sharp mod-
eration witnessed in inflation indices.
However, with economic growth expected to momen-
tarily lose momentum in the second half of this fiscal
on account of the demonetization drive, there is wide-
spread anticipation that the government will take bold
and pragmatic measures to mitigate and reverse the
downside risks to growth. What is more certain areas
like weak private sector investments, mounting NPAs
and low credit off take by industry also call for urgent
policy action in order that the economy achieves a sus-
tained and inclusive growth of 8 per cent and above in
the near future. Against this backdrop, following are
the CII’s pre-budget recommendations for Union Budg-
et 2017-18 to the government:

ECONOMY MATTERS 6
FOCUS OF THE MONTH
c) Asset recycling
• The government should recycle existing govern-
ment assets. Example, railways had opened up
development of railway stations on PPP basis. It will
be interesting if 50 rail stations under development
around the country could fructify by December
2017 and this should be announced in the budget
since the railway budget is now included.
2. Employment: Reducing the effec-
tive cost of creating good quality
jobs
The economy has created many jobs in informal ser-
vices and contract jobs. However, the moot issue is the
quality of employment generated.
• For existing firms: The government should extend
the policy frame work provided for textile and ap-
parels to all sectors. This provides for fixed-term
employment and State provision of employers
Provident Fund (PF) contribution in the first year.
• For new firms: The need is to move from subsidies
and incentives to removing the burden of state reg-
ulation on start-ups. This can enable creation of 10
million start-ups in next 5 years by allowing these
new start-ups to comply with regulations through
self-declaration for all interface with the state for
the first 5 years. The definition of a start-up shall be
any firm less than 5 years old with no further qualifi-
cation.
3. Innovation led Economy
• CII recommends building a National Technology
strategy between government and industry.
• There is need to substantially increase investment
in technology by firms doing in-house R&D. Public
investment in research in the higher education sec-
tor is 0.04 per cent of GDP which needs to increase
ten-fold in order to reach the global average of 0.4
per cent. Similarly, private sector investment in in-
house R&D which is currently 0.3 per cent of GDP
needs to increase five-fold in order to reach the
global average of 1.5 per cent.
• CII recommends creating a National Innovation
Fund with a corpus of at least Rs. 10,000 crores.
The government has Rs 8,000 crores in the Consoli-
dated Fund of India collected through Cess on tech-
nology imports which can be used for this purpose.
This should be awarded to the firms on the basis of
competitive proposals judged by peer review.
• The state provides abundant funds for research in
autonomous laboratories which currently stands
around Rs 90,000 crore. However, there should be
an increase in funds to finance research in public
higher education institutions. The increase would
take research in higher education from Rs 5000
crore to Rs 15,000 crore.
4. Reduction in Corporate Tax Rate
and withdrawal of all incentives
CII has proposed that corporate tax be brought down
to 18 per cent including all surcharges and cess. In re-
turn all tax incentives, concessions could be removed
and there would be no need of grandfathering of the
previous incentives. CII’s calculation of Profit Before
Tax (PBT) and tax foregone in 2014-15 indicates an ef-
fective rate of 19.8 per cent without any tax incentives/
concessions. We believe that in the past when corpo-
rate tax has been lowered, corporate tax collection has
gone up. An 18 per cent corporate tax should therefore
not lead to revenue loss to the government and at a
stroke move us away from a high tax, high concession
regime. This will help bring India in line with the most
attractive international investment destinations such as
Singapore, Sri Lanka, UK and Turkey. Additionally, it will
also send a powerful message to Indian industry and
global investors that India is an attractive investment
destination and a huge enabler for Make in India.

7
FOCUS OF THE MONTH
DECEMBER 2016
Time to Steady the Ship and Restore Confidence
I
n the last couple of years, India’s sound macro-eco-
nomic fundamentals supported by strong, construc-
tive government policies, benign global commodity
prices, RBI’s focus on curbing inflation and a bountiful
monsoon have helped India to be the fastest growing
major economy in the world. As the Economic Survey
for 2015-16 stated, amidst a gloomy economic land-
scape, India stands out as a haven of stability and an
outpost of opportunity. However, as the Finance Min-
ister prepares to present his fourth Budget this term,
he would have to contend with some short term turbu-
lence in the comfortable zone that India has been in.
The government’s decision to invalidate old high-value
currency notes is guided by the good intent to check the
growth of the parallel economy and bring the informal,
rural, and cash-based segments of the economy into
the fold of formal economy. Though the move will be
beneficial for the Indian economy in the long run, at the
current juncture when the private investment is already
weak, the demonetisation shock will have a negative
short-term impact on GDP growth. The contractionary
effect of the cash crunch would significantly affect the
growth outcomes of the third and the fourth quarters
of this financial year.
To counterbalance these adverse developments, the
Finance Minister will need to undertake some regula-
tory and fiscal stimulus measures that will create a ‘feel-
good’ effect, spur demand in the economy and incen-
tivise investments, thus reinstating confidence in the
economy. The tax buoyancy after the demonetisation
and the Income Declaration Scheme should provide the
desired fiscal space to reduce the burden on taxpayers
without compromising on the objective of improving
the tax-GDP ratio. The lower tax burden coupled with
the implementation of GST backed by robust IT infra-
structure would also be instrumental in improving tax
compliance in India.
To provide more disposable income in the hands of the
individual taxpayers, the basic exemption limit of Rs 2.5
lakhs should be revised upwards to Rs 5 lakhs. The tax
rate for taxpayers in the income bracket of Rs 5 lakhs to
Rs 10 lakhs should be reduced from the current 20 per
cent to 10 per cent. A reduction in the tax burden will
help push consumption and demand by putting more
money in the hands of the taxpayers, particularly in the
lower and middle income groups.
Currently, the tax burden on the Indian corporate sec-
tor is one of the highest in the world, with the applica-
bility of the Minimum Alternative Tax (MAT) at 18.5 per
cent and the Dividend Distribution Tax (DDT) at 20.36
per cent adding to the already high corporate income
tax rate of 34.6 per cent. More and more countries are
moving to a low tax regime to attract investments. The
United Kingdom proposes to reduce its corporate tax
rate of 20 per cent to 17 per cent in the next four years.
The US President-elect has announced a cut in the cor-
porate tax rate by half to 15 per cent. Even the com-
peting jurisdictions such as Vietnam, Thailand and Phil-
ippines are aiming to reduce the corporate tax rates.
India, too, needs a lower, more competitive tax rate
otherwise the businesses in India could be lured back
to the US or diverted to their jurisdictions. The FM has

ECONOMY MATTERS 8
FOCUS OF THE MONTH
promised a reduction in the corporate income tax rate
to 25 per cent by the year 2019, to be accompanied by
the withdrawal of incentives. The Government has al-
ready withdrawn some of the incentives and laid down
the roadmap for phasing out the remaining ones. It is
now time that a reduction in the corporate tax rate be
announced, in line with the global trend.
Over the past months, the Government undertook
many positive tax reforms to bring consistency and co-
herence in tax policy. Significant clarifications were is-
sued to bring clarity and certainty in taxation and steps
are being taken to improve ease of compliance and im-
prove dispute resolution.
To bring in greater tax certainty, the Government should
issue the guidelines for implementation of GAAR at the
earliest. The guidelines should include additional exam-
ples to provide clarity on where GAAR should or should
not be invoked. The guidelines should also clearly high-
light that GAAR is not to be invoked if SAAR applies and
that it should not override a treaty. Similarly, the draft
guiding principles issued in January 2016 for determina-
tion of Place of Effective Management (POEM) should
be finalised and made public. Ideally, the POEM provi-
sions should be made effective from the next financial
year, after the final guidelines are known and under-
stood by all. In case POEM is applied to consider a for-
eign company a resident, the same should be referred
to as a specialised panel, as in the case of GAAR.
In the interest of improving ease of doing business, the
government must consider withdrawing the Income
Computation and Disclosure Standards (ICDS). Taxpay-
ers are already grappling with changes like the Com-
panies Act and GST and there is scope for litigation on
many aspects of ICDS. It merely results in issues such as
multiplicity of accounting methods, increased compli-
ance burden of multiple records etc., which outweigh
its benefits. ICDS at best brings timing differences be-
tween accounting and taxable income.
Another provision that is prone to many disputes and
needs a review is disallowance under Section 14A. In-
come which is subject to distribution tax, for instance
dividends, and subsequently exempted in hands of the
recipient should be excluded from the scope of section
14A of the Act. Similarly, amendment to Section 72A of
the Act to allow benefits of carry forward of losses, pur-
suant to amalgamation, to all companies irrespective of
their line of business, especially service businesses will
provide much relief.
Many competing jurisdictions including Malaysia, China,
Indonesia, Brazil, Vietnam and Singapore provide incen-
tives to MNCs to set-up global research and develop-
ment (R&D) hubs in their territories. The position of
the Indian administration, unfortunately, is not very
clear. By dissuading companies from moving high value
added work to India, Circular 6 acts as a barrier to India
developing as an innovation hub. The allegation of PE
in case of secondment of expatriates by MNE groups
to their Indian subsidiaries dissuades the relocation of
their key decision makers to India. To encourage in-
vestment in R&D space, Circular 6 should be modified
to qualify a R&D centre as a Contract R&D centre and
permit it to earn a return on a cost plus basis even if the
Centre undertakes an economically significant function
(such as conceptualisation and design of the product),
gets involved in strategic control and direction of the
development or undertakes ‘end-to-end’ R&D. Second-
ment cases should be looked at liberally to not allege PE
merely because of the presence of expatriates in India,
if such expatriates work under the supervision and con-
trol of India business.
Another significant dimension that needs attention
is the improvement in the current dispute resolution
mechanisms. The government has taken many positive
steps in this direction, but further measures are needed
to bring about a perceptive change. For instance, 108
Advance Pricing Agreements (APAs) have been signed
since 2013-14. However, on the bilateral APA front, the
absence of Article 9(2) in the tax treaties of some of
the countries causes artificial barriers as India does not
permit transfer pricing dispute resolution through Mu-
tual Agreement Procedures (MAP) and bilateral APAs,
which otherwise is a global practice. These artificial
barriers should be done away with to make it easier for
companies resident in countries like Germany, France,
Singapore, Italy and South Korea to access the bilateral
APA forum.
Safe Harbour has also not been able to pick up as ex-

