Economy Matters: November - December Issue

1
FOREWORD
NOV-DEC 2015
A
s anticipated, the US Federal Reserve raised interest rates for the first time in almost a dec-
ade, signalling that the pace of subsequent hikes will be gradual and will depend on how
the economy moves forward. More importantly, the Fed said that its stance of monetary
policy would remain accommodative after this increase, thereby supporting further improvement
in labor market conditions and a return to 2 per cent inflation. The impact of the Fed rate hike on In-
dia’s exchange rate and stock market was minimal as a rate increase had already been factored in by
the markets. However, the Fed rate hike settles one issue—that asymmetric monetary policy across
developed economies is now a hard reality. Conforming to this trend was the European Central Bank
(ECB), which announced further measures to stimulate the Euro zone economy by extending quanti-
tative easing until at least March 2017.
Domestic GDP data grew at higher rate of 7.4 per cent in the second quarter of FY2016, indicating
that the recovery has gained strength, as we had anticipated. GDP growth is likely to exceed 7.5 per
cent for the full year. In a year when external demand remains a drag on the economy, this would
be considered a strong performance. The acceleration in the manufacturing sector shows that the
government’s policy direction is bearing fruit. The ‪Make in India‬ campaign with its objective of
raising the growth rate in the manufacturing sector has begun to make an impact. Policy measures
need to focus on a revival in project execution in manufacturing, real estate and infrastructure. An ac-
commodative monetary policy is also critical for pushing up growth. In this regard, the RBI’s decision
to maintain status-quo in its policy review held in early December was in line with our expectations,
given that there has already been a reduction of 50 bps in the last policy. The focus has now shifted
to the transmission of lower policy rates to banks’ lending rates. Banks need to be ready to finance a
pick-up in credit growth and RBI should ensure that high level of non-performing assets do not con-
strain banks from financing higher growth. We are happy to note that the RBI intends to maintain an
accommodative policy stance.
Favourable demographics position India to fill the void created by countries with an ageing popula-
tion, and become a major player in global business. The manner in which India uses this opportunity
will determine whether it will reap its demographic dividend. Apart from tackling spatial challenges
arising from a remarkable disparity in the demographics of its States, India will have to address the
critical issues of creating jobs and preparing its youth to participate in its economic growth. India
will need to alter its policy framework and give incentives for creating sufficient jobs and alleviating
workforce skill-mismatch. If status-quo persists in India policy framework for education & training
and workforce management, economic growth will soon hit a speed breaker. Hence, it’s critical to
create an educated workforce and job opportunities for realising the demographic dividend.
Chandrajit Banerjee
Director General, CII

EXECUTIVE SUMMARY
ECONOMY MATTERS 4
Global Trends
Cheer continues to make its way in the Euro zone
countries. While France, Germany, Italy and Spain
have mirrored the leaping growth in the Euro zone,
Greece is still stuck in a dicey situation. In the third
quarter of current fiscal, the growth in GDP doubled
to 1.6 per cent, on the back of private and state ex-
penditure. This mirrored the stimulus measures that
have been announced by the European Central Board
in the recent past. After ECB’s hawkish cut, the Fed
has delivered a dovish hike. Economic activity in the
US has been expanding at a moderate pace. The
growth in GDP in the third quarter of 2015 softened
to 2.2 per cent. Given the economic outlook, the Fed-
eral Open Market Committee which met on 15th-16th
December decided to raise the target range for the
federal funds rate to 0.25 per cent to 0.5 per cent.
Previously, it was between 0 per cent and 0.25 per
cent, a level it had been at for seven years. The stance
of monetary policy remains accommodative after this
increase, thereby supporting further improvement in
labor market conditions and a return to 2 per cent in-
flation.
Domestic Trends
GDP growth rose to 7.4 per cent in Q2FY16 from 7.0
per cent in the previous year and was broadly in line
with expectations. Gross value added (GVA at basic
prices) also rose to a similar reading of 7.4 per cent
during the quarter. Even though the GVA and GDP
remained robust during the quarter, the correspond-
ing nominal growth slowed down to 5.2 per cent and
6.0 per cent respectively. Looking ahead, a tentative
economic recovery is underway, but is still far from
robust. GDP growth is likely to exceed 7.5 per cent
for the full year. Industrial output jumped to a 5-year
high of 9.8 per cent in October 2015 as compared to
3.8 per cent in the previous month mainly due to fes-
tive demand and low base of last year. All the major
components of the IIP performed well in October
2015. Inflation on the other hand has remained sub-
dued except for occasional spurt in CPI inflation in the
last few months. On the external front, global weak-
ness has translated into our merchandise exports fall-
ing for the twelfth consecutive month in November
2015.
Corporate Performance
The corporate results at the end of the second quar-
ter of current fiscal continued to remain weak as the
financial performance of Indian companies, espe-
cially manufacturing sector firms showed only mild
improvement. Net sales on an aggregate basis con-
tracted by 5.7 per cent while for manufacturing firms
it showed contraction to the tune of 12.5 per cent
during the second quarter of the current fiscal. There
was deceleration witnessed in profitability on an ag-
gregate basis as PAT declined to 1.4 per cent. While
the growth in expenditure costs stood somewhat
curbed, the fading growth of net sales, as well as de-
cline in PAT, added to the problems.
Sector in Focus : Financial Conditions
Index in 3QFY16
The CII – IBA Financial Conditions Index came at 70.3
for Q3 FY 2015-16, thus showing healthy improve-
ment in the overall financial conditions in the Indian
economy vis-à-vis the previous quarter (67.8) owing
to expectations of leading banks and financial insti-
tutions of reduction in cost of funds, strong liquid-
ity position, better external financial linkages and an
uptick in economic activity. The reading of the Index
was significantly above the 50 mark implying a strong
majority of the respondent banks and financial insti-
tutions reporting improvement or no change in the
overall financial conditions as against deterioration
vis-à-vis the previous quarter. The scale of improve-
ment in the financial conditions index for the current
quarter will provide the necessary comfort to the RBI
in continuing and further extending the accommo-
dative monetary policy stance for supporting higher
economic growth.
Focus of the Month : Skilling India
Evolving demographics clearly point out that India
will remain a young nation and the largest contributor
to the global workforce over the next few decades.
This is in sharp contrast to the rapidly aging popula-
tion in the Western countries. Although, investment,
reforms and infrastructure are likely drivers of India’s
economic growth, no growth driver is as certain as
the availability of people in the working age group. A
young population is India’s demographic dividend. It
gives India the potential to become global production
hub as well as large consumer of goods and services.
Further, since the age- group of 45-60 years is the key
contributor to household savings, India’s saving rate,
which has increased rapidly in the last decade, will get
a further boost thereby supporting investment. The
rise in its working-age population, however, is neces-
sary but not sufficient for India to sustain its economic
growth. If India does not create enough jobs and its
workers are not adequately prepared for those jobs,
its demographic dividend will become a liability.

5
GLOBAL TRENDS
US Federal Reserve Bites the Bullet,
Raises Rate
NOV-DEC 2015
E
conomic activity in the US has been expanding at
a moderate pace. Household spending and busi-
ness fixed investment have been increasing at
solid rates in recent months, and the housing sector has
improved further; however, net exports have been soft.
The growth in GDP in the third quarter of 2015 softened
to 2.2 per cent as compared to 2.9 per cent in the com-
parable quarter in the previous year. This was mostly
led by a sharp fall in gross fixed capital formation and
exports. Growth in fixed capital declined to 3.5 per cent
as compared to 4.8 per cent in the third quarter of 2014.
Growth also moderated in government consumption
expenditure to 0.1 per cent as compared to 0.3 per cent
in the comparable quarter in the previous year. Margin-
al improvement in the growth in private consumption
to 3.2 per cent, as compared to 3.0 per cent previously,
was witnessed. Growth in exports fell to 1.2 per cent, as
compared to 3.7 per cent in the July-September quar-
ter of previous fiscal year. Growth in imports, which are
subtracted from the GDP, rose sharply to 5.6 per cent,
from 3.1 per cent previously. Consumer prices, though,
as a relief have been constantly declining, both for food
and energy. Inflation has continued to run below the 2
per cent longer-run objective, partly reflecting declines
in energy prices and in prices of non-energy imports.
Market-based measures of inflation compensation re-
main low; some survey-based measures of longer-term
inflation expectations have edged down. Further, a
range of recent labor market indicators, including ongo-
ing job gains and declining unemployment, shows fur-
ther improvement and confirms that underutilization of
labor resources has diminished appreciably since early
this year.

ECONOMY MATTERS 6
GLOBAL TRENDS
The Fed has a dual mandate of promoting “maximum
employment” and stable prices. On the jobs front, much
has improved since the depths of the Great Recession.
The U.S. jobless rate stands at 5 per cent, down sharply
from a crisis-era high of 10 per cent. Inflation, however,
remains stubbornly low, partly due to the collapse in en-
ergy prices. But in general, the US economy is on much
better footing and, as per the Fed’s assessment, can

