E-Survey 2011

CHAPTER

1

1.2 The real turnaround came in the second quarterof 2009-10 when the economy grew by 7.9 per cent.As per the advance estimates of GDP for 2009-10,released by the Central Statistical Organisation(CSO), the economy is expected to grow at 7.2 percent in 2009-10, with the industrial and the servicesectors growing at 8.2 and 8.7 per cent respectively.This recovery is impressive for at least three reasons.First, it has come about despite a decline of 0.2 percent in agricultural output, which was theconsequence of sub-normal monsoons. Second, itforeshadows renewed momentum in themanufacturing sector, which had seen continuousdecline in the growth rate for almost eight quarterssince 2007-08. Indeed, manufacturing growth hasmore than doubled from 3.2 per cent in 2008-09 to8.9 per cent in 2009-10. Third, there has been arecovery in the growth rate of gross fixed capitalformation, which had declined significantly in 2008-09

as per the revised National Accounts Statistics(NAS). While the growth rates of private andGovernment final consumption expenditure havedipped in private consumption demand, there hasbeen a pick-up in the growth of private investmentdemand. There has also been a turnaround inmerchandise export growth in November 2009, whichhas been sustained in December 2009, after adecline nearly twelve continuous months.

1.3 The fast-paced recovery of the economyunderscores the effectiveness of the policy responseof the Government in the wake of the financial crisis.Moreover, the broad- based nature of the recoverycreates scope for a gradual rollback, in due course,of some of the measures undertaken over the lastfifteen to eighteen months, as part of the policyresponse to the global slowdown, so as to put theeconomy back on to the growth path of 9 per centper annum.

The fiscal year 2009-10 began as a difficult one. There was a significant slowdownin the growth rate in the second half of 2008-09, following the financial crisis thatbegan in the industrialized nations in 2007 and spread to the real economy acrossthe world. The growth rate of the gross domestic product (GDP) in 2008-09 was6.7 per cent, with growth in the last two quarters hovering around 6 per cent. Therewas apprehension that this trend would persist for some time, as the full impact ofthe economic slowdown in the developed world worked through the system. It wasalso a year of reckoning for the policymakers, who had taken a calculated risk inproviding substantial fiscal expansion to counter the negative fallout of the globalslowdown. Inevitably, India’s fiscal deficit increased from the end of 2007-08, reaching6.8 per cent (budget estimate, BE) of GDP in 2009-10. A delayed and severely sub-normal monsoon added to the overall uncertainty. The continued recession in thedeveloped world, for the better part of 2009-10, meant a sluggish export recoveryand a slowdown in financial flows into the economy. Yet, over the span of the year,the economy posted a remarkable recovery, not only in terms of overall growthfigures but, more importantly, in terms of certain fundamentals, which justifyoptimism for the Indian economy in the medium to long term.

State of the Economyand Prospects

2 Economic Survey 2009-10

Key indicators

Data categories and components Units 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

1 GDP and Related IndicatorsGDP (current market prices) Rs crore 3239224 3706473 4283979 4947857 5574449QE 6164178 A E

Growth Rate % … 14.4 15.6 15.5 12.7 10.6GDP (factor cost 2004-05 prices) Rs crore 2967599 3249130 3564627 3893457 4154973QE 4453064 A E

Growth Rate % 9.5 9.7 9.2 6.7 7.2Savings Rate % of GDP 32.2 33.1 34.4 36.4 32.5 naCapital Formation (rate) % of GDP 32.7 34.3 35.5 37.7 34.9 naPer Cap. Net National Income(factor cost at current prices) Rs 24095 27183 31080 35430 40141 43749

2 ProductionFoodgrains Mn tonnes 198.4 208.6 217.3 230.8 233.9 a naIndex of Industrial Production(growth) Per cent 8.4 8.2 11.6 8.5 2.6 naElectricity Generation(growth) Per cent 5.1 5.2 7.3 6.3 2.7 na

3 PricesInflation (WPI) (52-week average) %change 6.5 4.4 5.4 4.7 8.4 1.6 b

Inflation CPI (IW) (average) %change 3.8 4.4 6.7 6.2 9.1 11.4 b

4 External SectorExport Growth ( US$) %change 30.8 23.4 22.6 29.0 13.6 -20.3 c

Import Growth (US$) %change 42.7 33.8 24.5 35.5 20.7 -23.6 c

Current Account Balance (CAB)/GDP Per cent -0.4 -1.2 -1.0 -1.3 -2.4 -3.3 d

Foreign Exchange Reserves Us$ Bn. 141.5 151.6 199.2 309.7 252 283.5 e

Average Exchange Rate Rs/ US$ 44.93 44.27 45.25 40.26 45.99 47.94 f

5 Money and CreditBroad Money (M3) (annual) %change 12.0 16.9 21.7 21.4 18.6 16.5 g

SCheduled Commercial Bank Credit(growth) %change 27.0 30.8 28.1 22.3 17.5 13.9 g

6 Fiscal Indicators (Centre)Gross Fiscal Deficiti % of GDP 3.9 4.0 3.3 2.6 5.9 h 6.5 j

Revenue Deficiti % of GDP 2.4 2.5 1.9 1.1 4.4 h 4.6 j

Primary Deficiti % of GDP 0.0 0.4 -0.2 -0.9 2.5 h 2.8 j

7 Population Million 1089 1106 1122 1138 1154 1170

A E GDP figures for 2009-10 are advance estimates; QE quick estimatesna not yet available / released for 2009-10a for 2008-09 the figures are the 4th advance estimates as on July 21, 2009.b Average Apr.-Dec. 2009.c Apr.-Dec. 2009.d CAB to GDP ratio for 2009-10 is for the period Apr.-Sept. 2009e as of December 31, 2009f Average exchange rate for 2009-10 (Apr.-Dec. 2009).g As on January 15, 2010.h fiscal indicators for 2008-09 are based on the provisional actuals for 2008-09.i fiscal indicators are as per revised GDP at current market prices based on National Accounts 2004-05 series.j fiscal deficit, revenue deficit and primary deficit were envisaged at 6.8, 4.8 and 3.0 per cent of GDP respectively at the

time of presentation of the 2009-10 Budget.

3State of the Economy and Prospects

Table 1.1 : Rate of growth at factor cost at 2004-2005 prices (per cent)

2005-06 2006-07 2007-08 2008-09 2009-10

Agriculture, Forestry & Fishing 5.2 3.7 4.7 1.6 -0.2Mining & Quarrying 1.3 8.7 3.9 1.6 8.7Manufacturing 9.6 14.9 10.3 3.2 8.9Electricity, Gas & Water Supply 6.6 10.0 8.5 3.9 8.2Construction 12.4 10.6 10.0 5.9 6.5Trade, Hotels & Restaurants 12.4 11.2 9.5 5.3 8.3*Transport, Storage & Communication 11.5 12.6 13.0 11.6 Financing, Insurance, Real Estate & Business Services 12.8 14.5 13.2 10.1 9.9Community, Social & Personal Services 7.6 2.6 6.7 13.9 8.2GDP at Factor Cost 9.5 9.7 9.2 6.7 7.2

Source : CSO.* Transport & communication included for 2009-10 in trade, hotels and restaurants.

1.4 A major concern during the year 2009-10,especially in the second half, was the emergence ofhigh double-digit food inflation. On a year-on-yearbasis, wholesale price index (WPI) headline inflationin December 2009 was 7.3 per cent but for food items(primary and manufactured) with a combined weightof 25.4 per cent in the WPI basket, it was 19.8 percent. Thus, unlike the first half of 2008-09 when globalcost-push factors resulted in WPI inflation touchingnearly 13 per cent in August 2008, with inflation inprimary and manufactured products just below theoverall average and that in the fuel and power groupat over 17 per cent, the upsurge in prices in thesecond half of 2009-10 has been more concentratedand confined to food items only. As of the weekending January 30, 2010 the inflation in primary foodarticles stood at 17.9 per cent, and that in fuel, powerlight and lubricants at 10.4 per cent. A significantpart of this inflation can be explained by supply-sidebottlenecks in some of the essential commodities,precipitated by the delayed and sub-normal south-west monsoons. Since December 2009, there havebeen signs of these high food prices, together withthe gradual hardening of non-administered fuelproduct prices, getting transmitted to other non-fooditems, thus creating some concerns about higher-than-anticipated generalized inflation over the nextfew months.

1.5 At global level, following one of the deepestdownturns in recent times, economic growth tookroot and extended to advanced economies in thesecond half of 2009. The pace and shape of recovery,however, remains uncertain. The InternationalMonetary Fund’s (IMF) World Economic Outlookupdate of January 26, 2010 suggests that followinga sharp decline of 3.2 per cent in 2009, output in theadvanced economies has begun to expand since

the second half of 2009 and is now expected to growby 2.1 per cent in 2010. In the case of emerging anddeveloping economies, the modest 2.1 per centoutput growth in 2009 is expected to be followed bya rise of about 6 per cent in 2010. For the world as awhole an output decline of 0.8 per cent in 2009 isprojected to turn into a growth of 3.9 per cent in2010. The rapid rebound in world output has beendriven by the extraordinary amount of policy stimulus,monetary as well as fiscal. The concern about therecovery losing momentum, once the stimulus iswithdrawn, remains. High unemployment rates,growing fiscal deficit and contraction of credit toproductive sectors are areas of concern for thedeveloped economies. For the emerging economies,which are already on the path to recovery, there arechallenges emanating from increased capital flowswith ramifications for monetary growth, inflation andexchange rate uncertainty, along with policyimplications for the capital account.

ECONOMIC GROWTH DURING 2009-10Overall GDP growth1.6 With the release of the Quick Estimates ofNational Income for 2008-09, the CSO has effected arevision in the base year of its NAS from 1999-2000to 2004-05. It includes changes on account of certainrefinements in definitions of some aggregates,widening of coverage, inclusion of long-term surveyresults and the normal revision in certain data inrespect of 2008-09. While there are no major changesin the overall growth rate of GDP at constant 2004-05 prices, except for 2007-08 where it has beenrevised upward from 9.0 to 9.2 per cent, there aresome changes in growth rates at sectoral level andin the level estimates of GDP. Thus, for instance,


5

Growth rate

Quarterly growth rates at constant 2004-05 prices

6

7

8

Figure 1.1

Per

cent

3-quartermovingaverage

Year2006-07 2007-08 2008-09 2009-10

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2005-06

9

10

11

2010-11

the contribution of the agriculture sector to the GDPat factor cost in 2004-05 has declined from 17.4 percent in the old series to 15.9 per cent in the newseries. Similarly, while the contribution of registeredmanufacturing has declined from 10.9 per cent inthe old series to 9.9 per cent in the new series, thatof unregistered manufacturing has increased from4.9 to 5.4 per cent. There is also an increase in thecontribution of real estate, ownership of dwellingsand business services from 8.2 per cent to 8.9 percent. In the case of level estimates of GDP at currentprices, the difference ranges from 3.1 per cent in2004-05 to 6 per cent in 2008-09. As a result, thereare also changes in the expenditure estimates ofthe GDP, which, as can be seen in the followingparagraphs, has altered the analysis related to theimpact of the global slowdown on the Indian economyas presented in the Economic Survey 2008-09.

1.7 The advance estimate of GDP growth at7.2 per cent for 2009-10, falls within the range of7 +/- 0.75 projected nearly a year ago in theEconomic Survey 2008-09. With the downside riskto growth due to the delayed and sub-normalmonsoons having been contained to a large extent,through the likelihood of a better-than-average rabiagricultural season, the economy has respondedwell to the policy measures undertaken in the wakeof the global financial crisis. While the GDP at factorcosts at constant 2004-05 prices, is placed at Rs44,53,064 crore, the GDP at market prices, atconstant prices, is estimated at Rs 47, 67,142 crore.The corresponding figures at current prices areRs 57,91,268 crore and Rs 61, 64,178 crorerespectively. It is worthwhile to note here that the

growth rates of GDP at market prices, at constant2004-05 prices, in 2008-09 and 2009-10 at 5.1 percent and 6.8 per cent have been considerably lowerthan the growth rates of GDP at factor cost. This isdue to the significant decline in net indirect taxes(i.e. indirect taxes minus subsidies) in the said yearson account of the fiscal stimulus implemented bythe Government, which included tax relief to boostdemand and increase in the expenditure onsubsidies.

1.8 The recovery in GDP growth for 2009-10, asindicated in the advance estimates, is broad based.Seven out of eight sectors/sub-sectors show a growthrate of 6.5 per cent or higher. The exception, asanticipated, is agriculture and allied sectors wherethe growth rate is estimated to be minus 0.2 percent over 2008-09. Sectors including mining andquarrying; manufacturing; and electricity, gas andwater supply have significantly improved their growthrates at over 8 per cent in comparison with 2008-09.The construction sector and trade, hotels, transportand communication have also improved their growthrates over the preceding year, though to a lesserextent. However, the growth rate of community,social and personal services has declinedsignificantly, though it continues to be around itspre-global crisis medium-term trend growth rate.Financing, insurance, real estate and businessservices have retained their growth momentum ataround 10 per cent in 2009-10. In terms of sectoralshares, the share of agriculture and allied sectors inGDP at factor cost has declined gradually from 18.9per cent in 2004-05 to 14.6 per cent in 2009-10.During the same period, the share of industry has


remained the same at about 28 per cent, whilethat of services has gone up from 53.2 per cent in2004-05 to 57.2 per cent in 2009-10.

Quarterly trend1.9 As per the revised quarterly GDP data onthe new series of NAS, it now turns out that theGDP growth rate for Q3 2008-09 was 6.2 per centas against 5.8 per cent on the old series. Thusthe growth rates in the three quarters followingthe flare-up of the global financial crisis inSeptember 2008, were 6.2, 5.8 and 6.1 per cent.As anticipated in the Economic Survey 2008-09,the economy exhibited a sharp ‘V’-shapedrecovery within a span of a few months of thestimulus measures, both fiscal and monetary,working through the system. The turnaround inthe growth momentum was confirmed with the Q22009-10 estimates, when the economy recordeda GDP growth of 7.9 per cent as against 7.5 percent in the corresponding quarter of 2008-09. Therecovery was broad based with mining andquarrying; manufacturing; and electricity, gas andwater supply recording impressive growth rates.Understandably, as a consequence of thecontinued fiscal expansion, and in particular withthe release of 60 per cent of the Sixth PayCommission arrears in September 2009,community, social and personal services recordeda significant pick-up in growth. The partial dataavailable since Q2 estimates on industrial growth,agriculture, as well as exports indicate the

continued momentum in the recovery, which isreflected in the advance estimates for 2009-10.

Per capita growth1.10 The growth rates in per capita income andconsumption, which are gross measures of welfarein general, have declined in the last two years. Thisis a reflection of the slowdown in the overall GDPgrowth. While the growth in per capita income,measured in terms of GDP at constant market prices,has declined from a high of 8.1 per cent in 2007-08to 3.7 per cent in 2008-09 and then recovered to 5.3per cent in 2009-10, per capita consumption growthas captured in the private final consumptionexpenditure (PFCE) shows a declining trend since2007-08 with its growth rate in 2009-10 falling to one-third of that in 2007-08 (Table 1.3). The growth rate

Table 1.2 : Quarterly growth rates of GDP at constant 2004-05 prices

Sectors 2007-08 2008-09 2009-10 AN Q1 Q2 Q3 Q4 AN Q1 Q2 Q3 Q4 AN Q1 Q2

Agriculture, Forestry 4.7 3.1 3.9 8.7 2.1 1.6 3.2 2.4 -1.4 3.3 -0.2 2.4 0.9& Fishing

Mining & Quarrying 3.9 1.1 4.6 4.5 5.1 1.6 2.6 1.6 2.8 -0.3 8.7 7.9 9.5Manufacturing 10.3 12.1 10.3 10.7 8.3 3.2 5.9 5.5 1.3 0.6 8.9 3.4 9.2Elec., Gas & Water Supply 8.5 10.2 9.1 7.1 7.8 3.9 3.3 4.3 4.0 4.1 8.2 6.2 7.4Construction 10.0 10.7 13.1 9.6 7.1 5.9 7.1 8.0 3.0 5.6 6.5 7.1 6.5Trade, Hotels, Transport 10.7 11.9 9.5 10.7 10.9 7.6 10.8 10.0 4.4 5.7 8.3 8.1 8.5

and CommunicationFinancing, Insurance, 13.2 14.0 13.8 13.3 11.9 10.1 9.1 8.5 10.2 12.3 9.9 8.1 7.7

Real Estate & BusinessServices

Community, Social & 6.7 4.2 7.0 5.3 9.8 13.9 8.7 10.4 28.7 8.8 8.2 6.8 12.7Personal Services

GDP at Factor Cost 9.2 9.3 9.4 9.7 8.5 6.7 7.6 7.5 6.2 5.8 7.2 6.1 7.9

Table 1.3 : Per capita income andconsumption at 2004-05 prices

Income Consumption

Rs (%) Rs (%)Growth Growth

2004-05 29,745 17,620 2005-06 32,012 7.6 18,909 7.32006-07 34,533 7.9 20,168 6.72007-08 37,328 8.1 21,841 8.32008-09 38,695 3.7 23,012 5.42009-10 40,745 5.3 23,626 2.7

Source: CSO.Note : Income is taken as GDP at market prices,Consumption is PFCE.


Table 1.4 : Demand side growth of GDP, growth contribution and relative share at2004-05 market prices (per cent)

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

GDP at Market Prices 9.3 9.4 9.6 5.1 6.8Consumption (Private) 9.0 8.2 9.8 6.8 4.1Consumption (Govt) 8.3 3.8 9.7 16.7 8.2Gross Capital Formation 14.7 14.5 16.9 -4.0 naGross Fixed Capital Formation 15.3 14.3 15.2 4.0 5.2Change in Stocks 24.8 35.0 15.1 -61.2 4.7Exports 25.9 21.8 5.2 19.3 -15.8Imports 32.5 22.0 10.0 23.0 -17.2 Contribution to Growth Consumption (Private) 57.3 51.3 59.7 78.2 36.0Consumption (Govt) 9.8 4.4 10.4 33.6 13.9Gross Capital Formation 51.4 52.6 62.7 -29.6 naGross Fixed Capital Formation 47.3 46.1 50.1 25.8 25.5Net Exports -18.6 -8.0 -15.0 -36.2 20.4 Relative ShareConsumption (Private) 59.2 59.1 58.4 58.5 59.5 58.0Consumption (Govt) 11.0 10.9 10.3 10.3 11.5 11.6Gross Capital Formation 32.7 34.2 35.8 38.2 34.9 naGross Fixed Capital Formation 28.8 30.3 31.7 33.3 32.9 32.5

Source: CSO.Note: Does not add to 100 because only major items are included in the table. Figures for 2009-10 are based onadvance estimates.

of per capita consumption was lower than that of percapita income up to 2007-08; however since then itwas higher in two years and became lower again in2009-10. The average growth in per capitaconsumption over the period 2005-06 to 2009-10 wasslower at 6.08 per cent than that in per capita incomeat 6.52 per cent. These year to year differences ingrowth rates can be explained by the rising savingsrate and also the rise in tax collections that havebeen observed in some of these years.

Aggregate demand and its composition1.11 The change in the NAS series from the oldbase of 1999-2000 to the new base of 2004-05 hasbrought about significant revision in the expenditureestimates of the GDP for 2008-09. While growth ofthe PFCE in 2008-09 was revised upward from 2.9per cent to 6.8 per cent, growth in Government finalconsumption expenditure was revised downwardsfrom over 20 per cent in 2008-09 on the old base to16.7 per cent on the new base. In 2009-10 a growthof 4.1 per cent is expected in private final expenditureand 8.2 per cent in Government final expenditure.There is therefore a significant decline in the growth

of consumption expenditure in 2009-10. However,the overall share of consumption expenditure, bothprivate as well as Government in GDP at marketprices, at constant 2004-05 prices, has declined onlymarginally from 70.9 per cent in 2008-09 to 69.6 percent in 2009-10 (Table 1.4).

1.12 At the same time, the growth rate of grossfixed capital formation in 2008-09 has also undergonea revision due to the change in the NAS base year.It was revised downward from 8.2 per cent in theearlier base to 4 per cent in the revised base for2008-09. It is, however, estimated to grow by 5.2 percent in 2009-10. Moreover, gross capital formationadjusted shows a negative 4 per cent growth in2008-09 in the new NAS base. This is because of asignificant decline in inventories (change in stocks)from Rs1,08,739 crore in the old base to Rs 59,812crore in the new base. The share of gross fixedcapital formation in GDP remains nearly the sameat 32.5 per cent in 2009-10 and 32.9 per cent in2008-09.

1.13 Thus it now appears that moderation in thedecline in GDP growth rate, in the second half of


Table 1.5 : Private final consumption : Annual growth and share at 2004-05 prices

2004-05 2005-06 2006-07 2007-08 2008-09

Annual Growth (per cent)Food, Beverages & Tobacco 7.5 3.8 7.2 2.7Clothing & Footwear 24.0 23.2 8.1 -0.6Gross Rent, Fuel & Power 3.4 4.0 4.8 3.4Furniture, Furnishings Etc. 14.1 15.9 14.6 3.7Medical Care & Health Services 5.8 4.5 2.5 8.1Transport & Communication 5.0 7.6 8.8 12.3Recreation, Education & Cultural Services 8.9 7.0 13.2 5.4Miscellaneous Goods & Services 15.9 21.2 25.6 19.3Total Private Consumption 8.6 8.3 9.6 6.8

Share of Total (per cent)Food, Beverages & Tobacco 39.6 39.2 37.6 36.8 35.3Clothing & Footwear 6.6 7.6 8.6 8.5 7.9Gross Rent, Fuel & Power 13.0 12.4 11.9 11.4 11.0Furniture, Furnishings, etc. 3.4 3.5 3.8 4.0 3.9Medical Care & Health Services 5.0 4.8 4.7 4.4 4.4Transport & Communication 19.6 19.0 18.9 18.7 19.7Recreation, Education & Cultural Services 3.4 3.4 3.4 3.5 3.4Miscellaneous Goods & Services 9.4 10.0 11.2 12.8 14.4

Total Private Consumption 100.0 100.0 100.0 100.0 100.0Source: CSO.

2008-09, was primarily a result of the boost providedby the fiscal stimulus to consumption demand, bothprivate as well as Government, rather than thecontinued buoyancy in investment growth, asindicated in the Economic Survey 2008-09. This infact was the intended purpose of the fiscal stimulus,which was not captured by the earlier NAS data. Itimplies that expansion in investments in themanufacturing sector may have declined a lot fasterand, perhaps, earlier than the estimates for 2008-09suggested in May 2009. This is, for example,reflected in the data on contribution to growth (Table1.4), where the contribution of consumption, privateas well as Government, to growth saw a steep risein 2008-09 while that of gross capital formationdeclined. Further, though the growth in gross fixedcapital formation (a proxy for investment growth) in2009-10 has recovered to 5.2 per cent from 4 percent in 2008-09, it is still below the GDP growth rateunlike in the pre-global crisis phase. This makes itnecessary, therefore, to watch the growth recoveryin private investment in the third and fourth quarters,in sequencing the rollback of the stimulus measures.Moreover, the contribution of net exports has becomepositive in 2009-10, after a considerable period oftime. It may again turn negative as the demand forimports increases with a deepening of industrialrecovery and a pick-up in domestic demand.

1.14 With growth in private expenditure on food,beverages and tobacco falling behind the overallgrowth in private consumption expenditure, the shareof expenditure on food items has gradually beendeclining over the years. As per the CSO data, itwas 35.3 per cent in 2008-09 as against 39.6 percent in 2004-05. At the same time, the growth inexpenditure on transport and communication andmiscellaneous goods and services has beenincreasing, though with occasional aberrations, withthe result that together they account for nearly thesame share in total private consumption as theexpenditure on food items.

PRODUCTION AND SUPPLY

Agriculture1.15 Total foodgrains production in 2008-09 wasestimated at 233.88 million tonnes as against 230.78million tonnes in 2007-08 and 217.28 million tonnesin 2006-07. In the agricultural season 2009-10, theimpact of the delayed and sub-normal monsoon isreflected in the production and acreage data for kharifcrops. As per the first advance estimates, coveringonly the kharif crop, production of foodgrains isestimated at 98.83 million tonnes in 2009-10, asagainst the fourth advance estimates of 117.70 million


tonnes for the kharif crop in 2008-09 and a target of125.15 million tonnes for 2009-10. Overall productionof kharif cereals in 2009-10 has shown a decline of18.51 million tonnes over 2008-09. Both for rice andcoarse cereals, there has been a shortfall ascompared to the targeted production and also theproduction level achieved in the previous year. In thecase of rice the decline is about 15 per cent over the2008-09 level and 17 per cent in comparison withthe target for 2009-10. The decline in kharif coarsecereals in 2009-10 in comparison with 2008-09 isnearly 20 per cent and the shortfall with respect tothe target for kharif 2009-10 is nearly 10 milliontonnes. Total production of kharif pulses is estimatedat 4.42 million tonnes in 2009-10, which is 8 percent lower than the production during 2008-09 and32 per cent lower than the targeted production for2009-10. Similarly, total kharif production of the nineoilseeds in 2009-10 is about 15 per cent lower thanthe kharif production in 2008-09.

1.16 Sugarcane production in 2009-10 is estimatedat 249.48 million tonnes, which is 9 per cent lowerthan the previous year and 27 per cent lower thanthe targeted production for 2009-10. Cottonproduction in 2009-10 is estimated at 236.57 lakhbales (of 170 kg each), which is higher than the fourthadvance estimates of 231.56 lakh bales in 2008-09by 2.2 per cent. However, it is lower than the targetset for 2009-10 by 9 per cent.

1.17 In terms of acreage, the kharif 2009-10 seasonsaw a decline of nearly 6.5 per cent or 46.18 lakh hain the area covered under foodgrains. Almost theentire decline in this acreage was confined to thekharif rice crop. While the decline in kharif acreageunder pulses was 5.63 per cent, the area under thenine oilseeds declined by 5.14 lakh ha. Some ofthis decline in acreage may have been made up bythe increased acreage in the rabi season. As perthe available estimates, wheat, pulses and groundnut

have seen an increase in acreage as compared tolast year.

1.18 During the south-west monsoon of 2009, thecountry as a whole received 23 per cent less rainfallas compared to the long period average (LPA). CentralIndia, north-east India, north-west India and thesouthern peninsula experienced 20 per cent, 27 percent, 36 per cent and 4 per cent deficient rainfallrespectively. At district level, 9 per cent of the districtsin the country received excess rainfall, 32 per centnormal rainfall, 51 per cent deficient rainfall and8 per cent scanty rainfall. Monsoon rainfall over thecountry as a whole was 53 per cent of the LPA duringJune, 96 per cent during July, 73 per cent in Augustand 79 per cent during September. Some of thisshortfall was made up during the post-monsoonseason (October-December) of 2009, when thecountry as a whole received 8 per cent excessrainfall.

1.19 The total designed storage capacity at fullreservoir level (FRL) of 81 major reservoirs in thecountry monitored by the Central Water Commissionis 151.77 billion cubic metres (BCM). At the end ofmonsoon 2009, total water availability in the reservoirswas 90.48 BCM, which is less than the wateravailability of 113.74 BCM at the end of monsoon2008 and the average of 100.95 BCM for the last 10years.

Industry and Infrastructure

1.20 The cyclical slowdown in the industrial sectorwhich began in 2007-08 got compounded by theglobal commodity price shock and the impact of theglobal slowdown during the course of calendar year2008 was arrested at the beginning of 2009-10. Afterthe first two months of the current fiscal, there wereclear signs of recovery. This is evident from the NASdata as well as the index of industrial production

Table 1.6 : Production of selected kharif crops(million tonnes)

2007-08(4th 2008-09 (4th 2009-10 (1st Difference betweenadvance advance advance 2009-10 and 2007-08

estimates) estimates) estimates)

Coarse Cereals 31.89 28.34 22.76 -9.13 Cereals 114.55 112.92 94.41 -20.14Pulses 6.40 4.78 4.42 -1.98Foodgrains 120.95 117.70 98.83 -22.12Oilseeds 20.71 17.88 15.23 -5.48


(IIP). While the CSO’s advance estimates placeindustrial-sector growth at 8.2 per cent, as against3.9 per cent in 2008-09, the IIP industrial growth isestimated at 7.7 per cent for the period April-November 2009-10, significantly up from 0.6 per centduring the second half of 2008-09. The manufacturingsector, in particular, has grown at the rate of 8.9 percent in 2009-10.

1.21 Growth in the major industrial groups has beena mixed bag. There was strong growth inautomobiles, rubber and plastic products, wool andsilk textiles, wood products, chemicals andmiscellaneous manufacturing; modest growth in non-metallic mineral products; no growth in paper, leather,food and jute textiles; and a slump in beverages andtobacco products in 2009-10. In terms of use-basedclassification, there was strong growth in consumerdurables and intermediate goods (partly aided bythe base effect); moderate growth in basic and capitalgoods; and sharp deceleration in consumer non-durables.

1.22 The improvement in the cost structure ofmanufacturing companies seems to have catalysedthe recovery. As the data on gross capital formationare available with a considerable lag, the investmentpicture is not yet clear. Growth in the production ofcapital goods, a proxy for investment, is improving,but different components of the “capital goods” groupreflect a mixed picture during the current year. Thestrength of the recovery so far has been helped bythe favourable base effect and mild inflation inmanufacturing articles, especially of industrial inputs.The declining trend in the number of mandays lostbecause of strikes and lockouts witnessed in recentyears has continued in 2009-10.

1.23 Core industries and infrastructure services,led by the robust growth momentum of telecomservices and spread across power, coal and otherinfrastructure like ports, civil aviation and roads, havealso shown signs of recovery in 2009-10. In thecurrent fiscal, electricity generation emerged fromthe lacklustre growth witnessed in the previous yearand equalled its performance in 2007-08. That thiswas achieved despite constraints imposed by theinadequate availability of coal and the dismal hydel-generation scenario due to the sub-normal monsoon,attests well to its potential. During April-December2009, the peak deficit and total energy deficit camedown considerably to 12.6 per cent and 9.8 per centrespectively from 13.8 per cent and 10.9 per centduring the corresponding period of the previous year.

This happened mainly due to the increase in thegrowth in electricity generation. The availability ofgas from the KG basin (D6) and surplus utilizationof gas available on fallback basis resulted in betterutilization of capacity and higher plant load factor(PLF) as also high growth in electricity generatedfrom gas-based plants. The overall PLF also improvedduring April-December 2009.

1.24 The domestic supply of crude oil remainedaround 34 million metric tonnes (mmt) and naturalgas at about 32 billion cubic metric tonnes duringthe past five years. With 15 new oil and gasdiscoveries during 2009-10, the domestic availabilityis expected to improve. During 2009-10, the projectedproduction for crude oil is 36.7 mmt, which is about11 per cent higher than the actual crude oil productionof 33.5 mmt in 2008-09.

1.25 Better resource management, throughincreased wagon load, faster turnaround time and amore rational pricing policy, led to perceptibleimprovement in the performance of the railways.There has been no across-the-board increase infreight rates in recent years. Railways have taken anumber of steps to attract additional traffic, one ofwhich is the dynamic pricing policy through whichdifferential tariff is charged to take care of skeweddemand during different periods of the year andbetween different regions. A new class of non-stopsuper fast passenger-carrying “Duronto” trains hasbeen introduced in September 2009. Seven Durontotrains have already been launched.

1.26 In 2009-10, as against the stipulated target ofdeveloping about a 3,165 km of national highwaysunder various phases of the National HighwayDevelopment Project (NHDP), the achievement upto end November 2009 has been about 1,490 km.Similarly, as against the 2009-10 target of about 9,800km for awarding projects under various phases ofthe NHDP, projects totalling a length of about 1,285km have been awarded up to end November 2009.

1.27 The opening of the telecom sector has notonly led to rapid growth in subscriber base, but hasalso significantly helped in maximization of consumerbenefits, particularly in terms of price discovery,following the forbearance approach in tariffs. Fromonly 54.6 million telephone subscribers in 2003, thenumber increased to 429.7 million at the end of March2009 and further to 562 million as of October 31,2009 showing an addition of 96 million subscribersduring the period from March to December 2009.


Service Sector

1.28 The service sector which has been India’sworkhorse for well over a decade has continued togrow rapidly. Following the NAS classification, itcomprises the sub-sectors trade, hotels, transportand communications; financing, insurance, realestate and business services; and community, socialand personal services. As against a growth of 9.8per cent in 2008-09 it grew at 8.7 per cent in 2009-10. While there has been a significant dip in thegrowth of community social and personal servicesin 2009-10, the other sub-sectors have either retainedtheir growth momentum or improved upon it. Acomparison between the old and the new series ofNAS reveals considerable difference in the levelestimates of the value added of service sub-sectorsto GDP at current prices. Thus, for instance, therehas been a decline, ranging from around 8 per centin 2004-05 to 30 per cent in 2008-09, in thecommunication sub-sector. This has been partlyoffset by the increase in the level estimates of valueadded in real estate, ownership of dwellings, businessand legal services, ranging from 11.6 per cent in2004-05 to nearly 34.4 per cent in 2008-09.

Savings and investmentsGross domestic savings

1.29 Gross domestic savings (GDS) at currentprices in 2008-09 were estimated at Rs 18,11,585crore, amounting to 32.5 per cent of GDP at market

Sectoral share in domesticsaving 2008-09

Figure 1.2

Privatecorporate sector

26%

Public sector4%

Household sector70%

Table 1.7 : Ratio of savings and investment to GDP

(Per cent at current market prices)

2004-05 2005-06 2006-07 2007-08 2008-09

Gross Domestic Saving 32.2 33.1 34.4 36.4 32.5 Public Sector 2.3 2.4 3.6 5.0 1.4 Private Sector 29.9 30.7 30.9 31.4 31.1 Household Sector 23.3 23.2 22.9 22.6 22.6 Financial Saving 9.8 11.4 10.9 11.2 10.4 Saving in Physical Assets 13.5 11.8 11.9 11.5 12.2 Private Corporate Sector 6.6 7.5 8.0 8.7 8.4 Gross Capital Formation (Investment) 32.7 34.3 35.5 37.7 34.9 Public Sector 7.4 7.9 8.4 8.9 9.4 Private Sector 23.8 25.3 26.4 27.6 24.9 Corporate Sector 10.3 13.5 14.5 16.1 12.7 Household Sector 13.5 11.8 11.9 11.5 12.2Gross fixed Capital Formation 28.8 30.4 31.4 33.0 33.0Stocks 2.5 2.8 3.4 3.5 1.3Valuables 1.3 1.1 1.2 1.1 1.3Saving-investment Gap Public Sector -5.1 -5.5 -4.8 -3.9 -8.0 Private Sector 6.1 5.4 4.4 3.8 6.2

Source: CSO.Note: Totals may not tally due to adjustment for errors and omissions.


prices as against 36.4 per cent in the previous year.The fall in the rate of GDS has mainly been due tothe fall in the rates of savings of the public sector(from 5.0 per cent in 2007-08 to 1.4 per cent in2008-09) and private corporate sector (from 8.7 percent in 2007-08 to 8.4 per cent in 2008-09). In respectof the household sector, the rate of saving hasremained at the same level of 22.6 per cent in2007-08 and 2008-09. Indeed, the change in the NASseries has had the most conspicuous effect on thesavings and investment rates. The rate of GDS onthe new series increased from 32.2 per cent in2004-05 to 36.4 per cent in 2007-08 before decliningto 32.5 per cent in 2009-10, as against the old serieswhere it rose from 31.7 per cent in 2004-05 to37.7 per cent in 2007-08. Thus, from 2005-06 to2007-08, the GDS rate was overestimated in the NASold series by an average of 1.3 per cent. Definitionalrefinements, better estimates of savings and a higherdenominator due to an increase in the level estimatesof GDP have contributed to the lowering of the rateof GDS in the new NAS series.

Capital formation1.30 Gross domestic capital formation(GDCF) atcurrent prices (adjusted for errors and omissions)increased from Rs18,65,899 crore in 2007-08 toRs19,44,328 crore in 2008-09 and at constant (2004-05)prices, it decreased from Rs16,22,226 crore in 2007-08 to Rs15,57,757 crore in 2008-09. The rate of grosscapital formation at current prices rose from 32.7per cent in 2004-05 to 37.7 per cent in 2007-08 beforedeclining to 34.9 per cent in 2008-09.

1.31 At sectoral level, the rate of gross capitalformation or simply the investment rate has increasedin both the public and private sectors. In the formerit rose continuously from 7.4 per cent in 2004-05 to9.4 per cent in 2008-09, whereas in the latter, itincreased from 23.8 per cent in 2004-05 to 27.6 percent in 2007-08 before falling to 24.9 per cent in2008-09. Between 2007-08 and 2008-09, theinvestment rate for the private corporate sectordeclined significantly from 16.1 per cent to 12.7 percent, whereas that of the household sector increasedfrom 11.5 to 12.2 per cent.

1.32 The sectoral savings-investment gap,reflecting the gap between gross domestic savingsand gross capital formation of a sector, declinedsignificantly for the public sector as its savingsincreased until 2007-08. However, with a sudden dropin its savings rate by nearly 4 percentage points in2008-09, this gap shot to a negative 8 per cent. Inthe case of the private corporate sector, the savings-investment gap has been consistently positive andhas risen in 2008-09 to 6.2 per cent after falling to 3.8per cent in 2007-08 from 6.1 per cent in 2004-05.

Sectoral investment

1.33 The sectoral investment rate is a usefulindicator of the direction of new investments. Whilethe overall growth of investment in India was in therange of 15 to 16 per cent per annum during the lastfew years, it plunged to - 2.4 per cent in 2008-09 asa result of the external shock-led slowdown. Atsectoral level, there has been a welcome rebound inthe growth rate of investment in the agricultural sector,which grew at 16.5 per cent and 26.0 per cent in2007-08 and 2008-09 respectively. This is in contrastto the growth rate of 1.4 per cent recorded in2006-07. Growth of investment in the industrial sectorhas been more than the total investment growth upto 2007-08. However, in 2008-09, this was reversed,when investment in the industrial sector declined by- 17.6 per cent as compared to a decline of - 2.4 percent in total investment. Within the industrial sector,the decline was more prominent in manufacturingand the construction sector. Investment in theunorganized manufacturing sector declined by anegative 42 per cent, indicative, perhaps, of thedifficulty faced by the sector in accessing credit dueto the tight market conditions in the post financial-crisis phase. Investment in the services sectorregistered a growth of 20.2 per cent in 2006-07, whichsuddenly declined to - 16.0 per cent in 2007-08 as aresult of a decline in investment in the trade, hotels

Sectoral share in grossdomestic capital formation2008-09

Figure 1.3

Household sector

34%

Valuables4%

Publicsector26%

Private corporate sector36%


and restaurants sub-sector. This decline in the saidsub-sector was made up in 2008-09 when, on thestrength of a growth of 19.4 per cent, there was arevival in investment growth rate in the services sectoras a whole. Within the services sector, the globalfinancial crisis has had a dampening effect oninvestment growth in the banking and insurance sub-sector in 2008-09.

Behaviour of Prices and Inflation1.34 The year-on-year WPI inflation rate has beenfairly volatile in 2009-10. It was 1.2 per cent in March2009 and then declined continuously to becomenegative during June-August 2009, assisted in partby the large statistical base effect from the previousyear. It turned positive in September 2009 andaccelerated to 4.8 per cent in November 2009 andfurther to 7.3 per cent in December 2009. For thefiscal year so far (March over December 2009) WPIinflation is estimated at 8 per cent.

1.35 Year-on-year inflation in the composite foodindex (with a weight of 25.4 per cent) at 19.8 percent in December 2009 was significantly higher than8.6 per cent last year. In respect of food articles,inflation on year-on-year basis in December was 19.2per cent and on fiscal-year basis (i.e. over March2009) it was 18.3 per cent. At the same time, thecomposite non-food inflation within the manufacturedgroup of the WPI (with a weight of 53.7 per cent) at2.4 per cent in December 2009, was lower than the6.7 per cent recorded last year. This suggestsconcentrated inflation. Indeed, for several months,rapidly rising food inflation has been a cause forconcern.

1.36 In December 2009, nearly 67 per cent of theoverall WPI inflation could be attributed to food items(primary and manufactured), followed by 12 per centin the fuel and power commodity group, the remaining21 per cent being explained by manufactured non-food and primary non-food articles. Among food itemsthe major contributors to inflation are milk (20 per

Table 1.8 : Sectoral investment growth rates at 2004-05 prices Rate of growth of GCF 2005-06 2006-07 2007-08 2008-09Agriculture, Forestry & Fishing 18.1 1.4 16.5 26.0Agriculture 18.7 0.5 17.7 27.4Forestry & Logging 27.3 16.0 -20.0 16.0Fishing 9.5 9.5 9.5 9.5Mining & Quarrying 40.0 3.5 14.6 -7.8Manufacturing 14.8 25.5 19.8 -21.9Registered 39.1 18.8 24.4 -17.6Unregistered -40.6 61.5 1.4 -42.5Electricity, Gas & Water Supply 28.6 23.7 8.7 1.3Construction 0.7 45.5 23.5 -22.8Trade, Hotels & Restaurants 26.3 20.2 -16.0 19.4Trade 24.9 23.2 -21.0 23.9Hotels & Restaurants 33.6 5.4 12.2 1.7Transport, Storage & Communication 14.7 1.0 26.3 30.3Railways 10.6 15.8 14.0 17.5Transport by Other Means 6.8 -2.0 27.8 13.7Storage -268.5 19.3 8.4 32.8Communication 27.0 -4.4 34.1 65.1Financing, Insurance, Real Estate & Business Services 5.7 1.3 16.8 10.5Banking & Insurance 46.3 38.3 1.4 -18.0Real Estate, Ownership Of Dwellings & Business Services 4.4 -0.4 17.8 12.0Community, Social & Personal Services 18.0 12.3 16.4 6.2Public Administration & Defence 16.0 13.9 15.7 8.5Other Services 20.8 10.2 17.4 3.0Total 16.0 16.1 15.2 -2.4

Source : CSO.


cent), eggs, meat and fish (over 20 per cent), rice(about 10 per cent), wheat (6 per cent), pulses (about9 per cent), potatoes (9 per cent) and tomatoes(6 per cent).

1.37 The recent period has witnessed significantdivergence in the WPI and CPI inflation rates,principally on account of the larger weights assignedto the food basket in the CPIs and due to the factthat retail prices are relatively sticky downwards.Thus, due to the sharp increase in essentialcommodity prices, while all the four CPIs remainedelevated since March 2008, rising gradually from about7 to 8 per cent (month-on-month) to around 15 to 17per cent in December 2009, WPI inflation first wentup from around 8 per cent in March 2008 to 13 percent in August 2008, then declined to about 1 percent in March 2009, turned negative during June toAugust 2009 before rising again to over 7 per cent inDecember 2009.

1.38 A significant part of this inflation can beexplained by supply-side bottlenecks in some of theessential commodities, precipitated by the delayedand sub-normal south-west monsoons as well asdrought-like conditions in some parts of the country.The delayed and erratic monsoons may also haveprevented the seasonal decline in prices, normallyseen during the period from October to March formost food articles other than wheat, from setting in.At the same time, it could be argued that excessivehype about kharif crop failure, not taking into accountthe comfortable situation in respect of food stocksand the possibility of an improved rabi crop, mayhave exacerbated inflationary expectationsencouraging hoarding and resulting in a higherinflation in food items. This is supported by theestimates on shortfall in production / availability ofmajor food items in 2009-10 for rice and wheat, asalso for some other items, except pulses. In thecase of sugar, delay in the market release of importedraw sugar may have contributed to the overalluncertainty, thereby allowing prices to rise tounacceptably high levels in recent months.

1.39 The implicit deflator for GDP at market pricesdefined as the ratio of GDP at current prices to GDPat constant prices is the most comprehensivemeasure of inflation on annual basis, Unlike the WPI,the GDP deflator also covers prices in the servicessector which now accounts for well over 55 per centof the GDP. Overall inflation, as measured by theaggregate deflator for GDPMP, increased from 4.7 percent in 2005-06 to 5.6 per cent in 2006-07 and thendeclined to 5.3 per cent in 2007-08, before rising

again to 7.2 per cent in 2008-09. It has beenestimated at 3.6 per cent in 2009-10 as per theadvance estimates.1.40 Similarly, in the absence of an economy-wideconsumer price index, it is useful to look at thedeflator for the PFCE as a more comprehensivemeasure of consumer inflation on an annual basis.It is defined as the ratio of PFCE at current prices toPFCE at constant prices. Thus consumer inflation,as measured by the deflator for the PFCE, increasedfrom 2.9 per cent in 2005-06 to 5.9 per cent in2006-07, followed by a decline in 2007-08 to 4 percent, before rising again to 7 per cent in 2008-09and estimated at 6.4 per cent in 2009-10, as per theadvance estimates.

External-sector Developments1.41 The global economy, led by the Asianeconomies especially China and India, has shownsigns of recovery in fiscal 2009-10. While global tradeis gradually picking up, the other indicators ofeconomic activity such as capital flows, assets andcommodity prices are more buoyant.

BOP developments H1 2009-101.42 As per the latest data for fiscal 2009-10,exports and imports showed substantial declineduring April-September (H1) of 2009-10 vis-à-vis thecorresponding period in 2008-09. However, there hasbeen improvement in the balance of payments (BoP)situation during H1 of 2009-10 over H1 of 2008-09,reflected in higher net capital inflows and lower tradedeficit. The trade deficit was lower at US$ 58.2 billionduring H1 (April-September) of 2009 as comparedto US$ 64.4 billion in April-September 2008 mainlyon account of decline in oil import.1.43 Merchandise exports on a BoP basis posteda decline of 27.0 per cent in H1 (April-September2009) of 2009-10 as against a growth of 48.1 percent in the corresponding period of the previous year.Import payments declined by 20.6 per cent duringApril-September 2009 as against a sharp increaseof 51.0 per cent in the corresponding period of theprevious year. The decline in imports is mainlyattributed to the base effect and decline in oil prices.1.44 The net invisibles surplus (invisibles receiptsminus invisibles payments) stood lower at US$ 39.6billion during April-September of 2009 as comparedto US$ 48.5 billion during April-September 2008. Thecurrent account deficit increased to US $ 18.6 billionin April-September 2009, despite a lower trade deficit,as compared to US $ 15.8 billion in April-September2008, mainly due to the lower net invisibles surplus.


1.45 Net capital flows to India at US $ 29.6 billionin April-September 2009 remained higher ascompared to US $ 12.0 billion in April-September2008. All the components, except loans and bankingcapital, that comprise net capital flows showedimprovement during April-September 2009 from thelevel in the corresponding period of the previous year.Net inward FDI into India remained buoyant atUS$ 21.0 billion during April-September 2009(US $ 20.7 billion in April-September 2008) reflectingbetter growth performance of the Indian economy.Due to large inward FDI, the net FDI (inward FDIminus outward FDI) was marginally higher atUS$ 14.1 billion in April-September 2009, reflectingbetter growth performance of the Indian economy.Portfolio investment mainly comprising foreigninstitutional investors’ (FIIs) investments andAmerican depository receipts (ADRs)/globaldepository receipts (GDRs) witnessed large netinflows (US $ 17.9 billion) in April-September 2009(net outflows of US $ 5.5 billion in April-September2008) due to large purchases by FIIs in the Indiancapital market reflecting revival in growth prospectsof the economy and improvement in global investors’sentiment.

Trade

1.46 Given the uncertain global context, theGovernment did not fix an export target for 2009-10,instead the Foreign Trade Policy (FTP) 2009-14 setthe objective of an annual export growth of 15 percent with an export target of US$ 200 billion by March2011. With the deepening of the global recession,the beginning of 2009-10 saw acceleration in the fallof export growth rate. The upwardly revised exportfigures for the first half of 2008-09 also contributedto the faster decline in the growth rate. While theexport growth rate was a negative 22.3 per cent inApril-November 2008-09, in November 2009, itbecame a positive 18.2 per cent after a 13-monthperiod of negative growth. This significant turnaroundis due to the low base figures in November 2008 (at$11.2 billion compared to $14.1 billion in October2008 and $13.4 billion in December 2008). The exportgrowth rate in November 2009 over October 2009was marginally positive at 0.04 per cent. In December2009 the recovery in export growth has continuedwith a positive year-on-year growth of 9.3 per centand a growth of 10.7 per cent over the previous month.

1.47 During 2009-10 (April-December) importgrowth was a negative 23.6 per cent accompaniedby a decline in both POL and non-POL imports of29.8 per cent and 20.7 per cent respectively. Gold

and silver imports registered negative growth of 7.3per cent primarily on account of the volatility in goldprices. The continuous rise in prices of gold alsodampened the demand. Non-POL non-bullion importsdeclined by 22.4 per cent reflecting slowdown inindustrial activity and lower demand for exports.Import growth was at a positive 27.2 per cent inDecember 2009 due partly to the base effect andpartly the 42.8 per cent increase in the growth ofPOL products with the pick-up in oil prices andindustrial demand. Non-POL items also registered asignificant growth in imports at 22.4 per cent, despitea high negative growth of gold and silver imports.1.48 Trade deficit fell by 28.2 per cent to US$ 76.2billion (as per customs data) in 2009-10 (April–December) from US$ 106 billion in the correspondingperiod of the previous year. There have beensignificant changes in the composition and directionof both exports and imports in this period.

Foreign Exchange Reserves1.49 During fiscal 2009-10, foreign exchangereserves increased by US$ 31.5 billion from US$252.0 billion in end March 2009 to US$ 283.5 billionin end December 2009. Out of the total accretion ofUS$ 31.5 billion, US$ 11.2 billion (35.6 per cent)was on BoP basis (i.e excluding valuation effect),because of higher inflows under FDI and portfolioinvestments, while accretion of US$ 20.3 billion (64.4per cent) was on account of valuation gain due toweakness of the US dollar against major currencies.Besides, the Reserve Bank of India (RBI) concludedthe purchase of 200 metric tonnes of gold from theIMF, under the IMF’s limited gold sales programmeat the cost of US$ 6.7 billion in the month ofNovember 2009. Further, a general allocation of SDR3,082 million (equivalent to US$ 4,821 million) and aspecial allocation of SDR 214.6 million (equivalentto US$ 340 million) were made to India by the IMFon August 28, 2009 and September 9, 2009respectively.

Exchange Rate

1.50 In fiscal 2009-10, with the signs of recoveryand return of FII flows after March 2009, the rupeehas been strengthening against the US dollar. Themovement of the exchange rate in the year 2009-10indicated that the average monthly exchange rate ofthe rupee against the US dollar appreciated by 9.9per cent from Rs 51.23 per US dollar in March 2009to Rs 46.63 per US dollar in December 2009, mainlyon account of weakening of the US dollar in theinternational market.


Conduct of Monetary Policy1.51 Since the outbreak of the global financial crisisin September 2008, the RBI has followed anaccommodative monetary policy. In the course of2009-10, this stance was principally geared towardssupporting early recovery of the growth momentum,while facilitating the unprecedented borrowingrequirement of the Government to fund its fiscaldeficit. The fact that the latter was managed wellwith nearly two-thirds of the borrowing beingcompleted in the first half of the fiscal year not onlyhelped in checking undue pressure on interest rates,but also created the space for the revival of privateinvestment demand in the second half of the year.

1.52 The transmission of monetary policy measurescontinues to be sluggish and differential in its impactacross various segments of the financial markets.

The downward revisions in policy rates announcedby the RBI post-September 2008 got transmittedinto the money and G-Sec markets; however, thetransmission has been slow and lagged the in thecase of the credit market. Though lending rates ofall categories of banks (public, private and foreign)declined marginally from March 2009 (withbenchmark prime lending rates [BPLR] of scheduledcommercial banks [SCBs] having declined by 25 to100 basis points), the decline was not sufficient toaccelerate the demand for bank credit. Consequently,while borrowers have turned to alternate sources ofpossibly cheaper finance to meet their funding needs,banks flush with liquidity parked their surplus fundsunder the reverse repo window.

1.53 There has been continuous moderation in thegrowth in broad money (M3) from around 21 per cent

0

Broadmoney (M3)

Y-o-Y Growth in broad money (M3) and non-food credit (% month end data)

5

10

15

20

25

30

Figure 1.4Pe

r ce

nt

Non-foodcredit

Year2007-08 2009-10

Apr

May Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar Apr

May Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar Apr

May Jun

Jul

Aug

Sep

Oct

Nov

Dec

15 J

an

2008-09

Table 1.9 : Deployment of gross bank credit by major sectors

Sector % Variation (year-on-year)2008-09(Nov. 21) 2009-10(Nov. 20)

Non-food Gross Bank Credit (1 to 4) 28.0 10.41. Agriculture and Allied Activities 21.5 21.42. Industry 37.0 14.23. Personal Loans 13.2 0.7

Housing 9.1 7.3Advances against Fixed Deposits 27.7 -11.8Credit Card Outstanding 25.7 -24.7Education 38.3 31.0Consumer Durables -9.8 -11.8

4. Services 32.9 7.9Transport Operators 24.4 10.6Professional Services 80.1 7.0Trade 20.5 14.4Real Estate Loans 49.0 15.3Non-banking Financial Companies 54.0 19.5

Priority Sector 22.6 15.4


at the beginning of the fiscal year to 16.5 per centas of mid-January 2010 and it has remained belowthe indicated growth projection for the period. Whilein the first half of the year, credit to the Governmentremained the key driver of money growth, since thethird quarter of 2009-10 that too has moderated.

1.54 Demand for bank credit/non-food creditremained muted during 2009-10. It was only fromNovember 2009 that some signs of pick-up becameevident. On financial-year basis (over end March),growth in non-food credit remained negative till June2009. It picked up thereafter, only to hover between0.0 to 1.8 per cent till mid-September 2009.Consistent growth in non-food credit was recordedonly after November 2009. As per the latest availabledata, non-food credit has recorded an increase of8.7 per cent on financial-year basis (till January 15,2010). It is also noteworthy that growth in aggregatedeposits has remained higher than the growth in bankcredit during 2009-10. The lower expansion in creditrelative to the significant expansion in deposits during2009-10 has resulted in a decline in the credit-depositratio from 72.4 in end March 2009 to 70.8 in mid-January 2010, though with some signs of revival sinceDecember 2009.

1.55 Growth in sectoral deployment of gross bankcredit on a year-on-year basis (as on November 20,2010) shows that retail credit has not picked up during2009-10 (Table 1.9). While growth in credit toagriculture remained more or less the same as onthe corresponding date of the preceding year, for theother broad sectors–industry, personal loans andservices—growth in credit decelerated as comparedto the corresponding period of the preceding year.The personal loans category has fared the worst withcredit deployment showing negative variation for sub-categories like (i) Advances against Fixed Deposits,(ii) Credit Card Outstanding and (iii) ConsumerDurables. It would be necessary to monitor theseindicators for an improvement in credit growth, whilesequencing measures to roll back the stimulus.

1.56 There has been significant increase byRs 50,000 crore during April-January 2009-10 in theavailability of non-banking resources, which hashelped industry meet its credit needs. Thus adjustednon-food credit that accounted for nearly 48 per centof the total flow of funds to the commercial sector in2008-09 (April-January), accounted for only 39 percent of the flow of funds in 2009-10 (April-January).On the other hand, the contribution of non-banksources increased from 52 per cent in 2008-09 tonearly 61 per cent in 2009-10 for the same period.This increase in flow of funds from non-bankingsources was both from domestic and foreign sourcesand is indicative of structural rigidities that affect themonetary transmission mechanism (Table 1.10)particularly in respect of the credit markets.

Fiscal Policy Developments1.57 The fiscal expansion undertaken by the CentralGovernment as a part of the policy response tocounter the impact of the global economic slowdownin 2008-09 was continued in fiscal 2009-10. Theexpansion took the form of tax relief to boost demandand increased expenditure on public projects tocreate employment and public assets. The net resultwas an increase in fiscal deficit from 2.6 per centin 2007-08 to 5.9 per cent of the revised GDP(new series) in 2008-09 (provisional) and 6.5 percent in the budget estimates for 2009-10 (asagainst 6.8 per cent of the GDP on the old series,reported earlier). Thus the fiscal stimulusamounted to 3.3 per cent of the GDP in 2008-09and 3.9 per cent in 2009-10 from the level of thefiscal deficit in 2007-08.1.58 As part of the fiscal stimulus, the Governmentalso enhanced the borrowing limits of the StateGovernments by relaxing the targets by 100 basispoints. As a result, the gross fiscal deficit of theStates combined rose from 1.4 per cent of the GDPin 2007-08 to 2.6 per cent in 2008-09 (revisedestimates [RE]) and was estimated at 3.2 per centof the GDP in 2009-10 (BE).

Table 1.10 : Contribution to total flow of resources to commercial sector (per cent) 2007-08 2008-09 2008-09 2009-10 (Apr.-Jan.)Adjusted Non-food Bank Credit* 44.2 45.7 47.7 39.2Flow from Non-banks 55.8 54.3 52.3 60.8 Domestic Sources 25.4 34.0 28.1 33.0 Foreign Sources 30.4 20.3 24.2 27.8

Source: RBI.* Includes Non-food Credit and Non-SLR Investment by SCBs.


1.59 In implementing the fiscal stimulus, theCentral Plan expenditure was frontloaded. This isevident from its growth of 34.3 per cent and 18.0 percent in 2008-09 and 2009-10 (BE), respectively. Asa proportion of the GDP, the Plan expenditure at 5.3per cent of the GDP in 2009-10(BE) was the highestin recent years. Non-Plan expenditure grew by 19.4per cent and 14.8 per cent respectively in 2008-09and 2009-10 (BE).

1.60 The relative success of the fiscal stimulus insupporting effective demand, particularly theconsumption demand, in 2008-09 and 2009-10 couldbe traced to its composition. The approach of theGovernment was to increase the disposable incomein the hands of the people, for instance by effectingreductions in indirect taxes (excise and service tax)and by expanding public expenditure on programmeslike the National Rural Employment Guarantee Act(NREGA) and on rural infrastructure. Theimplementation of the Sixth Pay Commissionrecommendations and the debt relief to farmers alsocontributed to this end. The fact that the approachworked is attested to by the GDP growth rate andmore specifically by the growth in privateconsumption demand in 2008-09 and also in2009-10 as reflected in the relevant data on the NASnew series. Consumption expenditure, by its verynature, has short lags, and affects demand quickly,with little or no effect on productivity, while productiveinfrastructure expenditure takes much longer totranslate into effective demand. The recovery havingtaken root now necessitates a review of publicspending. It has to be geared towards buildingmedium-term productivity of the economy andmaking up for the decline in investment growth incertain sectors of the economy.

