Economic Survey and Mid-Year Economic Analysis 2014-2015

           Economic Survey

A flagship annual document of the Ministry of Finance, Government of India,Economic Survey 2014–15 reviews the developments in the Indian economy over the previous 12 months, summarizes the performance on major development programmes, and highlights the policy initiatives of the government and the prospects of the economy in the short to medium term. This document is presented to both houses of Parliament during the Budget Session.

With detailed statistical data covering all aspects of the economy—macro as well as sectoral—the report provides an overview of the following issues:

• Economic Outlook, Prospects, and Policy Challenges
• Fiscal Framework
• 'Wiping Every Tear From Every Eye' : The JAM Number Trinity Solution
• The Investment Climate: Stalled Projects, Debt Overhang and The Equity Puzzle
• Credit, Structure and Double Financial Repression: A Diagnosis of the Banking Sector
• Putting Public Investment on Track: The Rail Route to Higher Growth
• What to Make in India? Manufacturing or Services?
• A National Market for Agricultural Commodities - Some Issues and Way Forward
• From Carbon Subsidy to Carbon Tax: India’s Green Actions
• The Fourteenth Finance Commission (FFC) - Implications for Fiscal Federalism in India?
• State of the economy and Public Finance
• Monetary management and financial intermediation
• External sector and Service sector
• Prices, agriculture and food management
• Industrial, corporate and infrastructure performance
• Climate change and sustainabke development
• Social infrastructure, employment and human development

This document would be useful for policymakers, economists, policy analysts, business practitioners, government agencies, students, researchers, the media, and all those interested in the development in the Indian economy.

The industry contributes about 7% of India'sGDP, employs millions, and is a major source of its foreign exchange earnings. The gems and jewellery industry, in 2013, created ₹251,000 crore (US$37 billion) in economicoutput on value added basis. It is growing sector of Indian economy.

1. MACROECONOMIC REVIEW

1.1 In July 2013, India was teetering on the edge of macroeconomic crisis with double digit

inflation, a high and rising current account deficit (CAD), and a falling rupee as investor sentiment

turned sour in the aftermath of the Fed's taper decision to signal the end of its quantitative easing.

India was grouped with Brazil, Indonesia, Turkey, and South Africa to constitute the Fragile (Famous)

Five amongst the emerging market countries (EMs).

1.2 Nearly 18 months on, the landscape has vastly changed. Macro-economic stability has

returned, reforms are being undertaken, the external environment has moved in India's favour,and above all, a new Government has come into power with a relatively unencumbered political mandate for decisive economic change, a mandate that markets have enthusiastically embraced.

The Indian stock market has increased in value by 33 percent since March (in dollar terms),amongst the highest in the EMs, benefitting from surging foreign capital inflows. India now represents one of the sparks in the world economy and the only major country not to suffer a growth downgrade by the IMF. From Fragile Five to Near-Solitary Spark of the global economy is the Indian narrative of the last year.

1.3 Figure 1.1 captures the change on the macroeconomic front. For the same Fragile     Five,a macroeconomic vulnerability index (MVI) has been constructed which adds      together a country's inflation rate, current account deficit, and fiscal deficit (all obtained from the latest World Economic Outlook of the IMF). The index is thus comparable across countries and across time. Heading into 2013, India was at the top of the pack on vulnerability with an index value of 22.4, comprising 

10.2 percent inflation rate, a budget deficit of 7.5 percent and a current account deficit    of 4.7 percent of GDP well above that in the other countries. Turkey in 2013 surpassed India because of high current account deficit (of nearly 8 percent). Since then, India's fortunes have improved dramatically and India demonstrated the greatest improvement in the MVI while the others maintained the status quo or showed only a marginal improvement. The chart, nonetheless, under-states the Indian improvement because the WEO has probably over-estimated India's inflation outturn for 2014. India still needs to be watchful in terms of its macro-economic fundamentals. The value of the index currently is well above 15 (recognizing that a value below 12-say 4 percent inflation, 2 percent CAD, and 6 percent fiscal deficit-is perhaps safer macroeconomic territory).

MID-YEAR ECONOMIC ANALYSIS

Figure 1.1: Macroeconomic Vulnerability Index

(Sum of inflation, current account deficit and fiscal deficit)

1.4 India's vulnerability to the Fed's "taper tantrum" owed also to investor perceptions about the underlying growth momentum. After several years of near 9 percent average growth, India's growth decelerated for about 12 quarters, declining below 5 percent in the last 2 quarters of 

FY2014 (Figure 1.2).

Figure 1.2 : Quarterly Growth Rate of Real GDP

1.5 Although it is still too early to detect signs of robust recovery, emerging trends indicate that the growth deceleration has bottomed out, manifested in the relative improvement in growth in the latest 2 quarters 

1.6 The macroeconomic improvement and the consequent turnaround in investor sentiment were spurred by the Government's policy actions. A non-exhaustive list of the major reforms includes:

 Deregulating diesel prices, paving the way for new investments in this sector;

 Raising gas prices from US$ 4.2 per million British thermal unit to US$ 6.17 (a 33 percent increase), and linking pricing, transparently and automatically, to international prices so as to provide incentives for greater gas supply and thereby relieving the power sector bottlenecks;

 Increasing FDI cap in defense to 49 percent, and targeting 100 percent FDI in investment;