7
GLOBAL TRENDS
NOV-DEC 2015
withstand a higher cost of borrowing. “The Committee
judges that there has been considerable improvement
in labor market conditions this year, and it is reasonably
confident that inflation will rise over the medium term
to its 2-per-cent objective,” the Fed’s rate-setting com-
mittee said in its policy statement.
Given the economic outlook, and recognizing the time
it takes for policy actions to affect future economic
outcomes, the Federal Open Market Committee which
met on 15th-16th December 2015 decided to raise the
target range for the federal funds rate to 0.25 per cent
to 0.5 per cent. Previously, it was between 0 per cent
and 0.25 per cent, a level it had been at for seven years.
The stance of monetary policy remains accommodative
after this increase, thereby supporting further improve-
ment in labor market conditions and a return to 2 per
cent inflation.
US banks and other depository institutions are required
by law to keep a certain level of funds in reserve. If a
bank doesn’t have sufficient reserves, it can borrow
from a bank holding excess funds. These short-term
loans take place in the federal funds market. The cost
of borrowing in this market is the federal funds rate.
But the Fed doesn’t set the rate. It can, however, try
to push the fed funds rate toward its target. To do so,
the Fed buys and sells government securities – an activ-
ity known as open market operations – to either raise
or lower the supply of reserves in the banking system,
which in turn affects rates. If there are less reserves to
lend out, for instance, rates should climb higher. This is
still however important because it influences other in-
terest rates – including those that truly hit home.
The hike was expected; as of the morning of the Meet-
ing, the implied probability of a hike was 76 per cent,
according to Bloomberg data and according to many,
failing to raise interest rates would have damaged the
Fed’s credibility. The figure was as high as 97 per cent
in a Wall Street Journal poll. More hikes are expected.
But Federal Reserve chair Janet Yellen has long said
the pace of rate hikes would be slow and gradual. “An
abrupt tightening would risk disrupting financial mar-
kets and perhaps even inadvertently push the economy
into recession,” she said earlier this month.
The Committee is maintaining its existing policy of rein-
vesting principal payments from its holdings of agency
debt and agency mortgage-backed securities in agency
mortgage-backed securities and of rolling over matur-
ing Treasury securities at auction, and it anticipates
doing so until normalization of the level of the federal
funds rate is well under way. This policy, by keeping the
Committee’s holdings of longer-term securities at siz-
able levels, should help maintain accommodative finan-
cial conditions.
In a related action, the Board of Governors of the Fed-
eral Reserve System voted unanimously to approve a
0.25 percentage point increase in the discount rate (the
primary credit rate) to 1.0 per cent.
As far as the equity markets are concerned, in the past,
equities in developed markets have reacted pretty well
to Fed tightening. For consumers, if the Fed, presum-
ably, continues to hike its target rate in the coming
months and years, interest rates on everything from
mortgages to car loans will also rise. Savers should
eventually see more favorable rates on their deposits,
too. As far as currencies are concerned, the U.S. dollar –
already riding a strong 2015 – is expected to get a boost
as the Fed begins normalizing rates. That’s not neces-
sarily good news. An even stronger dollar will weigh on
exports and dissuade some travelers from heading to
the States. U.S. companies with sizable foreign-curren-
cy sales would see a hit to their earnings. Also, foreign
companies with U.S.-denominated debt will face even
steeper debt-servicing costs if the U.S. currency climbs
higher.
The latest policy statement has shed further light on the
path forward: “The Committee expects that economic
conditions will evolve in a manner that will warrant only
gradual increases in the federal funds rate; the federal
funds rate is likely to remain, for some time, below levels
that are expected to prevail in the longer run. However,
the actual path of the federal funds rate will depend on
the economic outlook as informed by incoming data. ”

ECONOMY MATTERS 8
GLOBAL TRENDS
The growth was largely driven by more than two-fold
rise in growth of private consumption expenditure to
the tune of 1.7 per cent, as compared to a growth of
0.8 per cent in the third quarter of 2014. Significant rise
was also seen in the growth of government consump-
tion expenditure which stood at 1.6 per cent in the third
Growth in exports declined slightly to 4.4 per cent, as
compared to 4.6 per cent in the third quarter of the pre-
Cheer continues to make its way in the Euro zone coun-
tries (Austria, Belgium, Cyprus, Estonia, Finland, France,
Germany, Greece, Ireland, Italy, Latvia, Lithuania, Lux-
embourg, Malta, the Netherlands, Portugal, Slovakia,
Slovenia, and Spain). After a solid performance in the
second quarter, in the third quarter of current fiscal
quarter of current fiscal as opposed to a 0.9 per cent
growth previously. Both segments have been seeing an
ascending trend for the past five quarters. Fixed capital
formation also witnessed improved growth, with the
figure standing at 2.2 per cent as compared to 0.7 per
cent in the comparable quarter in 2014.
vious fiscal. Growth in imports, on the other hand, rose
marginally to 4.9 per cent as compared to 4.4 per cent
previously.
as well, the growth in GDP doubled to 1.6 per cent, on
the back of growth in private and state expenditure, as
compared to a growth of 0.8 per cent in the compara-
ble quarter in the previous fiscal year. This mirrored the
stimulus measures that have been announced by the
European Central Board in the recent past.
Euro zone Economies Recovering, Thanks to Stim-
ulus Measures

9
GLOBAL TRENDS
NOV-DEC 2015
While France, Germany, Italy and Spain have mirrored
the leaping growth in the Euro zone, with Italy, in fact,
climbing out of the negative territory, Greece is still
stuck in a dicey situation. In France, the growth in the
third quarter of the current fiscal stood at 1.2 per cent as
compared to a meagre 0.1 per cent growth in the third
quarter of 2014. In Germany, the growth in GDP im-
proved marginally to 1.7 per cent in the third quarter of
2015 as compared to the July-September quarter of the
previous fiscal. In Greece, the growth slipped into the
negative territory and the country witnessed a contrac-
tion in GDP to the tune of 1.1 per cent as compared to a
decent growth of 1.1 per cent in the comparable quarter
previous fiscal year. Italy, on the contrary, crept out of
the negative territory posting a GDP growth figure of
0.8 per cent in the third quarter of 2015 as compared to
a de-growth of 0.4 per cent previously. Finally, Spain re-
ported a two-fold increase in its growth rate to the tune
of 3.4 per cent in the July-September quarter in 2015
over a growth of 1.7 per cent in the comparable quarter
previous fiscal year.
In the 3rd December 2015 meeting, President Mario
Draghi announced further measures to stimulate the
Euro zone economy after the central bank revised
downwards its inflation projections. The Governing
Council of ECB decided to extend quantitative easing
until at least March 2017. The size of asset purchase
program remains unchanged while local government
bonds were added to program for the first time. The
Council decided that the interest rate on the deposit
facility will be decreased by 10 basis points to -0.30 per
cent. The interest rate on the main refinancing opera-
tions and the interest rate on the marginal lending facil-
ity will remain unchanged at 0.05 per cent and 0.30 per
cent respectively. Markets were, however, generally
disappointed by lack of more stimulative measures.
In December 2015, the ECB handed 18.3 billion euros
($20 billion) to Euro area lenders in the sixth round of
its long-term loan program aimed at channeling money
into the real economy. The take-up compares with the
15.5 billion euros the ECB lent in a similar operation in
September and the 74 billion euros handed out in June.
Banks have now taken a total of 419 billion euros since
the first offer was made in September 2014. Draghi an-
nounced the Targeted Longer-Term Refinancing Opera-
tions (TLTROs) as part of a package aimed at boosting
euro-area inflation and supporting lending to fuel the

ECONOMY MATTERS 10
GLOBAL TRENDS
The European Central Bank should reach its inflation
target “without undue delay” after easing its policy this
month, and there are no limits to what it can do to stim-
ulate price growth if necessary, its president said on 15th
December 2015. With inflation hovering just above zero,
the ECB has been loosening monetary policy this year
to fuel price growth, fearing that delays in achieving its
target rate for inflation of just below 2 percent could
damage its credibility. Draghi defended the bank’s lat-
est package of measures, which included a deposit rate
cut and an extension of its asset-buying program but
fell short of market expectations.
Earlier in October 2015, the ECB had left interest rates
on hold, with President Draghi saying that the bank will
reassess whether to extend its massive bond-buying
program by the end of the year. Draghi and ECB mem-
bers had left the door open for more monetary stimulus
but stopped short of announcing any new policy meas-
ures. He had remarked that the bank’s bond-buying
program will need to be “re-examined in December” as
inflation remains stubbornly low amid emerging market
weakness. That sent the euro sharply lower and stocks
markets higher.
recovery. While the TLTROs are now dwarfed by a bond-
buying program that will see the ECB and national cen-
tral banks spend at least 1.5 trillion euros, they give a sig-
nalof banks’ willingnessto bet onthe region’seconomic
upswing. Excess liquidity in the euro area has jumped to
almost 600 billion euros from less than 71 billion euros
in November 2014, giving banks easier access to market
financing. Lending is growing amid a steady, if fragile,
economic recovery. Loans to non-financial corporations
in the region rose 0.5 per cent in October from a year
earlier, the fastest pace since early 2012. The TLTROs
are directly tied to loan growth. Under current opera-
tions, banks can borrow as much as three times their
net lending to companies and households, excluding
mortgages over a set period. Since March, the ECB has
offered the TLTRO funds at the main refinancing rate of
0.05 per cent, abolishing the premium of 10 basis points
it charged in the first two rounds. The operations are
quarterly, and all the loans mature in September 2018.

11
GLOBAL TRENDS
NOV-DEC 2015
Other Global Developments During the Month
• The Bank of England (BoE) Monetary Policy Committee (MPC) voted 8-1 to keep interest rate unchanged at
0.5 per cent in its meeting held on December 10, 2015. Meanwhile, the stock of asset purchases was kept un-
changed at GBP 375 billion. The BoE said that in light of persisting headwinds to the economy, any increase
in the Bank rate would be gradual and would terminate at a lower level as compared to earlier cycles. They
also mentioned that there were no links between the recent ECB easing and the rising probability of Federal
Reserve action this month and that monetary policy in the UK would solely be driven by the inflation outlook.
The committee observed that markets expected the BoE to hold rates steady for a further period of time.
• US non-farm payrolls (NFP) came in higher than expected, increasing by 211K in November 2015. The October
print was revised higher to 298K (from 271K earlier). The September print was revised up as well, taking the
total September-October revisions to +35K. The less volatile three-month average NFP print picked up to 218K
(prior: 199K). The above 200K print indicates the continued recovery in the labour market. Decomposition of
the payrolls data shows that private service-providing segment posted the steepest losses in November 2015,
recording a 111K decline over the October number.
• China’s annual inflation rate came at 1.5 per cent in November of 2015, up from 1.3 per cent in the previous
month and above market consensus. The politically sensitive food prices increased by 2.3 per cent while non-
food cost rose at a slower 1.1 per cent.
• UK’s jobless rate decreased to 5.2 per cent in the three months to October of 2015, lower than 5.3 per cent in
the previous period. The unemployment rate fell for the fourth straight period to its lowest since May of 2008.

ECONOMY MATTERS 12
DOMESTIC TRENDS
GDP Growth Grows at a Higher Rate in
Q2FY16
G
DP growth rose to 7.4 per cent in Q2FY16 from
7.0 per cent in the previous year and was broad-
ly in line with expectations. Gross value added
(GVA at basic prices) also rose to a similar reading of
7.4 per cent during the quarter. Even though the GVA
and GDP remained robust during the quarter, the corre-
sponding nominal growth slowed down to 5.2 per cent
and 6.0 per cent respectively. Higher real growth print
vis-à-vis nominal growth indicates deflation in the price
index. Sector wise analysis shows deflationary trend in
sectors such as mining, manufacturing, construction,
trade along with financial and real estate services.
Looking ahead, a tentative economic recovery is under-
way, but is still far from robust. GDP growth is likely to
exceed 7.5 per cent for the full year. There are a number
of factors that can be attributed to the initial signs of
recovery in the economy. Though oil prices have picked
up from their recent lows, they still remain low, thus
helping to partially offset the major stress points in the
economy namely inflation and twin deficits. To top it,
a multi-dimensional reform agenda enunciated by the
government has also reignited the ‘feel good’ factor
which in turn has raised the business prospects of the
economy.