1.61 The recommendations of the Thirteen FinanceCommission (FC-XIII) have to be taken on board inshaping the fiscal policy for 2010-11 and in themedium term. The FC-XIII has recommended acalibrated exit strategy from the expansionary fiscalstance of 2008-09 and 2009-10 as the main agendaof the Central Government. Further, it has suggestedthat the revenue deficit of the Centre needs to beprogressively reduced and eliminated, followed byemergence of revenue surplus by 2014-15. Perhapsfor the first time, a cap on the overall debt of theGovernment has been recommended. It hassuggested a target of 68 per cent of the GDP for thecombined debt of the Centre and the States to beachieved by 2014-15. Thus the fiscal consolidation

path embodies steady reduction in the augmenteddebt stock of the Centre to 45 per cent of the GDPby 2014-15, and that of the States to less than 25per cent of the GDP by 2014-15. The FC-XIII hasalso suggested the need for the FRBM Act to specifythe nature of shocks that would require a relaxationof targets under the Act. It has recommended thatthe share of States in the net proceeds of shareableCentral taxes be 32 per cent in each of the financialyears from 2010-11 to 2014-15. (see Box 1.1)

Social-sector Development1.62 Fiscal 2009-10 saw the strengthening ofseveral public initiatives and programmes with a viewto cushioning the impact of the global slowdown onthe more vulnerable segments of the population inthe country. While some of these programmes werea part of the ongoing interventions to give effect to amore inclusive development strategy, there weresome measures that were undertaken as a directresponse to the slowdown of growth, especially inthe tradable sectors of the economy. Thus emphasisin favour of higher allocation to social-sectordevelopment given in recent years continued to bereflected in the allocations under the Union Budget2009-10. The share of Central Governmentexpenditure on social services including ruraldevelopment in total expenditure (Plan and non-Plan)increased to 19.46 per cent in 2009-10 (BE) fromabout 10.46 per cent in 2003-04. Similarly,expenditure on social services by GeneralGovernment (Centre and States combined) as aproportion of total expenditure increased from 19.9per cent in 2004-05 to 23.8 per cent in 2009-10 (BE).Further, sector-specific increases including ineducation, health and rural development werereinforced in the Budget allocations for 2009-10.

1.63 A major concern was regarding the possibilityof a rise in unemployment due to the slowdown ofthe economy. While comprehensive employmentdata for the current financial year are not available,some sample surveys conducted by the LabourBureau, Ministry of Labour and Employment,Government of India, indicated job losses in the wakeof the global financial crisis, which seem to havebeen reversed in recent months. Thus employmentis estimated to have declined by 4.91 lakh duringthe third quarter (October-December) of 2008; itincreased by 2.76 lakh during January-March 2009,followed by a decline of 1.31 lakh during April-June2009, and then an increase of 4.97 lakh during thesecond quarter (July-September) 2009. On thewhole, for the period October 2008 to September


Box 1.1 : Thirteenth Finance CommissionFollowing the mandate under the Presidential Order indicating the terms of reference, which flow from the articles 270, 275and 280 of the Indian Constitution, the FC-XIII submitted its report on December 30, 2009. The FC-XIII’s overall approachwas to foster “inclusive and green growth promoting fiscal federalism”. Observing that as against the level of 75 per centtargeted by the Twelfth Finance Commission, the combined debt-GDP ratio was 82 per cent in the terminal year (2009-10),the FC-XIII focused on anchoring the fiscal consolidation process in a medium-term debt reduction framework. The FC-XIIIproposes reducing the combined debt-GDP ratio to 68 per cent by 2014-15 with the Centre’s debt-GDP ratio declining to45 per cent. It recommended a calibrated exit strategy from the expansionary fiscal stance of 2008-09 and 2009-10.

The FC-XIII has recommended fiscal consolidation through the elimination of revenue deficit as the long-term target for boththe Centre and States. Following a design similar to that adopted by the recent Finance Commissions, the FC-XIII indicateda normative discipline for both Centre and States; with equal treatment which entailed no automatic priority for any level ofGovernment and a focus on equalization (and not equity). The latter signalled the intent of the FC-XIII to ensure that Statesand local bodies have the fiscal potential to provide comparable levels of public service at reasonably comparable levels oftaxation. This principle does not guarantee uniformity in public services across the country; but it addresses the fiscalrequirements of each jurisdiction to enable such uniformity.

Terming the goods and services Tax (GST) as a game-changing tax reform measure which will significantly contribute to thebuoyancy of tax revenues and acceleration of growth as well as generate positive externalities, the FC-XIII proposed a grandbargain. The six elements of the grand bargain for the GST included: 1. the design; 2. operational modalities; 3. bindingagreement between the Centre and States with contingencies for change in rates and procedures; 4. disincentives fornon-compliance; 5. the implementation schedule and; 6. the procedure for States to claim compensation. For this purpose,the FC-XIII recommended the sanction of Rs 50,000 crore as compensation for revenue losses of States on account of theimplementation of the GST. This amount would shrink to Rs 40, 000 crore were the implementation to take place on/afterApril 1, 2013 and further to Rs 30,000 crore were it to take place on/after April 1, 2014.

The following are some of the key recommendations of the FC-XIII:

The share of States in net proceeds of shareable Central taxes shall be 32 per cent every year for the period of the award.

Revenue accruing to a State is to be protected to the levels that would have accrued to it had service tax been a partof the shareable Central taxes, if the 88th Amendment to Constitution is notified and followed up by a legislationsenabling States to levy service tax.

Centre is to review the levy of cesses and surcharges with a view to reducing their share in its gross tax revenue.

The indicative ceiling on overall transfers to States on revenue account may be set at 39.5 per cent of gross revenuereceipts of the Centre.

The Medium Term Fiscal Plan (MTFP) should be a statement of commitment rather than intent.

New disclosures have been specified for the Budget/MTFP including on tax expenditure, public-private partnershipliabilities and the details of variables underlying receipts and expenditure projections.

The Fiscal Responsibility and Budget Management (FRBM) Act needs to specify the nature of shocks that wouldrequire relaxation of the targets thereunder.

States are expected to be able to get back to their fiscal correction path by 2011-12 and amend their FRBM Acts to theeffect.

State Governments are to be eligible for the general performance and special area performance grants only if theycomply with the prescribed stipulation in terms of grants to local bodies.

The National Calamity Contingency Fund (NCCF) should be merged with the National Disaster Response Fund(NDRF) and the Calamity Relief Fund (CRF) with the State Disaster Response Funds (SDRFs) of the respective States.

A total non-Plan revenue grant of Rs 51,800 crore is recommended over the award period for eight States. A performancegrant of Rs 1500 crore is recommended for three special category States that have graduated from a non-Plan revenuedeficit situation.

An amount of Rs 19,930 crore has been recommended as grant for maintenance of roads and bridges for four years(2011-12 to 2014-15).

An amount of Rs 24,068 crore has been recommended as grant for elementary education.

An amount of Rs 27,945 crore has been recommended for State-specific needs.

Amounts of Rs 5,000 crore each as forest, renewable energy and water sector-management grants have beenrecommended.

A total sum of Rs 3,18,581 crore has been recommended for the award period as grants-in-aid to States.

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2009, there may have been a net addition of 1.51lakh jobs in the sectors covered under the saidsurveys.

1.64 Under the NREGA, which is a major ruralemployment initiative, during the year 2009-10, 4.34crore households have been provided employmentso far. Out of the 182.88 crore person days createdunder the scheme during this period, 29 per centand 22 per cent were in favour of Scheduled Casteand Scheduled Tribe population respectively and 50per cent in favour of women.

Climate change1.65 While engaging constructively with theinternational community on the issue of climatechange, India has pursued a strong domestic agendafor addressing the issue. The Copenhagen conferenceon climate change (CoP 15) was held fromDecember 7-18, 2009 to discuss and reach anoutcome on climate change issues. At theCopenhagen conference, the Danish Presidency ofCoP15 had invited some of the participating countriesfor a discussion on relevant aspects of climatechange and presented the results to the CoP in theform of a “Copenhagen Accord”. The CoP did notadopt the results of the discussion and only tooknote of the “Accord”. It has been decided to continuethe negotiations with a view to concluding them atthe next CoP scheduled in Mexico from November29 to December 10, 2010. India recognizes that astrategy for addressing climate change has to bebased on sustainable development. This is reflectedin many of the major programmes addressingclimate variability concerns. Current Governmentexpenditure in India on adaptation to climatevariability exceeds 2.6 per cent of the GDP, withagriculture, water resources, health and sanitation,forests, coastal zone infrastructure and extremeevents being specific areas of concern.

Prospects, Short Term and Medium Term

1.66 There are several factors that have emergedfrom the performance of the economy in the last 12months, which, combined with an analysis ofperformance over the last couple of years, augur wellfor the Indian economy. There are some deep changesthat have taken place in India, which suggest thatthe economy’s fundamentals are strong. First, therates of savings and investment have reached levelsthat even ten years ago would have been dismissedas a pipedream for India. On this important dimension,India is now completely a part of the world’s fast-

growing economies. In 2008-09 gross domesticsavings as a percentage of GDP were 32.5 per centand gross domestic capital formation 34.9 per cent.These figures, which are a little lower than what hadbeen achieved before the fiscal stimulus was putinto place, fall comfortably within the range of figuresone traditionally associated with the East Asianeconomies. In 2007 South Korea had a savings rateof 30 per cent, Japan 28 per cent, Malaysia 38 percent and Thailand 33 per cent. Since these indicatorsare some of the strongest correlates of growth anddo not fluctuate wildly, they speak very well for India’smedium-term growth prospects. It also has to bekept in mind that, as the demographic dividendbegins to pay off in India, with the working age-grouppopulation rising disproportionately over the next twodecades, the savings rate is likely to rise further.Second, the arrival of India’s corporations in theglobal market place and informal indicators of thesophisticated corporate culture that many of thesecompanies exhibit also lend to the optimisticprognosis for the economy in the medium to longrun.

1.67 In the medium term it is reasonable to expectthat the economy will go back to the robust growthpath of around 9 per cent that it was on before theglobal crisis slowed it down in 2008. To begin with,there has been a revival in investment and privateconsumption demand, though the recovery is yet toattain the pre-2008 momentum. Second, Indianexports have recorded impressive growth inNovember and December 2009 and early indicationsof the January 2010 data on exports are alsoencouraging. Further, infrastructure services,including railway transport, power,telecommunications and, more recently but to alesser extent, civil aviation, have shown a remarkableturnaround since the second quarter of 2009-10. Thefavourable capital market conditions withimprovement in capital flows and businesssentiments, as per the RBI’s business expectationssurvey, are also encouraging. Finally, and eventhough it is too early to tell if this is a trend, themanufacturing sector has been showing a buoyancyin recent months rarely seen before. The growth rateof the index of industrial production for December2009—the latest month for which quick estimatesare available—was a remarkable 16.8 per cent. Thereis also a substantial pick-up in corporate earningsand profit margins.

1.68 Hence, going by simple calculations basedon the above-mentioned variables, coupled with the


fact that agriculture did have a set-back this yearand is only gradually getting back to the projectedpath, a reasonable forecast for the year 2010-11 isthat the economy will improve its GDP growth byaround 1 percentage point from that witnessed in2009-10. Thus, allowing for factors beyond the reachof domestic policymakers, such as the performanceof the monsoon and rate of recovery of the globaleconomy, the Indian GDP can be expected to growaround 8.5 +/- 0.25 per cent, with a full recovery,breaching the 9 per cent mark in 2011-12.

1.69 Given the steadily improving fundamentals ofthe economy discussed at the start of thissubsection, over and above the short-termimprovements that occurred during the current fiscalyear, the medium-term prospects of the Indianeconomy are really strong. If, in addition to this, there

are improvements in infrastructure, both urban andrural, and reform in governance and administration,which cuts down bureaucratic transactions coststhat slow down enterprise in India and breedcorruption, it is entirely possible for India to moveinto the rarefied domain of double-digit growth andeven attempt to don the mantle of the fastest-growingeconomy in the world within the next four years. Ifthis can be coupled with targeted Governmentinterventions, some of which have recently beenundertaken and some that are on the agenda, toinclude the marginalized segments of the populationin this development process, then the ultimate aimof rapid growth, which is to raise the standard ofliving of the disadvantaged and to eradicate poverty,should also be within reach in the not-too-distantfuture.

Micro-foundations ofInclusive Growth CHAPTER

2

2.2 Detailed analyses of the performance of varioussectors of the Indian economy and sector-specificpolicy options, and especially those pertaining toour immediate concerns, are conducted in thechapters that follow. The aim of this chapter is to gobeyond these short-term and sector-specificconcerns to broader questions of policymaking inIndia and, at the same time, to focus on the relativelyneglected subject of the micro-foundations ofmacroeconomic policy. In the rush to attend to theimmediate imperatives of policy, some of thefoundational questions, for instance those pertainingto individual incentives to perform better, which havesignificant long-run implications for the Indianeconomy, are often neglected. Policy changes whichare important but not so in any specific year run the

risk of not being implemented in any year. The aimof this chapter is to make amends for this bydeliberately thinking outside the box and taking ananalytical look at the base of policymaking in India.Some of the policy alternatives discussed here arefor debate and discourse, rather than immediateimplementation. The hope is that this will lead toimportant practical ideas for India’s sustaineddevelopment and inclusive growth and that some ofthem may enable us to create a road map for actualmedium- and long-term policies.

DEVELOPMENT AND DISTRIBUTION

2.3 In recent times India has grown fast not onlycompared to its own past but also in comparison

There have been few fiscal years in India’s history in which the outlooks at the startand the end have been as different as in the present one. In April 2009, India seemedto be mired in an economic slowdown that had begun over a year ago in theindustrialized nations and had engulfed the entire world. During the two precedingquarters India had clocked an annualized growth rate of 5.8 per cent, which wasmuch below the near-9 per cent that the nation had continuously achieved for fiveyears. It appeared that while we were a little late in joining the global recession wewere now firmly in it. A variety of stimulus packages were put in place in the secondhalf of 2008-09, in the Interim Budget 2009-2010 and, again, three months later,in the main Budget 2009-2010. By the second quarter the economy showed signs ofturning; and now, close to the end of the year, India seems to be rapidly returning tothe buoyant years preceding 2008. As always with any economy, there are risks.The drought-hit agricultural sector is not yet back to normal performance. The riskof a second-dip recession in the industrialized nations continues to cast a shadow onour nascent recovery. Nevertheless, at the year’s end, it is good to see India havingaverted a recession and come out of the slowdown faster than pundits predicted inApril 2009; and an analysis of various statistical trends that gird the economysuggests that the nation’s medium- and long-term prognosis is excellent. If we canput into effect some important structural policy measures, there is no reason whyIndia cannot achieve double-digit gross domestic product (GDP) growth and a rapiddiminution of poverty.


with other nations (see Table 2.1). But there cannotbe any room for complacency because it is possiblefor the Indian economy to develop even faster andalso to spread the benefits of this growth more widelythan has been done thus far. Before going into detailsof the kinds of micro-structural changes that we needto conceptualize and then proceed to implement, itis worthwhile elaborating on the idea of inclusivegrowth that constitutes the defining concept behindthis Government’s various economic policies anddecisions. A nation interested in inclusive growthviews the same growth differently depending onwhether the gains of the growth are heaped primarilyon a small segment or shared widely by thepopulation. The latter is cause for celebration butnot the former. In other words, growth must not betreated as an end in itself but as an instrument forspreading prosperity to all. India’s own pastexperience and the experience of other nationssuggests that growth is necessary for eradicatingpoverty but it is not a sufficient condition. In otherwords, policies for promoting growth need to becomplemented with policies to ensure that more andmore people join in the growth process and, further,that there are mechanisms in place to redistributesome of the gains to those who are unable to partakein the market process and, hence, get left behind.

2.4 A simple way of giving this idea of inclusivegrowth a sharper form is to measure a nation’sprogress in terms of the progress of its poorestsegment, for instance the bottom 20 per cent of thepopulation. One could measure the per capita income

of the bottom quintile of the population and alsocalculate the growth rate of its income; and evaluateour economic success in terms of these measuresthat pertain to the poorest segment. This approachis attractive because it does not ignore growth likesome of the older heterodox criteria did. It simplylooks at the growth of income of the poorest sectionsof the population. It also ensures that those who areoutside of the bottom quintile do not get ignored. Ifthat were done, then those people would in alllikelihood drop down into the bottom quintile and sowould automatically become a direct target of ourpolicies. Hence the criterion being suggested hereis a statistical summing up of the idea of inclusivegrowth. The policy discussions that follow do notexplicitly refer to this but are inspired by this idea ofinclusive growth, which, in turn, leads to twocorollaries, to wit that India must strive to achievehigh growth and that we must work to ensure thatthe weakest segments benefit from the growth.

2.5 For achieving inclusive growth there is criticalneed to rethink the role of the state. The early debateamong economists about the size of the Governmentcan be misleading. The need of the hour is to have anenabling Government. India is too large and complexa nation for the state to be able to deliver all that isneeded. Asking the Government to produce all theessential goods, create all the necessary jobs, andkeep a curb on the prices of all goods is to, at best,court failure, and, in greater likelihood, lead to a large,cumbersome bureaucracy and widespread corruption.The aim must be to stay with the objective of inclusive

Table 2.1 : Ranks of 109 nations, by PPP-corrected GDP per capita

Rank 1975 1984 1994 2004

58 Paraguay Dominican Rep. Dominican Rep. China75 Grenadines Honduras Zimbabwe India77 Ghana Sri Lanka China Georgia80 Mauritania Solomon Islands India Papua New Guinea89 Solomon Islands India Georgia Bangladesh90 India Rwanda Senegal Solomon Islands96 Bangladesh China Congo,Dem.Rep. Burkina Faso108 China Nigeria Rwanda Malawi

Source: Computation based on World Bank data.Legend : The Table shows the ranks of 109 nations for which purchasing power parity (PPP)-correctedincome data were available from 1975. In 1975 India was the 90th poorest nation, among these 109 nations. Overthe 19-year period illustrated here, India steadily improved its rank. It was 75th poorest by 2004. The one nationthat outstrips this performance is China, moving up from 108th rank to 58th, crossing over India somewherebetween 1984 and 1994.

23Micro-foundations of Inclusive Growth

growth that was laid down by the founding fathers ofthe nation, but to take a more modern view of whatthe state can realistically deliver. This is what leadsto the idea of an enabling state, that is, a Governmentthat does not try to directly deliver to the citizenseverything that they need. Instead, it (1) creates anenabling ethos for the market so that individualenterprise can flourish and citizens can, for the mostpart, provide for the needs of one another, and(2) steps in to help those who do not manage to dowell for themselves, for there will always beindividuals, no matter what the system, who need

support and help. Hence we need a Government that,when it comes to the market, sets effective, incentive-compatible rules and remains on the sidelines withminimal interference, and, at the same time, playsan important role in directly helping the poor byensuring that they get basic education and healthservices and receive adequate nutrition and food.This rollback of the Government in the former willenable it to devote more energy and resources toand be more effective in the latter. This changingview of the state will briefly be elaborated upon andthen some detailed policy suggestions taken up.

Box 2.1 : Growth, poverty and the quintile income

India’s growth performance over the last couple of decades or so has been a subject of a great deal of scholarlyenquiry, as well as a cause for celebration. A measured optimism, in this regard, would be understandable–-but aspillover into unbridled euphoria would not. The case against complacence resides in the large magnitudes of bothpoverty and inequality which coexist with growth. A natural question that arises is: is there a simple summarystatistic that might throw some light, all at once, on the phenomena of growth, inequality, poverty, and inclusion? Ina broad and suggestive way, yes: the statistic in question is the “quintile income”, or average income, of the poorest20 per cent of population.

What can we say about the performance of the quintile consumption expenditure level in India? Based on data invarious rounds of the National Sample Survey (NSS) on the distribution of consumption expenditure, and employingthe Consumer Price Index of Agricultural Labourers (CPIAL) as a price deflator, the table below presents informationon quinquennial trends in real average per capita consumption expenditure and real quintile expenditure. The vastlylower consumption of the bottom quintile is evident from this.

From eyeballing the data it is evident that, in comparison with one’s own consumption, the poorest quintile has donebetter than the average person in the economy. But the qualifier, “in comparison with one’s own income,” gives thebottom quintile a natural advantage since you have to give them less for them to have as high a percentage gain as therich. One way of correcting this is to define a “neutral” growth regime as one in which every quintile group gets thesame share of the increase in aggregate income. Treating 1977-78 and 2004-05 as the base year and the terminal yearrespectively, it can be checked using the table below that the poorest quintile gets less than the 0.2 per cent of theaggregate increase in income which is its neutral growth share. This simple arithmetic exercise shows that, while thebottom quintile in India has seen good growth using the benchmark of its own starting income, it has had a smallershare of the aggregate growth accrue to it.

Some statistics on mean and quintile monthly consumer expenditurefor rural India

1977-78 1983 1987-88 1993-94 1999-2000 2004-05

Per Capita Average ConsumptionExpenditure (at 1977-78Prices, in Rs) 68.89 71.17 78.27 77.95 84.55 90.35

QuintileConsumption Expenditure(at 1977-78 Prices, in Rs) 29.14 31.43 35.91 37.29 42.79 44.91

Source: S. Subramanian, “A Practical Proposal for Simplifying the Measurement of Income Poverty”, inK. Basu and R. Kanbur (eds): Arguments for a Better World: Essays in Honour of Amartya Sen, Volume 1: Ethics,Welfare, and Measurement. Oxford University Press: Clarendon, 2009.Note : The price index employed is the CPIAL. The base year is taken to be 1977-78.


2.6 In many poor nations the Government takesthe stance that, when in doubt about the goodnessor badness of two or more adults voluntarilyconducting an exchange, stop them. An enablingstate, on the contrary, takes the view that, whenin doubt, do not interfere. There are, of course,many actions of individuals and groups that willneed to be stopped for the welfare of society atlarge. But the default option of an enabling stateis to allow rather than stop, to permit instead ofprevent. This altered conception of the state canhave dramatic effect on the functioning of aneconomy, in general by promoting greaterefficiency and higher productivity. A concreteexample can help clarify this. One repeatedquestion that comes up in policy discussionsconcerns futures trade. Should we allow tradersto strike advance deals about buying and sellingwheat or rice or pulses in the future? Since forvital goods like these, a natural concern of everyGovernment is to adopt policies that do not leadto inflationary pressures, our policy stance onfutures markets depends on what we expect themto do to the spot prices. In other words, it dependson our view of what the existence of futuresmarkets does to the level of prices in today’smarket. An enabling Government takes the viewthat if we cannot establish a connection betweenthe existence of futures trading and inflation inspot prices, we should allow futures trade. Thisis in contrast to what an intrusive Governmenttends to do. In the event of finding no firmconnection between the two markets, it takes thestance that it will not give individuals the freedomto conduct futures trade. In fact, it is true that thetheoretical literature maintains a somewhatambivalent position on this. While allowing futurestrade does take us towards a more completemarket system, it is not true that allowing eachadditional market always leads to greaterefficiency. However, the converse of these claimsis not true either. What is being argued here isthat, under these circumstances, Governmentshould, ideally, desist from imposing an outrightban on futures trade and, instead, provide it witha regulatory structure to promote transparencyand to discourage collusion.

THE CHALLENGE OF POVERTY

2.7 The ultimate test of our policies has to be interms of their success in curbing poverty.

Unfortunately, on poverty India has some distanceto go. The recent Expert Group Report (alsoknown as the Tendulkar Report), commissionedby the Planning Commission, estimates India’saggregate poverty to be 37.2 per cent. That is, alittle over 37 per cent of our population lives belowthe poverty line, and, in particular, 41.8 per centof the rural population and 25.7 per cent of theurban population is poor. It is, however, worthclarifying that the higher poverty estimates thatTendulkar reports, compared to existing estimatesof the Planning Commission based on NSS data,do not reflect an increase in poverty, but merely achanged definition of what constitutes poverty. Ascalculations in a later chapter show, if we use theTendulkar method to calculate poverty in earlieryears those rates go up as well compared tostandard est imates based on NSS data.Nevertheless, whether we take India’s poverty rateto be 37.2 per cent or 27.5 per cent (as is impliedby the 61st round of NSS data of 2004-05), it iseasy to argue that it is too high for a nation growingas rapidly as India, and that special initiativesare needed to combat it.

2.8 Over the last five years the Government hasundertaken a large increase in budgetaryallocations for anti-poverty programmes. In fact,one of the features of India’s stimulus packagethat distinguishes it from stimulus packages inmany other nations is that the injection of demandhas taken the form, largely, of enhancing thebuying power of the poor and promoting socialservices. The share of Central Governmentexpenditure on social services, including ruraldevelopment, in total expenditure, Plan and non-Plan, was 10.46 per cent in 2003-04 and rose to19.46 per cent in 2009-10. The subsequent firmingup of the prices of food items consumed by thepoor is testimony to the fact that some of thisnear doubling of social and welfare-relatedexpenditures must have reached the poor andbolstered their incomes.

2.9 There are also numerous product-basedsubsidies, such as the ones given to fertilizerproduction and use, basic foodgrains, diesel andkerosene, which have been accumulated over theyears with the ostensible purpose of helping theweaker sections of the population, be they merelyconsumers or farmers trying to eke out a living


from their l itt le land. The impact of thesesubsidies, using the yardstick of povertymitigation, is, however, questionable. On the otherhand, the steady build up of these numbers nowconstitutes a major fiscal burden and tends tocrowd out the government’s ability to finance othervital activities in the economy that could promoteproductivity and eradicate poverty. Take, forinstance, the fertilizer subsidy. The prices offertilizers have been constant since 2002, whichmeans that in real terms the price has declined.Since firms have to be compensated enough forthem to remain in production, the gap betweenwhat the producers are paid and what farmers haveto pay to buy fertilizers has steadily risen. As aconsequence, the total subsidy that the CentralGovernment gives to the fertilizer sector reachedRs 76,606 crore in 2008-09 and though this isexpected to be lower this fiscal year, it remainslarge.

2.10 The main challenge is to direct the moneyalready allocated to help eradicate poverty. Theinability to do so has more to do with ideas thanvested interests. Some propositions are obviousas soon as one gives them some thought; but notobvious when one gives them a lot of thought.These are the ones prone to policy mistakes. Andonce a policy is put into effect and kept in placefor a while, vested interests gather in its favourand those interests resist change. But beyondthat it is a question of having a road map of wherewe can go and demonstrating to the larger publicthat it is a potential beneficiary of the proposedchange. Fortunately such a road map is feasible.There are systems of delivery of subsidies to thepoor that can be vastly more effective, entailsubstantial savings and involve no extraorganizational cost. In discussing these, it isuseful to keep a few principles in mind. For goodsthat are important for the poor, it is only correctthat the state should intervene to cushion the poor.The standard way to do this is by using somekind of a subsidy. However, a common mistake isto suppose that a subsidy scheme has to becoupled with price control. This is typically aslippery slope. In a large and complex economy,it is difficult for the state to gauge what the rightprice of a good is. Moreover, once the Governmentbecomes involved in setting the price of acommodity, this becomes a matter of politics andlobbying, which cumulatively adds to thedistortion. Hence prices are best left to the market.

If we want to ensure that poor consumers are notexposed to the vagaries of the market, the bestway to intervene is to help the poor directly insteadof trying to control prices, which almost invariablydoes more harm than good in the long run, andoften even not so long a run. On agriculture-sector policy and price control there is need togo the way India did with industry in 1991. Keepingthis in mind, it is possible to outline systems ofsupporting the poor which are more efficient andbetter targeted than the present ones.

2.11 Through a vast network of public distributionsystem (PDS) outlets across the nation, we tryto deliver some minimal supplies of heavilysubsidized grain to our below poverty line (BPL)households and also some to our above povertyline (APL) households. The PDS stores are firstgiven this subsidized grain and then instructed todeliver it at below market price to these specifiedhouseholds. It is believed many of these store-keepers (i) sell off this subsidized grain on theopen market, and (ii) then adulterate the remaininggrain and sell the diluted product to the BPL andAPL households, who have no choice in thematter. We may harangue about the dishonestyof PDS store-keepers and all those entrusted withdelivering the subsidies. It is indeed true thatpersonal integrity, honesty and trustworthinessin the citizenry are vital ingredients for a nation’seconomic progress—there is enough cross-country evidence of this. But when crafting policy,there is need to be realistic about the systemwithin which we work. To assume that all thoseentrusted with the task of administering theprogramme will do so flawlessly and then to blamethem when the system fails, is not the mark of agood policy strategist. For effective policy, whatis needed is to take people to be the way theyare and then craft incent ive-compatibleinterventions.

2.12 This paragraph outlines an altered systemthat, once in place, will be no more costly to runthan the existing one and is likely to be muchmore effective. The plan suggested here is notnovel and has been suggested on occasion byIndian pol icymakers and even in Budgetdocuments. However, it has never been fullyspelled out. The two planks of this system are(i) the subsidy should be handed over directly tothe households, instead of giving it to the PDSstore-keeper in the form of cheap grain and thenhave him deliver it to the needy households and


(ii) the household should be given the freedom tochoose which store it buys the food from. Supposethe BPL household gets a net subsidy of Rs x forwheat each month. Instead of giving this bycharging the household less than the market pricefor wheat, it should be given coupons worth Rs x,which can be used at PDS stores in lieu of moneywhen buying wheat. Under this new system no grainwill be given at a subsidized rate to the PDS storesand they will be free to charge the market price whenselling grain irrespective of who the customer is. Theonly change is that the PDS stores are now allowedto accept these coupons which they can then taketo the local bank and change to money, and thebanks, in turn, can go to the government and havethem changed to money. Further, households thatget these coupons should be allowed to go to anyPDS store of their choice.

2.13 Such a system will be more impervious tocorruption. Since the store owner will get the sameprice for grain from all buyers, poor and rich, he willhave no incentive, to turn the poor buyers away, ashappens currently, and cater to those buying atmarket price. (If it is felt that changing coupons tomoney is a bother, we can have a provision for payingstore owners an extra 2 per cent when they changecoupons to money.) Second, since BPL buyers cango to any store with their coupons, they will be ableto boycott stores that try to sell them poor-qualitygrain or mix gravel with the grain.

2.14 For the full success of this “coupons system”what is needed is an effective method of identifyingthe poor. This is where the Unique Identification (UID)

System, an initiative already launched by the presentGovernment, under the Unique Identification Authorityof India (UIDAI) (see Box 2.2) comes into play. Sincethe UID System will come into effect in 2012 andthe roster of individuals registered in it will graduallymove towards completion, it is possible to plan on aswitch to a coupons system by 2012 and also let itachieve full maturity as the UID registration movesto completion. Since the Unique Identification willnot, in itself, have information on people’s povertystatus, these kinds of tailoring of information willneed to be added on to the UID System. Further,since households do move in and out of BPL statusthere has to be provision for updating on information.However, it is not necessary to wait for the entireUID System to be in place to begin the switch to thecoupons system. This is because even our currentmethod of rations relies on ration shops having withthem lists of BPL customers whom they are meantto serve. So some identification of BPL citizens isalready available and this can be used to hand overcoupons to these individuals. In the final measure,to keep the scheme lean and simple and also tomaximize choice, we should not give individualsseparate coupons for rice and wheat but a certainvalue of coupons that can be used to buy rice orwheat—the break-up between the two will be eachindividual’s decision, depending on her preference.Eventually, there will be no need to have separatePDS outlets. Food will be available on the openmarket and poor people will get a monthly ration ofcoupons which they can take anywhere and buyfood.

Box 2.2 : UID SystemThe UID System is envisioned as a means for residents to easily establish their identity, anywhere in the country. It will be animportant step towards ensuring that residents in India can access the resources and benefits they are entitled to. The residentwill be able to enrol for a UID number by providing basic demographic as well as biometric details (which may includephotograph, fingerprints and iris scan) to the enrolling agency. The enrolling agency will transmit these details to a centralUID server. The server will then perform a de-duplication check using the resident’s key demographic and biometric fieldsagainst existing UID records in the database, to ensure that she does not already have a UID number. Once the checkconfirms that a duplicate record does not exist, the central system will issue a UID number to the resident. The resident canthen use the number with different service providers, who can verify his or her identity online. The agency has to transmit theUID number and information provided by the resident to the UID server, and the server immediately responds with a yes ora no.

The UID can have a significant impact on service delivery. The existing patchwork of multiple agency databases in Indiagives individuals the incentive to provide different personal information to different agencies and also impersonate someoneelse. In the UID infrastructure, all resident records are stored in a central database, and each new entry is de-duplicated--consequently, residents can only have one UID number, which is mobile and can be used anywhere in the country. The lackof duplicates, and accuracy and mobility in identity verification, would reduce opportunities for fraud and enable agenciesacross the country to provide residents with targeted, effective services and benefits.

Source : UIDAI, Planning Commission.


2.15 This new coupons system has one risk thatone must be prepared for. In the event of a nationalfood shortage, since the BPL individuals will havecoupons to help them out of the problem, for non-BPL individuals the shortage will be more acute. Thestate will in such situations have to import or usewhatever other means available to release foodgrainson the market to balance the amount taken away bythe recipients of coupons. This is not a seriousproblem of the coupons system because, at onelevel, the current system encounters the sameproblem. Since the BPL consumers are somewhatshielded through food rations, during shortages thecrisis gets more acute for non-BPL consumers.Under the current system the corrective measure offood release takes place automatically, since theBPL population receives not coupons but actual grain.Hence, even while the present system for targetingsubsidies is being reformed, there is need to continuewith the strategy of holding buffer stocks of essentialfoodgrains and releasing them in times of shortage.This is elaborated upon in a subsequent section.

Subsidies and Development2.16 Similar ideas can be carried over to otherproducts. The Expert Group on A Viable andSustainable System of Pricing of PetroleumProducts (also known as the Kirit Parikh Committee)has made similar proposals for subsidies onpetroleum and related products. Another candidatefor this kind of analysis is fertilizer subsidy, whichhas grown over the years into a large burden on thebudget. Yet, somewhat like with other subsidies,these reach the target population, namely farmersand especially small farmers, in a trickle, withenormous leakages on the way. Farmers have alsocomplained that what they get is frequently of poorquality, and the pricing and availability is such thatthey end up using less suitable fertilizers in largerquantities. In addition, differently from the case offood, since the subsidy is given across the board forfertilizers produced, all those who buy fertilizers,whether or not they are poor and need the subsidies,get them. If this system can be improved, it isarguable that by spending even half the money thatis currently spent on subsidies, we can be muchmore effective in helping poor farmers; and, further,by improving quality, increase agricultural productivityacross the nation, with beneficial multiplier effectsspreading to all sectors. And the saved money canbe used to retire a part of the fiscal deficit or directedto other use.

2.17 This problem of fertilizer quality was partof the Finance Minister’s Budget Speech on July6, 2009: “In the context of the nation’s foodsecurity, the declining response of agriculturalproductivity to increased fertilizer usage is amatter of great concern.” The Budget thenproposed making the much needed move towardsa nutrient-based subsidy regime. It further noted:“In due course it is also intended to move to asystem of direct transfer of subsidy to the farmers.”The idea of giving subsidies via coupons, in thesame way as discussed above for food, merelytakes the idea of “direct transfer of subsidy to thefarmers” to its natural conclusion. Again, to jumpto what the final design will be, the idea is thatGovernment will have no dealing with fertilizerproducers. Any firm will be free to produce anykind of fertilizer and sell it in the market at anyprice. The farmers, on the other hand, by whateverselection criterion that is decided upon, will begiven coupons that can be used to buy fertilizerson the open market. Any seller of fertilizers whoreceives these coupons will be free to encashthem at any bank and the bank, in turn, can givethese coupons to the Government and collectcash.

2.18 A switchover to a coupons system for fertilizersubsidies will entail several ancillary decisions.There will be need to decide who gets these coupons.One option is to give a fixed quota of these to everyfarming household. This will mean giving a subsidyto all farmers but for small farmers the subsidy willbe a larger fraction of their farming needs whereasfor large farmers this will turn out to be a smallerfraction. A more sophisticated approach is to givelarger amounts to farmers with larger land. And yetanother approach is to take a page out of the ideabehind progressive income taxation and not give anycoupons to large farmers. Whatever system isadopted, we will need some form of identification offarmers and will need to have some information abouttheir landholdings. This once again means that forthe full-fledged adoption of the coupons system, therewill be need to dovetail it to our UID System. If weare to move towards this, we should in fact work intandem with the UID work so that some informationthat we will need alongside a person’s pure identity,such as whether or not the person belongs to aBPL household, whether her profession is agricultureand, if so, the amount of land she owns and so oncan be fed into the system from the start. We maybe able to save on some duplication of effort if webegin early in building such an information system.


2.19 This system can easily be tweaked to ensurethat we discourage the use of fertilizers that may beharmful for the soil in the long run or have negativeexternalities for neighbouring farms. All we have todo is to have different coupons for different kinds offertilizers and vary the amount of subsidy for differentfertilizers to keep individual incentives in line withlong-run social objectives.

2.20 Moreover, it may be desirable to not imposeany restrictions on farmers selling off the coupons.If the recipient of a coupon decides that she doesnot want to buy fertilizers but would rather spendthe money on buying a television set instead, wehave every right to have misgivings about thispreference, but it is not a good idea to use the state’senforcement machinery to correct this. Modernbehavioural economics reminds us that there aresituations where individuals act against their owninterests because of lack of self-control orinconsistencies in their inter-temporal preferences,and so some paternalistic interventions can be goodfor them. While this is true, Government action toredirect individual choice ought to be measured andminimal. To try to meddle excessively in individuals’preferences is a mistake because it encouragesGovernment to reach out to doing more than itrealistically can, creating unnecessary bureaucratichurdles and breeding corruption.

2.21 The benefits of this coupons system can bevery large. With many producers engaged in

supplying fertilizers and buyers having the freedomto shop from anybody, the largest cause of sub-standard fertilizer production will be cut out. Wewould see a large improvement in the quality offertilizers and, with it, in overall agriculturalproductivity. In the present system Government hasto do elaborate calculations about the costs thatfirms incur in producing fertilizers, with firms tryingto inflate these costs. Under the new system, therewill be no need for this, since the Government willnot be paying anything to (or fixing the price offertilizers produced by) the firms. The switchover tothis organizationally leaner and directly targetedsystem means that even if the state substantiallycuts back on the total size of the subsidy, say byRs 20,000 crore, we should still see farmers gettingmore benefits than they currently do and agriculturalproductivity in the nation rising.

Bureaucratic Costs and Delays

2.22 India has one advantage over most emergingeconomies and even some industrialized ones–itsvibrant democratic institutions and independentjudiciary. This has greatly helped India gradually takeits place among the leading global economies of theworld. While this has helped the nation, there isanother feature that has been a hindrance–India'shigh bureaucratic delays. Thanks to recent datacollection from around the world on bureaucratictransactions costs, there are now hard statistics on

Table 2.2 : Doing business : Cross-country experience

Sl. Country Ease of How many Days to Time to Days toNo. doing days to enforce a close a export

business start a contract business(rank) business (days) (years)

(days)

1 Brazil 129 120 616 4.0 122 Chile 49 27 480 4.5 213 China 89 37 406 1.7 214 India 133 30 1,420 7.0 175 Indonesia 122 60 570 5.5 216 Japan 15 23 360 0.6 107 Malaysia 23 11 585 2.3 188 Mexico 51 13 415 1.8 149 Pakistan 85 20 976 2.8 2210 Russian Fed. 120 30 281 3.8 3611 Singapore 1 3 150 0.8 512 Sri Lanka 105 38 1,318 1.7 2113 Thailand 12 32 479 2.7 1414 USA 4 6 300 1.5 6Source : World Bank, Doing Business 2010.


where India stands. In terms of the ease of doingbusiness, India ranks 133rd in the world. Singaporeranks 1st, Malaysia 23rd, and China 89th. Thenumber of days it takes in India to enforce a contractis 1,420. It can no longer be argued that this isinevitable given the complexity of contracts becauseit takes 150 days for the same in Singapore, 300days in the US and 406 days in China (see Table2.2 and Table 2.3 for comparative data on 17 Indiancities). Likewise, for the time taken to closea business that has gone bankrupt. This takes9 months in Singapore, 18 months in the US,20 months in China and 7 years in India.

2.23 If one were to look at this from a brighter angle,India’s unpardonably large bureaucratic costs arelike a valuable resource buried under the ground,waiting to be excavated and used. Cutting down thesecosts is like unearthing a free, valuable resourcethat was lying idle. It can release large energies inthe nation and boost productivity and growth.Ironically, this can be India’s gold rush.

2.24 This problem is at times put down to the sizeof India’s bureaucracy. But that is not right. Acomplex economy such as that of India’s does needsubstantial numbers to regulate and run it. Bycomparison with even some vibrant market

economies, the actual number of people running theIndian Government is not large (see Box 2.3 forillustration in the context of India’s taxadministration). Further, there is a lot of talent in theIndian bureaucracy, since the selection process ishighly competitive. The problem lies elsewhere, inour conception of the state, to wit that it has to directlydeliver on every front and not be content with anenabling role; and also in the rules, regulations andprocedures inherited from our colonial times, andmade more cumbersome with layers of furtherprocedures and regulations added like on apalimpsest. The situation is like a traffic jam–askingeach person to move is useless advice. The need isto reform the system. If the current system ofsubsidies can be reformed, this itself will release alot of human resource that is presently tied up in thepointless complexities of running an inefficientsystem. Also the changes in the tax system—theGoods and Services Tax and the Direct Tax Code—that are being contemplated can have substantialimpact on not just improving the efficiency of thetaxes but on simplifying the procedures for payingtaxes.

2.25 The export sector is a good example of someof the principles discussed above. India has steadily

Table 2.3 : Doing business in India - Comparison among major cities/capitals

Sl. Places in India Ease of How many Days to Time to Days toNo. doing days to enforce a close a export

business start a contract business(rank) business (days) (years)

(days)

1 Ludhiana 1 33 862 7.3 212 Hyderabad 2 33 770 7 263 Bhubaneshwar 3 37 735 7.5 174 Gurgaon 4 33 1,163 7 255 Ahmedabad 5 35 1,295 6.8 176 New Delhi 6 32 900 7 257 Jaipur 7 31 1,033 9.1 228 Guwahati 8 38 600 8.3 229 Ranchi 9 38 985 8.5 2110 Mumbai 10 30 1,420 7 1711 Indore 11 32 990 8 2112 Noida 12 30 970 8.7 2513 Bengaluru 13 40 1,058 7.3 2514 Patna 14 37 792 9.3 1915 Chennai 15 34 877 7.5 2516 Kochi 16 41 705 7.5 2817 Kolkata 17 36 1,183 10.8 20

Source : World Bank, Doing Business in India 2009.


done better over the years. The groundwork for thiswas laid over a long time. In the Budget Speech of1983, for instance, the need for “basic reforms inthe international financial and trading system” wasstressed. India is today in a position to see anotherexpansion in exports. To achieve this quickly it willbe useful for Government to undertake somecoordinated policy actions, but there is one criticalaction that can single-handedly give India’s exportssector a boost. This is to do with governance andmay be illustrated with the example of textiles andclothing. The aggregate global textile and clothingexports happen to be large. In the year 2008, thesewere worth $ 612 billion. China alone exported $185billion worth of textiles and clothing that year, whichconstituted 30.3 per cent of the global value. In thesame year, India exported textiles worth $21 billion,which was a paltry 3.5 per cent of global exports.Vietnam, a much smaller country than ours, had anexport of $10.6 billon. Moreover, Vietnam’s share ofglobal trade has been growing by leaps and bounds.In the year 2000 it had a share of 0.6 per cent,whereas it now has a 1.7 per cent share. In the year2000, India had a share of 3.2 per cent, which roseto 3.5 per cent by 2006 and has remained at thesame level since. The phasing out of the quota

system in 2005 does not appear to have helpedIndian exports. Given the abundance of cheap labour,aiming to double our share of global exports in threeyears is not an impossible target.

2.26 There are many factors behind India’s sub-par performance, despite its natural comparativeadvantages (see Box 2.4). Our ports take long toclear and, because they are not well-equipped, oftenproducts have to travel by feeder ships to betransferred to larger vessels at other major ports,leading to delays. It, therefore, takes an unduly longtime for garments and apparel to travel from ourfactory gates to stores in industrialized nationswhere they are to be retailed. Since timing is theheart of success for these fashion-sensitiveindustries, much can be achieved by betteringperformance in this dimension. India has recentlybegun some welcome intiatives to attract foreigndirect investment (FDI) in the textile and clothingsector. This can help modernize this industry andaid its integration into the global textile market. Apartfrom being labour-intensive, this sector also happensto be one that employs a large number of womenlabourers and labourers belonging to minority anddisadvantaged groups.

Box 2.3 : Higher revenue from reforms in income tax administrationLow income tax compliance is known to limit the capacity of Governments in developing countries to raise revenue fordevelopmental purposes. Many factors have been acknowledged as contributing to this problem, such as the large informalsector, weak legal system, ambiguity in tax laws, inadequate information and accounting system, and corruption. Inrectifying this problem it is important to be realistic and separate out what can be changed in the short run and what cannot.Experience from around the world shows that reforming certain aspects of the tax administration–such as increasing thenumber of audit officers and their supporting staff and altering procedures for grouping taxpayers into assessment units–can be implementable options for reforming the tax system for generating higher revenues for the Government.

Interestingly, a detailed econometric study shows that, in India, significant compliance gains would accrue from expandedemployment. With regard to increased support staff in circles, both own and cross revenue effects turn out to be statisticallypositive and significant. Further, issues such as taxpayers strategically selecting into wards or circles, variation in supportstaff or enforcement effort generating spillover effects on workload and compliance in related units may be considered forchange to increase the efficacy of tax collection. Hence the problem is not of the size of bureaucracy. If anything, there is scopefor growth. The need is for administrative reform so that the resource of bureaucratic personnel can be used more effectivelyin promoting individual initiative.

Research results show that consideration should be given to removing the ward/circle distinction, replacing it with randomassignment rules. This will remove the strategic underfiling incentive, with beneficial compliance effects. Revenue gains maybe achieved by reallocating support staff from wards to circles, where they can be more productive. Penalty and prosecutioneffort appears to have significant effect on compliance (though here one has to be cautious not to encourage corrupt officialsto misuse the system). Encouraging efforts to improve the quality of information available to assessing officers and includingmeasures of penalty effort in their performance evaluation will also be helpful in reforming the tax administration.

Source : Arindam Das-Gupta, Dilip Mukherjee and Shanto Ghosh: “Tax Administration, Reform and TaxpayerCompliance in India” , International Tax and Public Finance, vol. 11, pp. 575-600.


2.27 Boosting our textile and clothing exportswould, therefore, amount to an anti-povertyprogramme and a pro-employment programmerolled into one. India’s textile and clothing sectorcurrently employs 35 million people and is, afteragriculture, the second largest provider ofemployment. Unlike agriculture, which has anatural tendency to shrink in terms of share ofGDP as the economy grows, there is no suchsecular trend that has been observed for clothingand textiles around the world. Hence this canpotentially be a major absorber of low-skilledlabour and give a much-needed boost to ourorganized manufacturing sector.

LABOUR REGULATION, WAGES ANDEMPLOYMENT

2.28 Almost all international studies concludethat India’s labour regulatory structure does nothave the flexibility commensurate with a buoyant,growing economy. For firms in the organizedsector having more than a certain critical numberof labourers it is extremely hard to retrenchworkers or downsize the labour force. At first sightthis looks like a pro-labour legislation, one thatprotects the interests of workers. On the otherhand, it can be argued that most potential firmsare far-sighted enough to realize that, once theybecome sufficiently large in terms of employment,if they later need to retrench workers becausethe demand for their product slacks off, they willnot be able to do so easily. This is likely to promptthem to remain small or not go into business atall, since all laws also play an expressionist rolewhereby they affect behaviour beyond the actualambit of the law. Hence it is arguable that ourlabour laws, such as the Industrial Dispute Act of1947, if appropriately reformed, can lead to agreater demand for labour, and through thatimprove economic well-being of workers.

2.29 As a counter argument to this it has beensuggested that, since most of these laws applyto the organized sector and India’s organizedsector is miniscule, changes in this law are likelyto have negligible effect one way or the other.However, it can be argued that the causality goesthe other way around. India’s organized sectorwould grow if, in keeping with the times, we couldamend the labour regulatory system, which wouldalso influence the culture and custom of the labourmarket and encourage employment in theorganized sector.

2.30 There are two different ways in whichworkers can gain power. One is through theconferring of rights to them and the other is bycreating market conditions that result in greaterdemand for labour and thereby increase the abilityof workers to ask for more and realistically expectthe demands to be satisfied. In India, while therehas been appreciation of the former, justice hasnot been done to the latter. The need is to bringthese laws into the public space for opendiscussion and the weighing of the availablescientific evidence, and then take decisions basedon what emerges from such an exercise.

Box 2.4 : Delays in infrastructure projects

A recent study, based on comprehensive data from theMinistry of Statistics and Programme Implementation,of 894 projects completed during April 1992 and March2009, provides information about the extent and natureof delays in India’s infrastructure projects and insightsinto the causes. First of all, delays are ubiquitous. Thepercentage of projects with positive time overruns goesfrom 60.75 per cent in the power sector (the starperformer), through 79.67 per cent in the petroleumsector, 95.08 per cent in shipping and ports and 98.36per cent in railways, to a well-rounded 100 per cent inhealth and family welfare. Further, most of these timeoverruns are accompanied by cost overruns. On the plusside, since the 1980s the propensity towards costoverruns has come down steadily and time overrunshave come down marginally. In terms of region, thesouthern states—Andhra Pradesh, Karnataka, Keralaand Tamil Nadu—have fewer delays and smaller costoverruns.

Among the causes of delay in completing theseinfrastructural projects and the cost overruns, the studyidentifies administrative delays by governmentdepartments, which, in turn, is caused by the hierarchicalorganizational structure of decision making ingovernment. By way of policy prescription it issuggested that speeding up be effected at the stages ofproject approval, awarding of contracts andimplementation. It is pointed out that incompletecontracts are a major cause of cost overruns.

Source : Ram Singh, ‘Delays and Cost Overruns inInfrastructure Projects: An Enquiry into Extents, Causesand Remedies,’ Working Paper No. 181, Centre forDevelopment Economics, Delhi School of Economics.


A FAMILY OF INFLATIONS AND

FOOD-SECTOR INTERVENTIONS

2.31 The fiscal year 2009-10 has been a time ofinflationary concerns. It was a year of a somewhatunusual inflation. While food inflation soared, inflationin the non-food sector was negligible. TheGovernment was concerned that the upward pressureon prices should not escalate to all sectors. And, atleast till January, the experience has been that of ahighly skewed food-sector inflation. The weekly food-price inflation on a year-on-year calculation reacheda maximum of 19.95 per cent for the week endingDecember 5, 2009. Since then the pressure haseased off a little. The skewedness of inflation thathas been observed—some sectors are facing hugeinflation, some no inflation and some deflation—israther rare in the country’s history. For instance, in1973-74 food inflation was 22.7 per cent and non-food 36.4 per cent, in 1980-81 food inflation was 11.4per cent and non-food 11.9 per cent, in 1986-87 foodinflation was 10.2 per cent and non-food 11.4 percent, in 1991-92 food inflation was 20.2 per cent andnon-food 18.0 per cent, and there are several otheryears where the pattern was the same. The currentinflation is of a different kind. It stands out for itslopsidedness across sectors. In 2009-10 (April-November) , food inflation was 12.6 per cent and non-food inflation minus 0.4 per cent. If we look at India’sinflation history from 1971, this kind of inflation, wherefood inflation is above 10 per cent and non-foodinflation is negative, has happened only twice before–

in 1992-93 and 1996-97. And food inflation of over10 per cent, non-food inflation negative and fuel,power, light and lubricant (FPL&L) inflation less than10 per cent has never occurred.

2.32 This experience points to the need fordeveloping a new system of nomenclature forinflations. What was occurring from the middle oflast year to now (and is so nicely visible in Figure 2.1in which the different graphs literally fan out fromearly 2009) is best described as “skewflation”, which,while not the most aesthetic of terms, captures theconcept of lopsided inflation well. There is actually aneed for creating some new terminology andconcepts to differentiate between different kinds ofinflation, since each type may require a differentpolicy prescription. In most industrialized nationsnowadays there is a practice of separating out “coreinflation” and overall inflation. Core inflation refers toinflation in sectors other than food and fuels, in thebelief that these are areas where prices oftenfluctuate because of sector-specific causes and oneshould not want to jump to economy-wide demandmanagement measures to counter these sector-specific price fluctuations.

2.33 India faced this same dilemma in December2009 when our core inflation remained negligible whilefood inflation was large. One silver lining of suchskewflations is that, unless one injects excessivedemand into the economy through lax monetarypolicy, they do not last long. After each of the twoprevious episodes of skewflation, the food price

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inflation came down rapidly. On the other hand,regular, balanced inflation tends to be more long-lasting. The most famous one in India’s history,starting in 1972, saw three consecutive years ofdouble-digit, food price inflation. Sustained inflationswere also observed starting in 1980 and 1991. Theseall began as generalized, across-the-board inflation.The primary cause of the recent food-price inflationwas the severe drought of 2009, which caused adownturn in food production in the third quarter of2009-10 and the expectation of the resultant pricerise itself fed further into the inflation. Governmentreacted carefully by easing up imports of relevantfoodgrains and sugar and also releasing wheat andrice from the stocks held by the Food Corporationonto the market.

2.34 Interestingly, this problem has led to somerethinking of the strategy of foodgrain procurementand release. In general, while India has been effectivein procuring foodgrains, mainly wheat and rice, itsstrategy of food release has scope for improvement.Fortunately, there is a lot of research in economicsthat can help Government device better policy. Thestandard method that we have used is to have aminimum support price (MSP) for wheat and anotherone for rice, and the state commits to buyingwhatever amount the farmers are willing to sell atthese prices. The idea is that, in years of highproduction, the Government’s granaries will stockup, as indeed they do. Then, in years of low foodproduction, when prices begin to rise, theGovernment will release this food onto the market todampen the price rise. It is, however, easy to fallinto two fault-lines in devising this release strategy.

2.35 First, as any reasonable authority would, theGovernment has stipulated norms for how muchbuffer stocks of foodgrains the Food Corporation ofIndia (FCI) should hold. Thus there are pre-specified“buffer norms” and “strategic reserves”. However, ifthe Government becomes too steadfast in makingsure that these norms will never be violated, theycease to play any role. In other words, if there arecertain minimal amounts of grain that we arecommitted to holding at all times, then it is the sameas not holding them. The traders and speculatorsrealize this and so cease to worry about thedampening effect that the stocks could have onprices. In short, the FCI needs to make it amplyclear that there are situations where it will offload allstocks, if need be, and violate the buffer norms. Aninviolable buffer norm is indistinguishable from nobuffer norm.

2.36 The second problem pertains to the “how” ofreleasing the grains that we decide to release.Suppose the Government has decided to release10,000 tonnes of wheat on the market in some stateand does it by forming batches of 1,000 tonnes (asit often does in reality) and offloading each batchthrough some form of open market sales, such assetting a reserve price and asking for tenders. Therewill in such a case be 10 persons or firms that willbuy up the grain. Now consider the alternative ofreleasing the same total grain in much smallerbatches to traders and millers or directly to retailconsumers. The price impact of these two kinds ofreleases will be vastly different. The former createsan oligopoly, whereas the latter creates a competitivemarket by giving little amounts of grain to lots ofpeople, and the downward pressure on prices in thislatter case will be much greater. This use of standardindustrial organization theory (Box 2.5 elaborateson this) can costlessly improve the efficacy of theFCI.

2.37 In January 2010 Government began usingsome of these kinds of interventions to improve itsfoodgrains release strategy. The decision was takento release foodgrains in multiple locations in smallquantities, at prices substantially below the marketprice. The effect of this action was soon evident onthe market prices. On January 29, 2010, the ReserveBank of India (RBI), also took some steps to mopup some excess liquidity from the market byannouncing an increase in the cash reserve ratio(CRR) by 75 basis points. Given that food inflation isbeginning to go down and there is slight increase innon-food inflation, this was a useful signal. Since itwas coupled with substantial increase in the growthestimate for 2009-10 (which brings the RBI estimatevirtually in line with the forecast that the Ministry ofFinance made some time ago) this staved off anyadverse reaction from the market.

2.38 The need now is to put together a standingplan, a kind of Standard Operating Procedure (SOP),for the kinds of actions that the state ought to takein the event of a skewed price rise in the food sector.An SOP will enable the FCI and other Governmentorganizations to go into action as soon as theinflationary situation in food crosses a threshold, inparticular, when the food price inflation is high andthe gap between food and non-food price inflationsgoes above a certain critical level. Some of


the specificities of the intervention can be modifiedon each occasion through special orders of therelevant empowered group but there ought to be aminimal standing order.

SOCIAL NORMS, CULTURE ANDDEVELOPMENT

2.39 Hard-nosed Government documents usuallymake no mention of the role of social norms andculture in promoting development and economicefficiency. However, there is now a growing body ofliterature that demonstrates how certain social normsand cultural practices are vital ingredients foreconomic efficiency and growth. Groups andsocieties that are known to be honest and trustworthytend to do better than societies that do not have thisreputation. There have been broad cross-countrystudies and also laboratory experiments with the

“trust game” that illustrate this. More generally, whatis being argued is that a nation’s success dependsof course on its resources, human capital andeconomic policies, for instance fiscal and monetarypolicies, but also on the cultural and social normsthat permeate society. We go through life strikinghundreds and thousands of minor contracts anddeals..You give a person money one day and theunderstanding is that that person will repair yourplumbing the next day or it can be the other wayaround (the person repairs your plumbing today andexpects you to pay him the following day); yousupply garments to a store and the store then paysyou for it; someone gives you a hair-cut and, afterthat, you pay her. It is difficult to have such minorcontracts enforced by a third party or some formallegal/bureaucratic machinery. If we try to do it thatway, as we have on occasion in India, the result willbe a cumbersome bureaucracy that is anyway

Box 2.5 : The economics of foodgrain procurement and releaseThe supply curve of wheat will be high in years of bounty and low in years of drought. If it follows that in years of bountythe price of wheat will be low, pL, and in years of drought it will be high, pH. The purpose of a procurement policy is to evenout some of this price fluctuation without having to necessarily rely on food imports from other nations. So what thegovernment does is to set an MSP somewhere above pL and buy up all the excess supply at that price. It follows, if theGovernment does this and then does not release the food thus procured, it will be contributing to a rise in prices on averagebecause now in years of bounty the price will be MSP and in years of drought the price will be pH. To counter this, Governmentneeds a policy of releasing food in years of food shortage.

This is where the tricky problem of how the grains are released comes up. If they are released in large batches to a few tradersor millers, the market structure that gets created is that of an oligopoly with a competitive fringe. Fortunately, the theory forthis is well understood and this can be used to design effective interventions. At each price take the demand for wheat andsubtract from this the supply of wheat that comes from the price-taking sellers. By doing this at each price we are left withwhat may be thought of as the “residual demand curve” for wheat. This is the demand curve that the oligopolistic sellers whobuy the large releases of the Government come into play. They buy up wheat from the Government and then release it on thisresidual market. It can be shown that, if the number of oligopolists is small, the market price for wheat will be high and,moreover, not all the wheat on offer by the Government will be picked up by the sellers. Hence the Government’s problem isnot just deciding how much wheat to release but in how many batches, since this will determine how many oligopolists arebrought into the market. The larger this number, the lower will be the price.