9
FOCUS OF THE MONTH
DECEMBER 2016
pected because of the high margins prescribed. The
Government should keep more realistic margins in line
with the margins agreed under the APA programme.
Moreover, the dichotomy created by prescribing two
safe harbour margins for software development and IT
enabled service i.e., 20 per cent where transaction value
does not exceed Rs. 500 crores and 22 per cent where
transaction value exceeds Rs. 500 crores, must be re-
moved. The mechanisms of the Authority for Advance
Ruling and Dispute Resolution Panels need to be made
more effective by increasing the number of benches
and providing strict timelines for disposal of cases.
No other reform has been as awaited by the industry as
the Goods and Services Tax (GST). At the time of writ-
ing this article, there was still a stalemate between the
Centre and the States over dual control under GST. The
industry hopes that these issues will be resolved at the
earliest for timely implementation of GST. In the mean-
while, certain provisions of the Model GST Law must be
reviewed. Service sectors such as banking, insurance,
telecom, consulting, airlines etc., which have PAN In-
dia operations, and e-commerce companies having a
virtual presence in every State without being physically
present will be seriously affected by the requirement of
State wise multiple registrations. A single centralised
registration should therefore replace the requirement
of multiple registrations for such service providers.
Refunds under the Model GST Law are provided only in
the case of exports and inverted duty structure. Delay
in refunds seriously impacts the working capital flow
and the cost of doing business. In line with interna-
tional best practices, any form of excess credit should
be promptly refunded. The draft GST law is absolutely
silent on manner of grandfathering the existing area
based exemptions granted to the units under the Excise
laws. A clear provision needs to be laid down so that
the interest of the existing manufacturers is not preju-
dicially affected. The transitory provisions should also
clarify how the input credit of the central excise duty
(CGST) shall be taken by the trader in the absence of
documents evidencing the payment of respective tax.
The Government is taking the right steps to make the
economy more transparent, simplify the tax structure
and to make India globally competitive. The upcoming
Budget should be focused on steadying the ship and re-
storing confidence in the economy. It’s time to persis-
tently work towards translating the announced reforms
into effective implementation and reducing the lag be-
tween the policy and on-the-ground action.

ECONOMY MATTERS 10
FOCUS OF THE MONTH
Emerging Strategic Directions of the Union Govern-
ment in the Context of the Monetary Policies and
Budget 2017
T
he new Government headed by Mr Narendra
Modi swept the Parliamentary polls in 2014 and
took over the Government in Delhi. A totally new
set up took over the roles in the Central Government
covering the various Ministries and in the last couple of
years even the bureaucracy went through a revamping
with new faces and a fresh approach to governance.
The Prime Minister had mentioned in his election
speeches that he would focus on bringing about a
change in the different spheres covering industry, agri-
culture and the basic principles of governance. This also
covered a promise of eradicating the black money prob-
lem in the national economy as well as bringing about a
radical change in all operating areas.
True to the above promise, the Government has re-
cently demonetized the Rs.500/- and Rs.1000/- notes
and is actively trying to digitize the economy. Also, the
Government is working towards changing all working
areas and assumptions by merging the ‘Railway Budget’
with the ‘General Budget’ and preponing the Budget
presentation to the beginning of February for ensuring
that all Budget workings are initiated and enforced with
effect from the beginning of the financial year i.e. 1st
April, 2017. This will also result in avoiding the vote-on-
account requirement since earlier the budget was being
passed in May/June resulting in non-availability of funds
for running the various Government Departments be-
tween April and May/June.
It is obvious from the above that a breath of freshness
is coming in for the various activities of the Govern-
ment which has not happened in the past. However,
the operating problems in the effective implementation
of the demonetization policy are still continuing and
it is expected that the said problems would get over
in the next few months so that the economy can get
kick-started from the set back in November. It is worth
mentioning that the demonetization strategy had to be
covered in a ‘veil of secrecy’ for the obvious reason that
issues relating to terrorist funding, counterfeit currency
and fall-outs of the black money economy were sought
to be addressed.
The Central Budget has now assumed a very critical role
in respect of the direction that the Government wishes
to provide for unshackling of the Indian economy to
move into a higher growth trajectory in the next few
years.Forinstance,theproposedintroductionoftheNa-
tional GST is now virtually certain which is expected to
reduce the complications in the realm of indirect taxes,
so that the multiplicity of levies like excise duty, service
tax and local taxes are replaced by a new model of sales
tax which is expected to result in improving the compli-
cations and disputes. In fact, the high level of comput-
erization in the designing of GST network will by itself
result in cutting down the tax-on-tax phenomenon and
help in seamless transition for the various products and
services in the country. This also will help in ensuring
that all transactions are captured for the consequential
adjustment of the taxes paid at the earlier levels and
this in turn will definitely result in the reduction of the
black economy. Consequently, the seeds will be sown
for improvement in the GDP, which is expected to go
up by 1-2 per cent. The Government has also announced
the focus on the ‘Make-in-India’ concept which should
also aid in bringing back manufacturing operations to
the country. A related suggestion is to change the mot-
to from ‘Make-in-India’ to ‘Made-in-India’. This change
would result in enhancing the branding of Indian manu-

11
FOCUS OF THE MONTH
DECEMBER 2016
facturing as an inherently valuable concept with focus
on quality which by itself would result in bringing back
more manufacturing to India.
In respect of Direct Taxes, demonetization has on its
own created some operating problems since India has
been historically a cash economy and the said Rs.500
and Rs.1000/- notes accounted for over 85 per cent
of the cash in the system i.e. around Rs.15 lakh crore.
Therefore, the replacement of the said currencies by
new notes will take some time. Parallely, the Govern-
ment has also instituted a number of measures for
digitization of the transactions to the maximum extent
possible and this will definitely help in the long run. The
Government has started providing incentives digital
payments so that all transactions are brought into the
official channels.
A number of economists have opined that the return of
the demonetized Rs.500/1000 notes should be less than
the Rs.15 lakh crores currency in circulation on a total
basis and this would help in RBI extinguishing the liabil-
ity for the said shortfall, which in turn could be used to
give a special dividend to the Government. As per in-
formation available till 10th December, 2016, Rs.12.44
lakh crores of the demonetized currency have already
been returned back to the RBI. However, this method-
ology for determination of the success or failure of de-
monetization may not be the ideal formula. In fact, the
Government has already brought about a new Taxation
Amendment Law for providing a window for a new In-
come Disclosure Scheme. This will help in getting back
the black money into the official system after payment
of a higher rate of taxes and penalty. This appears to be
a very good move to ensure that the unreported cash
economy can smoothly move in to the main economy
and therefore, the ideal position would be one in which
the entire Rs.15 lakh crore of Rs.500/Rs.1000 currency
could move into the official channels. The consequential
taxes would by itself result in generating additional rev-
enue for the Government and the black currency would
start contributing to the official economy in terms of
investments and growth. Further, the individual banks
would get additional liquidity which would by itself help
in their ability to give loans to all sectors at a lower in-
terest rate for growth and inflation would also come
down.
The Black Economy is actually not restricted only to the
currency form. It also exists in respect of gold and real
estate in addition to foreign moneys stashed abroad. It
is imperative that the Government takes further meas-
ures to address the above areas, so that there are no
gaps in the administration of the said problem. It may
be noted that the Government has already brought
about the new laws and regulations in respect of Bena-
mi Transactions (Prohibition) Amendment Act, 2016 and
Insolvency and Bankruptcy Code, 2016 and it is earnest-
ly hoped that the menace of the Black Economy gets
finally addressed by this multi-pronged approach.
The abovementioned strategic measures initiated by
the Central Government should now be strengthened
by new measures in the coming Budget for 2017. It is
suggested that the Government introduces special
measures for kick starting the economy. This could
take the form of a stimulus package for 2017-18 cov-
ering various sectors of the national economy as was
done in 2008-09. However, this time it could include
reduced rates of Indirect Taxes, whether in the form of
GST or otherwise depending on the final introduction
of the said GST Law. Other measures would include
lower rates of interest on loans for various critical ar-
eas like auto sector, agriculture and investments in in-
frastructure. There could also be in the form of special
subsidies in the important areas of the economy. For
Direct Taxes, the Government has already mentioned
that incentives would be reduced and it would be in
the form of investment-linked deductions as opposed
to profit- linked deductions for critical infrastructural ar-
eas like power (including wind and solar power) roads,
highways, ports etc.. This will create more purchasing
power for individuals and availability of increased funds
for investment in hands of Corporates. Moreover, with
the broadening and expansion of the tax base, the tax
rates could be brought down for both individuals and
corporates, which would incentivise and recharge the
national economy.
The Government has already initiated various steps in
the last couple of years by setting up the Easwar Com-
mittee for simplification of Income Tax Laws, the Ashok
Lahiri Committee for reduction of operating issues in In-
come Tax, the Standing Committee on TDS for ensuring
the smooth administration of tax deduction at source,
extensive computerization in respect of return filing,
processing, issue of circulars by CBDT for reduction of
tax disputes etc..
It is expected that all the above measures would help
in bringing about greater growth and buoyancy in the
national economy and help in unleashing the country in
the global stage so that India can take its rightful place
in the world.

