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1policy watch

this IssueInsideMessage From the Director General .. 1policy Barometer .............................. 5industry Voices ................................. 9

top View .......................................... 1 B Muthuraman, president, cii

Factfile ........................................... 11

cEoSpeak ........................................ 3Sunil Kant Munjal, past president and chairman, Economic policy council, cii

March 2012, Volume 1, Issue 1

Message from the Director General

I take great pleasure in introducing the first cii ‘policy watch’, a monthly

publication that would give an in-depth analysis of relevant and topical issues in the policy landscape in india. this new publication would bring to you the latest developments in a specific area along with the perspectives and recommendations of cii. we believe it will add to informed debate and, hopefully, help shape future direction for the country’s policies.

the challenges confronting the world in the last few years have been unprecedented in scale and dispersion. therefore, policymakers and economic stakeholders have to navigate with care a way to fashion the best outcomes for economic growth and development.

industry, as a vital partner in national development, has a special, responsible role to play in this endeavour. industry associations are expected to articulate the stance of industry so that it can contribute in an optimum manner to national development. this publication is a step in this direction.

the current edition focusses on policies that can be part of the budget exercise. Multiple challenges such as rising inflation and interest rates have buffeted the indian economy in the last year. however, positive economic signs are increasingly visible. india, with its strong fundamentals, is still among the fastest growing economies in the world. Business confidence is returning as seen in stronger exchange rates and stable stock markets.

cii has submitted its pre-budget Memorandum to the government, highlighting steps to initiate a new cycle for growth and investment. ‘policy watch’ apprises you of the analysis that went into the pre-budget recommendations and the key measures cii has outlined for the next fiscal year. i believe you would find it a useful document from cii. n

Focus Budget: Reforms-oriented budget needed to stimulate growth and investment

Policy

Confederation ofIndian Industry





In the run-up to Budget 2012-13, a host of economic factors are playing out, restricting available choices. What can Industry expect?

A Growth Agenda For Inclusive Development

A dvance Estimates for the GDp recently brought out by the central Statistical organisation have displayed a worrisome slowdown in the pace of

india’s rapid growth. although the first half of the current fiscal achieved GDp growth of 7.3 per cent, whole-year estimates have placed GDp at 6.9 per cent, indicating that the rate of growth for the second half of the year could be below 6.5 per cent. coming after two solid years of 8.4 per cent rate of growth, this indeed is a dampener. Given the imperative of sustaining growth to alleviate poverty, restraining the slide and propelling new forces for growth have to be the major considerations for the upcoming budget.

perhaps, of utmost concern is that the pace of capital formation, a crucial indicator for future expansion, is estimated at 5.6 per cent in 2011-12 – two percentage points below last fiscal’s rate. this is reflected in the decline in the value of projects commissioned by industry. the output of the construction industry, traditionally considered to be a growth propelling sector, is also weak. Similarly, the deceleration in consumption growth reflects a slackening of demand in the economy.

GDp slowdown has been accompanied by several other indicators that exhibit stress. Fiscal deficit in particular would come in

B Muthuramanpresident, cii

Chandrajit BanerjeeDirector General, cii

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at much higher levels than what was forecast in the previous Budget, perhaps by as much as 1-1.5 percentage points, unless disinvestment plans take off before 31 March 2012. this has led to debt overhang and rising government borrowings, in turn resulting in constrained funds for investment. the troubles of the global economy are reflected in the slower rate of export growth and mounting current account deficit which may touch as much as 3.5 per cent of GDp at the end of the year, the highest since the 1991 crisis. in addition, inflation, though contained, cannot be counted on the positive side as yet.

another consideration bearing on the Budget would be the advent of the 12th Five year plan. Given that many of the targets envisaged in the 11th plan fell short due to various global and domestic factors, the 12th plan would need a massive push upfront to spark the much-needed growth cycle. the upcoming plan envisions an average growth of 9 per cent for the next five years, and additionally aims at targeting inclusiveness through education and health interventions and at building infrastructure for energy, transportation and urban development.

in such a scenario, the Budget becomes a focal point for energising the economy to promote growth which is both inclusive and sustainable. Key target areas would be: containing the fiscal deficit, devising innovative