There is another corollary problem. At what price should the government release the grain? Earlier a somewhat mechanicalaccounting rule was used, which was to take the MSP price at which the wheat had been acquired and add to this the costsof freight and storage so as to ensure that the whole operation yielded an accounting profit. However, this method at timesled to a price very close to the market price and, on some occasions, higher than the market price. Of course, that would meanno buyers for the grain and so no impact on the market price. This was corrected in January when it was decided that therelease price must not be pegged to the historical purchase price and other costs but be released at a price substantially belowthe market price. There is, however, a risk that if the price is too low, it may be worthwhile for sellers to buy up what is on offerand sell it back to the Government at the MSP. If the release price is set below the anticipated MSP, this is bound to happen.But even if this is set slightly above the MSP, it may be worthwhile for large traders and millers to buy it up and sell it backat MSP. This operation will of course cause them a small loss but evacuating the wheat from the market could raise its pricesufficiently for this to be worthwhile.

Reference : Avinash Dixit and Nick Stern “Oligopoly and Welfare: A Unified Presentation with Applications toTrade and Development”, European Economic Review, vol. 13, 1982.


unable to deliver. Societies that are endowed withpersonal integrity and trustworthiness have the naturaladvantage that no third party is required to enforcecontracts. For outsiders the mere knowledge that aparticular society is trustworthy is reason to do morebusiness and trade with it.

2.40 One reason why these “social” causes ofdevelopment do not get enough recognition in theliterature on economic policy is that the science ofhow these economics-friendly social qualities areacquired is not yet fully understood. Fortunately, thenew discipline of behavioural economics is beginningto give us some insights into the formation of customsand behaviour. It is, for instance, known that buildingsand office spaces which are cleaner and aestheticallybetter maintained result in individuals being morehonest and desisting from corrupt activity. It is almostas if we have a mental inclination not to defile agood ambience through acts of corruption. New Yorkcity’s notorious high crime was controlled, amongother things, by cleaning up the city and removinggraffiti from the walls. New York’s police departmenttook a decision to deter vandalism and graffiti thatscar public spaces. This act of making the cityscapemore aesthetic somehow made potential criminalsless prone to crime. One sees casual evidence ofthis in the behaviour of Delhites using the metro. Ithas been widely noted that people behave betterwhen they travel on Delhi’s well-maintained metro(postponing their bad behaviour to when they comeup to the surface again, some would add). All this isin keeping with the influential “broken windows” theoryin sociology, which maintains that, if we control low-level, anti-social behaviour and take small steps toimprove the environment, this will have a naturaldeterrent effect on larger criminal behaviour and actsof corruption.

2.41 Also, the sheer recognition and awarenessthat some collective qualities of citizens, such ashonesty and trustworthiness, enable the entiresociety to do well prompts individuals to adopt thosequalities and overcome the ubiquitous free-riderproblem. Hence, for the long-run development of India,people need to be educated about the customs andqualities which, if possessed by all the people, canlead the nation to progress and development. Thisbrings us back to the subject of education andemphasizes that this has to be more than learningfrom textbooks about facts and figures. Whilediscoursing on technical economic policy matters,it is easy to be dismissive of the psychological andsociological determinants of economic outcomes.

While it is true that these interconnections have littleto do with short-term fiscal decisions, incontemplating medium- to long-term policies for anation’s development, which was the subject matterof this chapter, it would be remiss not to mentionthese non-economic foundations of economicprosperity.

A MISCELLANY OF CONCERNS

2.42 While these opening chapters draw heavilyfrom the rest of the Economic Survey devoted tospecific sectors and there is no need to becomprehensive here, it may nevertheless be worthputting in a foreword for some specific areas ofpolicymaking. For more than a decade now India’sservices sector has been the powerhouse of thenation’s economic growth. This is also a sector thatnow produces more than half the GDP of the nation.In recent years the industrial sector has begun tostir and, as discussed above, growth in this sector,especially its labour-intensive sub-sectors, can bean important antidote to poverty. Fortunately, majormanufacturing groups, like automobiles, rubber andplastic products, and chemicals, have shown robust,double-digit growth during April to November 2009;and, according to the advance estimate for 2009-10,the manufacturing sector as a whole has grown atthe remarkable rate of 8.9 per cent. The sector thatcontinues to cause concern and, all said and done,is still the mainstay of the Indian population, isagriculture. There is need to undertake serious policyinitiatives to reach the Government’s target ofsustained 4 per cent growth in this sector.

2.43 Here, as in other sectors, the aim of anenabling Government must be to provide thewherewithal of growth and enterprise and then leaveit to the farmers’ initiative and industry to take thesector forward. This implies that the state has totake purposive action to enhance rural infrastructureand promote research and development (R&D)pertaining to agricultural productivity. These areelaborated upon later in this Economic Survey, butit is worth mentioning here that innovative investmentin irrigation and water resources, and a steady supplyof energy and power from conventional and newersources, such as solar and wind, can go a long wayin empowering farmers. The need for R&D stemsfrom the fact that India’s agricultural productivitycontinues to be low, and improvement in this can goa great distance not only in helping us achieve thegrowth target of 4 per cent but also in building foodsecurity and keeping the lid on food price inflation.


The R&D sector is closely related to the state ofhealth of higher education and the researchinstitutes in the country. On these, India was oncein the forefront of emerging economies but thatmay not be the case any longer. This is notbecause there have been changes in our systemof higher education and research but, ironically,because there have not been. While otheremerging economies, especially those in Asia,have modernized the organization and financingof higher education and research, India is onlynow beginning to stir on these fronts. With a coupleof strategic steps to restructure, and the tappingof private-sector resources, it is possible for Indiato not only become a powerhouse in higher

education but to be a global hub of education andresearch.

2.44 The idea of a global hub has implicationsfor India’s international and neighbourly relations.If the country can become a place where studentscome from not just all of South Asia but also Africa,South East Asia, South America and (given India’scost advantage and long history of excellence inhigher education) also North America and Europe,this can become a catalyst for international tradeand investment and, in general, create a greaterrole for India in the global economy. Further, bypromoting civil society interaction and intellectualcooperation among the neighbouring nations, thiscan be a catalyst of peace.

Fiscal Developmentsand Public Finance CHAPTER

3

The fiscal space generated in the 2004-05 to 2007-08 period, following the FiscalResponsibility Budget Management Act (FRBMA) mandate, mitigated the knockon effects of global financial and economic crisis in 2008-09 through facilitation ofan expansionary fiscal stance to boost aggregate demand. While traditionally theassessment of public finances was confined to analysis of fiscal indicators, the macro-economy-wide impact of the crisis underscored the importance of using nationalaccounts data in tandem in such assessments. As per the national accounts data, in2008-09, the deceleration in growth in private final consumption expenditure waspartly made up for by the growth in Government consumption expenditure (over2007-08), which resulted in a shoring up of the overall economic growth rate. Thereversal in major fiscal deficit indicators in 2008-09 and 2009-10 constitutes aconscious policy-driven stimulus to counter the demand slowdown.

3.2 As the impact of the crisis continued through2009-10, the expansionary fiscal stance wascontinued in the Budget for 2009-10. Given therelative levels of shares of private final consumptionexpenditure and government consumptionexpenditure, such expansion could only be a short-term measure and the Medium Term Fiscal PolicyStatement presented along with the Budget for 2009-10 favoured a resumption of the fiscal consolidationprocess, albeit a gradual one, with fiscal deficitdeclining to 5.5 per cent of the gross domesticproduct (GDP) and 4.0 per cent of the GDP in 2010-11 and 2011-12 respectively. In its Report, theThirteenth Finance Commission has traced the pathof fiscal consolidation for the Centre and States.The resumption of the path of fiscal prudence wouldcomplement the recovery process in the near termand lay the foundation for reviving the growthmomentum in the long term.

3.3 The Budget for 2009-10, continuing with thepolicy of fiscal expansion to boost aggregatedemand, envisaged a fiscal deficit of Rs 4,00,996crore, equivalent of 6.8 per cent of the GDP (6.5 per

cent based on Advanced Estimates of GDP 2004-05 series). In absolute terms, this implied a growthof 21.5 per cent in the level of fiscal deficit over2008-09 (provisional). With growth in nominal GDPat only 10.6 per cent, as a proportion of the GDP,fiscal deficit was higher. The higher estimated levelsof fiscal deficit in 2009-10 owe largely to the fullerimpact of the tax cuts announced as a part of thefiscal stimulus packages late in the second half offiscal 2008-09. The bulk of the expansion was alsoreflected in the rise in revenue deficit in 2008-09and BE (budget estimate) 2009-10 (Table 3.1). Thereversal of the trend of fiscal consolidation was thusmarked in 2008-09 and BE 2009-10 (Figure 3.1).

3.4 The fiscal stimulus packages also facilitatedan expansion in the fiscal deficit of the Statesthrough a relaxation in targets by 100 basis points.As a result, the gross fiscal deficit of the Statescombined rose from 1.4 per cent of the GDP in2007-08 to 2.6 per cent in 2008-09 (RE) and wasestimated at 3.2 per cent of the GDP in 2009-10(BE). Following the high levels achieved in 2007-08, the reduced levels of revenue surplus at 0.1


automatic stabilizers and discretionary fiscalpolicies pursued to obviate the adverse impact ofthe global financial and economic crisis was madepossible by the space available and the largelycyclical nature of the fiscal deficit. In the literatureon the nature of fiscal deficits in India, availableevidence points to the predominance of thestructural features and the relatively small cyclicalcomponent. Therefore, the rapid and significantfiscal consolidation achieved in the post- FRBMAperiod up to 2007-08 was indeed an importantachievement that enabled greater fiscal space fora macroeconomic policy stance to counteract theimpact of the global economic crisis. Besides, asa proportion of the GDP, the reductions in fiscaldeficit in the period 2003-04 to 2007-08 were madepossible in equal measure by higher tax revenuesand expenditure compression. This facilitated useof both tax and expenditure measures in theexpansionary fiscal policies to boost demand. Assuch, the progress in fiscal consolidation in Indiais different from the typical models elsewhere drivenpurely by expenditure compression. Having regardto the levels of tax-GDP ratio, expenditurecommitments and needs, smaller social securitycontributions and weaker operation of automaticstabilizers, such a process was consideredapposite and might inform the policy stance, goingforward.

CENTRAL GOVERNMENT FINANCES

3.6 A low and stagnant tax-GDP ratiocharacterized Central Government revenues for aconsiderable period since 1990-91. This reflected

-1

Per

cent

of

GD

P

FiscalDeficit

Trends in deficits of Central Government

0

1

2

3

4

5

6

7

RevenueDeficit

PrimaryDeficit

Figure 3.1

Year

2005-06

2007-08

2006-07

2004-05

2008-09 (Prov)

2009-10(BE)

per cent of the GDP in 2008-09 (RE) and a modestdeficit of 0.6 per cent of the GDP in 2009-10 (BE)also reflected this expansionary stance. With theaward of the Thirteenth Finance Commission, theresumption of the progress in fiscal consolidationhas a distinct timeframe for both the Centre and theStates.

3.5 In advanced economies, the operation of

Table 3.1 : Trends in deficits of CentralGovernment

Year Revenue Fiscal Primary Revenuedeficit deficit deficit deficit as

per centof fiscal

deficit

(As per cent of GDP)

Enactment of FRBMA2003-04 3.6 4.5 0.0 79.72004-05 2.4 3.9 0.0 62.32005-06 2.5 4.0 0.4 63.02006-07 1.9 3.3 -0.2 56.32007-08 1.1 2.6 -0.9 41.42008-09(Prov.)* 4.4 5.9 2.5 74.8

2009-10(BE) 4.6 6.5 2.8 70.5

Source : Union Budget documents.BE–budget estimate.* Provisional and unaudited as reported by

Controller General of Accounts, Department ofExpenditure, Ministry of Finance.

Notes: The ratios to GDP at current market pricesare based on the Central StatisticalOrganization’s(CSO) National Accounts 2004-05 series.

39Fiscal Developments and Public Finance

in part the reform of the tax structure through lowerrates in indirect taxes and the levels of the tax base.The rapid growth momentum in the post-FRBMAperiod helped change the composition of taxes,deepen the process of rationalization of taxes andwiden the base. As a proportion of gross taxrevenue, direct taxes rose from a level of 19.1 percent in 1990-91 to reach 49.9 per cent in 2007-08;in 2008-09 (provisional), they were at 55.5 per cent.In terms of year-on-year growth, in 2008-09,reflecting the two distinct halves of the financial yearwith different economic environments, direct taxesgrew by 14.3 per cent with personal income taxrising by 20.8 per cent and corporate income taxby 10.8 per cent. This represented moderation fromthe levels that obtained in the period 2003-04 to2007-08. There was corresponding decline in theshare of indirect taxes in the 1990-91 to 2007-08period; however, service tax has emerged as a majorcomponent with a 10 per cent share in 2008-09. Interms of year-on-year growth, in 2008-09, indirecttaxes fared poorly with decline in both excise andcustoms and service tax moderating to a lowergrowth of 18.6 per cent. With non-tax revenuesremaining at a level of around 2 per cent of the GDPand at the given levels of devolution, revenue receiptswhich were at 11.0 per cent of the GDP in 2007-08declined to a level of 9.8 per cent in 2008-09(provisional).

3.7 As a proportion of GDP, total expenditure fellfrom a level of 17.1 per cent in 2003-04 to 14.4 percent in 2007-08, largely driven by the steep fall incapital expenditure with revenue expenditure fallingrelatively slowly (Figure 3.2). Total expenditure was

placed at Rs 8,81,469 crore in 2008-09, whichimplied a growth of 23.7 per cent over 2007-08 levelsand 17.4 per cent over that assumed in 2008-09(BE). The front loading of Plan expenditure wasevident in the rise in its proportion to the GDP froma level of 4.1 per cent in 2007-08 to 4.9 per cent in2008-09 (estimated initially at 4.6 per cent in BE2008-09) (Table 3.2). Thus the reversal in major fiscaldeficit indicators in 2008-09 and 2009-10 is a policy-driven stimulus to counter the demand slowdown.

BUDGETARY DEVELOPMENTS IN

2009-103.8 The Budget for 2009-10 presented on July6, 2009 was formulated in the midst of an uncertainmacroeconomic environment with a focus onrecovery from the economic slowdown following theknock-on effects of the global financial and economiccrisis. The three challenges identified includedleading the economy back onto the high growth pathof 9 per cent at the earliest; deepening andbroadening the inclusive agenda for development;and re-energizing the Government and improving thedelivery mechanism. In view of the uncertaintiesassociated with the impact of the crisis and not sostrong signs of recovery, the Budget for 2009-10continued fiscal expansion to boost demand. TheBudget acknowledged the short-term nature of thestance through a medium-term policy indication ofresumption of fiscal consolidation and the initiativeto rein in fiscal deficit through institutional reformmeasures like the intention to move towards anutrient- based subsidy regime (and ultimately to

0

Per

cent

of

GD

P

RevenueExpenditure

Receipts and expenditure of the Central Government

2

4

6

8

10

12

14

16

Figure 3.2

RevenueReceipts

CapitalReceipts

CapitalExpenditure

Year

2005-06

2007-08

2006-07

2004-05

2008-09 (Prov)

2009-10(BE)


Table 3.2 : Receipts and expenditure of the Central Government2004-05 2005-06 2006-07 2007-08# 2008-09 2008-09 2009-10

(B.E.) (Prov.) (B.E.)(Rs. crore)

1. Revenue Receipts (a+b) 3,05,991 3,47,077 4,34,387 5,41,864 6,02,935 5,44,651 6,14,497(a) Tax Revenue (Net of States’ share) 2,24,798 2,70,264 3,51,182 4,39,547 5,07,150 4,47,726 4,74,218(b) Non-tax Revenue 81,193 76,813 83,205 1,02,317 95,785 96,925 1,40,279

2. Revenue Expenditure 3,84,329 4,39,376 5,14,609 5,94,433 6,58,118 7,91,697 8,97,232of which:

(a) Interest Payments 1,26,934 1,32,630 1,50,272 1,71,030 1,90,807 1,90,485 2,25,511(b) Major Subsidies 44,753 44,480 53,495 67,498 67,037 1,23,640 1,06,004(c) Defence Expenditure 43,862 48,211 51,682 54,219 57,593 72,836 86,879

3. Revenue Deficit (2-1) 78,338 92,299 80,222 52,569 55,183 2,47,046 2,82,7354. Capital Receipts 1,92,261 1,58,661 1,49,000 1,70,807 1,47,949 3,36,818 4,06,341

of which:(a) Recovery of Loans* 62,043 10,645 5,893 5,100 4,497 6,158 4,225(b) Other Receipt 4,424 1,581 534 38,795 10,165 546 1,120

(Mainly PSU Disinvestment)(c) Borrowings and Other Liabilities $ 1,25,794 1,46,435 1,42,573 1,26,912 1,33,287 3,30,114 4,00,996

5. Capital Expenditure** 1,13,923 66,362 68,778 1,18,238 92,766 89,772 1,23,6066. Total Expenditure [2+5=6(a)+6(b)] 4,98,252 5,05,738 5,83,387 7,12,671 7,50,884 8,81,469 10,20,838

of which:(a) Plan Expenditure 1,32,292 1,40,638 1,69,860 2,05,082 2,43,386 2,75,450 3,25,149(b) Non-Plan Expenditure 3,65,960 3,65,100 4,13,527 5,07,589 5,07,498 6,06,019 6,95,689

7. Fiscal Deficit [6-1-4(a)-4(b)] 1,25,794 1,46,435 1,42,573 1,26,912 1,33,287 3,30,114 4,00,9968. Primary Deficit [7-2(a)] -1,140 13,805 -7,699 -44,118 -57,520 1,39,629 1,75,485

(As per cent of GDP)1. Revenue Receipts (a+b) 9.4 9.4 10.1 11.0 11.4 9.8 10.0

(a) Tax Revenue (Net of States’ Share) 6.9 7.3 8.2 8.9 9.6 8.0 7.7(b) Non-tax Revenue 2.5 2.1 1.9 2.1 1.8 1.7 2.3

2. Revenue Expenditure 11.9 11.9 12.0 12.0 12.4 14.2 14.6of which:

(a) Interest Payments 3.9 3.6 3.5 3.5 3.6 3.4 3.7(b) Major Subsidies 1.4 1.2 1.2 1.4 1.3 2.2 1.7(c) Defence Expenditure 1.4 1.3 1.2 1.1 1.1 1.3 1.4

3. Revenue Deficit (2-1) 2.4 2.5 1.9 1.1 1.0 4.4 4.64. Capital Receipts 5.9 4.3 3.5 3.5 2.8 6.0 6.6

of which:(a) Recovery of Loans* 1.9 0.3 0.1 0.1 0.1 0.1 0.1(b) Other Receipts (Mainly PSU Disinvestment) 0.1 0.0 0.0 0.8 0.2 0.0 0.0(c) Borrowings and Other Liabilities $ 3.9 4.0 3.3 2.6 2.5 5.9 6.5

5. Capital Expenditure** 3.5 1.8 1.6 2.4 1.7 1.6 2.06. Total Expenditure [2+5=6(a)+6(b)] 15.4 13.6 13.6 14.4 14.2 15.8 16.6

of which:(a) Plan Expenditure 4.1 3.8 4.0 4.1 4.6 4.9 5.3(b) Non-Plan Expenditure 11.3 9.9 9.7 10.3 9.6 10.9 11.3

7. Fiscal Deficit [6-1-4(a)-4(b)] 3.9 4.0 3.3 2.6 2.5 5.9 6.58. Primary Deficit [7-2(a)] 0.0 0.4 -0.2 -0.9 -1.1 2.5 2.8Memorandum Items (Rs crore)

(a) Interest Receipts 32,387 22,032 22,524 21,060 19,135 20,556 19,174(b) Dividend and Profit 15,934 18,549 18,969 21,531 24,758 20,653 19,340(c) Non-Plan Revenue Expenditure 2,96,835 3,27,518 3,72,191 4,20,861 4,48,351 5,56,521 6,18,834

Source : Union Budget documents. # Based on Provisional Actuals for 2007-08.* Includes receipts from States on account of Debt Swap Scheme for 2004-05.** Includes repayment to National Small Savings Fund for 2004-05.$ Does not include receipts in respect of Market Stabilization Scheme, which will remain in the cash balance of the Central

Government and will not be used for expenditure.Note : 1. The ratios to GDP at current market prices are based on CSO’s National Accounts 2004-05 series.

2. The figures may not add up to the total due to rounding/ approximations.


direct cash transfers) in fertilizers; setting up of anexpert group to advise on viable and sustainablepricing of petroleum products; encouraging people’sparticipation in public sector undertakings (PSUs)through disinvestment; and bringing about structuralchanges in direct taxes through the draft DirectTaxes Code and moving towards a harmonizedgoods and services tax (GST).

3.9 The Budget for 2009-10, acknowledging theimportance of infrastructure development, significantlyraised the allocation for the sector. This included asignificant step up (by 87 per cent) in the allocationunder the Jawaharlal Nehru National Urban RenewalMission (JNNURM); a 23 per cent hike in theallocation under the National Highway DevelopmentProgramme (NHDP); increase in allocation for theRailways from Rs10,800 crore in the Interim Budget2009-10 to Rs15,800 crore; and increase of 144 percent in the allocation under the National RuralEmployment Guarantee Scheme (NREGS) takingthe outlay to a level of Rs 39,100 crore.

Revenue and capital receipts

3.10 As the fiscal stimulus packages wereannounced late in the second half of 2008-09, thefull impact of the measures was expected to kick inthe current fiscal, particularly on the revenue side. Itwas initially estimated that the tax cuts announcedwould entail a revenue loss of around 1per cent ofGDP. Given the above, and the need to continuewith the stimulus, the Budget for 2009-10 presentedin July 2009 envisaged a growth of 5.1 per cent ingross tax revenue of the Centre and was estimatedat Rs 6,41,079 crore (Rs 6,09,075 crore in 2008-09provisional accounts and Rs 6,87,715 in BE 2008-09). While direct taxes were estimated to grow by9.4 per cent from 2008-09 (prov.) levels, indirect taxeswere estimated to grow marginally reaching a levelof Rs 2,69,477 crore (Table 3.3). Within direct taxes,revenue from personal income tax was estimated todecline by 9.0 per cent and that from corporateincome tax to grow by 20.1 per cent. While revenuefrom customs and excise was budgeted to declinemarginally, the growth in revenue from service taxwas estimated at 6.8 per cent, fully compensatingthe shortfall in the former.

3.11 These trends in individual taxes carriedforward the tilt in composition in favour of direct taxeswith their share in total tax revenue rising from 55.5

per cent in 2008-09 to 57.7 per cent in 2009-10(BE)(Figure 3.3). As proportion of the GDP, revenuefrom direct taxes marginally declined to a level of6 per cent and revenue from indirect taxessubstantially declined to reach 4.4 per cent. Thus,the marksmanship in indirect taxes took a knock in2008-09. This also reflected the fact that as part offiscal stimulus package to revive demand, it wasexcise that bore the brunt of tax cuts and the effectof economic slowdown was more pronounced inconsumption than on income.

Indirect taxesCustoms

3.12 In the Budget for 2009-10, no change wasmade in the overall rate structure of customs duties.The peak rate for non-agricultural products at 10 percent and the two major ad valorem rates at 5 percent and 7.5 per cent were retained. However, somesector-specific changes in the rates of duty weremade which are detailed below.

The concessional rate of basic customs duty of5 per cent on specified machinery for tea, coffeeand rubber plantations, which was earlieravailable up to April 30, 2009, was extended upto July 6, 2010. Basic customs duty on‘mechanical harvesters’ for coffee plantationswas reduced from 7.5 per cent to 5 per cent.Such harvesters were also exempted fromcountervailing duty (CVD) by way of excise dutyexemption. On permanent magnets formanufacture of PM synchronous generatorsabove 500 KW for use in wind-operatedelectricity generators, basic customs duty wasreduced from 7.5 per cent to 5 per cent.

Full exemption from customs duty presentlyavailable to specified raw materials/inputsimported by manufacturer-exporters of sportsgoods was extended to five additional items.Similarly, full exemption from customs dutypresently available to specified raw materialsand equipment imported by manufacturer-exporters of leather goods, textile products, andfootwear industry was extended to someadditional items. The basic customs duty onunworked corals was also reduced from 5 percent to nil.

Full exemption from basic customs dutyavailable to set-top boxes was withdrawn and


0Per

cent

of

gros

s ta

x re

venu

e

Excise

Composition of gross tax revenue

5

10

15

20

25

30

35

40

Figure 3.3

Customs

Corporatetax

45

Personalincome tax

Servicetax

Year

1990

-01

1995

-96

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

(Pro

v)

2009

-10

(BE)

Table 3.3 : Sources of tax revenue2004-05 2005-06 2006-07 2007-08 2008-09 2008-09 2009-10

(BE) (Prov.)@ (BE)

(Rs. crore)

Direct Taxes (a) 1,32,181 1,57,557 2,19,722 2,95,938 3,65,000 3,38,213 3,70,000Personal Income Tax 49,268 55,985 75,093 1,02,644 1,38,314 1,24,014 1,12,850Corporate Tax 82,680 1,01,277 1,44,318 1,92,911 2,26,361 2,13,812 2,56,725

Indirect Taxes (b) 1,70,936 1,99,348 2,41,538 2,78,845 3,21,264 2,69,454 2,69,477Customs 57,611 65,067 86,327 1,04,119 1,18,930 99,848 98,000Excise 99,125 1,11,226 1,17,613 1,23,425 1,37,874 1,08,740 1,06,477Service Tax 14,200 23,055 37,598 51,301 64,460 60,866 65,000

Gross Tax Revenue # 3,04,958 3,66,151 4,73,512 5,93,147 6,87,715 6,09,705 6,41,079

Tax revenue as a proportion of gross tax revenue (in per cent)

Direct Taxes (a) 43.3 43.0 46.4 49.9 53.1 55.5 57.7Personal Income tax 16.2 15.3 15.9 17.3 20.1 20.3 17.6Corporate Tax 27.1 27.7 30.5 32.5 32.9 35.1 40.0

Indirect Taxes (b) 56.1 54.4 51.0 47.0 46.7 44.2 42.0Customs 18.9 17.8 18.2 17.6 17.3 16.4 15.3Excise 32.5 30.4 24.8 20.8 20.0 17.8 16.6Service Tax 4.7 6.3 7.9 8.6 9.4 10.0 10.1

Tax revenue as a proportion of gross domestic product* (in per cent)

Direct Taxes (a) 4.1 4.3 5.1 6.0 6.9 6.1 6.0Personal Income Tax 1.5 1.5 1.8 2.1 2.6 2.2 1.8Corporate Tax 2.6 2.7 3.4 3.9 4.3 3.8 4.2

Indirect Taxes (b) 5.3 5.4 5.6 5.6 6.1 4.8 4.4Customs 1.8 1.8 2.0 2.1 2.2 1.8 1.6Excise 3.1 3.0 2.7 2.5 2.6 2.0 1.7Service Tax 0.4 0.6 0.9 1.0 1.2 1.1 1.1

Gross Tax Revenue # 9.4 9.9 11.1 12.0 13.0 10.9 10.4

Source: Union Budget documents. @ Provisional and unaudited as reported by Controller General of Accounts, Department of Expenditure, Ministry of Finance.

# includes taxes referred to in (a) & (b) and taxes of Union Territories and “other” taxes.* Refers to GDP at current market prices.

Notes: 1. Direct taxes also include taxes pertaining to expenditure, interest, wealth, gift and estate duty.2. The ratios to GDP at current market prices are based on the CSO’s National Accounts 2004-05 series.


basic customs duty of 5 per cent wasreimposed. Basic customs duty on LCD panelsfor manufacture of LCD televisions was reducedfrom 10 per cent to 5 per cent. Full exemptionfrom 4 per cent special CVD on parts formanufacture of mobile phones and accessorieswas reintroduced for one year, that is up to July6, 2010.

Basic customs duty on nine specified drugs andbulk drugs for their manufacture, and onevaccine was reduced from 10 per cent to 5 percent. These items were also exempted fromCVD by virtue of full exemption from excise duty.Also, the basic customs duty on Patent DuctusArteriosus/Atrial Septal Defect occlusiondevices was reduced from 7.5 per cent to 5 percent with nil CVD by way of excise dutyexemption. Similarly, basic customs duty onartificial hearts (left ventricular assist devices)was reduced from 7.5 per cent to 5 per cent.This device already attracts nil excise duty/CVD.

Basic customs duty on cotton waste and woolwaste was reduced from 15 per cent to 10 percent.

On packaged or canned software, CVDexemption has been provided on the portion ofthe value which represents the consideration fortransfer of the right to use such software, subjectto specified conditions. Service tax is leviableon this portion of the value as an “InformationTechnology Software Service”.

Customs duty on serially numbered gold bars(other than tola bars) and gold coins wasincreased from Rs100 per 10 g to Rs 200 per10 g. On other forms of gold, the customs dutywas increased from Rs 250 per 10 g to Rs 500per 10 g. Customs duty on silver was increasedfrom Rs 500 per kg to Rs 1,000 per kg.

3.13 Some other changes announced in theBudget 2009-10 and thereafter are listed below:

Basic customs duty on rock phosphate wasreduced from 5 per cent to 2 per cent.

CVD exemption on Aerial Passenger RopewayProjects was withdrawn. Consequently, suchprojects will attract applicable CVD.

Basic customs duty exemption for “concretebatching plants of capacity 50 cum per hour or

more” was withdrawn. Such plants will nowattract 7.5 per cent basic duty.

Inflatable rafts, snow skis, water skis,surfboards, sailboats and other water sportsequipment were fully exempted from basiccustoms duty.

Basic customs duty on bio-diesel was reducedfrom 7.5 per cent to 2.5 per cent.

Nil rate of basic customs duty on import of rawsugar, earlier available up to August 1, 2009,has been extended up to December 31, 2010.Import of white/refined sugar (up to 10 lakh MT)at nil rate has been extended up to March 31,2010.

Semi- or wholly milled rice was fully exemptedfrom basic customs duty till September 30, 2010.

Excise

3.14 The resurgence in the manufacturing sector,which led to the robust growth momentum in the2003-04 to 2007-08 period, owes also to therationalization of excise duties. As a consequenceof changes in ad valorem rates of Central exciseduty for non-petroleum products on February 24,2009 as part of the third fiscal stimulus package, adual rate structure with rates of 4 per cent and 8 percent ad valorem was put in place. This rate structurefor non-petroleum products has been retained inBudget 2009-10. However, the rate of duty on severalitems attracting 4 per cent was restored to 8 percent. Among the important sectors/items where suchan increase occurred were ceramic tilesmanufactures in a factory not using electricity forfiring the kiln; plywood, flush doors and articles ofwood; writing ink and other ink used in writinginstruments; zip fasteners; and MP3/MP4 orMPEG4 players. Consequent upon increase inexcise duty rate from 4 per cent to 8 per cent,abatement rates were revised suitably on itemscovered under retail sale price (RSP)-basedassessment.

3.15 On the other hand, the 4 per cent rate wasretained on mass consumption and essential itemssuch as drugs and pharmaceutical products;medical equipment; certain varieties of paper,paperboard and articles made therefrom; food itemssuch as sugar confectionary, biscuits of retail priceexceeding Rs100/kg, cakes and pastries andsherbets; pressure cookers; power-driven pumps


designed for handling water; water filtration/purification equipment; specified textile machinery;paraxylene; footwear of retail price exceeding Rs 250per pair but not exceeding Rs 750 per pair; compactfluorescent lamps (CFL) and vacuum and gas-filledbulbs of retail price not exceeding Rs 20 per bulb.

3.16 The specific changes made included:

Restoration of the scheme of optional exciseduty of 4 per cent for pure cotton.

Rate of duty on manmade fibre and yarnenhanced from 4 per cent to 8 per cent onmandatory basis. Beyond the fibre/yarn stagethe optional levy of 8 per cent ad valoremrestored (instead of pre-budget rate of 4 per cent).Similarly, textile items manufactured from naturalfibre other than cotton such as silk, wool andflax to bear an optional levy of 8 per cent advalorem instead of 4 per cent beyond the fiberstage. The enhanced rate of 8 per cent to alsoapply to blended fabrics and products.

Corresponding changes made in the rates of dutyapplicable to export- oriented units (EOUs) usingonly indigenous raw materials when they makeclearances of textile items in the domestic tariffarea (DTA).

Enhanced excise duty from 4 per cent to 8 percent ad valorem on some important textileintermediates, namely polyester chips; di-methylterephthalate (DMT), purified terephthalic acid(PTA); and acrylonitrile.

The ad valorem component of excise duty onpetrol intended for sale with a brand nameconverted into a specific rate. Consequently,such petrol to attract total excise duty ofRs 14.50 per litre instead of “6 per cent + Rs13per litre”.

Similarly, the ad valorem component of exciseduty on diesel, intended for sale with a brandname converted into a specific rate.Consequently, such diesel to attract total exciseduty of Rs 4.75 per litre instead of “6 per cent +Rs 3.25 per litre”.

Exemption from basic excise duty, additionalexcise duty and special additional excise dutyprovided to high-speed diesel (HSD) oil blendedwith bio-diesels, up to 20 per cent by volume,provided both HSD and bio-diesel have paid theappropriate excise duty.

Excise duty rate on special boiling point spiritsand Naphtha reduced to 14 per cent.

Excise duty on large cars/utility vehicles, havingengine capacity exceeding 1999 cc, reducedfrom “20 per cent + Rs 20,000 per unit” to “20per cent + Rs15,000 per unit”.

Excise duty on petrol-driven trucks/lorriesreduced from 20 per cent to 8 per cent. Exciseduty on chassis of such truck/lorries alsoreduced from “20 per cent + Rs10,000” perchassis to “8 per cent + Rs10,000” per chassis.

No change made either in the exemption limitor the eligibility limit for small- scale exemption.

Brand name restriction relaxed in respect ofprinted laminated rolls. As a consequence,manufacturers of printed laminated rolls bearingthe brand name of another person and fulfillingthe conditions of notification entitled to fullexemption from excise duty for their firstclearances of this item (for home consumption)not exceeding Rs150 lakh during the remainingpart of this financial year, that is 2009-10.

Full exemption from excise duty has beenprovided to goods falling under Chapter 68manufactured at the site of construction for usein construction work at such site.

Full exemption from excise duty provided to topsmanufactured from manmade fibres using thetow-to-top process under specified conditions.

Articles of jewellery on which brand name ortrade name is indelibly affixed or embossed(branded jewellery) fully exempted from exciseduty.

Full exemption provided to EVA compoundmanufactured on job-work basis for furthermanufacture of footwear.

Partial exemption from excise duty provided topackaged or canned software so that the dutypayable on that portion of the value whichrepresents the consideration for the transfer ofthe right to use such software is exempted.

Recorded smart cards and tags are exempt fromexcise duty. A condition had been added to thisexemption so as to make it available only if themanufacturer has not availed of central value-added tax (CENVAT) credit of the duty paid oninputs for these goods.


In respect of other taxable services, anew revamped and trust-based refundscheme notified with effect from July 7,2009. Under the new scheme, refund tobe granted to exporters within one monthwithout any pre-audit based oncertification. If the amount of refund claimdoes not exceed 0.25 per cent of the totalf.o.b. value of exports under a claim, self-certification by the exporter to the effectthat the eligible services have beenreceived and used for export by him andservice tax payable thereon has beenreimbursed would be sufficient to get therefund. In cases where amount of refundclaim exceeds 0.25 per cent of the f.o.b.value of exports, the refund claim to besanctioned on the basis of certificationby the chartered accountant who auditsthe annual accounts of the exporter. Asimplified format has been prescribed tofile the refund claims. The condition forfiling refund claims once in a quarterdispensed with and the time period forfiling the refund claim increased to oneyear from the date of export.‘Terminal handling charges’ added to thelist of services eligible for refund.Services provided for transport of exportgoods through national waterways, inlandwater and coastal shipping included inthe list of services eligible for refund ofservice tax.

(d) Other relief measures included:Exemption from service tax provided tointer-State or intra-State transportation ofpassengers in a vehicle bearing “contractcarriage permit”, with specifiedconditions.Federation of Indian Export PromotionOrganization (FIEO) and specified exportpromotion councils exempted from thelevy of service tax under the “Club orassociation service”. The exemptionwould be valid till March 31, 2010.Exemption from service tax leviable under“banking and other financial services” orunder “foreign exchange broking services”provided to inter-bank purchase and sale

Service Tax

3.17 The introduction of service tax in 1994-95ushered in a major structural change in indirect taxesin the form of wider base and facilitated the processof rationalization of excise duties resulting in lowertax burden on productive sectors. Over the years,there has been an increase in the number of servicesand the rate of service tax leviable (Table 3.4). TheBudget for 2009-10 carried this process forwardthrough the following measures:

(a) Service tax retained at 10 per cent (which wasreduced from 12 per cent on February 24, 2009as part of the fiscal stimulus package).

(b) The following four new services have been broughtunder the service tax net:(i) Services provided in relation to transport of

coastal goods and goods through nationalwaterways and inland water.

(ii) Services provided in relation to transport ofgoods by rail (service tax kept in abeyancefor some time).

(iii) Cosmetic and plastic surgery servicesundertaken to preserve or enhance physicalappearance or beauty.

(iv) Legal consultancy services provided by abusiness entity to another business entity.

(c) As relief to exporters :Two taxable services, namely “transportof goods by road” and “commission paidto foreign agents” exempted from the levyof service tax, should the exporter beliable to pay service tax on reverse chargebasis.

Table 3.4 : Service tax revenue

Year No. of Tax rate in Revenue Growth inservices per cent (Rs crore) per cent

2003-04 60 8 7891 91.42004-05 75 10 14200 80.02005-06 84 10 23055 62.42006-07 99 12 37598 63.12007-08 106 12 51301 36.42008-09 110 10 * 60702 18.32009-10(P) 114 10 36785 -6.5 #Source: Receipts Budget and Principal Chief Controllerof Accounts.* Reduced to 10 per cent with effect from February

24, 2009.# Over corresponding period April-December, 2008.(P) Revenue collection for 2009-10 (April-December

2009).


and expanding the base. This was carried forwardin 2009-10 through enhancement of the minimumlevel of income exempt under personal income taxby Rs10,000 for general taxpayers and by Rs15,000 for senior citizens. The surcharge of 10 percent on personal income tax was also eliminated.The fringe benefit tax was abolished to reduce thecompliance burden on employers. The rate ofminimum alternate tax was raised to 15 per centto improve inter-se equity in the taxation ofcorporate taxpayers.

3.19 Overall, tax proposals on direct taxes wererevenue neutral. In pursuance of a Budgetannouncement, the draft Direct Taxes Code andDiscussion Paper was released in August 2009 forpublic comments (Box 3.1). An alternate disputeresolution mechanism was introduced in theIncome-tax Act 1961 to facilitate expeditiousresolution of tax disputes involving internationaltransactions.

Tax ExpenditureDirect Taxes

3.20 As a part of the FRBMA mandate of normsfor transparency and disclosures, a “Statement ofRevenue Foregone” is tabled along with budgetdocuments (Appendices in Receipts Budget). Asper the Budget 2009-10, tax foregone on accountof exemptions under corporate income tax for 2007-08 and 2008-09 was estimated at Rs 62,199 croreand Rs 68,914 crore respectively. Deduction onaccount of accelerated depreciation, deduction ofexport profits of units located in Software Technologyparks and of EOUs were some of the major itemsunder such corporate exemptions. Tax foregone onaccount of exemptions under personal income taxwas estimated at Rs 33,278 crore and Rs 34,437crore respectively in 2007-08 and 2008-09 withdeduction on account of certain investments andpayments under section 80C of the Income-tax Actbeing the main exemptions.

Indirect Taxes

3.21 Estimates of total revenue foregone on theCentral excise side for 2008-09 were placed atRs1,28,293 crore as against the corresponding figureof Rs 87,468 for 2007-08. The sharp increase inrevenue forgone is attributable to the reduction inmean effective rate of excise duty from 16 per centto 14 per cent in the Budget for 2008-09; subsequent

of foreign currency between scheduledbanks.Services provided in relation to transportof goods by rail exempted from servicetax.Services provided or to be provided inrelation to management, maintenance orrepair of roads exempted from servicetax.Service tax exemption on taxableservices provided in relation to transportof specified goods through nationalwaterways, inland water and coastalshipping.Sub-brokers excluded from the definitionof “stockbroker”.Service tax exemption provided onbusiness auxiliary services provided inthe manufacture of pharmaceuticalproducts, medicines, perfumery,cosmetics or toilet preparationscontaining alcohol, which are chargedexcise duty under the Medicinal andToilet Preparations (Excise Duties) Act1955.Partial exemption from service taxgranted to job workers providing businessauxiliary service to the brand owners ofalcoholic beverages to the extent ofservice tax leviable on inputs (i.e. rawmaterials and packing materials) usedin the manufacture of such alcoholicbeverages.Service tax exemption provided to canalsbuilt under works contracts, includingEPC projects, provided they are not usedfor commercial purposes.Specified processes undertaken duringthe course of manufacture of parts ofcycles or sewing machines exemptedfrom service tax under business auxiliaryservices.

Direct Taxes3.18 The Budget for 2009-10 pointed out that thethrust of tax reforms over the last few years hadbeen on improving the efficiency and equity of thetax system by eliminating distortions in the taxstructure, maintaining moderate levels of taxation


Box 3.1 : Direct Taxes CodeThe Budget for 2009-10 underscored the importance of continuing the process of structural change in Direct Taxes andpromised a comprehensive code to this effect. A Discussion Paper (DP) along with a draft Direct Taxes Code was putin the public domain on August 12, 2009. The Code seeks to consolidate and amend the law relating to all direct taxes,that is income-tax, dividend distribution tax and wealth tax so as to establish an economically efficient, effective andequitable direct tax system which will facilitate voluntary compliance and help increase the tax-GDP ratio. All the directtaxes have been brought under a single code and compliance procedures unified, which will eventually pave the way fora single unified taxpayer reporting system. The need for the Code arose from concerns about the complex structure ofthe Income Tax Act, numerous amendments making it incomprehensible to the average tax payer and frequent policychanges due to the changing economic environment. The DP states that marginal tax rates have been steadily loweredand the rate structure rationalized to reflect best international practices and any further rationalization of the tax ratesmay not be feasible without corresponding increase in the tax base to enhance revenue productivity of the tax system andimprove its horizontal equity.

A threefold strategy for broadening the base has been articulated in the Code. The first element of the strategy is tominimize exemptions that have eroded the tax base. The removal of these exemptions would result in a higher tax-GDPratio; enhance GDP growth; improve equity (both horizontal and vertical); reduce compliance costs; lower administrativeburdens; and discourage corruption. The second element of the strategy seeks to address the problem of ambiguity in thelaw which facilitates tax avoidance. The third element of the strategy relates to checking of erosion of the tax basethrough tax evasion.

Some key features

The Discussion paper discusses the principles of residence-based taxation of income and source-based taxation ofincome in terms of international best practices that are mixes of the two. Under the Code, residence-based taxationis applied to residents and source-based to non-residents. A resident of India will be liable to tax in India on hisworld-wide income. However, a non-resident will be liable to tax in India only in respect of accruals and receipts inIndia (including deemed accruals and receipts).

The draft Code simplifies the dualistic concepts of “previous year” and “assessment year” used in the Act andreplaces them with the unified concept of “financial year” and decrees that all rights and obligations of the taxpayerand the tax administration will be made with reference to the “financial year”.

The DP argues for special treatment of capital gains under an income tax regime for two reasons. Firstly, taxing gainseach year, as they accrue, would strain the finances of an individual who is yet to receive these gains in hand. Second,the capital gain realized when a capital asset is sold is usually the accumulated appreciation in the value of the assetover a number of years. The “bunching” of such appreciation in the year in which the asset is sold pushes the sellerinto a higher marginal tax bracket, if the value of the asset is sufficiently high. As such, if no special treatment isaccorded to capital gains, a progressive income tax would discriminate against those whose income from capitalassets is in the form of capital gains as compared to those whose income is derived from interest or dividends. TheCode also seeks to eliminate the present distinction between short-term investment asset and long-term investmentasset on the basis of the length of holding period of the asset.

On tax incentives, the DP argues that they are inefficient, distorting, inequitous, impose greater compliance burdenon the taxpayer and on the administration, result in loss of revenue, create special interest groups, add to thecomplexity of the tax laws, and encourage tax avoidance and rent-seeking behaviour. Based on a comprehensivereview, the Code proposes that profit linked tax deductions will be replaced by investment linked deductions in areasof positive externality.

The draft Code argues against area-based exemption through allusion to economic distortion, that is allocate/ divertresources to areas where there is no comparative advantage. Such exemptions also lead to tax evasion and avoidance.It proposes that area-based exemptions that are available under the Income Tax Act 1961 will be grandfathered.

The draft Code proposes to rationalise the tax incentives for savings through the introduction of the ‘Exempt-Exempt-Taxation’ (EET) method of taxation of savings. Under this method, the contributions are exempt from tax(this represents the first ‘E’ under the EET method), the accumulations/accretions are exempt (free from any taxincidence) till such time as they remain invested (this represents the second ‘E’) and all withdrawals at any timewould be subject to tax at the applicable personal marginal rate of tax (this represents the ‘T’ under the EET method).


reduction in excise duty rates on petrol and HSD inJune 2008; across- the-board reduction in exciseduty rates by 4 percentage points on non-petroleumproducts in December 2008; and further reduction in10 per cent rate of excise duty to 8 per cent inFebruary 2009. Since the tariff rate continued toremain unchanged at 16 per cent, the revenueforegone, that is the difference between tariff rateand effective rate, grew sharply in 2008-09 ascompared to 2007-08. The estimated tax expenditurein respect of customs for 2008-09 was placed at Rs2,25,752 crore as compared to Rs1,53,593 crore(provisional) in 2007-08. The increase in customsrevenue foregone is due to exemptions given in 2008-09 to items like edible oils, crude petroleum, oresand concentrates.

EXPENDITURE TRENDS

3.22 In the post-FRBMA period (2004-05 to 2007-08), average annual/compound growth in totalexpenditure was 11.2 per cent, which comparedfavourably with the 12.2 per cent in the previous fouryears. Within total expenditure, growth in capitalexpenditure was again lower than that in revenueexpenditure. Adjusting for one-off distortions incapital expenditure like redemption of securities ofthe National Small Savings Fund in 2004-05 and theexpenditure on acquisition of State Bank of India(SBI) shares from the Reserve Bank of India (RBI),growth in capital expenditure is more stable. Whiletraditionally assessment of the trends in expenditure,particularly in the context of the fiscal consolidationprocess, had focused on the compression in termsof proportions of GDP, in view of the policy-drivenexpansion process it would be useful to understandthe magnitude and direction of the expansion. In2008-09 (provisional) and 2009-10 (BE), the increase

in total expenditure was of the order of 23.7 per centand 43.2 per cent respectively over the levels in 2007-08. In 2008-09, the main components of expendituresignificantly higher than their 2007-08 levels weremajor subsidies, social services, Plan expenditureand economic services. In 2009-10, the majorcomponents of the expansion were interestpayments, defence, social services and economicservices.

3.23 In a two-way classification of expenditure asPlan and non-Plan, the front loading of Planexpenditure is evident from the levels of growth of34.3 per cent and 18.0 per cent in 2008-09 and 2009-10 (BE) respectively. Plan expenditure at 5.3 percent of the GDP in 2009-10(BE) was the highest inrecent years. Non-Plan expenditure grew by 19.4per cent and 14.8 per cent respectively in 2008-09and 2009-10 (BE). In the four-way classification ofexpenditure, growth in 2008-09 and 2009-10 (BE)respectively was 32.2 per cent and 11.2 per cent innon-Plan revenue expenditure; -3.3 per cent (afteradjustment) and 55.3 per cent in non-Plan capitalexpenditure; 35.5 per cent and 18.4 per cent in Planrevenue expenditure; and 27.8 per cent and 16.1 percent in Plan capital expenditure (Figure 3.4 & 3.5).

INTEREST PAYMENTS

3.24 To the extent that rising interest paymentsreflect past consumption and do not contribute tocurrent productive uses and are primarily taxfinanced, they are a drag on the present generation.Inter-generational equity concerns were one of thekey objectives of institutionalizing the fiscalconsolidation process in the form of the FRBMA.Interest payments appropriated substantialproportions of revenue receipts and the efforts in the

0

Rs.

tho

usan

d cr

ore

Trends in Centre's revenue expenditure

100

200

300

350

Interest Payments

Major Subsidies

DefenceExpenditure

Grants to Statesand UTs

Others

Figure 3.4

50

150

250

Year

2005-06

2007-08

2006-07

2004-05

2008-09 (Prov)

2009-10(BE)


FRBMA period were to reduce the level of deficitsand incremental assumption of debt to contain theinterest burden. Interest payments as a proportionof revenue receipts declined from a level of 52.1 percent in 1998-99 to a level of 31.6 per cent in 2007-08. They were at the 35 per cent level in 2008-09(provisional) and were budgeted at 36.7 per cent in2009-10 (BE). The rise in the levels of gross marketborrowings in 2008-09 and 2009-10 (BE) has resultedin a reversal of the trend towards fall in average costof borrowings (Table 3.5 and Figure 3.6).

SUBSIDIES

3.25 The global commodity price shock(particularly in crude petroleum) that preceded theglobal financial crisis in 2008-09 led to a burgeoningof the subsidy bill and a sharp rise in the below-the-line issuance of bonds to oil and fertilizer companies.A major part of the supplementary demand for grantsthat were approved by Parliament in 2008-09 was

20

Per

cent

Year

Composition of revenue expenditure

40

60

80

100

Interest payments

Major subsidies

Defenceexpenditure

Grants to Statesand UTs

Others

2004-05 2005-06 2006-07 2007-08

0

Figure 3.5

33.0 30.2 29.2 28.8 24.1 25.1

11.6 10.1 10.4 11.4 15.6 11.8

11.411.0 10.0 9.1 9.2 9.7

14.0 16.8 16.5 18.2 15.7 16.0

29.9 31.9 33.9 32.5 35.4 37.3

2008-09 (Prov) 2009-10 (BE)

0

Rs.

tho

usan

d cr

ore

Interest on internal liabilities and average interest cost of borrowing

50

100

150

200

Figure 3.6

Per

cent

per

ann

um

0

2

4

6

8

Interest onInternal

Liabilities(Rs.)

AverageCost of

Borrowing(%)

250

10

12

Year

2005-06

2004-05

2003-04

2001-02

1990-91

2007-08

2006-07

2008-09 (Prov)

2009-10(BE)

2000-01

2002-03

Table 3.5 : Interest on outstanding internalliabilities of Central Government

Out- Interest Averagestanding on cost ofinternal internal borrowings

liabilities liabilities (per cent per annum)

(Rs. crore)2004-05 16,03,785 1,24,126 8.52005-06 17,52,404 1,29,474 8.12006-07 19,67,870 1,46,405 8.42007-08 22,47,104 1,67,102 8.52008-09(RE) 25,37,848 1,88,535 8.42009-10(BE) 28,94,434 2,21,198 8.7

Source : Union Budget documents.Notes:1. Average cost of borrowings is the per

centage of interest payment in year “t” tooutstanding liabilities in year “t-1”.

2. Outstanding internal liabilities excludeNational Small Saving Fund loans to States,with no interest liability on the part of theCentre.


devoted to payments to oil and fertilizer companieswho had to be compensated for the less than fullpass through in the administered prices of oil andfertilizers. As a proportion of GDP, major budgetarysubsidies rose from 1.6 per cent in 2003-04 to 2.2per cent in 2008-09 (provisional) and were budgetedat 1.7 per cent in 2009-10 (BE) (Figure 3.7). Besides,the above below-the-line issuance of oil and fertilizerbonds was of the order of 1.7 per cent of GDP in2008-09. The Budget for 2009-10, recognizing theimportance of institutional reforms, announced theintention to move towards a nutrient-based subsidyregime in respect of fertilizers and ultimately towardsdirect cash transfers and the setting up of an expertto advise on a viable and sustainable system ofpricing for petroleum products. Work onoperationalization of the former is being attemptedby the Department of Fertilizers and the Report ofthe latter containing the recommendations onpetroleum subsidies has been submitted on February3, 2010.

SUPPLEMENTARY DEMAND FORGRANTS

3.26 The first batch of Supplementary Demandsfor Grants approved by Parliament in December 2009included 61 Grants and two Appropriations. Totalgross additional expenditure approved by Parliamentis Rs 30,942.6 crore. This involves a net cash outgoaggregate of Rs 25,725.2 crore and technicalsupplementary involving gross additional expenditure,matched by savings of the ministries/departmentsor by enhanced receipts/recoveries aggregates ofRs 5,216.7 crore. Besides, token provision of Rs 73lakh is being sought, one lakh for each item ofexpenditure, for enabling reappropriation of savings

in cases involving New Service or New Instrument ofService. The main items entailing cash outgo includedfertilizer subsidies (Rs 3,000 crore); food subsidy(Rs 3,459 crore); and pensions (inculding defencepension) (Rs 6,743 crore).

CENTRAL PLAN OUTLAY

3.27 Central Plan outlay of Rs 3,88,078 crore wasenvisaged in 2008-09 (RE) comprising grossbudgetary support of Rs 2,04,128 crore (52.6 percent) and internal and extra budgetary resources(IEBR) of Central public-sector enterprises (CPSEs)of Rs1,83,950 crore. The Budget for 2009-10 raisedthe Central Plan outlay by 15.4 per cent over 2008-09 (RE) to reach Rs 4,47,921 crore. The outlay wascomposed of budgetary support of Rs 2,39,840 croreand IEBR of CPSEs of Rs 2,08,081 crore. The broadsector-wise allocations for important sectors includedenergy (25.8 per cent); social services (23.2 percent); transport (21.1 per cent); communication (3.7per cent); rural development (11.6 per cent); industryand minerals (8.0 per cent); agriculture and alliedactivities (2.4 per cent); and irrigation and flood control(0.1 per cent). Central assistance to State and UTPlans in 2009-10 (BE) is placed at Rs 85,309 crore,a growth of 8.2 per cent over 2008-09 (RE).

GOVERNMENT DEBT

3.28 Typically, the fiscal responsibility rules worldover are anchored in balanced budget and debttargets with clear differences in framework acrossadvanced economies and developing countries. InIndia, under the FRBMA, the rule focused onincremental assumption of liabilities. By and largethis rule was adhered to in the post-FRBMA period;

0

Rs.

tho

usan

d cr

ore

Subsidies as per cent of GDP

20

40

60

80

100

120

Figure 3.7

Per

cent

of

GD

P

0

0.5

1.0

1.5

2.0

2.5

Subsidies

Subsidiesas % of

GDP

140

Year

2005-06

2007-08

2006-07

2004-05

2008-09 (Prov)

2009-10(BE)


since 2008-09, there has been a rise in theassumption of net incremental liabilities as a resultof the expansionary fiscal policy stance. As a result,with the revised GDP series (2004-05) released bythe CSO, the ratio of outstanding liabilities to theGDP after falling from a level of 61.6 per cent in 2004-05 to 56.3 per cent in 2008-09(RE), has risenmarginally to 56.7 per cent in 2009-10(BE)(Table 3.6).Internal debt, mainly market borrowings, continuedto be the main component of outstanding liabilities(Figure 3.8).

ECONOMIC AND FUNCTIONALCLASSIFICATION

3.29 While the national accounts data give broadmagnitudes of the aggregate Governmentconsumption expenditure and capital formation, theeconomic and functional classification (EFC) of theCentral Government budget provides details specificto the Centre. The classification of financialtransactions in the annual budget is designed tofacilitate discussion and voting on demand for grantsand is to be seen in the context of accountability toParliament through institutional arrangements. TheEFC reclassifies the expenditures and receipts ofthe Central Government by economic and functionalcategories making them amenable to largermacroeconomic analysis, particularly the influenceof the budget on the various sectors of the economy.Of the total expenditure of the Centre, consumptionexpenditure remained in the range of 3.5 per cent to2.7 per cent of GDP in the period 1997-98 to 2007-08. Gross capital formation, after rising to a level of2.9 per cent of the GDP in 2007-08 declined to 2.5per cent of GDP in 2008-09 and was budgeted atthe same lavel i.e. 2.5 per cent of GDP in 2009-10.

The Budget for 2009-10 placed the ratio ofconsumption expenditure to total expenditure at 22per cent and the ratio of gross capital formation tototal expenditure at 15.2 per cent. However, as about34.4 per cent of the total expenditure is classifiedas unallocable, the real economy- wide impact needsto be reckoned for this purpose.

3.30 The share of salaries and wages withinconsumption expenditure was envisaged at 46.7 percent in 2009-10 (BE), which was lower than the 47.7per cent in 2008-09 (RE). The share of grants tototal expenditure was 35.8 per cent in 2009-10 (BE)as against 35.3 per cent in 2008-08 (RE). A significanteffect of the global recession and economic/fiscalstimulus announced by the Government is evidentin the increase in dissavings of the CentralGovernment from Rs (-)13,674 crore in 2007-08 toRs 1,64,293 crore in 2008-09 (RE). Dissavings werebudgeted at Rs 2,07,747 crore in 2009-10. As aproportion of GDP, dissavings of the CentralGovernment were placed at 2.9 per cent in 2008-09(RE) and at 3.4 per cent in 2009-10 (BE) (Table 3.7).

FISCAL OUTCOME

3.31 The twin global shocks and the resultantslowdown in the economy led to a policy responseof fiscal expansion in the latter half of 2008-09, whichcontinued through the current year. While,traditionally fiscal outcome is assessed in terms ofBudget Estimates and year-on-year variations in keyfiscal indicators in relation to the trend with particularfocus on deficit levels, given the expansionary stance,it would be appropriate to focus on fiscalmarksmanship in the current conjuncture.

0

Totaloutstanding

liabilities

Debt GDP ratios

10

20

30

40

50

60

70

Figure 3.8

Internalliabilities

MarketBorrowings

Externaldebt

(outstand-ing)

Per

cent

of

GD

P

Year

2005-06

2007-08

2006-07

2004-05

2008-09 (Prov)

2009-10(BE)


Table 3.6 : Outstanding liabilities of the Central Government(end-March)

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10(RE) (BE)

(Rs. crore)1. Internal Liabilities # 19,33,544 21,65,902 24,35,880 27,25,394 30,14,441 33,57,772

(a) Internal Debt 12,75,971 13,89,758 15,44,975 18,08,359 20,14,451 23,56,940(i) Market Borrowings 7,58,995 8,62,370 9,72,801 10,92,468 13,58,940 17,66,897(ii) Others 5,16,976 5,27,388 5,72,174 7,15,891 6,55,511 5,90,043

(b) Other Internal Liabilities 6,57,573 7,76,144 8,90,905 9,17,035 9,99,990 10,00,8322. External Debt (Outstanding)* 60,878 94,243 1,02,716 1,12,031 1,21,634 1,37,6803. Total Outstanding Liabilities (1+2) 19,94,422 22,60,145 25,38,596 28,37,425 31,36,075 34,95,4524. Amount due from Pakistan on Account 300 300 300 300 300 300

of Share of Pre-partition Debt5. Net Liabilities (3-4) 19,94,122 22,59,845 25,38,296 28,37,125 31,35,775 34,95,152 (As per cent of GDP)1. Internal Liabilities 59.7 58.4 56.9 55.1 54.1 54.5

(a) Internal Debt 39.4 37.5 36.1 36.5 36.1 38.2(i) Market Borrowings 23.4 23.3 22.7 22.1 24.4 28.7(ii) Others 16.0 14.2 13.4 14.5 11.8 9.6

(b) Other Internal Liabilities 20.3 20.9 20.8 18.5 17.9 16.22. External Debt (Outstanding)* 1.9 2.5 2.4 2.3 2.2 2.23. Total Outstanding Liabilities 61.6 61.0 59.3 57.3 56.3 56.7

Memorandum Items(a) External Debt (Rs crore)@ 1,91,182 1,94,078 2,01,204 2,10,083 2,64,076 2,80,122

(as Per Cent of GDP) 5.9 5.2 4.7 4.2 4.7 4.5(b) Total outstanding Liabilities

(adjusted) (Rs crore) 21,24,726 23,59,980 26,37,084 29,35,477 32,78,517 36,37,894(as Per Cent of GDP) 65.6 63.7 61.6 59.3 58.8 59.0

(c) Internal Liabilities (Non-RBI)## 17,71,117 19,69,106 22,17,671 24,71,396 27,07,443 30,60,774(as Per Cent of GDP) 54.7 53.1 51.8 49.9 48.6 49.7

(d) Outstanding Liabilities(Non-RBI) ## (Rs crore) 19,62,299 21,63,184 24,18,875 26,81,479 29,71,519 33,40,896Outstanding Liabilities (Non-RBI)(as Per Cent of GDP) 60.6 58.4 56.5 54.2 53.3 54.2

(e) Contingent Liabilities ofCentral Government (Rs crore) 1,07,957 1,10,626 1,09,826 1,04,872 n.a. n.a.Contingent Liabilities ofCentral Government(as Per Cent of GDP) 3.3 3.0 2.6 2.1 n.a. n.a.

