ECONOMY MATTERS: Corporate Profitability and Investment Trends

1
FOREWORD
JUNE-JULY 2015
C
hina’s economic growth for the second quarter of 2015 beat expectations, rising 7 per cent
from a year earlier. Though growth remained relatively robust, there were widespread
fears that the world’s second largest economy was slipping into a deeper slowdown, the
fears getting reflected in the recent crash in commodity prices. China’s downshifting after
decades of double-digit economic growth has rattled large swaths of Latin America, Africa and Aus-
tralia, which have prospered by shipping copper, iron ore and other raw materials to Chinese factory
floors at high prices. In this slower-growth environment, implementing the right policies will remain
a challenge for Chinese policy makers, and their ability to get it right will have significant implications
for global growth.
On the domestic front, the ongoing monsoon session of Parliament has been keenly anticipated by
Indian industry which depends on policymakers to set the framework for doing business. This session
in particular is critical, given that a number of key legislations are keenly awaited. The last two Par-
liament sessions have been among the most productive in recent years. With prudent participation
of all political parties, many bills of interest to industry were passed during the winter and budget
sessions. The most important of listed bills is the constitutional amendment bill which will formalise
introduction of the Goods and Services Tax, a next-generation indirect tax reform. CII believes that
with the continued implementation of economic reforms, the GDP growth rate could climb to 7.8-8.2
per cent this year and further to 9-10 per cent in the medium term. With over a crore youngsters join-
ing the workforce each year, India cannot afford the luxury of placing other interests over economic
compulsions any longer. Therefore, industry would expect that our lawmakers would come together
in a constructive manner to give shape to the future of India. Our window of opportunity to create a
developed India is now and we must not let it pass.
There is no gainsaying the importance of giving boost to the investment trajectory in a growing
economy like India. In fact, investment revival is crucial for spring-boarding growth. CII’s analysis of
the corporate performance for the period 2009-10 to 2013-14 has thrown up some interesting results.
Growth in both net sales and net profit has dropped sharply in the last two fiscal years. Over the past
five years, sectors like Hotels & Retail, Oil & Gas, Media & Entertainment, Consumer Durables, FMCG,
Healthcare & Pharmaceuticals, Banks & Financial Services, Textile, Paper, Leather, Rubber & Wood
and Auto & Auto Parts have performed better than the aggregate business sector in terms of net
sales growth. Worryingly, manufacturing segment has been suffering from chronic lacklustre perfor-
mance for several years now. In order to improve the profitability of the sector, there should be an
increased emphasis on improving the sector’s productivity along with focus on efficiency.
Chandrajit Banerjee
Director General, CII

EXECUTIVE SUMMARY
ECONOMY MATTERS 4
Global Trends
World’s second-largest economy, China’s economic
growth showed sign of stabilization, with the GDP posting
a 7 per cent growth rate in the second quarter of 2015. In a
bid to get projects going, the State Council—China’s cabi-
net—issued at least 10 guidance papers on infrastructure
investment in May 2015. Across the continent, the crisis in
Greece seems to have resolved as if now, with a bailout
package being promised by the ’trioka’ in exchange of aus-
terity measures which will be implemented by Greece. But
worryingly, over the years, the various bailout packages
have helped Greece, but its economic problems haven’t
gone away. The economy has shrunk by a quarter in five
years, and unemployment is above 25 per cent. The bail-
out money has mainly gone toward paying off Greece’s
international loans, rather than making its way into the
economy. And the government still has a staggering debt
load that it cannot begin to pay down unless a recovery
takes hold.
Domestic Trends
Industrial production growth inched down to 2.7 per cent
in May 2015 from 3.4 per cent in the month of April 2015.
April print was revised downward to 3.4 per cent from
4.1 per cent earlier. IIP growth slowed down in May 2015
as the manufacturing sector lost momentum on the back
of weak performance of consumer oriented sectors. Un-
seasonal rains earlier in the year resulting in lower rural
demand are weighing in on consumer goods. The gov-
ernment is aware of this situation and has already taken
a number of policy and reform initiatives. We are hopeful
that the initiatives taken by the government in terms of ex-
peditious project clearances, simplification of procedures
and new investment announcements as well as the ‘Make
in India’ initiative would improve the order book position,
revive demand and help effect a turnaround in the invest-
ment cycle. On the inflation front, CPI inflation in June 2015
crawled up to 5.4 per cent from 5 per cent in May 2015 due
to an increase in food inflation. Food CPI increased to 5.7
per cent from prior of 5.1 per cent. The rise in food CPI has
been primarily witnessed in protein inflation to a compos-
ite 9.7 per cent as against prior of 8.2 per cent.
Sector in Focus: Proposed 100 Smart Cit-
ies & Industrial Corridors
Currently while 30 per cent of the Indian population re-
sides in urban centers, these centers contribute around 65
per cent to the national GDP. It is projected that urban In-
dia will contribute about 75 per cent of national GDP in the
next 15 to 20 years while another 300 million people will
get added to the existing 300 million dwelling in Indian ur-
ban centers. The speed of urbanization will exert immense
pressure on the urban infrastructure, urban finance, natu-
ral resources and quality of urban life. In order to manage
this high level of urbanization, it is imperative for the gov-
ernment to resort to smart concepts and smart solutions.
Government of India has thus decided to develop 100
smart cities in India, as highlighted by the Finance Minister
during his budget speech of July 2014. Though the govern-
ment has committed to the development of smart cities in
India, the state level strategies for quick implementation
needs to be formulated and the operating model needs
to be finalized. Confederation of Indian Industry (CII) in
association with their Knowledge Partner, Brickwork Rat-
ings released a report titled ‘Proposed 100 Smart Cities &
Industrial Corridors: Developing Innovative Infrastructure
Financing options’ in June 2015. The excerpts of the report
are covered in this month’s Sector in Focus.
Focus of the Month: Corporate Profitabil-
ity and Investment Trends
Sales growth in the corporate business sector moder-
ated to 9 per cent in FY14, the lowest in past four years,
led by a persistent moderation in manufacturing segment,
even as the growth figures in services segment remained
stable. While growth in gross profit has also witnessed a
steady moderation over the years, growth in net profit has
dropped sharply, though remaining steady at 5 per cent
in the last two fiscal years. Over the past four years, sec-
tors like Hotels & Retail, Oil & Gas, Media & Entertainment,
Consumer Durables, FMCG, Healthcare & Pharmaceuticals,
Banks & Financial Services, Textile, Paper, Leather, Rubber
& Wood and Auto & Auto Parts have performed better than
the aggregate business sector. After major stimulus to all
sectors in FY12, apart from FMCG and Oil & Gas, significant
new investment proposals have not been announced for
the remaining sectors. Manufacturing segment has been
suffering from chronic lackluster performance for several
years now. Profitability ratios are dwindling on account of
low sales given slow demand. Cost cutting measures have
not been able to salvage the situation. Additional stimulus
combined with focus on efficiency would grease the stag-
gering wheels of the business sector and bring the econo-
my on track.

5
GLOBAL TRENDS
The Road Ahead for Greece
JUNE-JULY 2015
A
fter the Greeks overwhelmingly rejected aus-
terity demands of the creditors in exchange for
rescue loans in the referendum called by leftist
Syriza government on 5th July 2015, the possibility of
Greece’s ejection from Euro zone had come a step clos-
er to becoming a reality. However, as discussed in the
first article published last month, the other possibility
was a fresh round of bailout talks with European Central
bank guaranteeing Greek banks access to its reserves
and Greece staying in the Euro zone. This possibility
seemed to have materialized as if now.
With Greece suffering a total financial ruin with banks
running out of cash and capital controls still in place,
Prime Minister Alexis Tsipras, was forced to agree to
the terms of the nation’s creditors to avoid a disorderly
bankruptcy which would thereby push the economy
into deeper recession. This way the second possibility
nearly materialized on 12th July 2015 when Greece and
rest of the Euro zone reached an agreement leading to
a third bailout worth around 86 billion euros that would
keep the country in the single currency bloc. The auster-
ity measures were then approved by the Athens parlia-
ment with an overwhelming majority voting in favour of
the new reforms.
In exchange for the three year rescue package, Greece
will have to pay a price by accepting the extreme aus-
terity measures imposed by the creditors. The austerity
reforms agreed in the final Euro summit includes:
• Reforming pensions: According to Troika, across
the board pension cuts can save around one per
cent of GDP in 2016 and between 0.25-0.75 per cent
in 2015.
• Value added tax system and other taxes: Stream-
lining of the VAT system and broadening of the tax
base to increase revenue. With VAT to be charged
at 13 per cent for basic food, hotels, energy and wa-
ter and 23 per cent for the rest and rise in corporate
tax from 26 to 28 per cent.
• Labor market reforms: Labor market policies pro-
moting sustainable and inclusive growth thus align-
ing them with International and European best
practices.
• Energy : Privatization of its electricity transmission
network operator (ADMIE)

ECONOMY MATTERS 6
GLOBAL TRENDS
With the new reforms approved by the Greek and vari-
ous national parliaments, the European Union agreed
for a bridging loan for the country worth 7.2 billion
euros with almost all of it spent on repaying loans.This
allowed Greece to make a 3.5 billion euros payment
to European Central Bank which was due on 20th July
2015 and pay outstanding 1.5 billion euros to the IMF,
thus allowing the fund to take part in future bailout.
The agreement also enabled ECB to resume emergency
lending to Greek banks.
Banks too reopened for the first time in three weeks
following the bailout deal with capital controls still in
place, prohibiting people to withdraw more than 420
euros per week. Around a week later, Athens stock ex-
change finally reopened giving investors the first oppor-
tunity to react after five weeks of shut down. Predict-
ably, banks were hit the most with its four main banks,
including the National Bank of Greece crashing to the
daily trading limit of a 30 per cent loss.
After passing a series of reforms demanded by the
creditors, the Greek government is expecting the nego-
tiations to be concluded by 20th August, which marks
as a due date for repaying 3.2 billion euros to the Euro-
pean Central Bank. The European Commission officials
clearly stated that the creditors would not settle for a
rushed agreement and that the bailout deal requires
detailed reform commitments in writing. According to
Prime Minister Alexis Tsipras, Greece is in a final stretch
of negotiations with its creditors and expressed his con-
fidence in the bailout deal to end the uncertainty about
Greece’s future.
In case the bailout deal fails to conclude in the expected
time period, Greece would have to approach a Euro-
pean Union emergency fund or some other source in
order to repay the ECB held bonds. In such a scenario,
another set of economic revamping measures would
have to be passed in Greece’s parliament, thus creating
further pressure on the Prime minister who is already
struggling to keep his party from falling apart.
The delay in the new aid program is mainly caused due
to the reforms imposed by the creditors to restore their
confidence in Greece. While Athens has already passed
two packages of reforms through parliament, interna-
tional creditors now seek third wave of reforms before
they release any aid to keep the already battered econ-
omy from total collapse.
• Complete legal independence of Greek statistics of-
fice (ELSTAT)
• Liberalising the economy thus calling for more am-
bitious product market reforms including Sunday
trade, sales periods, milk and bakeries etc
• Action on non performing loans to strengthen the
financial sector
• Monetization of assets through privatization and
other means
Accepting the terms of its creditors, in a sense was a
betrayal for the Greek people as they decisively voted
against austerity. Also anti-austerity was the very rea-
son why they brought Syriza party to power in January.
Prime Minister Alexi Tsipras also faced rebellion in his
own party as some of his party members felt that the
anti-austerity objectives of the party were being com-
promised. Addressing the parliament Tsipras said: “We
have chosen a compromise that forces us to implement
a programme in which we do not believe, and we will
implement it because the alternatives are tough”.
Nevertheless, there was no trouble passing the draft
legislation as it was backed by the European opposition
parties allowing Greece to begin negotiations with its
creditors on the third bailout. Tsipras seems to rely on
the support of these opposition parties for the final bail-
out deal too, which is expected to be put before Greek
parliament before 20th August.
Tsipras who wanted a complete or partial write-down
of country’s massive debts –equivalent to 180 per cent
of GDP failed to negotiate with the creditors as they re-
fused the issue of debt relief. The deal announced clear-
ly stated that creditors would not forgive any Greek
debt and could only consider further discussions about
reducing annual debt payments by lengthening out pay-
ment periods or reducing interest rates.
On the other hand, with unsustainable debt levels the
International Monetary Fund (IMF) officials repeatedly
emphasized on debt restructuring of Greece by the
Euro zone and that it would consider to support the
new bailout only if Greece’s debt is reduced, ensuring
country’s comfort in debt repayments. This created
fund’s conflict with other creditors of Greece namely
Euro zone and European Central Bank.