Top View

Budget 2012-13, coming at the start of a new Five-year plan, provides an excellent opportunity for the government to implement bold reforms, which would revive the flagging economy at home and act as a buffer against external shocks.

means to boost investment, raising farm productivity and funding infrastructure. cii’s pre-budget recommendations are based on the pillars of improving fiscal situation, boosting agricultural output, expanding infrastructure and power, strengthening social infrastructure, assisting MSMEs and liberalising the financial sector.

these issues have been further detailed in the Direct and indirect tax recommendations, with a view to power corporate investments. Suggestions have covered investment allowance, rural infrastructure, tax exemption for long term capital gains, eliminating or reducing Mat, eliminating cascading Dividend Distribution tax (DDt), and incentivising R&D. Specific steps in direct taxes for housing and real estate, telecommunication, depreciation and personal taxation have also been covered, among a total range of suggestions. these would help attract funds into investment even while the Dtc is under due process. the chief indirect tax recommendations include retaining current rates for excise, service tax and customs duties as also sectoral specifics to ameliorate anomalies.

Budget 2012-13, coming at the start of a new Five year plan, provides an excellent opportunity for the government to implement bold reforms, which would revive the flagging economy at home and act as a buffer against external shocks. industry is hopeful that the Budget would help unleash the entrepreneurial spirit by unshackling the potential of the industrial and agriculture sectors.

india continues to be an agrarian economy with over 60 per cent of the population living in rural areas that is home to 75 per cent of the nation’s poor. Unless the millions of disadvantaged are brought into the mainstream and get the opportunity to earn, save, spend and invest, the fruits of development would be limited and our vision of a prosperous india would continue to elude us. n

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CEOSpeak

As you look back at the year since the last Budget, how do you think the economy has panned out? What have been the highlights and the concerns in the last one year?

over the last one year, the indian economy has started showing signs of fatigue. the recent advance Estimates are not encouraging.

No doubt, our GDp growth compares favourably with that of the global economy which is reeling under the impact of a slowdown. yet, new big investment projects are down to almost a trickle as hardening interest rates have constrained demand. Fiscal deficit is heading towards a 6 per cent mark while manufacturing inflation is still a cause for concern. Furthermore, the burgeoning current account deficit, rising external debt and stock market volatility has affected business confidence. Such a mood is reinforced by the recent Business confidence Survey of cii which points towards a subdued sentiment within industry.

At the threshold of a new Budget, what will be the constraints and the opportunities? Are you optimistic or cautious?

i am cautiously optimistic!

the room for fiscal operations is limited due to the high deficit. it will be difficult to raise taxes to source funds as this would place undue pressure on inflation and lead to lowering vital demand. at the same time, taxes cannot be brought down either, as the government’s borrowing position is already constrained. a very fine balance would have to be maintained. we, in cii, have suggested several concrete steps to unlock revenues from various sources such as widening the tax base, bringing subsidies under some control, disinvestment and shifting to accrual based budgeting. the FRBM act must also be amended for clarity on timelines in reducing the fiscal deficit.

in terms of opportunities, cii feels that this would be an opportune moment for

reiterating that the reform process is in ‘play’ mode. Decisive steps in a number of areas can be indicated through the Budget, even if they are not related to the government’s incomes and expenses. For example, cii has called for implementation of a twenty-point agenda for agricultural productivity, which has fallen way behind. this would include a model land leasing act, Seeds act, soil testing, drip irrigation, watershed management, etc. the most important signal would be greater involvement of the private

sector in areas such as farm mechanisation, skill training and healthcare.

What was the message from the global investing community on the Indian economy during the World Economic Forum Annual Meeting at Davos in January?

the impression gathered at the annual world Economic Forum Meet at Davos is that the indian growth story, despite facing some uncertainties in the short term, is essentially intact. Global leaders have appreciated the country’s fine balance between democratic processes and economic growth. in fact, the US trade Representative, Ron Kirk, reiterated that the US does not consider india as an emerging market and the perception in the US is that indians can do whatever americans can. they can make their own ipads and do much more. as president obama said during his visit to india in 2010, the global community believes that india has emerged. however, some doubts were expressed about individual decisions that could impact overseas investments in the short term.