13
DOMESTIC TRENDS
NOV-DEC 2015
On the supply side, surprising on the upside, agriculture
growth was the highest since Sept-14 at 2.2 per cent as
compared to 1.9 per cent in the previous quarter. While
a below normal monsoon (14 per cent deficient from its
LPA) allowed only a meager increase in Kharif produc-
tion as compared to last year, the downside in agricul-
ture appears to have been cushioned by the ‘allied-agri’
sector. Accounting for nearly 51 per cent of the sector’s
GVA, growth in livestock products, forestry and fisheries
was over 6.0 per cent in Q2FY16. Industry growth rose
to 6.8 per cent in Q2FY16 as compared to 6.5 per cent in
the previous quarter driven by robust growth posted by
manufacturing and electricity. Manufacturing grew at a
robust pace of 9.3 per cent in the second quarter of the
current fiscal as compared to 7.2 per cent in the previ-
ous quarter and also significantly higher than 4.6 per
cent growth registered in IIP. Services sector growth
stood at 8.8 per cent in Q2FY16 as compared to 8.9 per
cent in the previous quarter. Among its sub-sectors,
trade, hotels component growth softened to 10.6 per
cent in Q2FY16 as compared to 12.8 per cent posted in
the previous quarter. While the passenger vehicle sales
supported the sector, muted railways transport indi-
cators weighed on overall growth. In fact, the perfor-
mance would have been worse if not for the deflation-
ary trend in the sectoral price index.

ECONOMY MATTERS 14
DOMESTIC TRENDS
Going forward, in the short-run, growth will receive a
boost from the cumulative impact of economic reforms
and improved inflationary expectations. In its recent
evaluation of the Indian Economy, Ministry of Finance
has downscaled its growth forecast of the economy
from 8.1-8.5 per cent to 7.0-7.5 per cent for the current
fiscal on the back of declining global demand hurting ex-
ports, which fell for the 12th straight month in Novem-
ber, down 24 per cent from a year ago. Four successive
years of drought and poor monsoon in the current fis-
cal have hit agriculture. The mid-year review raised a
red flag for fiscal year 2016-17, saying that the economy
was giving off mixed signals and it was riding on just pri-
vate consumption and public spending, with private in-
vestment yet to gather momentum. Declining nominal
GDP (gross domestic product) growth could dent gov-
ernment revenue. Its prescription for a medium-term
growth trajectory includes supply-side reforms and de-
mand management.
Outlook
GDP data showing growth of 7.4 per cent in the second quarter of FY2016 indicates that the recovery has gained
strength, as we had anticipated. GDP growth is likely to exceed 7.5 per cent for the full year. In a year when external
demand remains a drag on the economy, this would be considered a strong performance. The acceleration in the
manufacturing sector shows that the government’s policy direction is bearing fruit. The Make in India campaign
with its objective of raising the growth rate in the manufacturing sector has begun to make an impact. Policy meas-
ures need to focus on a revival in project execution in manufacturing, real estate and infrastructure.
At market prices, private consumption expenditure
growth weakened to 6.8 per cent in Q2FY16 as com-
pared to 7.4 per cent in the previous quarter, with the
slowing nominal GDP growth weighing on consumption
demand. In contrast, government consumption expend-
iture growth picked up to 5.2 per cent as compared to
growth to the tune of 1.2 per cent posted in the previous
quarter. This is in line with the pickup in public admin-
istration services growth at the sectoral level. Mean-
while, capex recovery has maintained pace with gross
fixed capital formation rising to a 5-quarter high of 6.8
per cent. The investments growth is primarily driven
by public spending in sectors such as roads. The frag-
ile global economic situation is weighing on domestic
economy as well. In fact, the export and import data
prints have been consistently in the negative territory
over the last few quarters.

15
DOMESTIC TRENDS
NOV-DEC 2015
Industrial output jumped to a 5-year high of 9.8 per
cent in October 2015 as compared to 3.8 per cent in the
previous month mainly due to festive demand and low
base of last year. All the major components of the IIP
performed well in October 2015. Manufacturing and
capital goods showed strong recovery; consumer du-
rables provided robust support. It will be interesting to
watch if the momentum of industrial production is able
In contrast to the healthy performance of the overall in-
dustrial sector, output of the eight core industries rose
by a tepid 3.2 per cent in October 2015 on a y-o-y ba-
sis, unchanged from last month. The core sector index
comprises 38 per cent of the total weightage of items
included in the Index of Industrial Production (IIP). The
index’s cumulative growth from April to October 2015-
16 stood at 2.5 per cent, as compared to 5.6 per cent
during the corresponding period of 2014-15. Out of the
eight core industries -- fertilisers, cement, electricity and
coal reported healthy output numbers. However, pro-
duction of refinery products, crude oil, natural gas and
steel dwindled in the period under review.
Electricity generation, which commands the highest
weightage at 10.3 per cent in the IIP, rose by 8.8 per
to sustain, given the volatile nature of the data series.
On a cumulative basis, industrial production growth has
improved at higher pace of 4.8 per cent in April-October
2015 compared with 2.1 per cent in the corresponding
period last year. In FY16, we expect industrial produc-
tion to grow at a higher rate as compared to the pre-
vious fiscal on the back of improving global conditions
and policy aided domestic upturn.
cent during the month under review, whereas steel
production, the second most important component as
per weightage, contracted by 1.2 per cent. Distilling of
refinery products, the third most important component
as per weightage, declined by 4.4 per cent in October
2015. Crude oil output, fell by 2.1 per cent during the
month under review in comparison to the data for Octo-
ber 2014. Coal mining output, increased by 6.3 per cent
during the month under review. Cement manufacturing
output, having a weightage of 2.4 per cent, was higher
by 11.7 per cent. The sub-index for natural gas output,
slipped by 1.8 per cent in the month under considera-
tion. The fertilisers manufacturing which has a weight-
age of only 1.25 per cent rose exponentially by 16.2 per
cent in October 2015.
IIP Growth Springs up a Positive Surprise in
October 2015

ECONOMY MATTERS 16
DOMESTIC TRENDS
On the sectoral front, growth of manufacturing sector,
which constitutes over 75 per cent of the index, deceler-
ated to 2.6 per cent in September 2015 compared with
6.6 per cent growth in the previous month. In terms of
industries, seventeen (17) out of the twenty two (22) in-
dustry groups (as per 2-digit NIC-2004) in the manufac-
turing sector showed positive growth during the month
of October 2015 as compared to the corresponding
month of the previous year. The industry group ‘Furni-
ture; manufacturing n.e.c.’ grew at the highest positive
growth of 138.9 per cent, followed by 48.4 per cent in
‘Office, accounting & computing machinery’ and 47.5
per cent in ‘Radio, TV and communication equipment
& apparatus’. On the other hand, the industry group
‘Publishing, printing & reproduction of recorded media’
showed the highest negative growth of (-) 10.2 per cent,
followed by (-) 6.8 per cent in ‘Medical, precision & opti-
cal instruments, watches and clocks’ and (-) 2.9 per cent
in ‘Coke, refined petroleum products & nuclear fuel’.
Electricity output continued to grow at robust rate, al-
beit its growth rate moderated to 9.0 per cent in Oc-
tober 2015 as compared to 11.4 per cent in September
2015, in part due to a high base of last year. Mining out-
put growth increased to 4.7 per cent, from 3.0 per cent
growth in the previous month. The recent auction of
coal mines by the government could provide some im-
petus to coal production in the months to come.
The details in the use based segment are fairly encour-
aging. Capital goods growth continued to stay in expan-
sionary territory for the fourth consecutive month and
this seems to lend credence to a nascent turn around in
the capex cycle in the economy. This would also help to
significantly underpin overall growth prospects in the
second half of the fiscal. Capital goods output grew by
16.1 per cent in the month under review as compared to
10.3 per cent in the previous month. Consumer durables
have been on a strong footing for quite a few months
now and the October 2015 print was very robust at 42.2
per cent. This component has remained positive for
five months in a row now and has been aided by con-
tinuous improvement in sectors such as passenger cars.
The strength in consumer durables helped overall con-
sumer goods to post a strong growth of 18.4 per cent.
Consumer goods have been positive for a while now
but performance has mostly been tepid on account of
weakness in consumer non-durables. For the month of
October 2015, the non-durables sector registered posi-
tive growth of 4.7 per cent after three months of con-
traction. This could be an indicator of improving con-
sumption demand in the economy.

17
DOMESTIC TRENDS
NOV-DEC 2015
Wholesale price deflation, dropped to 2 per cent in No-
vember 2015 from 3.8 per cent in the previous month.
This is the eleventh consecutive month deflation in
wholesale prices. India has been witnessing a deflation-
ary trend in wholesale prices for over a year. WPI has
been experiencing deflation on annual basis from No-
vember last year. Sustained decline in WPI is good news
for corporate as WPI is input price for manufacturing
process. In contrast to WPI, rising prices for some food
products and firm demand during the festival season
pushed up retail inflation (CPI) to high of 5.4 per cent
in November 2015 as compared to 5.0 per cent in the
previous month. In part, the uptick in CPI inflation could
also be attributed to a low base effect of last year. Infla-
tion in CPI fuel & light prices remained unchanged at 5.3
per cent in November 2015 from the previous month.
The miscellaneous group in the consumption basket
witnessed a rise in inflation to 3.8 per cent from 3.5 per
cent. Going forward, the expected reversal in prices
of some perishables and pulses; the likely softness in
global crude oil prices and, consequently, domestic fuel
prices; as well as the waning of the adverse base effect
would contribute to keeping CPI inflation largely steady
at current levels during the remainder of FY 2015-16.
Outlook
Industrial production growth accelerated sharply in October 2015 on the back of higher growth in manufactur-
ing, capital goods and consumer goods sector. It will be interesting to see if this trend sustains for the remaining
months of this fiscal. The numerous Government policies, in terms of expeditious project clearances, simplification
of procedures and new investment announcements as well as the ‘Make in India’ initiative would help to improve
the order book position, revive demand and help effect a turnaround in the investment cycle in the future. In FY16,
we expect industrial production to grow at a higher rate as compared to the previous fiscal on the back of improv-
ing global conditions and policy aided domestic upturn.
CPI Inflation Shows a Spike in November 2015