ECONOMY MATTERS 12
FOCUS OF THE MONTH
Managing Publicly Held Land as an Asset and for Pub-
lic Interest 1
I
ndia’s public land holdings are vast and valuable. One
of the government’s most significant tangible assets,
whether in the hands of central ministries, state gov-
ernments, or local bodies, they occupy substantial acre-
age in high value urban areas and around major ports.
A pilot inventory of public lands in the Ahmedabad
Municipal Corporation2
indicates that 32 per cent of all
developed and developable land — excluding road net-
work, water bodies, and railway lines — is public land
with the Corporation. Indeed, the Union Government
departments and organizations are the largest land-
owners in the country.3
There is no definitive publicly
available inventory of central land holdings, but a study
of published sources indicates that these holdings are
very large and potentially underutilized.4
The 13 Major
Port Trusts hold around 100,000 hectares of land in all.
The Airports Authority of India controls 20,400 hectares
of high-value land surrounding major airports. Indian
Railways has identified 43,000 hectares of its massive
landholdings as unnecessary for railway service, and
estimated the value of this excess land at some US$40
billion. The Ministry of Defence is India’s largest land-
owner. Its holdings amount to over 700,000 acres, of
which about 0.7 lakh acres are in cantonments — many
of them in prime urban areas. In 2006 and 2007, the
Metropolitan Mumbai Regional Development Authority
(MMRDA) leased out 13 hectares of land in the Bandra
Kurla complex in Mumbai for about Rs. 5000 crores, or
roughly ten times the MMRDA annual infrastructure
budget and five times the Mumbai Municipal Corpora-
tion budget!5
Public lands in urban areas are highly valuable public
resources that deserve open and efficient management
following good international practice. The monetary
value locked up in government held, but unused land
cries out for efficient and effective land management.
A commonly held view in India is that land is a scarce,
highly valuable and a finite resource. Continued acquisi-
tion of private lands for public purpose has become a
contentious and socially divisive issue. But any govern-
ment seeking to expropriate large tracts of new land
for public purpose should manage its existing land hold-
ings in a way that not only brings in direct government
revenue but also helps indirectly to sustain economic
activity in and around these areas.
India is a rapidly modernizing and urbanizing society,
a society that is experiencing pressures from many dif-
ferent directions to invest in public services, human
capital and general welfare. Effective management of
public land represents an opportunity to respond to
these urgent needs. This should be part of a strategy
for managing the government’s balance sheet in public
interest. Disposing of surplus lands could free up fiscal
resources for investments in other much needed public
assets, such as long lived infrastructure networks that
can bring benefits to society for years to come.
1
This is drawn from a project done by IDF in 2013. The project was sponsored by PPIAF and World Bank, and was titled Formulation of a Public
Policy Framework for Monetizing Excess Public Lands
2
See chapter entitled “Inventory of Public Lands in Ahmedabad, Gujarat, India” in report cited in footnote 1.
3
Chawla et al. (May 2011), Government of India, Cabinet Secretariat, Report of The Committee on Allocation of Natural Resources
4
See chapter entitled “Capturing the Value Of Public Land for Urban Infrastructure: Centrally Controlled Landholdings” in the Report cited in
footnote 1.
5
See chapter entitled Unlocking Land Values to Finance Urban Infrastructure in the Report cited in footnote 1

13
FOCUS OF THE MONTH
DECEMBER 2016
Some of the necessary steps towards this goal are out-
lined below. The relevant question here is not whether
to release surplus government lands; this is happening
and will continue. The operative question is whether
the governance arrangements for management of pub-
lic lands can be improved to ensure that alienation of
these assets better serves the public purpose. The first
lesson from international experience is that individual
governmental agencies rarely, if ever, identify excess
lands voluntarily to permit redisposition of lands no
longer needed for their service function. Successful
utilization of public lands has mostly happened when
a strong centralized government agency has mandat-
ed the identification and redisposition of excess lands
to ensure proactive management of these assets. The
costs of holding onto lands allocated to government
departments and agencies are very small. Decentral-
ized agencies have little incentive, therefore, to get rid
of them.
Second, there must be a reliable and consistent inven-
tory of public lands that allows scrutiny by higher level
authorities of public land holdings, in particular Finance
Ministries/Departments, to ensure that valuable assets
are not held indefinitely when they could be converted
to other use, public or private. The absence of a regu-
larly updated, centralized, and consistent inventory of
public lands also leaves considerable scope for aliena-
tion through sale, grant, or most likely leasing, of valu-
able lands without scrutiny of these transactions.
Third, successful experiences from countries with a
federal structure point towards a separation of man-
agement arrangements for state and federal level land
assets. All of this must begin with a comprehensive in-
ventory of public lands. A good inventory should record
(a) location and dimensions of each land parcel (b) legal
title and any restrictions on development (c) current
use and future planned use, if part of a public develop-
ment plan and (d) valuation by parcels of economic sig-
nificance. Such an exercise should be carried out by all
departments in a ministry and by all agencies depend-
ing on a ministry for their funding, as well as, by all pub-
lic sector undertaking (PSU) owned wholly or partly by
government.6
Consistency and comprehensiveness are
more important than introducing sophisticated techno-
logical platforms that may slow down the creation of
the desired inventory. These must then be made pub-
licly accessible. A publicly accessible inventory of public
lands is an essential element in accountability.
Fourth, create a centralized process for identifying ex-
cess or surplus public lands. Once a list of “surplus” land
has been identified and made public, market forces and
perhaps other agents of government can focus on the
most attractive or useful surplus parcels and express
demand for them.
Fifth, create administrative and financial incentives for
excess land disposition and sound asset management.
One way of achieving this is to place the onus on gov-
ernment agencies to justify why they should hold any
land parcels, by requiring them to demonstrate their
necessary role in the agency’s public service provision.
Regardless of whether the land is ultimately disposed
of, or not, such an exercise identifies the extent to
which land is held as an asset by the government.
Sixth, institute an annual land audit using the principle
of value for money in identifying excess public lands.
Land held by government should be viewed as an in-
put into the provision of the public service for which
the landholding agency is responsible. All public land-
holdings therefore should regularly be reviewed, with
the goal of divesting those properties not necessary or
cost-effective for service provision. Property having no
efficient use is to be put on the open market at full value
(whether for rent, lease or outright sale). Such an audit
and its underlying principle will also help in acquisition
and allocation of public lands.
And finally, once the audit system is in place, the actual
management of the surplus land and the generation of
its value must be undertaken by specialized agencies,
with a well-defined public interest objective (which, in
most cases will involve land value maximization in some
form) and clear indicators for evaluating their perfor-
mance which, in turn, will have to be incentivised. This
is not rocket science but requires political will and lead-
ership that enables a government to work in the public
interest.
6
Minority owned government PSU’s may cause some complexities but government should use its powers even as a minority shareholder to per-
suade the agency to participate voluntarily. It is likely to be in the interests of all shareholders to know the location and be able to make decisions
on how to manage these assets with a sense of their potential value. Well managed PSUs are unlikely to have large excess lands and should have
nothing to hide.
(View expressed are personal)

15
DOMESTIC TRENDS
EXIM Performance Analysis: Last Five Years
DECEMBER 2016
T
he trade deficit for India has continued to follow
the declining trend since FY12, on the back of fall-
ing global oil prices. While the performance of
the dollar value of aggregate exports has been soften-
ing, mirroring the global slowdown, that of aggregate
imports is being curtailed at higher rates on the back
of falling oil prices. Oil, holding the top spot amongst
importing sectors, also saw a major fall in imports in
terms of dollar value as prices had been declining since
early 2011. Gems & Jewellery, the second top importing
sector has also seen a reduction in its dollar value of im-
ports since FY15.
to US$381 billion from US$489 billion in FY12 and US$448
billion in FY15. Exports have shown a less dramatic per-
formance, lying at US$262 billion in FY16 from US$306
billion in FY12 and US$310 billion in FY15. In the April to
October period during the current fiscal year, trade defi-
cit decreased to US$53 billion from US$78 billion in the
Trade deficit at its lowest in last five fiscal
years as exports see a double-digit contrac-
tion over FY15
The total deficit for the country dropped to as low as
US$119 billion in FY16, from a level of US$183 billion in
FY12 and US$138 billion in FY15. Imports in FY16 dropped

ECONOMY MATTERS 16
DOMESTIC TRENDS
comparable period in FY2016. Exports recorded a near-
flat growth in April-October in FY2017, 0.2 per cent; this
was however a marked improvement over the steep
contraction in exports to the tune of 17.1 per cent in the
comparable period in FY2016. Imports softened from
US$233 billion in April-October in FY2016 to US$209 bil-
lion in the same period in FY2017.
the lowest at US$19.6 billion in November 2015, while
in October 2016, exports stood at US$23.2 billion. Trade
deficit was at its highest levels at US$20.2 billion in Oc-
tober 2012, during the period of analysis – April 2011 to
October 2016, and witnessed a trough at US$4.4 billion
in March 2016 earlier this year, while in October 2016,
trade deficit levels were to the tune of US$10.4 billion.
The dollar value of aggregate imports in October 2016
stood at US$33.6 billion, as compared to the peak of
US$45.3 billion in May 2011 and above US$25.8 billion in
April 2016, when they were at the lowest during the pe-
riod of analysis – April 2011 to October 2016. During the
same period, aggregate exports witnessed their high-
est dollar value at US$30.5 billion in March 2013, and

17
DOMESTIC TRENDS
DECEMBER 2016
Lack of diversification of Indian export bas-
ket is plaguing the Indian export perfor-
mance
The sector-wise pattern in exports has not seen notice-
able changes in past three fiscal years. The top three ex-
porting sectors – engineering goods, gems & jewellery
and textiles – contribute to over half the dollar value
of aggregate exports, while next three – oil, agriculture
and drugs & pharmaceuticals – add the next quarter to
the tally. This limited diversification of India’s export
basket has led to a stagnant trend in export perfor-
mance, as a dismal performance in these sectors sways
the dollar value of aggregate Indian exports. During the
last fiscal year, all these six sectors have witnessed a
contraction in the dollar value of their exports, with the
exception of drugs & pharmaceuticals. However, the
drugs & pharmaceuticals sector has also seen a contrac-
tion in exports during April to October period of FY17.