"I Strongly Believe That We Have Come To The End of An Investment Down-cycle"

Sunil Kant Munjalpast president, cii; chairman,

cii Economic policy council and chairman, hero corporate Services ltd

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CEOSpeak

out by recent statements of the Finance Minister. For example, we may see some disinvestment happening before the end of the fiscal year. also, we must not lose sight of some of the steps that have recently been taken to revive sentiments, such as Qualified Foreign investors, National Manufacturing policy and raising single-brand retail FDi to 51 per cent.

i strongly believe that we have come to the end of an investment down-cycle. the inherent momentum of the economy is strong enough to move it upward, from here on. however, to sustain this investment cycle, cii members need to sustain pressure on the government to create a conducive policy environment.

Which are the central areas that you feel would be highlighted in the

Budget? Can we anticipate some major policy announcements?

i certainly believe that significant policy steps are to be announced through the Budget. our interactions with the government have been largely positive. in our pre-budget meeting, the FM indicated that fiscal consolidation would be his major agenda along with containing inflation. Expenditure would need to be compressed and revenues enlarged. it remains to be seen how to manage this while incentivising investments. we do hope that issues such as fuel prices, rail fares and subsidies will be addressed. there is also need for enhanced depreciation rate and abolishing surcharge and cess on corporate tax.

we would also look for measures in the financial sector that could open long-term access to funds for the infrastructure sector. the 12th plan has estimated expenditures of $1 trillion for infrastructure, and cii has made a number of suggestions regarding coverage of the definition of infrastructure, benefits under section 80-ia, long term capital gains, etc. the power sector faces many challenges due to inadequate availability of coal and the deteriorating financial position of power distribution companies, which must be addressed without delay to meet the 12th plan targets.

One key step that you think would greatly improve business confidence?

a real halt needs to be put to the rising fiscal deficit through several concrete, defined steps. at the same time, the centre should be resolute enough not to get swayed by coalition pressures while taking policy decisions. these two measures will go a long way in improving business confidence, not just in india but also overseas.

Any other issues that you would like to highlight?

we, in cii, would like to see a more aggressive policy stance, like increasing depreciation rate on plant and machinery, fast-tracking implementation of 100 mega projects, augmenting investment in infrastructure and simplifying tax and regulatory compliance, that taken together with other measures would boost investment and spark growth in the economy. n

With a vantage overview of the economy, what is your message to the larger CII membership as it prepares for the Budget and beyond?

there is hope that from the next financial year onwards, industry could look forward to brighter prospects for the economy and industry. already, inflation has started trending downwards and is projected to be in the range of 6-7 per cent by end-March. this would nudge the monetary authorities to relax the policy rates which would pave the way for lower interest rates necessary for investment.

indeed, the government has been reiterating in industry forums that it is undoubtedly committed to pursuing economic reforms. the fact that the government is committed towards ‘biting the bullet’ on reforms is borne

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F ragile external demand conditions on the one hand and structural imbalances in the

domestic economy on the other are drying up investments and having a deleterious impact on growth. Under the circumstances, industry looks forward to a reform-oriented budget which would prop up the economy and restore the confidence of business. Says Mr Sunil Kant Munjal, past president, cii and chairman, cii’s Economic policy council, “Given the challenging economic backdrop in which the coming Budget will be formulated and presented, innovative ways have to be crafted towards stimulating growth and investment by augmenting revenues and controlling expenditure.”

Contain fiscal deficit

the most important initiative to revive investor confidence is to send strong signals that the government is serious about

Challenging Economic Environment Calls For An Innovative BudgetGiving heed to CII’s recommendations would see revival of growth and investment

containing the fiscal deficit by rationalising expenditure while raising revenue. it is widely agreed that there will be a slippage in fiscal deficit targets pegged at 4.6 per cent of the GDp, by a margin of at least 1.0 to 1.5 per cent. already, in the first nine months of 2011-12, fiscal deficit touched 92 per cent of budget estimates owing to overshooting of subsidies, rising interest payments, shortfall in direct tax collections and the inability to realise non-debt capital receipts. a rising fiscal deficit exerts an upward pressure on interest rates and crowds out private consumption and investment expenditure, thereby constraining growth.

it is imperative to draw up a roadmap for fiscal consolidation through a revised Fiscal Responsibility and Budget Management act. it is also important to improve outcomes of expenditure on social programmes by plugging leakages, reducing corruption and

preventing cost overruns. a move towards direct transfer of cash subsidy to potential beneficiaries for better delivery of kerosene, lpG and fertilisers to the deserving is an aspect that the Budget could also address. Besides, there is need to hasten the disinvestment process and unlock the value of government assets.