ECONOMY MATTERS 18
DOMESTIC TRENDS
Rising food prices, pushed primary products prices into
the positive territory, after a gap of 6 months in Novem-
ber 2015. Inflation in primary articles stood at a high of
2.3 per cent in November 2015 as compared to deflation
to the tune of 0.4 per cent in the previous month. Infla-
tion in the prices of food articles rose to 5.2 per cent
in November 2015 from 2.4 per cent in the preceding
month. This is the third consecutive month of y-o-y rise
in prices of food articles. This was mainly due to rise in
prices of vegetables, especially onions and tomatoes,
and prices of pulses. Tomato prices rose y-o-y by 137.6
per cent in November 2015 as compared to the 9.3 per
cent rise recorded in the preceding month. Prices of on-
ion recorded an inflation of 52.7 per cent as compared
to 85.7 per cent in the previous month. According to
media reports, this dramatic rise in tomato prices was
due to lower production and consequent short-supply
of the vegetable. Reportedly, supplies of the two com-
modities from the southern States were disrupted due
to severe, unprecedented rainfall witnessed in Novem-
ber. Price of pulses recorded a rise in inflation to 58.2
per cent in November 2015 from 53 per cent in the pre-
vious month. All types of pulses recorded a y-o-y rise in
their prices. Prices of pulses have risen due to shortage
in production. Normally, food prices moderate with the
onset of rabi harvesting season. But, due to intermit-
tent unseasonal rainfalls and affect of El Nino resulting
into drought in some areas and flood in some major agri
commodities growing regions, the food prices remain
elevated.
Deflation in fuel sector stood at 11.1 per cent in Novem-
ber 2015, thus marking the fifth consecutive month of
double-digit deflation as compared to deflation to the
tune of 16.3 per cent in the month before. This fall was
on the back of y-o-y fall in prices of petrol and high-
speed diesel. Even though prices of petrol and diesel
were hiked on 15 November by 36 paisa per litre and 87
paisa per litre respectively, the prices showed a fall on
y-o-y basis. This was due to a high-base effect for both
petrol and diesel.
Manufacturing products prices recorded a deflation
of 1.4 per cent in November 2015 compared to 1.7 per
cent in the previous month. This was the ninth straight
month of y-o-y fall in manufacturing prices. The fall was
on account of deflation in the prices of textiles, chemi-
cals & chemical products and basic metals, alloys &
metal products. Textile prices recorded a y-o-y fall of 1.6
per cent mainly due to fall in global crude oil and cotton
prices. Prices of chemical & chemical products recorded
a deflation of 1.7 per cent, while prices of basic metals,
alloys & metal products fell y-o-y by 7.8 per cent. Non-
food manufacturing or core inflation, which is widely
regarded as the proxy for demand-side pressures in the
economy remained subdued at -1.9 per cent during the
month as compared to -2.1 per cent during the previous
month.

19
DOMESTIC TRENDS
NOV-DEC 2015
Outlook
The WPI index has declined for the eleventh consecutive month in November 2015 indicating slackness in economic
activity across sectors. In sharp contrast, retail inflation measured by the consumer price index (CPI) increased for
the fourth successive month in November 2015, pushed up by a surge in the monthly momentum. Food inflation
rose sharply in November, driven especially by pulses and vegetables. Its however interesting to note that though
CPI inflation has shown a spike in the last few months, it still remains more-or-less range bound in RBI’s target
range. Going forward, we expect subdued demand conditions to keep CPI inflation capped with only transient
episodes of rise due to surge in food prices.
India’s merchandise exports fell for the twelfth con-
secutive month in November 2015 this year. Exports
contracted by 24.5 per cent in November 2015 which
was more than the previous month’s decline. Contrac-
tion remained widespread, with petroleum products,
iron ore, oil seeds, rice and cereals posting the steep-
est declines (on a year-on-year basis). Meanwhile, tea,
jute manufactures, drugs and pharmaceuticals record-
ed positive growth, even as their growth rates have
slowed over the last few months. The overall weak
export growth is indicative of weak global demand as
well as sharp correction in commodity prices. Cumula-
tively, April-November 2015 saw exports dropping by
18.5 per cent. Given the recent trend, exports are likely
to fall below US$300 billion mark, for the first time since
FY2011. India aims to take exports of goods and services
to US$900 billion by 2020 and raise the country’s share
in world exports to 3.5 per cent from 2 per cent now.
Exports in the past four fiscal years have been hovering
at around US$300 billion.
Imports also contracted by a sharp 30 per cent in No-
vember 2015, led by a 63 per cent decline in fertiliser
imports, and a 45 per cent dip in oil imports. Pulses,
electronics and fruits and vegetables were the only
commodities to see an increase in imports. During
April-November 2015, India’s cumulative imports were
US$261 billion. This is a 17 per cent drop from US$316 bil-
lion, the cumulative figure for the same period last year.
The oil import bill dropped 45 per cent in October to
US$6.4 billion, following global cues of plunging crude
oil prices. Compared to this, US$11.7 billion was the com-
parative cost in November last year. Non-oil imports,
too, dropped 4.4 per cent to an estimated US$23 billion.
Gold was down 36 per cent at 3.5 billion dollars. Non-
oil, non-gold imports, taken as a reflection of domestic
demand and a broad gauge for industrial recovery, de-
clined by 0.22 per cent in November 2015.
Exports Contract for the 12th
Consecutive Month

ECONOMY MATTERS 20
DOMESTIC TRENDS
In its fifth bi-monthly monetary policy review, RBI chose
to keep the key policy repo rate unchanged at 6.75 per
cent; as per the expectations, after front-loading the
rate cut of 50 bps on September 29. The decision of the
Central Bank was based on the fact that inflation has
remained within target range of RBI this year so far. It,
however, cautioned vigil on core inflationary pressures,
which could see some uptick as consumer demand and
inflationary expectations perk up due to Seventh Cen-
tral Pay Commission payouts next fiscal. RBI in its mon-
etary policy statement stressed on the fact that the rate
Trade deficit remained steady at US$9.8 billion in No-
vember 2015 and US$88 billion during April-November
2015.The trade deficit for April-November 2014 stood at
US$103billion.Thoughimprovingdomesticcompetitive-
reduction cycle that commenced in January, less than
half of the cumulative policy repo rate reduction of 125
bps has been transmitted by banks. The median base
lending rate has declined only by 60 bps. The apex bank
has lined up a host of measures like examining linking
small savings interest rates to market interest rates etc
to ensure that the monetary transmission is strength-
ened in the future. Easing interest rates will be key to
support a consumption-led growth pick-up. For this to
happen, transmission of repo rate cuts to bank lending
rates must improve.
ness through structural reforms is crucial to improve ex-
ports performance, we believe that can only materialize
in the medium-term. In the near-term, a weaker Rupee
can act as a catalyst to revive competitiveness.
RBI Presses the Pause Button

21
DOMESTIC TRENDS
NOV-DEC 2015
RBI noted that the economy is in nascent stages of re-
covery, though the leading indicators portray mixed
performance. While Q2FY16 GDP data indicated robust
manufacturing growth, the outlook was likely to be
weighed down by weak rural and external demand. Ser-
vices growth was flat, while agriculture sector growth
remains under pressure on vagaries of monsoon. On
the consumption front, while urban consumption was
showing signs of a pick-up in some areas such as passen-
ger vehicles sales, rural demand has been weakened by
two consecutive deficient monsoons and slowing con-
struction activity. Nevertheless, new project announce-
ments as measured by the Centre for Monitoring Indian
Economy grew more strongly in the second quarter. It
remains to be seen whether growing public investment
can crowd in private investment on a sustained basis,
despite the still-low capacity utilisation.
The RBI has set itself an inflation target of 6 per cent
by January 2016. Notwithstanding the increase in retail
inflation in the last few months, RBI expects inflation
to remain within the target range. Though it has set it-
self a 5 per cent inflation target for 2016-17 end, payouts
under the Seventh Central Pay Commission (CPC) could
cause a transitory increase in inflation. Its impact on
domestic demand is likely to be offset by the Govern-
ment’s commitment towards fiscal consolidation. The
RBI is likely to track the Budget to garner details on ex-
ecution of the Pay Commission and assess quantum and
quality of fiscal consolidation.
In the external sector, exports contracted for the
twelfth month in a row to November, indicative of the
persisting weakness in global trade. Excluding petro-
leum products (PoL), however, the decline in exports
was more moderate and early signs of a turnaround
are visible in respect of readymade garments, drugs
and pharmaceuticals and electronics. With global com-
modity prices, especially those of crude, softening fur-
ther, both PoL and non-PoL exports continued to con-
tract, with the latter shrinking for the fifth consecutive
month. The decline in bullion imports despite the festi-
val season helped narrow the trade deficit in November
as well as over the financial year so far, moderating the
current account deficit further.
The RBI has maintained a balanced approach in this pol-
icy. Going forward, the Central Bank is likely to track a
variety of factors affecting inflation along with progress
on transmission while considering future decisions.
While further rate cuts are still on the cards, bar for the
same has been raised higher.
Outlook
The RBI’s decision to maintain status-quo was in line with our expectations, given that there has already been a
reduction of 50 bps in the last policy. The focus has now shifted to the transmission of lower policy rates to banks’
lending rates. Banks need to be ready to finance a pick-up in credit growth and RBI should ensure that high level of
non-performing assets do not constrain banks from financing higher growth. The projections made by the RBI on
GDP growth and CPI inflation are in line with our expectations. However, the RBI needs to note that WPI inflation
as well as the GDP deflator continues to be negative, indicating deflationary trends in large parts of the economy.
We are happy to note that the RBI intends to maintain an accommodative policy stance.