(f) Total Assets (Rs crore) 10,83,422 11,94,446 13,39,119 15,71,668 15,80,300 16,71,532Total Assets(as Per Cent of GDP) 33.4 32.2 31.3 31.8 28.3 27.1

Source: 1. Union Budget documents. 2. Controller of Aid Accounts and Audit. 3. Reserve Bank of India.n.a. : not available.

* External debt figures represent borrowings by Central Government from external sources and are basedupon historical rates of exchange.

@ Converted at year-end exchange rates. For 2004-05, the rates prevailing at the end of March 2005 and so on.# Internal debt includes net borrowing of Rs 64,211crore for 2004-05, Rs 29,062 crore for 2005-06, Rs 62,974

crore for 2006-07 Rs 1,70554 crore for 2007-08, Rs 88,773 crore for 2008-09(RE) and Rs 40,737 crore for 2009-10(BE) under the Market Stabilisation Scheme.

## This includes marketable dated securities held by the RBI.Note : The ratios to GDP at current market prices are based on the CSO’s National Accounts 2004-05 series.


Table 3.7 : Total expenditure and capital formation of the Central Government(As per economic and functional classification of the Central Government budget)

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10(RE) (BE)

(Rs. crore)

I. Total Expenditure 4,63,831 5,01,083 5,70,185 6,88,908 8,87,032 10,00,019II. Gross Capital Formation out of Budgetary

Resources of the Central Government 92,855 84,757 87,885 1,43,892 1,40,085 1,52,119(i) Gross Capital Formation

by the Central Government 27,396 34,450 36,487 43,652 55,973 63,364(ii) Financial Assistance for Capital Formation

in the Rest of the Economy 65,459 50,307 51,398 1,00,240 84,112 88,755III. Gross Savings of the Central Government -60,378 -61,431 -33,918 13,674 -1,64,293 -2,07,747IV. Gap(II-III) 1,53,233 1,46,188 1,21,803 1,30,218 3,04,378 3,59,866

Financed bya. Draft on other Sectors of

the Domestic Economy 1,35,918 1,09,799 1,10,801 1,18,180 2,82,424 3,41,683(i) Domestic Capital Receipts 2,08,259 1,30,687 1,06,284 1,45,351 2,52,440 3,41,683(ii) Budgetary Deficit / Draw Down of -72,341 -20,888 4,517 -27,171 29,984 0

Cash Balanceb. Draft on Foreign Savings 17,315 36,389 11,002 12,038 21,954 18,183

(As per cent of GDP)I. Total Expenditure 14.3 13.5 13.3 13.9 15.9 16.2II. Gross Capital Formation out of Budgetary

Resources of Central Government 2.9 2.3 2.1 2.9 2.5 2.5(i) Gross Capital Formation

by the Central Government 0.8 0.9 0.9 0.9 1.0 1.0(ii) Financial Assistance for Capital Formation

in the Rest of the Economy 2.0 1.4 1.2 2.0 1.5 1.4III. Gross Savings of the Central Government -1.9 -1.7 -0.8 0.3 -2.9 -3.4IV. Gap(II-III) 4.7 3.9 2.8 2.6 5.5 5.8

Financed bya. Draft on Other Sectors of Domestic Economy 4.2 3.0 2.6 2.4 5.1 5.5

(i) Domestic Capital Receipts 6.4 3.5 2.5 2.9 4.5 5.5(ii) Budgetary Deficit / Draw Down of -2.2 -0.6 0.1 -0.5 0.5 0.0

Cash Balanceb. Draft on Foreign Savings 0.5 1.0 0.3 0.2 0.4 0.3

(increase over previous year)II. Gross Capital Formation out of Budgetary

Resources of the Central Government 12.5 -8.7 3.7 63.7 -2.6 8.6Memorandum Items (Rs crore)

1 Consumption Expenditure 1,05,692 1,16,305 1,21,609 1,31,396 1,72,637 2,19,5532 Current Transfers 2,59,529 2,97,267 3,56,560 4,08,676 5,55,958 5,98,836

(As per cent of GDP)1 Consumption Expenditure 3.3 3.1 2.8 2.7 3.1 3.62 Current Transfers 8.0 8.0 8.3 8.3 10.0 9.7

Source : Ministry of Finance, An Economic and Functional classification of the Central Government Budget-various issues.Notes: (i) Gross capital formation in this table includes loans given for capital formation on a gross basis. Consequently

domestic capital receipts include loan repayments to the Central Government.(ii) Consumption expenditure is the expenditure on wages and salaries and commodities and services for current

use.(iii) Interest payments, subsidies, pension, etc. are treated as current transfers.(iv) Gross capital formation and total expenditure are exclusive of loans to States/UTs against States’/UTs’ share in

the small savings collection.(v) The figures of total expenditure of the Central Government as per economic and functional classification do not

tally with figures given in the Budget documents. In the economic and functional classification, interest transferredto Departmental Commercial Undertakings, loans written off, etc. are excluded from the current account. In thecapital account, expenditure financed out of Railways, Posts &Telecommunications’ own funds, etc, is included.

(vi) The ratios to GDP at current market prices are based on the CSO’s National Accounts 2004-05 series.


carried out between December 2008 and February2009; that is the across-the-board excise dutyreduction by 4 percentage points on December 7,2008 on non-petroleum products; further reductionof the 10 per cent rate to 8 per cent on February 24,2009; and reduction of service tax rate from 12 percent to 10 per cent, are now showing their full impacton revenue collection during 2009-10. However, on amonth-on-month basis, the decline in gross taxrevenues is getting moderated. Though, year-on-yearnon-tax revenue grew by 23.7 per cent in (April-December) 2009-10, it constituted only 58.2 per centof the BE (Table 3.8). There is likely to be a shortfall

3.32 On the revenue side, the Budget for 2009-10estimated growth in gross tax revenue at 5.1 percent composed of a 9.4 per cent growth in directtaxes and an envisaged growth of almost the samelevel in indirect taxes. As per the data on UnionGovernment accounts released by the ControllerGeneral of Accounts (CGA) for the year (April-December 2009), gross tax revenue has declinedby 2.5 per cent, composed of a 13.2 per cent growthin direct taxes and 20.4 per cent decline in indirecttaxes. The declining trend in revenue collection fromindirect taxes, which started in 2008-09, continuesin the current fiscal on account of the duty reductions

Table 3.8 : Central Government financesBudget April-December Col.4 as Per cent

Estimate per cent of change2009-10 2008-09 2009-10 2009-10 over

(BE) 2008-09

1 2 3 4 5 6

(Rs crore)

1. Revenue Receipts 6,14,497 3,75,937 3,89,271 63.3 3.5Gross Tax Revenue 6,41,079 4,26,795 4,16,094 64.9 -2.5Tax (Net to Centre) 4,74,218 3,09,927 3,07,591 64.9 -0.8Non-Tax 1,40,279 66,010 81,680 58.2 23.7

2. Capital Receipts 4,06,341 2,21,279 3,18,269 78.3 43.8of which:Recovery of Loans 4,225 2,974 3,983 94.3 33.9Other Receipts 1,120 43 4,306 384.5 9,914.0Borrowings and other Liabilities 4,00,996 2,18,262 3,09,980 77.3 42.0

3. Total Receipts (1+2) 10,20,838 5,97,216 7,07,540 69.3 18.5

4. Non-Plan Expenditure (a)+(b) 6,95,689 4,26,419 4,97,381 71.5 16.6(a) Revenue Account 6,18,834 4,03,758 4,60,970 74.5 14.2

of which:Interest Payments 2,25,511 1,23,735 1,30,005 57.6 5.1Major Subsidies 1,05,579 1,03,239 96,740 91.6 -6.3Pensions 34,980 21,487 37,465 107.1 74.4

(b) Capital Account 76,855 22,661 36,411 47.4 60.7

5. Plan Expenditure (i)+(ii) 3,25,149 1,70,797 2,10,159 64.6 23.0(i) Revenue Account 2,78,398 1,46,009 1,79,555 64.5 23.0(ii) Capital Account 46,751 24,788 30,604 65.5 23.5

6. Total Expenditure (4)+(5)=(a)+(b) 10,20,838 5,97,216 7,07,540 69.3 18.5(a) Revenue Expenditure 8,97,232 5,49,767 6,40,525 71.4 16.5(b) Capital Expenditure 1,23,606 47,449 67,015 54.2 41.2

7. Revenue Deficit 2,82,735 1,73,830 2,51,254 88.9 44.5

8. Fiscal Deficit 4,00,996 2,18,262 3,09,980 77.3 42.0

9. Primary Deficit 1,75,485 94,527 1,79,975 102.6 90.4

Source: CGA, Ministry of Finance.


in the non-tax revenues on account of delay inrealization of spectrum auction proceeds. Whiledirect taxes could partially compensate for thedecline in excise, overall revenue marksmanship maytake a knock.

3.33 On the expenditure side, the CGA data revealthat total expenditure in April-December grew by 18.5per cent (as against the 15.8 per cent growthenvisaged by the BE) and as a proportion of the BEfor the year was placed at 69.3 per cent. Planexpenditure grew by 23.0 per cent and was at 64.6per cent of the BE in April-December 2009. Non-Plan expenditure grew by 16.6 per cent (as againstthe growth of 14.8 per cent envisaged by the BE)and as a proportion of BE for the year was placed at71.5 per cent. Growth in two components, namelypensions and subsidies, has been faster thanenvisaged by the BE. Fiscal and revenue deficitswere placed at 77.3 per cent and 88.9 per cent ofthe BE respectively reflecting the developments inrevenue and expenditure in tandem (Table 3.9).

THE REPORT OF THE THIRTEENTHFINANCE COMMISSION (TFC)3.34 The TFC was constituted in terms of thePresidential Order November 13, 2007 to makerecommendations relating to tax devolution betweenthe Centre and States; grants-in-aid to States; andmeasures needed to augment the ConsolidatedFund of a State to supplement the resources of thePanchayats and Municipalities. In addition to the

above, the Commission has also been mandatedto review the state of finances of the Union andStates, keeping in view, in particular, the operationof the States’ Debt Consolidation and Relief Facility2005-2010 introduced by the Central Governmenton the basis of the recommendations of the TwelfthFinance Commission, and suggest measures formaintaining a stable and sustainable fiscalenvironment consistent with equitable growth. Subsequently, the Commission was given additionalterms of reference including the mandate to reviewthe roadmap for fiscal adjustments and suggest asuitably revised one with a view to maintaining thegains of fiscal consolidation through 2010 to 2015particularly considering the need to bring theliabilities of the Central Government on account ofoil, food and fertilizer bonds into the fiscalaccounting, and the impact of various otherobligations of the Central Government on the deficittargets. The TFC has since submitted its Report.

COLLECTION RATES

Trends in revenue collection in 2009-103.35 Assessment of the levels of protection inemerging economies with large differential in scheduleand effective rates of tariffs through headlinemeasures could be misleading and in such casesalternative measures like collection rates could beuseful. Collection rates, which also include additionalduties and special additional duties, have declinedover the years and rule below-peak non-agricultural

Table 3.9 : Trends in cumulative finances of Central Government for 2009-10 (Rs. crore)

2009-10 April April- April- April- April- April- April- April- April-BE May June July August Sept. Oct. Nov. Dec.

1. Revenue Receipts 6,14,497 11,846 32,178 71,995 1,05,378 1,57,198 2,44,471 2,84,479 3,07,125 3,89,271Per Cent of BE 1.9 5.2 11.7 17.1 25.6 39.8 46.3 50.0 63.3

2. Capital receipts 4,06,341 54,371 90,989 1,24,976 1,59,866 1,86,125 2,04,377 2,52,382 3,14,547 3,18,2693. Total Receipts 10,20,838 66,217 1,23,167 1,96,971 2,65,244 3,43,323 4,48,848 5,36,861 6,21,672 7,07,540

Per Cent of BE 6.5 12.1 19.3 26.0 33.6 44.0 52.6 60.9 69.34. Non Plan Expenditure 6,95,689 46,632 86,242 1,42,185 1,94,868 2,45,275 3,22,070 3,88,837 4,47,995 4,97,381

Per Cent of BE 6.7 12.4 20.4 28.0 35.3 46.3 55.9 64.4 71.55. Plan Expenditure 3,25,149 19,585 36,925 54,786 70,376 98,048 1,26,778 1,48,024 1,73,677 2,10,159

Per Cent of BE 6.0 11.4 16.8 21.6 30.2 39.0 45.5 53.4 64.66. Total Expenditure 10,20,838 66,217 1,23,167 1,96,971 2,65,244 3,43,323 4,48,848 5,36,861 6,21,672 7,07,540

Per Cent of BE 6.5 12.1 19.3 26.0 33.6 44.0 52.6 60.9 69.37. Revenue Expenditure 8,97,232 62,205 1,13,141 1,79,585 2,40,156 3,12,283 4,09,454 4,91,273 5,65,027 6,40,525

Per Cent of BE 6.9 12.6 20.0 26.8 34.8 45.6 54.8 63.0 71.48. Revenue Deficit 2,82,735 50,359 80,963 1,07,590 1,34,778 1,55,085 1,64,983 2,06,794 2,57,902 2,51,254

Per Cent of BE 17.8 28.6 38.1 47.7 54.9 58.4 73.1 91.2 88.99. Fiscal Deficit 4,00,996 54,158 90,758 1,24,302 1,58,554 1,82 ,290 1,97,775 2,45,075 3,06,221 3,09,980

Per Cent of BE 13.5 22.6 31.0 39.5 45.5 49.3 61.1 76.4 77.3

Source: CGA, Ministry of Finance.


basic customs duties (Table 3.10 and Figure 3.9).Exemptions, both general and specific, are a majorreason for the difference between headline tariffs andcollection rates. Besides, reduction in excise dutyrates has also affected customs duty collection onaccount of reduced revenue from additional customsduty, commonly known as CVD on imports.

PERFORMANCE OF THE DEPARTMENTALENTERPRISES OF THE CENTRALGOVERNMENT

Railways3.36 With a freight loading of 833.3 milliontonnes in 2008-09, Indian Railways achieved an

incremental loading of 39.4 million tonnes overthe 2007-08 level. The freight movement of theRailways was impacted by the slowdown in theeconomy in the second half of fiscal 2008-09 andthe year-end achievement was short of the revisedtarget by around 17 million tonnes. However,freight revenues for the fiscal were placed at Rs53,433 crore reflecting a growth of 12.6 per centover the 2007-08 level. The overall traffic revenuesfor 2008-09 were placed at Rs 79,837 crore, whichimplied a growth of 11.4 per cent over 2007-08.Taking into account a clearance of Rs 25 crorefrom traffic outstanding, the gross traffic receiptsof the Railways for 2008-09 were placed at Rs79,862 crore.

Table 3.10 : Collection rates for selected import groups*(per cent)

Sl. Commodity Group 2004-05 2005-06 2006-07 2007-08 2008-09No. (Prov.)

1 Food Products 22 32 23 19 42 POL 10 6 5 6 33 Chemicals 22 20 22 22 164 Man-made fibres 39 34 28 30 175 Paper & newsprint 7 9 10 10 86 Natural fibres 11 13 12 13 67 Metals 26 25 24 24 178 Capital goods 16 13 14 16 139 Others 6 5 6 6 410 Non POL 12 12 12 13 911 Total 11 10 10 10 7

Source : Department of Revenue, Ministry of Finance.Notes: * Collection rate is defined as the ratio of revenue collection (basic customs duty + countervailing duty) to value of

imports (in per cent) unadjusted for exemptions, expressed in percentage.Sl. No. 1 includes cereals, pulses, tea, milk and cream, fruits, vegetables, animal fats and sugar.Sl. No. 3 includes chemical elements, compounds, pharmaceuticals, dyeing and colouring materials, plastic and rubber.Sl. No. 5 includes pulp and waste paper, newsprint, paperboards and manufactures and printed books.Sl. No. 6 includes raw wool and silk.Sl. No. 7 includes iron and steel and non-ferrous metals.Sl. No. 8 includes non-electronic machinery and project imports, electrical machinery.

0

Per

cent

Total

Collection rates for selected import groups

10

20

30

40

50

60

70

Figure 3.9

Foodproducts

POL

Capitalgoods

Year

1990

-01

1995

-96

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

(Pro

v)


3.37 Ordinary working expenses at Rs 54,349crore in 2008-09 grew by 32.5 per cent. This highergrowth rate in ordinary working expenses is primarilyattributable to increase in staff cost on account ofimplementation of the Sixth Central PayCommission award including payment of 40 percent arrears. The total working expenses includingappropriations to Depreciation Reserve Fund andPension Fund at Rs 71,839 crore reflect anincrease of 31.9 per cent over the previous year.Taking into account the net variations of themiscellaneous receipts and miscellaneousexpenditure, Railways’ net revenues in 2008-09work out to Rs 9,175 crore.

3.38 Railways fully discharged the dividend liabilityfor 2008-09, which amounted to Rs 4,718 crore. Afterpayment of total dividend from the net revenuesearned, Railways in 2008-09 generated a net surplusof Rs 4,457 crore. Lower growth of traffic revenueson account of the slowdown in the economy coupledwith a sharp rise in staff cost due to implementationof the Sixth Central Pay Commission awardadversely affected the financial health of the Railwaysin 2008-09. Thus the operating ratio deteriorated to90.5 per cent from 75.9 per cent in the previous year.The net revenues as a proportion of capital-at-chargeand investment from capital fund for the fiscal workedout to 8.8 per cent.

3.39 The Plan outlay for 2008-09 stood at Rs36,856 crore including internally generated resourcesof Rs 18,942 crore, that is 51 per cent of the totaloutlay and market borrowings of Rs 7,804 crore bythe Indian Railway Finance Corporation which alsoincluded borrowings of Rail Vikas Nigam Limitedamounting to Rs 293 crore. Apart from strengtheningof the golden quadrilateral under the National RailVikas Yojana, certain important projects and workon dedicated freight corridors are in progress.Railways has also started work on setting up of somemega workshops to meet its rolling stockrequirements. Railways is also modernizing andupgrading its systems to augment rail services.

Department of posts3.40 Gross receipts of the Department of Posts in2008-09 were Rs 5,862 crore. Net working expensesduring the year were Rs 9,455 crore, resulting in adeficit of Rs 3,593 crore. In BE 2009-10, gross receiptsare budgeted to go up to Rs 6,136 crore and networking expenses estimated at Rs 11,768 crore. Thedeficit is thus projected to be Rs 5,632 crore.

3.41 India Posts is the largest postal network inthe world, with one post office serving 7,174 peopleand covering an area of approximately 21.2 sq. km.It provides access to postal services at affordableprices to all citizens in the country through its vastnetwork, which has grown from 23,344 post officesat the time of Independence to 1,55,035 post officesas on March 31, 2008. Of the total, 1,39,173 postoffices are in rural areas and 15,862 in urban areas.Rapid economic development led to increasingdemand for postal services. To cater to this, IndiaPosts plans to open 400 new post offices in ruralareas and relocate 300 post offices to areas withgreater demand for postal services in 2010-11. IndiaPosts has introduced franchisee outlets to cater tothis demand where it is not possible to opendepartmental post offices. So far, 850 franchisedoutlets have been opened and 3,200 more areplanned in 2010-11. The Department of Posts haslaunched ‘Project Arrow’, a pilot project to lay thefoundation for a comprehensive, long-termtransformation of India Posts. The project aims atproviding fast, reliable and efficient postal servicesto the customers, transforming India Posts into avibrant and responsive organization with a clear focuson social obligations as well. Out of a total of 25,531departmental post offices, 12,604 post offices havebeen computerized. Of these, 1,304 have so far beennetworked through leased lines with the National DataCentre. The Department of Posts has been giventhe responsibility to disburse wages to NREGSbeneficiaries through Post Office Savings Bankaccounts. Nearly 4 crore NREGS accounts havebeen opened up to November 2009, and the amountdisbursed in this financial year alone to more thanRs 5,600 crores. The Department of Posts has beenassisting other public authorities under the CentralGovernment in implementing the Right to Information(RTI) Act by providing services of its designatedCentral Assistant Public Information Officers.

Broadcasting3.42 Prasar Bharati, a public service broadcastergives due priority to matters of national importanceas determined by the Government of the day. Totalexpenditure of Prasar Bharati in 2008-09 was Rs2,518.9 crore excluding charges on account of spacesegment, spectrum charges and interest anddepreciation costs. Total receipts were Rs 1,261.3crore (gross) and Rs 1,096.8 crore (net) in 2008-09.Prasar Bharati has taken a number of steps toincrease revenue generation through aggressive


marketing and content improvement. Nine marketingdivisions functioning at Mumbai, Delhi, Kolkata,Chennai, Kochi, Guwahati, Hyderabad, Bangaloreand Thiruvananthapuram cater to the advertisingneeds of All India Radio and Doordarshan through asingle-window facility. Introducing digital technologyincluding Digital Terrestrial Transmission (DTT) andtelevision on mobile, expansion of Direct to Home(DTH) service of DD-Direct+ to 97 free-to-air channelswould further improve Doordarshan services.Digitalization of transmitters, studios and connectivitywould cover 70 per cent of the total population ofIndia under All India Radio Network. Prasar Bharatiis the host broadcaster during the forthcomingCommonwealth Games to be held in New Delhi in2010. As such, Prasar Bharati will be providingcoverage to various sports events as per internationalstandards for relay by the member countries of theCommonwealth. Commonwealth Games 2010 willgive Prasar Bharati an opportunity to introducemodern high definition television (HDTV) technologyto cover sports events. However, a resource gapcontinues to exist and a budget of Rs 2,079.1 crore(including the Commonwealth Games) has beenallocated in 2009-10 (BE) to cover the resource gapof Prasar Bharti.

FINANCES OF STATE GOVERNMENTS

3.43 Following the adoption of fiscal responsibilitylegislations (FRLs), the combined finances of theStates exhibited a faster than anticipated turnaroundin 2005-06 with the level of fiscal deficit at 2.4 percent of the GDP. There were, however, large variationsamongst States with Assam having a fiscal surplusof 0.6 per cent of the gross State domestic product(GSDP) and Mizoram having a high fiscal deficit of14.7 per cent of the GSDP in 2005-06. Statescombined posted a revenue surplus in 2006-07. Therecord of fiscal consolidation of the States combinedwas indeed remarkable and was facilitated by thegrowth in their own revenues following the successfuladoption of State-level value-added tax (VAT), thebuoyancy in Central taxes, the higher levels oftransfers and the scheme of Debt Consolidation andWaiver linked to fiscal consolidation.

3.44 In 2008-09, there was a growth of 15.3 percent in States’ own tax revenues and 26.6 per centin non-tax receipts (Table 3.11). However, with higherlevels of disbursements, which grew by 26 per cent,fiscal deficit went up to a level of 2.6 per cent of the

GDP but was still well below the 3.0 per cent levelmandated by the FRLs (Figure 3.10). With therelaxation in State-level fiscal targets to obviate theadverse impact of the global crisis, revenue deficit of0.6 per cent of the GDP and fiscal deficit of 3.2 percent of the GDP has been budgeted in 2009-10.

STATE-LEVEL REFORMS

3.45 The Debt Consolidation and Relief Facility(DCRF) has two components: (i) consolidation ofCentral loans (from the Ministry of Finance)contracted till March 31,2004 and outstanding ason March 31,2005 and (ii) provision of interest reliefand grant of debt waiver to States based on theirfiscal performance. Consolidation of Central loanshas given interest relief to States. Debt waiver isgranted to States based on their fiscal performance,for which an assessment is made annually. Benefitsunder the DCRF helped States by easing debt andinterest pressures and also incentivized States tofollow the path of fiscal correction. The Governmentof India relaxed the fiscal deficit target for States for2009-10 from 3 per cent to 4 per cent of States’respective GSDP, to enable States to borrow up to 4per cent of their GSDP as projected under the DCRFguidelines, to undertake capital expenditure.

3.46 So far, Central loans to 26 out of 28 Stateshave been consolidated to the extent ofRs 1,13,601.1 crore. Debt consolidation providedinterest relief to these 26 States to the extent of Rs4,392 crore, Rs 3,995 crore, Rs 3,903 crore,Rs 3,452.6 crore and Rs 2,945.7 crore in 2005-06,2006-07, 2007-08, 2008-09 and 2009-10 respectivelyas against the Twelfth Finance Commission’s (TFC)estimates of Rs 4,562 crore, Rs 4,256.8 crore,Rs 3,937.8 crore, Rs 3,492.7 crore and Rs 3,000.16crore respectievly. The difference is due to the factthat consolidations have been carried out for theseStates over five years as and when FRBMAs wereenacted in line with the recommendations laid downby the TFC in this regard.

3.47 The second component of the DCRF is debtwaiver. Consolidated debt of 15 States in 2005-06amounting to Rs 3,984.4 crore was waived; for 2006-07 debt of 23 States amounting to Rs 5,007.5 crorewas waived; and for 2007-08, debt of 23 Statesamounting to Rs 5514.0 crore was waived; for 2008-09 debt of 20 States to the extent of Rs 5153.8 crorewas waived; and for 2009-10 debt of eight Statesamounting to Rs 2379.7 crore was waived. Thus,


-1

Gross fiscaldeficit

Revenue and fiscal deficit of states

0

1

2

3

4

Figure 3.10

Revenuedeficit

Per

cent

of G

DP

Year

-2

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

(Pro

v)

2009

-10

(BE)

Table 3.11 : Receipts and disbursements of State Governments* 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

(RE) (BE)

(Rs crore)

I. Total Receipts(A+B) 5,63,660 5,95,629 6,73,604 7,47,365 9,05,382 10,02,710A. Revenue Receipts (1+2) 3,63,512 4,31,022 5,30,555 6,10,262 7,22,055 7,85,046

1. Tax Receipts 2,60,577 3,06,332 3,72,841 4,34,232 4,99,132 5,47,368of which:State’s Own Tax Revenues 1,82,027 2,12,307 2,52,548 2,84,169 3,27,711 3,63,511

2. Non-tax Receipts 1,02,935 1,24,690 1,57,714 1,76,030 2,22,923 2,37,678of which:Interest Receipts 8,648 9,380 11,825 12,643 16,551 12,989

B. Capital Receipts 2,00,148 1,64,607 1,43,049 1,37,103 1,83,327 2,17,664of which:Recovery of Loans & Advances 8,039 8,904 7,579 7,798 11,666 4,906

II. Total Disbursements(a+b+c) 5,53,427 5,61,682 6,57,281 7,31,680 9,21,673 10,34,426a) Revenue 4,02,670 4,38,034 5,05,699 5,66,856 7,14,718 8,22,104b) Capital 1,34,235 1,09,224 1,37,793 1,51,006 1,90,316 1,98,599c) Loans and Advances 16,522 14,424 13,789 13,818 16,639 13,723

III. Revenue Deficit 39,158 7,012 -24,856 -43,406 -7,337 37,058IV. Gross Fiscal Deficit 1,07,774 90,084 77,508 68,572 1,43,924 1,97,186

(As per cent of GDP)I. Total Receipts(A+B) 17.4 16.1 15.7 15.1 16.2 16.3

A. Revenue Receipts (1+2) 11.2 11.6 12.4 12.3 13.0 12.71. Tax Receipts 8.0 8.3 8.7 8.8 9.0 8.9

of which:States’ Own Tax Revenues 5.6 5.7 5.9 5.7 5.9 5.9

2. Non-tax Receipts 3.2 3.4 3.7 3.6 4.0 3.9of which:Interest Receipts 0.3 0.3 0.3 0.3 0.3 0.2

B. Capital Receipts 6.2 4.4 3.3 2.8 3.3 3.5of which:Recovery of Loans & Advances 0.2 0.2 0.2 0.2 0.2 0.1

II. Total Disbursements(a+b+c) 17.1 15.2 15.3 14.8 16.5 16.8a) Revenue 12.4 11.8 11.8 11.5 12.8 13.3b) Capital 4.1 2.9 3.2 3.1 3.4 3.2c) Loans and Advances 0.5 0.4 0.3 0.3 0.3 0.2

III. Revenue Deficit 1.2 0.2 -0.6 -0.9 -0.1 0.6IV. Gross Fiscal Deficit 3.3 2.4 1.8 1.4 2.6 3.2

Source: Reserve Bank of India.* Data from 2007-08 pertains to 27 State Governments, of which two are Vote on Accounts.Notes: 1. The ratios to GDP at current market prices are based on the CSO’s National Accounts 2004-05 series.

2. Capital receipts include public accounts on a net basis.3. Capital disbursements are exclusive of public accounts.4. Negative (-) sign indicates surplus in deficit indicators.


from 2005 to 2009, States have been granted debtwaivers for an aggregate amount of Rs 22,039.4 croreand interest relief of Rs 18,688.5 crore.

VAT3.48 VAT has been successfully introduced by allthe States. The introduction of VAT by States resultedin good growth in State’s own tax revenue in the lastfew years. During 2008-09, growth in tax revenue in33 VAT States/UTs was 14.4 percent in the revenuefrom VAT items. Under the specific scheme evolvedfor the purposes to facilitate introduction of VAT, theCentral Government compensated the revenuelosses at the rate of 100 percent of revenue lossduring 2005-06, 75 percent during 2006-07 and 50percent during 2007-08. An amount of Rs 2,558 crorehas already been released to States till December31, 2009 in the financial year 2009-10, so far. A totalamount of Rs.17,364 crore has been released to thestates so far under this scheme.

Central sales tax reforms3.49 Central Government in consultation with theEmpowered Committee of State Finance Ministers(Empowered Committee of State Finance Ministers)chalked out the roadmap for phasing out CentralSales Tax (CST) to coincide with the introduction ofthe proposed GST, which included the criticalcomponent of compensating the States for 5theresultant revenue losses. The scheme finalized inconsultation with the Empowered Committee of Statsprovides for new revenue generating measures forStates as the primary source of compensation. Italso provides for meeting 100 percent of the residuarylosses to a State, if any, thereafter, through thebudgetary resources of the Centre. An amount ofRs.5,979 crore has been released to the States tillDecember 31, 2009 in financial year 2009-10. Atotal amount of Rs.10,098 crore has been releasedto the States so far on account of CST compensationclaims of States for financial years 2007-08 and 2008-09.

GST3.50 In the Budget for 2007-08, an announcementwas made to the effect that GST would be introducedfrom April 1, 2010, and that the EmpoweredCommittee of State Finance Ministers would workwith the Central Government to prepare a road mapfor introduction of GST. The Empowered Committeeof State Finance Ministers prepared a report on a

Box 3.2 : First Discussion Paper on GST inIndiaDesign

Some of the key features of the proposed model asproposed by the Discussion Paper are as follows:

The GST is to have two components-Central GST andState GST—with separate rates, reflecting revenueconsiderations and acceptability. This dual GSTmodel would be implemented through multiplestatutes (one for the CGST and an SGST statute forevery State).The Central GST and the State GST would apply toall transactions of goods and services (with somespecified exceptions).The Central GST and State GST are to be paid to theaccounts of the Centre and the States separately.Cross-utilization of input tax credit (ITC) betweenthe Central GST and the State GST not to be allowedexcept in the case of inter-State supply of goods andservices under the Inter-State Goods and Service Tax(IGST) model.Uniform State GST threshold of gross annual turnoverof Rs10 lakh both for goods and services for all theStates and Union Territories to be be adopted withadequate compensation for States (particularly north-eastern region States and special category States)where lower threshold had prevailed in the VATregime.Each taxpayer to be allotted a PAN-linked taxpayeridentification number with a total of 13/15 digits.

The proposed GST, as per the Discussion Paper,subsumes the following taxes/duties of the Centre: centralexcise; additional excise duties; service tax; additionaland special additional customs duties; surcharges andcesses. The following State taxes and levies would alsobe subsumed under the GST: VAT / sales tax;entertainment tax (unless it is levied by local bodies);luxury tax; taxes on lottery, betting and gambling; Statecesses and surcharges in so far as they relate to supply ofgoods and services; entry tax not in lieu of octroi.

GST Rate StructureA two-rate structure –a lower rate for necessary itemsand goods of basic importance and a standard rate forgoods in general—proposed with a special rate forprecious metals and a list of exempted items. Exportswould be zero-rated. The GST will be levied on importswith necessary Constitutional Amendments.

model and road map for GST. The comments ofGovernment of India on the proposed design of GSThave been sent to the Empowered Committee ofState Finance Ministers in January 2010. A joint groupof officers has been constituted to prepare draftConstitutional bill, CGST legislation, model SGSTlegislation and rules required to introduce GST(Box 3. 2).


CONSOLIDATED GENERALGOVERNMENT

3.51 The full picture of public finances and theirimpact on the macroeconomy is best analysedthrough the levels of deficits in the consolidatedGeneral Government. As a proportion of the GDP,revenue receipts of the consolidated GeneralGovernment rose from a level of 19.0 per cent in

2004-05 to reach a level of 21.2 per cent in 2007-08. They were budgeted at 20.5 per cent in 2009-10(BE). With total disbursements remaining atmore or less the same levels in four years ending2007-08, the combined revenue and fiscal deficitcame down (Table 3.12). In fact the combined levelsof deficit were much lower than the levels (sum ofCentre and States) mandated by the FRBMA andState-level FRLs. Reflecting the overall expansion

Table 3.12 : Receipts and disbursements of consolidated General Government 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

(RE) (BE) (Rs crore)

I. Total Receipts(A+B) 8,88,345 10,14,689 11,25,499 13,11,589 16,42,815 18,39,239A. Revenue Receipts (1+2) 6,15,644 7,07,054 8,77,075 10,48,406 11,66,470 12,65,947

1. Tax Receipts 4,92,481 5,76,596 7,24,023 8,73,779 9,65,102 10,21,5852. Non-tax Receipts 1,23,163 1,30,458 1,53,052 1,74,627 2,01,368 2,44,362

of which:Interest Receipts 19,223 18,735 21,744 22,590 23,738 20,614

B. Capital Receipts 2,72,701 3,07,635 2,48,424 2,63,183 4,76,345 5,73,292of which:a) Disinvestment Proceeds 4,424 1,590 2,440 45,750 7,881 3,336b) Recovery of Loans & Advances 14,968 11,651 -773 4,710 13,238 6,582

II. Total Disbursements(a+b+c) 8,69,757 9,59,855 11,09,174 12,95,903 16,59,109 18,70,955a) Revenue 7,30,405 8,06,366 9,32,441 10,57,569 14,00,408 15,85,740b) Capital 1,13,304 1,32,585 1,57,316 2,19,853 2,34,906 2,64,796c) Loans and Advances 26,048 20,904 19,417 18,481 23,795 20,419

III. Revenue Deficit 1,14,761 99,312 55,366 9,163 2,33,938 3,19,793IV. Gross Fiscal Deficit 2,34,721 2,39,560 2,30,432 1,97,037 4,71,520 5,95,090

(As per cent of GDP)I. Total Receipts(A+B) 27.4 27.4 26.3 26.5 29.5 29.8

A. Revenue Receipts (1+2) 19.0 19.1 20.5 21.2 20.9 20.51. Tax Receipts 15.2 15.6 16.9 17.7 17.3 16.62. Non-tax Receipts 3.8 3.5 3.6 3.5 3.6 4.0of which:Interest Receipts 0.6 0.5 0.5 0.5 0.4 0.3

B. Capital Receipts 8.4 8.3 5.8 5.3 8.5 9.3of which:

a) Disinvestment Proceeds 0.1 0.0 0.1 0.9 0.1 0.1b) Recovery of Loans & Advances 0.5 0.3 0.0 0.1 0.2 0.1

II. Total Disbursements(a+b+c) 26.9 25.9 25.9 26.2 29.8 30.4a) Revenue 22.5 21.8 21.8 21.4 25.1 25.7b) Capital 3.5 3.6 3.7 4.4 4.2 4.3c) Loans and Advances 0.8 0.6 0.5 0.4 0.4 0.3

III. Revenue Deficit 3.5 2.7 1.3 0.2 4.2 5.2

IV. Gross Fiscal Deficit 7.2 6.5 5.4 4.0 8.5 9.7

Source : Reserve Bank of India.Note : The ratios to GDP at current market prices are based on CSO’s National Accounts 2004-05 series.


to stimulate demand, fiscal and revenue deficit for2009-10 (BE) is placed at 9.7 and 5.2 per cent ofthe GDP (Figure 3.11).

OUTLOOK

3.52 Based on the trends available for April-December 2009, there is likely to be a shortfall inrevenue receipts on account of the large decline inindirect taxes like customs and excise and thelikely lower-than-budgeted non-tax revenues. Withsome expenditure restraint, as a proportion of theGDP, it might still be possible to contain the deficitat budgeted levels. While the current year’sperformance is relevant mainly in the context offiscal marksmanship given the expansionarystance, it is the medium-term prospect that is really

0

Gross FiscalDeficit

Combined (centre and states) revenue and fiscal deficit

2

4

6

8

10

12

Figure 3.11

RevenueDeficit

Per

cent

of

GD

P

Year

2005-06

2007-08

2006-07

2004-05

2008-09 (Prov)

2009-10(BE)

important. The largely structural nature of fiscaldeficits in India, the levels of recovery in theeconomy and the sustainability of the recoverywithout fiscal stimulus call for resumption of theprocess of fiscal consolidation in a gradual manner.The Report of the Thirteenth Finance commissionhas provided an assessment of the state of publicfinances and the broad direction of fiscalconsolidation by the Centre and States. Goingforward, the nature of the fiscal consolidation –whether it should rely on revenue growth, which isin turn linked to the growth recovery, or on greaterexpenditure cuts— are important in the traditionalincremental adjustment process; but lasting fiscalconsolidation could accrue with reforms in thedesign and delivery of Plan schemes, outcomefocus of expenditure and institutional reforms.

Prices and MonetaryManagement CHAPTER

4

The movements in the rate of inflation reflect changes in demand and supplyconditions in the economy. Inflation management therefore, involves controllingthe demand situation as well as reining in inflationary expectations through variousmonetary measures. On the supply side it would encompass various administrativeand fiscal measures. The first half of the financial year 2008-09 was marked byhigh wholesale price index (WPI)-based inflation, primarily due to the rise in globalcommodity and fuel prices. The subsequent global economic meltdown startingSeptember 2008 reversed the trend and WPI inflation slipped into negative territoryduring June to August 2009. This was due to the decline in commodity prices globallyand the base effect. As regards food inflation, the upswing noticed in the first quarterof 2008-09, continued during 2009-10 due to unfavourable south-west monsoon,the worst since 1972. Though the current spectre of double-digit inflation in foodarticles is ascribable to supply-side constraints, it is necessary to ensure that themonetary policy stance does not lead to pressure on prices. The RBI has, therefore,initiated calibrated changes in rates to mop up the prevalent excess liquidity in thesystem through the second and third quarter reviews wherein increases in statutoryliquidity ratio (SLR) and cash reserve ratio (CRR) respectively were announced.Suitable fiscal and administrative measures are also being taken by the Governmentto contain the food price inflation and preventing it from spilling over to generalisedinflation.

PRICES

4.2 Monthly changes in headline inflation, year-on-year, measured in terms of the wholesale priceindex (WPI) exhibited significant volatility duringfinancial year 2008-09 and varied from 1.20 per centin March 2009 to 12.82 per cent in August 2008.The volatility continues during the current financialyear (2009-10). There is, however, fundamentaldifference in the reasons for volatility observed lastyear and those seen this year. The volatility observedin the first half of 2008-09 was due to increasinginternational fuel and commodity prices whichpushed WPI inflation to a high of 12.8 per cent. Thesubsequent decline in WPI inflation in the secondhalf of 2008-09 was due to falling international fueland commodity prices. International fuel andcommodity prices stabilized in the first half of 2009-10 but at a relatively lower level than in the

corresponding period of the last year. WPI inflation,however, continued to fall during the first half of 2009-10 due to the high base achieved last year duringthis period, and moved to negative zone from Julyto August 2009. From September, 2009 onwardsWPI inflation has been rising at a very fast cliplargely because of increase in the prices of fooditems, both primary and manufactured, and non-food agricultural items. Apprehensions of shortagesin agricultural production due to a deficient south-west monsoon this year are mainly responsible forincreasing inflation. Average food inflation whichwas 7.56 per cent during fiscal 2008-09 increasedto 13.54 per cent in the period April to December2009. Overall food inflation in December 2009 was19.77 per cent. However, it appears to have reachedits peak in December 2009 and is expected tomoderate herefrom and also stabilize overall WPIon account of the likely impact of several measures


taken by the Government to contain food priceinflation.

Average annual trends in WPI inflation4.3 The years of relatively high average annualinflation, above 5.5 per cent, in this decade havebeen 2000-01, 2004-05 and 2008-09. All these wereyears of high fuel prices. The year 2004-05, however,also witnessed high inflation in manufacturedproducts because of high growth in the grossdomestic product (GDP) in this sector leading tohigh demand and high prices of raw materials suchas basic metal alloys and metal products, non-metallic mineral products and machinery andmachine tools. The year 2008-09 was different fromthe earlier two years as high inflation was witnessedin all the three sectors primarily because of highinternational fuel and commodity prices including offood items, reflective of gradual linking of the Indianeconomy with the world (Table 4.1). The year 2009-10 is totally out of sync with the trends seen inearlier years with overall average inflation (April toDecember) being low at 1.63 per cent and averageinflation in the primary and fuel groups being 8.78per cent and - 6.35 per cent respectively.

Recent monthly trends in WPI inflation4.4 Based on rising international fuel andcommodity prices and high domestic demand,inflation in the fuel and manufactured groups startedaccelerating from November 2007. The year 2008-09 started with 8.0 per cent WPI inflation, reacheda peak of 12.8 per cent in August 2008 and declinedthereafter due to falling international commodityprices. The year 2009-10 started with a low headlineWPI inflation of 1.3 per cent in April 2009, whichmoved into the negative zone during June to August2009 and was reported to be 7.31 per cent inDecember 2009 (Table 4.2). The increase in overallinflation since September 2009 is primarily due torise in prices of primary articles, particularly fooditems, due to a deficient monsoon and expectationsof shortage. Lately, a rising trend in food prices hasalso been observed in the global market, particularlyin prices of sugar, palm oil, soyabean and tea.

Disaggregated analysis of WPI averageinflation4.5 Each major group in the WPI commoditybasket is further disaggregated on the basis of use.Analysis at this level has assumed importance in

Table 4.2 : WPI inflation during 2008-09 and 2009-10 (per cent)

Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan. Feb. Mar.

2008-09 8.0 8.9 11.8 12.4 12.8 12.3 11.1 8.5 6.2 4.9 3.5 1.22009-10 1.3 1.4 -1.0 -0.5 -0.2 0.5 1.5 4.8 7.3

Source : Department of Industrial Policy & Promotion.Note: WPI is provisional for November and December 2009.

Table 4.1 : Annual average inflation rate based WPI (per cent)Year Primary Fuel, power, Manufactured All

articles light & lubri. products commodities

Weights (%) 22.02 14.23 63.75 100.00 2000-01 2.8 28.5 3.3 7.2 2001-02 3.6 8.9 1.8 3.6 2002-03 3.3 5.5 2.6 3.4 2003-04 4.3 6.4 5.7 5.5 2004-05 3.7 10.1 6.3 6.5 2005-06 2.9 9.5 3.1 4.4 2006-07 7.9 5.6 4.4 5.4 2007-08 7.6 0.9 5.0 4.7 2008-09 10.1 7.5 8.1 8.42008-09(Apr.-Dec.) 10.93 11.32 9.47 10.202009-10(Apr.-Dec.)P 8.78 -6.35 1.77 1.63

Source : Department of Industrial Policy & Promotion.P : Provisional.

65Prices and Monetary Management

view of the fact that the current phase of relativelyhigh inflation is concentrated in food items which isa subset of the primary group. Table 4.3 providestrends in disaggregated annual inflation at sub-sectorlevel based on use. The high food inflation duringthe current financial year, both in the primary andmanufactured groups, is marked. Another apparentfact that emerges is the relatively high inflationobserved during the last five years in the mineralsgroup. This indicates a demand-supply mismatchin the mining sector fuelled by rise in internationalprices of minerals and high growth rates achieved.The moderation in prices in this sector during thecurrent financial year is because of the slowdown indomestic and international demand.

Food Inflation4.6 For purposes of computing the food index,the components of food articles in the primaryarticles group and manufactured food products inthe manufactured products group are clubbed. Theoverall weight of the composite food index in theWPI is 25.43 per cent, which comprises primary

food articles with a weight of 15.40 per cent andmanufactured food products with a weight of 10.03per cent (after adjusting for oil cakes, weight= 1.42per cent, and cattle feed, weight= 0.01per cent). Aquarter-wise analysis of food inflation in the currentWPI series (Base Year 1993-94=100), during thelast 15 years, reveals that before the current spellof high food inflation, there were two earlier episodesin the fourth quarter (Q4) of 1996-97 (13.6 per cent)and third quarter Q3 of 1998-99 (17.1 per cent). Thehigh inflation in 1996-97 was due to increase in pricesof rice, wheat, gram and fruits & vegetables. Highfuel prices in the international market alsocontributed to the higher food prices by increasingtransportation costs. The spike in food prices in1998-99 was in the aftermath of implementation ofthe Fourth Pay Commission recommendationsleading to a demand-supply gap. During this year,High inflation was reported in the case of onionsand potatoes among vegetables, pulses, rice andwheat. Among manufactured products high priceswere reported in the case of edible oils but sugarprices were stable. The current spell of high food

Table 4.3 : Annual average inflation by major heads in WPI (per cent)Weight 2004- 2005- 2006- 2007- 2008- 2008- 2009-

Commodities (%) 05 06 07 08 09 09(Apr.- 10 (Apr.-Dec.) Dec.)P

All Commodities 100.00 6.48 4.43 5.42 4.66 8.39 10.20 1.63I Primary Articles 22.03 3.69 2.87 7.85 7.61 10.06 10.93 8.78

A. Food Articles 15.40 2.70 4.83 7.78 5.46 8.02 7.57 13.31B. Non-Food Articles 6.14 0.70 -4.48 5.14 12.64 11.17 14.24 0.43C Minerals 0.48 110.31 26.54 28.13 13.20 34.90 45.53 -5.51

II Fuel, Power, Light & Lubricants 14.23 10.14 9.49 5.61 0.93 7.46 11.32 -6.35A. Coal Mining 1.75 15.34 3.72 0.00 2.68 6.60 9.08 -0.91B. Minerals Oils 6.99 15.17 13.93 7.87 0.95 11.08 17.17 -10.12C. Electricity 5.48 1.73 4.07 3.15 0.48 1.06 1.40 -0.08

III Manufactured Products 63.75 6.26 3.07 4.43 4.97 8.09 9.47 1.77A. Food Products 11.54 4.98 1.09 3.22 4.27 10.04 10.59 15.49B. Beverages, Tobacco & its Products 1.34 5.26 4.85 7.36 10.27 9.50 9.53 5.25C. Textiles 9.80 3.04 -4.50 2.16 -0.98 5.95 4.96 4.18D. Wood & Wood Products 0.17 0.06 8.41 6.01 4.65 8.34 8.30 1.62E. Paper & Paper Products 2.04 0.75 2.23 6.83 1.84 4.38 4.23 1.04F. Leather & Leather Products 1.02 5.99 7.13 -4.38 4.14 1.08 0.83 -0.99G. Rubber & Plastic Products 2.39 -0.37 3.42 6.61 7.15 4.66 5.47 1.79H. Chemicals & their Products 11.93 2.54 3.58 3.03 5.57 7.23 8.85 3.20I. Non-Metallic Mineral Products 2.52 6.34 7.80 12.82 8.86 3.74 4.32 3.27J. Basic Metal Alloys & Products 8.34 21.16 7.43 6.82 6.86 14.44 19.65 -12.67K. Machinery & Machine Tools 8.36 5.65 5.14 5.56 7.07 4.74 5.44 -1.34L. Transport Equipment & Parts 4.29 4.68 3.63 1.56 2.71 5.22 6.09 0.05

Source: Department of Industrial Policy & Promotion. P: Provisional.


inflation is across board for all food items exceptedible oils (Figure 4.1). Specifically, very high inflationcan be observed in the case of sugar, pulses,vegetable & fruits and cereals.

Annual inflation as per different priceindices4.7 Inflation measured in terms of the consumerprice indices (CPIs), has remained higher than WPIinflation in the last 14 months (November 2008-December 2009) (Table 4.4). The divergencebetween the WPI and CPI (IW) still continues but is

declining after reaching its peak in July 2009.(Figure 4.2)

Food inflation in CPIs and WPI4.8 Food inflation based on WPI and CPIs hasbeen rising since April 2009 (Table 4.5) and doesnot reflect any significant divergence (Figure 4.3).

Main drivers of inflation4.9 Besides the commodity-wise figures, theweight contributions of different commodities to totalinflation also give an indication of the drivers of

Infl

atio

n (P

er c

ent)

Year

Trends in quarterly WPI inflation (per cent)

-2

0

2

4

6

8

10

12

Figure 4.1

14

16 WPI -all commo-

dities

WPI -total food

items

18

1995

-96

1996

-97

1997

-98

1998

-99

1999

-200

0

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

2009

-10

Table 4.4 : Annual inflation as per different price indices (per cent)Month WPI CPI-IW CPI-UNME CPI-AL CPI-RL

2008- 2009- 2008- 2009- 2008- 2009- 2008- 2009- 2008- 2009-09 10 09 10 09 10 09 10 09 10

April 8.0 1.3 7.8 8.7 7.0 8.8 8.9 9.1 8.6 9.1May 8.9 1.4 7.8 8.6 6.8 9.7 9.1 10.2 8.8 10.2June 11.8 -1.0 7.7 9.3 7.3 9.6 8.8 11.5 8.7 11.3July 12.4 -0.5 8.3 11.9 7.4 13.0 9.4 12.9 9.4 12.7August 12.8 -0.2 9.0 11.7 8.5 12.9 10.3 12.9 10.3 12.7September 12.3 0.5 9.8 11.6 9.5 12.4 11.0 13.2 11.0 13.0October 11.1 1.5 10.4 11.5 10.4 12.0 11.1 13.7 11.1 13.5November 8.5 4.8 P 10.4 13.5 10.8 13.9 11.1 15.7 11.1 15.7December 6.1 7.3 P 9.7 15.0 9.8 - 11.1 17.2 11.1 17.0January 5.0 10.4 10.4 11.6 11.4February 3.5 9.6 9.9 10.8 10.8March 1.2 8.0 9.3 9.5 9.7

Average 8.4 9.1 8.9 10.2 10.2

Source : Department of Industrial Policy and Promotion, Labour Bureau and Central Statistical Organization (CSO). P : Provisional.IW: Industrial Workers, UNME: Urban Non-Manual Employees, AL: Agricultural Labourer, RL: Rural Labour


Table 4.5 : Food inflation based on WPI, CPI-IW and CPI-AL/RL (per cent)Weight Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec.

(%) 2009 2009 2009 2009 2009 2009 2009 2009 2009

Food (CPI_IW) 46.20 10.42 11.72 12.24 14.67 13.73 13.55 13.84 17.61 21.29Food (CPI_AL) 69.15 9.09 11.16 12.44 13.96 14.13 14.63 15.33 18.14 20.22Food (CPI_RL) 66.77 9.09 11.16 12.44 14.22 14.13 14.63 15.33 18.14 20.43Food (WPI) 25.43 9.04 9.56 10.80 12.67 13.32 14.67 14.24 17.78P 19.77P

Source : Department of Industrial Policy and Promotion, Labour Bureau P : Provisional

Infl

atio

n (P

er c

ent)

Trends in food inflation in WPI, CPI-IW and CPI-RL24

4

6

8

10

12

Figure 4.3

14

16

WPI(Total food)

CPI-IW(Food)

18

CPI-RL(Food)

Year

Apr

May Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar Apr

May Jun

Jul

Aug

Sep

Oct

Nov

Dec

2008-09 2009-10

20

22

Infl

atio

n (P

er c

ent)

Trends in inflation based on WPI and CPIs

-2

0

2

4

6

8

10

12

Figure 4.2

14

16 WPI

CPI-IW

18

CPI-RL

Year

Apr

May Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar Apr

May Jun

Jul

Aug

Sep

Oct

Nov

Dec

2008-09 2009-10

inflation. In December 2009, thirty essentialcommodities with a weight of 17.63 per cent andannual inflation of 21.89 per cent contributed 51.88per cent to overall inflation. Food combined(comprising primary and manufactured food) with aweight of 25.43 per cent and annual inflation of 19.77per cent contributed 66.56 per cent towards overall

inflation. Table 4.6 identifies items which havecontributed significantly towards overall inflation inDecember 2009. These are rice, wheat, pulses,vegetables and fruits, milk, fish and meat and teain primary articles; non-administered mineral oils inthe fuel group; and sugar/gur and oil cakes inmanufactured products.


Sugar

4.10 Sugar production in India is cyclical in nature.Two to three years of high production are followedby two to three years of low production. The estimatedarea under sugarcane and sugarcane production fellsignificantly from the 2007-08 sugar crop year to2009-10 sugar crop year (first advance estimates).Sugar production fell from 263 lakh tonnes in the2007-08 sugar season to 146 lakh tonnes in the2008-09 sugar season (provisional). Further, in yearsof shortage of sugarcane, the amount of caneavailable for crushing by sugar mills (termed drawlrate) is much lower with higher levels of diversionfor other uses like production of gur and khandsarisugar. The sugar industry is envisaging productionof 160 lakh tonnes in the 2009-10 sugar season.The estimated demand for the 2009-10 sugar seasonis 230 lakh tonnes. Domestic production may meetonly about two-thirds this demand. This is puttingtremendous pressure on sugar prices. Further,based on expectations of large sugar imports by

India, international sugar prices are also hardeningin recent months. This is also influencing sugarprices in India. Table 4.7 provides monthly changesin the sugar price index which shows monthly aswell as annual fluctuations in sugar prices.

Pulses

4.11 India has been a net importer of pulses.Domestic production of pulses has been around14-14.8 million tonnes during the last three yearswhile the demand is estimated at around 17-18million tonnes. The gap between demand and supplyis met by import of a variety of pulses from differentcountries depending upon their availability. In viewof limited sources for different varieties of pulses,domestic prices fluctuate according to availabilityand prices in the international market. Kharif pulseproduction reached a peak in 2007-08 at 6.4 milliontonnes and declined to 4.78 million tonnes in 2008-09 (fourth advance estimates). In 2009-10 it isestimated to further fall to 4.42 million tonnes (firstadvance estimates). Apprehensions of shortages

Table 4.6 : Weighted contribution and inflation in WPI (per cent)Weight Weighted contribution Inflation

(%) Oct-09 Nov-09P Dec-09P Oct-09 Nov-09P Dec-09P

All Commodities 100.00 100.00 100.00 100.00 1.46 4.78 7.31Primary Articles 22.02 137.15 58.39 48.23 8.67 11.84 14.88

Food combind 25.43 232.53 90.68 66.56 14.24 17.78 19.77Food Articles 15.40 140.38 56.52 42.54 12.99 16.71 19.17Food MP 10.03 92.14 34.16 24.02 16.68 19.88 20.93

Essential Commodities 17.63 209.39 75.00 51.88 18.53 21.15 21.89Rice 2.45 21.48 6.19 3.99 14.29 12.95 12.33Wheat 1.38 8.78 3.74 2.39 9.31 12.66 12.04Pulses 0.60 11.44 5.04 3.95 25.08 35.22 41.58Vegetables 1.46 7.67 5.98 7.28 7.06 16.92 39.22Potatoes 0.26 17.60 5.60 3.70 98.60 101.58 123.85Onions 0.09 2.03 0.70 0.42 33.10 32.41 27.41Fruits 1.46 7.21 3.96 2.43 5.90 10.64 9.83Milk 4.37 28.70 10.33 8.06 10.03 11.49 13.36Eggs,Meat & Fish 2.21 36.96 14.55 9.03 23.37 29.75 27.16Tea 0.16 0.29 0.43 0.37 2.96 15.30 21.45

Fuel and Power 14.23 -100.02 -3.94 12.03 -6.66 -0.89 4.29Rest mineral oils 1.55 -66.59 6.46 13.77 -21.96 9.53 38.18

Manufactured Products 63.75 60.11 46.10 39.46 1.60 3.99 5.17Food Products 11.54 117.69 51.30 36.33 17.33 24.70 26.40

Sugar 3.62 76.82 27.95 18.72 46.26 53.76 53.98Gur 0.06 1.40 0.37 0.28 40.02 32.60 37.23Oil Cakes 1.42 25.52 17.14 12.31 21.14 50.39 56.87

Source : Department of Industrial Policy & Promotion. P : Provisions


may be the reason for high inflation in pulses. Theprogress in sowing of rabi pulses during the currentcrop year has so far been quite encouraging. Asignificant increase of about 7.806 lakh ha in thearea under pulses (on February 4, 2010 comparedto February 4, 2009) is expected to help indampening prices.

Rice4.12 According to first advance estimates releasedby the Ministry of Agriculture, rice production in the2009-10 kharif marketing season (KMS) is 71.65million tonnes. The production target in the rabiseason is 14.5 million tonnes. Thus the totalproduction of rice in 2009-10 is estimated at 86.15million tonnes. Rice production in 2008-09 was99.15 million tonnes (fourth advance estimates).Lower production by about 12.93 million tonnes maybe the reason for the current phase of inflation inrice. However, market arrivals of paddy in Punjaband Haryana this year are higher than the marketarrivals during the corresponding period last year.Rice procurement in the present marketing seasonas on February 3, 2010 has touched 20.14 milliontonnes. This is only 3 per cent lower than last year’sprocurement as of date despite severe drought inthe kharif season this year. Punjab has contributed9.27 million tonnes followed by Chhattisgarh 2.51million tonnes, Andhra Pradesh 2.12 million tonnes,Uttar Pradesh 2.11 million tonnes, Haryana 1.81million tonnes and Orissa 1.05 million tonnes. Thesedevelopments are expected to contain inflation inrice in the coming months.