Policy Barometer

india inc. looks forward to the early implementation of tax reforms sought to be introduced by the Dtc and the GSt. pending these, cii believes that the government should focus on measures to widen the tax base, strengthen tax administration and e-governance and maintain stability in the tax regime. creating an environment of trust, simplicity and ease would encourage voluntary compliance by the taxpayers.

Rajiv Memani chairman, cii National committee on indirect taxes/GSt and country Managing partner, Ernst & young pvt ltd

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Policy Barometer

Implement DTC and GST

it is also important to lay the ground for implementing Dtc and GSt as this would not only go a long way in improving government finances but would also bring an element of transparency in our tax system. comments Mr Rajiv Memani, chairman, cii National

committee on indirect taxes/GSt, “india inc. looks forward to the early implementation of tax reforms sought to be introduced by the Dtc and the GSt. pending these, cii believes that the government should focus on measures to widen the tax base, strengthen tax administration and e-governance and maintain stability in the tax regime. creating an environment of trust, simplicity and ease would encourage voluntary compliance by the taxpayers.” also, measures to improve the dispute resolution mechanism would help in unlocking the substantial amounts locked in tax litigation, adds Mr Memani.

with regard to corporate tax, investment-linked incentives being introduced to widen the tax base should be accompanied by a reduced corporate tax rate of 25 per cent as proposed in the original Dtc. Further, Mat should not negate these incentives. if the government introduces measures to curb international tax avoidance, these should only be prospective, specific and clear-cut so as to avoid subjectivity in their application. in the case of indirect taxes, while the service tax base can be widened to include more

implementation of GSt which has the potential to add about 1-1.5 per cent to GDp growth is critical for the economy. however, the current proposal which excludes critical sectors like petroleum, alcohol and real estate from its purview could seriously undermine the benefits of GSt. the proposal to exclude electricity duty, entry tax and entertainment tax from GSt has the potential to further constrain the benefits. cii, therefore, recommends that central and state governments pave the way for the earliest implementation of GSt with all goods and services included in it.

R. Seshasayeepast president, cii; chairman, cii international policy council and Executive Vice chairman,ashok leyland ltd.

services in the tax net, cii is of the view that the negative list approach of taxing services should be adopted only with the implementation of GSt.

while cii looks forward to the scheduled implementation of Dtc, it is concerned about certain restrictive provisions relating to residency rule, GaaR, treaty override etc and hopes that they will be appropriately amended before the law comes into effect.

Augment investment in infrastructure

investment in infrastructure, which is very much behind schedule, also deserves our topmost priority. poor quality of roads, inconsistent power supply, inadequate port infrastructure, and deficient urban development adversely impact india’s competitiveness and discourage foreign investment. hence, investment in infrastructure has to double to $ 1 trillion over the 12th plan period to make a visible difference on the ground. it is in this context that public private partnerships in infrastructure need to be given a boost, by working towards formulating a common

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Policy Barometer

in order to develop a more stable equity market and attract risk capital to fund economic growth, it is important to enhance flow of domestic investments/savings in equity market through following measures:

abolish Stt completely. 1. Give direct incentives 2. to equity based mutual funds and insurance schemes.levy import duty on 3. gold imports and the money raised needs to be ploughed back into equity market.Strengthen insurance 4. and pensions segments

creation of a vibrant corporate Bond Market (cBM) is critical to attract long term capital. cBM accounts for only 5 per cent of the total bond market in india, while it is 45 per cent, 41 per cent and 52 per cent respectively in Malaysia, Singapore and hong Kong.

Subsidies are used worldwide to financially strengthen a specific strata of society or specific sectors of industry. however, in india, there are inefficiencies in the use of subsidies, leading to a disproportionate fiscal outlay. to weed out inefficiencies in the existing system and achieve better utilisation of funds in a transparent manner, there is an urgent need that the Budget make fresh efforts for transfer of subsidies. this will help in taking the next step of direct transfer of cash subsidy to people below the poverty line for foodgrains, kerosene, fertilisers, lpG etc. this will strengthen the whole system and ensure last mile delivery to the intended recipient.