 Replacing the cooking gas subsidy by direct transfers on a national scale;

 Instituting the Expenditure Management Commission that will lay out a plan for rationalizing expenditures;

 Reforming the coal sector via auctions and greater private sector entry;

 Instituting a major program for financial inclusion--the Pradhan Mantri Jan Dhan Yojana - -under which over 9 crore new accounts have been opened till December 11, 2014;

 Continuing the push to extending coverage under the Aadhaar program, targeting enrollment for 1 billion Indians;

 Eliminating the quantitative restrictions on gold;

 Expediting environmental clearances;

 Facilitating Presidential Assent for labour reforms in Rajasthan, setting an example    for further reform initiatives by the States; and consolidating and making          transparent a number of labour laws; and

 Implementing a program of disinvestments 1.7 On the inflation front, the key actions were the interest rate increases (of 75 basis points) by the RBI since August 2013, and the broader signalling of anti-inflation policy and framework in the form of the Urjit Patel Committee Report -- all of which contributed to policy credibility. This was significantly helped by this Government’s actions including the continuation of fiscal consolidation, release of food stocks, and crucially by the moderation of minimum support price (MSP) increases,from near double digits previously to 3-3.5 percent, in the case of rice and cereals.

1.8 On the current account, the increase in tariffs and imposition of restrictions on gold last year (since liberalized in two stages in May and then in November 2014) were the key actions that helped reduce the CAD and hence reliance on foreign financing. 

1.9 At the same time, the external environment has turned in India's favour. In this fiscal year,there has been a substantial reduction in the global prices of India's major commodity importspetroleum, gold, coal, vegetables oils, fertilizers, and silver (that together constitute 51 percent of total imports and 12 percent of GDP). The reduction in prices has been substantial in some cases- 40 percent in the case of oil, so that the average reduction weighted by GDP is about 1.8 percent of GDP (around 1.5 percent of GDP if India's exports of oil are also taken into account). The collateral benefit has been an improvement in the current account, moderating pressures on inflation, and relief for the fiscal situation as oil subsidies which accounted for about 1 percent of

GDP have also come down.

Short-term Growth Outlook

1.10 The Economic Survey 2013-14 (published in July 2014) observed that during 2014-15 the Indian economy was expected to recover only gradually with growth in real GDP likely in the range of 5.4 - 5.9 per cent. It also noted the possibility of growth remaining on the lower side of the range for the following reasons: 

 (i) lagged effects of reforms undertaken to restart the investment cycle; 

(ii) weak growth outlook in some Asian economies, particularly China that would     depress Indian exports;

 (iii) elevated levels of inflation that limit the scope of RBI to reduce policy rates;

and 

(iv) expectation of below-normal monsoons. The prospect of economic reforms and a strongerthan- expected recovery in some major advanced economies, especially the United States, were expected to bolster the Indian recovery.

1.11 Investment is yet to pick up significantly. But on the upside, inflation has come down dramatically, the monsoons failed to extract as much of a toll on growth as expected, and India received a large supply side shock in the form of reduced commodity prices that amounted to about 1.5 percent of GDP. The year could end with growth around 5.5 percent.

2. OUTLOOK AND CHALLENGES FOR SPECIFIC SECTORS

Fiscal Challenges

1.12 This is an especially challenging year for four reasons that are elaborated in Box below:

 The tax base was weaker than expected thanks to unanticipated moderation in inflation;

 The revenue projections were over-optimistic;

 The budget was unduly burdened by a legacy of carried-over expenditures; and

 Above all, the deficit target represented strongly pro-cyclical fiscal policy-consolidation

when growth was below potential-which is ambitious at the best of times and also unusual amongst the major economies today.

Box 1.1: The Challenging FY2015 Budget In line with the Government's commitment to medium term fiscal consolidation, and to ensure macroeconomic stability in the short run, the budget inherited a targeted fiscal deficit of 4.1 percent of GDP, down from 4.5 percent in the previous year. How ambitious a target was this? Evaluating the budget from the revenue side suggests that the target was ambitious. The budget assumed nominal GDP growth of 13.4 percent and a tax buoyancy (relative to nominal GDP) .1.5.1 An overestimation of revenue can result from an overestimation of nominal GDP growth as well as an overestimation of buoyancy.

We attempt here a simple decomposition of the overall overestimation of revenue into these two factors.2 Our estimate is that these two factors together may have led to total tax revenue optimism by about ` 1,05,000 crores or 0.84 percent of likely FY2015 GDP which is broadly the shortfall that now looms ahead. Overestimation due to growth optimism: Significant inflation moderation in India combined with still tepid real growth below potential--will mean that nominal GDP growth will be about 10.6 percent instead of the 13.4 percent assumed in the budget. This will entail revenue optimism to the extent of ` 27,000 crores or 0.22 percent of GDP. Overestimation due to buoyancy optimism: The second reason for the revenue optimism relates to the buoyancy assumptions. The table below shows the average buoyancy for the major revenue items for the previous five years and compares them with the implied assumption in the budget. In many cases, the assumed buoyancy was far in excess of historical performance.