ECONOMY MATTERS 22
CORPORATE PERFORMANCE
Corporate Profitability Remains Subdued in Q2FY16
T
he corporate results at the end of the second
quarter of current fiscal continued to remain
weak as the financial performance of Indian
companies, especially manufacturing sector firms, did
not show much improvement. While the growth in ex-
penditure costs stood somewhat curbed, fading growth
of net sales as well as decline in PAT added to the prob-
lems. The analysis factors in the financial performance
during the second quarter of 2015-16 of a balanced pan-
el of 2318 manufacturing companies (excluding oil and
gas companies) and 1250 service firms extracted from
the Ace Equity database.
Net sales on an aggregate basis contracted by 5.7 per
cent at the end of the second quarter of 2015-16, as com-
pared to a growth of 3.6 per cent in the same quarter a
year ago. In fact the growth in net sales has been decel-
erating now for the past six quarters straight now. The
net sales for manufacturing firms showed contraction
by as high as 12.5 per cent during the quarter as com-
pared to a growth of 1.7 per cent in the same quarter a
year ago. Firms in the service sector showed moderate
improvement, with their net sales growing at a pace of
7.9 per cent in the second quarter of current fiscal as
compared to a growth of 7.6 per cent in the same quar-
ter in the previous year. The low net sales of firms were
reflective of the lack of ample demand in the economy.
The slowing demand in the external markets has been
doing no good either.

23
NOV-DEC 2015
On an aggregate basis, total expenditure contracted
sharply by 12.1 per cent in the reporting quarter as
against a growth of 4.5 per cent in the corresponding
period of 2014-15. This was mostly led by a contraction
in the cost of services and raw materials. While costs
for the manufacturing sector contracted by 20.5 per
cent as compared to a growth of 2.2 per cent in the
same quarter a year ago, those in the service sector too
dropped to 7.4 per cent as compared to 10.2 per cent in
the second quarter of 2014-15. This came as a breather
and fairly cushioned the severe impact of lower net
sales growth during the quarter. Amongst the various
components of total expenditure, the growth in wages
and salaries stood at 7.5 per cent in the second quarter
While moderation in growth of expenditure has to some
extent mitigated the impact of the current bout of eco-
nomic crisis characterized by falling growth in net sales,
the reduction was not large enough to provide cush-
ion to the bottom-line of the corporate. Consequently,
there was deceleration witnessed in profit after tax
(PAT) in the second quarter of 2015-16 on an aggregate
basis as PAT declined to 1.4 per cent in the July-Septem-
ber quarter of 2015 as compared to a growth of 11.4 per
cent in the second quarter of 2014-15. PAT actually im-
proved for manufacturing firms by 4.6 cent in the sec-
ond quarter of current fiscal as compared to a growth
of 2.4 per cent in the same quarter of last year. This was
led by sharp double-digit contraction in the cost of ser-
vices and raw materials in the sector. The service sector
of current fiscal as compared to 7.2 per cent recorded
in the corresponding period of 2014-15. Encouragingly,
growth in interest costs decelerated to 6.6 per cent
in the reporting quarter as against 10.0 per cent in the
same quarter of 2014-15. This mirrors the reduction in
the interest rates by the RBI in the recent months. The
brightest spot for the companies came from the fact
that growth in raw material cost contracted by as high
as 23.1 per cent in the reporting quarter as compared
to a positive growth of 2.0 per cent seen in the same
quarter of 2014-15. Since, raw material cost has the larg-
est share in total expenditure cost, its decline is indeed
a good news for the firms.
also lagged behind as PAT witnessed de-growth by 0.4
per cent in the reporting quarter as against a growth
of 17.4 per cent seen in the corresponding quarter of
last year. Operating profits (PBDIT) too followed fairly
similar trends and on an aggregate level, de-growth was
witnessed in operating profits to the tune of 12.1 per
cent in the second quarter of 2015-16 against a growth
of 4.5 per cent over the corresponding period of 2014-
15. The figures were worse for the manufacturing sec-
tor, wherein, operating profits contracted by 20.5 per
cent as compared to a positive growth of 2.2 per cent a
year ago. For the service sector, operating profits wit-
nessed only a marginal decline to 7.4 per cent as com-
pared to 10.2 per cent in the same quarter in 2014-15

ECONOMY MATTERS 24
Our analysis shows that both net and gross margins did
not witness major falls, and even improved in some cas-
es across sectors and on an aggregate basis. This does
not appropriately mirror the contraction in operating
profits and decelerating profitability because of the
denominator effect in play. While PAT and PBDIT fell,
the fall in net sales was even larger, and the maintained
Over the past nine quarters, while net sales and expend-
iture has mostly followed a downward trend, profitabil-
ity has displayed wide fluctuations. A period of positive
growth which lasted four quarters saw PAT growing to
as much as 39.1 per cent in the first quarter of previous
margins are thus attributed to the denominator effect.
Falling profitability is still a cause of worry. For the sec-
ond quarter in the current fiscal, while the net margin
stood at 7.2 per cent on an aggregate basis, up from 6.7
per cent in year on year terms, for manufacturing and
services, it stood at 11.8 per cent and 4.3 per cent re-
spectively.
fiscal year, only to drop in the negative territory where-
in it has been hovering in double digit negative figures
for the next two quarters, much to the concern of the
industry. While the bottom-line has crept back into
the positive domain for the last two quarters, meagre
growth is still a worry.

25
NOV-DEC 2015
Efforts are in force by firms to improve their own pro-
duction efficiencies and employ cost effective measures
to tide over the current difficult times. Simultaneously,
there are also expectations of some serious economic
reforms, some of which have already come in form of
necessary rate cuts by the RBI, that would elevate the
economy, help pick up sales and raise the profitability
for the Indian corporate in the months to come.

ECONOMY MATTERS 26
TAXATION
GST – Not to Lose Heart – It’s Unputdownable!
T
he winter session of the Parliament could not
fetch us the much expected Goods and Services
Tax (GST) for reasons beyond economics. The
GST Constitution Amendment Bill will now have to wait
for the Budget Session of 2016 for its passage in Rajya
Sabha. But one must not lose heart on GST. Its introduc-
tion is just a matter of time. But for a few differences in
its structure, the GST is being supported by all political
parties. The issues raised by the Congress, the main op-
position party have now narrowed down to three.
First, the Congress has demanded that the provision for
the levy of an additional tax of one percent over and
above the Integrated GST (IGST) on supply of goods in
the course of interstate trade be scrapped. It may be
recalled that GST being a destination based tax, the
state’s share of GST will accrue to the destination state
in the case of inter-state movement of goods and servic-
es. Therefore, the predominantly manufacturing states
have been complaining about the loss of revenue in the
GST regime. In order to please them, this provision of
origin based additional levy has been proposed in the
Bill so that these states can retain this tax with them.
This additional origin based tax is against the principles
of destination based GST. Besides, non-availability of In-
put Tax Credit (ITC) for this additional tax would lead to
cascading of taxes. Further, this tax would entail addi-
tional compliance costs. In fact, this method of compen-
sating the states was not necessary since the Bill itself
envisages compensation by the Centre to the states for
five years in case of revenue loss in the GST regime.
The second demand of the Congress for an independ-
ent Dispute Settlement Authority (DSA) has its origin
in the 115th Constitution Amendment Bill presented by
Mr. Pranab Mukherjee, then Finance Minister in March
2011.That Bill had proposed an independent GST DSA
headed by a retired Supreme Court judge, to adjudicate
any dispute arising out of a deviation from the recom-
mendation by the GST council comprising Finance Min-
isters of all states and chaired by the Union Finance
Minister. But the Standing Committee of Finance led

27
TAXATION
NOV-DEC 2015
by Mr. Yashwant Sinha recommended for making a
provision empowering the GST council itself to decide
about the modalities to resolve disputes, having regard
to the concern of the states about interference by the
DSA with the state’s fiscal autonomy. It was however
recorded by the committee that the Attorney General
had opined that the supremacy of the legislatures over
the finance would not be effected by the creation of
one independent DSA.
To bring fairness and transparency to the dispute settle-
ment process, it is necessary that the dispute is settled
by a body independent of the GST council. In fact, even
the present provision at clause 12 of the Bill says that the
GST council may ‘decide about the modalities to resolve
disputes arising out of its recommendations.’ (Emphasis
supplied). Therefore this issue can be resolved by spell-
ing out the ‘modalities to resolve disputes’ in specific
in the GST Bill itself, notwithstanding what Mr. P. Chid-
ambaram, then Finance Minister had reportedly written
in file on the issue, as claimed by Mr. Arun Jaitley, the
Union Finance Minister. This will be elaborated soon.
The third demand of Congress is with respect to cap-
ping the GST rate at 18 per cent and putting it in the Con-
stitution itself. The concern of the Congress seems to
be that unless capped constitutionally at 18 per cent, in
the coming years, the Centre with the support of the re-
quired number of states could go on increasing the GST
rate, thus adding to continuous inflation and resultant
sufferings of the common man. The point to be noted
is that the rate of duty is dynamic and it will need to be
changed at different times depending upon various fac-
tors. Once the GST rate is inscripted in the Constitution,
the Government would have to go through the arduous
route of constitution amendment each time the GST
rate needs to be raised beyond the capped one. There-
fore, a constitutional provision for capping the GST
would not be a sound step. The Congress would need
to be persuaded not to insist on this demand of cap-
ping, particularly since the Expert Panel headed by Mr.
Arvind Subramanian, the Chief Economic Advisor, in its
report released in early December, has recommended
the standard rate that would be applicable to most of
the goods, to be between 17 to 18 per cent. This is at par
with what the Congress had demanded.
Now, a few words about the report of the panel headed
by the Chief Economic Advisor on GST Revenue neutral
rate (RNR) and the GST rate (s). The panel has deter-
mined the RNR to be between 15 - 15.5 per cent. There-
fore, if the Government was to charge GST in a single
rate, the GST rate would have been in this range of 15
to 15.5 per cent .But, there will be multiple rates of GST,
as recommended by the panel also. The first Discussion
paper released in November 2009 had also indicated
multiple rates of duty.
Considering that there will be multiple rates, the panel
has recommended for a standard rate of 17 to 18 per
cent and a merit rate of 12 per cent for goods of use by
common man, broadly speaking, Then, there will be a
much higher rate 40 per cent for goods and other de-
merit goods like cigarette and tobacco, luxury cars and
other specified luxury items. There will also be a special
very low rate of around 2 per cent for precious metals
like gold, silver etc. Then, there will be total exemption
from GST in respect of goods for use by the poor and
also essential in other respects. The panel has also rec-
ommended to cut down the list of exemptions by doing
away with excessive selectivity and discretion.
Besides the GST rates, the panel has made a few recom-
mendations with respect to the GST structure as well. It
has called for minimizing the burden on small tax payers
by increasing the threshold for GST at Rs. 40 lakhs of an-
nual turnover. Currently negotiations are on with Centre
insisting on a threshold of Rs. 25 lakhs while the states
demanding that of Rs. 10 lakhs. The panel’s other rec-
ommendation is to bring Petroleum, Alcohol, Electricity
and Real Estate within GST. The panel apprehends that
these exclusions may lead to economic distortions, and
denial of credit for taxes paid on inputs from the GST
domain. The panel has also recommended scrapping of
the aforesaid additional one percent tax.
As the passage of the GST bill in Rajya Sabha was get-
ting difficult, the Union Finance Minister addressed an
assembly of top five chambers of Trade and Industry
who had joined together on the 16th December to ex-
press their views on the introduction of GST. The Presi-
dents of the five chambers like CII, FICCI, ASSOCHAM,
PHD Chambers of Commerce & Industry and Confed-
eration of All Indian Traders (CAIT) who addressed the