Uday Kotakchairman, cii National committee on capital Markets and Executive Vice chairman & Managing Director, Kotak Mahindra Bank ltd.

Ajay S Shriramchairman, cii National committee on Sugar and chairman & Senior Managing Director, DcM Shriram consolidated ltd.

definition of infrastructure, setting up an effective dispute resolution mechanism, effecting greater transparency in bidding procedures, drawing up an effective land acquisition policy, creating a shelf of bankable projects and ensuring easy availability of institutional finance by creating infrastructure debt funds.

the availability of consistent power supply at a reasonable price requires multiple measures in the form of smoothening supply of coal, ending government monopoly in coal, encouraging corporatisation of mining, reform in the distribution segment, and implementing open access, among other measures. More funds must be incentivised towards infrastructure by leveraging pension and insurance funds.

Rural infrastructure must be strengthened in a mission mode. while this has been carried out under the Bharat Nirman scheme, much remains to be done. irrigation facilities must be extended to more arable land from the current low 40 per cent or so. housing, rural innovation and technology also need to be incentivised. in particular, education and skill development in rural areas needs to be undertaken comprehensively through a national mission and greater participation of the private sector.

Invest in social infrastructure

one of the main reasons for the poor state of healthcare in the country is low public expenditure, which stands at merely 1.3 per cent of the GDp. the central government has been making efforts to increase the spending on healthcare in every budget. Nevertheless, health care projects in india are not seen as attractive for investment. Return on capital Employed (RocE) for hospitals in india (5 per cent) is much lower than other sectors of the economy like power (9.8 per cent), telecom (13.7 per cent), engineering and construction (18 per cent). RocE in hospitals in india is also lower than those of Europe (about 9 per cent), South africa (about 10 per cent) and South East asia (about 6 per cent).

there is need to augment investment in social infrastructure including education and healthcare in order to help india reap the benefits of the demographic advantage.

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Policy Barometer

in health care, for example, there is need to create an empowered nodal agency for public private partnership (ppp) and expand the scope of the Rashtriya Swasthya Bima yojana (RSBy). Besides, the granting of infrastructure status to healthcare industry is crucial to promote investment in this sector. according to Dr Naresh trehan, chairman, cii National committee on healthcare, “Budget 2012-13 could bring in innovations for eventually ensuring universal access to quality healthcare. Strengthening the models of ppp can lower costs and make healthcare eminently more affordable.”

Similarly, in education and skill development, cii has suggested a Skill Development Bank that would provide exclusive funds for lending to trainees, lending for self-employment by trained persons and lending to skill development institutions. Since finance is a major constraint for both, the institutes and the beneficiaries, an efficient system for credit needs to be devised.

to achieve 8-9 per cent GDp growth, the agriculture sector should also grow at more than 4 per cent to feed the 1.21 billion people of india. cii's comprehensive twenty point agenda could chart the roadmap for reviving the agricultural sector and set in motion the next green revolution.

Rakesh Bharti Mittal chairman, cii agriculture counciland Vice chairman & Managing Director, Bharti Enterprises ltd

public sectors source at least 20 per cent of the input requirements from MSMEs.

to conclude, a holistic approach that would address all sectors is needed in the Budget. this would include modernising agriculture, pushing labour-intensive manufacturing, and boosting health, education and infrastructure – key areas that require capital infusion. cii is also looking forward to greater liberalisation of FDi limits in banking, insurance, retail and aviation, and removal of Mat on SEZs.

the indian economy stands at a crucial juncture in its economic history. the expectations and aspirations of a hopeful population of 1.21 billion rest on responsible governance by all stakeholders, including the government and industry. Budget 2012-13 would be yet another step in helping india achieve its high potential as a nation. n

Budget 2012-13 could bring in innovations for eventually ensuring universal access to quality healthcare. Strengthening the models of public private partnership can lower costs and make healthcare eminently more affordable.