ECONOMY MATTERS 18
DOMESTIC TRENDS
Engineering goods has been a top exporter since FY14,
contributing one fourth of dollar value of aggregate In-
dian exports. While this proportion has been fairly con-
stant, in FY16, engineering exports saw a contraction to
the tune of 14.8 per cent in its dollar value, as compared
to a double-digit growth of 13.9 per cent in FY15. This is
a major cause of worry as engineering goods comprise
a major chunk of aggregate exports. The situation has
improved only to a limited extent in the April to October
period in the current fiscal. The contraction in that pe-
riod stood at 1.3 per cent as compared to de-growth of
11.3 per cent in the comparable period in FY16.
Gems & jewellery, contributing around 15 per cent of to-
tal dollar value of exports in FY16, witnessed a further
contraction to the tune of 4.6 per cent in its dollar value
of exports as compared to a de-growth of 0.9 per cent
in FY15. In the April to October period in FY17, the sector
witnessed dramatic improvement in growth rate to the
tune of 14.5 per cent as compared to a negative growth
rate of 6.4 per cent in the comparable period in FY16.
Textiles, which contributed around 13 per cent of total
dollar value of aggregate exports during FY16, also saw
its share diminishing by 2.3 per cent in FY16, as com-
pared to a growth of 5.6 per cent in the previous fiscal
year. The growth rate declined further in April to Octo-
ber period of current fiscal year to a negative rate of 4.4
per cent as compared to a contraction of 0.4 per cent
in the same period in FY16. Agriculture, contributing to
8 per cent of dollar value of aggregate exports during
FY16, saw a contraction of 18.3 per cent in FY16 as com-
pared to a de-growth of 4.8 per cent in 2015. In fact, for
eight of the top 10 exporting sectors, growth rates lay
in the negative territory. While this was, in some part, a
result of the falling demand due to slowdown in global
economies, the importance of these commodity groups
in the aggregate Indian export basket affected aggre-
gate export growth adversely.
Drugs & pharmaceuticals industry, unlike all the rest,
was expanding its dollar value of exports till FY16. The
absence of product patents, till its revision in 2005, had
helped India build the capacity to manufacture generic
drugs, resulting in high export growth figures. April to
October period in FY17 however saw a negative growth
rate to the tune of 2.1 per cent in this sector on account
of a steep fall in prices. This happened because of grow-
ing consolidation of the distribution business in the
world’s largest markets, especially the US, while the
supply side of generic drugs remains competitive. Also
drug multinationals have pressured governments into
tightening the norms to discourage bulk exports from
abroad, sounding bad news for the Indian pharmaceu-
ticals industry.
Iron-ore exports, that were large because of demand
from China, have been slowing down in each fiscal year
since FY14 due to slowdown in China. Increasing domes-
tic demand of crude and petroleum within the country
has reduced the exports in the oil sector as well, in each
fiscal year since FY14. Although handicraft exports have
been performing consistently well since FY14, their
meager contribution of 0.7 per cent, during FY16, fails
to make a dent in the aggregate export basket.

19
DOMESTIC TRENDS
DECEMBER 2016
The dollar value imports in Oil and Gems &
Jewellery sectors continues to contract
During FY16, the top three importing sectors – oil, gems
& jewellery and electronic goods – contributed to a lit-
tle less than half the total dollar value of aggregate im-
ports, while the next three sectors – machinery, chemi-
cals and base metals – added the next quarter to the
tally. While the list of top ten importing sectors has not
seen major inclusions or exclusions over last three fiscal
years, the proportions have seen noticeable changes.
The proportion of oil in the dollar value of aggregate
imports has declined from 36 per cent in FY14 to 22 per
cent in FY16. Electronic goods comprised 11 per cent of
the dollar value of aggregate imports in FY16 as com-
pared to 7 per cent in FY14.
The observation that – while oil has seen a large decline
in proportion of imports, the change has been not so
dramatic for other sectors – reflects that the decline in
the dollar value of aggregate imports as a denominator
is in tandem with the decline in dollar value of imports
of oil. In other words, oil has been a near sole contribu-
tor to curtailing of imports and trade deficit. While the
dollar value of aggregate imports contracted by 15.0 per
cent in FY16 and that of all other sectors with the excep-
tion of oil contracted by only 3.8 per cent in the same
fiscal year, oil imports alone witnessed contraction to
the tune of 40.0 per cent in dollar value during FY16. It is
noteworthy, however, as prices have been correcting,
imports have contracted only 15.4 per cent in the April
to October period of FY17 as compared to a contraction
of 41.9 per cent in the comparable period in FY16.
Gems & jewellery, which contributed to as much as 15
per cent to the total dollar value of imports in FY16, saw
a contraction in imports of 9.8 per cent in dollar value
as compared to a growth of 7.6 per cent in the previous
fiscal year. In the April to October period of the current
fiscal, imports contracted further to the tune of 20.4 per
cent as compared to a negative growth rate of 6.4 per
cent in the comparable period in FY16.

ECONOMY MATTERS 20
DOMESTIC TRENDS
Six of the top ten importing sectors witnessed a con-
traction in the dollar value of imports. In the April to
October period of the current fiscal as many as nine
of the ten sectors witnessed a contraction in imports.
Growth in the dollar value of import of electronic goods
softened in FY16 and stood at 9.8 per cent as compared
to 15.5 per cent in FY15. In the April to October period of
FY17, contraction of 1.8 per cent was witnessed howev-
er, as compared to a growth rate of 9.5 per cent in simi-
lar period in previous fiscal. Machinery saw a contrac-
tion to the tune of 5.4 per cent in FY16 as compared to
a growth of 8.6 per cent in FY15. The downward trend
is persistent as the sector saw a contraction of 15.0 per
cent in April to October period of FY17 as compared to
1.3 per cent growth in comparable period in FY16. Chem-
icals witnessed a higher growth of 3.0 per cent in FY16
as compared to a growth of 1.9 per cent a year ago. In
the April to October period of FY17 however, the sector
slipped into negative territory and contracted by 2.0 per
cent as compared to a 2.2 per cent growth in April to
October period in FY16. Base metals, which constituted
6 per cent of the aggregate imports in FY16 in terms of
dollar value, saw a contraction of 8.6 per cent in FY16 in
its dollar value of imports as compared to a growth of
25.1 per cent in FY15 as prices of base metals corrected.
The trend persists as the sector saw a contraction of 17.2
per cent in April to October period of FY17 as compared
to 3.1 per cent de-growth in comparable period in FY16.

21
DOMESTIC TRENDS
DECEMBER 2016
The monthly performance of major sectors, in the first
two quarters of FY17, apart from oil and gems & jew-
ellery which are on a clear declining trend, has been
mixed. Electronic goods and chemicals have seen a
somewhat sustained level of imports during April 2016
to October 2016. Imports in machinery, base metals,
ores & minerals, transport equipment and agriculture
have softened during the same period – the first two
quarters of FY17.
Aftermath: Rising oil prices sound warning
bells for India
Export performance has become a cause for serious
concern especially as out of top ten sectors – which
comprised around 90 per cent of dollar value of aggre-
gate exports during FY16– eight have registered a con-
traction in dollar value of exports. While momentarily,
imports seem to provide some cushion to the widening
Industrial output contracted in October 2016, declin-
ing by 1.9 per cent as compared to 0.7 per cent in the
previous month. Mining and manufacturing segments
remained a cause for concern with capital goods con-
tinuing to weigh on the headline print. Consumer goods
recorded a contraction as well during the month. The
Manufacturing sector growth once again
slips into negative territory
The manufacturing sector, which has the highest weight
among all the industrial output sub-sectors, once again
slipped into the negative territory — contracting by 2.4
deficit, it is important to note that the OPEC decision
on 30th November 2016 to reduce oil production has
sent oil prices into a rally resulting in apprehensions
about the continuation of the gains accrued from low
oil prices. A potential ban on gold import will help ease
the situation and reduce imports to some extent; gold
prices have already been falling since July 2016. The best
course would be to take preventive actions as soon as
possible, before the trade deficit plunges into a wide
gap again. These would include diversification of ex-
ports basket, lobbying for better prices for agricultural
products in the international markets, curtailing oil con-
sumption by promoting renewable energy devices and
encouraging further not just the Make in India initiative
but also focusing on use of indigenous raw materials
and exporting finished products as compared to semi-
finished produce so as to fetch best prices especially in
industries like electronic goods, agriculture and gems &
jewellery.
recent weakness in IIP has already shown up in lower
than expected GDP growth in Q2FY17. On a cumulative
basis, factory output in April-October 2016 contracted
by 0.3 per cent compared to 4.8 per cent growth in the
same period a year-ago.
per cent in October 2016 as compared to 0.9 per cent
growth in September 2016. In terms of industries, 12
out of the 22 industry groups (as per 2- digit NIC-2004)
in the manufacturing sector showed negative growth
during October 2016 as compared to the corresponding
month of the previous year. For the April-October 2016
Industrial Output Contracts Once Again