The optimism was greater in relation to indirect taxes than for direct taxes. In the case of service taxes for example, the assumed elasticity over-estimated revenue by 26,000 crore rupees (0.2 percent of GDP). Some of this optimism may have been on account of the expansion of the tax base for services but the assumed buoyancy was apparently not realized. In aggregate, the elasticity assumptions may have led to revenue optimism by about `78,000 crores (0.62 percent of GDP). This experience should inform the forthcoming budget. In addition, the budget was strained by a legacy effect, reflecting the excess carryover of subsides from the past. This amount is difficult to quantify precisely but could range from 0.3 to as much as 1 percent of GDP.

Therefore, evaluating the fiscal performance this year should take account of the legacy costs and the ambitious targets that were inherited. They were ambitious because of optimistic revenue projections, of unanticipated moderation in inflation (the consumer's gain being the Government's loss), and also because of below-potential growth. The latter implies that India is-unusually amongst the major economies according to the IMF-pursuing pro-cyclical fiscal policies. The

Government is committed to meeting the fiscal targets for FY 2015, despite the difficult odds engendered by a combination of these factors. 1 Tax buoyancy is defined as the ratio of revenue growth to the growth in the corresponding base, typically nominal GDP. Tax elasticity is essentially the tax buoyancy controlling for changes in either the tax base or tax rates. The historical buoyancy estimates are roughly also elasticity estimates because for the period under consideration and with some exceptions, there were no major changes in the tax base or rates. We examined the buoyancy estimates with alternate tax bases (for example, manufacturing GDP for excise taxes, services GDP for service taxes) and obtained broadly similar results. 2 Note that the percentage change in revenue generated can be written as the product of the buoyancy and the GDP growth rate. Overestimation in revenue in FY15 resulting from overestimation of buoyancy (col.5 in Table), then, is the product of buoyancy overestimation (difference between the budgeted buoyancy and the 'historical' buoyancy), the nominal growth rate for FY15 and tax collections in FY14 (provisional actual). A similar method is followed to calculate the overestimation resulting from an over-optimistic GDP growth projection Table: Estimating the Revenue Over-Projection in the Union Budget 2014-15

Tax Base Historical

1.9 At the same time, the external environment has turned in India's favour. In this fiscal year,
there has been a substantial reduction in the global prices of India's major commodity importspetroleum,

gold, coal, vegetables oils, fertilizers, and silver (that together constitute 51 percent of total imports and 12 percent of GDP). The reduction in prices has been substantial in some cases-  40 percent in the case of oil, so that the average reduction weighted by GDP is about 1.8 percent of GDP (around 1.5 percent of GDP if India's exports of oil are also taken into account). The collateral benefit has been an improvement in the current account, moderating pressures on inflation, and relief for the fiscal situation as oil subsidies which accounted for about 1 percent of GDP have also come down.

Short-term Growth Outlook

1.10 The Economic Survey 2013-14 (published in July 2014) observed that during 2014-15 the
Indian economy was expected to recover only gradually with growth in real GDP likely in the
range of 5.4 - 5.9 per cent. It also noted the possibility of growth remaining on the lower side of the
range for the following reasons: (i) lagged effects of reforms undertaken to restart the investment
cycle; (ii) weak growth outlook in some Asian economies, particularly China that would depress
Indian exports; (iii) elevated levels of inflation that limit the scope of RBI to reduce policy rates;
and (iv) expectation of below-normal monsoons. The prospect of economic reforms and a strongerthan-
expected recovery in some major advanced economies, especially the United States, were

expected to bolster the Indian recovery.

1.11 Investment is yet to pick up significantly. But on the upside, inflation has come down
dramatically, the monsoons failed to extract as much of a toll on growth as expected, and India
received a large supply side shock in the form of reduced commodity prices that amounted to

about 1.5 percent of GDP. The year could end with growth around 5.5 percent.

2. OUTLOOK AND CHALLENGES FOR SPECIFIC SECTORS

Fiscal Challenges
1.12 This is an especially challenging year for four reasons that are elaborated in Box 1.1
below:
 The tax base was weaker than expected thanks to unanticipated moderation in inflation;
 The revenue projections were over-optimistic;
 The budget was unduly burdened by a legacy of carried-over expenditures; and
 Above all, the deficit target represented strongly pro-cyclical fiscal policy-consolidation
          when growth was below potential-which is ambitious at the best of times and also unusual

          amongst the major economies today.

Monetary Policy and Inflation

1.13 One of the dramatic macroeconomic developments in recent months has been the decline in inflation, see Figure 1.3. November inflation printed at 4.4 percent. This represents a dramatic decline from the peak level of 11.2 percent reached in November 2013. These low numbers are not just due to base effects (high inflation today because of low inflation at this time last year).

Even the momentum of headline inflation for the latest three months (average) is 2.4 percent, down from 11.8 percent in (the third quarter of FY2014), a staggering decline.

1.14 Moreover, these developments were unanticipated. Even as recently as September 2014, the RBI's projection for January 2015 was 7.4 percent, representing an over-estimate of nearly 200 basis points. The same was true for most financial market assessments.

1.15 Understanding the latest trends is critical to an assessment of the inflation outturn for
2015 and for the stance of monetary policy going forward. The decline in inflation owes to four factors that are discussed in some detail subsequently:

A. A decline in agricultural prices;
B. A decline in commodity prices, especially oil;
C. Continued economic weakness relative to potential; and

D. Credibility of policy making

A. Agriculture: Since, agriculture constitutes almost 50 percent of the consumer price index
(CPI), it has a decisive impact on the headline. The following developments are particularly

noteworthy:

 Between January 2011 and October 2014, the World Bank's Food Price Index for
food, oil and meals, and grains declined, respectively by 20, 27, and 29 percent.
 Moreover, the rate of growth of rural wages, after having averaged 18 percent (26
percent at its peak) for the previous five years, has now decelerated sharply into single
digit territory (see Figure 1.5). This reflects strong disinflationary pressures in agriculture
and signals a slack in the labour market.