7
GLOBAL TRENDS
JUNE-JULY 2015
Will the Third Bailout Restore
Greece to Good Health?
Assuming that the three year bailout deal goes through,
Greece’s immediate future seems secured. But does
this assure that the country will not demand a fourth
bailout in the medium or long-run?
Answers to such questions remain disputed as some
economists believe that the fresh austerity measures
are bound to have a contractionary effect on growth.
While some were of the view that Greece’s third bail-
out is bound to fail for the same reasons that the last
two bailouts did, more optimistic views stated that the
structural reforms demanded by the creditors will have
a favorable impact on growth and employment. Cen-
tre for European Reform, a British think tank predicted
that the Greece’s economy will be 4.2 per cent smaller
by 2018 as a result of austerity measures imposed by the
creditors.
With stubbornly high unemployment rates and econo-
my having shrunk by a quarter in five years, Greeks will
now suffer the pain of fresh austerity measures. Even if
debt relief is granted by the creditors, as suggested by
IMF, next few years will be hard because economy will
continue to shrink before settling into a period of low
growth.
Prolonged recession followed by a phase of low recov-
ery would make Greece’s debt highly unsustainable.
IMF has even warned Euro zone creditors about the
Greece’s government debt expected to climb to 200
per cent of national income by 2017.
• Shipping industry may take a hit as the government
has agreed to raise the taxes. This may be fearsome
for the industry which employs more than two lakh
people and contributes around 7.5 per cent of GDP.
If enacted, Greece would become one of the most
expensive countries to own a ship in the European
Union.
• Tax hikes will adversely impact Greece’s tourism
industry which constitutes 9 per cent of GDP. The
bailout proposal being considered by European
leaders would boost Greek meal sales tax from the
current 13 per cent to 23 per cent and for hotels
room sales taxes would rise from 6.5 per cent to 13
percent.
Conclusion
Only time will tell, whether the latest bailout package for Greece, will be able to solve its problems. Over the years,
the various bailout packages have helped Greece, but its economic problems haven’t gone away. The economy
has shrunk by a quarter in five years, and unemployment is above 25 per cent. The bailout money has mainly gone
toward paying off Greece’s international loans, rather than making its way into the economy. And the government
still has a staggering debt load that it cannot begin to pay down unless a recovery takes hold. Almost two-thirds of
Greece’s debt, about 200 billion euros, is owed to the Euro zone bailout fund or other Euro zone countries. Greece
does not have to make any payments on that debt until 2023. The International Monetary Fund has proposed ex-
tending the grace period until mid-century.
So while Greece’s total debt is big—as much as double the country’s annual economic output—it might not matter
much if the government did not need to make payments for decades to come. By the time the money came due,
the Greek economy could have grown enough that the sum no longer seemed daunting. In the short-term, though,
Greece has a problem making payments due on loans from the International Monetary Fund and on bonds held by
the European Central Bank. Those obligations amount to more than 24 billion euros through the middle of 2018 and
it is unlikely that either institution would agree to long delays in repayment.

ECONOMY MATTERS 8
GLOBAL TRENDS
China’s Economy Shows Moderate but Steady
Growth in 1H2015
C
hina’s economic growth shows sign of stabiliza-
tion, with the GDP posting a 7 per cent growth
rate in the second quarter of 2015 as per the Na-
tional Bureau of Statistics. The gross domestic product
figure announced by the National Bureau of Statistics
(NBS) matched the 7.0 per cent expansion in the first
three months of this year. With this, the first-half GDP
stood at 7.0 per cent. The value added of the primary
industry was up by 3.5 per cent; the secondary industry,
up by 6.1 per cent; and the tertiary industry up by 8.4
per cent in the second quarter.
In the first six months, the investment in fixed assets
(excluding rural households) grew by nominal year-
on-year growth of 11.4 per cent (a real growth of 12.5
per cent after deducting price factors), 2.1 percentage
points slower than the first quarter, due to the contrac-
tion of real estate investment despite the government’s
supportive policy. Specifically, the investment by the
state holding enterprises rose by 12.3 per cent; private
investment was up by 11.4 per cent, accounting for 65.1
percent of the total investment. Further, in the first half
year, the total retail sales of consumer goods reached
14,157.7 billion yuan, a nominal year-on-year rise of 10.4
per cent (a real growth of 10.5 percent after deducting
price factors), 0.2 percentage point slower than that in
the first quarter. Coming to exports, the total value of
imports and exports in the first half year of 2015 was
11,531.6 billion yuan, a decrease of 6.9 per cent on year-
on-year basis. The total value of exports was up by 0.9
per cent; the total value of imports showed decrease of
15.5 per cent. Consequently, the trade balance stood at
1,612.8 billion yuan in surplus.
In the first six months, the consumer price went up by
1.3 per cent year-on-year, 0.1 percentage point higher
than that in the first quarter. Specifically, the price went
up by 1.3 per cent in urban areas and 1.1 per cent in ru-
ral areas. Grouped by commodity categories, prices for
food was up by 2.0 per cent; tobacco, liquor and articles
up by 0.5 per cent; clothing up by 2.9 per cent; house-
hold facilities, articles and maintenance services up by
1.1 per cent; health care and personal articles up by 1.8
per cent; transportation and communication down by
1.6 per cent; recreation, education, culture articles and
services up by 1.5 per cent and housing up by 0.7 per
cent.

9
GLOBAL TRENDS
JUNE-JULY 2015
Chinese Stock Market Crash
The recent stock market crash in China’s stock market
had reverberations throughout the global markets too.
The deleveraging of the Chinese economy has always
seemed likely to be a long and troublesome saga, last-
ing many years or even decades if it is to prove success-
ful. The latest episode involves a sudden collapse in do-
mestic “A” shares, which have dropped by 19 per cent in
less than a fortnight, and have triggered what has been
widely described as an “emergency” easing in monetary
policy. Market volatility is likely to stay dangerously high
for quite a while, making this a very speculative market
for Chinese residents to enter. Even after the latest
crash, the domestic equity market has still more than
doubled in the past 12 months. So far, this has had very
little effect on the wider economy, which suggests that
the crash could prove to be nothing more than a market
event that will not translate into consumer spending or
bank lending. However, the fact that the central bank
has responded immediately to the crash with a decisive
monetary policy shift suggests that the authorities are
genuinely concerned.
But overall credit extension in the economy is still grow-
ing at 15.8 per cent, compared to growth of only 6.2
per cent in nominal GDP, so the credit/GDP ratio is still
soaring. The attempts to control credit after President
Xi Jinping came to office in 2013 initially seemed to be
working, but only at the expense of a slowdown in GDP
that was obviously getting out of control early in 2015.
Policy Changes
China’s economy, a key driver of world growth, ex-
panded 7.4 per cent last year, slower than the 7.7 per
cent in 2013, and its weakest annual growth since 3.8
per cent in 1990. The slowdown has been a major fac-
tor in a global fall in commodity prices, and so far the
economy has largely failed to pick up momentum this
year. Economists said the stable growth momentum is
underpinned by the slight rebound in industrial produc-
tion. They expect the government to continue escalate
policy supports in the coming months.
Chinese authorities are looking to diversify growth
away from big-ticket projects -- that helped drive years
of double-digit GDP expansion to consumer demand,
which is seen as more sustainable. But too fast a decel-
eration in investment can be harmful to overall growth.
They have been taking more aggressive pre-emptive
steps with the People’s Bank of China (PBoC), the cen-
tral bank, cutting benchmark interest rates four times
since November 2014 and reducing bank reserve re-
quirements in a bid to boost lending. Such measures
can take time to affect growth. It is very likely that the
economic growth in the second half will be better than
the first half considering the positive factors including
policy support and a recovery in the property market.
Additionally, in a bid to get projects going, the State
Council—China’s cabinet—issued at least 10 guidance
papers on infrastructure investment in May 2015. Chi-
na’s top economic planning agency, the National De-
velopment and Reform Commission, has outlined 1,043
projects for public-private partnership totaling 2 trillion
yuan ($322.1 billion) in investment. For 2015, the Chinese
government expects the economy to grow around 7
per cent, the weakest expansion in 25 years.