Wheat

4.13 In rabi marketing season (RMS) 2009-10 atotal of 25.38 million tonnes of wheat has beenprocured as against 22.69 million tonnes in RMS2008-09. The year is expected to end with sufficientstocks--more than the buffer norms. Further, theprogress of wheat sowing in the rabi season duringthe current crop year (2009-10) has so far been quiteencouraging. The area under wheat is estimated toincrease by 1.71 lakh ha from 275.87 lakh ha onFebruary 4, 2009 to 277.58 lakh ha on February4,2010. Expectation of a better wheat harvest islikely to moderate wheat prices.

Vegetables

4.14 Average WPI inflation in vegetables(weight:1.46 per cent in the WPI) from April toDecember 2009 was more than 52 per cent, whichis significantly higher than the 9 per cent recordedduring the same period last year. Month-on- monthchanges in the WPI index for vegetables displayeda relatively high increase in the months of April, June,July and November 2009. Potatoes, onions, tapioca,tomatoes, peas green and brinjal were the highestcontributors to the inflation in vegetables. Theincrease in vegetable prices could be attributed tothe failure of monsoon followed by floods in some ofthe southern states. With the arrival of the wintercrop, vegetable prices have started to moderateand are expected to further fall. Table 4.8 givesmonth-onmonth changes in the WPI index forvegetables.

Table 4.7 : Sugar (weight: 3.62 per cent ): month-on-month percentage change in the WPI

Month 1996-97 1997-98 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Apr. 0.54 1.26 0.70 0.22 -0.25 0.00 -0.74 1.84 5.99May 1.35 2.33 0.17 4.56 -0.75 0.81 -2.97 -0.33 2.46Jun. 1.77 0.76 0.69 0.93 -0.69 -0.06 -1.88 -0.67 3.06Jul. -1.39 0.53 3.88 -0.14 1.96 -0.92 -0.14 1.15 0.35Aug. 1.41 0.07 4.81 2.27 1.24 -0.58 -0.50 5.67 7.31Sep. -0.61 0.82 0.24 2.77 -0.67 -0.94 0.71 1.45 7.23Oct. -1.57 0.15 0.79 -0.54 0.43 -1.42 0.21 0.00 0.82Nov. 3.11 0.22 0.16 0.07 1.17 -1.08 -0.42 0.19 5.32P

Dec. 3.10 0.07 -1.41 1.49 -1.21 -2.00 -0.21 0.06 0.20P

Jan. -0.08 -0.44 -1.35 8.54 2.09 -3.90 1.85 3.98 Feb. 1.42 -0.07 8.13 -1.35 4.27 -1.87 0.84 7.05 Mar. 5.03 -0.22 -0.60 0.37 -0.87 -1.97 1.73 0.61 Total (Apr.-Mar.) 14.08 5.47 16.22 19.19 6.71 -13.93 -1.51 21.00 Apr.-Dec. 7.71 6.21 10.04 11.63 1.22 -6.19 -5.93 9.36 32.73P

Source : Department of Industrial Policy and Promotion P : Provisions


Milk4.15 There is no apparent shortage of milk in themarket. However, one of the reasons for increase ininflation in milk and milk products could be inflationin coarse cereals and oil cakes, which is used asfeed for animals.

Tea4.16 There is shortfall in production of tea in Indiaand other tea-producing countries. WPI-baseddomestic inflation in tea is 21 per cent in December2009. The price of tea in the international market inDecember 2009 has risen by about 55 per cent overthe price in the same month last year.

Non-administered petro products4.17 The inflation in non-administered petroproducts is linked to international crude oil prices.

WPI inflation in this group was negative in October2009 and has moved to the positive zone fromNovember 2009 and is currently at 38.2 per cent.Its weighted contribution to overall inflation is muchhigher than its weight in the commodity basket andtherefore makes it a commodity to watch. Averageinternational crude oil prices increased from 44.11$/bbl in January-March 2009 to 75.5$/bbl in October-December 2009. This contributed to increase ininflation in non- administered petro products.

World food inflation4.18 A comparison of the food index published bythe World Bank and WPI-based domestic foodinflation reveals that since April 2008 world foodprices reflected much higher volatility compared tothe WPI food index (Figure 4.4). Further,

Table 4.8 : Vegetables (weight: 1.46 per cent ): Month-on-month percentage change in the WPI

Month 1996-97 1998-99 2001-02 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Apr. 35.44 22.90 25.38 33.28 29.48 20.87 20.56 11.13 36.56

May 6.50 7.58 12.22 7.72 3.64 3.14 3.59 -0.93 3.01

Jun. 8.84 19.95 12.85 9.36 3.95 22.49 6.25 7.61 10.72

Jul. 0.53 6.01 14.25 -1.74 16.64 0.18 15.66 8.02 13.29

Aug. 12.34 -4.17 3.53 11.57 -5.39 -3.67 -1.65 -5.39 -10.67

Sep. -5.90 4.22 -14.89 -9.59 0.00 4.15 -3.61 2.56 -3.56

Oct. 0.87 25.22 7.19 14.56 7.13 4.12 -10.69 3.45 -4.48

Nov. 1.60 3.68 6.65 -8.38 4.42 -4.84 -5.71 3.99 13.57P

Dec. 0.12 -23.96 -10.33 -26.42 -17.46 -11.55 -8.90 -21.13 -6.09P

Jan. -16.65 -42.81 -22.39 -8.84 -10.06 -4.34 -5.99 0.75

Feb. 0.22 -24.85 -10.36 -4.77 -17.46 -8.08 -2.78 -10.21

Mar. -9.71 5.17 6.95 7.96 -0.63 5.76 11.78 -0.62

Total (Apr.-Mar.) 34.20 -1.06 31.04 24.69 14.27 28.24 18.52 -0.76 Apr.-Dec. 60.34 61.42 56.84 30.35 42.42 34.89 15.51 9.32 52.35P

Source : Department of Industrial Policy and Promotion. P : Provisions

Infl

atio

n (P

er c

ent)

International and domestic food inflation

-40

-20

0

20

40

Figure 4.4

60

80

Worldfood

WPI(domestic

food)

Year

Apr

May Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar Apr

May Jun

Jul

Aug

Sep

Oct

Nov

Dec

2008-09 2009-10


Table 4.9 : WPI based domestic year-on-year inflation (per cent)

Period Energy Non- Agri- Beve- Food Fats Grains Other Raw Tim- Other Fertil Metalsenergyculture rages and food mate- ber raw -izers andommo- oils rials mate- Mine-

dities rials rals

Jan. 2009 -1.70 6.81 9.79 8.91 9.37 0.60 11.25 32.73 9.98 10.05 0.19 8.38 9.54Feb. 2009 -3.40 5.41 7.32 10.08 9.32 -3.01 13.14 25.52 1.76 7.69 -2.69 8.54 1.88Mar. 2009 -6.00 3.17 5.14 9.34 8.07 -6.96 11.61 20.37 0.56 7.74 -12.90 5.43 -7.47Apr. 2009 -5.69 3.21 6.71 5.88 10.14 -4.05 11.92 15.66 2.55 10.05 -16.35 4.03 -12.11May 2009 -6.14 3.43 6.91 5.60 10.62 -2.14 14.14 36.27 1.86 3.57 -15.77 -0.60 -12.19Jun. 2009 -12.53 2.32 7.74 5.99 11.13 -7.85 14.39 26.50 -2.20 0.25 -18.08 -1.46 -13.95Jul. 2009 -10.37 2.29 9.03 5.45 12.36 -9.38 13.90 18.88 -5.18 0.25 -18.69 -3.19 -15.03Aug. 2009 -9.26 2.44 9.08 5.14 12.98 -7.29 14.19 13.90 -4.22 0.25 -17.04 -3.03 -13.46Sep. 2009 -8.18 2.91 9.08 4.75 13.75 -5.59 16.10 7.19 -3.57 0.25 -16.76 -2.68 -12.74Oct. 2009 -6.66 3.75 9.35 4.75 14.67 -3.93 14.75 4.83 -0.66 0.25 -14.47 -2.28 -11.68Nov. 2009P -0.89 6.30 12.61 4.47 19.75 -1.38 16.46 12.50 1.17 0.25 -6.18 -2.03 -8.28Dec. 2009P 4.29 8.09 16.01 5.29 21.94 0.18 16.86 16.30 5.62 0.25 -2.31 -3.52 -6.93

Source : Department of Industrial Policy and Promotion. P : ProvisionsNote : Catagorisation of WPI items/groups as compared to items stock groups in the world Bank Inksheet.

used in Table 4.10 (Figures in brackets are items/groups in WPI basket): Energy (Fuel group); Non EnergyCommodities (All commodities excluding energy); Agriculture (Food Articles and Non-Food Articles);Beverages (Beverages, Tobacco & Tobacco Products); Food (Food Articles and Food Products); Fats andOils (Edible Oils, Butter and Ghee); Grains (Cereals and Pulses); Other Food (Other Food Articles); RawMaterials (Non-Food Articles and Minerals); Timber (Wood & Wood Products); Other Raw Materials(Naphtha and Basic Metals Alloys & Metals Products); Fertilizers (Fertilizers); Metals and Minerals (BasicMetals, Alloys & Metals Products and Minerals)

a higher volatility was seen in the internationalmarket in almost all commodity groups compared

Table 4.10 : Inflation in world commodity price indices (per cent)Period Energy Non- Agri- Beve- Food Fats Grains Other Raw Tim- Other Fertil Metals

energyculture rages and food mate- ber raw -izers andommo- oils rials mate- Mine-

dities rials rals

Jan. 2009 -45.48 -23.64 -16.56 3.41 -19.07 -33.25 -7.57 -0.79 -19.25 4.08 -33.60 14.39 -37.75Feb. 2009 -51.58 -30.29 -23.60 -7.26 -26.35 -38.60 -20.59 -5.15 -23.94 -1.71 -37.50 -4.71 -42.46Mar. 2009 -52.00 -34.12 -28.39 -13.24 -31.61 -43.36 -26.51 -11.64 -26.16 -6.28 -38.52 -26.80 -42.95Apr. 2009 -52.87 -32.04 -25.79 -5.53 -29.51 -33.62 -36.31 -8.67 -24.11 -11.08 -32.60 -45.23 -38.33May 2009 -52.31 -29.14 -22.00 -4.97 -24.33 -26.81 -31.51 -7.19 -23.27 -5.99 -33.79 -53.57 -34.49Jun. 2009 -48.37 -31.14 -24.55 -7.92 -26.27 -30.98 -30.42 -8.66 -27.96 -9.27 -38.49 -55.93 -36.04Jul. 2009 -52.48 -32.31 -26.17 -8.10 -28.90 -34.68 -33.02 -10.17 -27.35 -14.23 -34.92 -61.46 -34.86Aug. 2009 -39.69 -22.70 -15.67 -0.06 -17.84 -17.95 -31.87 2.03 -17.86 -9.50 -22.76 -68.29 -21.27Sep. 2009 -35.07 -19.00 -11.59 7.77 -14.17 -15.06 -31.78 12.90 -14.74 -9.44 -17.97 -68.09 -16.97Oct-. 2009 -6.15 0.74 9.13 32.28 5.40 10.90 -14.37 22.27 6.80 -7.18 18.25 -59.72 4.10Nov. 2009 26.21 14.78 20.09 41.26 17.13 25.37 -0.02 25.65 16.77 -7.83 39.49 -52.05 23.12Dec. 2009 55.23 27.65 28.22 37.30 23.49 34.59 5.02 29.63 36.25 -9.21 87.74 -41.70 42.79

Source : World bank pink sheet.

to the domestic market in India (Tables 4.9and 4.10).


Infl

atio

n (P

er c

ent)

Inflation trends in PFCE-deflator, WPI and CPI-IW

0

2

4

6

8

Figure 4.5

10

12

PFCE-deflator(Base

2004-05)

WPI-inflation(Base

1993-94)

CPI-IWinflation(Base2001)

2005

-06

2006

-07

2007

-08

2008

-09

2009

-10

YearNote: 1.WPI and CPI-IW for 2009-10 are avarage of Apr-Dec 2009. 2.PFCE for 2008-09 is quick estimate (QE) and for 2009-10 is advanced estimate (AE)

Inflation: Private Final ConsumptionExpenditure (PFCE) Deflator versus WPIand CPI-IW4.19 The PFCE measures the average change overtime in the price paid for all consumer purchases.For this reason, the PFCE deflator measureschanges in the cost of living, and because itmeasures the price paid for all consumer purchases,versus just a basket of goods, it is considered amore accurate measure of inflation than the CPI.Table 4.11 provides annual inflation trends in PFCEdeflator, based on new series of data released bythe CSO with 2004-05=100, and its comparison withWPI and CPI-IW inflation. PFCE-based inflation isat a lower level than CPI-IW inflation during all thefour years (2005-06 to 2008-09) (Figure 4.5).

Housing Price Index4.20 The importance of the construction and realestate sector in creation of both physical andfinancial assets has been growing. The share of theconstruction sector in the GDP at constant prices(2004-05) has increased from 7.7 per cent in 2004-05 to 8.0 per cent in 2008-09 (quick estimates).Similarly, the share of real estate, ownership of

dwelling and business services (in the financialsector) in overall GDP has increased from 8.9 percent in 2004-05 to 9.2 per cent in 2008-09 (quickestimates). Both these sectors have grown at anaverage of 9.7 per cent (construction) and 9.6 percent (real estate, ownership of dwelling and businessservices) during 2004-05 to 2008-09.

4.21 The launch of the National Housing Bank(NHB) RESIDEX in India in 2007 was a maiden effortto capture the trend of price movements in residentialproperty on a comprehensive scale. Initially 2001was taken as the base year for the NHB RESIDEXand price movements during the period 2001-05 werecaptured for five cities (Bangalore, Bhopal, Delhi,Kolkata and Mumbai). Subsequently, based on datafrom the housing finance companies (HFCs) andNational Council of Applied Economic Research(NCAER) the NHB RESIDEX was updated for twoyears, 2006 and 2007.

4.22 The NHB RESIDEX has now been expandedto fifteen cities, namely Bangalore, Bhopal, Delhi,Kolkata, Mumbai, Ahmedabad, Faridabad, Chennai,Kochi, Hyderabad, Jaipur, Patna, Lucknow, Puneand Surat and updated up to December 2008 with2007 as the new base year. From 2008 the NHB

Table 4.11 : Annual trends in PFCE deflator, WPI, and CPI-IW inflation(per cent).

Year PFCE deflator(Base: 2004-05) WPI inflation(Base: 1993-94) CPI-IW inflation(Base: 2001)

2005-06 3.2 4.4 4.42006-07 6.0 5.4 6.72007-08 3.6 4.7 6.22008-09 (QE) 7.0 8.4 9.12009-10 (AE) 6.4 1.6* 11.4*

Source: Department of Industrial Policy & Promotion, CSO and Labour Bureau.QE—quick estimates; AE—advance estimates; * Average April- December


RESIDEX is being updated on half-yearly basis. Thelast update is for the period January–June 2009. Inorder to make it a truly national index the intentionis to extend the NHB RESIDEX to 63 cities whichare covered under the Jawaharlal Nehru NationalUrban Renewal Mission (JNNURM).

4.23 The movement in prices of residential houseshas shown a mixed trend in the 15 cities coveredunder the NHB RESIDEX (base 2007) (Table 4.12and Figure 4.6 ). During the first half of 2008 (Januaryto June), out of 15 cities, residential housing pricesin 12 showed an increasing trend, 2 cities reporteda declining trend and there was no change in case

Table 4.12 : City-wise RESIDEX (Base 2007)Cities 2007 2008 Jan.- June 2008 July- Dec. 2009 Jan.-June

Delhi 100 124 130 121Bengaluru 100 73 76 58Mumbai 100 112 117 124Kolkata 100 114 140 159Bhopal 100 139 151 139Hyderabad 100 96 92 65Faridabad 100 100 121 136Patna 100 103 100 107Ahmedabad 100 106 100 127Chennai 100 104 95 120Jaipur 100 119 115 71Lucknow 100 103 102 104Pune 100 101 97 103Surat 100 101 98 111Kochi 100 106 95 90

Source : National Housing Bank.

of 1 city over the base year (2007). In the secondhalf of 2008 (July to December), nine cities reporteda decline in prices and there was an increase in thecase of six cities over the previous half year figures.The first half of 2009 (January to June), however,shows some revival in housing prices over theprevious half-year period (July-December 2008) witha higher price index reported in the case of ninecities, namely Ahmedabad (27 per cent), Chennai(26 per cent), Kolkata (14 per cent), Surat (13 percent), Faridabad (12 per cent), Patna (7 per cent),Mumbai (6 per cent), Pune (6 per cent) and Lucknow(2 per cent). During the same period, the remaining

Inde

x nu

mbe

rs

Movement in City-wise Residex (Base 2007)

150

50

60

70

80

90

Figure 4.6

100

110

Base:2007

120

Delh

i

Beng

alur

u

Mum

bai

Kolk

ata

Bhop

al

Hyde

raba

d

Farid

abad

Patn

a

Ahm

edab

ad

Chen

nai

Jaip

ur

Luck

now

Pune

Sura

t

Koch

i

130

140

160

170

2008Jul-Dec

2008Jan-Jun

2009Jan-Jun


six cities, namely, Jaipur (-38 per cent), Hyderabad(-30 per cent), Bengaluru (-24 per cent), Bhopal(-8 per cent), Delhi (-7 per cent) and Kochi (-5 percent) showed correction in prices. Three cities,namely Hyderabad, Jaipur and Kochi have showncorrection in prices both in the second half of 2008and first half of 2009.

Anti-inflationary measures4.24 The Government has taken a number of short-and medium-term measures to improve domesticavailability of essential commodities and moderateinflation. Procurement of rice as on February 3, 2010(KMS 2009-10) is 20.14 million tonnes as against33.60 million tonnes procured during the entire KMS2008-09. Procurement of wheat as on November1,(RMS 2009-10) is 25.3 million tonnes against 22.7million tonnes last year. The total stock of rice and

wheat held by the FCI in January 2010 is 47.4 milliontonnes comprising 24.3 million tonnes of rice and23.1 million tonnes of wheat. Even after keeping theminimum buffer stock (8.2 million tonnes of wheatand 11.8 million tonnes of rice in January), there areenough foodgrains to intervene in the market to keepprices at a reasonable level. A strategic reserve of 5million tonnes of wheat and rice has also beencreated. This is in addition to the buffer stock heldby the FCI every year. However, the Central issueprice (CIP) for rice at Rs 5.65 per kg for below povertyline (BPL) and Rs 3 per kg for Antyodaya AnnaYojana (AAY) and wheat at Rs 4. 15 per kg for BPLand Rs 2 per kg for AAY since July 2002 has alsobeen maintained to protect the interests of BPLfamilies and AAY beneficiaries. Box 4.1 lists someof the anti-inflationary measures taken by theGovernment.

Box 4.1 : Measures to contain inflation, particularly food inflation(a) Monetary Measures taken by the RBI in the current fiscal year

(i) The monetary policy stance for 2009-10, inter alia, has been to maintain a monetary and interest rate regimeconsistent with price stability and financial stability, and supportive of the growth process.

(ii) The RBI in its Second Quarter Review of monetary policy on October 27, 2009 made a minor modification in thestatutory liquidity ratio (SLR) and restored it to 25 per cent of net demand and time liabilities (NDTL) with effectfrom the fortnight beginning November 7, 2009.

(iii) In the Third Quarter Review of the RBI’s monetary policy on January 29, 2010, the CRR of scheduled banks wasraised by 75 basis points from 5.0 per cent to 5.75 per cent of their NDTL in two stages; the first stage of increaseof 50 basis points will be effective the fortnight beginning February 13, 2010, followed by the next stage of increaseof 25 basis points effective the fortnight beginning February 27, 2010 .

(b) Fiscal Measures

(i) Reducing import duties to zero-–for rice, wheat, pulses, edible oils (crude) and sugar; and for maize (under TRQof 5 lakh tonnes per annum, beyond which 15per cent duty will apply);

(ii) Reducing import duties on refined and hydrogenated oils and vegetable oils to 7.5 per cent;

(iii) Allowing import by sugar mills of raw sugar at zero duty under open general licence (OGL) up to August 1, 2009(notified on April 17, 2009). This has since been extended to December 31,2010.

(iv) Allowing import of white/ refined sugar by STC/MMTC/PEC and NAFED up to 1 million tonnes by august 1,2009 under OGL at zero duty (notified on April 17, 2009). This has since been extended up to March 31, 2010.Furthermore, the duty-free import of white/refined sugar under OGL has been opened to other Central/ StateGovernment agencies and to private trade in addition to existing designated agencies.

(v) Removing levy obligation in respect of all imported raw sugar and white/ refined sugar.

(c) Administrative Measures

(i) 2 million tonnes of wheat and1 million tonnes of rice have been allocated to States for distribution to retailconsumers over and above normal public distribution system (PDS) allocation for the period October 2009 toMarch 2010.

(ii) One million tonnes of wheat has been allocated for release by the FCI in the open market through OMSS for theperiod October 2009 to March 2010.

(iii) The National Agricultural co-operative Marketing Federation (NAFED) has been allocated 37,400 metric tonnesof wheat and 15,500 metric tonnes of rice for distribution through its outlets at the same rate at which allocationsare made to State governments under OMSS (D).

(Contd....


MONETARY DEVELOPMENTS DURING2009-104.25 The liquidity constraint that had emergedconsequent to the global financial crisis, led theRBI to maintain an accommodative monetary policystance since September 2008 which continuedduring 2009-10. The slew of measures introducedafter September 2008 to enhance the liquidity inthe system included a series of downward revisionsin policy rates covering repo rate, reverse repo rate,CRR and SLR, besides providing specified windowsfor accommodating distressed sectors. Thesemeasures had a salutary effect on the overall liquiditysituation. Though the policy during 2009-10continued to broadly underscore the accommodativestance, the monetary authority reviewed theemerging economic situation from time to time.Keeping in view the comfortable liquidity position,the SLR was restored to its earlier level of 25 percent of NDTL with effect from November 7, 2009. A

few sector-specific measures provided earlier by wayof accommodative windows, and whose utilizationwas lower than expected, were also withdrawn inthe Second Quarter Review of Monetary Policy 2009-10 (October 27, 2009). In addition, in the ThirdQuarter Review (January 29, 2010) the RBIannounced that the CRR was being raised from 5.0per cent of NDTL to a level of 5.50 per cent effectivethe fortnight beginning February 13,2010 and to 5.75per cent effective the fortnight beginning February27,2010.

Trends in Monetary Aggregates4.26 During 2009-10, the growth rates in reservemoney (M0) and narrow money (M1) have been higheras compared to the preceding year while broadmoney (M3) growth has been lower (Table 4.13). Themoderation in growth of broad money is largely onaccount of the deceleration in growth of bank creditto the commercial sector.

(iv) The National Cooperative Consumers Federation (NCCF) has been allocated 32,684 metric tonnes of wheat and11,000 metric tonnes of rice for distribution through its outlets at the same rate at which allocations are made toState Governments under OMSS (D).

(v) Export of non-basmati rice, edible oils and pulses (except kabuli chana)has been banned.

(vi) Effected no changes in Tariff Rate Values of edible oils;

(vii) Imposed stock limit orders in the case of paddy, rice, pulses, sugar, edible oils and edible oilseeds upto 30.9.2010;In order to discourage non-household sector consumers from stockpiling sugar and to ensure adequate availabilityof sugar in the open market for actual consumers, the Central Government has issued a notification dated22.08.2009 imposing stockholding limit on bulk consumers.

(viii) Using Minimum Export Price (MEP) to regulate exports of onion (averaging at $500 per tonne for January 2010)and basmati rice ($900 PMT);

(ix) Futures trading in rice, urad and tur suspended by the Forward Market Commission in the year 2007-08 andcontinues during 2009-10. Futures trading in sugar was suspended w.e.f. 27.5.2009 upto 31st December, 2009.This has been extended up to 30th September, 2010.

(x) Distribution of imported edible oils to States/UTs at a subsidy of Rs.15/kg.

(xi) To augment availability of pulses, permitted the Public Sector Undertakings (namely, STC, MMTC, and PEC)and NAFED to import and sell pulses under a scheme and the losses, if any, up to 15 per cent are reimbursed bythe Government.

(xii) Distribution of imported pulses through PDS at a subsidy of Rs.10 per kg to State Governments.

(xiii) Permitted sugar factories to sell processed raw sugar in the domestic market and fulfill export obligation on tonneto tonne basis.

(xiv) Proportion of sugar production requisitioned as levy sugar has been increased from 10 to 20 per cent for2009-10 sugar season to ensure adequate levy sugar supplies under PDS.

(xv) During 2009-10 sugar season, 19.34 lakh tonnes of raw sugar and 3.89 lakh tonnes of white/ refined sugar havearrived in the country/ would be arriving shortly.

(xvii) Minimum Support Prices (MSPs) have been systematically increased, leading to increased acreage, production,productivity and central procurement. For the marketing season of 2008-09, the MSP of wheat was increased toRs. 1,080. For different grades of paddy, for kharif marketing season 2009-10, the MSP has been increased toRs.950-980 per quintal and a bonus of Rs 50 per quintal for all varieties.

Box 4.1: Contd. ...)


Reserve Money (M0)

4.27 Reserve money grew by 6.4 per cent in 2008-09 as compared to 30.9 per cent during 2007-08.During 2009-10, on financial-year basis, M0increased by 3.8 per cent (up to January 15, 2010),as against a decline of 3.7 per cent during thecorresponding period of the preceding year(Table 4.14).

4.28 Net foreign assets (NFA) of the RBI and netdomestic assets (NDA) are the two main drivers ofreserve money. On financial-year basis, the NFAdeclined by 0.4 per cent during end March-January15, 2010, as against a decline of 0.9 per cent duringthe corresponding period of the previous year. On ayear-on-year basis, as on January 15, 2010, theNFA expanded by 4.1 per cent as against a 9.7 percent increase in the previous year (Figure 4.7).

Table 4.13 : Movement of select monetary parameters(per cent)

Items Growth rates (%) Growth rates as on January15, 20102007-08 2008-09 Financial-year basis Year-on-year basis

2009-10 2008-09 2009-10 2008-09M0 30.9 6.4 3.8 -3.7 14.8 6.6M1 19.4 8.4 7.8 -1.1 18.2 8.6M3 21.4 18.6 10.8 12.8 16.5 19.1

Source: RBI.

4.29 Net RBI credit to the Central Governmentincreased by Rs 29,638 crore during the financialyear (up to January 15, 2010). This was mainly onaccount of unwinding of Market StabilisationScheme (MSS) balances and open marketoperations of the Reserve Bank, offset by increasein the cash balances of the Central Governmentand reverse repo operations. On year-on-year basis,increase in the net RBI credit to the CentralGovernment, as on January 15, 2010, wasRs1,19,895 crore as against an increase ofRs1,27,184 crore during the corresponding perioda year ago.

Narrow Money (M1)

4.30 M1 growth decelerated in the second half of2008-09 and staged a recovery in 2009-10. Itincreased by 8.4 per cent in 2008-09 as compared

Table 4.14 : Sources of change in reserve money(per cent)

Growth rate Financial-year basis Year -on-Year

Jan.16 Jan.15, Jan.16 Jan.15,2009 2010 2009 2010over over over over

2008-09 March 31, March 31, Jan.18, Jan.16 2008 2009 2008 20091 2 3 4 5 6

Reserve Money (M0) 6.4 -3.7 3.8 6.6 14.8A. Components

a) Currency in Circulation 17.0 12.2 12.5 17.0 17.3b) Bankers’ Deposits with the RBI -11.3 -31.4 -16.0 -15.6 8.6c) “Other” Deposits with the RBI -38.5 -42.2 -30.7 10.0 -26.2

B. Select Sources of Reserve Money1. Net Foreign Exchange Assets ofthe RBI 3.6 -0.9 -0.4 9.7 4.12. Government’s Currency Liabilities to the Public 9.0 6.7 6.7 8.7 9.03. Net Non-monetary Liabilities of the RBI 84.5 54.9 -8.0 135.8 9.6

Source: RBI.


to an expansion of 19.4 per cent during 2007-08.During 2009-10, M1 increased by 7.8 per cent ona financial-year basis (up to January 15, 2010) asagainst a decline of 1.1 per cent during thecorresponding period of the previous year. On year-on-year basis, as on January 15, 2010, M1 growthaccelerated to 18.2 per cent as compared to 8.6per cent a year ago (Figure 4.8).

4.31 The components of narrow money arecurrency with the public and deposit money of thepublic. As on January 15, 2010, currency with thepublic expanded by 12.3 per cent over end-March2009, as against an increase of 12.2 per cent duringthe corresponding period of the preceding year. Themain element of the other components, namelydemand deposits with banks, witnessed a modestincrease of 3.1 per cent during the period up toJanuary 15, 2010 as against a decline of 13.6 percent during the corresponding period of the previous

year. On year-on-year basis, as on January 15,2010, the growth of currency with the public wasmarginally higher at 17.3 per cent as comparedwith 17.2 per cent on the corresponding date ayear ago. During the same period, growth indemand deposits accelerated to 19.8 per cent ascompared with a decline of 0.8 per cent a yearearlier.

Broad money (M3)

4.32 Broad money (M3) increased by 18.6 per centduring 2008-09. During the current financial year(2009-10), up to January 15, 2010, the growth in M3was 10.8 per cent as compared to 12.8 per centduring the corresponding period of the previous year.On year-on-year basis, M3 grew by 16.5 per centas on January 15, 2010, as compared to 19.1 percent on the corresponding date of the previous year.(Figure 4.9)

-10

Reserve money and RBI net foreign exchange assets - annual growth rate

0

10

20

30

40

50

60

Figure 4.7Pe

r ce

nt

RM

NFA

70

Year

Apr

May Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar Apr

May Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

2008-09 2009-10

4

Narrow Money (M1) – annual growth rate (per cent)

6

8

10

12

14

16

18

Figure 4.8

Per

cent

20

22 2009-10

2008-09

2007-08

24

13 A

pr

27 A

pr

11 M

ay

25 M

ay

08 J

un

22 J

un

06 J

ul

20 J

ul

03 A

ug

17 A

ug

31 A

ug

14 S

ep

28 S

ep

12 O

ct

26 O

ct

09 N

ov

23 N

ov

07 D

ec

21 D

ec

04 J

an

18 J

an

01 F

eb

15 F

eb

28 F

eb

14 M

ar

28 M

ar


4.33 The main components and sources of broadmoney are indicated in Table 4.15.

4.34 The growth in M3 was primarily reflected inthe expansion in aggregate deposits during this

16

Broad Money (M3) – annual growth rate (per cent)

18

20

22

Figure 4.9Pe

r ce

nt

24

2009-10

2008-09

2007-08

26

13 A

pr

27 A

pr

11 M

ay

25 M

ay

08 J

un

22 J

un

06 J

ul

20 J

ul

03 A

ug

17 A

ug

31 A

ug

14 S

ep

28 S

ep

12 O

ct

26 O

ct

09 N

ov

23 N

ov

07 D

ec

21 D

ec

04 J

an

18 J

an

01 F

eb

15 F

eb

28 F

eb

14 M

ar

28 M

ar

Table 4.15 : Sources of change in money stock (M3) Growth rate

March March March January January31, 2008 to 31, 2008 to 31, 2009 to 18, 2008 to 16, 2009 to

March January January January January31, 2009 16, 2009 15, 2010 16, 2009 15, 2010

1 2 3 4 5 6

Per cent

Broad Money (M3) 18.6 12.8 10.8 19.1 16.5I. Components of M3 (1+2+3+4)

1. Currency with the Public 17.2 12.2 12.3 17.2 17.32. Demand deposits with Banks 0.5 -13.6 3.1 -0.8 19.83. Time Deposits with Banks 22.7 18.3 11.9 23.1 16.04. “Other” deposits with theRBI -38.4 -42.2 -30.7 10.0 -26.2

II. Sources of Change in Money Stock (M3)1. Net Bank Credit to Government 42.0 28.7 19.6 38.2 31.9

of which: Other Banks’ Credit to Government 20.0 17.1 18.1 19.3 21.1

2. Bank Credit to Commercial Sector 16.8 11.0 7.9 20.5 13.6of which:Other Banks’ Credit to Commercial Sector 16.4 11.0 8.2 20.4 13.5

3. Net Foreign Exchange Assets of the Banking Sector 4.4 -2.1 -2.1 10.5 4.44. Government’s Currency Liabilities to the Public 9.0 6.7 6.7 8.7 9.05. Banking sector’s Net Non-

monetary Liabilities Other than Time Deposits 16.2 0.5 -6.2 35.8 8.4Memo Items

1. Money Multiplier (M3/M0) 4.15 2. Velocity of Money 1.12 3. Net Domestic Assets 12.8 19.8 15.9 22.8 21.34. Net Domestic Credit 17.3 15.6 11.4 25.1 18.8

Source : RBI.


period. Within aggregate deposits, time depositsregistered a growth (year-on-year) of 16.0 per centas on January 15, 2010, as compared to 23.1 percent on the corresponding date of the previous year.In 2009-10, there has been gradual deceleration inthe growth of time deposits, with softening of interestrates, in contrast to the shift from demand to timedeposits during the second half of 2008-09. On theother hand, demand deposits expanded by 19.8 percent (year-on-year) as on January 15, 2010, ascompared to a decline of 0.8 per cent a year ago.

4.35 During 2009-10, the banking system’s creditto the Government was the major driver of growth inbroad money, a trend which has persisted sincethe third quarter of 2008-09. The increase inGovernment’s borrowing programme to finance theexpansionary fiscal response to the economicslowdown was the underlying reason. However, M3growth has shown signs of deceleration after

September 2009. This owes to the fact that beingfront loaded, the major part of the governmentborrowing was completed in the first half of the year.

4.36 Among the sources of M3, bank credit to thecommercial sector, which had been deceleratingsince October 2008, has shown a revival sinceNovember 2009 (Figure 4.10).

Money multiplier4.37 During 2008-09, the rate of expansion of M0was lower than that of M3. Accordingly, the ratio ofM3 to M0 (money multiplier) showed an increase. Inend-March 2009, this ratio was higher at 4.8 ascompared to 4.3 in end-March 2008. During thecurrent financial year, the increasing trend in themoney multiplier continued, with reserve moneyregistering a lower growth than broad money supply.As on January 15, 2010, the money multiplier was5.4 (Figure 4.11).

5

Bank credit to commercial sector – annual growth rate (per cent)

10

15

20

Figure 4.10Pe

r ce

nt

25

2009-10

2008-09

2007-08

30

13 A

pr

27 A

pr

11 M

ay

25 M

ay

08 J

un

22 J

un

06 J

ul

20 J

ul

03 A

ug

17 A

ug

31 A

ug

14 S

ep

28 S

ep

12 O

ct

26 O

ct

09 N

ov

23 N

ov

07 D

ec

21 D

ec

04 J

an

18 J

an

01 F

eb

15 F

eb

28 F

eb

14 M

ar

31 M

ar

4.0

Movements in money multiplier

4.4

4.8

5.2

Figure 4.11

Per

cent

5.6

2009-10

2008-09

2007-08

6.0

13 A

pr

27 A

pr

11 M

ay

25 M

ay

08 J

un

22 J

un

06 J

ul

20 J

ul

03 A

ug

17 A

ug

31 A

ug

14 S

ep

28 S

ep

12 O

ct

26 O

ct

09 N

ov

23 N

ov

07 D

ec

21 D

ec

04 J

an

18 J

an

01 F

eb

15 F

eb

28 F

eb

14 M

ar

31 M

ar


Movement in other monetary indicators4.38 During 2009-10, bank credit recorded anincrease of 8.4 per cent (end-March – January 15,2010). As against this, bank deposits recorded anincrease of 10.7 per cent during the same period.The lower expansion in credit relative to theexpansion in deposits during 2009-10 has resultedin a decline in the credit-deposit ratio. It fell from72.4 in end-March 2009 to 70.92 on January 15,2010. The investment-deposit ratio increased from30.4 per cent in end-March 2009 to 32.53 on January15, 2010 as scheduled commercial banks (SCBs)preferred to invest a larger share of their deposits inSLR securites. Commercial banks’ holdings of SLRsecurities were 29.9 per cent of NDTL as on January15, 2010 as against 28.1 per cent in end-March2009 and 28.8 per cent a year earlier. This wasconsistently higher than the stipulated level of 24per cent of NDTL with effect from November 7, 2008and 25 per cent with effect from November 7, 2009 .

4.39 Monetary deepening, as measured by theratio of average M3 to GDPMP (GDPat market prices),increased from 65.5 per cent in 2004-05 to 77.8 percent in 2008-09. This could be attributed to the

spread of banking services in the country anddevelopment of the financial sector. The monetizationof the economy as measured by the ratio of averageM1 to GDP has shown a marginally increasing trendduring this period. In 2004-05, this ratio was 18.5per cent, which has increased to 20.4 per cent in2008-09 (Table 4.16 and Figure 4.12).

Liquidity Management4.40 The monetary easing in the aftermath of theglobal financial crisis constituted the main theme ofliquidity management during financial year 2009-10with periodic fluctuations in cash balances of theCentral Government providing temporary variations.The Reserve Bank continued its active policy ofassuring liquidity during 2009-10 through OpenMarket Operations (OMO), Liquidity AdjustmentFacility (LAF) and also unwinding (including de-sequestering) of balances under the MarketStabilization Scheme (MSS) to maintain appropriateliquidity in the system.

4.41 As a result, liquidity conditions remainedcomfortable during 2009-10. In its Annual PolicyStatement 2009-10, the RBI had reduced the LAFrepo and reverse repo rates by 25 basis points

Table 4.16 : Select monetary aggregates (ratios to GDP) As per cent of GDPMP

Currency Demand deposits Time deposits Aggregate M1 M3 with public with banks with banks deposits

1990-91 8.7 6.4 28.5 34.9 15.3 43.81991-92 8.8 6.9 28.8 35.7 15.9 44.71992-93 8.6 6.9 29.8 36.6 16.0 45.71993-94 8.8 6.6 30.3 36.9 15.7 46.11994-95 9.1 7.2 30.4 37.6 16.7 47.11995-96 9.4 6.7 29.8 36.5 16.6 46.41996-97 9.2 6.5 30.5 37.0 16.1 46.61997-98 9.3 6.7 33.0 39.7 16.3 49.21998-99 9.1 6.7 35.5 42.2 16.0 51.51999-2000 9.5 6.8 37.7 44.5 16.4 54.12000-01 9.6 7.2 41.3 48.5 17.0 58.22001-02 10 7.4 44.9 52.2 17.5 62.32002-03 10.5 7.5 49.0 56.5 18.2 67.12003-04 10.7 7.8 48.9 56.7 18.7 67.62004-05* 10.4 8.0 47.0 55.0 18.5 65.52005-06* 10.3 8.8 46.8 55.6 19.3 66.12006-07* 10.5 9.4 48.8 58.2 20.0 68.92007-08* 10.5 9.5 52.7 62.2 20.1 72.82008-09* 11.0 9.3 57.4 66.7 20.4 77.8

Source : RBI.* Computed on revised GDP data released by the CSO (2004-05 onwards) on January 29, 2010.


effective April 21, 2009 to 4.75 per cent and 3.25per cent respectively. In recognition of the easingliquidity conditions, the 14-day term repo facility, adaily facility hitherto, was converted to a weeklyfacility effective April 27, 2009. The average dailynet absorption under the LAF continued to remainover Rs1,20,000 crore during June 2009,notwithstanding advance tax collections around themiddle of the month. This continued through July-August 2009 and the LAF absorption under reverserepo reached a peak of Rs1,68,215 crore onSeptember 4, 2009. Liquidity conditions continuedto remain in surplus mode in October and November2009 with average absorption under the LAF beingaround Rs1,00,000 crore. However, net LAFabsorption declined by end December mainly on

account of advance tax outflows (Table 4.17 andFigure 4.13)

4.42 During the year 2009-10, liquidity was alsofacilitated through OMOs purchased aggregating Rs57,000 crore . Additionally, the decline in MSSbalances and de-sequestering of around Rs 28,000crore provided liquidity of around Rs 81,000 crore(Figure 4.14).

4.43 Consistent with the changed tempo of forexinflows, the ceiling for the MSS which was Rs2,50,000 crore since November 2007 was scaleddown to Rs 50,000 crore in July 2009. The averageweekly outstanding on account of the MSS reflectedthe situation. From a level of Rs 75,146 crore inApril, 2009 it steadily declined to around Rs 18,773crore by November 2009 (Table 4.18).

10

Select monetary aggregates as per cent of GDP

20

30

40

50

60

70

80

Figure 4.12R

atio

s to

GD

P (p

er c

ent)

AggregateDeposits

M1

M3

Year

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

-200

Rup

ees

‘000

cro

res

LAF reverse - repo and repo volume

-150

-100

-50

Figure 4.13

0

50

100

Year2008-09 2009-10

SLAF

FLAF

Note : 1. Repo is positive and Reverse repo is negative. 2. All additional LAF are included in first LAF (FLAF) till July 31, 2008. the second LAF (SLAF)that was discontinued from August 6, 2007 was reintroduced from August 1,2008 on reporting Fridays and from September 17, 2008 on daily basis.Thereafter, the special fixed rate term repo under the LAF and forex swap facility are included in the second LAF. The second LAF, on daily basis, hasagain been discontinued from May 6, 2009 and is being conducted on reporting Fridays with effect from May 8, 2009.

Apr

May Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar Apr

May Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan


Table 4.17 : Liquidity management(Rupees crore)

Outstanding as on last Friday LAF MSS Centre’s surplus@ Totalof the month

2008January 985 1,66,739 70,657 2,38,381February 8,085 1,75,089 68,538 2,51,712March* -50,350 1,68,392 76,586 1,94,628April 32,765 1,72,444 36,549 2,41,758May -9,600 1,75,362 17,102 1,82,864June -32,090 1,74,433 36,513 1,78,856July -43,260 1,71,327 15,043 1,43,110August -7,600 1,73,658 17,393 1,83,451September -56,480 1,73,804 40,358 1,57,682October -73,590 1,65,187 14,383 1,05,980November -9,880 1,32,531 7,981 1,30,632December 14,630 1,20,050 3,804 1,38,4842009January 54,605 1,08,764 -9,166 1,54,203February 59,820 1,01,991 -9,603 1,52,208March* 1,485 88,077 16,219 1,05,781April 1,08,430 70,216 -40,412 1,38,234May 1,10,685 39,890 -6,114 1.44,461June 1,31,505 22,890 12,837 1,67,232July 1,39,690 21,063 26,440 1,87,193August 1,53,795 18,773 45,127 2,17,695September 1,06,115 18,773 80,775 2,05,663October 84,450 18,773 69,391 1,72,614November 94,070 18,773 58,460 1,71,303December 19,785 18,773 1,03,438 1,41,996

Source : RBI.Notes : @: excludes minimum cash balance with Reserve Bank in case of surplus.* : As on March 31.1. Negative sign under LAF indicates injection of liquidity and negative sign under centre’s surplus indicates

Ways & Means Advances / Overdrafts.

0

Rup

ees

‘000

cro

res

Market stabilisation scheme

50

100

150

Figure 4.14

200

250

300

Limits

Actuals

Year2008-09 2009-10

Mar Apr

May Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar Apr

May Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar Apr

May Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

2007-08


Table 4.18 : Call money market

Call turnover Call rate^ LAF# Reverse repo rate Repo rate MSS*(Rs crore) (Per cent) (Rs crore) (Per cent) (Per cent) (Rs crore)

2008-09 Apr. 2008 19,516 6.11 26,359 6.00 7.75 1,70,726May2008 19,481 6.62 11,841 6.00 7.75 1,75,565Jun.2008 21,707 7.75 -8,622 6.00 8.00/8.50 1,74,433Jul. 2008 24,736 8.76 -27,961 6.00 8.50 1,72,169Aug. 2008 23,408 9.1 -22,560 6.00 9.00 1,71,944Sep. 2008 23,379 10.52 -42,591 6.00 9.00 1,75,666Oct. 2008 28,995 9.9 -45,612 6.00 8.00 1,69,123Nov. 2008 21,812 7.57 -8,017 6.00 7.50 1,47,648Dec. 2008 21,641 5.92 22,294 5.00 6.50 1,24,848Jan. 20-09 18,496 4.18 45,474 4.00 5.50 1,13,535Feb. 2009 22,241 4.16 50,649 4.00 5.50 1,02,934Mar. 2009 23,818 4.17 33,360 3.50 5.00 88,0772009-10Apr. 2009 21,820 3.28 1,01,561 3.25 4.75 75,146May 2009 19,037 3.17 1,25,728 3.25 4.75 45,955Jun. 2009 17,921 3.21 1,23,400 3.25 4.75 27,140Jul. 2009 14,394 3.21 1,30,891 3.25 4.75 22,159Aug. 2009 15,137 3.22 1,28,275 3.25 4.75 19,804Sep. 2009 16,118 3.31 1,21,083 3.25 4.75 18,773Oct. 2009 15,776 3.17 1,01,675 3.25 4.75 18,773Nov. 2009 13,516 3.19 1,01,719 3.25 4.75 18,773Dec. 2009 13,302 3.24 68,522 3.25 4.75 18,773

Source: RBI.^ : Average of daily weighted call rate.* : Average of weekly outstanding MSS.# : Average daily absorption under LAF.

Money market4.44 The money market remained by and largeorderly during 2009-10, due to the prevailing surplusliquidity conditions. Call rate continued to hoveraround the reverse repo rate during Q1 of 2009-10and averaged 3.2 per cent as compared to 4.2 percent during the last quarter of 2008-09. During thesecond quarter of 2009-10, the call rate averaged3.25 per cent. Even in the third quarter, the callrate continued to hover around the lower bound ofthe informal LAF corridor (Table 4.18). The averagecall rate was placed at 3.20 per cent during thisperiod.

4.45 Interest rates in the collateralized segmentsof the money market--the market repo (outside theLAF) and the collateralized borrowing and lending

obligation (CBLO)–-also moderated in tandem withthe behaviour of the call rate and remained belowthe call rate during 2009-10. (Figure 4.15) Theweighted average interest rate in the collateralizedsegment of the money market marginally increasedfrom 2.4 per cent in the first quarter of 2009-10 to2.7 per cent during the second quarter. During thethird quarter of the year, it averaged 2.8 per cent.Transaction volumes in the CBLO and market reposegments remained at a relatively high level during2009-10. Around 75 per cent of the lending in thecollateralized segment was contributed by mutualfunds, which reflected their enhanced lendingcapacity. The collateralized market remained thepredominant segment of the money market andaccounted for more than 80 per cent of its totalvolume.


Certificates of Deposit4.46 With the persistence of surplus liquidityconditions, the fortnightly average issuance ofcertificates of deposit (CD) also remained high duringmuch of 2009-10. The amount of outstanding CDsissued by SCBs increased from Rs 1,92,867 crorein end-March 2009 to Rs 2,43,584 crore as onDecember 4, 2009. The outstanding amountconstituted 7.84 per cent (as on December 4, 2009)of aggregate deposits of CD-issuing banks withsignificant inter-bank variation. During April–December 4, 2009, the average issuance was ofthe order of Rs 11,000 crore as compared to Rs6,131 crore during the corresponding period of theprevious year. Most of the CDs issued were of morethan six months duration. The weighted averagediscount rate declined from 7.53 per cent in end-March 2009 to 4.84 per cent as on December 4,2009.

Commercial Paper4.47 During 2009-10, the commercial paper (CP)market also picked up with the easing of liquidityconditions and the size of fortnightly issuanceincreased significantly. The outstanding amount ofCP issued by corporates has shown an increasingtrend from Rs 44,171 crore in end-March 2009 toRs1,03,915 crore as in end -November 2009,marginally coming down to a level of Rs 90,305 crorein end-December 2009 . The weighted averagediscount rate (WADR) of CP declined from 9.79 percent as in end-March 2009 to 4.71 per cent as inend-July 2009 and increased to 5.17 per cent inend-November 2009. The shares of “manufacturingcompanies” and “other financial institutions” in totaloutstanding CPs have increased in the recent periodwhile the share of “leasing and finance companies”

has declined. “Manufacturing companies” accountedfor 45 per cent of the share in end-November 2009.(Table 4.19).

Treasury Bills (T-bills)4.48 T-bills issuances during the year 2009-10were dynamically managed, keeping in view theemerging requirements of the Government and themarket conditions. The T-bills issued for enhancedamounts in 2008-09 which became due forrepayment both in the first and second quarters of2009-10 were fully rolled over. The primary marketyields for TBs of different tenors (91 days, 182days and 364 days ) remained by and large stableduring 2009-10 as compared to the pattern observedin 2008-09. (Figures 4.16, 4.17 and 4.18).

4.49 The introduction of a new short-terminstrument, known as cash management bill (CMB),was announced in August 2009 to meet thetemporary cash-flow mismatches of the Government.CMBs are non-standard, discounted instrumentsissued for maturities of less than 91 days. However,issuance of CMBs has not so far been resorted toduring the year.

Central Government Borrowing4.50 The Union Budget (2009-10) placed the netmarket borrowings requirement of the CentralGovernment at Rs 3,97,957 crore as against Rs2,42,316 crore raised during the previous year.Including repayments of Rs 93,087 crore, grossmarket borrowing was estimated at Rs. 4, 91,044crore (as compared to Rs 3,18,550 crore raised inthe previous year). The actual issuances during thefirst half of the current year amounted to Rs 2,95,000crore (as against issuances of Rs 1,06,000 croreduring the corresponding period of the previous year);

0

Movement of money market rates

3

6

9

Figure 4.15Pe

r ce

nt

12

MarketRepo

(Non-RBI)

Call Money

CBLO

ReverseRepo Rate

Repo Rate

Year2008 2009

Jan

Feb

Mar Apr

May Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar Apr

May Jun

Jul

Aug

Sep

Oct

Nov

Dec


the issuance calendar for dated securities releasedon September 29, 2009 proposed to raiseRs 1,23,000 crore during the second half of the year.

4.51 The gross borrowing requirement in 2009-10was 54 per cent higher than in 2008-09. In order tocarry out the borrowing programme in a non-disruptive

Table 4.19 : Activity in money market segments(Rupees crore)

Average daily volume Commercial Certificates of (one leg) paper deposit

Year/ Call Market CBLO Total Money Term Out- WADR Out- WADRmonth repo market money stand- (per- stand- (per-

rate* ing cent) ing cent)(per

cent)

Apr. 2008 9,758 14,966 38,828 63,552 5.31 374 37,584 8.85 1,50,865 8.49

May 2008 9,740 14,729 36,326 60,795 6.29 420 42,032 9.02 1,56,780 8.95

Jun. 2008 10,854 11,262 35,774 57,890 7.35 253 46,847 10.03 1,63,143 9.16

Ju l. 2008 12,368 8,591 23,669 44,628 8.09 226 51,569 10.95 1,64,892 10.23

Aug. 2008 11,704 10,454 22,110 44,268 8.65 501 55,036 11.48 1,71,966 10.98

Sep. 2008 11,690 10,654 20,547 42,891 9.26 335 52,038 12.28 1,75,522 11.56

Oct. 2008 14,497 9,591 16,818 40,906 8.66 345 48,442 14.17 1,58,562 10

Nov. 2008 10,906 15,191 24,379 50,476 6.58 319 44,487 12.42 1,51,493 10.36

Dec. 2008 10.820 16,943 32,261 60,024 5.37 415 40,391 10.7 1,51,214 8.85

Jan. 2009 9,248 18,053 31,794 59,095 3.99 454 51,668 9.48 1,64,979 7.33

Feb. 2009 11,121 19,929 38,484 69,534 3.89 669 52,560 8.93 1,75,057 6.73

Mar. 2009 11,909 21,593 48,319 81,821 3.76 451 44,171 9.79 1,92,867 7.53

Apr. 2009 10,910 20,545 43,958 75,413 2.41 332 52,881 6.29 2,10,954 6.48

May 2009 9,518 22,449 48,505 80,472 2.34 338 60,740 5.75 2,18,437 6.2

Jun. 2009 8,960 21,694 53,553 84,207 2.69 335 68,721 5 2,21,491 4.9

Jul. 2009 7,197 20,254 46,501 73,952 2.83 389 79,582 4.71 2,40,395 4.96

Aug. 2009 7,569 23,305 57,099 87,973 2.62 461 83,026 5.05 2,32,522 4.91

Sep. 2009 8,059 27,978 62,388 98,425 2.73 381 79,228 5.04 2,16,691 5.3

Oct. 2009 7,888 23,444 58,313 89,645 2.7 225 98,835 5.06 2,27,227 4.70

Nov. 2009 6,758 22,529 54,875 84,162 2.87 191 1,03,915 5.17 2,45,101 4.86

Dec. 2009 6,651 20,500 55,338 82,489 2.91 289 - - 2,43,584+ 4.84+

Source: RBI.+ As on December 4, 2009. * Weighted average rate of call, market repo and CBLO.WADR : Weighted average discount rate.

0

Auction cut-offs in 91 day T-bill auctions

2

4

6

Figure 4.16

Cut

off

yiel

ds (

per

cent

)

8

2009-10

2008-09

10

1

3

5

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9

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May Jun

Jul

Aug

Sep

Oct

Nov

Dec

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Feb

Mar


0

Auction cut-offs in 182 day T-bills

2

4

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Figure 4.17Cu

t of

f yi

elds

(pe

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nt)

8

2009-10

2008-09

10

1

3

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9Ap

r

May Jun

Jul

Aug

Sep

Oct

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Dec

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Mar

0

Auction cut-offs in 364 day T-bills

2

4

6

Figure 4.18

Cut

off

yiel

ds (

per

cent

)

8

2009-10

2008-09

10

1

3

5

7

9

Apr

May Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

manner, a number of steps were taken. First, theborrowing programme of the Central Government for2009-10 was frontloaded as credit offtake by theprivate sector is usually low in the first half. Further,MSS securities of the order of Rs 28,000 crore werede-sequestered. Besides, the Reserve Bank resortedto active liquidity management by way of unwindingof MSS securities and purchase of securitiesthrough a pre-announced OMO calendar. Theunwinding of MSS securities through redemptionwas of the order of Rs 42,000 crore during the firsthalf of the year; as against the OMO announcementof Rs 80,000 crore through the auction route for thefirst half of 2009-10, the actual purchases were Rs57,487 crore, the shortfall from the projected levelbeing on account of easy liquidity conditions.

4.52 During 2009-10 ( up to January 15, 2010),gross market borrowing raised through datedsecurities by the Central Government (excludingissuances under the MSS) was Rs 3,93,000 crore(net Rs 3,51,911 crore) as against Rs1,80,000 crore(net Rs 1,35,972 crore) raised during thecorresponding period of the previous year. This also

included floating rate bonds amounting to Rs 2,000crore with a tenor of 11 years issued on December18, 2009. Keeping in view market preferences, theweighted average maturity of dated securities issuedduring the year so far ( up to January 15, 2010)worked out lower at 11.17 years as compared to14.62 years for issues during the correspondingperiod of the previous year. The weighted averageyield of dated securities during 2009-10 (uptilJanuary 15, 2010) was lower at 7.22 per cent ascompared to 8.15 per cent during the correspondingperiod of the previous year (Figure 4.19).

Yields on 10-Year Government Securities(10-year G-Sec)

4.53 The movement in yields in the 10-year G-Secmarket may be categorized into three broad phases.During the first phase (April 2009), the yield on10-year G-Sec declined from 7.01 per cent to 6.23per cent between end-March and end-April 2009;this was due to substantial easing of liquidityconditions, decline in inflation rate, OMO purchaseauctions and reduction in LAF policy interest rates.


4.54 During the second phase (May 2009-August2009), the 10-year yields started rising following theincrease in size of primary auctions (from Rs12,000crore to Rs15,000 crore) as well as anticipation ofoverwhelming supplies in view of the large borrowingprogramme of the Government. The 10-year yieldrose to 7.17 per cent in end-September 2009 ascompared to 6.23 per cent as in end-April 2009.

4.55 During the third phase (September-December 2009), the G-sec yields traded in a broadrange with a hardening bias. The yield declined onthe back of the RBI’s decision to hike SLR by 1percentage point to 25 per cent (as announced inthe Second Quarter Review of Annual PolicyStatement for 2009-10, on October 27, 2009).However, the G-Sec yield rose subsequently onaccount of a host of factors including absence ofannouncement of the OMO purchase auctioncalendar during the second half of the fiscal year2009-10, and expectation by market participantsthat the policy rates might be raised due to increasein the inflation level (as reflected by the increase inthe WPI). The 10 year G-Sec yield was at 7.72 percent as on January 12, 2010 as compared to 7.17per cent as in end-September 2009.

State Government Borrowings4.56 In the light of the policy measures tominimize the adverse impact of the global financialcrisis, the Union Budget had announced that StateGovernments could borrow an additional 0.5 per centof their gross State domestic product (GSDP) up toa ceiling of 4 per cent of GSDP in 2009-10.Accordingly, the net market borrowings of the Stateswere placed at Rs.1,40,000 crore for 2009-10 (gross: Rs 1,56,238 crore), compared to actual net marketborrowings of Rs 1,03,766 crore (gross: Rs 1,18,138crore) in 2008-09. During the current year 2009-10(up to January 15, 2010), the amount raised by State

Governments aggregated to Rs 1,05,937.71 croreas compared to Rs 52,842.74 crore raised duringthe corresponding period last year. The weightedaverage yield of the auctions so far has been 8.03per cent as compared to 7.74 per cent during thecorresponding period last year.

Monetary Policy Stance During 2009-104.57 Conditioned by the need for monetary policyto respond to the then slackening economic growth,the RBI’s monetary policy stance during 2009-10was aimed at providing a policy regime that wouldenable credit expansion at viable rates whilepreserving credit quality so as to support the returnof the economy to a steady growth path. The AnnualPolicy Statement of the RBI for 2009-10 (April 21,2009) clearly indicated the continuance of the policybeing followed since mid-September 2008 tominimize the impact of the global financial crisis onthe domestic economy and restore the economy toa high growth path consistent with price and financialstability. With the resolve to maintain a soft interestrate regime, the repo rate was further reduced from5.00 per cent to 4.75 per cent with effect from April21, 2009, while the reverse repo rate was reducedfrom 3.50 per cent to 3.25 per cent. There were nomajor changes in policy rates during 2009-10, exceptfor restoration of the SLR to the earlier level of 25per cent of NDTL (from 24 per cent ) in November2009 and an increase of 75 basis points in CRReffective February 2010. The changes in policy ratesince 2008-09 are brought out in Table 4.20.

Quarterly Reviews

4.58 The RBI’s First Quarter Review of theMonetary Policy 2009-10 (July 28, 2009) did notannounce any revisions in policy rates. Whilecontinuing the accommodative monetary stance, it,however, noted that there could be a reversal of theexpansionary measures to anchor inflation

6

Weighted average yield of primary issues of dated securities (cumulative)

7

8

9

Figure 4.19Pe

r ce

nt

10

2009-10

2008-09

Apr

May Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar


expectations and subdue inflationary pressures, ifso warranted. The RBI’s Second Quarter Review ofMonetary Policy 2009-10 (October 27, 2009) madean overall assessment of the economy and indicatedthat the stance of monetary policy for the remainingperiod of 2009-10 would be to: (i) maintain a monetaryand interest rate regime consistent with pricestability and financial stability, and supportive of thegrowth process; (ii) keep a vigil on the trends ininflation and be prepared to respond swiftly andeffectively through policy adjustments to stabilizeinflation expectations; and (iii) monitor the liquiditysituation closely and manage it actively to ensurethat credit demands of productive sectors areadequately met while also securing price andfinancial stability.