Dr Naresh Trehan chairman, cii National committee on healthcare and chairman & Managing Director, Medanta – the Medicity

Focus on farms

Reforms in the farm sector are of utmost importance if we have to lift our people out of poverty and ensure that the fruits of growth trickle down to the grassroots level. here, cii recommends that the government should increase investment in agri-infrastructure like storage, communication, roads and market on a priority basis through the private ppp model.

the private sector should be incentivised to participate in farm mechanisation, agricultural markets and cold chains. the states should be provided incentives for adopting the model apMc act, while Minimum Support prices (MSp) should be gradually replaced with comprehensive crop insurance scheme. Besides, the Model land leasing act should be introduced. land leasing should be legalised at the state level and land ceiling act should be abolished. Says Rakesh Bharti Mittal, chairman, cii agriculture council, “to achieve 8-9 per cent GDp growth, the agriculture sector should also grow at more than 4 per cent to feed the 1.21 billion people of india. Given the constraints of shrinking land area, soil degradation, declining water resources and technology fatigue, the only way to increase the productivity in the entire agriculture and food supply chain is through modern farming techniques, mechanisation, provision of scientific agricultural inputs and supporting small and medium farmers in agri-extension activities, both pre- and post- harvest practices. cii's comprehensive twenty point agenda could chart the roadmap for reviving the agricultural sector and set in motion the next green revolution.”

Revive SMEs

Small and Medium Enterprises (SMEs) in india play an important role in the economy by contributing around 8 per cent of the GDp, 45 per cent of industrial output, 40 per cent of exports, and employing more than 60 million people to produce over 8000 quality products. the sector, however, is plagued by numerous issues, restricting its potential. cii recommends that to promote synergies between MSMEs and large industries, the latter should be entitled for tax benefits subject to the condition that private and

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the oil & gas sector is critical for india’s energy security as well as for the financial impact it has on the country’s import bill. the government needs to include oil & gas exploration under the definition of infrastructure for attracting large scale investments required in this sector. we have also highlighted the compelling need for including petroleum products under the ambit of GSt.

Vikram Singh Mehtachairman, cii National committee on hydrocarbons and chairman, Shell Group of companies, india

it is expected that in the next five years, 50 per cent of the total investment needs in infrastructure to the tune of about $ 500 billion will come from the private sector. apart from strengthening the existing ppp framework, the coming budget should set in process policies for more efficient ways of land acquisition and the creation of land banks.

Vinayak Chatterjeechairman, cii National task Force on Regulatory Framework in infrastructure and

chairman, Feedback infrastructure Services private ltd.

Even as the country’s power sector witnesses record capacity additions at over 50 Gw in the current Five year plan, urgent policy initiatives are needed to address some of the key issues that are hindering the growth of this sector. we hope the coming Budget will attempt to address the issue of improving the flow of funds by revising the sectoral lending limits of banks for infrastructure segments (including the power sector) in any take-out scheme floated by the government and by relaxation in RBi EcB guidelines for refinance of power projects by increasing the rupee debt percentage and raising the quantum of EcB funds for automatic approval. we urge the Government to usher in distribution reforms and include electricity under the purview of GSt.

the last Budget proposed raising Rs 40,000 crore by way of disinvestments. however, only a small fraction of this target is likely to be achieved mainly due to the bearish market conditions that prevail now. with tax revenues showing limited signs of returning to buoyancy next year, the disinvestment proceeds will be critical in containing fiscal deficit. the government could look at raising about Rs 40,000 crore through this option, a majority of which should be invested in the development of physical infrastructure like highways, ports, airports in smaller cities and rural infrastructure.

G V Sanjay ReddyDeputy chairman, cii (SR) and Vice chairman, GVK industries ltd

Industry Voices

allocation for the social sector for the current year stands at Rs 161,000 crores, having increased by 17 per cent over the previous year. it constitutes 36 per cent of the total plan allocation. however, given the poor utilisation of resources and leakages that exist in many social programmes, there is greater need to increase the utility of expenditure allocated for such programmes by plugging leakages, reducing corruption and adhering to timelines to prevent cost overruns. we hope that Budget 2012-13 will bring into focus the execution and effective implementation of the various social sector programmes that are meant to benefit the bottom of the pyramid.