ECONOMY MATTERS 10
DOMESTIC TRENDS
A Critical Monsoon Session
T
he monsoon session of Parliament has been
keenly anticipated by Indian industry which de-
pends on policymakers to set the framework for
doing business. This session in particular is critical, given
that a number of key legislations are keenly awaited.
A stable and predictable investment climate arising
from a well-functioning Parliament with time-bound
procedures is central to our economic development as-
pirations. The last two Parliament sessions have been
among the most productive in recent years. With pru-
dent participation of all political parties, many bills of
interest to industry were passed during the winter and
budget sessions.
These include the Mines and Mineral (Development
and Regulation) Act, the Insurance Act, the Companies
(Amendment) Act, the Motor Vehicles Act, Coal Mining
Act, and so on. Industry hopes that the monsoon ses-
sion will be equally productive and enact major legisla-
tions that would have far-reaching benefits for India’s
development.
The most important of listed bills is the constitutional
amendment bill which will formalise introduction of the
Goods and Services Tax, a next-generation indirect tax
reform. The GST, first mentioned in the budget speech
of 2005-06, is to be introduced by April 1, 2016. After the
bill is passed in Parliament, it will have to be ratified by
the state governments and preparations for its intro-
duction can begin.
We are happy that most of the issues seem to be ironed
out for a GST that will subsume nearly all indirect taxes
and cover almost all sectors. Most political parties have
been supporting GST in principle, and it is imperative
that the bill is passed in this session to avoid further de-
lay.
As CII has said time and again, GST is likely to add 1.5
percentage points to GDP growth rate. It is also the
first concrete step to convert India into a single market,
make the supply chain smooth and efficient, and curb
inflation. Besides, it would also add to indirect tax rev-

11
DOMESTIC TRENDS
JUNE-JULY 2015
enues. The Make in India campaign would gain greatly
from its introduction.
The other crucial legislation is the Right to Fair Compen-
sation and Transparency in Land Acquisition, Resettle-
ment and Rehabilitation (Second Amendment) Bill. It
was passed by Lok Sabha during the winter session and
is undergoing committee review in the Rajya Sabha.
Projects worth Rs 2.44 lakh crore have been stalled,
many of them due to land acquisition issues. Industry
has no objection to the compensation rates for acquisi-
tion as well as resettlement and rehabilitation require-
ments. However, the time taken under the current Act
of 56 months is far too long given the urgency of infra-
structure and other developments. Also, the processes
are complicated.
Delay in land acquisition has led to funds being tied up,
which in turn has impacted bank lending capacity. Due
to this, proposed investments are facing challenges in
obtaining finance. The process of land acquisition must
be made smoother, faster and more efficient, with suffi-
cient satisfaction to all stakeholders in a balanced man-
ner.
The proposed amendment would apply to five sectors
of defence, rural infrastructure, affordable housing, in-
dustrial corridors, and infrastructure development un-
der public-private partnership. These would be exempt
from social impact assessment, restrictions on acquisi-
tion of multi-cropped land and consent clause. Industry
believes that these are reasonable exemptions; other-
wise, India may be faced with a situation where we are
unable to respond to external threats due to requisite
land not being available for defence! Similarly, industrial
corridors such as the Delhi-Mumbai and Chennai-Ben-
galuru corridors are aspirational strategies designed to
boost investments, create millions of new jobs, develop
smart cities, and act as a magnet for growth.
A third important bill pending in Parliament is the Micro,
Small and Medium Enterprises Development (Amend-
ment) Bill, not listed for this session. This bill proposes
to raise MSME investment limits in plant and machin-
ery, and also link the investment limits to inflation. Thus,
more enterprises would come under the ambit of the
law and be eligible for multiple benefits relating to tax-
es, credit and other facilities. CII believes this would pro-
pel the entrepreneurship boom and encourage more
manufacturing enterprises, thus offering livelihood op-
portunities to millions of people.
The Electricity Amendment Bill is also significant. It
would separate the distribution and electricity supply
segments and provide for efficient licensing and proce-
dures. It would also include renewable energy and in-
stitute a smart grid. These amendments are necessary
to resolve the multiple issues in the power generation
sector.
Above all, industry would expect Parliament to transact
business — discuss and deliberate on key issues of na-
tional and economic importance, including the bills in
question. The Indian economy appears to be reviving.
However, for this revival to become strong and to take
firm roots it is important that the pace of policy reforms
that has been on display in the last 14 months continues
unabated.
CII believes that GDP growth rate could climb to 7.8-
8.2 per cent this year and further to 9-10 per cent in the
medium term. However, this is contingent on contin-
ued reforms. With over a crore youngsters joining the
workforce each year, India cannot afford the luxury
of placing other interests over economic compulsions
any longer. Therefore, industry would expect that our
lawmakers would come together in a constructive man-
ner to give shape to the future of India. Our window of
opportunity to create a developed India is now and we
must not let it pass.
This article appeared in Times of India dated 24th
July 2015. The online version can be accessed from the following link:
http:// http://blogs.times ofindia.indiatimes.com/toi-edit-page/a-critical-monsoon-session-parliament-must- transact-
business-pass-key-bills-to-nurse-economy-back-to-health/

ECONOMY MATTERS 12
DOMESTIC TRENDS
Industrial production growth inched down to 2.7 per
cent in May 2015 from 3.4 per cent in the month of April
2015. April print was revised downward to 3.4 per cent
from 4.1 per cent earlier. IIP growth slowed down in
May 2015 as the manufacturing sector lost momentum
on the back of weak performance of consumer oriented
sectors. Unseasonal rains earlier in the year resulting in
lower rural demand are weighing in on consumer goods.
The index of eight core industries rose by 4.4 per cent in
May 2015 to 178.6, compared to its level in May 2014, the
fastest seen since November 2014, and followed two
straight months of contraction. The eight core indus-
tries — coal, crude oil, natural gas, refinery products,
fertilisers, steel, cement, and electricity — account for
a combined weight of 37.9 per cent in the overall IIP.
The refinery products industry grew the fastest, at 7.9
per cent in May 2015, compared to May 2014. This is far
faster than the -2.9 per cent seen in April 2015. Coal pro-
duction grew the second-fastest, at 7.8 per cent. How-
ever, this was marginally slower than the growth of 7.9
per cent registered in April 2015. Coming as welcome
news to those fearing severe power outages this sum-
This is reflected in lower two wheeler and tractor sales
in April and May 2015. Therefore, a favourable distribu-
tion of rainfall so far and deficiency at -4 per cent of
LPA – much lower than last year – is a welcome respite.
In balance, in FY16, we expect industrial production to
grow at a higher rate as compared to the previous fiscal
on the back of improving global conditions and policy
aided domestic upturn.
mer, electricity generation increased 5.5 per cent in May
2015 against -1.1 per cent in the previous month.
The growth of production of crude oil, fertilisers, and
cement all entered the green in May 2015 from contract-
ing in April 2015. Crude oil production growth grew 0.8
per cent, while those of fertilisers and cement were at
1.3 per cent and 2.6 per cent, respectively. The perfor-
mance of the natural gas industry improved marginally,
but it still contracted in May — this marks 54 consecu-
tive months of contraction since December 2010. The
industry’s output was -3.1 per cent lower than its per-
formance in May 2014. It was -3.5 per cent in April. The
steel industry accelerated its growth by two percentage
points to 2.6 per cent in May from 0.6 per cent in April
2015.
IIP Growth Slows Down in May 2015

13
DOMESTIC TRENDS
JUNE-JULY 2015
On the sectoral front, growth of manufacturing sec-
tor, which constitutes over 75 per cent of the index,
halved to 2.2 per cent in May 2015 compared with 4.2
per cent growth in the previous month. In terms of in-
dustries, twelve (12) out of the twenty two (22) industry
groups (as per 2-digit NIC-2004) in the manufacturing
sector showed positive growth during the month of
May 2015 as compared to the corresponding month
of the previous year. The industry group ‘Wearing ap-
parel; dressing and dyeing of fur’ grew at the high-
est positive growth of 15.8 per cent, followed by 11.2
per cent in ‘Furniture; manufacturing n.e.c.’ and 11.1
per cent in ‘Coke, refined petroleum products & nu-
clear fuel’. On the other hand, the industry group ‘Ra-
dio, TV and communication equipment & apparatus’
showed the highest negative growth of (-) 24.3 per
cent, followed by (-) 18.9 pr cent in ‘Office, accounting
& computing machinery’ and (-) 9.2 per cent in ‘Pub-
lishing, printing & reproduction of recorded media’.
In contrast, electricity output grew at a robust rate
of 6.0 per cent in May 2015 as compared with a con-
traction in the previous month. Mining output contin-
ued to remain in the positive territory for the fourth
consecutive month, with its pace of growth further
galloping to 2.8 per cent in May 2015 as compared
to 0.2 per cent in April 2015. The recent auction of
coal mines by the government could provide some
impetus to coal production in the months to come.
On the use-based front, capital goods sector growth
was subdued in May 2015, which does not augur well
for the outlook of investment demand in the economy.
Capital goods sector growth grew by a paltry 1.8 per
cent in May 2015 as compared to 6.8 per cent in the
previous month. Consumer goods sector growth which
had moved into the positive territory in April 2015, once
again contracted in May 2015. Worryingly, consumer
durables sector growth which had turned positive
in the previous month, once again turned negative in
May 2015. This raises doubts about the credence of the
one-off positive figure in April 2015. Non-durable sector
growth too moved into the negative territory in May
2015 after remaining consistently in the positive territo-
ry for 6 months. Going ahead, the progress of monsoons
becomes critical as it would have immediate bearing on
consumer goods especially non-durables. Notably, non
durables have a significant share in IIP at 21.4 per cent.
Basic and intermediate goods posted positive growth.

ECONOMY MATTERS 14
DOMESTIC TRENDS
Wholesale price index (WPI) recorded a deflation of
2.4 per cent in June 2015. This is the eighth consecutive
month wherein the deflationary trend has continued. In
June 2014, as a stark contrast, the wholesale price infla-
tion had stood at 5.7 per cent. Inflation, as measured on
the Wholesale Price Index (WPI), has been in the nega-
tive zone since January 2015, resulting in an interest rate
cut by the central bank in its policy review on 2 June,
2015.
CPI inflation in June 2015 crawled up to 5.4 per cent
from 5 per cent in May 2015 due to an increase in food
inflation. Food CPI increased to 5.7 per cent from pri-
or of 5.1 per cent. The sequential momentum in food
prices spiked to 1.8 per cent month-on-month basis,
highest since July 2014. The rise in food CPI has been
primarily witnessed in protein inflation to a composite
9.7 per cent as against prior of 8.2 per cent. Pulses infla-
tion rose for the 6th consecutive month and was at its
highest rate of 22.2 per cent in June 2015. This year, the
Ministry of Agriculture has already raised minimum sup-
port prices (MSPs) for pulses by 1.1 to 1.7 per cent plus a
bonus of Rs. 200 per quintal. This could add some more
pressure to pulses prices. Core inflation rose by 20 bps
to 5.3 per cent in June 2015, a slower climb compared
to 40 bps in May 2015. The pick-up however, came from
a sharp jump in personal care and effects (up 120 bps)
and in household services, health, transport and com-
munication and, recreation and amusement (all up 30
bps). Some of this rise is likely to be led by the impact
of higher prices due to the service tax hike announced
in the budget.
CPI Inflation Crawls Up in June 2015
Outlook
Industrial growth of 2.7 per cent during the month of May 2015 due to slow growth of mining and manufacturing
sectors is below potential. However, industrial growth is on the path of recovery, as many of the stalled projects
have started to move. Consumer goods sector has again entered the negative territory, signalling a decline in the
purchasing power, particularly in the power sector. The government is aware of this situation and has already
taken a number of policy and reform initiatives. We are hopeful that the initiatives taken by the government in
terms of expeditious project clearances, simplification of procedures and new investment announcements as well
as the ‘Make in India’ initiative would improve the order book position, revive demand and help effect a turnaround
in the investment cycle.