4.59 The Second Quarter Review recognized thedilemma that while growth drivers warranted adelayed exit from the accommodative policy regime,inflation concerns called for an early exit. The RBInoted that a premature exit from the accommodativestance could derail the growth, but a delayed exitcould also potentially engender inflationexpectations. Therefore, while keeping the bank,repo and reverse repo rates unchanged, it announcedclosure of some special liquidity support measures,which were not being fully utilized, besides restoringthe SLR to the earlier level of 25 per cent of NDTL.The following measures were announced in theSecond Quarter Review of the Monetary PolicyStatement:

i. Taking note of the fact that the SCBs’investment in SLR securities was higher thanthe stipulated 24 per cent, the RBIannounced that the SLR which had earlierbeen reduced from 25 per cent of NDTL to24 per cent in November 2008, was beingrestored to 25 per cent with effect from thefortnight beginning November 7, 2009.

ii. Liabilities of scheduled banks arising fromtransactions in CBLO (which were earlierexempted from CRR prescription), would bebrought into the fold for maintenance of CRRwith effect from the fortnight beginningNovember 21, 2009.

iii. Keeping in view the large increase in creditto the commercial real estate sector,provisioning requirements to the sectorclassified as “standard assets” wereincreased from 0.40 to 1 per cent.

iv. The limit for the export credit refinance facility[(under section 17(3A) of the RBI Act], whichwas raised to 50 per cent of eligibleoutstanding rupee export credit, was returnedto the pre-crisis level of 15 per cent.

v. The two non-standard refinance facilities: (i)special refinance facility for SCBs undersection 17(3B) of the RBI Act (available upto March 31, 2010), and (ii) special term repofacility for SCBs (for funding to mutual funds,non-banking finance companies , andhousing finance companies) (available up toMarch 31, 2010) have been discontinued.

vi. The forex swap facility to banks for tenor upto three months (available up to March 31,2010) has been discontinued.

Table 4.20 : Revision in policy ratesSl. Date Repo Reverse CRRno. rate repo

rate2008

1. April 26, 2008 7.75 6.00 7.752. May 10, 2008 7.75 6.00 8.003. May 24, 2008 7.75 6.00 8.254. June 12, 2008 8.00 6.00 8.255. June 25, 2008 8.50 6.00 8.256. July 5, 2008 8.50 6.00 8.507. July 19, 2008 8.50 6.00 8.758. August 30, 2008 9.0 6.0 9.09. October 11, 2008 9.0 6.0 6.510. October 20, 2008 8.0 6.0 6.511. October 25, 2008 8.0 6.0 6.012. November 3, 2008 7.5 6.0 6.013. November 8, 2008 7.5 6.0 5.514. December 6, 2008 6.5 5.0 5.5

200915. January 5, 2009 5.5 4.0 5.516. January 17,2009 5.5 4.0 5.517. March 5, 2009 5.0 3.5 5.018. April 21, 2009 4.75 3.25 5.0

201019. February 13 2010 4.75 3.25 5.5*20. February 27 2010 5.75*

Source : RBISLR : The prescribed SLR as a per cent of NDTL

was lowered from a level of 25 per cent to24 per cent w.e.f. . November 8, 2008. Thishas been restored to 25 per cent w.e.fNovember 7, 2009 in the Second QuarterReview of Monetary Policy 2009-10.

* : A two-stage increase in CRR announced inRBI’s Third Quarter Review of MonetaryPolicy 2009-10 (January 29, 2010) effectiveFebruary 13 and 27, 2010.


4.60 The RBI has in its Third Quarter Review ofthe Monetary Policy (January 29, 2010) indicatedthat its stance is shaped by three importantconsiderations ;

i. The need to shift policy stance from“managing the crisis” to “managing therecovery” which implies reversal from thecrisis-driven expansionary stance, therebyrecognizing the need for carrying forward theprocess of exit further .

ii. Though the inflationary pressures in thedomestic economy stem predominantly fromthe supply side, consolidating recoveryincreases the risks of these pressures spillingover into a wider inflationary process.

iii. Strong anti-inflationary measures, whileaddressing one problem may precipitateanother by undermining the recovery,particularly by deterring private investmentand consumer spending.

4.61 Based on its assessment, the RBI left thebank rate, repo and reverse repo rates and SLRunchanged ; however, it announced that the CRRwas being raised by 75 basis points from 5.0 percent to 5.75 per cent in two stages; the first stageof increase of 50 basis points to be effective thefortnight beginning February 13, 2010, followed bythe next stage of increase of 25 basis points effectivethe fortnight beginning February 27, 2010. The hikein CRR is estimated to have potential to absorbaround Rs 36,000 crore from the system which ispresently witnessing surplus liquidity.

4.62 The response of the monetary authority tothe changing economic environment was alsoreflected in the indicative projections for macro-levelparameters made by the RBI for 2009-10 in the

Table 4.21 : RBI’S indicative projections of macro parameters for 2009-10Indicative projections for growth rates (per cent)

Annual Policy First Quarter Second Quarter Third Quarter2009-10 Review Review Review

(April 21,2009) (July 28, 2009) (October 27, 2009) (Jan. 29, 2010)

GDP Growth 6.0 6.0 with an 6.0 with an 7.5upward bias upward bias

WPI Inflation 4.0 5.0 6.5 with an 8.5upward bias

Money Supply Growth (M3) 17.0 18 17 16.5

Aggregate Deposits of SCBs 18.0 19.0 18.0 17

Adjusted Non-food Credit 20.0 20 18 16

Annual Policy Statement for the year andsubsequent quarterly reviews. The revisionsconsidered by the RBI are summarized in Table 4.21.

CHALLENGES AND OUTLOOK

4.63 Food prices are cyclical in nature. A sharpincrease in food prices during the recent period hasbeen a cause of concern. A significant part of thisinflation could be explained by supply-sidebottlenecks in some of the essential commodities,precipitated by the delayed and sub-normal south-west monsoon as well as drought-like conditions insome parts of the country. However, inflation in someof the commodities, like wheat and rice, in whichthere is ample stock available, could have beenexacerbated due to inflationary expectations. Makingavailable adequate and timely quantities of theseitems and at different locations to overcome supply-demand mismatches is the real challenge.

4.64 India cannot be immune to global pricesituations especially when a significant proportionof our requirement of edible oils, pulses and sugar(in years of shortages) is met through imports. Atthe same time, for a large country like India thescope for imports for many commodities is limited.Any decision to import food items raises globalprices which impacts domestic prices as well.Proper and timely assessment of the supply-demandsituation and preventive action become the essenceof supply-side management.4.65 The concentrated pressure on headlineinflation arising from high food prices entails the riskof getting transmitted over time to other non-fooditems through expectations-driven wage pricerevisions, and thereby manifesting into a generalizedinflation.


4.66 The international crude oil prices have increasedfrom $ 44/bbl in January-March, 2009 to $ 77/bbl inJanuary, 2010. Despite this, the administered pricesof petroleum products in the domestic market havebeen maintained at the same level since July 2009.Sustaining current levels of domestic petroleum pricesin this scenario of rising international prices may notbe viable for long from the fiscal side; at the sametime, increase in prices would have its impact oninflation levels.

4.67 As of now, the outlook for inflation is conditionedby supply-side pressures in the near term, possiblereturn of pricing power with stronger recovery in growth,further revival in private demand with improvingconsumer and business confidence, and possible spurt

in global commodity prices in response torecovery in advanced economies.

4.68 While the fiscal issues including fiscalrectitude are important, the transmission of themonetary policy stance to the monetary and realsectors is equally critical. It would therefore alsobe incumbent on the policy authorities not onlyto address the inflationary expectations but alsomonitor and ensure that the growth in moneysupply and credit to productive sectors is at theenvisaged levels so that the growth prospects inthe near to medium terms are sustained on aneven keel, without ,at the same time, jeopardizingthe price scenario.

Financial Intermediationand Markets CHAPTER

5

BANK CREDIT

5.2 The accommodative monetary policy stanceadopted by the Reserve Bank, post-September2008, in response to the global financial crisis,continued during 2009-10. Though the policy focusedon maintaining a market environment conducive tothe flow of credit to the productive sectors of theeconomy, growth in bank credit remained low during2009-10. The prevalent economic conditions as wellas the cost of funds appear to have contributed tothe slowdown in non-food bank credit from thebanking sector. In addition, banks also reined incredit to the retail sector due to perceptions ofincreased risk on account of the general slowdownand to guard against bad loans.

5.3 While the overall credit demand of themanufacturing sector from the banking sector sloweddown during the 2009-10, corporates could access

non-bank domestic sources of funds and externalfinancing (which had almost dried up earlier duringthe crisis period) at lower costs. Thus, while bankcredit during 2009-10 continued to decelerate, therewas a turnaround in financing from non-bankdomestic sources. It is likely that revival of growthin bank credit would manifest in the near-termeconomic recovery process.

5.4 As against an increase of 22.3 per cent in2007-08, bank credit increased by 17.5 per centin 2008-09. Non-food credit during the sameperiods was 23.0 per cent and 17.8 per centrespectively. During 2009-10, on financial-yearbasis, growth in bank credit extended by scheduledcommercial banks (SCBs) stood at 8.4 per cent(end March 2009 to January 15, 2010), ascompared to 11.9 per cent during thecorresponding period in 2008-09 (Table 5.1). This

The financial markets today encompass not only traditional banking institutions, but alsomany other financial entities such as insurance companies, pension funds, mutual funds,venture capital funds and stock and commodity exchanges that perform the function of financialintermediation. This development has been accompanied by the advent of market-basedinstruments of the stock and bond markets, financial products such as asset-backed securities,financial futures and derivative instruments. While reducing the dependence of investors onbank credit to fund their investments, these have also contributed to reallocation of risks andputting of capital to more efficient use. Financial markets also serve the need for greaterfinancial inclusion. The recent experience from the global financial crisis, has however, shownthat, despite the variety of instruments and the sophistication of the markets, they may notremain immune to crisis, if the investors/institutions do not pay adequate attention to thefundamentals or if the pricing of risk and the ratings for these instruments are not transparent,and if the regulatory oversight is poor. An efficient and healthy financial market, shouldtherefore avoid the shortcomings as gleaned from the experience of the global financial marketsin the last couple of years. The deepening and broadening of financial markets also underscoresthe importance of institutional safeguards for monitoring and analysing the domestic as wellas external developments to ensure that the regulatory system is efficient and effective. Thischapter summarizes the developments in the financial sector in India in the last year, which hasremained relatively immune to the global financial turbulence through a proactive response tothe challenges.


is also below the Reserve Bank’s indicativeprojected trajectory for the full year, of 20.0 per centas set out in the First Quarter Review and 18.0 percent in the Second Quarter Review for 2009-10. Theyear-on-year growth in bank credit as on January15, 2010 was 13.9 per cent as against 22.0 percent on the corresponding date of the previous year.Growth in non-food credit so far in 2009-10 onfinancial-year basis and on year-on-year basis waslower than the previous year’s levels. Growth inaggregate deposits in 2009-10 was broadlycompatible with the growth in the previous year. Thelower expansion in credit relative to the significantexpansion in deposits during 2009-10 has resulted

in a decline in the credit-deposit ratio to 70.92 onJanuary 15, 2010 from 72.4 in end-March 2009.(Figure 5.1).

5.5 During 2009-10, public-sector banks (PSBs)were observed to be faring better in terms of growthin credit extended as compared to the decelerationin private banks and decline in foreign banks. Highermarket borrowing by the Government, low creditgrowth and the ample liquidity in the system led tobanks’ investment in statutory liquidity ratio (SLR)securities. Commercial banks’ holdings of suchsecurities close to 30 per cent of their net demandand time liabilities (NDTL) remained higher than the

Table 5.1 : Flow of bank creditAs of January 15, 2010

Financial year Year onOutstanding as in end March so far year

Rs. crore (Percentage variation) 2007 2008 2009 16-Jan-09 15-Jan-10 2008- 2009- 2008- 2009-

09 10 09 10

1. Bank Credit 19,31,188 23,61,914 27,75,549 2642077 3008909 11.9 8.4 22.0 13.9

(a) Food Credit 46,520 44,399 46,211 49,695 42,534 11.9 -8.0 26.8 -14.4

(b) Non-food Credit 18,84,668 23,17,515 27,29,338 2592382 2966375 11.9 8.7 21.9 14.4

2. Aggregate Deposits 26,11,932 31,96,940 38,34,110 3630875 4242574 13.6 10.7 20.1 16.8

(a) Demand Deposit 4,29,730 5,24,310 5,23,085 448440 540660 -14.5 3.4 -1.6 20.6

(b) Time Deposit 21,82,202 26,72,630 33,11,025 3182435 3701914 19.1 11.8 23.9 16.3

3. Investments ( SLR) 7,91,517 9,71,715 11,66,410 1139279 1380157 17.2 18.3 19.5 21.1

(a) GovernmentSecurities 7,76,058 9,58,662 11,55,785 1128489 1366055 17.7 18.2 20.0 21.1

(b) Other ApprovedSecurities 15,459 13,053 10,625 10,790 14,102 -17.3 32.7 -18.3 30.7

Source : RBI.

68

Credit-deposit ratio

69

70

71

72

73

74

75

Figure 5.1

Per

cen

t

2009-10

2008-09

2007-08

76

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Fortnights

stipulated SLR level of 24 per cent (25 per cent witheffect from November 7, 2009). Consequently, theinvestment-deposit ratio increased from 30.4 per centin end-March, 2009 to 32.53 on January 15, 2010 asSCBs preferred to invest their resources in SLRsecurities (Figure 5.2).

Interest rates

i. Domestic Deposit Rates

5.6 Deposit rates of SCBs softened during 2009-10. Interest rates offered by PSBs on deposits of

maturity of one year to three years declined fromthe 8.00-9.25 per cent range in March 2009 to 6.00-7.25 per cent in December 2009, while those ondeposits of maturity of above three years came downfrom the 7.50-9.00 per cent range to the 6.25-7.75per cent during the same period. The term depositrates of private-sector banks and foreign banks ondeposits of maturity of one year up to three yearsalso declined from the 7.50-10.25 per cent and 2.50-9.50 per cent range respectively in March 2009 tothe 5.25-7.50 per cent and 2.25-7.75 per cent rangein December 2009 (Table 5.2).

93Financial Intermediation and Markets

27

Investment-deposit ratio

28

29

30

31

32

33

34

Figure 5.2Pe

r ce

nt

2009-10

2008-09

2007-08

2625242322212019181716151413121110987654321

Fortnights

Table 5.2 : Movements in deposit and lending rates(per cent)

Interest rates Mar.-08 Sep.-08 Dec.-08 Mar.-09 Dec.-09

Term Deposit RatesPSBs

a) Up to 1 year 2.75-8.50 2.75-10.25 2.75-10.25 2.75-8.25 1.00-6.50b) 1 year up to 3 years 8.25-9.25 8.75-10.25 8.50-10.75 8.00-9.25 6.00-7.25c) Over 3 years 8.00-9.00 8.50-9.75 8.50-9.75 7.50-9.00 6.25-7.75

Private-Sector Banksa) Up to 1 year 2.50-9.25 3.00-9.75 3.00-10.00 3.00-8.75 2.00-7.00b) 1 year up to 3 years 7.25-9.25 8.30-10.50 9.00-11.00 7.50-10.25 5.25-7.50c) Over 3 years 7.25-9.75 8.25-10.25 8.50-11.00 7.50-9.75 5.75-8.00

Foreign Banksa) Up to 1 year 2.25-9.25 3.50-9.75 3.50-9.75 2.50-8.50 1.25-7.00b) 1 year up to 3 years 3.50-9.75 3.50-10.50 3.50-11.25 2.50-9.50 2.25-7.75c) Over 3 years 3.60-9.50 3.60-11.00 3.60-11.00 2.50-10.00 2.25-8.50

BPLRPSBs 12.25-13.50 13.75-14.75 12.50-14.00 11.50-14.00 11.00-13.50Private-Sector Banks 13.00-16.50 13.75-17.75 13.00-17.25 12.75-16.75 12.50-16.75Foreign Banks 10.00-15.50 10.00-16.00 10.00-17.00 10.00-17.00 10.50-16.00

Source: RBI.


ii. Lending Rates

5.7 The benchmark prime lending rates (BPLRs)of PSBs moved from the 12.25-13.50 per cent rangein March 2008 to 11.50-14.00 per cent in March2009 and 11.00-13.50 per cent in December 2009.The BPLRs of PSBs, private-sector banks andforeign banks decreased from their September 2008levels in March 2009 and further declined inDecember 2009. However, the movement in theBPLRs does not fully and accurately reflect thechanges in effective lending rates as nearly two-thirds of banks’ lending takes place at sub-BPLRrates; the share of sub-BPLR lending of all SCBs(excluding export credit and small loans) was nearly67.0 per cent in March 2009, and increased furtherto 70.4 per cent in September 2009. To addressthis anomaly, the Reserve Bank announced theconstitution of the Working Group on BPLR in itsAnnual Policy Statement of 2009-10 to review thesystem and suggest changes to make credit pricingmore transparent. The Group submitted its reporton October 20, 2009. The Working Group hasrecommended replacing the existing BPLR systemwith a base rate system. With the proposed baserate system, banks will not need to lend below thebase rate as it would represent the bare minimumrate below which it would not be viable for them tolend. The proposed base rate may include all thosecost elements which can be clearly identified andwhich are common across borrowers. The actuallending rates charged to borrowers could work outto be the base rate plus borrower-specific chargesthat would include product-specific operating costs,credit risk premium and tenor premium.

iii. NRE/FCNR(B) Deposits

5.8 To encourage the inflow of foreign funds,interest rate ceilings on Foreign Currency NonResident Bank accounts {FCNR(B)} and NonResident (External) Rupee Account {NR(E)RA}deposits of all maturities were revised upwards by50 basis points each on September 16 and October15, 2008. After a review, the Reserve Bank furtherincreased the interest rate ceiling on FCNR(B) andNRE deposits by 75 basis points each on November15, 2008. At present, the interest rate ceiling onsuch deposits stands at Libor/Swap rates plus100 basis points and Libor/Swap rates plus 175basis points, respectively.

iv. Rupee Export Credit

5.9 In view of the difficulties being faced byexporters on account of the weakening of externaldemand, the Reserve Bank on November 15, 2008extended the period of entitlement of the first slabof pre-shipment rupee export credit, which wasavailable at a concessional interest rate ceiling ofthe BPLR minus 2.5 percentage points from 180days to 270 days. Furthermore, on November 28,2008 the period of entitlement of the first slab ofpost-shipment rupee export credit was extendedfrom 90 days to 180 days for availing of aconcessional interest rate ceiling of the BPLRminus 2.5 percentage points. On December 8, 2008,the Reserve Bank extended the concessionalinterest rate ceiling of the BPLR minus 2.5percentage points to overdue bills up to 180 daysfrom the date of advance. The validity of the reductionin the interest rate ceiling to 250 basis points belowthe BPLR on pre-shipment rupee export credit upto 270 days and post-shipment rupee export creditup to 180 days has been further extended up to April30, 2010.

5.10 Factoring in the prevalent economic scenario,the Government of India extended interest ratesubvention of 2 percentage points with effect fromDecember 1, 2008 till March 31, 2010 on pre- andpost-shipment rupee export credit, for certainemployment-oriented export sectors. Banks havebeen allowed to charge the identified sectorsinterest rates not exceeding the BPLR minus 4.5percentage points on pre-shipment credit up to 270days and post-shipment credit up to 180 days onthe outstanding amount for the period December 1,2008 to March 31, 2010. However, the totalsubvention will be subject to the condition that theinterest rate, after subvention, will not fall below 7per cent, which is the rate applicable to theagriculture sector under priority-sector lending.Banks are also required to ensure that the benefitof the 2 per cent interest subvention is passed oncompletely to the eligible exporters.

SECTORAL DEPLOYMENT OF CREDIT

5.11 Disaggregated data on sectoral deploymentof gross bank credit from 49 banks accounting forabout 95 per cent of bank credit and non-food creditavailable up to November 20, 2009 showed thatamong the major sectors, credit (year-on-year) toagriculture recorded a growth of 21.4 per cent (23.0per cent in March 2009), while that to industry


(medium and large) recorded a growth of 12.8 percent (as against 18.6 per cent in March 2009). Creditto wholesale trade recorded a growth of 27.4 percent (as against 21.0 per cent in March 2009).

5.12 Credit to the priority sector grew by 15.4 percent (year-on-year) in November 2009 as comparedto 22.5 per cent in March 2009. Among the prioritysub-sectors, credit to micro and small enterprises(MSEs) (including service-sector enterprises)recorded a growth of 19.3 per cent (year-on-year) inNovember 2009 as compared to 22.7 per cent inMarch 2009. (Table 5.3).

Priority-sector Lending5.13 Domestic SCBs, both in the public and privatesectors are required to meet a target of 40 per centof their adjusted net bank credit (ANBC) or creditequivalent amount of off-balance sheet exposures(OBEs), whichever is higher, for lending to the prioritysectors. Within this, sub-targets of 18 per cent and10 per cent of ANBC or credit equivalent amount ofOBE, whichever is higher, have been stipulated for

lending to agriculture and the weaker sectionsrespectively. In respect of foreign banks having officesin India, the target for lending to the priority sectorhas been kept at 32 per cent of ANBC or creditequivalent amount of OBE, whichever is higher.Within the overall target of 32 per cent to be achievedby foreign banks, advances to the MSE and exportsectors should not be less than 10 per cent and 12per cent of the ANBC or credit equivalent amount ofOBE, whichever is higher, respectively. Theoutstanding advances by PSBs, private-sector banksand foreign banks to the priority sector as on thelast reporting Fridays of March 2007, 2008 and 2009are given in Table 5.4.

5.14 Though the public, private-sector and foreignbanks, as individual groups, achieved the overallpriority-sector lending targets as on the last reportingFriday of March 2009, there were shortfalls in all thecategories included in the priority sector.

5.15 Out of 27 public-sector banks, three did notachieve the overall priority-sector lending target of40 per cent as on the last reporting Friday of March

Table 5.3 : Sectoral deployment of gross bank credit Outstanding as on Absolute % variation

Sl. Item variationNo. Mar. 27, Mar. 27, Nov. 20,

Mar. 27, Nov. 20, 2009 over 2009 over 2009 over2009 2009 Mar. 28, Mar. 28, Nov. 21,

2008 2008 2008

(amount in Rs. crore)Gross Bank Credit 26,48,501 27,58,069 4,01,212 17.9 9.9

1 Public Food Procurement Credit 46,211 41,852 1,812 4.1 -15.32 Non-Food Gross Bank Credit 26,02,290 27,16,217 3,99,400 18.1 10.4

a) Priority Sectors 9,15,886 9,49,428 1,68,506 22.5 15.4 i. Agriculture 3,38,656 3,43,070 63,314 23.0 21.4 ii. Micro and Small Enterprises (MSEs) 3,09,196 3,35,654 57,119 22.7 19.3iii. Other Priority Sectors 2,68,034 2,70,704 48,073 21.9 4.7

b) Industry ( Medium & Large) 8,85,393 9,65,057 1,25,330 18.6 12.8c) Wholesale Trade

(Other than Food Procurement) 67,425 80,922 11,723 21.0 27.4d) Other Sectors 7,33,586 7,20,810 93,841 12.9 0.3Of Total Non-Food Gross Bank Credit,1. Housing 2,76,957 2,91,760 19,165 7.4 7.32. Consumer Durables 8,187 8,028 -612 -7.0 -11.83. Real Estate Loans 91,575 88,581 28,261 44.6 15.34. Tourism and Hotels and Restaurants 13,625 15,667 1,420 11.6 22.75. Loans to Individuals against Shares,

Debentures, Bonds,etc. 2,286 2,347 -1,891 -45.3 -36.8

Source : RBI.Note : Data are provisional and relate to select banks which account for around 95 per cent of the gross bank

credit of all SCBs. Figures are as on the last reporting Friday of the month.


2009. As regards lending to agriculture by PSBs,only 14 banks achieved the target of 18 per cent. Inthe case of private-sector banks, out of 22 banks,five did not achieve the overall priority- sector lending

target of 40 per cent and only eight achieved thetarget of 18 per cent for lending to agriculture. Whilethe target for lending to the weaker sections (10 percent) was achieved by 15 PSBs, only four private-

Table 5.4 : Particulars of advances to the priority sectorA. PUBLIC SECTOR BANKS (Rs crore)

As on the last reporting Friday ofDetail March 2007 March 2008 March 2009 (provisional)

Total priority sector advances 5,21,376 6,10,450 7,20,083(39.7%) (44.7%) (42.5%)

Total advances to agriculture # 2,02,614 2,49,397 (17.2%)(15.4%) (18.3%) 2,98,211

Total advances to micro & small 1,02,550 1,51,137 1,91,307enterprises * (7.8%) (11.1%) (11.3%)Advances to weaker sections 93,747 1,21,740 1,67,041

(7.1%) (8.9%) (9.8%)

# Indirect agriculture is reckoned only up to 4.5 per cent of the ANBC or credit equivalent of OBEs, whicheveris higher.

B. PRIVATE SECTOR BANKS


Total priority sector advances 1,44,549 1,64,068 1,90,207(42.9%) (47.8%) (46.8%)

Total advances to agriculture# 52,034 58,567 76,062(12.7%) (17.0%) (15.9%)

Total advances to micro & small 13,136 46,912 47,916enterprises * (3.9%) (13.7%) (11.8%)Advances to weaker sections 5,223 7,152 15,832

(1.6%) (2.0%) (3.9%)

# Indirect agriculture is reckoned only up to 4.5 per cent of the ANBC or credit equivalent of OBEs, whicheveris higher.

C. FOREIGN BANKS


Total priority sector advances 37,831 50,254 55,483(33.4%) (39.5%) (34.3%)

Total advances to micro & small 11,637 15,489 18,138enterprises* (10.3%) (12.2%) (11.2%)Total Export credit (includes SSI export) 20,711 28,954 31,511

(18.3%) (22.7%) (19.4%)

Source : RBI* Figures for 2007 represent small-scale industries. In terms of revised guidelines on lending to the priority

sector, MSEs are defined on basis of the Micro, Small and Medium Enterprises Development (MSMED) Act2006.Figures in parentheses for the year 2007 show percentage of advances to net bank credit while those forthe years 2008 and 2009 show percentage to ANBC.


sector banks achieved the same as on the lastreporting Friday of March 2009. Out of 27 foreignbanks, only four did not achieve the overall priority-sector lending target of 32 per cent as on the lastreporting Friday of March 2009. The number of foreignbanks, which did not achieve the targets of 10 percent and 12 per cent for lending to the MSE andexport sectors respectively, stood at six.

5.16 In order to improve and enhance the flow ofcredit to the priority sector, a number of policyinitiatives were taken during 2009-10 including thefollowing:

Housing

Banks were advised that loans granted to housingfinance companies (HFCs) for on-lending toindividuals for purchase/construction of a dwellingunit per family be classified as housing loans underthe priority sector, provided the housing loans grantedby HFCs do not exceed Rs 20 lakh per dwellingunit. Eligibility under this measure was restricted to5 per cent of the individual bank’s total priority-sectorlending, on an ongoing basis. This specialdispensation is made applicable for loans grantedby banks to HFCs up to March 31, 2010.

Small-scale Sector

Banks have been advised that loans granted forcertain activities under micro and small (service)enterprises would be included within the prioritysector provided such enterprises satisfy the definitionof micro and small (service) enterprises in respectof investment in equipment (original cost excludingland and building, furniture, fittings and other itemsnot directly related to the service rendered or as maybe notified under the MSMED Act 2006) (i.e. notexceeding Rs10 lakh and Rs 2 crore respectively).

5.17 The activities which would be included withinthe priority sector are, consultancy services includingmanagement services, composite broker servicesin risk and insurance management, third-partyadministration (TPA) services for medical insuranceclaims of policy holders, seed grading services,training-cum-incubator centres, educationalinstitutions, training institutes, retail trade, practiceof law, i.e. legal services, trading in medicalinstruments (brand new), placement andmanagement consultancy services and advertisingagency and training centres.

5.18 There will be no separate retail trade categoryunder the priority sector. Loans granted by banksfor retail trade [i.e. advances granted to retail traders

dealing in essential commodities (fair price shops),consumer cooperative stores; and advances grantedto private retail traders with credit limits not exceedingRs 20 lakh] would henceforth be part of the small(service) enterprises.

Rural Infrastructure Development Fund(RIDF)5.19 The Government of India initiated the setting-up of an RIDF to be raised from the commercial banksto the extent of their shortfall in agricultural lending.The Fund has since been continued, with its corpusbeing announced every year in the budget. Over theyears, coverage under the RIDF has been madebroad based in each tranche and ,at present, a widerange of 31 activities under various sectors is beingfinanced. The annual allocation of funds announcedin the Union Budget has gradually increased fromRs 2,000 crore in 1995–96 (RIDF I) to Rs 14,000crore in 2009-10 (RIDF XV). The aggregateallocations have reached Rs 1,00,000 crore. Further,

a separate window has been created under the RIDFwith a corpus of Rs 4,000 crore, with annualreplenishment, for partly funding the rural roads andbridges components of the Bharat NirmanProgramme from 2006–07 to 2008-09. This amountwas raised to Rs 4,500 crore in 2009-10.

5.20 As against the total allocation of Rs1,00,000crore, encompassing RIDF I to XV, sanctionsaggregating Rs 99,654.53 crore have been accorded

Table 5.5 : Sanctions and disbursementsUnder the RIDF and Bharat Nirman

(As on December 31, 2009) (Rs crore)

Region Sanctions Disburse- Disburse-ments ments

as per centof sanction

South 27,068.41 17,417.90 64.35West 14,354.92 10,042.81 69.96North 27,997.49 18,513.68 66.13Central 8,956.38 5,607.56 62.61East 16,901.57 8,825.99 52.22North-easternRegion & Sikkim 4,375.76 2,415.68 55.21Total 99,654.53 62,823.62 63.04Bharat Nirman 16,500.00 14,080.70 85.34

Grand Total 1,16,154.53 76,904.32 66.21Source : NABARD (National Bank for Agriculture and

Rural Development).


to various State Governments, and disbursementsunder the Fund amounted to Rs 62,823.62 crore, upto end December 2009. The National Rural RoadsDevelopment Agency (NRRDA) was sanctionedduring the tranches RIDF XII to RIDF XV and it hasso far availed of a disbursement of Rs 14, 080.70crore. (Table 5.5).

5.21 During 2009-10 the aggregate disbursementto the States amounted to Rs 8,853.12 crore till endDecember 2009 and that to the NRRDA was Rs2,081.70 crore (Table 5.6).

AGRICULTURAL CREDIT

Flow of Agricultural Credit5.22 As against the target of Rs 2,80,000 crore(provisional) for agricultural credit in 2008-09, thebanking system disbursed credit of Rs 2,92,437

crore to the agricultural sector, thereby exceedingthe target by around 4 per cent. Commercial banksand regional rural ranks (RRBs) together extendedcredit to 81.02 lakh new farmers during 2008-09. Inaddition to this, cooperative banks provided loans to13.88 lakh new farmers during the period, thus takingthe total number of farmers financed by the bankingsystem to 94.90 lakh.

5.23 The total credit flow to agriculture during 2009-10 up to October 31, 2009 by commercial banks,cooperative banks and RRBs was of the order of Rs1,65,439.37 crore, amounting to 51 per cent of theannual target of Rs 3,25,000 crore (Table 5.7).

Kisan Credit Card Scheme (KCC)

5.24 The KCC scheme has become a widelyaccepted mechanism for delivery of credit to farmers.The banking system has issued 878.30 lakh KCCsas of November 30, 2009. The scheme now alsocovers borrowers of the long-term cooperative creditstructure. The KCC has thus become a single windowfor a comprehensive credit product. The year-wiseand agency-wise break up of the cards issued sinceinception is given in Table 5.8.

INITIATIVES FOR THE AGRICULTURALSECTOR

Personal Accident Insurance Scheme(PAIS)5.25 In order to safeguard the interests of KCCholders, NABARD has allowed banks the discretionto opt for any insurance company of their choice.The banks have, however, to keep in mind the guidingprinciples of PAIS, especially the premium- sharingformula,and coverage while negotiating with insurancecompanies.

Table 5.7 : Flow of institutional credit to agriculture and allied activities(Rs crore)

Sl. No. Agency 2004-05 2005-06 2006-07 2007-08 2008-09^ 2009-10*

1. Cooperative Banks$ 31,424 39,786 42,480 48,258 36,762 32,925% share 25 22 18 19 13 20

2. RRBs 12,404 15,223 20,435 25,312 26,724 20,065% share 10 8 9 10 9 12

3. Commercial Banks 81,481 1,25,477 1,66,486 1,81,088 2,28,951 1,12,449% share 65 70 73 71 78 68

Total (1+2+3) 1,25,309 1,80,486 2,29,401 2,54,658 2,92,437 1,65,439

Source : NABARD.$ : Including Others ^ : Provisional * : Up to October 31, 2009.

Table 5.6 : Disbursements during 2009-10(As on December 31, 2009) (Rs crore)

Region Disbursement Achieve- Target Achieve- ment(%)

ment

South 4,235 1,367.15 32.28West 2,350 795.27 33.84North 4,450 261.23 58.81Central 1,200 392.74 32.73East 3,100 1,384.91 44.67North-easternRegion & Sikkim 680 214.12 31.49RIDF Total 16,015 6,771.42 42.28New Delhi–NRRDA 4,500 2,081.70 46.26Grand Total 20,515 8,853.12 43.15

Source: NABARD.


Enlargement of the scope of KCC5.26 With a view to making it more user-friendly,NABARD has enlarged the scope of the KCCscheme to cover term loans for agriculture and alliedactivities, including a reasonable component forconsumption needs, besides the existing facility ofproviding crop loan limit.

Crop Insurance on KCC5.27 Crop loans disbursed under the KCC Schemefor notified crops are covered under the RashtriyaKrishi Bima Yojana (National Crop InsuranceScheme), introduced to protect the interests of thefarmer against crop loss caused by naturalcalamities, pest attacks, etc.

MICRO FINANCESelf-Help Groups (SHGs)5.28 In an effort to mainstream micro credit andincrease its outreach, the RBI had issuedcomprehensive guidelines in February 2000stipulating that micro credit extended by banks toindividual borrowers directly or through anyintermediary would henceforth be reckoned part oftheir priority-sector lending. Banks were given thefreedom to formulate their own model[s] or chooseany conduit/intermediary for extending micro credit.The SHG-Bank Linkage Programme implementedby commercial banks, RRBs and cooperative bankshas emerged as the major micro- finance programmein the country.

5.29 Under the SHG-Bank Linkage Programme,as on March 31, 2009, 61,21,147 SHGs held savingsbank accounts with total savings of Rs 5,545.62 croreas against 50,09,794 SHGs with savings of

Rs 3,785.39 crore as on March 31, 2008. Thus morethan 8.06 crore poor households were associatedwith banking agencies under the SHG- Bank LinkageProgramme.

5.30 As on March 31, 2009, commercial bankshad the maximum share of SHG savings with savingsof 35,49,509 SHGs (58 per cent) amounting to Rs2,772.99 crore (50 per cent); this was followed byRRBs with savings bank accounts of 16,28,588SHGs (26.6 per cent) and savings amount ofRs1,989.75 crore (35.9 per cent) and cooperativebanks with savings bank accounts of 9,43,050 SHGs(15.4per cent) and savings amount of Rs 782.88 crore(14.1 per cent).

5.31 The share of the Swarnajayanti GramSwarozgar Yojana (SGSY) in SHG savings accountswas 15,05,581 SHGs, forming 25 per cent of thetotal SHGs having savings accounts in banks. During2008-09, the average savings per SHG with all banksincreased from Rs 7,556 as on March 31, 2008 toRs 9,060 as on March 31, 2009, varying between ahigh of Rs 12,218 per SHG with RRBs and a low ofRs 7,812 per SHG with commercial banks. As onMarch 31, 2009, the share of women SHGs in totalSHGs with savings bank accounts was 48,63,921,accounting for 79.46 per cent as compared to theprevious year’s share of 79.56 per cent.

5.32 During 2008-09, banks financed 16,09,586SHGs, including repeat loans to existing SHGs, asagainst 12,27,770 SHGs during 2007-08—a growthof 31.1 per cent (number of SHGs). As on March31, 2009, 42,24,338 SHGs had outstanding(cumulative) bank loans of Rs 22,679.85 crore asagainst 36,25,941 SHGs with outstanding bankloans of Rs16,999.90 crore as on March 31, 2008(Table 5.9). This included 9,76,887 SHGs (6.5 per

Table 5.8 : Agency-wise KCCs issued and amount sanctioned (as of November 30, 2009)

Agency Cards issued (lakh) Amount sanctioned (Rs. crore)2006-07 2007-08 2008-09 2009-10 Total# 2006-07 2007-08 2008-09 2009-10@ Total#

Cooperative Banks 22.97 20.91 13.44 12.17 373.61 13,141 19,991 8,428 5,241 1,38,229$

RRB 14.06 17.73 14.15 11.02 125.73 7,373 8,783 5,648 5,512 4,93,44$

Commercial Banks 48.08 46.06 58.34 8.45^ 378.96 26,215 59,530 39,009 6,657^ 1,93,497*

Total 85.11 84.70 85.93 31.64 878.30 46,729 88,262 53,085 17,329 3,81,070

Source : NABARD# Since inception of the scheme in 1998. ^: Data up to 30 June 2009@ Break-up i.e term loan is not available$ Total amount sanctioned includes Rs 2,859 crore for term loan under KCC for 2008-09.$$ Total amount sanctioned includes Rs 2,304 crore for term loan under KCC for 2008-09.* Total amount sanctioned includes Rs 10,279 crore for term loan under KCC for 2008-09.


cent) with outstanding bank loans of Rs 5,861.72crore (21.7per cent) under the SGSY as against9,16,978 SHGs with outstanding bank loans of Rs4,816.87 crore as on March 31, 2008. Commercialbanks had the maximum share of around 70 percent of outstanding bank loans to SHGs followed byRRBs with a share of 23 per cent and cooperativebanks with the balance. As on March 31, 2009, theaverage bank loan outstanding per SHG was Rs53,689 as against Rs 46,884 as on March 31, 2008.It varied from a high of Rs 57,037 per SHG in thecase of commercial banks to a low of Rs 31,460 perSHG in the case of cooperative banks.

5.33 Pursuant of the announcement made in theReserve Bank’s Annual Policy Statement for theyear 2007-08, all regional offices (ROs) of theReserve Bank were advised to undertake anevaluation of the SHG-Bank Linkage Programme.This was intended to ascertain the degree oftransparency in maintaining accounts by SHGs andtheir adherence to best practices. The evaluationof SHGs carried out by the ROs revealed that therewas scope for improvement in the area ofmaintenance of books of accounts. It also broughtout that rotation of group leaders was generally notfollowed by SHGs. However, other best practiceslike strict adherence to attendance of groupmeetings, recording minutes of the meetings andprompt repayment of bank loans were beingfollowed.

5.34 The momentum of growth in the micro-financesector has brought into focus the importance ofregulating the sector to function in an efficient andorderly manner. There would be need for greatertransparency in their functioning and for facilitatingtheir reach to un-banked population of the country.

FINANCIAL PERFORMANCE OF BANKS

5.35 The balance sheets of SCBs in India availableas of 2008-09 indicate that the SCBs remainedrobust. However, the Indian banking sector was notcompletely insulated from the effects of the slowdownin the economy in 2008-09.

5.36 The consolidated balance sheets of SCBsexpanded by 21.2 per cent as in end-March 2009 ascompared to 25.0 per cent in the previous year. Whilethe balance sheets of PSBs maintained their growthmomentum, private-sector and foreign banksregistered a deceleration in growth. The workingresults of SCBs under different categories areabstracted in Table 5.10.

5.37 During 2008-09, the growth rate of banks’lending to industries, personal loans and serviceswitnessed a deceleration, while the growth rate ofbanks’ lending to agriculture and allied activitiesincreased substantially. Overall, the incrementalcredit–deposit (C-D) ratio declined sharply reflectingthe slowdown in credit growth.

Table 5.9 : Progress under SHG-Bank LinkageYear New SHGs financed by banks Bank loan**

During the year Cumulative during the year CumulativeNo. Growth (%) No. Amount$$ Growth (%) Amount$$

2002-03 2,55,882 29 7,17,360 1,022.34 87 2,048.682003-04 3,61,731 41 10,79,091 1,855.53 81 3,904.212004-05 5,39,365 49 16,18,456 2,994.25 62 6,898.462005-06 6,20,109 15 22,38,565 4,499.09 50 11,397.552006-07 11,05,749* — 28,94,505@ 6,570.39 — 12,366.49$2007-08 12,27,770* 11 36,25,941 8,849.26 35 16,999.90$2008-09# 16,09,586* 31.1 42,24,338 12,256.51 38.5 22,679.85$

Source : NABARD* Include existing SHGs also, which were provided repeat bank loan.** Includes repeat loans to existing SHGs.# Provisional $ Outstanding. $$ Amount in Rs. Crore.@ from 2006-07 onwards, data in respect of number of SHGs financed by banks and bank loans are

inclusive of SHGs financed under the Swarnajayanti Gram Swarozgar Yojana (SGSY) and the existinggroups receiving repeat loans. Owing to this change, NABARD discontinued compilation of data oncumulative basis from 2006-07. As such data from 2006-07 onwards are not comparable with the dataof the previous years.


5.38 The consolidated balance sheets of SCBs,expanded by 21.2 per cent as in end-March 2009,as compared to 25.0 per cent in end-March 2008.The growth rate of aggregate deposits of SCBsdecelerated to 22.4 per cent as in end-March 2009from 23.1 per cent as in end-March 2008. The growthrate of aggregate loans and advances of SCBsdecelerated to 21.2 per cent as in end-March 2009from 25.0 per cent in the previous year. Apart fromcyclical factors which led to slowdown after a periodof high credit growth, the deceleration wasaccentuated this year because of the overall

slowdown in the economy in the aftermath of theglobal financial turmoil. The capital to risk-weightedassets ratio (CRAR) of SCBs improved to 13.2 percent as in end-March 2009 from 13.0 per cent as inend-March 2008, remaining significantly above thestipulated minimum of 9.0 per cent.

5.39 Growth in investments by banks deceleratedto 23.1 per cent as of end-March 2009. However,the share of investments under the SLR categoryincreased during 2008-09, due to banks’ preferenceto park their funds in low-risk and low-returninstruments against the backdrop of prevailing

Table 5.10 : Working results of scheduled commercial banks

Items Foreign Old pvt. sector New pvt. All SCBPSBs banks banks sector banks

2007-08 2008-09 2007-08 2008-09 2007-08 2008-09 2007-08 2008-09 2007-08 2008-09

(Rs Crore)A Income 2,45,872 3,15,608 35,005 45,213 16,798 21,572 71,199 81,443 3,68,874 4,63,836

(i) Interest Income 2,13,075 2,73,428 24,417 30,322 14,614 18,783 56,377 66,283 3,08,483 3,88,816(ii) Other Income 32,797 42,180 10,588 14,891 2,184 2,789 14,822 15,160 60,391 75,020

B Expenditure 2,19,280 2,81,215 28,392 37,704 14,821 19,163 63,654 72,985 3,26,147 4,11,067(i) InterestExpended 1,48,902 1,93,447 10,604 12,817 9,960 12,834 38,535 44,123 2,08,001 2,63,221(ii) Intermediation Cost

(Operating Expenses) 46,663 55,190 10,353 12,299 3,235 3,939 17,032 17,840 77,283 89,268(iii) Provisions and

Contingencies 23,715 32,578 7,435 12,588 1,626 2,390 8,087 11,022 40,863 58,578C Operating Profit

(A - Bi - Biii) 73,255 89,583 16,966 19,808 5,212 6,348 24,577 26,298 1,20,010 1,42,037D Net Profit (A-B) 26,592 34,393 6,613 7,509 1,977 2,409 7,545 8,458 42,727 52,769E Net Interest Income

(Spread) (Ai - Bi) 64,173 79,981 13,813 17,505 4,654 5,949 17,842 22,160 1,00,482 1,25,595F Total Assets 30,21,924 37,66,716 3,64,099 4,47,149 1,94,544 2,32,001 7,45,599 7,95,464 43,26,166 52,41,330G Net Income

(Aii + E) 96,970 1,22,161 24,401 32,396 6,838 8,738 32,664 37,320 1,60,873 2,00,615 (As per cent of total assets)

A Income 8.14 8.38 9.61 10.11 8.63 9.30 9.55 10.24 8.53 8.85(i) Interest Income 7.05 7.26 6.71 6.78 7.51 8.10 7.56 8.33 7.13 7.42(ii) Other Income 1.09 1.12 2.91 3.33 1.12 1.20 1.99 1.91 1.40 1.43

B Expenditure 7.26 7.47 7.80 8.43 7.62 8.26 8.54 9.18 7.54 7.84(i) Interest Expended 4.93 5.14 2.91 2.87 5.12 5.53 5.17 5.55 4.81 5.02(ii) Intermediation Cost

(Operating Expenses) 1.54 1.47 2.84 2.75 1.66 1.70 2.28 2.24 1.79 1.70(iii) Provisions and

Contingencies 0.78 0.86 2.04 2.82 0.84 1.03 1.08 1.39 0.94 1.12C Operating Profit

(A - Bi - Biii) 2.42 2.38 4.66 4.43 2.68 2.74 3.30 3.31 2.77 2.71D Net Profit (A-B) 0.88 0.91 1.82 1.68 1.02 1.04 1.01 1.06 0.99 1.01E Net Interest Income

(Spread) (Ai - Bi) 2.12 2.12 3.79 3.91 2.39 2.56 2.39 2.79 2.32 2.40

Memo Item1 Operating Expenses as

Per Cent of Net Income 48.12 45.18 42.43 37.96 47.31 45.08 52.14 47.80 48.04 44.50

Source: RBI.


uncertainties. On other hand, growth of banks’investments in non-SLR securities (i.e. bonds/debentures/ shares and commercial papers)decelerated. The total flow of funds from SCBs tothe commercial sector comprising credit and non-SLR investments increased by 17.5 per cent (Rs4,21,091 crore) in 2008-09 as compared to 22.6 percent (Rs 4,44,807 crore) in 2007-08.

5.40 SCBs did not raise any resources from theequity market during 2008-09 though they accessedthe debt market for the purpose. The return on assets(ROA) remained at the previous year’s level of 1.0per cent, while the return on equity (ROE) increasedto 13.3 per cent during 2008-09 from 12.5 per centduring 2007-08.

5.41 The Indian banking sector was, however, notcompletely insulated from the effects of the slowdownin the economy as evident from the financialperformance of the SCBs. The growth rates of incomeas well as expenditure of the SCBs slowed down,leading to deceleration in growth of net profits.

Capital Adequacy Ratio5.42 One of the major indicators suggesting thatthe Indian banking system has withstood the pressureof global financial turmoil is the improvement in theCRAR. The overall CRAR of all SCBs improved to13.2 per cent by end-March 2009 from 13.0 per centa year earlier, thus remaining significantly above thestipulated minimum of 9.0 per cent. While the CRARof as many as 78 banks was above 10 per cent, thatof only one bank was in the range of 9 to 10 per cent.

5.43 All commercial banks in India excluding RRBsand local area banks have become Basel II compliantas of March 31, 2009. To begin with, theStandardised Approach for Credit Risk, BasicIndicator Approach for Operational Risk andStandardised Duration Approach for Market Risk havebeen implemented in India. However, theimplementation of advanced approaches under theBasel II framework would bring about the upgradationof the risk management framework as well as capitalefficiency in the Indian banking system.

Non-performing Assets (NPAs) of theBanking Sector5.44 Indian banks recovered a higher amount fromNPAs during 2008-09 as compared to the previousyear, pointing towards efforts for improvement in theasset quality of banks. The total amount recoveredand written-off in 2008-09 was Rs 38,828 crore

However, though this was higher than the Rs 28,283crore written off in 2007-08, it was lower than thefresh NPAs added (Rs 52,382 crore) during the year.Though some slippage was to be expected in thecurrent global context, it has been moderate ascompared to the problems faced by banks all overthe world. Among the various channels of recoveryavailable to banks for dealing with bad loans, theSARFAESI Act and the Debt Recovery Tribunals(DRTs) have been the most effective.

5.45 The gross NPAs to gross advances ratio forSCBs remained constant at 2.3 per cent during2008-09 as in 2007-08. However, though the grossNPA to gross advances ratio of PSBs declined from2.2 per cent in March 2008 to 2.0 per cent as ofMarch 2009, that of old private banks increasedfrom 2.3 to 2.4 per cent and that of foreign banksfrom 1.8 to 4.0 per cent in March 2009 over the levelof March 2008. The net NPA ratio (net NPAs aspercentage of net advances) increased marginallyfrom 1.0 to 1.1 in the case of SCBs in March 2009.

Technological Developments in Banks5.46 Banks in India are using InformationTechnology (IT) not only to improve their own internalprocesses but also to increase facilities and servicesto their customers. Efficient use of technology hasfacilitated accurate and timely management of theincreased volumes of transactions of banks,consistent with a larger customer base.

5.47 During 2008-09, the transmission of clearingdata—both for cheque and electronic clearingservices—and collation of inputs from currencychests as part of the Integrated Currency ChestOperations and Management System (ICCOMS)was done using secured websites. The prevalent ITsystem to process the accounting requirements ofthe State and Central Governments was replacedby the Centralised Public Accounts DepartmentSystem (CPADS), which is considered more robustand user friendly.

5.48 To facilitate a smoother and faster bidding inthe Primary Dated Securities Auctions held by theReserve Bank, a new version of the NegotiatedDealing System Auction module, developed andhosted by the Clearing Corporation of India, wasdeveloped in 2008-09, leading to its launch with effectfrom May 11, 2009.

5.49 One of the major achievements during 2008-09 was the increase in the number of branchesproviding Core Banking Solutions (CBS). The total


number of branches of PSBs that have implementedCBS increased from 35,464 as on March 31, 2008to 44,304 as on March 31, 2009.

5.50 The computerization of the banking sector,which is regarded as the precursor to othertechnological initiatives, is almost in completionstage. The proportion of PSB branches that achievedfull computerization increased from 93.7 per cent asof end-March 2008 to 95.0 per cent as of end-March2009. That continuous progress is being made bybanks is reflected in the increase in the number ofbanks moving into the ‘more than 90 per cent butless than 100 per cent’ category. During 2008-09,the total number of automated teller machines (ATMs)installed by banks grew by 25.4 per cent.

NON-BANKING FINANCIALINSTITUTIONS (NBFIS)5.51 While banks account for a major share ofthe Indian financial system, NBFIs also play animportant role in providing a wide range of financialservices. While banks have an edge in providingpayment- and liquidity-related services, NBFIs tendto offer enhanced equity and risk-based products.The major intermediaries that are included in theNBFI group are development finance institutions(DFIs), insurance companies, non-banking financialcompanies (NBFCs), primary dealers (PDs) andcapital market intermediaries such as mutual funds.The NBFIs provide medium- to long-term finance todifferent sectors of the economy.

Financial Institutions (FIs)5.52 Based on the major activity undertaken byFIs, they could be classified into three broadcategories, namely (i) term-lending institutions whosemain activity is direct lending by way of term loansand investments (e.g. EXIM Bank); (ii) refinanceinstitutions which mainly extend refinance to banksas well as NBFIs (e.g. NABARD, the SmallIndustries Development Bank of India [SIDBI] andNational Housing Bank [NHB]); (iii) investmentinstitutions which deploy their assets largely inmarketable securities (e.g. the Life InsuranceCorporation of India [LIC]).

5.53 In the context of the emergent liquidityconstraints following the onset of the global financialcrisis, the RBI in December 2008, provided a windowfor refinance facilities of Rs 7,000 crore, Rs 5,000crore and Rs 4,000 crore for SIDBI, EXIM Bank andthe NHB respectively. Accommodation under this

facility was to be charged at the repo rate under theLiquidity Adjustment Facility (LAF) of the RBI. Theamount outstanding under the special refinancefacility remained small up to February 2009 for eachinstitution, but picked up in the subsequent months(Table 5.11).

5.54 The ‘umbrella limit’ for aggregate borrowingsby financial institutions (FIs) (through five specifiedinstruments, namely term deposits, term moneyborrowings, certificates of deposits [CDs],commercial papers [CPs] and inter-corporatedeposits [ICDs]) which was stipulated not to exceed100 per cent of their net owned funds (NOFs) at anytime, as per their latest audited balance sheets, wasalso raised to 200 per cent of NOFs for one yearwith effect from December 8, 2008 for EXIM Bankand from January 15, 2009 for the NHB, subject toreview and subject to the asset liability management(ALM) guidelines of the Reserve Bank.

5.55 During 2008-09, though there was increasein financial assistance both sanctioned and disbursedby FIs, the increase in disbursements (93.3 per cent)was more pronounced than that in sanctions (70.2per cent). A major part of the increase in financialsanctions and disbursements was accounted formainly by investment institutions (especially the LIC)followed by term-lending institutions (Table 5.12).

5.56 Resources raised by the FIs during 2008-09were considerably higher than those during theprevious year. The increase was largely in the short-term mode, while the raising of long-term and foreigncurrency resources declined as compared to thepreceding year. Resources raised by FIs from themoney market rose sharply during 2008-09 with the

Table 5.11 : Utilization of refinance facilities(Amount in Rs crore)

AIFIs Re- Cumulative Cumulative No.offinance amount amount bene-

sanction drawn up disbursed ficiaries-ed June 26, up to June,

2009 26, 2009

SIDBI 7,000 5,684 4,971 33*988 1,043 22**

7,747 1,841 5,179Exim Bank 5,000 3,000 3,478 35NHB 4,000 3,979 3,979 14#

Total 16,000 21,398 15,312 5,283

Source: RBI* State Finance Corporations (SFCs) and banks.** Non Banking Finance Companies# Housing Finance Companies


utilization of the “umbrella limit” reaching 58.0 percent in 2008-09 as compared to 22.9 per cent in thepreceding year. External sources contributed 30.7per cent of sources of funds during 2008-09 ascompared to 51.7 per cent during the preceding year.

5.57 FIs recorded improvement in their asset qualityduring 2008-09. In terms of net NPA to net loansratio, the asset quality of SIDBI and EXIM Bankimproved during the year. The net NPA ratio ofNABARD increased marginally. None of the FIs hadany assets in the ‘loss’ category as of end-March2009.

5.58 Net interest and non-interest incomes of FIsincreased by 22.5 per cent and 31.1 per centrespectively during 2008-09. The operating profitincreased by 33.5 per cent during the year. The netprofit of FIs also increased despite higher provisionsfor taxation. The capital adequacy ratio of all the FIscontinued to be significantly higher than the minimumstipulated norm of 9 per cent.

NON-BANKING FINANCIALCOMPANIES (NBFCS)5.59 The NBFCs as a whole account for 9.1 percent of the assets of the total financial system. Inthe wake of the recent global financial crisis and itsfallout for FIs, the RBI undertook measures topreserve financial stability and arrest the moderationin the growth momentum. As a measure aimed atexpanding rupee liquidity, the Reserve Bank provideda special repo window under its LAF for NBFCs. Inaddition, an existing special purpose vehicle (SPV)was used as a platform to provide liquidity supportto NBFCs. In December 2008, systemically

important non-deposit taking NBFCs (NBFCs-ND)were permitted, as a temporary measure, to raiseforeign currency short-term borrowings under theapproval route subject to certain conditions.

5.60 The total number of NBFCs registered withthe Reserve Bank, consisting of deposit-takingNBFCs (NBFCs-D), residuary non-bankingcompanies (RNBCs), mutual benefit companies(MBCs), miscellaneous non-banking companies(MNBCs) and Nidhi companies, declined from12,809 in end-June 2008 to 12,740 in end-June 2009.The number of NBFCs-D also declined from 364 inend-June 2008 to 336 in end-June 2009, mainly dueto the exit of many NBFCs from deposit-takingactivity (Table 5.13).

5.61 The ratio of deposits of reporting NBFCs tothe aggregate deposits of SCBs dropped to 0.53 percent in end-March 2009 from a level of 0.73 per centin end- March 2008, mainly due to the decline indeposits of reporting NBFCs.

Table 5.12 : Financial assistance sanctioned and disbursed by financial institutions(Rs crore)

Category Amount Percentage variation

2007-08 2008-09 2008-09

S D S D S D

(i) All-India Term-Lending Institutions* 18,696 17,379 33,660 31,604 80.0 81.9

(ii) Specialised Financial Institutions# 366 189 597 283 63.1 49.7

(iii) Investment Institutions@ 39,670 28,460 65,731 57,086 65.7 100.6

Total assistance by FIs(i+ii+iii) 58,732 46,028 99,988 88,973 70.2 93.3

Source : RBIS Sanctions * Relating to SIDBI and Industrial Investment Bank of India. D Disbursements# Relating to IVCF and ICICI Venture. @ Relating to LIC and GIC & erstwhile subsidiariesAll data are provisional.

Table 5.13 : Number of NBFCs Registeredwith the RBI

End June Number of Number ofregistered NBFCs-D

NBFCs

2004 13,764 6042005 13,261 5072006 13,014 4282007 12,968 4012008 12,809 3642009 12,740 336Source: RBI.


5.62 Total assets of NBFCs declined to Rs 95,727crore during 2008-09 from Rs 99,014 crore in thepreceding year. Public deposits also recorded adecline to Rs 21,548 crore in end- March 2009 fromRs 24,400 crore in end-March 2008. The NOFs ofNBFCs witnessed a growth of 8.8 per cent and stoodat Rs13,458 crore as in end-March 2009. The shareof RNBCs in NBFCs in terms of total assets, publicdeposits and NOFs recorded marginal decline during2008-09 over the preceding year.

5.63 Total assets/liabilities of NBFCs (excludingRNBCs) expanded at the rate of 1.3 per cent during2008-09 as compared to 53.6 per cent during 2007-08. Borrowings, which are the major source of fundsfor NBFCs, increased by 9.3 per cent during theyear, while public deposits declined by 4.9 per centindicating the continuing shift in the pattern of raisingof resources. On the assets side, hire purchaseassets and loans and advances, which are majoritems of assets, witnessed growth of 6.3 per centand 12.0 per cent respectively in 2008-09, ascompared to 27.9 per cent and 70.2 per centrespectively, during the earlier year. Growth of totalinvestments of NBFCs decelerated mainly due todeceleration in investment in approved securities.Other investments increased by 37.4 per centduring 2008-09 as compared to 30.0 per cent during2007-08.

5.64 Among NBFC groups, asset financecompanies (AFCs) held the largest share in totalassets/liabilities (70.3 per cent), followed by loancompanies (28.9 per cent), hire purchase companies(0.6 per cent) and equipment leasing (0.3 per cent).The increase in assets/liabilities of AFCs was mainlyon account of reclassification of NBFCs, which wasinitiated in December 2006.