ECONOMY MATTERS 28
TAXATION
meeting unequivocally supported the Government’s ef-
forts in early introduction of GST. The Chief Economic
Advisor highlighted the unique character of the Indian
GST-its principle of cooperative federalism and biparti-
san approach of all political parties. He also explained
the importance of GST in the GDP growth of the country
and referred to certain nuances of his recently submit-
ted report on the GST rates. In the concluding speech of
the meet, the Finance Minister spoke about the contro-
versies surrounding the issues raised by the Congress
on the GST Bill and explained the Government’s posi-
tion on these issues. On the first issue of additional 1 per
cent tax, he conceded that it was a fairly arguable issue
and could be considered if the states agreed. On the
second issue of independent Dispute Settlement Au-
thority, Mr. Jaitley pointed out that the states did not
agree to the idea of a separate DSA and that Mr. P Chi-
dambaram as Finance Minister during 2012-14 had also
expressed views similar to those in the Bill. However, he
seemed amenable to this demand of Congress as well.
But he stoutly opposed the scripting of a capped GST
rate in the constitution for the reasons explained herein
before. The Finance Minister concluded by urging the
Trade and Industry to build up pressure in favour of ear-
ly clearance of the GST bill in Rajya Sabha since they all
are waiting for GST.
During his speech, the Finance Minister had also stated
that if he cannot introduce GST because of the per-
ceived weakness of the present Parliamentary system,
he will have to think of an alternative. He did not elabo-
rate on this point. One hopes that having reached on
the cusp of the biggest indirect tax reform through in-
troduction of GST, he is not thinking now of introducing
central GST that would subsume merely three central
indirect taxes viz Central Excise duty, Service Tax and
Countervailing Duty of Customs. This will not eliminate
the ills of cascading of taxes in the distribution chan-
nel of goods. Further, the multiplicity of indirect taxes
of the states and different state VAT rates across the
states will continue. In addition, the cross border com-
pliance requirements of Central Sales Tax (CST), entry
tax will continue. Consequently, the idea of a common
economic market in the country will remain a far cry. It
is therefore sincerely hoped that in national interest, all
political parties will come together and clear the GST bill
with whatever further necessary changes in the next
Budget Session of early 2016 so that we can have our
GST by say October 2016. The time for GST has indeed
come.
(The author is former Chairman Central Board of Excise & Customs. He is also the author of the book “GST in India”.
Views are personal)

29
SECTOR IN FOCUS
Financial Conditions Index: October – December 2015
NOV-DEC 2015
T
he CII – IBA Financial Conditions Index at 70.3 for
Q3 FY 2015-16 shows healthy improvement in the
overall financial conditions in the Indian econ-
omy vis-à-vis the previous quarter (67.8) owing to ex-
pectations of leading banks and financial institutions of
reduction in cost of funds, strong liquidity position, bet-
ter external financial linkages and an uptick in economic
activity. According to the CII – IBA Financial Conditions
Index for Q3 FY 2015-16, there was a significant rise in
the expectation of banks and financial institutions for
an improvement in the overall financial conditions index
leading to an increase in the external financial linkages
index, the cost of funds index and the economic activity
index on a quarter-on- quarter basis. Also, even as there
was a relative decline in the funding liquidity index from
the previous quarter, it was recorded at the highest lev-
el among the four sub- indices.
The reading of the CII – IBA Financial Conditions Index
for Q3 FY 2015-16 at 70.3 was significantly above the
50 mark implying a strong majority of the respondent
banks and financial institutions reporting improve-
ment or no change in the overall financial conditions as
against deterioration vis-à-vis the previous quarter.

ECONOMY MATTERS 30
SECTOR IN FOCUS
For Q3 FY 2015-16, the Funding Liquidity Index recorded
at 74.7, was at the highest level among the sub-indices,
contributing the maximum share (26.5 per cent) in the
overall Financial Conditions Index, followed by the Cost
Among the sub-indices, the External Financial Linkages
Index witnessed the maximum improvement to reach
at 68.4 in Q3 FY 2015-16 from 59.0 in the previous quar-
ter. This reflects the strong degree of optimism in the In-
dian financial sector to withstand any potential shocks
emerging from the US Fed interest rate hike anticipated
in December 2015.
Even as there was a mixed response from banks and fi-
nancial institutions in terms of changes in the exchange
of Funds Index (69.4) contributing 24.7 per cent, Eco-
nomic Activity Index (68.8) contributing 24.4 per cent
and External Financial Linkages Index (68.4) contribut-
ing 24.3 per cent.
rate, majority of them (63.9 per cent) expects net capi-
tal inflows by FIIs to increase in the current quarter. Fur-
ther, majority of the respondents (75.0 per cent) expect
India’s position on foreign exchange reserves to im-
prove further in the current quarter whereas more than
half of the respondents (52.8 per cent) expect that the
mobilization by Indian companies through global equity
& debt markets is not likely to change significantly dur-
ing the current quarter.

31
SECTOR IN FOCUS
NOV-DEC 2015
The Cost of Funds Index at 69.4 witnessed moderate
improvement from 68.6 in the previous quarter. With
the RBI reducing the repo rate by 50 basis points just
before the beginning of the current quarter, majority of
the respondent banks and financial institutions expects
the overall cost of funds to decline in the current quar-
ter.
Among the cost of funds indicators, 58.3 per cent of
the respondents expects the banks’ base rate to de-
cline whereas the short-term interest rates (the inter-
bank call rate & 3 month bank certificate of deposit
rate) and the long-term interest rate (yield on 10 year
government bond) was expected to decline by 50.0 per
cent and 63.9 per cent of the respondents respectively.
Further, maximum number of respondents (47.2 per
cent) expect the corporate Bond Spread (between top
rated 10 year corporate bond & government bond) to
improve.
The Funding Liquidity Index was recorded at 74.7,
a modest decline from the previous quarter (75.3).
Though the number is significantly higher than the 50
mark, still signaling a strong expectation of improve-
ment in the funding liquidity in the Indian financial sys-
tem, the decline on a quarter on quarter basis may not
be favourable for the overall financial conditions going
forward.
While there has been a noticeable drop in the percent-
age of respondents expecting improvement in liquid-
ity through RBI’s management of the Liquidity Adjust-
ment Facility (LAF) operations as well as the term repos

ECONOMY MATTERS 32
SECTOR IN FOCUS
and reverse repos window, majority of the respondent
banks and financial institutions expect improvement in
mobilization in the money market through commercial
papers & certificate of deposits, issuance in the corpo-
rate bond market as well as mobilization from equity
market in the current quarter.
The Economic Activity Index with a standing at 68.8
witnessed a moderate increase from 68.3 in the previ-
ous quarter. The overall expectation of improvement in
the economic activity augurs well for underpinning the
financial conditions in the prevailing macroeconomic
scenario.
The CII – IBA Financial Conditions Index is based on a
survey of major banks and financial institutions on their
expectations of key financial and economic variables
determining financial conditions in the Indian economy.
A total of 36 leading banks and financial institution par-
ticipated in the survey for the current quarter.
In terms of different category of respondents, 21 Public
Sector Banks, 7 Private Sector Banks, 4 Foreign Banks,
2 Cooperative Banks and 2 NBFCs participated in Round
3 of the Financial Conditions Expectation Survey. Based
on their responses, the CII – IBA Financial Conditions
The rise on a quarter on quarter basis was led by the
expectation of improvement in growth rate of real GDP
and the Non-Food Bank Credit in the current quarter
by a strong majority of respondents (77.8 per cent and
83.3 per cent respectively). However, the performance
on the inflation (Consumer Price Index) front was ex-
pected to deteriorate by half of the respondent banks
and financial institutions. Further, the maximum num-
ber of respondents (52.8 per cent) expects no signifi-
cant change in the asset prices (stock and housing mar-
ket) vis-à-vis the previous quarter.
Index was derived for the October – December 2015
quarter.
The CII - IBA Financial Conditions Index was launched
in the first quarter of 2015-16 to - (i) Serve as a key in-
dicator in assessing the short term financial conditions
in the Indian economy, (ii) Provide effective monitoring
of current financial conditions for facilitating regulatory
and policy decisions, (iii) Provide early signals on turn-
ing points in financial conditions, and (iv) Help tracking
credit flow conditions for industry & service sectors
from various channels.

33
FOCUS OF THE MONTH
Skilling India
NOV-DEC 2015
E
volving demographics clearly point out that India
will remain a young nation and the largest con-
tributor to the global workforce over the next
few decades. This is in sharp contrast to the rapidly
aging population in the Western countries. Although,
investment, reforms and infrastructure are likely driv-
ers of India’s economic growth, no growth driver is
as certain as the availability of people in the working
age group. A young population is India’s demographic
dividend. It gives India, the potential to become global
production hub as well as large consumer of goods and
services. Further, since the age- group of 45-60 years is
the key contributor to household savings, India’s saving
rate, which has increased rapidly in the last decade, will
get a further boost thereby supporting investment. The
rise in its working-age population, however, is neces-
sary but not sufficient for India to sustain its economic
growth. If India does not create enough jobs and its
workers are not adequately prepared for those jobs, its
demographic dividend will become a liability.
Apart from creating jobs, it is important to also create
the requisite skill set among the labour force as well.
The current mismatch in India’s workforce demand and
supply is as much in jobs that require basic vocational
skills as it is in jobs that require well-qualified manpow-
er. If the current trends in nature of labour demand
and supply continue, skill mismatch would continue to
plague the Indian labour market. The mismatch would
stem from skill shortages, where there are not enough
people with a specific type of skill to meet demand. A
new generation of educated and skilled people, who
are in short supply, will be required to spearhead India’s
transition to a knowledge based economy. Given the
importance of skilled labour force, this month’s Focus
of the Month dwells on this issue. Experts from varied
areas have presented their views on this crucial topic.