15
DOMESTIC TRENDS
JUNE-JULY 2015
Primaryproductscontinuedtofacedeflationtothetune
of 0.8 per cent in June 2015. However, primary food arti-
cles recorded inflation to the tune of 2.9 per cent, albeit
at a slower pace from the previous month. However,
going forward, there is upside risks to food inflation on
the back of the expected fall in food grain production
due to unseasonal rainfalls in March and April 2015. Fur-
ther, primary non-food inflation moved into the positive
territory in June 2015, after remaining in negative terri-
tory for the last eight consecutive months.
Fuel sector continued to remain under deflation as it
stood at -10.0 per cent in June 2015 as compared to -10.5
per cent in the month before. Both petrol and diesel too
showed deflation during the month.
Manufacturing sector too posted deflation for the
fourth consecutive month in June 2015 as it stood at
-0.8 per cent as compared to -0.6 per cent in the previ-
ous month. Non-food manufacturing or core inflation,
which is widely regarded as the proxy for demand-side
pressures in the economy remained range bound at -0.9
per cent during the month as compared to -0.6 per cent
during the previous month.

ECONOMY MATTERS 16
DOMESTIC TRENDS
Exports contracted for the seventh consecutive month,
by 15.8 per cent in June 2015 as compared to decline to
the tune of 20.0 per cent in the prior month. The key sec-
tors that have witnessed a decline include petroleum,
engineering and electronic goods items. The weakness
in exports growth reflected the weak global demand
conditions, sharp contraction in commodity prices and
relative strong currency vis-à-vis other Asian peers. Ser-
vices sector exports, too, fell sharply. At US$11.8 billion
– the lowest in almost three years – services exports
declined 14.8 per cent on-year in May 2015. With this,
A fall in imports was positive for the trade deficit, which
improved to US$10.83 billion in June from US$11.76 bil-
lion last year. Cumulatively during April-June 2015-16,
services exports have declined for the third consecutive
month.
Imports too contracted by 13.5 per cent in June 2015,
compared to previous month’s contraction of 16.1 per
cent. Gold imports eased to US$2.0 billion in June 2015
as compared to US$2.4 billion in the previous month.
Meanwhile, the oil import bill increased to US$8.7 bil-
lion from US$8.5 billion recorded in June 2015. Oil prices
have declined significantly in the last few weeks in the
wake of the Iran-P5+1 nuclear accord being reached,
which paved the way for removal of sanctions imposed
on Iran.
trade deficit stood at US$32.2 billion, marginally lower
than US$33.1 billion in the year ago period.
Outlook
So far, the southwest monsoon conditions remain favourable – rainfall at seven per cent below the long term aver-
age, and reasonably well-distributed. But, what has raised red flags is the inflation in pulses crossing 22 per cent in
June as production has suffered largely a result of weak monsoons last year and damage to crops from unseasonal
rains this year. This necessitates proactive measures from government to contain runaway inflation particularly in
pulses, in case monsoons turn unfavourable in the crucial July and August months.
Exports Continue to Slide

17
DOMESTIC TRENDS
JUNE-JULY 2015
Government launched SKILL INDIA on the occasion of
the first-ever World Youth Skills Day on July 15th
, 2015.
During the event, Prime Minister Shri Narendra Modi
unveiled the Skill India logo and launched four land-
mark initiatives of the Ministry of Skill Development
and Entrepreneurship: National Skill Development Mis-
sion, National Policy for Skill Development and Entre-
preneurship 2015, Pradhan Mantri Kaushal Vikas Yojana
(PMKVY) scheme and the Skill Loan scheme.
The Pradhan Mantri Kaushal Vikas Yojana (PMKVY), the
Ministry’s flagship, demand-driven, reward-based skill
training scheme will incentivise skill training by provid-
ing financial rewards to candidates who successfully
complete approved skill training programmes. Over the
next year, PMKVY will skill 24 lakh youth, across India.
For the first time, the skills of young people who lack
formal certification, such as workers in India’s vast un-
organised sector, will be recognised. Through an initia-
tive known as ‘Recognition of Prior Learning’ (RPL), 10
lakh youth will be assessed and certified for the skills
that they already possess.
Prime Minister also launched the Skill Loan scheme.
Loans ranging from Rs 5,000-1.5 lakhs will be made
available to 34 lakh youth of India seeking to attend
skill development programmes over the next five years.
Sanction letters for the first ever Skill Loans were hand-
ed out by the Prime Minister to aspiring trainees.
While addressing the audience Prime Minister, articulat-
ed a clear overarching vision for Skill India. He highlight-
ed the centrality of skills to India’s development and
called on government, private sector and India’s youth
to work together to make this vision a reality. The Prime
Minister also highlighted the potential for skilled Indian
youth to be recognized around the world.
World Youth Skills Day and the launch of SKILL INDIA
were celebrated nation-wide. State Governments or-
ganized events to emphasize the importance of skill
development for the youth in their states, mobilizing
candidates, launching fresh training programs and felic-
itating successful trainees. Across India, special PMKVY
mobilization camps are being organized at 100 locations
with Nehru Yuva Kendra Sangathan (NYKS). A national
SMS campaign is being rolled out to build awareness of
the program, reaching about 40 crore subscribes. Fresh
PMKVY training was initiated in 1,000 centres across
all States and Union Territories in India today, covering
50,000 youth in 100 job roles across 25 sectors.
Prime Minister Launches SKILL INDIA on the Occasion of World
Youth Skills Day
Prime Minister Shri Narendra Modi and Minister of State (Independent Charge) for Skill Development &
Entrepreneurship, Shri Rajiv Pratap Rudy at the launch of Skill India

ECONOMY MATTERS 18
TAXATION
A Pleasant Experience with the Rajya Sabha Panel
on GST Bill
T
he esteemed Select Committee of Rajya Sabha
has tabled its report in Parliament after exami-
nation of the 122nd
Constitution Amendment Bill,
on the 23rd
of July 2015. Now that the Report has been
placed in the public domain, I thought of sharing my
experience in this regard. I was requested to appear
before the Select Committee on the forenoon of 16th
of June, 2015. Besides the Chairman of the Empowered
Committee of the State Finance Ministers, the Revenue
Secretary, Additional Secretary (Revenue), Member
(GST) and other senior officers of the Central Board of
Excise & Customs, four experts were also invited on
that forenoon. Excepting me, the other three experts
were eminent economists viz Dr. Abhijit Sen, former
Member, Planning Commission, Dr. Rathin Roy, Direc-
tor NIPFP, Delhi and Dr. Pinaki Chakraborty, Professor,
NIPFP.
At the outset, Shri Bhupendra Yadav, the Chairman
of the Select Committee, while welcoming the par-
ticipants, requested them to offer their views on the
GST Bill, one by one. As the presentations started, the
Hon’ble Members of the Select Committee also inter-
vened from time to time seeking clarifications. In the
next few paragraphs, I would like to set out a summary
of my submissions before the esteemed Committee.
I submitted at the outset that it was my belief that com-
promises become necessary in a federal democracy,
and as a corollary, the compulsions of cooperative fed-
eralism in a federal democracy more often than not lead
only to incremental reforms, and not necessarily a big
bang reform in one go. It was explained that the Dual
GST model proposed in the Bill would be like a joint ven-
ture between Centre and the twenty-nine plus States.
In order to make this joint venture successful, all the
States will have to be taken on board. Therefore, out
of the compulsions of federal democracy, the Finance
Minister had to make certain necessary compromises in
the structure of the GST.

19
TAXATION
JUNE-JULY 2015
While appreciating the inclusion of Petroleum and
certain Petroleum Products, within the ambit of GST,
constitutionally, I made certain suggestions for the in-
clusion of Alcohol as well within GST on the grounds of
keeping the input tax credit (ITC) chain intact and wid-
ening of the tax base so as to bring down the Revenue
Neutral Rate (RNR). My view was that Alcohol, a de-
merit good should also be brought within the ambit of
GST, as was proposed in case of Tobacco & Cigarettes,
the other demerit goods. Further, State excise duty in
addition to GST could be levied by the States on Alcohol
so as to cover the duty difference between GST rate and
the prevalent State Excise Duty Rate, as has been pro-
posed in the case of Tobacco & Cigarettes.
However, if the States oppose this proposition, my al-
ternative proposal was to give Alcohol the same treat-
ment as was being given to Petroleum and its products.
In either case, the clause ‘except taxes on the supply
of the alcoholic liquor for human consumption’ would
have to be deleted from the definition of GST at Clause
12A of the Bill. Further, as has been done in the case of
Petroleum and its products, the levy of GST on Alcohol
may be postponed to a later date to be decided by the
GST council. Till that time, the States will continue to
levy State Excise duty and State VAT on Alcohol. The
advantage would be that no further amendment of the
Constitution would be needed, when the States agree
to bring in Alcohol within GST at a later date.
While appreciating the subsuming of ‘Entry Tax includ-
ing Octroi’ within the ambit of GST, it was noted that
there were some concerns that the abolition of Entry
Tax and Octroi would adversely hurt the revenue in-
terest of the local municipalities and Panchayats etc. I
explained the importance of subsuming of Entry Tax in
breaking the trade barriers in interstate movement of
goods, and thus facilitating one of the main objectives
of GST i.e. creation of ‘common economic market’.
The Clause (4) of the proposed Article 279A at sub
clause (e) states that the GST Council shall make recom-
mendations to the Union and the States on “the rates
including floor rates with bands of goods and services
tax”. Although the common perception was that the
band would be a narrow one, but the provision did not
specify so. Therefore, it may be wise to add the word
‘narrow’ before the word ‘bands’ in the aforesaid sub
clause (e). In fact, this band should not be wider than 1
per cent (+ - 0.5%). Otherwise, there may be too much of
variation of GST rates across the country causing harm
to the objective of ‘common economic market’.
On compensation to the States by Centre in case of
revenue loss by the States after introduction of GST, I
observed that the Union Finance Minister had made the
necessary compromise by proposing to incorporate a
provision regarding compensation in the Constitution
at Clause 19 of the Bill. The States have now demand-
ed 100 per cent compensation in all the five years, and
not restricted upto the 3rd year. I explained that it is
my belief that in the GST regime there will be high tax
buoyancy due to two factors – widening of the tax base
and efficient technology based tax collection machinery
with much less scope of tax evasion. Once that hap-
pens, it can be expected that after about three years,
there will be no loss of revenue by the states, and thus
there will be no need for compensation. Therefore, hav-
ing agreed to give compensation, there was no harm in
Centre agreeing to give 100 per cent compensation for
all the five years, in case of loss of revenue; – that would
raise the comfort level of the States, and bridge the evi-
dent trust-deficit between Centre and the States.
On the proposal to impose one per cent origin based
tax to be collected by the origin states in respect of in-
terstate movement of goods and services in addition
to the Integrated GST (IGST), it was pointed out that
this tax would be against the basic principle of GST that
the State’s share of GST would accrue to the destina-
tion States. Further, this provision was the sore point
for the trade and industry as well, for the simple rea-
son that there won’t be any input tax credit for this tax.
This denial of credit will lead to cascading of taxes and
consequent inflation. It would be still worse in the case
of stock transfer where the one per cent tax on supply
(and not ‘sale‘) will keep on accumulating with each
transfer, thus increasing the tax incidence to 6 per cent
where there are six transfers. Moreover, at each state
border there will be inevitable compliance costs – both
visible and invisible. Thus, this tax would also under-
mine the growth of common economic market, one of
the major objectives to be achieved through GST.
While urging for deletion of this clause, it was suggest-
ed that in order to raise the comfort level of the pre-