ECONOMY MATTERS 22
DOMESTIC TRENDS
period, the sector’s output contracted by 1.0 per cent,
as against a growth of 5.1 per cent in the same period
a year ago. Mining & quarrying sector continued to re-
main in the negative territory for the third consecutive
month, declining by 1.1 per cent in October 2016, while
electricity sector posted an anemic growth of 1.1 per
cent in the reporting month as compared to 2.4 per cent
in the previous month.
Capital goods continue to remain a key drag
on the overall IIP
According to use-based classification, capital goods con-
tinued to remain a key drag on the overall IIP. Capital
goods witnessed the twelfth straight month of contrac-
tion in the month of October 2016. The sector posted a
contraction of 25.9 per cent in October as compared to
a decline of 21.6 per cent in the previous month. Within
this sector, rubber insulated cables was the major lag-
gard. The continued decline in the output of the capital
goods sector has raised doubts about the recovery of
investment cycle in the country. To be sure, industrial
production excluding the output of the capital goods
sector stood at 1.9 per cent during the month as com-
pared to 4.3 per cent in the previous month. Going for-
ward, capital expenditure by the Government will be
crucial to support recovery in this segment.
Consumer goods growth also contracts dur-
ing the month
Consumer goods growth entered the negative territory
for the first time in 6 months in October 2016. Within
this category, consumer durables witnessed a sharp
slowdown at 0.2 per cent as compared to double-digit
growth of 13.9 per cent in September 2016. Consumer
non-durables contracted by 3.0 per cent as compared
to 0.1 per cent growth evidenced in the previous month.
This segment has been depressed for most of the year.
While better monsoon and pay panel awards were ex-
pected to aid this sector, the recent demonetisation
move of the government is anticipated to bring sub-
dued gains for this sector.
In contrast, core sector output improves for
the second consecutive month in October
2016
The output of eight core infrastructure industries im-
proved to 6.6 per cent in October 2016 on a year-on-
year basis as compared to 5.0 per cent in September
2016, thanks to a sharp rise in refinery production and
a pick-up in cement production. The cumulative output
rose to 4.9 per cent in April-October 2016 over the cor-
responding period of last year. The index measures the
output in eight infrastructure sectors – steel, cement,
coal, refinery products, natural gas, crude oil, fertilisers
and electricity generation. It has a 38 per cent weight in
the Index of Industrial Production (IIP).

23
DOMESTIC TRENDS
DECEMBER 2016
Outlook
The contraction in industrial output in October 2016 is a matter of concern. However, going forward, normal mon-
soons, which should improve rural demand, along with the lagged impact of interest rate reductions and 7th
pay
commission handouts, are expected to cushion demand in future and boost industrial activity. There may be short-
term disruptions on account of government’s recent demonetisation move as it impacts the cash based transac-
tions, which are a large part of the Indian economy. However, in the medium-term the impact of this demonetisa-
tion will be largely positive for economic growth.
Cement output quickened to 6.2 per cent in October
2016 compared with a 5.5 per cent rise in September
2016. Refinery products output expanded sharply to 15.1
per cent in October 2016 as compared to 9.3 per cent in
the previous month. The same three sectors continued
to contract in October 2016 as in August and September
2016 - coal, crude oil and natural gas.
Wholesale Price Index (WPI) based inflation continued
its downward trajectory as it slowed down to 3.2 per
cent in November 2016 as compared to 3.4 per cent in
the previous month mainly due to a squeeze in cash
availability which in turn impacted prices of perishable
commodities. CPI inflation too edged lower to 3.6 per
cent in November 2016 from 4.2 per cent previously on
the back of lower food prices even as core inflation re-
mained sticky. CPI food inflation cooled further to 2.6
per cent from 3.7 per cent previously. Within this seg-
ment, vegetables inflation and pulses led the steepest
fall in November 2016 as compared to October 2016.
Pulses inflation fell to 0.2 per cent as compared to 4.1
per cent in the previous month. Government measures
to address structural issues in pulses have cooled down
prices in this segment. While concerns in pulses infla-
tion have lessened off-late, recent areas of concerns
like sugar and cereals still remain. To be sure, inflation
in sugar has continued to remain in double-digits for
8 consecutive months. Meanwhile, CPI core inflation
stood unchanged at 4.9 per cent.
Retail inflation for November 2016 is presently within
RBI’s comfort zone wherein CPI is within the 4 per cent
level with a two-percentage point-band on either side.
The moderate inflation scenario has rightly facilitated
the RBI decision to retain the accommodative policy
stance in the recent Monetary Policy. CII expects the
WPI inflation for November 2016 to also follow the trail
of CPI inflation so that the overall inflation trajectory
continues to remain benign.
Inflation Ebbing Down Slowly

ECONOMY MATTERS 24
DOMESTIC TRENDS
Food and non-food articles inflation pulls
down inflation in primary articles
Amongst the WPI sub-categories, inflation in primary
articles eased sharply to 1.1 per cent in November 2016
as against 3.3 per cent growth posted in October 2016.
Within primary articles, inflation in both food and non-
food sub categories witnessed a moderation in out-
put during the reporting month. For instance, primary
food inflation slowed to 1.5 per cent (as compared to
4.3 per cent in October 2016) while non-food inflation
stood at -0.1 per cent (as compared to 1.1 per cent in Oc-
tober 2016). The main reason behind the deceleration
in primary food inflation was the steep fall in vegeta-
ble prices which dropped to -24.1 per cent in November
2016 against -9.97 per cent increase in October 2016. .
However, inflation in mineral category quickened to 1.2
per cent during the reporting month as compared to a
contraction during the previous month.
Fuel inflation accelerates; upward risks in
sight
In contrast, inflation in the fuel group of WPI acceler-
ated to 7.2 per cent in November 2016 from 6.2 per
cent in the previous month. Inflation in both, petrol and
diesel group, quickened to 5.5 per cent (from 3.6 per
cent in October 2016) and 19.5 per cent (19.3 per cent
in October 2016) respectively in October 2016. Going
forward, with the Organization of the Petroleum Ex-
porting Countries (OPEC) announcing an agreement in
November 2016 to cut back on output in an attempt to
lift global prices back up, we can expect some upward
pressure on global crude oil prices. This in turn will push
up domestic fuel inflation as well. Crude oil prices re-
cently hit an 18-month high of US$56.44 per barrel.
Non-food manufacturing inflation remains
sticky
Similarly, Inflation in the manufactured group quick-
ened to 3.0 per cent in November 2016 as compared to
2.7 per cent posted in the previous month. Manufactur-
ing food inflation, which had moved to double-digits in
July 2016 marginally increased to 10.7 per cent in the
reporting month from 10.5 per cent in the previous
month. Meanwhile, manufacturing non-food inflation
(popularly called as core inflation and a proxy for de-
mand-side pressures in the economy) remained sticky
at 1.4 per cent in November 2016 as compared to 1.0 per
cent in October 2016. With core inflation recording an
increase after a prolonged period of deflation, there are
indications that demand is returning to the economy.
However, the recent demonetisation move of the gov-
ernment is expected to curb some demand pressures.

25
DOMESTIC TRENDS
DECEMBER 2016
Outlook
Both WPI and CPI inflation moderated in November 2016, providing relief to the policymakers. The softening of
CPI and WPI inflation was attributed essentially to a downward drift in the momentum of food prices assisted by
favourable monsoon which has led to record food-grain output in the kharif season. The fall in prices could also
be partly reflective of the demonetisation impact, which has led to lower demand in the economy due to a cash
crunch. The moderate inflation scenario has rightly facilitated the RBI decision to retain the accommodative policy
stance and will encourage RBI to further reduce rates.
In a surprise move, the Reserve Bank of India (RBI)
maintained status-quo and kept all the policy rates un-
changed in its fifth third bi-monthly monetary policy
review held on December 7th, 2016. The Central Bank,
while flagging uncertainties from the recent demon-
etization move, noted that it will wait and watch to
see how these factors pan out. However, the decision
of the Monetary Policy Committee (MPC) was in con-
sonance with the objective of containing consumer
price index (CPI) inflation at 5 per cent by Q4FY17 and
the medium-term target of 4 per cent within a band of
+/- 2 per cent, while supporting growth. The repo rate
remains unchanged at 6.25 per cent while reverse repo
rate and Marginal Standing Facility (MSF) rate currently
stand unchanged at 5.75 per cent and 6.75 per cent re-
spectively.
RBI Keeps Policy Rates Unchanged, Maintains an
Accommodative Stance