ECONOMY MATTERS 34
FOCUS OF THE MONTH
Towards Creating a Skill Ecosystem
I
ndia sits at the forefront of the new economic para-
digm. It is one of the fastest growing economies with
GDP growth targeted at 9 per cent.
Most analysts expect the Indian economy to grow at
sustained high rates during the coming decades and
emerge as one of the largest economies in the world.
According to Goldman Sachs, India is projected to be-
come the second largest economy in the world by the
year 2050.
One of the main reasons behind the positive wave of
the Indian economic growth emerges from its demo-
graphic profile. India’s current population of 1.2 billion
is expected to enlarge to 1.8 billion by 2045. The signifi-
cant aspect of this increase relates to the expansion in
the size of its working age (15-64 years) population. The
emerging demographic dynamics of the country en-
sures that it will have one of the youngest populations
in the world, with the bulk of the population belonging
to the working age category. By the year 2026, 64.8 per
cent of the Indian population is expected to be in the
working age bracket.
Demographics as well as growth figures portray India’s
future as perfectly aligned, however its success is any-
thing but guaranteed.
Circa 2000, inspite of a demographic advantage the im-
pact of ‘employability’ on the overall demand-supply sit-
uation indicates that India could face a huge issue with
a shortage of skilled people, that is, engineers (~6 lakh),
graduates (~39 lakh) and vocationally trained personnel
graduates (~7 lakh) in the next five years. Today, India
is poised at a stage where its status as a break-through
economy depends on its focus and attention on build-
ing its human capital.
For our economy to grow at 8-9 per cent, secondary
tertiary sectors will need to grow at 10-11 per cent with
agriculture sector at 4 per cent. Large migration from
agriculture (primary) to secondary/tertiary is imminent.
Hence a large skill gap will exist requiring skilling devel-
opment. The Projected demand of skilled workforce is
400 million workforce by 2022, with 150 million required
in the manufacturing and services sector alone.
If this issue is not addressed effectively, the economic
and social implications will be drastic. The role of the
government, private sector, skill training providers and
society cannot be overemphasised as it is mandated
to imparting the necessary skills to the workforce. It
is equally important for the business sector to engage
with sincerity and enthusiasm in the dialogue of skill
enhancement to make the “Make in India” mission a
reality.
The last one year has seen a positive move from the
Government with the creation of a dedicated Ministry
of Skill Development & Entrepreneurship. In support,
we at CII have been working towards creation of a
demand-responsive eco-system for Skill Development
with a multi-pronged approach.
First, we have recognised the need to create awareness
on vocational training through policy advocacy and
competitions such as WorkSkills and WorldSkills Inter-
national. CII believes that there is a need for a frame-
work to ensure career progression. The National Skill
Qualification Framework (NSQF) has been meticulously

35
FOCUS OF THE MONTH
NOV-DEC 2015
planned to ensure seamless mobility between the edu-
cation and technical training system.
Second, we believe that it is necessary to utilise the
existing training institutions and ensure that they can
scale themselves to match demand. CII has made a
conscious effort towards creation of Public Private
Partnership (PPP) to rejuvenate institutions such as the
Industrial Training Institutes (ITIs) with CII members
adopting and upgrading 398 ITIs. A blue book to guide
Institute Management Committee (IMCs) members has
been brought out. An impact study of 100 ITIs has been
conducted to assess the performance of the ITIs with
suggestions for improvements. We have initiated pilot
projects to create appropriate standards for these In-
stitutes. Industry has embarked on flexi MoUs with the
Ministry of Labour & Employment giving companies the
flexibility to design training programmes at ITIs tailored
to industry needs.
Third, quality assurance has to be emphasised when
delivering and assessing trainees. CII is a National As-
sessing Body for the Modular Employable Skills Scheme
(MES) and the recently launched Prime Minister’s
Kaushal Vikas Yojana (PMKVY).
Fourth, creation of additional Sector Skill Councils
(SSC): providing industry participation in setting stand-
ards and certification approach. CII has promoted SSCs
Beauty & wellness; BFSI; Furniture & Fittings; Green
Jobs; Healthcare; Infrastructure Equipment; Life Scienc-
es; Logistics; Paint & Coatings; Person With Disabilities;
Strategic Manufacturing; Tourism & Hospitality
Fifth, the policy level recommendations submitted by
CII have been instrumental in creation of Apprentice-
ship Act 2014. The industry needs to realize the benefits
of bringing in a robust apprenticeship regime as this
will enable lifelong learning and ensure generations of
trained and skilled labour.
Sixth, we need to promote many more skill develop-
ment Institutions in rural and urban areas. Opportuni-
ties for training are prevalent in the urban areas how-
ever, there are lesser avenues in rural areas. With a
specific focus on skilling the rural youth, CII in partner-
ship with Pan IIT has created Skill Gurukuls with 100 per
cent placement in remote districts of India.
Lastly, there is a need to create employment exchanges
to link training to employment and to create a skill re-
pository to link trainees to jobs. For this, CII is working
closely with Ministry of Labour & Employment to con-
vert the existing employment exchanges to Model Ca-
reer Centres.
CII strongly believes that Recognition of Prior Learning
(RPL) is imperative to engage the large skilled uncerti-
fied labour force. CII supports the RPL initiative by the
Government of India which will train workers in the
Construction sector and utilise construction sites as
training centres.
To ensure that the economy grows at a sustainable rate
with rise in industrial growth, industry has to create an
enormous pool of skilled workforce. CII, as an organisa-
tion, that has witnessed the power of training to cre-
ate an industry, believes that this timely focus on skills
development in India at present is critical and highly
welcome.

ECONOMY MATTERS 36
FOCUS OF THE MONTH
Ms. Sunita Sanghi, Adviser, Education, Skill Development & Employment, NITI Aayog
&
Ms. A. Srija 1
, Director, Skill Development & Employment in NITI Aayog
Introduction
1
The authors wish to acknowledge the contribution of Mr. Shrinivas Shirke, former Research Officer of NITI Aayog in preparation of
the Tables derived from unit level data of NSSO.
Linkages between skill development, pro-
ductivity and employment potential: theo-
retical perspective
Skill development is an important driver to address pov-
erty reduction by improving employability, productivity
and helping sustainable enterprise development and in-
clusive growth. It facilitates a cycle of high productivity,
increased employment opportunities, income growth
anddevelopment.However,thisisjustonefactoramong
many affecting the productivity whose measurement
differs for individuals, enterprise and economy. The
increase in productivity could be due to availability of
skilled & healthy manpower; technological up gradation
and innovative practices; and sound macroeconomic
strategies. The manifestations of improved productivity
can be in the form of improvement in real gross domes-
tic product (economy), increased profit (enterprises)
and higher wages (workers). In this section, we are
looking into the relationship between skill development
and productivity with focus on India. However, to be-
gin with it is necessary to understand what constitutes
productivity and how it is measured at different levels.
Productivity which explains an input-output relation-
ship is a crucial factor whose benefits can be distribut-
ed in a number of different ways such as better wages
and working conditions to workforce; increased profits
and dividend to shareholders; environmental protec-
tion; and increase in revenue to Governments. This
helps both the enterprise and country to remain com-
petitive in the domestic and global market respectively.
The increase in productivity can be attributed to varied
reasons such as new technology, new machines, better
management practices; investment in plant and equip-
ment and technology, occupation safety improvement
in the skill level of workers; macro-economic policies,
labour market conditions, business environment and
public investment in infrastructure and education.
Therefore, it is evident that skill development is just
one factor necessary for the productivity growth and it
needs to be an integral part of the development poli-
cies. The policies should address the levels of develop-
ment and need and requirement of various sectors.
Besides this the skill policy should focus on improving
access, quality and relevance of training for different
segments and sectors. The evidence from developed
countries suggests that investment in education and
skillshelpseconomytomovetohighgrowthsectorsand
break the low wage, low skill development syndrome.
Different countries at different levels of development
face different challenges. In the context of developing
economies like India the challenge is to meet the skilled
manpower requirement of the high growing sectors on
the one hand through better synergy between employ-
ers and the training providers, increased investment in
the training infrastructure and also to ensure that the
informal economy also have skilled manpower wherein
the informally trained skills are recognised and certified
and that entrepreneurship training is provided for mov-
ing to formal sector. The workplace training plays an im-
portant role in productivity enhancement but in the de-
veloping economies the huge informal economy poses a
challenge which could be addressed by developing clus-
ters or lead firm taking the initiative which would help
achieving economies of scale in the skills development;
development of competencies within and between
firms and availability of lead firm facilities. This would
make available skilled manpower by the lead firm as
per its requirement and the small enterprise would im-
prove their productivity. The Government can facilitate
linkages among various companies and stimulate adop-
Skill Development and Productivity of the Workforce

37
FOCUS OF THE MONTH
NOV-DEC 2015
tion of technologies and skill upgrading programmes.
The linking of skills and productivity would not only
benefit the enterprise and economy but would also
facilitate different segments of the population particu-
larly the marginalised sections of the society to reap the
benefits of the economic growth through skill develop-
ment. The lack of access to education and training or
the low quality or relevance of training keeps the vulner-
able and marginalized sections into the vicious circle of
low skills and low productive employment. The National
Skill Policy provides a framework to ensure access to
various target groups to realise their potential for pro-
ductive work and contribute in economic and social de-
velopment. However, different approaches need to be
adopted which may overlap as groups are not mutually
exclusive such as improving agriculture marketing ex-
tension; investing in rural infrastructure; making avail-
able quality education; on the job and targeted training
for the disabled and identifying the requirement of mi-
grant workers. The question is how one links the skill
development to future challenges so as to address the
demand of the growing economies. The National Skill
Development policy provides for integration of skill de-
velopment into the national development polices such
as developing infrastructure, reducing poverty and de-
cent work agenda. The diagram below explains the re-
lationship between skill development strategy for pro-
ductivity, employment and sustainable development.
It emerges that coordination among various stake-
holders, coherence in sectoral, macro and skill policies,
knowledge sharing and effective participation of trade
unions and employers along with technology develop-
ment is central to any development strategy. The par-
ticipation by all stakeholders would strengthen move
towards skilled economy. It would also ensure that
small enterprises get access to training services and
developing their managerial capabilities for growth. It
also emerges that while coherence is necessary, it is
also necessary (repetition) to ensure gender equality,
upgrade technology, and diversify production struc-
ture, building up individual competencies and collecting
/dissemination of information on future requirements
as also available supply. This would improve availability
of skilled manpower and reduce the supply mismatch.
In this back drop an attempt has been made to see
where India stands and how its skill polices can be inte-
grated with macro and the sectoral policies to achieve
increase employability.