ECONOMY MATTERS 20
TAXATION
dominantly manufacturing States, it may be specifically
mentioned in the Compensation scheme that this factor
of loss of revenue may be specially taken into consid-
eration while calculating the compensation amount for
that State.
The need for a separate Dispute Settlement Authority
for settling disputes between Centre and States, and
among States, that would be independent of the GST
Council was emphasized. As the cause of action giving
rise to disputes would emanate only from the recom-
mendations of the GST Council, it was felt imperative
that the dispute is settled by a body independent of GST
Council, to bring fairness and transparency in dispute
settlement process.
It was also explained to the esteemed Committee that
there was a need to change the definition of ‘Services’.
The following definition of ‘Supply of Services’ was sug-
gested, which appeared to be a better option instead of
defining ‘Services’: “Supply of Services’ means any busi-
ness activity which is not supply of goods.”
A note of caution was sounded on fixing the GST Rate
stating that it must not add to inflation. The way to keep
the GST rate low was also explained. The GST rate is a
very important factor in earning the trust of the tax pay-
ers. Howsoever efficient the GST machinery may be, the
tax-payers won’t welcome GST happily if the GST rate is
kept high, because that will lead to high inflation. Even
in developed countries like Australia and Canada, GST
was initially opposed by the poorer sections of the tax-
payers because of high GST rate. It was explained that
the GST rate is normally based on the Revenue Neutral
Rate (RNR). In the present circumstances, the RNR is
expected to be high because Petroleum and its prod-
ucts and Alcohol have been kept out of GST and conse-
quently, the tax base would shrink. But, a high GST rate
in line with high RNR would definitely lead to high infla-
tion. Therefore, my submission was that the esteemed
Committee may advise the Government not to go strict-
ly by the RNR while fixing the GST rate. To start with,
India’s GST rate should not go beyond 20 per cent for
standard rate and perhaps 14 per cent for reduced rate.
As for Food and Food products, at present these are
mostly exempt from Central Excise duty, but these are
charged to State VAT. As a welfare measure, all food
items of use by poor, including some of the packaged
food of essential items may be exempted from GST. The
packaged food at higher end for use by the upper mid-
dle class may be charged at the reduced rate of GST.
There may not be any food item at standard rate of GST
except for certain special items identifiable to be con-
sumed by the rich people only. It was explained that I
was laying emphasis on low GST rate for food items, be-
cause this is the most sensitive issue for the poor and
middle class. As is commonly known, the poor spend
the highest percentage of their incomes in food and
food products. Therefore high rate of GST on food items
would hit the poor hard. Whenever we have seen agita-
tion against GST across the world, it has been mainly
due to increase in price of food and food products after
introduction of GST.
As for the service component of GST, the consumers are
currently paying Service Tax at 14 per cent. The services
sector contributes around 60 per cent of the country’s
GDP. In the GST regime, if the standard rate, which can
be expected to be at least 20 per cent, is applied to the
Services as well it will lead to inflation, and it will affect
adversely the service sector, whose contribution is the
mainstay of our GDP. Therefore, it was submitted that
the services may be charged to the reduced rate of GST
which can be expected to be somewhere near the pre-
sent Service Tax rate of 14 per cent.
I further explained that there was a way to keep the GST
rate lower than the RNR and yet achieve the targeted
revenue, by simply denying the input tax credit of some
indentified items at the intermediate stage of the flow
of goods. This will no doubt give rise to a little amount
of cascading of taxes – but that can be managed in the
overall interest of keeping the GST rate low, while not
losing much revenue. It was pointed out that even now
in the Central Excise regime, input tax credit is not al-
lowed to certain Petroleum Products.
While talking about GST on Small Business, it was sug-
gested that very small business should not be brought
within GST, since that is not at all cost – effective, and
administering them is cumbersome. An ideal GST law
would demand that the threshold should be very low
and the exemptions should be kept minimum. But pure
economic laws cannot always be applied in the taxation
matters of a developing economy due to many factors.

21
TAXATION
JUNE-JULY 2015
The present threshold limits in respect of Central Excise,
Service Tax and State VAT are Rs 1.5 crore, Rs 10 lakhs
and Rs 3 to 5 lakhs respectively. It was explained that
the threshold limit for GST would decide whether we
want to bring small business as well within the ambit of
GST. The VAT/GST specialists across the world maintain
that it is not at all advisable to bring the small business
in the GST. Keeping this in mind, the threshold should
be kept reasonably high.
Considering that the implementation issues would be as
important as the policy formulation issues in a big tax
reform like GST, a few critical implementation issues
were brought to the notice of the Committee. These are
summarized below.
It was submitted that even as the target date for imple-
menting GST is 1st
April, 2016, there has been no serious
consultation so far with the trade and industry and oth-
er taxpayers and stake holders. With just a few months
to go, the taxpayers are completely unaware of the pro-
posed laws, rules and procedures etc. for the GST.
It was submitted that the feedback from taxpayers and
other stake holders about deficiencies, if any, would
help the tax administrations immensely. Similarly, the
stakeholders would need to know more about the GST-
Net, the Special Purpose Vehicle that would provide the
common IT platform for all the stakeholders to work
on, in the GST regime. That would help in their prepara-
tions for working in the GST scenario.
Further, it was explained to the esteemed Commit-
tee that the administrative structure of the Central
GST and State GST authorities will have to be uniform.
Considering the vast coverage of GST across the cities,
small towns and rural areas, both the Centre and the
EC should jointly finalize the administrative structures
on priority. Based on that, the infrastructure and logis-
tics for functioning of the different field formations will
have to be kept ready well before 1st April, 2016. Noth-
ing much has been heard in these areas relating to the
GST administrative structure.
It was also explained that the Dispute Resolution ar-
rangements with respect to technical issues between
the taxpayers and taxmen attain particular significance
because there will be two authorities – Central GST au-
thority and State GST authority, and they will have to
work in tandem. The process of dispute resolution will
start with the issuance of show cause notice by the tax-
man to the taxpayer. Since the two authorities for CGST
and SGST would be governed by two different Acts i.e.
CGST Act and SGST Act, the show cause notices for the
same violation of law or rule will have to be issued by
the two authorities independently. It was suggested to
the Committee that to ease the agony of the taxpayers,
the adjudication proceedings followed by the appeal
proceedings should preferably be done at one place by
a Bench of Adjudicators and a Bench of Appellate Au-
thorities. The Bench could comprise one from the CGST
authority and the other from the SGST authority. This
will ensure that the taxpayers do not have to represent
/ appear before two authorities separately either at the
adjudication or in appeal proceedings. Orders emanat-
ing from those Benches could be made applicable to
both the CGST and the SGST authorities. The details
could be worked out. This will add to the cause of ‘ease
of dong business’.
I concluded by saying that the Indian GST, although still
an ‘imperfect GST’, will be a good GST that India would
be proud of. A purist may not like these compromises.
But, it is a bitter truth that compromises do become
necessary for furthering the cause of cooperative fed-
eralism in federal democracies. The question is - how
long can the country wait with endless negotiations be-
tween Centre and the States. It’s time to move forward
with an ‘imperfect GST’ and let the all powerful GST
Council make further course corrections at the earliest
opportunity so that we can quickly move to get the per-
fect GST in the near future. Today’s imperfections in the
Dual GST model can surely be corrected when the un-
founded fear of the States about loss of revenue is dis-
pelled by virtue of tax buoyancy which would definitely
happen with wider tax base and technology based ef-
ficient tax collection machineries in the GST regime.
[Mr. Sumit Dutt Majumdar is also the author of a book titled “GST in India-its travails, tribulations and challenges ahead”]

ECONOMY MATTERS 22
SECTOR IN FOCUS
Proposed 100 Smart Cities & Industrial Corridors
Introduction
The Indian economy has managed to escape relatively
unhurt from the global economic turmoil owing to
strong fundamentals, which would continue to drive its
growth. It is important to undertake integrated efforts
to further strengthen these fundamentals and fulfil the
aspiration of achieving a strong growth in future. With
half of the world’s population living in cities, increasing
the strain on energy, transportation, water, building
and public spaces, there is a growing need for “smart”
city solutions which are both efficient and sustainable
on one hand and can generate economic prosperity and
social wellbeing on the other.
Currently while 30 per cent of the Indian population re-
sides in urban centers, these centers contribute around
65 per cent to the national GDP. It is projected that ur-
ban India will contribute about 75 per cent of national
GDP in the next 15 to 20 years while another 300 million
people will get added to the existing 300 million dwell-
ing in Indian urban centers. The speed of urbanization
will exert immense pressure on the urban infrastruc-
ture, urban finance, natural resources and quality of
urban life. In order to manage this high level of urbani-
zation, it is imperative for the government to resort to
smart concepts and smart solutions. Government of In-
dia has thus decided to develop 100 smart cities in India,
as highlighted by the Finance Minister during his budget
speech of July 2014.
Though the government has committed to the devel-
opment of smart cities in India, the state level strate-
gies for quick implementation needs to be formulated
and the operating model needs to be finalized. Confed-
eration of Indian Industry (CII) in association with their
Knowledge Partner, Brickwork Ratings released a re-
port titled ‘Proposed 100 Smart Cities & Industrial Cor-
ridors: Developing Innovative Infrastructure Financing
options’ during the Financial Market Conclave 2015:
Changes for Growth organized by CII on 27 June, 2015 at
Kolkata. The excerpts of the report are covered in this
month’s Sector in Focus.