5.65 Of the total deposits held by all NBFCs, AFCsheld the largest share in total deposits of NBFCs(70.5 per cent); loan companies and hire purchasecompanies accounted for low shares of 19.9 per centand 9.6 per cent respectively.

5.66 Continuing the trend of the previous year,public deposits held by all groups of NBFCs takentogether declined moderately during 2008-09. Thistrend is indicative of the shift in preference of NBFCsfrom public deposits to bank loans/ debentures. Thedecline in public deposits was mainly evident in thecase of loan companies and equipment-leasingcompanies due to reclassification of some of thesecompanies as asset finance companies. Depositsof asset finance companies increased by 17.5 percent during 2008-09.

5.67 The asset size of NBFCs varied significantlybetween less than Rs 25 lakh to above Rs 500 crore.The asset-holding pattern remained skewed in 2008-09, with 12 NBFCs with asset size of “above Rs 500crore” holding 95.8 per cent of the total assets of allNBFCs, while the remaining 263 NBFCs held onlyabout 4.2 per cent in end-March 2009.

5.68 Financial performance of NBFCs in terms ofincome and net profit improved during 2008-09. Whilegrowth in expenditure decelerated over the previousyear, it, however, witnessed higher growth thanincome, resulting in a decline in operating profit by2.2 per cent. Net profit registered a moderate growthmainly due to lower provisioning for tax. The cost toincome ratio deteriorated from 68.9 per cent in 2007-08 to 74.1 per cent in 2008-09. Non-interest cost at97.6 per cent continued to constitute the dominantshare in the total cost of NBFCs during 2008-09.Concomitantly, the interest cost accounted for asmall share.

5.69 Gross NPAs (as percentage of grossadvances) of asset finance, equipment leasing,investment and hire purchase companies declinedduring 2008-09. Net NPAs (as percentage of netadvances) increased marginally in the case of assetfinance companies and hire purchase companies,while those of equipment leasing and investmentcompanies decreased. NPAs of loan companiesremained negative during 2008-09 also. Asset qualityof various types of NBFCs as reflected in variouscategories of NPAs (substandard, doubtful and loss)showed that there was sharp improvement in theasset quality of equipment leasing companies anddeterioration in the asset quality of hire purchasecompanies during 2008-09 over the previous year.

5.70 CRAR norms were made applicable to NBFCsin 1998, in accordance with which every deposit-taking NBFC is required to maintain a minimumcapital, consisting of Tier-I and Tier-II of not less than12 per cent (15 per cent in the case of unrateddeposit-taking loan/investment companies) of itsaggregate risk-weighted assets and of risk-adjustedvalue of off-balance sheet items. The number ofNBFCs with less than the minimum regulatory CRARof 12 per cent declined to 9 in end-March 2009 from47 in end- March 2008. In end-March 2009, 198 outof 207 NBFCs had CRAR of 12 per cent or more asagainst 280 out of 327 NBFCs in end-March 2008.The number of NBFCs with CRAR more than 30 alsodeclined to 168 in end- March 2009 from 239 in end-March 2008.


5.71 Regulation of non-banking entities is beingprogressively strengthened and the process hadstarted before the onset of the global financial crisis.Issues relating to the level playing field between bank-sponsored NBFCs and non-bank associated NBFCsand other issues of regulatory convergence andregulatory arbitrage were examined with respect tosystemic implications. NBFCs-ND with asset sizeof Rs100 crore and above are defined as systemicallyimportant and an elaborate prudential framework hasbeen put in place to regulate these entities.

5.72 Initially, with a view to protecting the interestsof depositors, regulatory attention was mostlyfocused on NBFCs accepting public deposits(NBFCs-D). Over the years, however, this regulatoryframework has been widened to include issues ofsystemic significance. The sector is beingconsolidated and while deposit-taking NBFCs havedecreased both in size as well as in terms of thequantum of deposits held by them, NBFCs-ND haveincreased in terms of number and asset size. NBFCs-ND with asset size of Rs100 crore and above aresubject to CRAR and exposure norms prescribedby the RBI.

5.73 A reclassification of NBFCs was effected inDecember 2006, whereby companies financing real/physical assets for productive/ economic activitiesare classified as AFCs, while the other two categoriesare loan companies (LCs) and investment companies(ICs).

5.74 In July 2008, the Reserve Bank revised theapproach towards monitoring of frauds in NBFCswhich was earlier issued in March 2008. NBFCs havebeen advised to report frauds in their subsidiariesand affiliates/joint ventures, and directions were alsoissued in January 2009, requiring them to adopt aninterest rate model which precludes high interestrates and at the same time be transparent to thecustomers.

5.75 The final guidelines regarding non-deposittaking systemically important NBFCs (NBFC-ND-SI) were issued on August 1, 2008. According tothese guidelines, the minimum CRAR for each NBFC-ND-SI was raised from the existing 10 per cent to 12per cent to be reached by March 31, 2009 and 15per cent to be reached by March 31, 2010. In view ofthe economic downturn and based on severalrequests received, this requirement has beenpostponed for one year. The NBFCs-ND-SI wererequired to make additional disclosures relating toCRAR, exposure to the real estate sector and thematurity pattern of assets and liabilities in theirbalance sheet from the year ending March 31, 2009.

5.76 In October 2008, taking into consideration theneed for enhanced funds for increasing business andmeeting regulatory requirements, the Reserve Bankdecided that NBFCs-ND-SI may augment theircapital funds by issue of perpetual debt instruments(PDIs). Such PDIs are eligible for inclusion as Tier Icapital to the extent of 15 per cent of total Tier Icapital as on March 31 of the preceding year.

5.77 In December 2008, systemically importantNBFCs-ND-SIs were permitted, as a temporarymeasure, to raise foreign currency short-termborrowings under the approval route subject to certainconditions. In this connection, all the NBFCs-ND-SIthat have availed of short-term foreign currency loanswere advised to furnish a monthly return as per theprescribed format within ten days from the end ofthe month to which it pertains.

5.78 To enable the RBI to verify that “fit and proper”management of NBFCs is continuously maintained,it has been decided that any takeover/acquisition ofshares or merger/ amalgamation of an NBFC-D withanother entity or any merger/amalgamation of anentity with an NBFC-D that would give the acquirer/another entity control of the NBFC-D, would requireprior permission of the RBI with effect fromSeptember 17, 2009.

5.79 To hedge the underlying exposures of NBFCs,directions were issued covering the framework fortrading of interest rate futures by NBFCs inexchanges in India recognized by the SecuritiesExchange Board of India (SEBI) subject to RBI/SEBIguidelines.

5.80 The turbulence in the international financialmarkets in 2008 also affected the domestic financialsector including NBFCs sector, particularly a fewNBFCs-ND-SI. These entities have been financinglong-term assets with short-term commercial paperand non-convertible debentures which weresubscribed to mainly by mutual funds (MFs). SuchNBFCs-ND-SI faced difficulties as MFs were not ina position to roll over these instruments during thecrisis period. The measures undertaken by theReserve Bank in respect of the NBFC sectorfollowing the financial crisis were as follows:

i) NBFCs-ND-SI were permitted as a temporarymeasure to raise short-term foreign currencyborrowings under the approval route subject tofulfillment of certain conditions. While theresources raised were to be used only forrefinancing of short-term liabilities and not forcreation of fresh assets, it was also advisedthat the maturity of such borrowing should not


exceed three years and the maximum amountshould not exceed 50 per cent of the NOF orUS$10 million (or its equivalent), whichever washigher.

ii) Banks were permitted, on a temporary basis,to avail of liquidity support under the LAFwindow through a relaxation in the maintenanceof SLR up to 1.5 per cent of their NDTL,exclusively for meeting the fundingrequirements of NBFCs and mutual funds.

iii) The risk weight on banks’ exposure to NBFCs-ND-SI was reduced to 100 per cent from 125per cent irrespective of credit rating, whileexposure to AFCs which attracted a risk weightof 150 per cent was also reduced to 100 percent.

iv) NBFCs-ND-SI were permitted to augment theircapital funds by the issue of PDIs. The amountof PDI raised by NBFCs-ND-SI would not betreated as ‘public deposit’ within the meaningof Reserve Bank directives.

v) The proposed increase in the CRAR to bemaintained by NBFCs-ND-SI to 12 per centand subsequently to 15 per cent was deferredby one year, i.e. 12 per cent by March 31,2010 and 15 per cent by March 31, 2011.

vi) The RBI provided direct lending facility as alender of last resort (LOLR) to NBFCs-ND-SIagainst their rated CPs through an SPV bysubscribing to its bonds. The facility wasoperationalized in January 2009 through anSPV called ‘IDBI SASF Trust’ to provide liquiditysupport against investment grade paper ofNBFCs, subject to their fulfilling certainconditions. It was designed as an LOLR facilityto allow an orderly downsizing of the balancesheets of financially sound NBFCs which facedshort-term temporary liquidity requirement. Thefacility has been availed of by only one NBFCso far, which has drawn Rs1,040 crore underthe scheme and there is no outstanding balanceas of date. The Government of India hadextended the facility for any paper issued tillSeptember 30, 2009 and the SPV would ceaseto make fresh purchases after December 31,2009 and would recover all dues by March 31,2010.

The NBFC sector has been witnessing aconsolidation process in recent years, wherein theweaker NBFCs are gradually exiting, paving the wayfor a stronger NBFC sector.

CAPITAL AND COMMODITYMARKETS5.81 The capital and commodity markets exhibitedbuoyancy during 2009 as the markets recovered andgained strength against the backdrop of a distinctimprovement in the risk appetite of investors leadingto a sharp rise in international capital flows toemerging markets including India. Positive domesticfactors, namely better than expected performanceof corporates and banks and higher GDP growthduring the second quarter (Q2) of 2009-10 alsosupported an uptrend in the Indian capital market.

Capital Market5.82 The Indian equity markets, which had declinedsharply during 2008, reflecting the volatility ininternational financial markets and foreign institutionalinvestment outflows, began the year 2009 on asubdued note. The market remained range boundduring April-March 2009 but exhibited signs ofrecovery from April 2009. With the revival of foreigninstitutional investors’ (FIIs) interest in emergingmarket economies including India, the equitymarkets gained strength during May-July 2009. Therewas a fresh spell of bullish sentiment in September2009, with the Bombay Stock Exchange (BSE)Sensex recording a high of 17,126.84 during themonth. The Indian equity markets closed lower at15,896.28 in end-October 2009, before showing animprovement during November-December 2009. Themovement in equity indices in the Indian capitalmarket was in line with trends in major internationalequity markets, a sign of increasing integration.Against the backdrop of these trends in Indian equitymarkets, the regulatory measures initiated duringthe year were clearly in the direction of introducinggreater transparency, protecting investors’ interestsand improving efficiency in the working of Indianequity markets, while also ensuring the soundnessand stability of the Indian capital market.

Primary Market

5.83 Though resource mobilization from the primarymarket through equity investments was sluggish in2009 both in terms of number of issues and amountraised through public rights issues and follow-onpublic offerings, there was an increase in debt marketactivity and private placements. The total numberof initial public offerings (IPOs) declined to 20 in 2009from 37 in 2008. The total amount mobilized throughequity issues in 2009 was lower at Rs 23,098 croreas compared to Rs 49,485 crore raised in 2008. Theamount raised through IPOs, however, increased


slightly in 2009 to Rs 19,296 crore from Rs 18,393crore in 2008. The mean IPO size increased to Rs965 crore in 2009 from Rs 497 crore in 2008. Therewas no debt issue in 2008. The total amountmobilized through three debt issues during 2009 wasRs 3,500 crore. The total amount raised throughprivate placement of debt in 2009 at Rs 2,38,226crore was higher by 53.0 per cent than its previousyear’s level of Rs 1,55,743 crore. Total resourcesmobilized through the primary market at Rs 2,80,090crore recorded an increase of 32.4 per cent in 2009(Table 5.14).

5.84 During 2009, total net resources mobilizedby MFs increased to Rs 1,43,775 crore as comparedto net redemptions amounting to Rs 624 crore in2008. Private-sector mutual funds, which hadwitnessed heavy redemption pressure in 2008,recorded a turnaround with total net resourcemobilization of Rs 1,14,095 crore in 2009 as againsta net redemption of Rs12,506 crore in 2008. Totalfunds mobilized by public-sector mutual funds weremarginally higher at Rs 17,624 crore in 2009 (Rs14,587 crore in 2008). The Unit Trust of India (UTI),which had recorded net redemptions of Rs 2,704

crore in 2008, mobilized Rs12,056 crore in 2009(Table 5.15).

Secondary market5.85 Indian equity markets witnessed a revival inthe secondary market segment, which had recordeda sharp decline in the wake of the global financialcrisis during the later half of 2008 (Figure 5.3). Thesecondary market staged a handsome recovery in2009 following stimulus measures implemented bythe Government and resurgence of foreign portfolioflows displaying renewed interest by foreign investors.The subdued global commodity prices in thebeginning of 2009 also lifted the sentiments in theIndian capital market. Furthermore, election resultsannounced in May 2009 removed uncertainty oneconomic policies and as such boosted Indian equitymarkets and both benchmark and sectoral indicesrallied. The equity markets gained further tillSeptember 2009 on positive cues from the globalmarkets, before declining during October 2009.Market sentiments improved during November-December 2009, leading to gains in equity pricesand an uptrend in equity market indices.

Table 5.15 : Trends in resource mobilization (net) by MFs(Rs crore)

Sector Calendar Year2006 2007 2008 2009

1. UTI 6,426 9,245 -2,704 12,0562. Public Sector 12,229 8,259 14,587 17,6243. Private Sector 86,295 1,20,766 -12,506 1,14,0954. Total (1 to 3) 1,04,950 1,38,270 -624 1,43,775

Source : SEBI

Table 5.14 : Resource mobilization through the primary market(Rs crore)

Calendar YearMode 2006 2007 2008 2009(P)

1. Debt 389 594 0 3,5002. Equity 32,672 58,722 49,485 23,098 of which, IPOs 24,779 33,912 18,393 19,296Number of IPOs 75 100 37 20Mean IPO size 330 339 497 9653. Private Placement 1,17,407 1,84,855 1,55,743 2,38,2264. Euro Issues (ADR/GDR) 11,301 33,136 6,271 15,266

Total (1 to 4) 1,61,769 2,77,307 2,11,499 2,80,090

Source : SEBI and RBI (for Euro Issues)P Provisional


5.86 Amongst the National Stock Exchange (NSE)indices, both Nifty and Nifty Junior recorded positiveannual equity returns (current year-end index dividedby previous year-end index multiplied by 100) of 75.8per cent and 128.6 per cent in 2009 as against negativeannual equity returns of 51.8 per cent and 63.5 percent respectively during the calendar year 2008.

5.87 In terms of month-to-month movement, theNSE S&P CNX Nifty index showed improvementsduring March-May, July-September and November–December 2009. The S&P CNX Nifty index movedup from its previous year’s closing level of 2,959 to5,201 on December 31, 2009, recording an increaseof 75.8 per cent over the year. Nifty junior was onan uptrend in terms of month-end values from Marchto December 2009, except a marginal decline in itsvalue in end-October 2009. The rise in the NiftyJunior index, on a point-to-point basis, was 128.6per cent in end-December 2009. The movement inthe BSE Sensex and BSE 500 indices was moreor less in the same direction as in the case of Niftyindices during the year 2009.

5.88 During 2009, the Asian stock markets wereon a recovery path. The cumulative change in globalindices in end-December 2009 over the end-December 2003 level revealed a significant rise inthese indices across countries. The JakartaComposite index (Indonesia) registered a rise of264.1 per cent to 2,510 at end-December 2009,while the BSE Sensex was up by 199.1 per centto 17,465 in end-December 2009. Nikkei 225,Japan, however remained lower than its end-December 2003 level. Notwithstanding animprovement in global stock indices during the year,they were still lower than the levels reached in 2007(Table 5.16).

5.89 Market capitalization of shares traded on theBSE and NSE increased sharply in 2009. Marketcapitalization, which had reached record levels in2007, recovered in the case of Nifty, Nifty junior, theBSE Sensex and BSE 500 by end-December 2009.It surpassed the 2007 level in the case of Niftyjunior, while for other indices it remained lower than2007 levels (Table 5.17).

0

NSE

Ind

ices

Year

Movement of indices of NSE and BSE

2000

4000

6000

8000

10000

12000

Figure 5.3

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

2009

NiftyClosing

NiftyJunior

SensexClosing

BSE

Ind

ices

0

5000

10000

15000

20000

Table 5.16 : Cumulative change in movement of global indices*

Index Cumulative change over end-2003 level

2004 2005 2006 2007 2008 2009

BSE Sensex, India 13.1 61.0 136.1 247.4 65.2 199.1Hang Seng Index, Hong Kong 13.2 18.3 58.8 121.2 1.1 74.2Jakarta Composite Index, Indonesia 44.5 68.1 161.0 296.8 35.5 264.1Nikkei 225, Japan 7.6 50.9 61.3 43.4 -22.9 -5.3Kospi Index, South Korea 10.5 69.7 76.8 133.9 25.6 104.4Kuala Lumpur Comp. Index, Malaysia 14.2 13.4 38.0 82.0 -3.3 58.7TSEC weighted Index, Taiwan 4.2 11.2 32.8 44.4 -25.2 32.3SSE Composite Index, China -15.4 -22.4 78.7 251.5 43.7 116.9

Source : Derived from various country sources.* End year closing.


5.90 Market volatility, as measured by the standarddeviation of daily volatility of the Indian indices,declined significantly in 2009. However, the volatilityof weekly returns of Indian indices, namely Sensexand BSE 500, in 2009 was even higher than thatin 2008, while Nifty indices, namely Nifty andNifty junior, recorded lower volatility in 2009(Table 5.18).5.91 The P/E ratio of the major stock marketindices, which partly discounts future corporateearnings reflecting investors’ expectations of corporateprofit, witnessed a sharp increase in 2009. Thevaluation of stocks in terms of P/E ratios of the

Sensex and Nifty increased to 22.36 and 23.17respectively as on December 31, 2009 as against12.36 and 12.97 respectively as on December 31,2008. This trend was also seen in P/E ratios ofstock indices across select emerging marketeconomies (EMEs) during 2009. Moreover, thedifferences in valuation of stocks in terms of P/E ratiosamongst EMEs were not very sharp (Table 5.19).

5.92 The price of a security depends largely ondemand and supply conditions and is influenced bythe impact cost, which represents the cost ofexecuting a transaction in a given security, for a

Table 5.18 : Volatility of weekly returnson the equity markets (standard deviation)

Class of stocks PeriodJan 2008 Jan 2009Dec 2008 Dec 2009

IndiaTop 50 (Nifty) 4.30 3.89Next 50 (Nifty Junior) 4.89 4.39Sensex 4.57 5.12BSE 500 4.68 5.29

Source : NSE and BSE

Table 5.19 : P/E ratios in selectemerging markets

Index/market Dec. 2008 Nov. 2009

South Korea KOSPI 10.95 21.32Thailand SET 7.26 25.23Indonesia JCI 8.26 26.46Malaysia KLCI 10.09 22.18Taiwan TWSE 9.31 N.AIndia BSE Sensex 12.36 21.53India S&P CNX Nifty 12.97 22.37

Source : SEBI

Table 5.17 : Equity returns, volatility, market capitalization & P/E ratioIndex Calendar Year

2006 2007 2008 2009

NNifty :Returns (per cent) 39.83 54.77 -51.79 75.76End-year Market Capitalization (Rs cr.) 19,75,603 35,22,527 18,32,610 33,14,447Daily volatility * 1.64 1.60 2.81 2.14End-year P/E 21.26 27.62 12.97 23.17Nifty Junior :Returns (per cent) 28.24 75.73 -63.52 127.91End-year Market Capitalization (Rs cr.) 3,33,693 6,43,625 2,95,471 6,55,899Daily volatility * 1.96 1.71 3.15 2.23End-year P/E 21.78 26.48 8.99 16.28BSE Sensex :Returns (per cent) 46.7 47.2 -52.48 76.35End-year Market Capitalization (Rs cr.) 17,58,865 28,61,341 14,63,165 26,49,482Daily Volatility * 1.6 1.5 2.85 2.19End-year P/E 22.8 27. 7 12.36 22.36BSE 500 :Returns (per cent) 38.9 63.0 -58.74 85.34End-year Market Capitalization (Rs cr.) 33,36,509 64,70,881 29,40,741 56,87,505Daily Volatility * 1.6 1.5 2.75 2.05End-year P/E 20.2 29.1 12.4 21.9

Source: BSE and NSE.* Standard deviation values.

P/E—price to earnings ratio.


predefined order size, at any given point of time.Market liquidity and impact cost are inverselyrelated. The impact cost for purchase or sale of Niftyand Nifty Junior portfolios was lower than in theprevious three years (Table 5.20).

5.93 The turnover in the spot and derivativessegment on the NSE recorded an increase of 19.6per cent and 33.6 per cent respectively in 2009. TheBSE spot market turnover in 2009 declined furtherby 3.8 per cent over and above a decline of 6.4 percent in 2008. The turnover in the derivatives marketon the BSE was only Rs 36 crore in 2009 asagainst Rs 75,178 crore in 2008 (Table 5.21).

5.94 The spot market turnover (one way) for theNSE and BSE at Rs 50,86,096 crore in 2009 washigher by 12.7 per cent over its previous year’s levelof Rs 45,12,562 crore in 2008. The turnover in thederivatives segment for the NSE and BSE, takentogether, at Rs 1,55,65.799 crore, also posted a riseof 32.7 per cent in 2009. The turnover in the NSEspot and derivative markets, as a proportion ofmarket capitalization of the Nifty, was 115 per centand 470 per cent respectively. The turnover in theBSE spot market was 22 per cent of marketcapitalization of the BSE (500) Index.

5.95 The number of registered FIIs rose to 1,706at the end of 2009 from 1,594 in 2008. The numberof sub-accounts also increased to 5,331 from 4,872during the same period. The FII in the spot marketincreased to Rs 83,424 crore in 2009 as comparedto withdrawals of Rs 52,987 crore in 2008. Further,net investment in debt was lower at Rs 4,563 crorein 2009 as compared to Rs 11,772 crore in 2008.Total net investment by FIIs in equity and debtmarkets taken together, increased considerably toRs 87,987 crore in 2009 compared to a net declineof Rs 41,216 crore in 2008 (Table 5.22).

5.96 The cumulative assets under management ofmutual funds increased by 60.9 per cent to Rs6,65,146 crore as on December 31, 2009 from Rs4,13,365 crore as on December 31, 2008. The shareof income- /debt-oriented schemes in total assetsunder management was higher at 54.2 per cent in2009 as against 47.7 per cent in 2008. The assetsunder management of equity- /growth-orientedschemes during 2009 accounted for 26.3 per centof the total assets under management (23.9 percent during 2008). However, the share of assetsunder money market schemes in total assets undermanagement declined to 12.0 per cent during 2009from 20.0 per cent during 2008 (Table 5.23).

Debt Market5.97 The Indian debt market has two segments,namely Government securities and corporate debt.

Government Securities

5.98 The fresh issues of Government of India(GoI) dated securities in 2009 amounted to Rs4,89,000 crore as against Rs 2,04,317 crore[including securities issued under the MarketStabilisation Scheme (MSS)] in 2008. Theoutstanding dated securities of the GoI increasedfrom Rs 14,16,443 crore in end-December 2008 toRs 18,26,774 crore in end-December 2009. Yields

Table 5.21 : Market turnover(Rs crore)

Market Calendar year

2006 2007 2008 2009

NSE Spot 19,16,227 30,93,982 31,88,509 38,12,031

BSE Spot 9,61,653 14,14,727 13,24,053 12,74,065

NSE Derivatives 70,46,665 1,19,40,877 1,16,54,375 1,55,65,763

BSE Derivatives 18,071 2,19,824 75,178 36

Source: NSE and BSE

Table 5.20 : Equity spot market liquidity :Impact cost (%)

Calendar yearPortfolio 2006 2007 2008 2009

Nifty NSE Impact Cost

at Rs 50 lakh 0.08 0.08 0.11 0.06Nifty Junior NSE Impact Cost

at Rs 25 lakh 0.16 0.14 0.19 0.09Source : NSE


on securities showed relatively lower intra-yearvariations in 2009 as compared to the previous year.The cut-off yield-to-maturity (YTM) range on freshissuances during the year narrowed from 6.24-10.03per cent in 2008 to 4.86-8.43 per cent in 2009. Theweighted average yield on primary issuances of dated

securities declined to 7.10 per cent in 2009 from8.20 per cent in 2008. The weighted average maturityof dated securities was shorter at 11.5 years in 2009(13.1 years in 2008).

5.99 The volume of secondary market transactions(outright) in government securities marginallyimproved during the year, with the turnover ratio(volume of transactions as a ratio of end-period stock)increasing to 1.7 in the calendar year 2009 from 1.5in 2008.

5.100 In the secondary market, the yields on datedgovernment securities hardened during the year,particularly after July 2009, reflecting the impact ofthe announcement of a relatively large governmentborrowing programme for the year 2009-10. Yieldsgradually moved up during the course of the year.Yields on dated securities of five and 10-yearmaturities increased to 7.30 per cent and 7.59 percent respectively in end-December 2009 from 5.41per cent and 5.25 per cent respectively in end-December 2008.

Corporate debt

5.101 In pursuance of the guidelines of the HighLevel Expert Committee on Corporate Bonds andSecuritisation (December 2005) and the subsequentannouncement made in the Union Budget 2006-07,SEBI authorized the BSE (January 2007), NSE(March 2007) and Fixed Income Money Market andDerivatives Association of India (FIMMDA) (August2007) to set up and maintain corporate bond reporting

Table 5.22 : Transactions of FIIs(Rs crore)

Transactions Calendar year2007 2008 2009

End-year Number of FIIs (in numbers) 1,219 1,594 1,706End-year Number of Sub-accounts (in numbers) 3,644 4,872 5,3311. Equity Market Activity Spot Gross Buy 8,14,877 7,21,606 6,24,238 Gross Sell 7,43,391 7,74,593 5,40,814 Net (Gross Buy-Gross Sell) 71,486 -52,987 83,4242. Debt Gross Buy 31,418 48,019 1,11,772 Gross Sell 21,990 36,248 1,07,209 Net (Gross Buy-Gross Sell) 9,428 11,772 4,5633. Total FII Investment (1+2) Gross Buy 8,46,295 7,69,625 7,36,010 Gross Sell 7,65,380 8,10,841 6,48,023 Net (Gross Buy-Gross Sell) 80,915 -41,216 87,987

Source : SEBI

Table 5.23 : Assets under managementof mutual funds

(Rs crore)Schemes At the end of

2006 2007 2008 2009Money Market 97,757 1,12,349 82,776 80,102 (30.2) (20.4) (20.0) (12.0)Gilt 2,057 1,975 6,368 3,609 (0.6) (0.4) (1.50) (0.5)Income 86,349 1,97,342 1,97,132 3,60,469 (26.7) (35.9) (47.7) (54.2)Growth 1,19,539 1,92,129 99,081 1,74,680 (36.9) (34.9) (23.9) (26.3)Balanced 9,170 19,938 11,349 17,602 (2.8) (3.6) (2.8) (2.7)ELSS 8,725 19,063 11,577 23,198 (2.7) (3.5) (2.8) (3.5)Gold ETF NA 467 734 1,352 (0.1) (0.2) (0.2)Other ETF NA 6,674 1,761 1,031 (1.2) (0.4) (0.2)FoF Investing Overseas 2,588 3,103 (0.6) (0.5)

Total 3,23,598 5,49,936 4,13,365 6,65,146

Source : SEBIFigures in parenthesis show percentage share.


platforms for capturing all information related totrading in corporate bonds as accurately as possible.In the second phase of development, the BSE andNSE put in place corporate bonds trading platformsin July 2007 to enable efficient price discovery in themarket. This was followed by operationalization ofa DvP-I(trade-by-trade)- based clearing andsettlement system for over-the-counter trades incorporate bonds by the clearing houses of theexchanges. In view of these market developments,the Reserve Bank of India announced in its SecondQuarter Review of the Annual Policy Statement for2009-10 in October 2009 that the repo in corporatebonds can now be introduced. In pursuance of thesame, the RBI issued ‘Repo in Corporate DebtSecurities (Reserve Bank of India) Directions, 2010’on January 8, 2010 which will come into force witheffect from March 1, 2010.

5.102 Total traded volume in corporate bonds duringApril-December 2009 was Rs 2,42,686 crore, that ishigher by 173.4 per cent over the Rs 88,750 croreduring April-December 2008.

5.103 During 2009-10 up to December 2009, theyield on corporate debt paper (with AAA rating) forfive-year maturity moved in the range of 7.71-8.94

per cent. The yield on corporate debt paper softenedtill mid-May 2009 but remained above the 8.0 percent level thereafter. The spread between yield onfive-year GoI bonds and corporate debt paper (AAArating) with five-year maturity, which was around 330basis points in the beginning of 2009, narrowed downto 150 basis points by end-June and further to around110 points by end-December 2009.

Currency derivatives5.104 Exchange Traded Currency Futures wereintroduced in the Indian market following guidelinesissued by the Standing Technical Committee set upjointly by the RBI and SEBI on August 6, 2008. Theunderlying idea was to facilitate transparency andefficiency in price discovery, eliminate counterpartycredit risk, provide access to all types of marketparticipants, standardize products and provide atransparent trading platform. Trading in the currencyfutures segment commenced at the NSE in August2008. Later, the BSE and the Multi CommodityExchange of India Ltd. (MCX) were also givenpermission to trade in currency derivatives. Tradingin Currency Futures (INR/US$ contract) started onthe NSE, the BSE and the Multi CommodityExchange- Stock Exchange (MCX-SX) on August

Yield on GOIBonds(5-year

maturity)

Rat

e (P

er c

ent)

Yield on 5 year G-sec and corporate debt paperFigure 5.5

4.0

5.0

7.0

8.0

10.0

Yield onAAA Bonds

(5-yearmaturity)

6.0

9.0

11.0

12.0

Years

Nov

Dec

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

2007 2008 2009

2009-10

Rate

(Per

cen

t)Secondary market yields on 10-year benchmark G-SecFigure 5.4

02 May

02 Jun

02 Jul

02 Aug

02 Sep

02 Oct

02 Nov

02 Dec

02 Jan

02 Feb4.0

5.0

7.0

8.0

10.0

2008-09

6.0

9.0

02 Apr

02 Mar

Period


29, 2008, October 1, 2008 and October 7, 2008respectively.

5.105 The total number of contracts traded andtraded value at the NSE were 2,263.62 lakh andRs 10,82,258 crore in 2009, while the MCX-SXrecorded 2,242.74 lakh contracts with traded valueof Rs 10,71,583 crore during 2009 (Table 5.24). Themonth-to-month average daily traded value at boththe exchanges increased—from Rs 1,199 crore inJanuary 2009 to Rs 9,115 crore in December 2009at the NSE and from Rs 1,221 crore to Rs 9,452crore at the MCX-SX for the same period. Tradingvolumes at the BSE were not significant during theyear under consideration.

5.106 In order to facilitate direct hedging of risk inmajor currency pairs by market participants, theReserve Bank of India proposed in October 2009that the recognized stock exchanges be permittedto offer currency futures contracts in currency pairsof euro-INR, Japanese yen-INR and pound sterling-INR, in addition to US dollar-rupee contracts whichare already permitted. Accordingly, SEBI issued acircular on January 19, 2010, permitting eligible stockexchanges to introduce currency futures on euro-INR, pound sterling-INR and Japanese yen-INR.

Exchange Traded Interest Rate Futures

5.107 Exchange traded interest rate futures (IRFs)contracts on a 10-year notional coupon bearingGovernment of India security started trading at theNSE on August 31, 2009. Market participants includebanks and primary dealers, mutual funds, insurancecompanies, corporate houses, brokers, FIIs and retailparticipants. IRFs enable banks and primary dealersto mitigate risk and improve process efficiency, whilemutual funds, insurance companies and corporatescan use them to manage risk pertaining to volatilityin interest rates. The minimum contract size for anIRF is Rs 2 lakh. The trading volumes in IRFs have,

however, remained low. LIC and Central Bank of Indiahave recently come forward to support transactionsin the IRF market by buying securities from variousmarket participants who wish to liquidate thesecurities received as part of their IRF obligations.The NSE has announced new steps, namelynarrowing the basket of deliverable securities toexclude the more illiquid ones and delaying thesettlement date to the last business day of themonth, so that participants have more trading daysthan previously, aimed at increasing traded volumesin IRFs.

Policy Developments during 2009-10

5.108 Some of the salient policy initiatives relatingto the capital market taken during the year were:

I. Primary MarketIn its continuing endeavour to make the existingpublic issue facility more efficient, SEBIintroduced Applications Supported by BlockedAmount (ASBA Phase I) as a supplementaryfacility which was available to retail individualinvestors in public issues only. ASBA Phase Iwas subsequently extended to rights issues. Ithas been decided to introduce ASBA Phase II,which will be applicable to all public issues andrights issues with single payment option whichare opening on or after January 1, 2010.

The amended SEBI (Disclosure and InvestorProtection) Guidelines 2000 provide that anunlisted company making an IPO shall list thesecurities being issued through the IPO on atleast one stock exchange having nationwidetrading terminals. A concept of Anchor Investorin public issues through book building has alsobeen introduced.

The existing listing requirements for IDRs (IndianDepository Receipts) issued by issuingcompanies from countries whose securities

Table 5.24 : Currency futures segment at the NSE and the MCX-SXMonth/year NSE MCX-SX

January- August- January- August-December December December December

2009 2008 2009 2008

No. of Contracts Traded 226,362,368 11,514,000 224,273,548 8,876,000

Trading Value (Rs crore) 1,082,258 56,005 1,071,583 43,572

Average Daily Trading value (Rs crore) 4,473 4,433

Source : SEBI


market regulators are signatories to theMultilateral Memorandum of Understanding(MMOU) of the International Organization ofSecurities Commissions (IOSCO) weresimplified. Accordingly, a Model ListingAgreement containing listing requirements forlisting of IDRs of such issuing companies wasspecified.

In order to enhance disclosures regardingshareholding pattern in a listed Company andalso to bring more transparency and efficiencyin the governance of a listed company, it hasbeen decided to introduce a uniform procedurefor dealing with unclaimed shares and dividenddeclarations by listed companies and reducethe notice period for all corporate actions likedividend and bonus for all scrips, whether indemat or physical, whether in the F&O segmentor not. The notice period for record dates andboard meetings has been reduced to seven andtwo working days respectively. The listingagreement should disclose the shareholdingpattern for each class of shares and voting rightspattern in the company. Listed companies havebeen prohibited from issuing shares with superiorvoting or dividend rights vis-à-vis the rights onequity shares that are already listed.

II. Secondary Market

It is mandatory for the transferee(s), in case ofsecurities market transactions and off-market/private transactions involving transfer of sharesin physical form of listed companies, to furnisha copy of the PAN card to the Company/RTAsfor registration of such transfer of shares.

In order to bring in more transparency in thegrievance redressal mechanism available instock exchanges, it was decided that they willhenceforth disclose the details of complaintslodged by clients/investors against tradingmembers and companies listed in the exchange,on their website. The aforesaid disclosure shallalso include details pertaining to arbitration andpenal action against the trading members.

With a view to instilling greater transparency anddiscipline in dealings between clients andstockbrokers, stockbrokers have been advisedto register a client by entering into an agreementwith him. The registration requirements includeboth mandatory and non-mandatory documents.The former include (a) a member-client

agreement (MCA)/tripartite agreement in casea sub-broker is involved, (b) a know-your-client(KYC) form and (c) a risk disclosure document(RDD). A copy of all the documents executedby the client shall be given to him, free of charge,within seven days from the date of execution ofthe documents by him.

In case a stock exchange has no trading for aperiod of less than six months, it shall ensurethat necessary regulatory requirements havebeen complied with before resuming trading andthe matter may be placed before its Board withreasons, if any.

Stock exchanges have been permitted to settheir trading hours (in cash and derivativessegments) subject to the condition that theseare between 9 am and 5 pm and the Exchangehas in place a risk-management system andinfrastructure commensurate with the tradinghours.

Taking note of the fact that stock exchangeshad reduced/waived transaction charges, theywere advised, while revising such transactioncharges, to ensure that their systems werecapable of handling additional load and it didnot affect the existing riskmanagement system.The revised charges should be uniformly appliedto trades of similar nature and implemented in afair and transparent manner.

SEBI-registered stockbrokers (including tradingmembers) of stock exchanges have beenallowed to provide access to clients throughauthorized persons.

It was decided that in case of a buy transactionin the cash market, VaR margins, extreme lossmargins and mark-to-market losses togethershould not exceed the purchase value of thetransaction. However, in case of a saletransaction in the cash market, the existingpractice would continue, namely VaR marginsand extreme loss margins together shall notexceed the sale value of the transaction andmark-to-market losses would also be levied.

It was decided to bring in parity betweendomestic venture capital funds and foreignventure capital investors (FVCIs). Applicantsdesirous of registering with SEBI as FVCIs arerequired to obtain firm commitment from theirinvestors for contribution of an amount of at leastUS$ 1 million at the time of submission ofapplications seeking registration.


III. Corporate Bonds

In order to develop the primary market forcorporate bonds in India, it has been decided toput in place a Simplified Listing Agreement forDebt Securities. Where the equity of an issueris listed, and such an issuer seeks listing ofdebt securities (whether by way of public issueor private placement), minimal incrementaldisclosures related to the debt security issuancewould be sufficient, since a large amount ofinformation is already in the public domain.

All trades in corporate bonds between specifiedentities, namely mutual funds, FIIs/ sub-accounts, venture capital funds, FVCIs, portfoliomangers, and RBI-regulated entities as specifiedby the RBI should necessarily be cleared andsettled through the National Securities ClearingCorporation Limited (NSCCL) or the IndianClearing Corporation Limited (ICCL). This isapplicable to all corporate bonds traded over thecounter (OTC) or on the debt segment of stockexchanges on or after December 1, 2009.However, trades in corporate bonds that aretraded on the capital market segment/equitysegment of stock exchanges and are requiredto be settled through clearing corporations/clearing houses of stock exchanges are exemptfrom these guidelines.

The Simplified Listing Agreement for DebtSecurities put in place by SEBI has beenamended, requiring issuers to maintain 100 percent asset cover sufficient to discharge theprincipal amount at all times for the debtsecurities issued; submit half-yearly certificatesregarding maintenance of 100 per cent assetcover (banks, NBFCs and issuers of Government-guaranteed bonds are exempt from thisstipulation); furnish a half-yearly statement ondeviations in use of issue proceeds, if any, tothe stock exchange; deposit 1 per cent of theamount of debt securities offered for subscriptionto the public; submit/publish financialstatements to the exchange.

IV. Derivatives

Stock exchanges have been allowed flexibilityto set the expiry date/day for equity of derivativecontracts while at the same time ensuring thatthere is no change in contract specifications orthe risk-management framework and the integrityof the market is not affected in any manner.

It was decided to introduce an exchange-traded10-Year notional coupon bearing GoI securityfutures.

V. FIIs

The overall limit for investments by FIIs and sub-accounts is US$ 5 billion for governmentsecurities and treasury bills and US$ 15 billionfor corporate debt. Investments by FIIs/ sub-accounts in debt-oriented mutual fund units(including units of money market and liquidfunds) are considered corporate debt. A majorpart of the debt limit is allocated to FIIs/sub-accounts on an open bidding platform providedby the stock exchanges. The auction processis performed alternatively on NSE and BSEoffered platforms. Maximum and minimum limitsvary as per the total amount available for auction.The limits availed of in this process need to beutilized within 45 days. The remaining part ofdebt limit is allocated on a ‘first-come-first-served’basis subject to ceiling. The limits availed of inthis process need to be utilized within 11 workingdays.

VII. Mutual Funds

In order to empower investors to decide thecommission to be paid to distributors inaccordance with the level of service received, tobring about more transparency in payment ofcommissions and to incentivize long-terminvestment, it was decided that there should beno entry load for all mutual fund schemes; thescheme application forms should carry a suitabledisclosure to the effect that the upfrontcommission to distributors will be paid by theinvestor directly to the distributor, based on hisassessment of various factors including servicerendered; of the exit load charged to the investor,a maximum of 1 per cent of the redemptionproceeds should be maintained in a separateaccount which can be used by the AssetManagement Companies to pay commissionsto the distributor and to take care of othermarketing and selling expenses. Any balanceshould be credited to the scheme immediately.

It was decided that no distinction among unitholders should be made based on the amountof subscription while charging exit loads.

Considering the importance of a systems auditin the technology-driven asset-managementactivity, it was decided that mutual funds should


have a systems audit conducted by anindependent CISA/CISM-qualified or equivalentauditor once in two years. For the financial yearsApril 2008–March 2010, the systems auditshould be completed by September 30, 2010.

Units of mutual fund schemes were permittedto be transacted through registered stockbrokersof recognized stock exchanges.

All intermediaries of mutual funds units have beenadvised to follow the code of conduct strictly.

It was decided that no mutual fund should investmore than 30 per cent of net assets in moneymarket instruments of an issuer. In case ofexisting schemes where the investments inmoney market instruments of an issuer are notin compliance with this guideline, the AMC shouldensure compliance within a period of threemonths from the date of notification.

It was clarified that mutual funds can invest inIDRs [Indian Depository Receipts as defined inCompanies (Issue of Indian Depository Receipts)Rules 2004] subject to compliance with SEBI(Mutual Funds) Regulations 1996 and guidelinesissued thereunder, specifically investmentrestrictions as specified in the Seventh Scheduleof the Regulations.

With a view to ensuring that the value of debtsecurities reflects the current market situationin the calculation of net asset value, it wasdecided to indicate the discretionary markup andmarkdown in the case of rated and unrated debtsecurities. It was also decided that thediscretionary mark up or down limit, as detailedin a circular dated June 12, 2009, should beapplied for valuation of securities purchased afterits issuance.

VII. Regulatory Developments

The SEBI (Delisting of Equity Shares)Regulations 2009 notified on June 10, 2009provide a mechanism for voluntary as well ascompulsory delisting of equity shares of acompany and listing of delisted equity shares.

The SEBI (Issue of Capital and DisclosureRequirements) Regulations 2009 provide for, interalia, offer for sale by listed companies andstipulate that the allotment/refund period in publicissues should be 15 days and issue period forall types of issuers 10 days. Under theseregulations, exemption from eligibility norms for

making an IPO earlier available to a bankingcompany, corresponding new bank andinfrastructure companies, and firm allotment inpublic issues has been removed.

In order to facilitate the issuance of IDRs, SEBIhas laid down a regulatory structure by carryingout suitable amendments to the SEBI (Custodianof Securities) Regulations 1996 (to enable thecustodian to undertake the activity of domesticdepository for IDRs), SEBI (DepositoryParticipants) Regulations 1996 (to make IDRseligible as security for dematerialization), SEBI(Foreign Institutional Investor) Regulations 1995(to allow FIIs also to invest in IDRs).

The fees payable by some of the intermediariesand market participants, namely custodian ofsecurities, FIIs, FVCIs, mutual funds andstockbrokers and sub-brokers, have beenmodified.

The SEBI (Mutual Funds) Regulations 1996 havebeen amended in April and June 2009 to makelisting of close-ended schemes mandatory andto provide that the units under close-endedschemes shall not be repurchased beforematurity. Close-ended debt schemes have beenallowed to invest in securities of initial or residualmaturities not exceeding their own maturity.Furthermore, a mutual fund scheme can investonly up to 30 per cent of its net assets in moneymarket instruments of an issuer. However, thislimit is not applicable to investments inGovernment securities, treasury bills andcollateralized borrowing and lending obligations.

COMMODITY FUTURES MARKET

5.109 Commodities traded in the commodityfutures market during 2009 included a variety ofagricultural commodities, bullion, crude oil, energyand metal products. Several new commodities wereintroduced for futures trading in 2009, such asalmond, imported thermal coal, carbon credits andplatinum. The total value of trades in the commodityfutures market rose from Rs 50.34 lakh crore in 2008to Rs 70.90 lakh crore during 2009.

5.110 The average daily value of trades in thecommodity exchanges improved from Rs 16,400 croreduring 2008 to Rs 23,200 crore in 2009. Agriculturalcommodities, bullion and energy accounted for alarge share of the commodities traded in thecommodity futures market.


5.111 The MCX, Mumbai, recorded the highestturnover in terms of value of trade during 2009,followed by the National Commodity & DerivativesExchange Ltd.(NCDEX) and National MultiCommodity Exchange of India Ltd.(NMCE)respectively. (Table 5.25)

INSURANCE AND PENSION FUNDS

Insurance5.112 The insurance sector was opened for privateparticipation with the enactment of the InsuranceRegulatory and Development Authority Act 1999.While permitting foreign participation in ventures setup by the private sector, the Government restrictedparticipation of the foreign joint venture partner through

the foreign direct investment (FDI) route to 26 percent of the paid-up equity of the insurance company.

New entrants in the insurance sector5.113 Since the opening up of the sector, thenumber of participants has gone up from six insurers(including LIC of India, four public-sector generalinsurers and the General Insurance Corporation asthe national reinsurer) in the year 2000 to 44 insurersoperating in the life, non-life and reinsurancesegments (including specialized insurers, namelythe Export Credit Guarantee Corporation [ECGC] andAgricultural Insurance Company [AIC]). Two of thegeneral insurance companies, namely Star Healthand Alliance Insurance Company and Apollo DKVfunction as standalone health insurance companies.

Table 5.25 : Turnover on commodity futures markets(Rs crore)

Calendar yearName of the exchange 2007 2008 2009

Multi Commodity Exchange (MCX), Mumbai 27,30,415 42,84,653 59,56,656National Commodity and Derivatives Exchange (NCDEX) 7,74,965 6,28,074 8,05,720National Multi Commodity Exchange, (NMCE) 25,056 37,272 1,95,907Others 1,24,051 83,885 1,32,173Total 36,54,487 50,33,884 70,90,456

Source : Ministry of Consumer Affairs

Box 5.1 : Regulation and development of commodity futures marketsThe year 2009 began on an optimistic note for the commodity futures market with the revocation of suspension offutures trading in chana, soy oil, rubber and potato in December 2008. This was followed six months later, in May 2009,by the revocation of suspension of trading in wheat. However, futures trading in sugar was suspended on May 26, 2009for a period of six months till December 31, 2009, which was further extended to September 30, 2010. Agriculturalcommodity futures staged a remarkable recovery, recording a trading value of Rs10.88 lakh crore in 2009, displayinggrowth of 48 per cent over the previous year. During the year, a new national commodity exchange, i.e. the ICEX becameoperational.

The Forward Markets Commission (FMC), the regulator for commodity futures trading under the provisions of theForward Contracts (Regulation) Act 1952 continued its efforts to broad-base the market. The emphasis was on participationof physical market participants, especially farmers, as hedgers, to counterbalance the speculative element in pricediscovery and to increase the awareness level of farmers and other market participants. The Commission undertookvarious regulatory measures to facilitate hedgers’ participation and promote delivery in agricultural commodities, suchas introduction of the Exchange of Futures for Physicals (EFP) and Alternate Futures Settlement Mechanism, allowinghigher position limits to NAFED to facilitate hedging and delivery by it and introduction of an early delivery system inselect commodities. In addition, efforts were made to develop an “aggregation” model in collaboration with commodityexchanges to promote participation of farmers. The FMC also undertook several regulatory initiatives to prevent marketmanipulation and ensure market integrity, financial integrity and customer protection. Major policy developmentsinitiated by the Forward Markets Commission included the issuance of guidelines for bringing members of the commodityexchanges under the purview of the Money Laundering Act and guidelines for divestment of the equity by the existingnational exchanges after five years of their operation. A price dissemination project was initiated by the FMC, underwhich spot and future prices of agricultural commodities would be made available to farmers on a real-time basis onprice ticker boards placed at Agricultural Produce Marketing Committees.

Source: Ministry of Consumer Affairs.


Of the 21 insurance companies that have set upoperations in the life segment post opening up ofthe sector, 19 are in joint venture with foreign partners.Of the 15 insurers who have commenced operationsin the non-life segment, 14 are in collaboration withforeign partners. The two standalone health insurancecompanies have been set up in collaboration withforeign joint venture partners. Thus, as of date, 33insurance companies in the private sector areoperating in the country in collaboration withestablished foreign insurance companies from acrossthe globe.

Life insurance5.114 The post-liberalization period has beenwitness to tremendous growth in the insuranceindustry, more particularly so in the life segment.However, in 2008-09, on account of the financialmeltdown, the life insurance segment saw adownward trend. The first-year premium, which isa measure of new business secured, underwrittenby the life insurers during 2008-09 was Rs 87,006crore as compared to Rs 93,713 crore in 2007-08,registering a negative growth of 7.2 per cent. Interms of linked and non-linked business during theyear 2008-09, 50.9 per cent of the first-year premiumwas underwritten in the linked segment while 49.1per cent was in the non-linked segment as against75:25 in the previous year. The shift towards thetraditional segment is significant during the year2008-09.

Non-life insurance

5.115 The non-life insurers (excluding specializedinstitutions like the Export Credit GuaranteeCorporation and Agriculture Insurance Corporationand the standalone health insurance companies)underwrote premium of Rs 30,352 crore in 2008-09in India, as against Rs 27,824 crore in 2007-08.

Insurance Penetration5.116 Insurance penetration is defined as the ratioof premium underwritten in a given year to GDP.Insurance penetration in the year 2000 when thesector was opened up to the private sector was2.32 (life 1.77 and non-life 0.55), and it has increasedto 4.60 in 2008 (life 4.00 and non-life 0.6). Theincrease in levels of insurance penetration has to beassessed against the average growth of over 8.2 percent in the GDP in the last five years.

Initiatives taken in the insurance sector

5.117 The initiatives taken by the insuranceauthority in the sector include the following:

Amendment to Insurance Legislation: TheInsurance Laws (Amendment) Bill 2008introduced in Parliament recently, proposes toamend the Insurance Act 1938, the InsuranceRegulatory and Development Authority (IRDA)Act 1999 and the General Insurance Business(Nationalization) Act 1972. The amendments to

Box 5.2 : Development of electronic spot exchangesThe Government and FMC have allowed the national commodity exchanges to set up three spot exchanges in thecountry, namely the National Spot Exchange Ltd. (NSEL), NCDEX Spot Exchange Ltd. (NSPOT) and National AgricultureProduce Marketing Company of India Ltd. (NAPMC). During 2009, there was significant expansion of spot exchanges’trading facilities in India. These spot exchanges have created an avenue for direct market linkage among farmers,processors, exporters and end users with a view to reducing the cost of intermediation and enhancing price realizationby farmers. They would also provide the most efficient spot price inputs to the futures exchanges. The spot exchangeswould encompass the entire spectrum of commodities across the country and would bring home the advantages of anelectronic spot trading platform to all market participants in the agricultural and non-agricultural segments. On theagricultural side, the exchanges would enable farmers to trade seamlessly on the platform by providing them real-timeaccess to price information and a simplified delivery process, thereby ensuring them the best possible prices. On the buyside, all users of the commodities in the commodity value chain would have simultaneous access to the exchanges,which would be able to procure at the best possible prices. Therefore, the efficiency levels attained as a result of suchseamless spot transactions would result in major benefits for both producers and consumers. Thus the exchangeswould enhance the efficiency of the existing OTC markets in the country

So far, Maharashtra, Karnataka, Gujarat, Rajasthan, Orissa and Madhya Pradesh have given licences to the spotexchanges to undertake electronic spot trading. The agricultural commodities traded on the spot exchange platform arecotton, castor seed, desi channa, guar seed, RM seed, wheat, barley, red arecanut, maize, yellow peas, urad, lemon tur,soyabean, jeera, ground nut, sugar, moong and pepper. In the process, farmers’ realization has increased by 4-5 per cent.The total turnover of the three exchanges during 2009 was Rs 2,810 crore.

Source: Ministry of Consumer Affairs.


the Insurance Act and the IRDA Act focus onthe current regulatory requirements; theproposed changes provide for more flexibility inoperations and are aimed at deletion of clausesthat are no longer relevant in the present context.The amendments also provide for enhancementof enforcement powers and levy of stringentpenalties.

De-tariffing: The road map for de-tariffing wasnotified by the IRDA on September 23, 2005,based on the demand from various stakeholdersthat continuance of the tariff regime wasinconsistent with the opening up of the sectorto provide healthy competition. As a first step,de-tariffing was confined to decontrol of ratesonly and terms and conditions of the policy werenot permitted to be changed till March 31, 2008.De-tariffing of the non-life industry was notifiedwith effect from January 1, 2007. In order tomoderate the impact of tariff increase oncommercial vehicle owners, the IRDA hasretained the powers to determine the rates ofmotor-third party premium for commercialvehicles, and to ensure that all insurers undertakecommensurate exposure to this line of business,a Motor Pool has been created under Section34 of the Insurance Act 1938. All non-life insurersare required to collectively participate in a poolingarrangement to share in all motor-third partyinsurance business for commercial vehiclesunderwritten by them with effect from April 1,2007. The IRDA decided to permit the generalinsurers to file variations in deductibles fromthose prescribed under the erstwhile tariffssubject to written disclosures and acceptanceby the insured prior to finalization of the insurancepolicy and add-on covers over and above theerstwhile tariff covers with appropriate additionalpremiums with effect from January 1, 2009. Theinsurers were also permitted to extendengineering insurances to mobile/ portableequipments. Industrial All Risk (IAR) policiescould now be issued to all industries includingthe petrochemical industry with the sum insuredless than Rs100 crore. However, the generalinsurers were not permitted to abridge the scopeof standard covers available under erstwhiletariffs.

Micro Insurance: Micro insurance is widelyaccepted as one of the essential ingredients offinancial inclusion packages to provide a hedgeagainst unforeseen risks. Micro-insurance

regulations issued by the IRDA have provided afillip to propagating micro insurance as aconceptual issue. With the positive andfacilitative approach adopted under micro-insurance regulations, it is expected that allinsurance companies would come out with aprogressive business approach and carry forwardthe spirit of the regulations thereby extendinginsurance penetration to all segments of society.Nine insurance companies have filed 26 micro-insurance products both in the individual andgroup segments. It may be mentioned that someof the insurers had been selling products thatfall within the parameters stipulated for eligibilityas micro insurance even prior to notification ofmicro-insurance regulations.

Amendments to the Regulations on Ruraland Social Sector Obligations: Theobligations of the new insurers towards the ruraland social sectors for the sixth to tenth years oftheir operations have been linked to their pastperformance in the said sectors. With a view togiving a fillip to micro insurance, the performancein these sectors has now been benchmarked tothe insurance policies satisfying the definitionof ‘micro insurance’ as laid down in the MicroInsurance Regulations 2005. The regulationshave been further amended to provide forrelaxation in obligations based on whether theinsurance company had commenced operationsin the first or second half of the financial year.For insurance companies commencingoperations in the first half of the financial year,the applicable obligations for the first year shallbe 50 per cent of the obligations as specified inthe Regulations. In case of companies whichcommence operations in the second half of thefinancial year and are in operation for less thansix months, it is stipulated that no rural- or social-sector obligations shall be applicable for thatyear and the annual obligations as indicated inthe Regulations shall be applicable from the nextfinancial year of operations.

Guidelines on the Anti-Money Laundering(AML) Programme: The IRDA issued guidelineson the AML Programme to the insuranceindustry on March 31, 2006, in terms of whichinsurers were advised to put a proper AML policyframework in place in case of life insurancecompanies and non-life insurance companieseffective from August 1, 2006 and January 1,2007 respectively. The AML Programme


emphasizes KYC norms and requires insurersto document identity, residence, sources offunds etc. as part of the due diligence process.While the guidelines are applicable to lifeinsurance companies on all contracts, in thecase of general insurance companies, thecompliance is required at the payout stage, i.e.during claims/refunds of over Rs1.00 lakh. Cashacceptance thresholds have been fixed at Rs50,000, beyond which premium/proposaldeposits have to be remitted through bankingchannels.

Data Warehouse: The IRDA has initiated stepsto design, build and manage a data warehousefor the insurance industry recognizing that datawill help the insurers design new products andallow scientific underwriting, further calculationsof actuarial risks, price setting and variousaspects relating to claims settlement,management of hazards, etc. As a first step,the IRDA has designed a data set relating tohealth and motor vehicle insurance. The IRDAalso proposes to put in place a formal datawarehouse to enable access by variousstakeholders across the industry.

Consumer Grievance Redressal Cell: TheGrievance Redressal Cell of the IRDA looks intocomplaints from policyholders. Complaintsagainst life and non-life insurers are handledseparately. This Cell plays a facilitative role bytaking up complaints with the respectiveinsurers.

Public Awareness Campaigns/Programmes:The IRDA’s strategy for consumer awareness/education includes campaigns through externalmedia, i.e. mass media, mainly print, televisionand the Internet and internal initiatives such asan exclusive consumer education web page andsample booklets on various insurance-relatedtopics, containing generic information, whichinsurers would also be advised to publish anddistribute.

Cap on ULIP Charges: The insurance industryhas introduced unit-linked insurance plans(ULIPs) which have found favour with insurancecustomers in India. These products prescribecertain charges, which are deducted either fromcontributions or from the fund. In order to simplifyand to ensure that the charges are reasonable,relevant to the services being provided and clearlyunderstandable by the customers, the IRDA has

mandated an overall cap on all charges puttogether. Care has been taken to ensure thatthe insurers have freedom to distribute chargesacross the term of the policy. This also impartsflexibility and facilitates product innovation.

Corporate Governance Guidelines forInsurance Companies: Corporate Governanceguidelines have been rolled out for insurancecompanies, which are effective from April 1, 2010.The objective of the guidelines is to ensure thatthe structure, responsibilities and functions ofthe Board of Directors and senior managementof the company fully recognize the expectationsof all stakeholders as well as those of theregulator. The guidelines broadly cover majorstructural elements of corporate governance ininsurance companies.

Pension Sector: Highlights

5.118 Pension-sector reforms were initiated in Indiato establish a robust and sustainable social securityarrangement in the country seeing that only about12-13 per cent of the total workforce was covered byany formal social security system. The New PensionSystem (NPS) was introduced by the Governmentfrom January 1, 2004 for new entrants to the CentralGovernment service, except the Armed Forces, andwas extended to the general public from May 1,2009 on a voluntary basis. The features of the NPSdesign are self-sustainability, portability andscalability. Based on individual choice, it is envisagedas a low-cost and efficient pension system backedby sound regulation. As a pure “defined contribution”product with no defined benefit element, returns wouldbe totally market related. The NPS provides variousinvestment options and choices to individuals toswitch over from one option to another or from onefund manager to another, subject to certain regulatoryrestrictions.

5.119 The Pension Fund Regulatory &Development Authority (PFRDA), set up as aregulatory body for the pension sector, is engagedin consolidating the initiatives taken so far regardingthe full NPS architecture and expanding the reachof the NPS distribution network. The full NPSarchitecture comprising a Central RecordkeepingAgency (CRA), pension fund managers (PFMs),trustee bank, custodian and NPS Trust has beenput in place and is fully operational. The NationalSecurities Depository Limited (NSDL) has beenselected as the CRA. The PFRDA has alsoappointed six Pension Fund Managers (PFM) for


the unorganized sector, namely UTI RetirementSolutions Limited, SBI Pension Funds Pvt. Ltd.,ICICI Prudential Life Insurance Company Ltd., IDFCAsset Management Company Ltd., Reliance CapitalAsset Management Ltd. and Kotak Mahindra AssetManagement Company Ltd., as pension fundsponsors under the NPS.