Anil Sardanachairman, cii National committee on power and Managing Director, the tata power company ltd

Farhad Forbesco-chairman, cii affirmative action council and Director, Forbes Marshall private ltd

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Industry Voices

in view of the deferment of consideration of the Direct taxes code, the Finance Bill, 2012 is expected to carry a large number of amendments to the direct tax laws. at the outset, considering the inflationary trend, there is a strong case for rationalisation of the basic exemption limit and slab rates of taxation. Depreciation rates need to be rationalised for encouraging more investment and goodwill should be specifically included as an eligible intangible asset for amortisation. it is expected that deductions relating to infrastructure development u/s.80-ia shall also be pruned and widened. another area calling for enlargement of the scope of deduction relates to R&D. the benefit of weighted deduction should be allowed for agro based industries, food processing and packaging units, and engineering institutions. to give a fillip to the housing sector, which has considerably

slowed down, the benefit of interest on housing loans and repayment of such loans is expected to be enlarged. the provisions of the Minimum alternate tax require elimination or at least rationalisation by exempting long term capital gains. Removal of the cascading effect of Dividend Distribution tax with reference to multiple layers of holding-subsidiary companies structure, is also expected.

T N Manoharanchairman, cii National task Force on Direct taxes and Director, Mca Management consultants pvt ltd

the current domestic economic scenario, with falling factory output marked by dipping GDp growth, are posing new challenges to indian MSMEs, many of which have been assiduously building up their capabilities to move up the global manufacturing value chain.Viewed against this background, the Union cabinet’s nod for the public procurement policy for Micro and Small Enterprises (MSEs) assumes great significance. cii has strongly advocated for a procurement policy like this, and it is indeed gratifying to see that indian industry has unequivocally supported the policy measure.the procurement policy will deepen the foray of small businesses into key and strategic sectors. although the government is likely to exempt the defence sector from the MSE procurement policy, the SME attention is rightly transfixed on the emerging opportunities in the defence sector, stemming from the offset provisions.Market access is key to the growth of the MSME sector. over the years, global outsourcing has opened up new markets for indian MSME manufacturing firms. they have been supplying a whole range of intermediate goods to global majors. Now, with insourcing gathering pace, domestic MSMEs are seeing fresh growth opportunities.in the midst of these developments, the government announced its plan to open up multi-brand retail to FDi. this decision has been temporarily put on hold but the writing is clearly on the wall. FDi will greatly benefit indian MSMEs in terms of large sourcing, market access, knowledge sharing, and quality improvement.the macro-economic outlook may not seem very promising at this stage but the growth opportunities for MSMEs are emerging from different quarters. to get the best of the situation, indian MSMEs will need to accelerate the adoption of new technologies. ict is central to these enterprises in establishing partnerships with global buyers and suppliers.against this backdrop, formulation of the Budget for the next year will be an immensely challenging task. the Budget will have to endeavour at reviving the growth momentum of the economy by stimulating investments and unshackling the growth potential of the MSMEs.

Ramesh Datlachairman, cii MSME council and Managing Director, Elico ltd

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Factfile

“Global recovery faltered....

Global growth prospects for 2012 have decelerated on account of increasing concerns over the sovereign debt crises in the Euro area and weak growth prospects in the advanced economies

rate) thirteen times. the focus of monetary policy stance during May-october 2011 was on containing and anchoring inflation expectations even if it meant sacrificing growth. however, in view of the slowdown in growth especially investment activity and the moderation in inflation, RBi’s policy stance is signalling a shift towards growth.

Growth in India has moderated....

the combined impact of adverse domestic and global factors has resulted in a slowdown in GDp growth.

the cSo advance Estimates for 2011-12 has revised the GDp growth figures to a three year low of 6.9 percent which reflects a slowdown across major segments of economic activity.

High Inflation impacts demand....

This has slowed down investments and consumption....

consumption demand has also slowed down though the fall is less pronounced as compared to investment demand.

And hurt industrial growth…

the latest industrial production numbers released by the central Statistics office (cSo) show that cumulative growth in industrial production has slowed down to 3.6 during april-December, 2011-12 as against 8.3 per cent over the corresponding period of 2010-11. this is largely on account of the sluggish growth in the manufacturing and mining sectors.

Economic Growth – India Still Facing Headwinds

RBI resorts to monetary tightening to curb inflation....