ECONOMY MATTERS 26
DOMESTIC TRENDS
RBI takes notes of a gradual but steady
growth recovery
On the growth front, the Central Bank highlighted that
the output of real Gross Value Added (GVA) in Q2 of
2016-17 turned out to be lower than projected on ac-
count of a deeper than expected slowdown in indus-
trial activity. Investment spending still remains in the
negative territory. Moreover, the growth outlook of
the third quarter was clouded by the still unfolding ef-
fects of the withdrawal of the high denomination legal
tender. In view of latter, RBI noted that the downside
risks to growth in the near-term have risen which could
travel through two major channels: (a) short-run disrup-
tions in economic activity in cash-intensive sectors such
as retail trade, hotels & restaurants and transportation,
and in the unorganised sector; (b) aggregate demand
compression associated with adverse wealth effects.
Hence, it pared its GVA growth forecast for 2016-17 from
7.6 per cent to 7.1 per cent, with evenly balanced risks.
However, the Central Bank sounds a cau-
tious note on inflation
On the inflation front, RBI added that the downside to
inflation has increased since the last policy, but risks re-
main as the impact of rising global oil prices and rupee
depreciation on imported inflation and the effect of the
7th Pay Commission payouts on consumer demand will
be visible soon. Going forward, inflation in categories
such as housing, transport, trade in household goods
and consumer services — including ‘eating out’ which
relies mostly on cash transactions- will most likely see
a downward pressure in the coming months. Conse-
quently, as per the RBI, the withdrawal of high denomi-
nation legal tender could result in a possible temporary
reduction in inflation of the order of 10-15 basis points
in Q3FY17. Taking these factors into account, headline
inflation is projected at 5 per cent in Q4 of 2016-17 with
risks tilted to the upside but lower than in the October
policy review.
Demonetisation impact felt on liquidity con-
ditions
The policy acknowledged the surge in systemic liquid-
ity as a result of the move to replace specified bank
notes. However, this is likely to be seen as transitory
and the objective of moving liquidity towards neutral-
ity remains in place. A slew of steps were taken by the
RBI to manage the excess liquidity entering the banking
system post the demonetisation move announced by
the government on 8th November, 2016. To be sure, the
currency in circulation plunged by Rs 7.4 trillion up to
December 2, 2016; consequently, net of replacements,
deposits surged into the banking system, leading to a
massive increase in its excess reserves. The Reserve
Bank scaled up its liquidity operations through variable
rate reverse repo auctions of a wide range of tenors
from overnight to 91 days, absorbing liquidity (net) of
Rs 5.2 trillion. From the fortnight beginning November
26, an incremental Cash Reserve Ratio (CRR) of 100 per
cent was applied on the increase in Net Demand and
Time Liabilities (NDTL) between September 16, 2016
and November 11, 2016 as a temporary measure to drain
excess liquidity from the system.

27
DOMESTIC TRENDS
DECEMBER 2016
Outlook
RBI’s decision to maintain a status-quo in policy rates is reflective of the primacy given to restraining inflationary
expectations in the monetary policy discourse even while maintaining an accommodative stance. The recent global
developments have also persuaded the RBI to maintain the status quo. With banks now flush with liquidity post
de-monetisation, CII hopes that lending activity can be facilitated at a time when credit to industry is at a six- year
low. Employment-intensive sectors such as the auto, consumer durables and housing industry and the SME sector,
which are presently facing cash crunch, need to be revived quickly.
Current account deficit (CAD) for the second quarter
of the current fiscal (2QFY17) stood slightly higher at
US$3.4 billion or 0.6 per cent of GDP as compared to
US$0.3 billion or 0.1 per cent of GDP in the previous
quarter mainly due to higher trade deficit and lower
invisibles. However, in the same quarter last year, CAD
stood sharply higher at US$8.5 billion which translates
into 1.7 per cent of GDP. The contraction in CAD on a
year-on-year (y-o-y) basis could be primarily attributable
to a lower trade deficit (US$25.6 billion) brought about
by a larger decline in merchandise imports relative to
exports. However, rising crude oil prices may put some
pressure on trade deficit going forward. Crude prices
reached an 18-month high at US$56.44 per barrel on
12th December, 2016 after members of the Organiza-
tion of the Petroleum Exporting Countries (OPEC) and
oil producers outside the group led by Russia agreed
to reduce output. On a cumulative basis, the CAD nar-
rowed to 0.3 per cent of GDP in H1 of 2016-17 from 1.5
per cent in H1 of 2015-16 on the back of the contraction
in the trade deficit.
Invisible related flows lower in 2QFY17
Invisibles related flows were lower at US$22.2 billion
in 2QFY17 as compared to US$29.2 billion in the same
quarter last year. Component wise, net services re-
ceipts moderated on y-o-y basis, primarily owing to the
fall in earnings from software, financial services and
charges for intellectual property rights. Private transfer
receipts, mainly representing remittances by Indians
employed overseas, amounted to US$15.2 billion, hav-
ing declined by 10.7 per cent from their level a year ago.
quarter last year mainly on account of higher net for-
eign investment. The net foreign investments were
fired up by a healthy jump in foreign direct investment
(FDI) component during the quarter. Meanwhile, port-
Higher direct foreign investment cushions
capital account
Net capital account increased sharply to US$12.7 billion
in 2QFY17 as compared to US$7.6 billion in the same
Current Account Deficit Widens in 2QFY17

ECONOMY MATTERS 28
DOMESTIC TRENDS
folio flows witnessed an inflow of US$6.1 billion as com-
pared to an outflow to the tune of US$3.4 billion in the
same quarter in the previous year. Buoyant IPO market
domestically and ample liquidity globally supported
portfolio related flows during the quarter.
We expect CAD to come below 1 per cent of GDP in
FY17. The key risk to the outlook is volatility in portfo-
lio related flows and deceleration in remittance related
inflows. From a longer term perspective, although the
external sector performance remains favorable, the
Robust foreign investment and lower current account
deficit supported BoP to remain in positive territory. In
Q2 of 2016-17, foreign exchange reserves (on BoP ba-
sis) increased by US$8.5 billion as against a decline of
US$0.9 billion in Q2 of last year
sustainability of the same is still doubtful in view of the
global headwinds like uncertainty from Trump presiden-
cy, Italy referendum etc. still hovering over the horizon.
Sustaining the positive momentum of exports perfor-
mance will be crucial in this regard.

29
CORPORATE PERFORMANCE
Corporate Performance of Manufacturing Sector
Shows Improvement
DECEMBER 2016
T
he corporate results at the end of the second
quarter of fiscal year 2017 brought a reason for
cheer for the manufacturing sector which saw
an improvement in both its bottom-line and top-line.
The sector, which was buoyed by a significant fall in in-
puts costs following the collapse of global commodity
prices, registered a sharp pickup in profitability growth
in 2QFY17 as compared to the same quarter a year ago.
Worryingly, both bottom-line and top-line of services
sector firms continued to remain weak so far. The anal-
ysis factors in the financial performance of a balanced
panel of 1670 manufacturing companies (excluding oil
and gas companies) and 948 service firms extracted
from the CMIE’s Prowess database.
Bottom-line of firms on an aggregate basis
registers a stellar performance in 2QFY17
In 2QFY17, the bottom-line of the manufacturing firms
registered a growth of 28.3 per cent as compared to
13.6 per cent in the same quarter a year ago. Net sales
of manufacturing firms also grew by 3. 9 per cent in
2QFY17 as compared to a contraction of 1.4 per cent in
2QFY16. Thanks to the slump in commodity prices in the
past few years, manufacturing firms were able to im-
prove their profitability fairly easily. But they no longer
have this advantage at present. In fact, after the recent
decision by the Organization of the Petroleum Export-
ing Countries (OPEC) to cut production, Brent crude
futures rallied by 15 per cent in the week till 2nd Decem-
ber, posting their biggest weekly gain in over five years.
Moreover, the demonetisation move of the govern-
ment is also expected to hit both sales and profitability
of firms going forward.

ECONOMY MATTERS 30
CORPORATE PERFORMANCE
In contrast, net sales growth is recovering
slowly
Service sector performance has remained lackluster
since last few quarters. Net sales growth of service
sector firms contracted by 4.2 per cent in 2QFY17 as
compared to 8.1 per cent growth in 2QFY16, reflecting
in part the lack of ample demand in the economy. The
After several quarters of disappointments, the Septem-
ber quarter results of Indian companies were slightly
ahead of expectations. However, before any celebra-
tions could kick in, the companies have been hit by the
double whammy of a Donald Trump presidency and the
Indian government’s demonetisation of high-value cur-
rency notes.
Efforts are in force by firms to improve their own pro-
slowing demand in the external markets has been do-
ing no good either. In contrast, PAT growth of service
sector firms improved to 5.3 per cent in 2QFY17 as com-
pared to contraction of 4.9 per cent in the same quarter
in the previous year. Once again, the profitability of ser-
vice sector firms was cushioned by falling input prices.
duction efficiencies and employ cost effective measures
to tide over the current difficult times. Simultaneously,
there are also expectations of some serious economic
reforms, some of which have already come in form of
necessary rate cuts by the RBI, that would elevate the
economy, help pick up sales and raise the profitability
for the Indian corporate in the months to come.