ECONOMY MATTERS 38
FOCUS OF THE MONTH
Labour Market
As compared to other developed and developing coun-
tries, India has a unique window of opportunity for an-
other 20-25 years called the “demographic advantage”.
IfIndiaisabletoskillitspeoplewiththerequisitelifeskills,
job skills or entrepreneurial skills in the years to come
the demographic advantage can be converted into the
dividend wherein those entering labour market or are
already in the labour market contribute productively to
economic growth both within and outside the country.
But meeting this objective is a daunting task as India
faces the challenge of skilling large labour force that
is largely illiterate or below primary and unskilled. The
structural transition from the agricultural to the non-ag-
ricultural sector has seen rapid decline in the contribu-
tion of farm sector to the GDP to 16 per cent but a very
slow decline in the workforce participation level to 48
per cent resulting in the low level of productivity in the
agriculturalsector.Thenatureofjobscreatedisinformal
(91 per cent of the workforce) and the status of employ-
ment is self-employed. Further, there is the high degree
of unemployment among the youth due to aspirational
mismatch or skill mismatch, declining participation of fe-
males in the labour force and an economic environment
wherein jobs are not created commensurate with the
economic growth. The distribution of the workforce by
sector and status of employment shows that in agricul-
ture sector where almost 32 per cent is self-employed
majority is operating as own-account worker or unpaid
helper (Table-1). After agriculture the proportion of
those working as self-employed is Trade (7 per cent) and
manufacturing (6 per cent). In these two sectors also
the proportion of workforce working as own account
workers are more than those working as employers.
Where does India Stand

39
FOCUS OF THE MONTH
NOV-DEC 2015
The proportion of those working as casual labour is
higher in agriculture (17 per cent) followed by construc-
tion (9 per cent) and manufacturing (2 per cent). On
the whole, about 52 per cent of the total workforce
was self-employed, of which own-account workers ac-
counted for 33 per cent and the unpaid helper 18 per
cent. The proportion of workforce with regular wage or
salary was just 18 per cent and 30 per cent were casually
employed. When we talk about productivity it only cov-
ers those who are in the regular wage or salaried em-
ployment. The self-employed operating as own account
workers are mostly household enterprises assisted by
unpaid helpers. In this type of employment the pro-
ductivity levels are low, working conditions poor, wage
employment is totally absent. On the other hand if the
own account workers can be upgraded to becoming
an employer by providing skill development and other
logistic support, it leads to creation of further wage
employment and enhancement of their productivity.
Relationship between literacy and pov-
erty reduction
The preponderance of self-employment mainly in agri-
culture is mostly due to their low education and skill lev-
els stimulated by their poor economic background. The
proportion of population upto the poverty line i.e. the
extremely poor and poor increased from 21.8 per cent in
2004-05 to 25.3 per cent in 2011-12. But the proportion of
the marginally poor and the vulnerable decreased from
19.0 per cent to 16.5 per cent and from 36.0 per cent
to 30.7 per cent between 2004-05 and 2011-12. On the
whole 72.5 per cent of the population fall in the catego-
ry of poor and vulnerable in 2011-12 as compared to 76.7
per cent in 2004-05, a decrease of 4.2 points. (Table-2)
Table-3 shows the distribution of the unorganized work-
ersacrossdifferentexpenditureclass.Itmaybeseenthat
76.28 per cent belong to the poor & vulnerable category
in 2011-12 as compared to 78.70 per cent in 2004-05, a de-
clineof2.42points.Thisrelativelylowleveloflivingofthe
workforce brings out the quality of employment which
calls for a look at their educational and skill qualification.

ECONOMY MATTERS 40
FOCUS OF THE MONTH
Linkages between skill development, pro-
ductivity and employment potential
Skill development is the focus area of the government
policy. It is central to accessing employment in the for-
mal sector and enhancing productivity in the informal
economy for reducing poverty and risk of underemploy-
ment. The National Policy on Skill Development aims to
train about 104.62 million people afresh and additional
460 million are to be reskilled, up-skilled and skilled by
20222
. Considering that majority of these labour force
would be self or casual employed, the challenge is to
how to improve the skill levels of these workforce.
These categories cut across various target groups or
vulnerable sections of the society. The groups are not
mutually exclusive and there are overlaps because the
workers in the self-employed category are a hetero-
geneous lot while the casual employed may be inter-
mittently employed and in different unskilled works.
The lack of access to good education and training
keeps the vulnerable and the marginalized sections
into the vicious circle of low skills; low productive em-
ployment and poverty. The marginalized group which
includes rural poor, youth, persons with disabilities,
migrant workers and women constitute the high-
est number of poor. In India 70 per cent of the labour
force reside in rural areas and depend on low produc-
tive agricultural activity where there is huge underem-
ployment leading to low level of productivity. The high
proportion living in poverty among women in India is
due to their concentration in low productivity work.
The skill strategy needs to focus on strategy of skill de-
velopment should be aimed at addressing the skill needs
of the self-employed as well as the casual employed. To
quote Economic Survey 2013-14, “India can increase its
long-termtrendgrowthbyunleashingtheentrepreneur-
ial spirit of millions across the country by strengthening
the economic freedom of the people.” In accordance,
the National Policy on Skill Development & Entrepre-
neurship 2015 emphasises on entrepreneurship devel-
opment as the pathway for creating more wage em-
ployment and in turn growth of the economy. The policy
has identified following policy strategy for promoting
entrepreneurship viz; (i) educate and equip potential
and early stage entrepreneurs across India (ii) connect
entrepreneurs to peers, mentors and incubators (iii)
support entrepreneurs through Entrepreneurship Hubs
(E-Hubs) (iv) catalyse a culture shift to encourage en-
trepreneurship (v) encourage entrepreneurship among
the under-represented groups (vi) promote entrepre-
neurship amongst women (vii) improve ease of doing
business (viii) improve access to finance and (ix) foster
social entrepreneurship and grassroots innovations.
Skill development of the self-employed is essential
to make the transition from own account workers to
employers or entrepreneurs. The success of the major
programmes of the current Government viz; Make in
India, Digital India, Smart City, Namami Gange, Swachh
Bharat depends on the success of the Skill India Mission
in skilling and reskilling 460 million by 2022. The skill de-
velopment programmes to promote entrepreneurship
are also equally important namely-(i) SETU- the Self-Em-
ployment and Talent Utilization scheme which is a Tech-
no-Financial, Incubation and Facilitation Programme to
support all aspects of start-up businesses, and other
2
National Policy for Skill Development and Entrepreneurship, 2015.

41
FOCUS OF THE MONTH
NOV-DEC 2015
self-employment activities, particularly in technology-
driven areas, (ii) Atal Innovation Mission AIM an inno-
vation promotion platform involving academics, entre-
preneurs, and researchers drawing upon national and
international experiences to foster a culture of innova-
tion, R&D in India and (iii) Start Up India to promote
bank financing for start-ups and offer incentives to
boost entrepreneurship and job creation in the country.
Current and future skill requirements for
India
Nearly 56 per cent of the workforce in 2011-12 had basic
education upto primary and the proportion of low lit-
Asregardsskilltraining,75.8percentoftheworkforcedid
nothaveanyskilltrainingduring2011-12whilethepropor-
tion of workforce with formal training was only 3.05 per
eracy levels was high among the female workforce (75
per cent below primary) as compared to the males. The
proportion of total workforce with educational qualifi-
cation secondary was just 11.5 per cent while for the fe-
maleworkforceitwasstilllowerat5.4percent.(Table-4)
cent. The proportion of workforce that received training
through informal modes was 12.46 per cent. (Table-5)

ECONOMY MATTERS 42
FOCUS OF THE MONTH
Some estimates of skill gaps in different
sectors
Inanalysingtheskillgap,thereexisttwotypesoflowed-
ucated labour force entering the labour market due to
their poor economic conditions and remaining unskilled.
Oneistheeducatedlabourforcewhoarenotabletofind
jobs matching their qualification due to lack of technical
or soft skills. This is the reason for the high rate of edu-
cated unemployment among the youth. To reduce the
skill gap among the educated there is the need for bet-
ter quality education, knowledge of english language,
on the job training as well as better job information.
Aashish Mehta argues that ‘India’s skill gaps rests on
weak conceptual foundations. While some industries do
sufferfromrealskillgaps,othersareconstrainedbycom-
From Table-4 and Table-5 the education and vocational
profile of the workforce throws light on the challenge
that India faces if the labour force consisting of existing
and new entrants are to be provided age appropriate
skill training which might include skilling, reskilling and
upskilling.
mercialdifficultiesthatmaybebetteraddressedthrough
policies other than skill development programmes’3
.
The India Skills report 2015 quotes Dr. Rajendra Kumar
Pandey4
as saying that India has to achieve the target of
skilling/upskilling 150 million people by 2022. He further
explains skill gap as ‘the phrase skill gap refers to rede-
fining the relationship between education, industry and
business.’ In simple terms a skill gap can be defined as
the difference between the skills needed for a job ver-
sus those skills possessed by a prospective worker5
.
The Ministry of Skill Development & Entrepreneurship
has estimated the estimated incremental human re-
source requirement across 24 sectors as 109.73 million
by 2022. The Institute of Applied Manpower Research
in their Occasional Paper ‘Estimating Skill Gap on a Re-
With such low skill levels the profile of our enterprise is
such that nearly 95 per cent of the units are micro in size
engaging less than 5 workers. The challenge therefore
lies in expanding the size of the enterprises to beyond 5
in number so that the progression of growth of the en-
terprises from being a single employer to that of being
a partnership or private corporate entity takes place.
Unless this transition is in place the productivity levels
will not improve and neither will employment. (Table-6)
2
How serious are India’s manufacturing skill gaps? Column by Aashish Mehta, University of California, 13th October,2015, http://www.
ideasforindia.in/article.aspx?article_id=1437
3
President, NIIT University Neemrana
4
A Better Measure of Skills Gaps: Utilizing Act Skill Profile and Data for Strategic Skill Research

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