Between January 2010 and october 2011, the RBi cumulatively raised cRR by 100 basis points and increased the policy rate (Repo

Original Forecast Revised Forecast

4

3.3 3.3

2.5

World BankIMF

Agriculture Manufacturing

2010-11

7.0

2.5

7.6

3.9

9.3 8.46.9

9.4

2011-12

GDP atFactor Cost

Services

Dec-09 Jun-10 Jun-11 Jan-12Dec-10

% change in WPI

Dec-11

7.1

10.29.4 9.5

7.56.55

29 January 2010

Repo Rate in %

4.75%

8.5%

24 Jan 2012

Q1 FY11 Q2 FY11 Q3 FY11 Q4 FY11

ConsumptionInvestment

Q1 FY12 Q2 FY12

9.1 8.5 7.5

7.45.6

5.7

11.110.3

7.8

0.4

7.9

-0.6

Mining Manufacturing

Growth in IIP (April-Dec)

Electricity

2010

-2.7

2011

General

6.9 9

3.9 4.6

8.3

3.6

9.4

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Factfile

Contact usFor suggestions or to advertise with us, contact:

Priya Shirali

Confederation of Indian Industry23, institutional area

lodi Road, New Delhi 110 003tel: 91-11-2462 9994-7Email: [email protected]

Budget numbers so far not encouraging...

the central government’s plans for fiscal correction are under strain due to a combination of slower economic growth and spending overruns.

Receipts

the total receipts of the central government have declined by 14.7 per cent during april-December 2011 over the corresponding period last year. while the net tax revenue increased by 7.5 per cent, non-tax revenue plunged by 59.6 per cent.

• Ontaxrevenue,thelatestfiguresshowthattotaltaxcollectionshave gone up by 14 per cent during april-January 2011-12. a break up shows that indirect tax collections notched up an impressive 15.1 per cent year-on-year growth in the april-January period. at the present rate of growth, our indirect tax target may be achieved as nearly 80.74 per cent of the budget target has been achieved. however, direct tax collections have been below expectations, having achieved a meagre 9.28 per cent growth during april-January 2011-12 or 60 per cent of the budget target.

• On non-tax revenues, the budget for the current fiscal hasproposed raising Rs 40,000 crore by way of disinvestments. however, only a small fraction (Rs.1144 crore as on 31st December, 2011) of this target has been achieved mainly due to the bearish market conditions.

Expenditure

the total expenditure of the government increased by 14 per cent during april-December 2011-12 on year-on-year basis. interest payments alone increased by 83.1 per cent.

a major cause for concern is the rising subsidy bill which has grown at an alarming rate in recent times. Subsidies are estimated to touch Rs. 1.4 lakh crore in the current fiscal and are likely to overshoot the budget target by Rs 1 lakh crore.

Deficit

the excess of expenditure over revenue receipts has led to the burgeoning of fiscal deficit in the current fiscal. a sharp rise in subsidies, combined with a dip in tax and other revenues, is expected to push up the fiscal deficit for the current year to well over 5.5-6 per cent (of GDp), against the Budgetary target of 4.6 per cent (Rs 4.12 lakh crores). the fiscal deficit has reached 92 percent of the budget target during april-December 2011-12 as against 45 percent for the same period last year.

Receipts

50.1

-14.7

136.4

-59.6

54.9

-16.3

-100

-50

0

50

100

150

% YoY Apr-Dec 2010 % YoY Apr-Dec 2011

Revenue receipts

Non Tax Revenue

Total receipts

Expenditure

9.4 12.0

28.7 29.4

11.2 13.9

0

10

20

30

40

% YoY Apr-Dec 2010 % YoY Apr-Dec 2011

Revenue Expenditure Capital Expenditure Total Expenditure

#Estimated

1.22.3 2.2 2.1 2.71629 31 29

37

0

2

4

FY08 FY09 FY10 FY11 FY12#010203040

Budget Subsidies as a percent of GDP

Spend on subsidies as a percent of Taxes

-3.3-2.5

-6.0 -6.4-5.1 -4.6

-8.0

-6.0

-4.0

-2.0

0.0

FY07 FY08 FY09 FY10 FY11 FY12#

Central fiscal deficit as a percentage of GDP

# Targeted

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