31
POLICY FOCUS
POLICY FOCUS
DECEMBER 2016
1. Lok Sabha Passes Disabilities Bill
The Lok Sabha passed on 16th December, 2016 “The
Rights of Persons with Disabilities Bill - 2016”. The Bill
will replace the existing Persons with Disabilities (PwD)
Act, 1995, which was enacted 21 years back. The Rajya
Sabha has already passed the Bill on 14.12.2016.
The salient features of the Bill are:
i. Disability has been defined based on an evolving
and dynamic concept.
ii. The types of disabilities have been increased from
existing 7 to 21 and the Central Government will
have the power to add more types of disabilities.
iii. Speech and Language Disability and Specific Learn-
ing Disability have been added for the first time.
Acid attack victims have been included. Dwarf-
ism, muscular dystrophy have has been indicated
as separate class of specified disability. The New
categories of disabilities also included three blood
disorders, Thalassemia, Hemophilia and Sickle Cell
disease.
iv. In addition, the Government has been authorized
to notify any other category of specified disability.
v. Responsibility has been cast upon the appropriate
governments to take effective measures to ensure
that the persons with disabilities enjoy their rights
equally with others.
vi. Additional benefits such as reservation in higher ed-
ucation, government jobs, reservation in allocation
of land, poverty alleviation schemes etc. have been
provided for persons with benchmark disabilities
and those with high support needs.
vii. Every child with benchmark disability between the
age group of 6 and 18 years shall have the right to
free education.
viii. Government funded educational institutions as
well as the government recognized institutions will
have to provide inclusive education to the children
with disabilities.
ix. For strengthening the Prime Minister’s Accessible
India Campaign, stress has been given to ensure ac-
The important policy announcements by the Government in the month of November-December 2016 are covered in
this month’s Policy Focus. Our endeavor through this section is to keep our readers abreast of the latest happenings
on the policy front so that they can take an informed decision accordingly.

ECONOMY MATTERS 32
POLICY FOCUS
cessibility in public buildings (both Government and
private) in a prescribed time-frame.
x. Reservation in vacancies in government establish-
ments has been increased from 3 per cent to 4 per
cent for certain persons or class of persons with
benchmark disability.
xi. The Bill provides for grant of guardianship by Dis-
trict Court under which there will be joint decision –
making between the guardian and the persons with
disabilities.
xii. Broad based Central & State Advisory Boards on
Disability are to be set up to serve as apex policy
making bodies at the Central and State level.
xiii. Office of Chief Commissioner of Persons with Dis-
abilities has been strengthened who will now be as-
sisted by 2 Commissioners and an Advisory Commit-
tee comprising of not more than 11 members drawn
from experts in various disabilities.
xiv. Similarly, the office of State Commissioners of Disa-
bilities has been strengthened who will be assisted
by an Advisory Committee comprising of not more
than 5 members drawn from experts in various dis-
abilities.
xv. The Chief Commissioner for Persons with Disabili-
ties and the State Commissioners will act as regula-
tory bodies and Grievance Redressal agencies and
also monitor implementation of the Act.
xvi. District level committees will be constituted by the
State Governments to address local concerns of
PwDs. Details of their constitution and the func-
tions of such committees would be prescribed by
the State Governments in the rules.
xvii. Creation of National and State Fund will be created
to provide financial support to the persons with
disabilities. The existing National Fund for Persons
with Disabilities and the Trust Fund for Empower-
ment of Persons with Disabilities will be subsumed
with the National Fund.
xviii.The Bill provides for penalties for offences commit-
ted against persons with disabilities and also viola-
tion of the provisions of the new law.
xix. Special courts will be designated in each district
to handle cases concerning violation of rights of
PwDs.
The New Act will bring our law in line with the United
National Convention on the Rights of Persons with Dis-
abilities (UNCRPD), to which India is a signatory. This
will fulfill the obligations on the part of India in terms of
UNCRD. Further, the new law will not only enhance the
Rights and Entitlements of Divyangjan but also provide
effective mechanism for ensuring their empowerment
and true inclusion into the Society in a satisfactory man-
ner.
CII’s Reaction
The Rights of persons with Disabilities Bill, 2014 passed by both the houses is a landmark decision towards ensur-
ing equal opportunities and accessibility to the Persons with Disabilities and will go a long way in creating inclusive
society. The bill takes into fold the Corporate sector to ensure that persons with disabilities are provided with
barrier-free access in buildings, transport systems and all kinds of public infrastructure, and are not discriminated
against in matters of employment.
Empowerment of Persons with Disabilities (PwDs) has been an important part of CII’s agenda for promoting and
enabling inclusion. CII has been working towards mainstreaming PwDs into the workforce, by sensitizing members
through a ‘Corporate Code on Disability’, manuals to assist companies with hiring processes, sensitization films to
encourage companies; facilitating employment through dedicated recruitment drives across India; and promoting
barrier free workplaces to enable access to services and facilities.
“CII is highly committed to bring in transformational change in the society and welcomes the Disability Bill. CII looks
forward to further engagement with the government on the new bill. We hope that the guidelines will emerge
through a consultative process with all stakeholders and will create a facilitative environment for industry to cre-
ate disabled friendly policies, infrastructure and services” Chandrajit Banerjee, Director General, Confederation of
India Industry.

33
POLICY FOCUS
DECEMBER 2016
2. GST Council approves most of draft mod-
el Bill
The Goods and Services Tax (GST) Council, comprising
the Union finance minister and state representatives,
mainly their finance ministers met for two days on 23-
24 December, 2016. The Council approved structure of
Central Goods & Services Tax (CGST) and State Goods &
Services Tax (SGST) laws. The Council also cleared most
of the draft model GST Bill. With the sharing of adminis-
trative powers a tough nut to crack, the Goods and Ser-
vices Tax (GST) Council sidestepped it and devoted pro-
ductive time to make the principal Bill of 195 sections,
defining the comprehensive indirect tax, foolproof and
ready for tabling in Parliament and state assemblies.
3. Government of India Rescinds Classifica-
tion of Cyprus as ”notified jurisdictional
area”
Recently, on 18 November 2016, a revised double taxa-
tion avoidance agreement (DTAA) was signed between
India and Cyprus (2016 DTAA), which replaced the ear-
lier DTAA of 1994. Subsequent to the above, the Cen-
tral Board of Direct Taxes (CBDT) of the Government
of India (GoI) has now published Notification No. 114
of 2016 dated 14 December 2016 (2016 Notification) in
the Gazette of India rescinding Cyprus’ classification as
a “Notified Jurisdictional Area” (NJA) under the Indian
Tax Laws (ITL). The 2016 Notification rescinds the NJA
classification of Cyprus from 1 November 2013, except
as respects things done or omitted to be done before
such rescission.
4. Cabinet Approves Replacement of ‘Major
Port Trusts Act, 1963’
The Union Cabinet, chaired by the Prime Minister, Shri
Narendra Modi has approved the proposal of Ministry
of Shipping to replace the Major Port Trusts Act, 1963 by
the Major Port Authorities Bill, 2016. This will empower
the Major Ports to perform with greater efficiency on
account of full autonomy in decision making and by
modernizing the Institutional structure of Major Ports.
With a view to promote the expansion of port infra-
structure and facilitate trade and commerce, the pro-
posed bill aims at decentralizing decision making and
to infuse professionalism in governance of ports. The
new Major Ports Authority Bill, 2016 would help to im-
part faster and transparent decision making benefiting
the stakeholders and better project execution capabil-
ity. The Bill is aimed at reorienting the governance mod-
el in central Ports to landlord port model in line with the
successful global practice. This will also help in bringing
transparency in operations of Major Ports.
The salient features of the Major Ports Authority Bill are
as under:
a. The Bill is more compact in comparison to the Major
Port Trusts Act, 1963 as the number of sections has
been reduced to 65 from 134 by eliminating over-
lapping and obsolete Sections.
b. The new Bill has proposed a simplified composition
of the Board of Port Authority which will comprise
of 11 members from the present 17 to 19 Members
representing various interests.
c. The role of Tariff Authority for Major Ports [TAMP]
has been redefined. Port Authority has now been
given powers to fix tariff which will act as a refer-
ence tariff for purposes of bidding for PPP projects.
PPP operators will be free to fix tariff based on mar-
ket conditions. The Board of the Port Authority has
been delegated the power to fix the scale of rates
for other port services and assets including land.
d. An independent Review Board has been proposed
to be created to carry out the residual function of
the erstwhile TAMP for Major Ports, to look into dis-
putes between ports and PPP concessionaires, to
review stressed PPP projects and suggest measures
to review stressed PPP projects and suggest meas-
ures to revive such projects and to look into com-
plaints regarding services rendered by the ports/
private operators operating within the ports would
be constituted.
e. The Boards of the Port Authority have been dele-
gated full powers to enter into contracts, planning
and development, fixing of tariff except in national
interest, security and emergency arising out of inac-
tion and default. In the present MPT Act, 1963 prior
approval of the Central Government was required
in 22 cases.
f. Empowers the Board to make its own Master Plan
in respect of the area within the port limits and to
construct within port limits Pipelines, Telephones,
Communication towers, electricity supply or trans-
mission equipment. The Board is empowered to
lease land for Port related use for upto 40 years and
for any purpose other than the purposes specified
in section 22 for upto 20 years beyond which the ap-
proval of the Central Government is required.
g. Provisions of CSR & development of infrastructure
by Port Authority have been introduced.

ECONOMY MATTERS 34
GLOBAL TRENDS
OPEC Decision to have Major Repercussions
O
n 30th
November 2016, the Organization of the
Petroleum Exporting Countries (OPEC) an-
nounced their first oil production agreement in
eight years. The historic agreement will see oil produc-
tion by OPEC nations cut by 1.2 million barrels per day
(b/d) to about 32.5 million b/d for six months from the
start of January 2017. The agreement also has an option
to extend the agreement to the end of 2017. Aggregate
production has been stated in terms of the 14 OPEC
members including Indonesia, although Indonesia is no
longer a member as of this meeting. Non-OPEC mem-
bers including Russia have also agreed to lower produc-
tion by 600 thousand barrel per day (kb/d). The heavy
lifting though looks set to be done by Saudi Arabia who
has agreed to reduce output by 486 kb/d. At the same
time the Saudis appear to have softened their stance on
Iran somewhat with the latter now freezing production
at nominally less than 3.8m b/d and marginally higher
than current levels. Iraq, who had previously disputed
price cutting, agreed to a cut of 210 kb/d. OPEC will also
establish a monitoring committee with the aim of im-
proving compliance from the historical record.