 Further, the Government has consciously moderated the rate of growth of minimum
support prices (MSPs). After having averaged at over 12 percent from 2007 to 2013,
the MSP for rice and wheat has been brought down to 3.8 percent in the current fiscal
year.

B. Oil prices: Declining commodity prices, especially of oil, have driven inflation down. Oil
and petroleum accounts for about 37 percent of imports and 9 percent of GDP. Oil prices
have declined by about 40 percent this year and have contributed positively and substantially to declining inflation.

C. Economic activity: Despite the sprouting of green shoots, a robust recovery has still to fully take hold (an overview is contained in Chapter III).

 In the most recent quarter, the economy grew at 5.3 percent largely due to a positive
performance of agriculture.
 Private investment has not yet picked up, and is being held back by the legacy of
distressed corporate balance sheets.
 The performance of indirect tax receipts, which grew at 5.6 percent in the first six months,
and the muted pick-up in credit also point to ongoing weakness relative to potential. 

D. Credibility of monetary policy: For a long time, the Indian economy had been drifting without a credible monetary anchor. Since late 2013, however, this has been laudably reversed.
Figure 1.4 illustrates this.

1.16 For nearly six years (2007 third quarter to 2013 third quarter), India lost monetary policy credibility, reflected in the fact that real policy interest rates were consistently negative at a time when inflation was persistently in the double-digit territory. For the first time in decades, inflation in India exceeded that in comparator countries (Figure 1.4).

1.17 That has been reversed since the end of 2013, with real interest rates climbing back into positive territory, and as of today stand just above 2 percent (on a 3-month forward-looking basis). Monetary policy credibility has been gained through important actions both by the RBI and by the Government. For its part, the RBI raised policy rates since July last year and published the Urjit Patel Committee Report, both of which signalled the move towards a flexible inflation targeting regime. In doing so the RBI has clearly demonstrated the capacity to rein in inflation.

1.18 But the Government's contribution to inflation control has been important if somewhat
under-recognized. By releasing stocks at a time that food availability seemed worrisome, and crucially by reining in the increase in MSPs, Government actions, along with declining world prices have moderated the inflationary impulses stemming from agriculture.

Inflation outlook

1.19 The stance of monetary policy will be determined not just by the past developments but an assessment of inflationary impulses going forward. Of the four factors considered above, the most important will be agriculture. But before we discuss agriculture, it is useful to review the outlook for the other factors.

1.20 Oil Prices: The risk that the decline in oil prices will reverse itself always exists. However, the persistence of tempered oil prices seems highly probable for at least three reasons. Demand is softening because of slowing growth in major areas of the world economy, including China and Europe. Noteworthy supply shifts are occurring related to the increase in oil and shale gas production in the U.S. and the concomitant decline in the oligopolistic power of OPEC (notably its swing producer, Saudi Arabia). Finally, the anticipated end to the abnormally low interest cycle in the US and the prospect of future rate increases will favour extraction of oil over keeping it in the ground, thereby further boosting supply and keeping prices soft. Higher rates will also lead to financial asset-reallocation away from commodities, especially oil, as a class into US financial instruments.

1.21 Economic Activity: Shortfalls in the ambitious revenue target in the current fiscal year will likely lead to expenditure cuts, which impact growth especially since expenditure multipliers tend to be high. Therefore, aggregate demand pressures on future inflation from the fiscal side will remain muted.

1.22 Agricultural Inflation: A useful perspective can be gained by categorizing the agriculture
sector into tradable and non-tradable components (recognizing as always that the boundaries between the two are blurred). Tradability and non-tradability vary according to commodity, more in the case of oilseeds and pulses, and also across time as Government policy attempts to insulate the economy from foreign prices, not always symmetrically depending on whether the priority is accorded to producers or consumers. More recently, domestic prices have converged toward international prices.

1.23 Broadly, the determinants of agricultural inflation are external and domestic. On the former, a combination of international prices and the concomitant pressures to adjust minimum support prices influence inflation. Domestic demand pressures depend on the strength of the economy and the fiscal deficit; domestic cost pressures are related to wage growth that may stem from Government programs.

1.24 Looking ahead, we need to assess the outlook separately for these external and domestic determinants of agricultural inflation. According to World Bank projections, global agricultural prices will remain muted, a likely decline of 1 percent in 2015 relative to 2014. This will have a key impact on MSP increases. In wheat and rice, the FOB price and the MSP are close. For this reason, it is likely that the recent trend of modest MSP price increases (of 3-3.5 percent percent) will continue, moderating inflationary pressures.

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Foreign Policy Impacts in India’s $500 Million Bet on Iran

New Delhi hopes a giant new Iranian port will help meet its energy needs — and outflank Pakistan

dia’s plan to spend $500 million on a new port complex on Iran’s Indian Ocean coast caps a decade-long quest to find a way to get sorely needed supplies of energy. But the Chabahar port deal also offers India a way to outflank Pakistan and elbow its way into the economic and diplomatic jockeying that is reshaping Central Asia.