23
SECTOR IN FOCUS
JUNE-JULY 2015
Prime Minister’s Vision to Set up 100
Smart Cities
The Union Cabinet cleared Prime Minister Narendra
Modi’s vision - 100 smart cities spread across the coun-
try - and the new urban renewal mission named after
Atal Bihari Vajpayee (AMRUT), replacing the existing
one named after Jawaharlal Nehru (JNNURM), with a
total outlay of Rs 98,000 crore for the next five years.
The move is expected to recast the urban landscape of
the country to make them more liveable and inclusive.
This would be implemented as:
• Smart City aspirants: Each Smart City aspirant will
be selected through a ‘City Challenge Competition’
intended to link financing with the ability of the cit-
ies to perform and achieve the mission objectives.
Each state will shortlist a certain number of smart
city aspirants as per the norms to be indicated and
they will prepare smart city proposals for further
evaluation for extending central support.
• Central Assistance: Each selected city under the
scheme would get Central assistance of Rs 100
crore a year for five years. The remaining money
has to come from the states, urban bodies and the
consortium that they form with corporate entities.
The mission aims to release funds depending on
multi-pronged progress of the projects and makes
citizen participation an integral part of the plan-
ning of these cities. Central assistance will be to the
extent of 50 percent of project cost for cities and
towns with a population of up to 10 lakh and one
third of the project cost for those with a population
of above 10 lakh.
• Each state will get at least one Smart City: A Spe-
cial Purpose Vehicle will be created for each city
to implement Smart City action plan. The SPV will
be created with the Urban Local Body (ULB), state
government and the Centre as partners for imple-
mentation of the project.
• Formation of Smart Cities Council: Smart Cities
Council India has been formed to promote develop-
ment of smart cities in the country. It is part of the
US-based Smart Cities Council, which is a consor-
tium of smart city practitioners and experts, with a
100-plus member and advisor organizations operat-
ing in over 140 countries.
• Enhancing quality of life: The Mission of building
100 smart cities intends to promote adoption of
smart solutions for efficient use of available assets,
resources and infrastructure with the objective of
enhancing the quality of urban life and providing
a clean and sustainable environment, the govern-
ment said. Focus will be on core infrastructure ser-
vices like adequate and clean water supply, sanita-
tion and solid waste management, efficient urban
mobility and public transportation, affordable hous-
ing for poor, power supply and robust IT connectiv-
ity.
• Atal Mission for Rejuvenation & Urban Transfor-
mation (AMRUT), which seeks to lay a foundation
to enable cities and towns to eventually grow into
smart cities, will be implemented in 500 locations
with a population of one lakh and above. Under
this mission, states will get flexibility of designing
schemes that best suit their needs.
• AMRUT to focus on basic infrastructure services:
AMRUT will focus on ensuring basic infrastructure
services such as water supply, sewerage, storm
water drains, transport and development of green
spaces and parks with special provision for meeting
the needs of children.
What is a Smart City?
The term encompasses a vision of an urban space that is
ecologically friendly, technologically integrated and me-
ticulously planned, with a particular reliance on the use
of information technology to improve efficiency.
The Modi government’s idea is a little different. The
government’s reference note for Members of Parlia-
ment on the issue actually offers a fairly simple defini-
tion: “Smart Cities are those that are able to attract
investments.” Everything else, such as good infrastruc-
ture and simple processes that make it easy to start and
run businesses, follow from this.

ECONOMY MATTERS 24
SECTOR IN FOCUS
Why do we need smart cities?
India is urbanising at an unprecedented rate, so much
that estimates suggest nearly 600 million of Indians will
be living in cities by 2030, up from 290 million as report-
ed in the 2001 census. According to a McKinsey Global
Institute study estimated that cities would generate 70
per cent of the new jobs created by 2030, produce more
than 70 per cent of the Indian gross domestic product
and drive a fourfold increase in per capita income across
the country.
How to turn out the City as Smart?
The cabinet note focuses on retrofitting, redevelop-
ment, pan-city initiatives and development of new cit-
ies. It also gave a few examples. “Under retrofitting, de-
ficiencies in an identified area will be addressed through
necessary interventions as in the case of Local Area Plan
for downtown Ahmedabad. Redevelopment enables
reconstruction of already built-up area that is not ame-
nable for any interventions, to make it smart, as in the
case of Bhendi Bazar of Mumbai and West Kidwai Nagar
in New Delhi. Pan-city components could be interven-
tions like Intelligent Transport Solutions that benefits all
residents by reducing commuting time,” it said.
Policy Initiatives from the Government & Financial Reg-
ulators to Develop Innovative Infrastructure Finance
Options
The government and the financial regulators viz., RBI
and SEBI have been working in tandem to launch initia-
tives to promote the infrastructure sector. A few initia-
tives on this front are delineated below:
RBI Initiatives to Support Infrastruc-
ture Financing
• RBI draft circular allowing Indian companies to
issue rupee bonds: RBI has issued a draft circular
to allow companies to issue rupee-denominated
bonds overseas, at a coupon not greater than 500
bps than that offered by Government securities of
similar maturity. This would also help companies
raise resources and would facilitate more foreign
investors to invest in infrastructure sector.
• Creating a suitable atmosphere to resolve
NPAs : This will facilitate and make it a good sys-
tem for stressed asset management with greater
emphasis on asset reconstruction rather than asset
stripping. A few steps taken in this matter are:
- Introduction of a comprehensive Framework
for Revitalising Distressed Assets in the Econo-
my for early detection of sickness and remedial
measures.
- Issued guidelines to encourage sale of assets
to Securitisation Companies (SCs) / Recon-
struction
- Companies (RCs) at a stage when the assets
have good chance of revival and fair amount of
realisable value.
• Exempted from regulatory requirements: RBI has
permitted banks to issue long-term bonds with a
minimum maturity of 7 years to raise resources for
lending to (i) long term projects in infrastructure
sub-sectors, and (ii) affordable housing. The instru-
The key feature of a Smart City is the intersect be-
tween Competitiveness, Capital and Sustainability.
The smart cities should be able to provide good infra-
structure such as water, sanitation, and reliable utility
services, health care; attract investments; transpar-
ent processes that make it easy to run a commercial
activities; simple and online processes for obtaining
approvals, and various citizen centric services to
make citizens feel safe and happy.

25
SECTOR IN FOCUS
JUNE-JULY 2015
ments are exempted from regulatory requirements
such as maintenance of CRR/SLR and priority sector
lending. This will ensure adequate credit flow to in-
frastructure and to affordable housing sector.
• Issue of long term bonds and facilitate crosshold-
ing by banks: RBI has allowed cross holding in issue
of long-term bonds by banks for financing of infra-
structure and affordable housing, allowed banks to
extend loans to individuals against such long-term
bonds issued by them in order to provide liquidity
to retail investors in such bonds, banks can invest in
the long term bonds issued by other banks to pro-
vide liquidity and tradability of these bonds.
• Infrastructure Debt Funds (IDFs): It has allowed
entry of IDF-NBFCs into sectors where there is no
Project Authority. Further, it has allowed IDF-NBFCs
to undertake investments in non-PPP projects and
PPP projects without a Project Authority.
• Flexible Structuring of Long Term Project Loans
to Infrastructure and Core Industries: RBI issued
guidelines to banks for flexible structuring and re-
financing of fresh term loans to long term project
loans to infrastructure and core industries. It has ac-
ceded to requests made by the NBFCs, for extend-
ing the banks’ guidelines to them.
• Strategic Debt Restructuring (SDR): Banks may,
at their discretion, undertake a ‘Strategic Debt
Restructuring (SDR)’ by converting loan dues to
equity shares. RBI has allowed SDR under the gen-
eral principle of restructuring that the shareholders
bear the first loss rather than the debt holders. This
will facilitate the lender’s hands to unblock the capi-
tal locked through appropriate measures.
SEBI Initiatives Enabling Investment in Infra-
structure
• REIT & InvIT Regulations 2014: SEBI has created an
enabling framework for REITs and InvITs through
regulations with the intention to help entities in the
infrastructure and real estate sectors to raise funds
and provide much needed liquidity. These instru-
ments are pooled investments, earn income and
have to distribute earnings from real estate.
The trusts would issue units for the funds raised
from investors and the corpus would be invested
in infrastructure or real estate projects. The units
would be listed on a stock exchange with a mini-
mum subscription limit for REITs of Rs. 2 lacs and
for InvITs it will be Rs. 10 lacs. The investments will
be carried through a SPV held by REITs with more
than 50 per cent holding. SPV can invest in commer-
cial real estate and hold more than 80 per cent in
properties with other restrictions.
In one of the facilitating moves, the union cabinet
allowed REITs to be an eligible financial instrument
or structure under the FEMA Act, 1999. Once REIT
takes off, it will provide a good opportunity to un-
lock value in these asset classes. Further, it is ex-
pected to lift the pressure on banks for funds in
these sectors and enable the player to access for-
eign funds. As an alternative investment option, RE-
ITs/InvITs are potential game changers in the capital
market.
• Regulation-International Financial Services Cen-
tres and GIFT City in Gujarat: IFCs across the world
have evolved in different ways depending on the
competence of the domestic system, needs of the
economy and tax arbitrage. The Government has
evinced its interest in working closely with the In-
dustry and the way forward to evolve GIFT to the
best standards across the globe.
• Intended SEBI regulations on Municipal Bonds:
SEBI is expected to issue regulations on Municipal
Bonds very shortly. This will enable infrastructure
projects of municipal corporations to issue bonds
and list them on stock exchanges. The new norms
provide adequate safeguards like having invest-
ment grade credit rating, the issuers should not
have defaulted on their repayment obligations in
the last one year and through disclosure require-
ments to be made by the prospective issuers.
• Crowd funding: Crowd funding is an innovative way
to provide funding to entrepreneurs through pro-
vision of seed capital. Crowd funding is solicitation
of funds (small amount) from multiple investors
through a web-based platform or social networking
site for a specific project, business venture or social
cause.

ECONOMY MATTERS 26
SECTOR IN FOCUS
• SEBI discussion paper on alternate capital raising
platform and review of other regulatory require-
ments: There is a proposal on alternate capital rais-
ing platform wherein money shall be raised only
from institutions and high net worth individuals by
the new-age companies having innovative business
model and belonging to knowledge-based technol-
ogy sector. This will be initially made applicable to
companies which are in the area of software prod-
uct development, ecommerce, new-age compa-
nies having innovative business model, etc. which
create new business opportunities or which serve
important efficiency enhancement in existing busi-
ness activities.
• SEBI consultative paper on guidelines on overseas
investments and other issues/clarifications for
AIFs/VCFs: There are 136 Alternative Investments
Funds (AIFs) registered with SEBI. SEBI intends to
issue a proposal for AIFs to invest in equity and eq-
uity linked instruments only of off-shore venture
capital undertakings, subject to overall limit of
US$500 million.
• Discussion paper on revisiting the capital raising
process: There is a proposal on use of Secondary
Market infrastructure for making applications in
Public Issue (e-IPO) Proposal on Fast Track Issu-
ances (FPO and Rights Issue). It will facilitate capi-
tal raising by industry and pave the way for existing
listed companies to issue FPO/Rights issue to retail
investors. It is expected that raising capital process
time will be curtailed to the benefit of issuers and
investors.
• Conversion of debt to equity: SEBI will allow banks
to convert debt to equity after relaxing some of the
disclosure and acquisition clauses applicable under
ICDR and SAST when they convert debt to equity of
“listed borrower companies in distress.
Policy Initiatives from the Government
The government has carried out substantial structural
reforms to provide an impetus to the growth machin-
ery. Some of the key measures initiated are as follows:
The NITI Aayog as an institution is expected to rejuve-
nate the policy process through innovation. The enhanc-
ing of FDI in insurance has given a boost to the financial
sector and auction of natural resources like coal has
given the fillip to the investment in core sector. Taken
together, it is likely to boost the infrastructure sector.
The Rail and Union Budgets have outlined the reforms
to be undertaken in times to come which can usher in
a sustained growth without inflicting pain on the fis-
cal side. The Union Budget proposal to set up National
Investment and Infrastructure Fund though budgetary
support of around Rs. 20,000 crores is a move in the
right direction.