35
GLOBAL TRENDS
DECEMBER 2016
Comparing the agreed reductions among
member countries
Comparing the agreed reductions in absolute terms,
Saudi Arabia is committing to the largest reduction.
However, comparing the agreed output ceilings against
November 2014 production (before the initiation of the
market share maximization strategy), both Saudi Ara-
bia and Iraq will hold onto the majority of their gains.
Viewed in terms of percentage reductions to baseline
levels, OPEC member countries are very tightly grouped
around the 4.4 per cent to 4.8 per cent range(not clear),
with an average reduction of 4.56 per cent. Indonesia
requested for suspension of its OPEC membership be-
cause as a net importer of oil, it will struggle to support
the deal. Iran wanted exemptions on account of an at-
tempt to recapture the market share lost under years
of western sanctions. Libya and Nigeria, asked for the
same, since exports have been hampered due to vio-
lence. The issue of offsetting increases from exempt
countries has become all the more pressing because
Libya raised its production by 150 kb/d and Nigeria by
180 kb/d in October, while Saudi Arabia has been slow
to reduce production from the summer ramp-up. The
only factor depressing production in October was main-
tenance activity in Angola which lowered output by 170
kb/d to 1.52m b/d.
The significance of non-OPEC contributions
On the subject of non-OPEC contributions to a pur-
ported 600 kb/d reduction, meetings are scheduled
between OPEC and non-OPEC producers in the current
month. According to the OPEC press conference, Oman
has offered to contribute by way of cuts of up to 10 per
cent in line with the OPEC reduction while Russia has
offered a cut of 300 kb/d. However, there is a history
of Russian non-compliance and also Russian oil produc-
tion is not the output of a single state-owned com-
pany but rather a number of at least partially publicly
owned companies. Further several new fields are being
launched which will contribute meaningfully in 2017. At-
tempts to cut production at the brownfields could in
turn result in additional costs that oil companies would
be unwilling to bear.
A meeting held on 28th September 2016 in Algiers had
preceded the one on 30th November 2016 in Vienna.
A skeptical view had then been held on the possibility
of a production cut. This was because of rising output
from Libya and Nigeria, the uncertainty of how the pact
might deal with country exemptions and disputes over
a distinction between reported and actual production
in Iraq. However, a further meeting on 28-29 October
was characterized as constructive and fruitful and pro-
duction cuts are now underway. The agreement is more
bullish than market expectations. First, the 33.0m b/d
upper limit in the range, as mentioned by OPEC in an
earlier announcement, has been omitted, leaving the
32.5m b/d as the sole target level. Second, the non-
OPEC contributions of 600 kb/d have been described
as nearly agreed, with Russia and Oman having been
named as key contributors. That said while the agree-
ment is clearly a big help for the demand-supply rebal-
ancing, there remains skepticism that the full non-OPEC
reduction will be realized.
The decision continues to command atten-
tion across markets
The agreement has sent oil prices in a rally. By the end
of 30th November 2016, West Texas Intermediate (WTI)
saw a jump to US$49.41/b from US$45.29/b a day be-
fore, registering a steep 9.1 per cent hike. The move
for WTI in particular is the biggest one-day gain since
12th February 2016, when it rose by 12.0 per cent in a
single day. The price of Brent rose to US$47.95/b on the
announcement day as compared to US$44.68/b a day
earlier, growing by 7.3 per cent. The prices continued
to rise the following day on 1st December 2016 and reg-
istered hikes by 12.8 per cent and 17.0 per cent for WTI
and Brent respectively as compared to the prices pre-
announcement on 29th November 2016. The climb in
prices has been unrelenting in recent weeks and on 12th
December 2016, the price of WTI closed at US$52.74/b,
which is 16.4 per cent upwards of the pre-announce-
ment levels. Similarly, Brent closed on the same day at
US$53.99/b, a 20.8 per cent hike over the pre-announce-
ment levels.

ECONOMY MATTERS 36
GLOBAL TRENDS
The price at which WTI closed on 12th
December 2016,
US$52.74/b, is the peak during the last one year, and is
a growth by as much as 101.4 per cent over the lowest
levels of US$26.19 on 11th
February 2016. Similarly, Brent
Reverberations across asset classes and en-
ergy stocks which had been hammered in
the aftermath of Global Financial Crises
The impact of the agreement on oil prices is having
profound consequences across several asset classes,
with oil producers and explorers benefitting while hurt
is being felt across dependent sectors such as airlines.
Further to this, the increase in energy costs is likely to
be adding to inflationary pressures, placing additional
weight on longer-term government bond prices. The
biggest feed through to other asset classes from the
oil move was in sovereign bond markets where the re-
flationary effect had yields spiking higher. The 10-year
closed on 12th
December 2016, at an all-time high of
US$53.99/b, which is upwards to the tune of 107.6 per
cent when compared to its trough at US$26.01/b earlier
this year on 20th January 2016.
treasury yields surged 9bps on 30th November 2016
to 2.38 per cent after peaking a little above 2.40 per
cent, following the announcement and in the process
closed at the highest yield since July 2015. On 12th De-
cember, 2016, the yields closed at 2.47 per cent, 18bps
higher than the pre- announcement level. The yields are
now over 100 bps higher than where they were just 5
months ago. There was a similar move for Emerging
Markets (EM) sovereigns. In the Euro zone, too, 10-year
Bund yields edged up just over 5 bps to 0.27 per cent
following the announcement, and on 12th December
2016, yields stood at 0.39 per cent, 18bps upwards of
pre-announcement levels on 29th November 2016.

37
GLOBAL TRENDS
DECEMBER 2016
Federal Reserve Bites the Bullet; Hikes Interest Rate
In line with market expectations, US Federal Reserve
hiked its key Fed fund target rate by 25 bps to between
0.50-0.75 per cent in its monetary policy review meeting
held on December 14th, 2016. There were no dissenters
to this decision. The Federal Open Market Committee
(FOMC) judged that in light of realized and expected la-
bour market conditions, as well as the progress on the
inflation front, it was deemed appropriate to hike the
Fed Funds rate. The stance of monetary policy remains
accommodative, thereby supporting some further
strengthening in labor market conditions and a return
to 2 per cent inflation. Notably, the Fed commentary
has turned decidedly hawkish — with several referenc-
es to fiscal expansionary stance under the new Trump
administration and the resultant likelihood of a tighter
monetary policy.
On economic growth front, the FOMC noted the moder-
ate pace of expansion in economic activity, while men-
tioning solid job gains and a decline in the unemploy-
ment rate. It however made note of the fact that while
household spending had been rising moderately, fixed
investment by businesses had remained soft. In the
Summary of Economic Projections (SEP) that accompa-
nied the statement, the FOMC revised higher its projec-
tion for GDP growth for 2016 and 2017, while the unem-
ployment rate projection was revised slightly lower for
both years. The latter is in line with the firm recovery
seen in the labour market.
On the inflation front, FOMC underlined that inflation
had increased since earlier this year but was still below
the Committee’s 2 per cent longer-run objective, partly
reflecting earlier declines in energy prices and in prices
of non-energy imports. Moreover, the market-based
measures of inflation compensation had moved up con-
siderably, but were still low; most survey-based meas-
ures of longer-term inflation expectations were little
changed, on balance, in recent months.
The median Fed Funds rate projection for 2017 was re-
vised higher to 1.375 per cent from 1.125 per cent, while
the same for 2018 was raised to 2.125 per cent from
1.875 per cent made earlier. The current dot plot in-
dicates a faster pace of rate hikes in 2017 (3 hikes), as
compared to the expectation from the September dot
plot (2 hikes). Fed Chair, Janet Yellen, mentioned in the
accompanying press conference that the broad upward
shift in the dot plot may have resulted from participants
incorporating fiscal expectations in their Fed Funds rate
projections, while emphasizing that the upward revi-
sion was a minor change.
Aftermath
As far as the US, which became a net exporter of oil
three years ago, is concerned, on a macroeconomic
level, the price rise could help nudge the Federal Re-
serve towards its long-awaited interest rate hike. Be-
sides, OPEC’s attempts to gauge the cost of petroleum
could also be nullified by the expected surge in US oil
supply under drilling-friendly President-elect Donald
Trump. The effect on consumers’ finances as a result of
the output cap will likely be a minor dent at the worst
and should be outweighed by the benefits to domestic
oil producers—nothing like the sort of influence OPEC
production cuts have wielded on the U.S. economy in
the past.
India, however, needs to take the move with a pinch of
salt. The hitherto gains achieved via a curtailed deficit on
account of falling dollar value of imports through low oil
prices are now set to diminish, and the deficit could ex-
acerbate in near future. However, the oil price increase
may remain capped due to the following reasons:
• Non-OPEC production remains high – Russian pro-
ducers reluctant to cut production.
• Shale output from US coming back at higher prices.
• Demand side remains subdued with continuing
downward revisions in global growth prospects.
• China’s Strategic Petroleum Reserve (SPR) is close
to full capacity.

ECONOMY MATTERS 38
GLOBAL TRENDS
Going forward, FOMC expects that economic condi-
tions will evolve in a manner that will warrant only grad-
ual increases in the federal funds rate; the federal funds
rate is likely to remain, for some time, below levels that
are expected to prevail in the longer run. However, the
actual path of the federal funds rate will depend on the
economic outlook as informed by incoming data.

ECONOMY MONITOR
ECONOMY MATTERS 40

41
ECONOMY MONITOR
DECEMBER 2016

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