During a visit to Iran this week, Indian Prime Minister Narendra Modi announced a spate of deals that included the long-sought accord to develop the port of Chabahar, which sits less than 50 miles from Gwadar, the deepwater port China is developing in Pakistan. The development plans will give Iran its first deepwater port, to finally allow it to conduct global trade with big cargo ships rather than the small ships its ports can currently handle, thus ending its reliance on the United Arab Emirates as a shipping intermediary.

The Chabahar plans also include factories as well as road and rail links to Afghanistan and beyond. Once complete, the new port could help India bypass Pakistan and deepen its ties with energy-rich countries in Central Asia like Turkmenistan and Uzbekistan. Chabahar also promises to give Afghanistan an outlet to the sea, potentially boosting the trade prospects of the landlocked and war-torn nation.

“It’s meant to ease access to key markets,” said Michael Kugelman, senior associate for South Asia at the Wilson Center. The port and rail connections will give India, which has become one of the biggest energy consuming countries in the world, access to natural gas from Iran and countries in Central Asia, as well as offering quicker transit for Indian trade as far afield as Russia.

“For India, it’s about economics and energy,” he said.

Chabahar has been on the drawing board for more than a decade, but was stalled due to Iran’s international isolation. But Iran and India have long had close ties: Even when Iranian oil exports were sharply limited by U.S. sanctions, India remained one of Iran’s biggest customers. Now that sanctions are being lifted as part of the nuclear deal, India is rushing to take advantage.

But closer ties with Iran could also complicate India’s relations with the United States just ahead of Modi’s long-awaited visit to Washington next month. Spurred by concerns over Chinese expansion in Asia, and particularly in the South China Sea and in the Indian Ocean, New Delhi and Washington just opened the door to greater defense cooperation, especially between their navies.

The United States is keeping a close eye on the Indian investment in Iran, a State Department official told Congress this week. But since the deal is mostly meant to give India trade access it currently doesn’t have — rather than deepen military ties with Tehran — it won’t likely raise red flags, Nisha Desai Biswal, the assistant secretary of state for South and Central Asia, said at the hearing.

That would be good news for New Delhi, which has long been seeking alternative ways of addressing its growing energy needs without relying on an ambitious, quixotic, $10 billion plan to build a pipeline that would snake from Turkmenistan across Afghanistan and Pakistan to India.

Groundbreaking has begun on the project, known as TAPI, but the pipeline’s viability is threatened both by terrorism and instability in Afghanistan and by long-standing enmity between Pakistan and India. Chabahar could pave the way for India to tap the vast deposits of natural gas in Central Asia without worrying about shipping its energy supplies through war-torn Afghanistan or through Pakistani territory. And if post-sanctions Iran is able to attract enough foreign investment to rejuvenate its natural gas fields,  the Shiite republic could also become a source of gas for India.

That’s not to say that broader geopolitical calculations don’t enter into New Delhi’s thinking. In recent years, China has pushed its own plan to integrate Central and South Asia with a so-called “new Silk Road” that includes overland road and rail links and a maritime route across the Indian Ocean from China to Europe. Chinese investment in Gwadar is part of that, as is another port deal in Sri Lanka and a military base in Djibouti. Just this week, a Chinese firm inked a deal to develop port and industrial facilities in Oman. The deepening diplomatic and military ties between Beijing and Islamabad in particular make many in New Delhi nervous.

“The Chinese penetration into the subcontinent is of course a concern for India,” said C. Raja Mohan, the director of Carnegie India.

That concern about China combines with the legacy of the 1947 partition of India and Pakistan, which at a stroke pushed Indian borders away from both Iran and Afghanistan. Ever since, Pakistan has refused to allow India access through its territory, cutting it off from Afghanistan and essentially locking India out of China’s Silk Road projects.

For India, said Mohan, Chabahar offers a route to sidestep the geographical legacy of partition and regain direct access to its former neighbors. It’s a way to not only push back against perceived Chinese encirclement, but also gives India a path to play a bigger part in developing Afghanistan and Central Asia. Indeed, some Chinese commentators have concluded that the Chabahar port plus the road and rail links will give India a much bigger voice in Afghanistan’s future.

“Basically, it all comes down to the historical consequences of partition,” Mohan said.

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The Modi Government’s New FDI Policy Will Hurt Indian Interests

Overview

The ‘ease of doing business’ is being promoted at the cost of socio-economic factors including employment generation and agricultural livelihoods.

The latest changes in foreign direct investment (FDI) norms in India have made entry and control of foreign investors in a lot of sectors easier. Defence and civil aviation have been opened to 100% FDI under the government approval route (the FDI limit was 49% in airlines before). Many other sectors have been allowed 100% (or near 100%) FDI with government approval or through the automatic approval route. These include animal husbandry, trading of food products produced in India (including through e-commerce), private security services and broadcasting carriage services (such as DTH, cable networks and mobile TV). Up to 74% FDI (against the previous 49%) in brownfield pharmaceutical industry projects will no longer require government approval. Brownfield airports too have been brought under the automatic approval route.

The condition of access to state-of-the-art technology in India has been removed in defence. In addition, for single-brand retail trading companies undertaking business with state-of-the-art technology, the restriction of sourcing up to a certain percentage of inputs locally has been totally relaxed for three years, followed by a partial relaxation for another five years – a favour granted apparently on Apple’s appeal.