27
FOCUS OF THE MONTH
Corporate Profitability and Investment Trends
JUNE-JULY 2015
S
ales growth in the corporate business sector
moderated to 9 per cent in FY14, the lowest in
past four years, led by a persistent moderation in
manufacturing segment, even as the growth figures in
services segment remained stable. Apart from a major
spurt in FY12, wherein, growth in net sales stood at the
tune of 22 per cent, led by services segment, growth
figures have been dwindling. While growth in gross
profit has also witnessed a steady moderation over the
years, growth in net profit has dropped sharply, though
remaining steady at 5 per cent in the last two fiscal
years. Even in FY12, despite high sales, net profits had
contracted given high cost of raw materials and inter-
est. Over the years, costs have moderated, thus main-
taining profitability in wake of dismal net sales growth.
Sectors like Banks and Financial Services, Healthcare &
Pharmaceuticals, Hotels & Retail, IT & Telecom, Metals
& Minerals and Textile, Paper, Leather, Rubber & Wood
fared well in FY14 in terms of sales growth, while others
like Auto & Auto Parts, Capital Goods, Construction &
Construction Materials, Consumer Durables, Fertilizers
& Chemicals, FMCG, Media & Entertainment, Oil & Gas,
Packaging & Logistics, Power witnessed moderation in
sales growth.
The analysis factors in the financial performance during
fiscal years 2009-10 to 2013-14 of a balanced panel of
17,457 Indian firms spread across 16 major sectors: Auto
& Auto Parts, Capital Goods, Banks and Financial Servic-
es, Construction & Construction Materials, Consumer
Durables, Fertilizers & Chemicals, FMCG, Healthcare &
Pharmaceuticals, Hotels & Retail, IT & Telecom, Media
& Entertainment, Metals & Minerals, Oil & Gas, Packag-
ing & Logistics, Power and Textile, Paper, Leather, Rub-
ber & Wood. 2014-15 has been excluded from the sam-
ple, as the number of firms which have declared their
final consolidated annual results for the year were very
few. The data has been extracted from Ace Equity. For
investment proposals analysis, data from CMIE’s data-
base Capex has been used.

ECONOMY MATTERS 28
SECTOR IN FOCUS
While net sales growth has been declining, a simulta-
neous cost cutting in cost of raw materials and inter-
est cost has kept profitability in line. New investment
proposals have taken a steep fall in the last three fiscal
The profitability ratios have seen a slight moderation
over the years on an aggregate basis. Net margin (PAT/
Net sales) has come down from 8 per cent in FY10 to
6 per cent in FY14. Gross margin (PBDIT/Net sales) has
also seen slight decline from 18 per cent in FY10 to 17 per
cent in FY14. Interest coverage defined by ratio of gross
profit (PBDIT) and interest cost has seen a steep fall
from 167 per cent in FY10 to 114 per cent in FY14, thus af-
years. While they stood above Rs. 15 trillion during fis-
cals years 2010 and 2011, in fiscal years 2013 and 2014 the
figure stood at nearly Rs. 5 trillion.
fecting the ability of firms to secure loans. Further inter-
est cost as a percentage of net sales increased though
this was more of a denominator effect as net sales have
declined. Staff costs as a proportion of net sales have
remained steady over the past five years. Cost of raw
materials as a percentage of net sales has come down
steadily, from as much as 42 per cent in FY10 to 36 per
cent in FY14.

29
FOCUS OF THE MONTH
JUNE-JULY 2015
In manufacturing segment, net sales saw a huge dip
from as high as 22 per cent in FY10 to meager 5 per cent
in FY14. Gross profits and net profits, while on a declin-
ing trend in long-term, saw an improvement in the lat-
est year majorly on the back of decline in tax burden and
staff costs as well as cost of raw materials. Net profits
still hovered in the negative territory though. Profitabil-
ity ratios have seen a decline. Interest coverage has also
declined majorly because of declining growth in gross
profit. New investment proposals have declined three-
folds in the last five years. New investment proposals to
the tune of greater than Rs. 10 trillion in FY10 declined
steeply to close to Rs. 3 trillion in FY14.

ECONOMY MATTERS 30
FOCUS OF THE MONTH
Net sales growth in services sector improved marginally
in FY14 to 14 per cent, though growth in both growth
in gross profits and net profits fell on account of rise
in cost of raw materials and tax burden. Gross margins
have remained steady over the years even as gross
profit has fallen consistently largely because net sales
have correspondingly declined. The figure stood at 19
per cent in FY14. Interest cost as a proportion of net
sales saw a rise, even as interest costs fell, on account
of denominator effect. Interest coverage has dropped
sharply over the years attributed to declining gross
profit growth. New investment proposals in this seg-
ment too have declined hugely from nearly Rs. 5 trillion
in FY10 to nearly Rs 1 trillion in FY14.

31
FOCUS OF THE MONTH
JUNE-JULY 2015
Sectoral Analysis
On an average over the past five years, Hotels & Retail
and Media & Entertainment dominated the business
sector in growth in net sales, net profits and gross prof-
its. Sectors like Banks & Financial Services and Health-
care & Pharmaceuticals displayed above average prof-
its despite mediocre growth in net sales. IT & Telecom
fared comparatively well in net profits and gross profits
despite dismal net sales growth. A major concern was
presented as important sectors like Capital Goods and
Construction & Construction Materials remained in the
bottom five sectors in net sales growth and gross and
net profits growth over the five year period.

ECONOMY MATTERS 32
FOCUS OF THE MONTH
New investment proposals saw an overall decline over
the years, thus the compounded average growth rate
(CAGR) for the last five fiscal years remained in the neg-
ative territory for all the other sectors except Oil & Gas
For the fiscal year, 2013-14, the leading sectors in prof-
itability ratios were Metals and Minerals, Banks and Fi-
nancial Services, IT & Telecom and Healthcare and Phar-
and FMCG. While Consumer Durables, Textile, Paper,
Leather, Rubber & Wood fared somewhat better than
the average, IT & telecom, Hotels & Retail and Media
& Entertainment bore the brunt of steep cuts in new
investment proposals.
maceuticals. Net margins stood as high as 10 per cent
in these sectors. These four sectors along with Power
reported gross margins to the tune of 21-22 per cent.

33
FOCUS OF THE MONTH
JUNE-JULY 2015
Sectors like Auto & Auto Parts, Packaging and Logistics,
Consumer Durables, Textile, Paper, Leather, Rubber &
Interest Coverage ratio measured by gross profits as a
ratio of interest costs, stood as high as 913 per cent for
Oil & Gas sector in FY14. Other sectors, where this ratio
was high were- IT & Telecom, Healthcare & pharmaceu-
ticals, Auto & auto Parts and FMCG. The figure was as
low as 44 per cent for Banks and Financial Services. The
sector also saw an exceptionally high ratio of interest
cost/net sales standing at 48 per cent as compared to
Proportion of cost of raw materials to net Sales was as
high as 83 per cent for Oil & Gas sector and even for
Hotels and Retail, Fertilizers & Chemicals, Textile, Pa-
per, Leather, Rubber & Wood and Auto & Auto Parts it
Wood, Hotels & Retail and Fertilizers & Chemical fared
below average in performance in profitability ratios.
only single digit ratios for all the other sectors. Power,
Construction & Construction Materials and Metals &
Minerals along with Hotels & Retail had higher values
of ratios such as interest costs as a proportion of net
sales. For sector such as, Fertilizers & Chemicals, FMCG,
Consumer Durables, Auto & Auto Parts and Oil & Gas,
the ratio of interest cost to net sales was as low as only
1 to 3 per cent.
stood at greater than 50 per cent in FY14. Lowest ratios
were seen for Media & Entertainment, IT & Telecom and
Power at 15 per cent, 13 per cent and 10 per cent respec-
tively. Staff costs as a percentage of net sales were ex-

ECONOMY MATTERS 34
FOCUS OF THE MONTH
ceptionally high for IT & Telecom sector and stood at 24
per cent. For Media & Entertainment and Healthcare &
Pharmaceuticals, it stood at 10 per cent. The proportion
Auto & Auto Parts
Net sales growth in FY14 stood as low as 1 per cent
as compared to a strong 32 per cent growth in FY11.
This was also reflected in gross profits and net profits
growth. The former fell from 17 per cent in FY11 to 3 per
cent in FY14. The latter contracted by the tune of 7 per
cent as compared to a growth of 16 per cent in FY11. It
was however a respite over contraction to the tune of
16 per cent in FY13. Growth in interest costs and staff
of costs remained low for Fertilizers & Chemicals and
FMCG at 4 per cent and Consumer Durables and Oil &
Gas at 3 per cent and 2 per cent respectively.
costs saw moderation and cost of raw materials in fact
saw a contraction in FY14, although not enough to miti-
gate the meager sales growth. New investment propos-
als in the sector have declined from Rs 377 billion in FY10
to mere Rs 88 billion in FY14. Net margin in the sector
declined to 3 per cent in the years FY13 and FY14 from a
ratio of 6 per cent five years ago. Gross margin stood at
10 per cent in FY14 as compared to 13 per cent in FY10,
though marginally above 9 per cent figure in FY13. Inter-
est coverage has also fallen to 619 per cent in FY14 from
842 per cent in FY11.
A further disaggregated analysis of the sectors is undertaken in the subsequent section.

35
FOCUS OF THE MONTH
JUNE-JULY 2015
Banks & Financial Services
Growth in net sales in FY14 at 17 per cent was much
lower than the figure for FY12 at 37 per cent. Net prof-
its witnessed flat growth as compared to growth of 24
per cent in FY11 while growth in gross profits fell from
24 per cent to 7 per cent in FY14. Interest cost growth
moderated to 14 per cent in FY14 from 42 per cent in
FY12, while growth in raw materials cost stood at 31 per
cent in FY14 as compared to 67 per cent in FY12. Growth
in tax burden has steadily moderated from 26 per cent
in FY11 to 5 per cent in FY14. Profitability ratios have fol-
lowed an inverted ‘U’ trend in the past five years. Gross
margin and net margin stood at their highest in the last
five years in FY11 at 27 per cent and 14 per cent respec-
tively. Interest coverage has fallen from 53 per cent in
FY10 to 44 per cent in FY14. While the proportion of net
sales to interest costs and cost of raw materials has in-
creased steadily, that of staff costs has declined over
the past five years. The sector saw no new investment
proposals in the last five years.