The stated objective of 100% FDI and other relaxations is to promote employment and improve infrastructure, along with greater FDI inflows and the ease of doing business in India. An official statement said that with most sectors coming under the automatic approval route, India is now the most open economy in the world for FDI.

Why this move will hurt India’s interests

While the latest FDI policy change will certainly boost FDI inflows and increase the ease of doing business in India, it is doubtful whether it will promote other more important socio-economic objectives. On the contrary, it might hurt them. Here are some of the major impacts.

Domestic economy, employment and economic security of people: Rather than promoting employment, these FDI relaxations might accelerate the ongoing trend of jobless growth and rising inequality. With 100% FDI owned commercial entities, a much greater share of returns on investments will go outside India, decided based on business preferences of foreign owners. Therefore, multiplier effects of financial returns on the economy and employment will be limited. Relaxation of local sourcing restrictions will further add to the dampening of multiplier effects.

Infrastructure: It is inexplicable why infrastructure cannot be improved without FDI relaxation. India’s infrastructure in major sectors including civil aviation and broadcasting services has already been witnessing substantial investments, growth and modernisation. There are several Indian firms, both public and private, which have demonstrated a long experience of building facilities and networks with modern technology and systems, through either sole ownership or joint ventures. In infrastructure requiring the latest technology, growth could easily have continued through joint venture mechanisms.

Agricultural economy and families dependent on it: Hundred percent FDI in animal husbandry, retail and trading of food products might lead to greater consolidation and control of farmland and other agricultural assets in the hands of large corporations. This will make a majority of small farmers and farm-dependent families more vulnerable and accelerate distress migration to cities. Alternately, the policy change should have been directed at improving economic security and technological skills of small farmers and farmers’ cooperatives.

Small manufacturing and services industries: Relaxation of local sourcing norms for state-of-the-art technology based retail trading companies will subdue opportunities for suppliers to increase their business and upgrade technology skills. Small industries, most of which are suppliers to larger firms, constitute an overwhelming majority of India’s industrial base. A policy that goes against their interest is therefore detrimental to the ‘Make in India’ agenda.

Manufacturing and services industries where Indian firms have already demonstrated near world-class competence: There are industries where some Indian firms have proven high competency in technology and management. These include existing parts suppliers in the defence industry. They also include parts suppliers in the automotive industry, several of whom have the ability to upgrade and potentially supply to defence and civil aviation sectors. Additionally, raw material as well as finished product manufacturers in pharmaceuticals and a lot of retail industries have vast experience of selling high quality products and services. Airlines services and airport projects in India too have established domestic players with track records of efficient and high quality performance in services and projects involving complex operations and technology. Similarly, there are routine service industries, such as private security, that have witnessed the emergence of domestic firms with professional work standards and management systems. And there is reasonable domestic competition in these industries. The Indian pharmaceutical industry is known for reverse engineering, efficient operations and technological skills and is a major supplier of affordable medicines to many third world countries. In this scenario, what substantial benefit will 100% FDI bring? Instead, the effort should be to equip well-performing domestic firms to become globally competitive and increase their exports. That will boost the economy and employment, and upgrade technological skills.

Domestic R&D and manufacturing capability in state-of-the-art technology areas: Removal of the condition of access to state-of-the-art technology in India in the defence sector and waiver of the minimum local sourcing condition in single-brand retail with state-of-the-art technology has directly hurt the opportunities for building those higher-end capabilities among Indian industries and entrepreneurs. Rather than allowing foreign companies to bypass domestic suppliers while doing business in India, they must be asked to integrate domestic manufacturers and service providers within their supply chains so that they contribute directly to building India’s economy as well as technological competence. Achieving higher value and creating capability through technology and innovation must be as important a goal for India’s economy as universal employment generation. Unfortunately, both have been side-stepped.

FDI should support and be subservient to, rather than dictate, socio-economic development

A deeper concern is that our developmental priorities, as reflected in drastic FDI relaxations, appear fundamentally misplaced. While ‘ease of doing business’ is a desirable thing, in India’s case it is being promoted at the expense of other more important national objectives such as employment; survival and skill upgradation of agricultural and small manufacturing economies and families dependent on them; expanding on existing domestic capacities in those industries where Indian firms have already demonstrated competence; and development of domestic R&D and manufacturing capability in state-of-the-art technology areas. FDI should be subservient to, and support, these more important socio-economic goals. The ongoing development policy, by promoting FDI at the expense of these goals, is in fact really not for development.

By and large, democracies with high income and low social strife are the ones which have opened their economies to foreign capital in a major way only after achieving a reasonable degree of domestic economic stability, industrial technological competence and overall prosperity. Opening a large economy to foreign investments without either adequate checks or having a strong domestic economy of suppliers, markets and technological capability is akin to fattening a person by injecting drugs. It is a short cut to growth, but one which will yield an economy that is inherently weak and vulnerable. It is also likely to produce a society beset with economic fault-lines that constantly trigger social conflicts – a phenomenon that might intensify beyond the levels we have witnessed in the past.

what do you think?

Indian Retail Industry 2016

OverView

The Indian Retail sector has come off age and has gone through major transformation over the last decade with a noticeable shift towards organised retailing. A T Kearney, a US Based global management consulting firm has ranked India as the fourth most attractive nation for retail investment among 30 flourishing markets.

The retail market is expected to reach a whooping Rs. 47 lakh crore by 2016-17, as it expands at a compounded annual growth rate of 15 per cent, accordingy to the ‘Yes Bank - Assocham’ study.

The retail market, (including organised and unorganised retail), was at Rs. 23 lakh crore in 2011-12. According to the study, organised retail, that comprised just seven per cent of the overall retail market in 2011-12, is expected to grow at a CAGR of 24 per cent and attain 10.2 per cent share of the total retail sector by 2016-17.

In terms of sheer space, the organised retail supply in 2013 was about 4.7 million square feet (sq ft). This showed a 78 per cent increase over the total mall supply of just 2.5 million sq ft in 2012.

“Favourable demographics, increasing urbanisation, nuclearisation of families, rising affluence amid consumers, growing preference for branded products and higher aspirations are other factors which will drive retail consumption in India,”  said DS Rawat, Assocham Secretary General.

Retail classification 

                     

 Retail industry can be broadly classified into two categories namely- organised and unorganised retail.

• Organized retail - Organised traders/retailers, who are licensed for trading activities and registered to pay taxes to the government.
• Unorganized retail – It consists of unauthorized small shops - conventional Kirana shops, general stores, corner shops among various other small retail outlets - but remain as the radiating force of Indian retail industry.

Market Dynamics

In the past few years, Indian Retail sector has seen tremendous growth in the organised segment. Major domestic players have stepped into the retail arena  with long term, ambitious plans to expand their business across verticals, cities and formats.

Companies like Tata, Reliance, Adani Enterprise and Bharti have been investing considerably in the booming Indian Retail market. Along with these giant retailers, a number of transnational brands have also entered into the market to set up retail chains in close association with bigger Indian companies.

High consumer spending over the years by the young population (more than 31% of the country is below 14 years) and sharp rise in disposable income are driving the Indian organised retail sector’s growth. Even Tier I & Tier II cities and towns are witnessing a major shift in consumer preferences and lifestyles, the result of which, they have emerged as attractive markets for retailers to expand their presence.

The Indian retail sector is highly fragmented and the unorganised sector has around 13 million retail outlets that account for around 95-96% of the total Indian retail industry. However, going forward, the organised sector’s growth potential is expected to increase due to globalisation, high economic growth, and improved lifestyle.

Although the growth potential in the sector is immense, there are obstacles too, that could slow the pace of growth for new entrants. Rigid regulations, high personnel costs, real estate costs, lack of basic infrastructure, and highly competitive domestic retailer groups are some such challenges.

Key drivers of the Indian Retail Industry

• Emergence of nuclear families
• An increase in the double-income households trend
• Large working population
• Reasonable Real estate prices
• Increase in disposable income and customer aspiration
• Demand as well as increase in expenditure for luxury items
• Growing preference for branded products and higher aspirations
• Growing liberalization of the FDI policy in the past decade
• Increasing urbanisation,
• Rising affluence amid consumers

Bottlenecks

• A long way to meet international standards
• Lack of efficient supply-chain management
• Lack of required retail space
• No fixed consumption pattern
• Shortage of trained manpower
• Lack of proper infrastructure and distribution channel
•  

Emerging sectors/trends in Indian retailing

Within retail, the emerging sectors would be food and grocery, apparel, electronics, e-commerce, fashion and lifestyle.

Incorporation of technology in the organised retail segment has been something to reckon with in the past few years. Use of computers for merchandise planning and management, control of inventory costs and supplies and replenishment of goods done electronically, internal store billing, etc has changed the face of product retailing.

Online retail business is the next gen format which has high potential for growth in the near future. After conquering physical stores, retailers are now foraying into the domain of e-retailing. The retail industry is all set to test waters over the online medium, by selling products through websites. Food and grocery stores comprises the largest chunk of the Indian retail market.

An emerging trend in this segment is the virtual formats where customer orders are taken online through web portals which are delivered at the door step the very same day or the following day. This trend has been catching up with most of the large sized retail chains that have their websites.

The Road Ahead…

According to panel members at the seventh Food and Grocery Forum India, the opportunities in food and grocery retail in India are immense, given that it constitutes about 69 per cent of India’s total retail market. The Indian retail market, currently estimated at $490 billion, is project to grow at a compounded annual growth rate of 6 per cent to reach $865 billion by 2023. Modern retail with a penetration of only 5% is expected to grow about six times from the current 27 billion USD to 220 billion USD, across all categories and segments.

Organised Retail is emerging as the new phenomenon in India and despite the slump, the market is growing exponentially. As economic growth brings more of India’s people into the consuming classes and organized retail lures more and more existing shoppers, by 2015, more than 300 million shoppers are likely to patronize organized retail chains.

Consumer markets in emerging market economies like India are growing rapidly owing to robust economic growth. India's modern consumption level is set to double within five years to US$ 1.5 trillion from the present level of US$ 750 billion.

The growing middle class is an important factor contributing to the growth of retail in India. By 2030, it is estimated that 91 million households will be ‘middle class’, up from 21 million today. Also by 2030, 570 million people are expected to live in cities, nearly twice the population of the United States today.

Thus, with tremendous potential and huge population, India is set for high growth in consumer expenditure. With India's large ‘young’ population and high domestic consumption, the macro trends for the sector look favorable.