ECONOMY MATTERS 36
FOCUS OF THE MONTH
Capital Goods
The sector, being pivotal for growth in economy, pre-
sented major reasons of concern. Net sales contracted
in FY14 by 5 per cent as compared to a growth to the
tune of 20 per cent in FY11 in the sector. Gross profits
saw a contraction to the tune of 6 per cent for the sec-
ond consecutive year while net profits contracted for
the third straight year, and by as much as 25 per cent in
FY14. Cost of raw materials saw a contraction as well, by
4 per cent in FY14, led by a decline in demand. Growth
in staff costs too has declined over the years. While new
Construction & Construction
Materials
Netsalesinthissectortoosawasteepdeclineandstood
at mere 1 per cent in FY14 from double-digit figures in
FY11 and FY12. Gross profits contracted to the tune of
9 per cent in FY14 while net profits saw a contraction
for the third straight year and contracted by as much
investment proposals were as high as Rs 236 billion in
FY12, they have fallen to a meagre Rs 39 billion in FY14.
Net margin in the sector has halved in the past five years
and stood at a low of 4 per cent in FY14. Gross margin
too has declined from 17 per cent in FY10 to 12 per cent
in FY14. Interest coverage has halved to 311 per cent in
FY14 from 652 per cent in FY11. Proportion to net sales
of components of expenditure – interest cost, cost of
raw materials and staff cost, did not exhibit much vari-
ability, apart from a minor decline in raw materials cost,
over the five years given the fixity in the nature of pro-
duction process.
as 24 per cent in FY14. Growth in interest cost halved in
last four years to 12 per cent in FY14. Cost of raw materi-
als saw a contraction by 4 per cent in FY14 compared to
double-digit growth figures in previous three years. Tax
burden also saw a contraction for third straight year in
FY14. New investment proposals fell from as high as Rs.
2,482 billion in FY11 to Rs. 404 billion in FY14. Net mar-
gin fell three fold in past five years and stood at 3 per

37
FOCUS OF THE MONTH
JUNE-JULY 2015
Consumer Durables
Net sales in the sector fell steeply to 9 per cent in FY14
from 22 per cent in FY11. Net profits contracted to the
tune of 8 per cent in FY14 while growth in gross profits
also fell to 8 per cent in FY14 from 25 per cent in FY11.
Growth in interest costs has seen huge variation over
the years, standing as high as 51 per cent in FY12 and as
low as 9 per cent in FY13. Growth in cost of raw materi-
als stood as high as 22 per cent in FY12 but contracted
by 1 per cent in FY14. Staff costs growth has come down
steeply from 22 per cent in FY11 to 7 per cent in FY14.
The sector saw new investment proposals to the tune
of Rs 24 billion in FY14 while they stood at a high of
Rs 62 billion in FY12. Net margin halved over the past
five years and stood at 2 per cent in FY14. Gross mar-
gin remained fairly constant throughout and stood at
7 per cent in FY14. Interest coverage too fell from 498
per cent in FY10 to 359 per cent in FY14. Proportion of
interest costs to net sales for the sector has remained
fairly stable throughout and stood at 2 per cent in FY14.
Proportion of raw materials to net sales stood at 53 per
cent in FY14, the lowest in five years while proportion of
staff costs to net sales stood at 3 per cent for the fifth
consecutive year in FY14.
cent in FY14. Interest coverage fell from 389 per cent in
FY10 to 195 per cent in FY14. Proportion of interest costs
to net sales increased to 9 per cent in FY14 from 6 per
cent in FY10, while ratio of cost of raw materials to net
sales increased to 36 per cent in FY14 from 31 per cent in
FY10. Proportion of staff costs to net sales did not vary
much over the years.

ECONOMY MATTERS 38
FOCUS OF THE MONTH
Fertilizers and Chemicals
Net sales growth in the sector fell drastically to 4 per
cent in FY13 and FY14 from 23 per cent in FY11 and FY12.
Net profits saw a contraction to the tune of 28 per cent
in FY14 as compared to growth of 26 per cent in FY11.
Gross profits contracted by 5 per cent in FY14 as com-
pared to growth of 17 per cent in FY11. Growth in inter-
est costs has fluctuated over the years and stood at 17
per cent in FY14. In FY14 the tax burden contracted by
20 per cent in the same year. New investment propos-
als stood at as high as Rs. 482 billion in FY11 but declined
hugely to Rs 76 billion in FY14. Profitability ratios have
not seen much variation over the years; net margin and
gross margin stood at 4 per cent and 10 per cent respec-
tively in FY14. Interest coverage in line with aggregate
trend fell steeply from 500 per cent in FY10 to 395 per
cent in FY14. Proportion to net sales of components of
expenditure – interest cost, cost of raw materials and
staff costs remained invariant over the years and stood
at 3 per cent, 60 per cent and 4 per cent respectively in
FY14.

39
FOCUS OF THE MONTH
JUNE-JULY 2015
FMCG
Net sales growth in the sector fell sharply to 9 per cent
in FY14, though a marginal improvement over 7 per cent
in FY13. Net profits saw a contraction to the tune of 32
per cent in FY14 even as a steady growth was visible
over previous three years and had stood at 21 per cent
in FY13. Gross profits contracted by 4 per cent in FY14 as
compared to growth of 21 per cent in FY12. Growth in
interest costs stood at 9 per cent in FY14, lower than 42
per cent in FY12. In FY14, the growth in cost of raw mate-
rials stood at 9 per cent, down from 20 per cent in FY12.
Growth in staff costs also moderated to 15 per cent in
FY14 as compared to 17 per cent a year ago. FMCG was
the only sector without huge decline in new investment
proposals. New investment proposals stood at as high
as Rs. 125 billion in FY12 and at Rs 102 billion in FY14. Net
margin and gross margin stood at 4 per cent and 11 per
cent respectively in FY14 as compared to 7 per cent and
13 per cent in FY11. Interest coverage fell steeply from
649 per cent in FY10 to 496 per cent in FY14. Proportion
to net sales to components of expenditure – interest
cost and staff costs remained invariant over the years
and stood at 2 per cent and 4 per cent respectively in
FY14. Cost of raw materials as a proportion to net sales
fluctuated over the years standing at 52 per cent in FY14.

ECONOMY MATTERS 40
FOCUS OF THE MONTH
Healthcare & Pharmaceuticals
Net sales growth in the sector improved to 14 per cent in
FY14 as compared to 6 per cent in FY13 though modera-
tion from 31 per cent in FY12. Net profits moderated to 5
per cent in FY14 from 14 per cent a year before. Growth
in gross profits has improved steadily to 21 per cent in
FY14 from 12 per cent in FY11. In FY14, the growth in cost
of raw materials stood at 6 per cent, down from 25 per
cent in FY12. Growth in staff costs also moderated to 16
per cent in FY14 as compared to 25 per cent in FY11. New
investment proposals stood at as high as Rs. 340 billion
in FY11 but merely at Rs 73 billion in FY14. Net margin
and gross margin stood at 10 per cent and 21 per cent
respectively in FY14 as compared to 22 per cent and 20
per cent in FY11. Proportion to net sales of components
of expenditure – interest cost and staff costs remained
invariant over the years and stood at 3 per cent and 10
per cent respectively in FY14. Cost of raw materials as a
proportion to net sales fluctuated over the years stand-
ing at 37 per cent in FY14.
Hotels & Retail
Net sales growth in the sector fell to 23 per cent in FY14,
from 28 per cent in FY12. Net profits saw a decline in
growth to the tune of 21 per cent in FY14 as compared
to 61 per cent in FY13, albeit remaining in positive re-
gion unlike FY11 and FY12 wherein it had contracted.
Gross profits improved to 26 per cent in FY14 as com-
est costs moderated to 12 per cent in FY14 from 31 per
cent in FY12. In FY13 and FY14, the growth in cost of raw
materials stood at 32 per cent, down from 42 per cent
in FY12. Growth in staff costs also moderated to 11 per
cent in FY13 as compared to 19 per cent in FY12. New
investment proposals stood at as high as Rs. 128 bil-
lion in FY12 but merely at Rs 8 billion in FY14. Net mar-
gin contracted to the tune of 4 per cent in FY14, being
negative for third consecutive year while gross margin
stood at 7 per cent in FY14. Unlike other sectors, inter-
est coverage remained fairly steady at stood at 142 per
expenditure – interest cost and staff costs remained
invariant over the years and stood at 5 per cent and 8
per cent respectively in FY14. Cost of raw materials as
a proportion to net sales fluctuated over the years and
stood at 62 per cent in FY14.

41
FOCUS OF THE MONTH
JUNE-JULY 2015
IT & Telecom
Net sales growth remained fairly stable over the years
and stood at 12 per cent in FY14. The sector recorded
net profits growth to the tune of 97 per cent in FY14.
Gross profits improved to 22 per cent in FY13 as com-
est costs has consistently declined from 66 per cent in
FY11 to a contraction of 2 per cent in FY14. In FY14, the
growth in cost of raw materials stood at 8 per cent,
down from 13 per cent in FY13. Growth in staff costs also
moderated to 18 per cent in FY14 as compared to 20 per
cent a year ago. New investment proposals stood at as
high as Rs. 312 billion in FY12 but merely at Rs 64 billion
in FY14. Net margin and gross margin stood at 10 per
cent and 22 per cent respectively in FY14. Interest cov-
erage fell steeply from 1279 per cent in FY10 to 732 per
staff costs remained fairly consistent over the years
and stood at 3 per cent, 13 per cent and 24 per cent
respectively in FY14.

ECONOMY MATTERS 42
FOCUS OF THE MONTH
Media & Entertainment
Net sales growth in the sector fell drastically to 9 per
cent in FY14 from 27 per cent in FY11. Net profits saw
a moderation in growth to the tune of 64 per cent in
FY14 as compared to 77 per cent in FY13. Gross profits
growth moderated to 13 per cent in FY14 as compared
to growth of 24 per cent in FY12. In FY14, the growth in
cost of raw materials stood at 2 per cent, down from 18
per cent in FY11. Growth in staff costs also moderated to
9 per cent in FY14 as compared to 47 per cent in FY12.
New investment proposals stood at as high as Rs. 171
billion in FY12, but no new investments were made in
FY14. Net margin and gross margin stood at 4 per cent
and 18 per cent respectively in FY14, fairly invariant over
the years. Proportion to net sales of components of
staff costs remained fairly similar since FY10 and stood
at 4 per cent, 15 per cent and 10 per cent respectively
in FY14.

ECONOMY MATTERS: Corporate Profitability and Investment Trends

ECONOMY MATTERS: Corporate Profitability and Investment Trends

Recomendados

Recomendados

Mais conteúdo relacionado

Mais procurados

Mais procurados (20)

Destaque

Destaque (20)

Semelhante a ECONOMY MATTERS: Corporate Profitability and Investment Trends

Semelhante a ECONOMY MATTERS: Corporate Profitability and Investment Trends (20)

Mais de Confederation of Indian Industry

Mais de Confederation of Indian Industry (20)

Último

Último (20)

ECONOMY MATTERS: Corporate Profitability and Investment Trends