THE INDIAN RETAIL SCENE

India is the country having the most unorganized retail market. Traditionally it is a family�s livelihood, with their shop in the front and house at the back, while they run the retail business. More than 99% retailer�s function in less than 500 square feet of shopping space. Global retail consultants KSA Technopak have estimated that organized retailing in India is expected to touch Rs 35,000 crore in the year 2005-06. The Indian retail sector is estimated at around Rs 900,000 crore, of which the organized sector accounts for a mere 2 per cent indicating a huge potential market opportunity that is lying in the waiting for the consumer-savvy organized retailer.

Purchasing power of Indian urban consumer is growing and branded merchandise in categories like Apparels, Cosmetics, Shoes, Watches, Beverages, Food and even Jewellery, are slowly becoming lifestyle products that are widely accepted by the urban Indian consumer. Indian retailers need to advantage of this growth and aiming to grow, diversify and introduce new formats have to pay more attention to the brand building process. The emphasis here is on retail as a brand rather than retailers selling brands. The focus should be on branding the retail business itself. In their preparation to face fierce competitive pressure, Indian retailers must come to recognize the value of building their own stores as brands to reinforce their marketing positioning, to communicate quality as well as value for money. Sustainable competitive advantage will be dependent on translating core values combining products, image and reputation into a coherent retail brand strategy.

There is no doubt that the Indian retail scene is booming. A number of large corporate houses � Tata�s, Raheja�s, Piramals�s, Goenka�s � have already made their foray into this arena, with beauty and health stores, supermarkets, self-service music stores, newage book stores, every-day-low-price stores, computers and peripherals stores, office equipment stores and home/building construction stores. Today the organized players have attacked every retail category. The Indian retail scene has witnessed too many players in too short a time, crowding several categories without looking at their core competencies, or having a well thought out branding strategy. 

STRATEGIES, TRENDS AND OPPORTUNITIES 2007

Retailing in India is gradually inching its way toward becoming the next boom industry. The whole concept of shopping has altered in terms of format and consumer buying behavior, ushering in a revolution in shopping in India. Modern retail has entered India as seen in sprawling shopping centres, multi-storied malls and huge complexes offer shopping, entertainment and food all under one roof. The Indian retailing sector is at an inflexion point where the growth of organized retailing and growth in the consumption by the Indian population is going to take a higher growth trajectory. The Indian population is witnessing a significant change in its demographics. A large young working population with median age of 24 years, nuclear families in urban areas, along with increasing workingwomen population and emerging opportunities in the services sector are going to be the key growth drivers of the organized retail sector in India.

GROWTH OF RETAIL SECTOR IN INDIA

Retail and real estate are the two booming sectors of India in the present times. And if industry experts are to be believed, the prospects of both the sectors are mutually dependent on each other. Retail, one of India�s largest industries, has presently emerged as one of the most dynamic and fast paced industries of our times with several players entering the market. Accounting for over 10 per cent of the country�s GDP and around eight per cent of the employment retailing in India is gradually inching its way toward becoming the next boom industry.

CHALLENGES & OPPORTUNITIES

Retailing has seen such a transformation over the past decade that its very definition has undergone a sea change. No longer can a manufacturer rely on sales to take place by ensuring mere availability of his product. Today, retailing is about so much more than mere merchandising. It�s about casting customers in a story, reflecting their desires and aspirations, and forging long-lasting relationships. As the Indian consumer evolves they expects more and more at each and every time when they steps into a store. Retail today has changed from selling a product or a service to selling a hope, an aspiration and above all an experience that a consumer would like to repeat. 

For manufacturers and service providers the emerging opportunities in urban markets seem to lie in capturing and delivering better value to the customers through retail. For instance, in Chennai CavinKare�s LimeLite, Marico�s Kaya Skin Clinic and Apollo Hospital�s Apollo Pharmacies are examples, to name a few, where manufacturers/service providers combine their own manufactured products and services with those of others to generate value hitherto unknown. The last mile connect seems to be increasingly lively and experiential. Also, manufacturers and service providers face an exploding rural market yet only marginally tapped due to difficulties in rural retailing. Only innovative concepts and models may survive the test of time and investments. 
However, manufacturers and service providers will also increasingly face a host of specialist retailers, who are characterized by use of modern management techniques, backed with seemingly unlimited financial resources. Organized retail appears inevitable. 

Retailing in India is currently estimated to be a US$ 200 billion industry, of which organized retailing makes up a paltry 3 percent or US$ 6.4 billion. By 2010, organized retail is projected to reach US$ 23 billion. For retail industry in India, things have never looked better and brighter. Challenges to the manufacturers and service providers would abound when market power shifts to organized retail. 

CONCLUSION

The retail sector has played a phenomenal role throughout the world in increasing productivity of consumer goods and services. It is also the second largest industry in US in terms of numbers of employees and establishments. There is no denying the fact that most of the developed economies are very much relying on their retail sector as a locomotive of growth. The India Retail Industry is the largest among all the industries, accounting for over 10 per cent of the country�s GDP and around 8 per cent of the employment. The Retail Industry in India has come forth as one of the most dynamic and fast paced industries with several players entering the market. But all of them have not yet tasted success because of the heavy initial investments that are required to break even with other companies and compete with them. The India Retail Industry is gradually inching its way towards becoming the next boom industry.

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