5.120 NPS implementation in the CentralGovernment has stabilized with more than 5.64 lakhemployees already covered. Reconciliation of datapertaining to the period prior to coming into forceof the CRA is on the verge of completion. Currently,the total amount under management of the threefund managers appointed by the PFRDA for CentralGovernment employees is over Rs 3,200 crore.These PFMs are SBI Pension Fund Private Ltd.,UTI Retirement Solution Ltd. and LIC Pension FundLtd. The NPS has also been well received by theState Governments and 23 State Governments/Union Territories have notified similar schemes fortheir new recruits under the ambit of the NPS. ThePFRDA has been working with all the States toenable them to log on to the NPS architecture withease. NPS Trust and CRA have been in continuousdialogue with State Governments/Union Territoriesfor facilitating their entry into the NPS. As of date,the CRA has already signed agreements with 11State Governments whereas the NPS Trust hassigned agreements with nine State Governments.

5.121 Efforts are under way to extend the reachof the NPS to new segments like Central and Stateautonomous bodies and the organized sector andintroduce micro-pension initiatives focusing on a lowcost model of the NPS to be implemented throughSHGs and similar bodies. More than 250 Centralautonomous bodies have evinced interest in joiningthe NPS. Several State Government autonomousbodies and undertakings are in dialogue with thePFRDA for extending the NPS to their employees.The PFRDA has also launched a scheme formanagement of the pension corpus of variouscorporates under the NPS architecture.

5.122 For all citizens including workers in theunorganized sector, the NPS is currently availablethrough nearly 900 service provider (SP) branchesof 21 Points of Presence (PoP). The PFRDA hasalso recently appointed the Department of Posts asPoP in addition to seven other financial institutionswhich will expand the PoP-SP network by morethan five times. While Tier I, the non-withdrawablepension account under the NPS has been in

operation since May 1, 2009, Tier II, thewithdrawable account has been made operationalfrom December 1, 2009. The PFRDA has alsoenhanced the maximum entry age into the NPSfrom 55 years to 60 years. These initiatives areexpected to help realize the full potential of the NPSin terms of economies of scale and benefit thesubscribers in terms of lower fees and charges andhigher returns.

5.123 The pension fund managers manage threeseparate schemes consisting of three assetclasses, namely (i) equity, (ii) Government securitiesand (iii) credit risk-bearing fixed income instruments,with the investment in equity subject to a cap of50 per cent. The fund managers will invest only inindex funds that replicate either the BSE sensitiveindex or NSE Nifty 50 index. The subscriber will havethe option to decide the investment mix of hispension wealth. In case the subscriber is unable/unwilling to exercise any choice regarding assetallocation, his contribution will be invested inaccordance with the “auto choice” option with apredefined portfolio.

5.124 Pension reforms in India have madesubstantial progress. With the extension of the NPSto all citizens from May 1, 2009, every citizen inthe country now has the opportunity to participatein a regulated pension market. This will contributesignificantly to old age income security in thecountry.

CHALLENGES AND OUTLOOK5.125 Institutional players and corporatesconstitute major players in the Indian capital market.The retail investor participation remains limited inthe corporate debt market and mutual funds. Theinterdependence between corporate and mutualfunds has recently raised concerns relating tovolatility in financial markets.

5.126 The recent global financial turmoil raisedmany issues about governance of financialintermediaries and awareness of investors. Investorawareness is a prerequisite for investor protection.In fact, investor protection and education are twosides of the same coin. Neither will have the desiredimpact in isolation. A simultaneous and coordinatedeffort on both fronts would help investors take well-informed financial decisions besides protecting theirinterests and ensuring orderly conditions in markets.Greater effort therefore is needed for investoreducation and promoting investors’ protection.


5.127 Pension reforms in India have generatedwidespread interest internationally. The PFRDA facesthe challenge of expanding the distribution networkof the NPS to cover the entire unorganized sector inthe country, educate citizens to take appropriateinvestment decisions, based on their risk and returnprofile, and contribute to improved financial literacylevels. Provision of a statutory status to the pensionregulator would help the PFRDA perform its regulatoryand developmental roles effectively. The success ofpension reforms will not only facilitate the flow oflong-term savings for development, but also help

establish a credible and sustainable social securitysystem in the country.

5.128 Capital market solutions for catastrophe riskinsurance are another area that needs focus. Thisessentially transfers insurance risk of naturalcalamities like earthquakes, hurricanes and floodsto the capital markets through issue of catastrophebonds. The instrument is widely used in advancedcountries and there is scope for introducing it incountries like India to provide insurance againstcontingencies.

Balance of Payments CHAPTER

6

Fiscal 2009-10 has witnessed a global recovery after a crisis of severe worldwideproportions. The risks of double-dip recession, however remain, with need for cautionin dealing with high public debt and unwinding of fiscal and monetary stimuli.The Indian economy also saw a turnaround, registering 7 per cent growth duringH1 (April –September 2009) of 2009-10, after touching a low of 5.8 per cent in thethird and fourth quarters of 2008-09. The balance-of-payments (BoP) situationimproved on the back of a surge in capital flows and rise in foreign exchange reserves,which have been accompanied by rupee appreciation.

THE GLOBAL CRISIS AND BEYOND

6.2 The last two and a half years have been themost turbulent for the global economy since WorldWar II. The crisis that began in a small corner of thefinancial system, i.e. the sub-prime mortgagemarket in the United States spread like wildfire toengulf the entire global financial system. The fall ofLehman in September 2008 was the proverbial laststraw, making the crisis truly global in terms ofoutreach, impact and severity for both advanced anddeveloping countries.

6.3 Countries have, however, been affected bythe crisis differently and in varying degrees.Advanced economies as a group have been moreseverely affected with 3.2 per cent negative growthforecast for 2009 (IMF World Economic Outlook,January 2010). All rich countries, with the exceptionof Australia, experienced decline, before a likelyupturn in 2010 in most economies.

6.4 Developing countries are likely to grow by2.1 per cent in 2009 and 6.0 per cent in 2010, ledby India and China, which remained the most resilientto the crisis. The impact on the emerging world wasthrough reversal of capital flows, fall in stockmarkets, depreciation of local currency, decline inexports and general risk aversion, which affectedconsumption and investment. The social impact ofthe crisis, though, has been more severe for theemerging economies, as they have fewer cushionsagainst shocks.

6.5 The response to the crisis, however, hasbeen equally swift, with concerted and coordinatedefforts by governments and monetary authorities,through conventional and non-conventional fiscaland monetary instruments. As a result, there aresigns of recovery in the global economy with theUS, Euro Zone and Japan already out of recessionand the momentum of growth picking up in emergingeconomies (Table 6.1).

6.6 Risks however remain, with rich countriescontinuing to be more vulnerable to double-diprecession. First, levels of unemployment remainshigh despite expansionary polices. Second, theextensive use of fiscal policy has meant a sizeableincrease in fiscal deficit with the gross public debtto gross domestic product (GDP) ratio in advancedeconomies likely to rise from 75 to 115 per centduring 2008-2014. Third, the timing of exit isimportant. An early exit could increase the risk ofanother recession, while late exit could worsenpublic debt ratios, crowd out private investment andfuel inflationary expectations. Fourth, return ofrecession could cause havoc. With most policytoolkits already exhausted, public debt ratiosskyrocketing and the balance sheets of centralbanks stretched, little ammunition remains fordealing with another crisis.

6.7 As emerging economies are ahead on therecovery curve, a major fallout has been large flowsof capital from rich countries seeking to benefit from

125Balance of Payments

Box 6.1 : Asset price bubbles in emerging economiesThere are strong signs of recovery in the global economy. The emerging economies, particularly in Asia, are, however, aheadon the recovery curve. This has negative fallout for emerging economies by way of outsized inflows of capital to takeadvantage of higher returns.The higher returns are due to both interest differentials and stock market returns, with theEmerging Market MSCI Index rising by 77.1 per cent during 2009. The rush of portfolio investment that is not supportedby fundamentals like high economic growth is fuelling the rise in stock markets.A major fallout of the capital inflow is appreciation of domestic currency through creating a supply-demand imbalance inthe foreign exchange market. The implication is similar to ‘Dutch disease’, a concept that owes its origin to offshore naturalgas finds in the Netherlands in the 1960s, which led to a surge in capital flows and domestic currency appreciation thatmade exports uncompetitive and affected domestic industry through cheaper imports. The large inflows are more seriousfor countries with current account deficits, as domestic currency appreciation generally worsens the deficit. Together withloss of international competitiveness due to pegged exchange rates in some countries, the currency appreciation may makethe recovery process more difficult in many emerging economies.The sharp increase in stock market prices also increases speculative activity, besides contributing to market volatility. Theboom and bust cycle in stock markets, since the onset of the crisis, has followed surge and reversal of capital flows to asignificant extent. Such price volatility is detrimental for the orderly development of the capital markets and for stockmarkets to be a viable source for financing capital expenditure.Another area of asset price bubble is commodities (oil, metals and agricultural), which have emerged as an ‘asset class’ dueto high returns, their role as a hedge against inflation and diversification benefits on account of low correlations. A numberof instruments like exchange traded funds (ETFs) are available, which make commodity investment accessible to institutionaland individual investors. The rise in the global price of oil, however, could affect nascent recovery in oil- importing emergingeconomies. Besides, many emerging economies like India are being affected by the high food prices, where apart fromdomestic supply factors, investment demand appears to be playing a contributory role. A key element in the speculativeflows is ‘carry trade’, which is characterized by borrowing in currencies with low interest and investment in higher interestcurrencies to take advantage of interest differentials. The carry trade money has also been flowing into stock markets inemerging economies to take advantage of higher returns. Record low interest rates in the US and other advanced countriesare reportedly behind the trade. Carry trade and its unwinding have contributed significantly to currency volatility in theinternational markets during the recent past. The same mechanism is now fuelling asset price bubbles in emerging economiesand leading to domestic currency appreciation.

Table 6.1 : Selected Economic Indicators : WorldSl. Items 2008 2009 2010No. Projection Projection

I World Output (per cent change) # 3.0 -0.8 3.9a Advanced Economies 0.5 -3.2 2.1b Other Emerging Market and Developing Countries 6.1 2.1 6.0

of whichDeveloping Asia 7.9 6.5 8.4China 9.6 8.7 10.0India 7.3 5.6 7.7

II Net Capital Flows to Emerging Market and Developing Countries(US$ billion)i Net Private Capital Flows (a+b+c) 129.5 -52.5 28.3

(a) Net Private Direct Investment 425.0 279.0 269.5(b) Net Private Portfolio Investment -85.4 -99.8 -110.4(c) Net Other Private Capital Flows -210.1 -231.6 -130.8

ii Net Official Flows -105.7 50.3 -14.2III World Trade @

i Trade Volume 3.0 -11.9 2.5ii Export Volume 2.8 -11.4 2.6

IV Current Account Balance (per cent to GDP)i US -4.9 -2.6 -2.2ii China 9.8 7.8 8.6iii India -2.2 -2.2 -2.5iv Middle East 18.3 2.6 7.9

Source : For item I-International Monetary Fund (IMF), World Economic Outlook, January 2010; for items II toIV–World Economic Outlook, October 2009.

# growth rates are based on GDP at purchasing power parities@ Average of annual percentage change for world exports and imports of goods and services.


interest rate differentials and a stock market boom.As such outsized inflows are not supported byeconomic fundamentals, they are contributing toasset price bubbles and appreciation of domesticcurrency, which may affect the process of recovery(Box 6.1).

6.8 The Indian economy was initially affectedthrough a reversal of capital flows, rupee depreciationand stock market decline. Thereafter, especially afterthe collapse of Lehman Brothers, the real sectorwas affected through a fall in exports and generalrisk aversion. The decline, however, was partly offsetby the resilience of the rural economy due toimprovement in the agricultural terms of tradebecause of higher support prices for agriculturalproduce, income generated through the NationalRural Employment Guarantee Scheme, agricultureloan waivers, building up of rural infrastructure underthe Bharat Nirman programme and increasingawareness through media and mobile phonepenetration. Together with the fact that it is largelydomestic demand driven, (merchandise exports

account for 15 per cent of the GDP), the Indianeconomy has exhibited considerable resilience inthe face of the crisis.

BALANCE OF PAYMENTS (BOP)6.9 Under current account of the BoP,transactions are classified into merchandise (exportsand imports) and invisibles. Invisible transactions arefurther classified into three categories, namely(a)Services–travel, transportation, insurance,Government not included elsewhere (GNIE) andmiscellaneous, which latter encompassescommunication, construction, financial, software,news agency, royalties, management and businessservices, (b) Income, and (c) Transfers (grants, gifts,remittances, etc.) which do not have any quid proquo.

6.10 Capital inflows can be classified byinstrument (debt or equity) and maturity (short orlong term). The main components of capital accountinclude foreign investment, loans and banking

Table 6.2 : Balance of payments : Summary(US$ million)

Sl. Items 2004-05 2005-06 2006-07 2007-08 2008-09 Apr-Sep. Apr-Sep.No. 2008 2009

PR PR P

1 Exports 85206 105152 128888 166162 189001 111085 811392 Imports 118908 157056 190670 257629 307651 175483 1393563 Trade Balance -33702 -51904 -61782 -91467 -118650 -64398 -582174 Invisibles (net) 31232 42002 52217 75731 89923 48549 39599

Non-factor Services 15426 23170 29469 38853 49631 25110 15371Income -4979 -5855 -7331 -5068 -4507 -1646 -2353Private Transfers 20525 24493 29825 41706 44567 25091 26695

5 Goods and Services Balance -18276 -28734 -32313 -52614 -69019 -39288 -428466 Current Account Balance -2470 -9902 -9565 -15737 -28728 -15849 -186187 External Assistance (net) 1923 1702 1775 2114 2637 869 5718 External Commercial Borrowings (net) 5194 2508 16103 22609 7941 3166 7459 Non -resident Deposits (net) -964 2789 4321 179 4290 1072 2864

10 Foreign Investment (net) 13000 15528 14753 43326 3467 8349 32088of which (i) FDI (net) 3713 3034 7693 15893 17498 13867 14142(ii) Portfolio (net) 9287 12494 7060 27433 -14030 -5518 17946

11 Other Flows (net)a 9476 2427 9219 39673 -9687 -106 -811712 Total Capital Account (net) 28629 24954 46171 107901 8648 13350 28151

(including errors and omission)

13 Reserves (-)26159 (-)15052 (-)36606 (-)92164 (+)20080 (+)2499 (-)9533[increase (-) / decrease (+)]

Source : RBI PR: Partially Revised P: Preliminarya Includes, among others delayed export receipts and errors and omissions.


capital. Foreign investment comprising foreign directinvestment (FDI) and portfolio investment representsnon-debt liabilities, while loans (external assistance,external commercial borrowings and trade credit) andbanking capital including non-resident Indian (NRI)deposits are debt liabilities.

6.11 India’s BoP exhibited considerableresilience during fiscal 2008-09 despite one of theseverest external shocks. The current accountbalance [ (-) 2.4 per cent of GDP in 2008-09 vis-à-vis(–) 1.3 per cent in 2007-08] remained well within thesustainable limits and there was limited use of foreignexchange reserves, despite massive decline in netcapital flows to US$ 7.2 billion in 2008-09 as againstUS$ 106.6 billion in 2007-08. As per the latest BoPdata for fiscal 2009-10, exports and imports showedsubstantial decline during April-September (H1) of2009-10 vis-à-vis the corresponding period in2008-09. There has been improvement in the BoPscenario during H1 of 2009-10 over H1 of 2008-09,reflected in higher net capital inflows and lower tradedeficit. However, the invisible surplus declined andcurrent account deficit widened vis-a-vis thecorresponding period last year (Table 6.2).

CURRENT ACCOUNT

Merchandise (exports and imports)6.12 The impact of the global financial crisis wastransmitted to India through various external sectortransactions, mainly the trade and financial routes.The transmission of external demand shocks wasmuch more swift and severe on export growth, which,on a BoP basis, declined from a peak of 57 per centin Q1 (April-June 2008) of 2008-09 to (-) 8.4 per centin Q3 (October – December 2008) and further to(-)20 per cent in Q4 (January – March 2009) of2008-09–-a fall for the first time since 2001-02. Importgrowth, which remained robust till the Q2 (July –September 2008) of 2008-09, declined by 20.8 percent in Q3 over Q2 and 20.1 per cent in Q4 over Q3,moving in tandem with the slowdown in domesticindustrial demand and sharp decline in internationalcrude oil and other primary commodity prices. Thustrade deficit generally expanded in the first twoquarters of 2008-09 due to the combined effect of ahigh crude oil prices-driven increase in imports andthe collapse in external demand. However, in Q4 of2008-09, with the pace of decline in imports outpacingthat in exports, trade deficit narrowed downsignificantly to US$ 20.2 billion as compared to US$25.3 billion in Q1, US$ 39.1 billion in Q2 and US$

34.0 billion in Q3. For the full fiscal 2008-09, however,trade deficit witnessed a marked expansion to US$118.7 billion (9.7 per cent of GDP) as compared toUS$ 91.5 billion (7.4 per cent of GDP) in 2007-08.

6.13 India’s current account position during thefirst half of 2009-10 (April-September) continued toreflect the impact of the global economic downturnand deceleration in world trade witnessed since thesecond half of 2008-09. Growth in exports and importscontinued its declining trend during the first half of2009-10. On a BoP basis, India’s merchandiseexports, which started falling in October 2008,recorded a decline of 27.0 per cent in H1 (April-September 2009) of 2009 as against a significantincrease of 48.1 per cent during the correspondingperiod of the previous year.

6.14 Similarly, the declining trend in imports,which began during the third quarter of 2008-09, aftera gap of almost seven years, continued during thefirst half of 2009-10. Import payments, on a BoPbasis, registered a decline of 20.6 per cent duringH1 of 2009-10 as compared to robust growth of 51.0per cent in the corresponding period of the previousyear.

6.15 According to the Directorate General ofCommercial Intelligence and Statistics (DGCI&S)data, oil imports recorded a decline of 45.0 per centin April-September 2009 as against a significant riseof 83.0 per cent during April-September 2008. Duringthe same period, non-oil imports showed a relativelymodest decline of 26.3 per cent (as against anincrease of 43.8 per cent in April-September 2008).In absolute terms, oil imports accounted for about26 per cent of total imports during April-September2009 (34.2 per cent in the corresponding period ofthe previous year). According to the data releasedby the Gem & Jewellery Export Promotion Council,total import of gems and jewellery declined by 12per cent during April-September 2009 as against anincrease of 33.6 per cent during the correspondingperiod of the previous year.

6.16 Trade deficit, however, remained lower atUS$ 58.2 billion during April-September 2009 ascompared to US$ 64.4 billion in April-September 2008(9.6 per cent decline), mainly on account of the declinein oil imports. A detailed analysis of India’s tradeperformance occurs in the next chapter.

Invisibles6.17 Two components of the current receipts,which remained relatively resilient in the face of the


global economic meltdown, were software servicesand workers’ remittances, mainly responsible forhigher invisible surplus. The invisibles accountreflects the combined effects of transactions relatingto international trade in services, income associatedwith non-resident assets and liabilities, labour andproperty and cross-border transfers, mainly workers’remittances. India’s net invisibles (invisible receiptsminus payments) increased by 18.7 per cent in2008-09, led mainly by receipts under privatetransfers and software services. The net invisiblessurplus increased from US$ 75.7 billion (6.1 per centof GDP) in 2007-08 to US$ 89.9 billion (7.4 per centof GDP) during 2008-09.

6.18 Services have shown relative resilience ascompared to other components of India’s BoP in theface of the global economic slowdown, with the netservices surplus expanding from US$ 38.9 billionduring 2007-08 to US$ 49.6 billion during 2008-09,led primarily by software services exports. Servicesexports, however, declined in the last quarter of2008-09, after a long phase of sustained growth. Theimpact of the global economic shocks on India’ssoftware exports was evident during 2008-09,especially in the second half of the year.Notwithstanding this, software exports during2008-09 (US$ 43.5 billion) recorded a growth of17.7 per cent (27.2 per cent during 2007-08). Amongother major services, travel receipts were adverselyaffected during 2008-09 as the growth of touristarrivals in the country significantly went down. Againstthe backdrop of slowdown in global trade, businessservices exports declined marginally in 2008-09, withgrowth remaining volatile over the quarters andexhibiting significant decline in the second half ofthe year.

6.19 Reflecting the adverse impact of continuingglobal financial crisis, invisible receipts, comprisingservices, current transfers and income, recorded adecline of 11.6 per cent (US$ 75.4 billion) during H1of 2009-10 as compared to an increase of 32.5 percent (US$ 85.3 billion) in H1 of 2008-09, mainlyattributable to the lower receipts under almost allcomponents of services. However, private transferreceipts, which had marginally declined during thesecond half of 2008-09, increased by 4.3 per cent inthe first half of 2009-10.

6.20 Private transfers are mainly in the form of (i)inward remittances from Indian workers abroad forfamily maintenance, (ii) local withdrawal from NRIrupee deposits, (iii) gold and silver brought throughpassenger baggage, and (iv) personal gifts/donations

to charitable/religious institutions. Private transferreceipts, comprising mainly remittances from Indiansworking overseas, increased to US$ 27.5 billion inH1 of 2009 as compared to US$ 26.4 billion in thecorresponding period of the previous year. Privatetransfer receipts constituted 17.6 per cent of currentreceipts in April-September 2009 (13.4 per cent inthe corresponding period of the previous year).

6.21 NRI deposits, when withdrawn domestically,form part of private transfers because once withdrawnfor local use these become unilateral transfers anddo not have any quid pro quo. Such local withdrawals/redemptions from NRI deposits cease to exist asliability in the capital account of the BoP and assumethe form of private transfers, which are included inthe current account of the BoP. Under NRI deposits,both inflows as well as outflows remained steady. Amajor part of outflows from NRI deposits is in theform of local withdrawals. These withdrawals,however, are not actually repatriated but are utilizeddomestically. During April-September 2009, the shareof local withdrawals in total outflows from NRI depositswas 63.4 per cent as compared to 64.9 per cent inApril-September 2008.

6.22 Under private transfers, inward remittancesfor family maintenance accounted for 53.3 per centof total private transfer receipts, while localwithdrawals accounted for 43.0 per cent in April-September 2009 as against 52.6 per cent and 42.3per cent respectively in April-September 2008.

6.23 Software receipts at US$ 21.4 billion in April-September 2009 showed a decline of 11.5 per centas against a growth of 35.3 per cent in April-September 2008. Miscellaneous receipts, excludingsoftware exports, stood at US$ 7.8 billion in April-September 2009 (US$ 14.9 billion in April-September2008). Receipts under non-software miscellaneousservices like business services, construction androyalties, copyrights and licence fees declined.

6.24 The key components of business servicesreceipts and payments were trade-related services,business and management consultancy services,architectural, engineering and other technicalservices and services relating to maintenance ofoffices. Receipts of architectural, engineering andother technical services, maintenance of officesabroad and business and management consultancyservices declined while payments related to theseservices rose moderately, resulting in decline in netexports of these services. Investment incomereceipts amounted to US$ 7.3 billion in April-


Table 6.3 : Selected indicators of the external sectorSl. Items 2004-05 2005-06 2006-07 2007-08 2008-09 Apr-Sep. Apr-Sep.No. 2008 2009

1 Growth of Exports – BoP (%) 28.5 23.4 22.6 28.9 13.7 48.1 -27.0

2 Growth of Imports – BoP (%) 48.6 32.1 21.4 35.1 19.4 51.0 -20.6

3 Growth of Non-factor Services (Credit) (%) 61.0 33.3 28.0 22.4 12.5 29.1 -21.4

4 Growth of Non-factor Services (Debit) (%) 66.4 24.0 28.5 16.2 1.1 20.3 -4.6

5 Exports/Imports—BoP (%) 71.7 67.0 67.6 64.5 61.4 63.3 58.2

6 Exports/Imports of Goods and Services (%) 87.5 85.0 86.2 83.0 80.8 80.5 73.9

7 Import Cover of FER (No. of months) 14.3 11.6 12.5 14.4 9.8 10.8 12.4

8 External Assistance (net)/ TC (%) 6.9 6.7 3.9 2.0 30.5 6.5 2.0

9 ECB (net)/TC (%) 18.5 9.8 35.6 21.2 91.8 23.7 2.6

10 NRI Deposits / TC (%) -3.4 11.0 9.6 0.2 49.6 8.0 10.2

As per cent of GDPmp11 Exports 11.8 12.6 13.6 13.5 15.4 18.9 14.5

12 Imports 16.5 18.8 20.1 21.0 25.1 29.8 24.9

13 Trade Balance -4.7 -6.2 -6.5 -7.4 -9.7 -10.9 -10.4

14 Invisible Balance 4.3 5.0 5.5 6.1 7.4 8.3 7.1

15 Goods and Services Balance -2.6 -3.4 -3.4 -4.3 -5.6 -6.7 -7.7

16 Current Account Balance -0.4 -1.2 -1.0 -1.3 -2.4 -2.7 -3.3

17 ECBs 0.7 0.3 1.7 1.8 0.7 0.5 0.1

18 FDI (net) 0.5 0.4 0.8 1.3 1.4 2.3 2.5

19 Portfolio Investment (net) 1.3 1.5 0.7 2.2 -1.2 -0.9 3.2

20 Total Capital Account (net) 4.0 3.0 4.9 8.8 0.6 2.3 5.0

21 External Debt 18.1 16.7 17.5 18.1 20.5 - -

Source: RBITC: Total Capital Flows (net); ECBs: External Commercial Borrowings;FER: Foreign Exchange Reserves; GDPmp: Gross Domestic Product at current market prices.

As

per

cent

of

GD

P

Year

Current account deficit, goods & services balance, trade balance,invisibles balance and net capital inflows as a per cent of GDP during2004-05 to 2008-09

-12

-10

-8

-6

-4

-2

0

Figure 6.1

Currentaccountdeficit

2

4

6

8

10

Goods &servicesbalance

Tradebalance

Invisiblesbalance

Net capitalinflows

2004-05 2005-06 2006-07 2007-08 2008-09

-0.4-1.2 -1.0 -1.3

-2.4-2.6-3.4 -3.4

-4.3-4.7-6.2 -6.5

-7.4

4.35.0 5.5 6.1

7.4

4.03.0

4.9

8.8

0.6

-5.6

-9.7


September 2009 and remained at almost the samelevel as of the previous year.

6.25 Invisibles payments have also shown adecline of 2.6 per cent in April-September 2009(against an increase of 15.0 per cent in April-September 2008). This decline is mainly due to lowerpayments towards travel, transportation, non-softwareservices and private transfers. Lower transportationpayments in April-September of 2009 (a decline of29.4 per cent) mainly reflected the lower volume ofimports. In addition, lower payments may also beattributed to the lower freight rates on internationalshipping as compared to the corresponding periodof last year. Investment income payments, reflectingmainly interest payments on commercial borrowings,external assistance, non-resident deposits andreinvested earnings of FDI enterprises operating inIndia, amounted to US$ 9.4 billion in April-September2009 higher than that of US$ 8.7 billion during April-September 2008. The increase in investment incomepayments was mainly due to a rise in reinvestmentearnings of the FDI companies.

6.26 Consequently, net invisibles (invisiblesreceipts minus invisibles payments) stood lower atUS$ 39.6 billion during April-September 2009 ascompared to US$ 48.5 billion during April-September2008. At this level, the invisibles surplus financedabout 68.0 per cent of trade deficit during April-September 2009 as against 75.4 per cent duringApril-September 2008. (Table 6.3 and Figure 6.1).

Current Account Balance6.27 The trade channel of the BoP played animportant role in transmitting global economicshocks to India. A swifter impact of the slowdown inglobal demand on exports and relatively laggedresponse of imports to domestic demand slowdowntended to widen the trade deficit, notwithstandingthe sharp decline in international crude oil prices inthe second half of 2008-09. Some of the adverseimpact of the considerable widening of the trade deficiton the overall current account during the year was,however, partly contained by the relative resilienceof software services exports and remittances fromoverseas Indians. A notable feature in the last quarterof 2008-09, however, was significant narrowing downof the trade deficit on account of a larger decline inimports relative to exports, which along with thesustained invisibles surplus led to a significantreduction in the current account deficit (CAD).However, for fiscal 2008-09, despite the higherinvisibles surplus of US$ 89.9 billion (7.4 per cent ofGDP), the CAD increased to US$ 28.7 billion (2.4per cent of GDP), mainly on account of the wideningtrade deficit, as compared to US$ 15.7 billion (1.3per cent of GDP) in 2007-08.

6.28 The CAD, despite lower trade deficits,increased to US$ 18.6 billion in H1 (April-September)of 2009-10 from US$ 15.8 billion in April-September2008 mainly due to a lower net invisibles surplus.(Figure 6.2)

As

per

cent

of

GD

P

Current account deficit, goods & services balance, trade balance,invisibles balance and net capital inflows as a per cent of GDPduring H1 of 2008-09 and 2009-10

-12

-10

-8

-6

-4

-2

0

Figure 6.2

2

4

6

8

10

2008-09 H1 (Apr-Sep) 2009-10 H1 (Apr-Sep)

Currentaccountdeficit

Goods &servicesbalance

Tradebalance

Invisiblesbalance

Net capitalinflows

-2.7 -3.3

-6.7-7.7

-10.9

8.3

2.3

5.0

-10.4

7.1


CAPITAL ACCOUNT

6.29 The impact of the global financial crisisthrough the financial channel was reflected in thesharp turnaround in the capital flows cycle from asustained phase of surges in inflows to large outflows,particularly in Q3 (October-December 2008) of2008-09. The early signs of the impact of the financialcrisis on capital inflows were evident in the portfoliooutflows that started in February 2008. Followingthe failure of Lehman Brothers, there was a suddenchange in the external environment, characterizedby a global liquidity squeeze and increased riskaversion on the part of international investors. As inthe case of other major emerging market economies(EMEs) there was a withdrawal of funds from thedomestic equity markets by portfolio investors aspart of the global deleveraging process as also asignificant reduction in the access of Indiancorporates to overseas financing. Thus there werelarge capital outflows by portfolio investors duringSeptember-October 2008, with concomitantpressures in the foreign exchange market.

6.30 The deteriorating external financingconditions also rendered Indian firms’ access toexternal commercial borrowings and trade creditssomewhat difficult. The resilience shown by FDIinflows, however, reflects the continued confidencein the Indian economy as a long-term investmentdestination.

6.31 On the whole, the adverse impact of theglobal financial market turmoil was reflected in lowercapital inflows during 2008-09. There was massivedecline in net capital flows from US$ 106.6 billion in2007-08 (8.8 per cent of GDP) to US$ 7.2 billion (0.6per cent of GDP) in 2008-09. The decline was mainlydue to net outflows under portfolio investmentincluding foreign institutional investments (FIIs),American depository receipts (ADRs)/ globaldepository receipts (GDRs) (US$ 14.0 billion),banking capital including NRI deposits (US$ 3.2billion) and short-term trade credit (US$ 1.9 billion).However, notwithstanding these adversedevelopments, the resilience of FDI inflows (US$ 17.5billion in 2008-09) reflected the growing perceptionof India as one of the favourite long-term investmentdestinations.

6.32 The revival in capital flows witnessed duringQ1 of 2009-10 gathered momentum during Q2 of2009-10. Net capital flows at US$ 29.6 billion in April-September 2009 remained higher as compared toUS$ 12.0 billion in April-September 2008. All thecomponents under net capital flows, except loans

and banking capital, showed improvement duringApril-September 2009 from their levels in thecorresponding period of the previous year. In bankingcapital, net inflows under non-resident depositsremained higher during April-September 2009 ascompared to their previous year’s level.

6.33 Net inward FDI into India remained buoyantat US$ 21.0 billion during April-September 2009 (asagainst US$ 20.7 billion in April-September 2008)reflecting the continuing liberalization and bettergrowth performance of the Indian economy. Duringthis period, FDI was channeled mainly intomanufacturing (21.4 per cent) followed bycommunication services (12.8 per cent) and the realestate sector (12.6 per cent). Net outward FDI ofIndia at US$ 6.8 billion in April-September 2009remained at almost the same level as that of thecorresponding period of 2008-09. Due to the largeinward FDI, the net FDI (inward minus outward) wasmarginally higher at US$ 14.1 billion in April-September 2009. Portfolio investment mainlycomprising FIIs and ADRs/ GDRs witnessed largenet inflows (US $ 17.9 billion) in April-September2009 (net outflows of US $ 5.5 billion in April-September 2008). This was mainly due to largepurchases by FIIs in the Indian capital marketreflecting revival in the growth prospects of theeconomy and improvement in global investors’sentiment. The inflows under ADRs/GDRs increasedto US$ 2.7 billion in April-September 2009 (as againstUS$ 1.1 billion in April-September 2008).

6.34 The net external commercial borrowings(ECBs) inflow remained lower at US$ 0.7 billion inApril-September 2009 than the US $ 3.2 billion inApril-September 2008. Banking capital (net)amounted to US$ 1.1 billion in April-September 2009as compared to US$ 5.0 billion in April-September2008. Among the components of banking capital,NRI deposits witnessed higher net inflows of US$2.9 billion in April-September 2009 as compared toUS$ 1.1 billion in April-September 2008. Short-termtrade credit recorded a net outflow of US$ 0.6 billion(inclusive of suppliers’ credit up to 180 days) duringApril-September 2009 as against a net inflow of US$4.9 billion during the same period of the previousyear. Other capital includes leads and lags in exports,special drawing rights (SDR) allocation, funds heldabroad, advances received pending issue of sharesunder FDI and other capital not included elsewhere(n.i.e). Other capital recorded a lower net outflow ofUS$ 4.3 billion in April-September 2009 as comparedto US$ 10.3 billion in April-September 2008.


FOREIGN EXCHANGE RESERVES

6.35 Foreign exchange reserves are an importantcomponent of the BoP and an essential element inthe analysis of an economy’s external position.India’s foreign exchange reserves comprise foreigncurrency assets (FCA), gold, special drawing rights(SDRs) and reserve tranche position (RTP) in theInternational Monetary Fund (IMF). The level of foreignexchange reserves is largely the outcome of the RBI’sintervention in the foreign exchange market tosmoothen exchange rate volatility and valuationchanges due to movement of the US dollar againstother major currencies of the world. Foreignexchange reserves are accumulated when there isabsorption of the excess foreign exchange flows bythe RBI through intervention in the foreign exchangemarket, aid receipts, interest receipts, and fundingfrom the International Bank for Reconstruction and

Development (IBRD), Asian Development Bank(ADB), International Development Association (IDA),etc. Both the US dollar and euro are interventioncurrencies. Foreign currency assets are maintainedin major currencies like the US dollar, euro, poundsterling, Australian dollar and Japanese yen. Foreignexchange reserves are denominated and expressedin the US dollar only.

6.36 Beginning from a low level of US$ 5.8 billionat end-March 1991, foreign exchange reservesincreased gradually to US$ 25.2 billion by end-March1995, US$ 38.0 billion by end-March 2000, US$113.0 billion by end-March 2004 and US$ 199.2 billionby end-March 2007. They reached their peak at US$314.6 billion in end-May 2008. The reserves declinedthereafter to US$ 252.0 billion at the end of March2009. The decline in reserves in 2008-09 was interalia a fallout of the global crisis and strengthening ofthe US dollar vis-à-vis other international currenciesand the fact that our reserves are measured in dollarterms. During 2009-10, the level of foreign exchangereserves increased from US$ 252.0 billion at the endof March 2009 to US$ 283.5 billion at the end ofDecember 2009, mainly on account of valuation gainas the US dollar depreciated against most of theother major international currencies in 2009. Thecomponent-wise details of foreign exchange reservesfrom 1950-51 to 2009-10 (up to December 2009) inrupees and US dollars are given in Appendix 6.1 (A)and 6.1 (B).

6.37 In fiscal 2008-09, the widening of the CADcoupled with net capital outflows resulted in thedrawdown of foreign exchange reserves of US$ 20.1billion (excluding valuation) as against an accretionof US$ 92.2 billion in 2007-08. During 2009-10, theaccretion in foreign exchange reserves on a BoPbasis (i.e. excluding valuation) was US$ 9.5 billionin H1 (April-September 2009) of 2009-10 as againsta decline of US$ 2.5 billion during the correspondingperiod of the previous year. This was mainly onaccount of higher capital inflows to the tune of US$17.9 billion in the form of portfolio investment vis-a-vis an outflow of US$ 5.5 billion in H1 (April-September 2008) of 2008-09.

6.38 Taking into account the valuation effect,India’s foreign exchange reserves recorded a declineof US $ 57.7 billion during 2008-09 to US $ 252.0billion as at end-March 2009. Valuation loss arisingout of depreciation of major currencies against theUS dollar, at US$ 37.6 billion, accounted for 65.2per cent of the total decline in foreign exchangereserves during 2008-09. However, in 2009-10 foreign

Box 6.2 : Dubai Financial Crisis and the IndianEconomyDubai World, the flagship holding company of the DubaiGovernment with active participation in some large realestate projects, sought a debt restructuring and six-monthstandstill in its debt repayment (estimated at US$ 59 billionas of August 2009) on November 25, 2009. Although therewas initial reaction in the domestic foreign currency andIndian stock markets, the impact was insignificant andshort-lived. The primary capital market remainedunaffected and there was no visible effect of the Dubainews on the money and government securities markets.The markets recovered immediately, backed by the newsof 7.9 per cent GDP growth in Q2 of 2009-10.

As regards its impact on the real sector, a quick assessmentsuggests that it may be modest. There could be someimpact on India’s exports and imports, keeping in viewthe significant share of the UAE in India’s internationaltrade. As Indian expatriates comprise a large percentageof the total workforce in Dubai, the crisis may lead tosalary cuts or job losses for Indian workers in theconstruction sector with consequent effect on remittancesand NRI deposits. The UAE accounts for 10 per cent oftotal remittances and 11.3 per cent of NRI deposits.

Subsequent developments indicate that the impact of theDubai crisis on financial markets around the world hasbeen contained, following the announcement by the UAEcentral bank that it would stand behind UAE banks andbranches of foreign banks operating in the UAE.Furthermore, the Government of Abu Dhabi and the UAEcentral bank agreed to provide financial support to DubaiWorld. The Government of Abu Dhabi has agreed to grantUS$ 10 billion to the Dubai Financial Support Fund formeeting a series of upcoming obligations of Dubai Worldincluding sukuk (Islamic bond) obligations of US$ 4.1billion, which fell due on December 14, 2009. Theseassurances to trade creditors and contractors have providedconfidence to the financial markets.


exchange reserves recorded an increase of US$ 29.3billion in H1 (April-September 2009) of which US$

19.8 billion was on account of valuation gain (Table6.4).

Table 6.5 : Summary of changes in foreign exchange reserves (US$ billion)Sl. Year Foreign exchange Total Increase / Increase/decrease Increase/decreaseNo. reserves at the decrease in in reserves in reserves due

end of financial reserves on a BoP to valuation year (end March) basis effect

1 2004-05 141.5 + 28.6 +26.2 + 2.4(91.6%) (8.4%)

2 2005-06 151.6 + 10.1 +15.0 (-) 4.9(148.5%) (- 48.5%)

3 2006-07 199.1 + 47.5 +36.5 + 11.0(76.8%) (23.2%)

4 2007-08 309.7 + 110.6 +92.2 + 18.4(83.4%) (16.6%)

5 2008-09 252.0 - 57.7 -20.1 - 37.6(34.8%) (65.2%)

6 2009-2010 283.5 +31.5 +11.2 + 20.3(upto Dec. 2009) (35.6%) (64.4%)

Source: RBI.Note: Figures in parentheses indicate percentage share in total change.

Table 6.4 : Sources of variation in foreign exchange reserves on BoP basis and valuationeffect (US$ billion)

April-September

Sl.No. Items 2007-08 2008-09 2008-09 2009-10

I Current Account Balance (-) 15.7 (-) 28.7 (-)15.8 (-)18.6II Capital Account (net) (a to g) 107.9 8.6 13.4 28.2

a Foreign Investment (i+ii) 43.3 3.5 8.3 32.1(i) FDI 15.9 17.5 13.9 14.1(ii) Portfolio Investment 27.4 (-) 14.0 (-)5.5 17.9

of which:FIIs 20.3 (-) 15.0 (-)6.6 15.3ADRs/GDRs 6.6 1.2 1.1 2.7

b External Commercial Borrowings 22.6 7.9 3.2 0.7c Banking Capital 11.8 (-)3.2 5.0 1.1

of which: NRI Deposits 0.2 4.3 1.1 2.9d Short-term Trade Credit 15.9 (-)1.9 4.9 (-) 0.6e External Assistance 2.1 2.6 0.9 0.6F Other Items in Capital Account* 11.0 -1.5 (-)10.3 (-)4.3g Errors and Omissions 1.3 1.4 1.4 -1.4h Overall balance (I+II) 92.2 (-)20.1 (-) 2.5 9.5

III Reserve Change on BoP Basis (-) 92.2 (+) 20.1 (+) 2.5 (-)9.5(Increase - / Decrease +)

IV Valuation Change 18.4 (-) 37.6 (-) 20.9 19.8Total Reserve Change (III+IV) 110.6 (-) 57.7 (-) 23.4 29.3(Increase in reserves (+) /Decrease in reserves (-))

Source: RBI.Note: * : ‘Other items in capital account’ include SDR allocations, leads and lags in exports, funds held abroad,

advances received pending issue of shares under FDI and transactions of capital receipts not includedelsewhere.As per the BoP compilation practice, an increase in reserves is indicated by (-) sign and a decreaseby (+) sign. For other items (+) sign indicates increase and (-) sign means decrease.


6.39 A summary of changes in the foreignexchange reserves since 2004-05 with a breakdowninto increase/decrease on a BoP basis and valuationeffect is presented in Table 6.5.

6.40 In 2009-10, three major developments havetaken place in the area of foreign exchange reservesmanagement. The first relates to investment of foreignexchange reserves in infrastructure projects.Pursuant to the announcement made in the UnionBudget 2007-08 about using a part of the foreignexchange reserves for financing domesticinfrastructure requirements without the risk ofmonetary expansion, the India Infrastructure FinanceCompany Limited was set up as a wholly ownedsubsidiary in London, UK, called IIFC (UK) in April2008. The subsidiary will borrow up to US$ 5 billionin tranches from the RBI by issuing US dollar-denominated bonds and on-lend the resources toIndian infrastructure companies for meeting theircapital expenditures outside India. It has alreadyraised the first tranche of US$ 250 million. Thesecond development relates to the IMF’s allocationof SDRs to member countries including India. Ageneral allocation of SDRs for an amount equivalentto US$ 250 billion and a special SDR allocationpursuant of the fourth amendment of the IMF’sArticles of Agreement, amounting to US$ 33 billion,was made by the IMF to member countries on August28, 2009 and September 9, 2009 respectively. Indiareceived SDR 3,082 million (equivalent to US$ 4,821million) under general allocation and SDR 214.6

million (equivalent to US$ 340 million) under specialallocation from the IMF. These SDR allocations haveresulted in an increase of US$ 5.2 billion in India’sforeign exchange reserves. The third majordevelopment was the purchase of gold from the IMFby the RBI (Box 6.3).

6.41 In line with the principles of preserving thelong-term value of the reserves in terms of purchasingpower and minimizing risk and volatility in returns,the RBI holds foreign currency assets (FCAs) inmajor convertible currencies instruments. Theseinclude deposits of other-country central banks, theBank for International Settlements (BIS) and top-rated foreign commercial banks, and in securitiesrepresenting debt of sovereigns and supranationalinstitutions with residual maturity not exceeding10years, to provide a strong bias towards capitalpreservation and liquidity. The annualized rate ofreturn, net of depreciation, on the multi currency-multi asset portfolio of the RBI and gold declinedmarginally to 4.2 per cent in 2008-09 from 4.8 percent in 2007-08.

6.42 Country-wise details of foreign exchangereserves reveal that India is the fourth largest foreignexchange reserves holder in the world, after China,Japan and Russia (Table 6.6).

Box 6.3 : RBI purchase of gold from the IMFThe Executive Board of the IMF, on September 18, 2009announced its decision to sell 403.3 metric tonnes of goldas a central element of its New Income Model and in orderto increase its resources for lending to low-incomecountries. The IMF also decided that the initial offer of thesale would be directly to official holders, including centralbanks. Consequent of this, the RBIconcluded the purchaseof 200 metric tonnes of gold from the IMF, under theIMF’s limited gold sales programme, at the cost of US$6.7 billion, in November 2009, as part of its foreignexchange reserves management operation. The purchasewas an official- sector off-market transaction and wasexecuted over a two-week period during October 19-30,2009 at market-based prices. With this purchase, goldholdings in the country’s foreign exchange reserves haveincreased from 357.7 tonnes to 557.7 tonnes, which isabout 6 per cent of the reserves. Post–purchase, India hasbecome the 10th largest official gold-holding country inthe world.

Table 6.6 : Foreign exchange reserves ofsome major countries

Sl. Country Foreign exchangeNo. reserves during 2009

(US$ billion)

1 China (December 2009) 2399.2

2 Japan (December 2009) 1049.4

3 Russia (December 2009) 439.0

4 India (December 2009) 283.5

5 Korea (December 2009) 270.0

6 China P R Hong Kong 256.3(November 2009)

7 Brazil (December 2009) 238.5

8 Germany (November 2009) 189.5

9 Singapore(November 2009) 188.9

10 Italy (November 2009) 140.1

11 France (November 2009) 139.1

Source: IMF except China.


6.43 A comparative picture of foreign exchangereserves and import cover as measured by theratio of foreign exchange reserves to import of goodsand services for select country groups and countriesincluding India is presented in Table 6.7. Amongthe country groups, “Developing Asia” and the“Middle East” accumulated reserves during theperiod 2005- 09, leading to steady improvement inthe ratio of reserves to import of goods and services.

EXCHANGE RATE

6.44 The exchange rate policy is guided by thebroad principles of careful monitoring and

management of exchange rates with flexibility, whileallowing the underlying demand and supplyconditions to determine its movements over a periodin an orderly manner. Subject to this predominantobjective, RBI intervention in the foreign exchangemarket is guided by the goals of reducing excessvolatility, preventing the emergence of destabilizingspeculative activities, maintaining adequate levelsof reserves, and developing an orderly foreignexchange market.

6.45 In fiscal 2008-09, the rupee depreciatedagainst major international currencies, except thepound sterling, due to deceleration in capital flowsand widened trade deficit. The annual averageexchange rate of the rupee in 2008-09 was Rs45.99 per US dollar, Rs 64.98 per euro and Rs46.22 per 100 yen, indicating depreciation by 12.5per cent, 12.2 per cent and 23.5 per centrespectively over the annual average exchange rateduring 2007-08. However, annual average exchangerate of the rupee per pound sterling of 78.29 in2008-09 indicated appreciation by 3.2 per cent over2007-08.

6.46 In fiscal 2009-10, the rupee hasstrengthened against the US dollar on the back ofsignificant turnaround in FII inflows, continuedinflows under FDI and NRI deposits, bettermacroeconomic performance of the Indian economyand weakening of the US dollar in internationalmarkets. Additionally, the outcome of the generalelections, which generated expectations of politicalstability, buoyed the market sentiment andstrengthened the rupee, especially in the secondhalf of May 2009. The rupee exhibited significantstrength against the US dollar in October 2009.However, since then it has generally been range-bound moving in the range of Rs 46-47 per USdollar. As a result, the rupee/US dollar exchangerate, which was Rs 50.95 per dollar in end-March2009, appreciated to Rs 46.64 per dollar as onJanuary 1, 2010. At this level, the Indian rupee hasappreciated by 9.2 per cent over its March 31,2009 level. Over the same period, the rupeerecorded an appreciation of 1.0 per cent againstthe euro and 3.5 per cent against the Japaneseyen. However, it depreciated by 3.4 per cent againstthe pound sterling. Movement in exchange rate ofthe rupee vis-à-vis major international currencies,month-wise, during 2009-10 (up to December 2009)is presented in Figure 6.3.

Table 6.7 : International comparison offoreign exchange reserves (US $ billion)and ratio of reserves to imports of goods &services

Country/CountryGroup 2005 2006 2007 2008 2009

(Proj.)Country

Russia 176.5 296.2 467.6 413.4 380.7(107.4) (141.7) (165.5) (112.3) (163.2)

China 822.5 1069.5 1531.3 1950.3 2240.0(115.5) (125.4) (148.0) (158.2) (227.8)

India 132.5 171.3 267.6 248.0 263.1(72.8) (75.5) (95.1) (73.6) (81.1)

Brazil 53.3 85.2 179.5 192.9 219.8(54.4) (70.7) (113.8) (87.6) (129.6)

Mexico 74.1 76.3 87.1 95.1 93.5(30.5) (27.4) (28.5) (28.5) (36.3)

Country GroupDeveloping 202.8 250.7 332.6 339.3 363.8Asia (38.4) (42.3) (49.0) (41.8) (53.6)(excludingChina & India)Middle 357.7 491.1 695.6 825.9 870.3East (87.4) (99.3) (112.8) (101.1) (113.0)

Source : World Economic Outlook Database, October2009.

Note : Reserves are based on offical holding of goldvalued at SDR 35 an ounce. This convention results ina marked underestimation of reserves for countriesthat has substantial gold holdings.

India’s FOREX reserves were US$ 283.5 billion (end ofDecember 2009) and US$ 252.0 billion at the end ofMarch 2009.

Figures in parentheses indicate ratio of reserves toimports of goods and services.


6.47 In 2009-10, on a month-on-month basis,the average monthly exchange rate of the rupeeappreciated during April-June, August and October-November while it depreciated during July,September and December. The average monthlyexchange rate of the rupee strengthened fromRs 51.23 per US dollar during March 2009 toRs 46.63 per US dollar during December 2009(Figure 6.4).

6.48 The month-wise details of the exchange rateof the rupee against major international currenciesand the RBI’s sale/purchase of foreign currency inthe foreign exchange market during 2009-10 areindicated in Table 6.8.

6.49 The exchange rate of the rupee vis-à-visselect international currencies since 1980-81, year-wise, and during 2009-10, month-wise, is indicatedin Appendix 6.5.

6.50 During 2008-09, the US dollar generallyappreciated against most currencies, except theJapanese yen and Chinese yuan. During 2009-10so far, the appreciating trend has been reversedbecause of declining safe haven flows to the US,large-scale quantitative easing in the US and changein market sentiment against the dollar. However, thedollar gained some strength against major currencies,especially in December 2009, on the back of various

-5

App

reci

atio

n/de

prec

iati

onMonth on month appreciation(+)/depreciation(-) of rupee against majorinternational currencies during 2009-10

-4

-3

-2

-1

0

1

Figure 6.3

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

DecUS$

PoundSterling

-6

2

3

4

5

Euro

Yen

2009

Rup

ee p

er U

S do

llar

Monthly average exchange rate (Rupee per US dollar) duringMar - Dec 2009 and appreciation/depreciation over the previous month

Figure 6.4

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Monthlyaverage

exchange rate(Rs. per US

dollar) - LHS

Appreciation /Depreciation

- RHS

45

46

47

48

49

50

51

52

53

-4

-3

-2

-1

0

1

2

3

4 Appreciation/depreciation

2009


Table 6.8 : Exchange rates and RBI’s sale/purchase of foreign currency in the exchangemarket during 2009-10

Monthly average exchange rates (Rupee per foreign currency)*,

Month US$ Pound Euro Yen** RBI Net sale (-) /Sterling purchase (+)

(US$ million)Average 2008-09 45.99 78.29 64.98 46.22 -

(-12.46) (3.24) (-12.20) (-23.53) -

March 2009 51.23 72.90 66.92 52.51 (-) 3,388(-3.84) (-2.85) (-6.03) (1.83)

2009-10April 2009 50.03 73.58 65.81 50.84 (-) 2,487

(2.39) (-0.92) (1.69) (3.29)

May 2009 48.53 74.83 66.20 50.22 (-) 1,437(3.09) (-1.67) (-0.60) (1.25)

June 2009 47.77 78.16 66.98 49.45 (+) 1,044(1.59) (-4.25) (-1.16) (1.56)

July 2009 48.48 79.35 68.24 51.26 (-) 55(-1.46) (-1.50) (-1.85) (-3.55)

August 2009 48.30 79.93 68.87 50.80 (+) 181(0.37) (-0.73) (-0.92) (0.92)

September 2009 48.44 79.35 70.44 52.85 (+) 80(-0.29) (0.74) (-2.22) (-3.89)

October 2009 46.72 75.73 69.29 51.76 (+) 75(3.68) (4.78) (1.66) (2.12)

November 2009 46.57 77.33 69.50 52.28 (-) 36(0.33) (-2.07) (-0.31) (-1.0)

December 2009 46.63 75.76 68.18 52.00(-0.13) (2.06) (1.93) (0.52)

Source : RBI * FEDAI indicative rate; ** Per 100 Yen. Figures in parentheses indicate appreciation (+) and depreciation (-) over the previous month/year.

indicators suggesting a pick-up in economic activityin the US and financial market conditions turning

more conducive to economic growth. Between end-March and end-December 2009, the US dollar

Table 6.9 : Exchange rate of US dollar against international currencies during 2009-10Month / Year (End month) GBP/USD Euro/USD USD/JPY AUD/USD

March 2009 1.4327 1.3249 98.84 0.6921

April 2009 1.4787 1.3226 98.57 0.7252

May 2009 1.5511 1.3690 96.79 0.7656

June 2009 1.6466 1.4036 96.33 0.8070

July 2009 1.6721 1.4250 94.68 0.8354

August 2009 1.6276 1.4249 95.18 0.8321

September 2009 1.6257 1.4506 90.85 0.8544

October 2009 1.6202 1.4772 90.18 0.8949

November 2009 1.6570 1.4886 88.08 0.9156

December 2009 1.6278 1.4696 89.65 0.9044

US$ Appreciation (+) / Depreciation (-)(End December 2009 over March 2009) -11.99 -9.85 -9.30 -23.47

Source: RBI


depreciated by 12.0 per cent against the poundsterling, 9.9 per cent against the euro, 9.3 per centagainst the Japanese yen and 23.5 per cent againstthe Australian dollar. Among Asian currencies, itdepreciated against the Indian rupee, Indonesianrupiah, Malaysian ringgit, South Korean won andThai Baht. The exchange rate of the US dollar vis-a-vis other major international currencies, namely poundsterling, euro, Japanese yen and Australian dollar ispresented in Table 6.9.

6.51 The nominal effective exchange rate (NEER)and real effective exchange rate (REER) indices areused as indicators of external competitiveness ofthe country over a period of time. NEER is theweighted average of bilateral nominal exchange ratesof the home currency in terms of foreign currencies.REER is defined as a weighted average of nominalexchange rates adjusted for home and foreigncountry relative price differentials. REER capturesmovements in cross-currency exchange rates aswell as inflation differentials between India and itsmajor trading partners. The RBI has beenconstructing six currency (US dollar, euro foreurozone, pound sterling, Japanese yen, Chineserenminbi and Hong Kong dollar) and 36 currencyindices of NEER and REER.

6.52 The rupee appreciated against the US dollarby 10.0 per cent during 2009-10 till November 2009.The rupee appreciation was, however, modest at 3.23

per cent against the six-currency trade-weightedNEER during 2009-10 (March to November 2009).The average six-currency trade-weighted REER(base:1993-94=100) increased from 98.58 in April2009 to 104.94 in November 2009 mainly on accountof appreciation of the rupee against the US dollarand increase in inflation differentials between Indiaand its trading partners (Table 6.10 and Appendix6.6).

THE G-206.53 The G-20 is taking up the cause of globalstability, policy coordination and growth at globallevel. The details of G-20 summits held in 2009 areas under:

London Summit (UK): April 2, 20096.54 The summit was held against a backdrop ofeconomic and financial crisis of enormousproportions. The leaders resolved to restoreconfidence, growth and jobs; repair the financialsystem to restore lending; strengthen financialregulation to rebuild trust; fund and reform theinternational financial institutions; promote globaltrade and investment and reject protectionism; andbuild an inclusive and sustainable recovery.

6.55 The ‘Global Plan for Recovery and Reform’brought out at the Summit, inter alia, pledgedsignificant reforms towards:

Table 6.10 : Movement of rupee and indices of NEER and REER during 2009-10

Month/Year Rs per Appreciation NEER * REER * Appreciation AppreciationUS dollar (+)/ (+)/ (+)/

depreciation (-) depreciation depreciationin Rs per dollar (-) in NEER (-) in REER

over previous over previous over previousmonth month month

2008-09 (April-March) 45.99 64.87 104.47March 2009 51.23 60.35 95.682009-10April 2009 (P) 50.03 2.39 61.49 98.58 1.89 3.03May 2008 (P) 48.53 3.09 62.31 101.37 1.33 2.83June 2009 (P) 47.77 1.59 62.43 101.11 0.19 (-) 0.26July 2009 (P) 48.48 (-) 1.46 61.36 100.64 (-) 1.71 (-) 0.46August 2009 (P) 48.30 0.37 61.22 101.52 (-) 0.23 0.81September 2009 (P) 48.44 (-) 0.29 60.61 101.25 (-) 1.00 (-) 0.27October 2009 (P) 46.72 3.68 62.40 103.84 2.95 2.56November 2009 (P) 46.57 0.33 62.30 104.94 (-) 0.16 1.05December 2009 (P) 46.63 (-) 0.13

Source : RBI* Six-Currency Trade Based Weights- Base: 1993-94 (April-March) =100


Box 6.4 : What is the G-20?The Group of Twenty (G-20) Finance Ministers and CentralBank Governors was established in 1999 in Berlin to bringtogether systemically important industrialized anddeveloping economies to discuss key issues in the globaleconomy. The member countries of the G-20 are Argentina,Australia, Brazil, Canada, China, France, Germany, India,Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia,South Africa, South Korea, Turkey, the United Kingdom,the United States of America and the European Unionrepresented by rotating Council presidency and theEuropean Central Bank. To ensure that global economicfora and institutions work together, the Managing Directorof the IMF and the President of the World Bank, plus thechairs of the International Monetary and FinancialCommittee and Development Committee of the IMF andWorld Bank, are ex-officio members of the G-20. TogetherG-20 member countries represent 90 per cent of globalgross national product, 80 per cent of world trade as wellas two-thirds of the world’s population.

Restoring growth and jobs;

Strengthening financial supervision andregulation;

Strengthening our global financial institutions;

Resisting protectionism and promoting globaltrade and investment; and

Ensuring a fair and sustainable recovery for all.

6.56 As per the London communique the leadershave agreed to treble resources available to the IMFto $ 750 billion, to support a new SDR allocation of$ 250 billion, to support at least $100 billion ofadditional lending by the multilateral developmentbanks (MDBs), to ensure $ 250 billion of support fortrade finance, to use the additional resources fromagreed IMF gold sales for concessional finance forthe poorest countries and to constitute an additional$ 1.1 trillion programme of support to restore credit,growth and jobs in the world economy.

Pittsburgh Summit (USA): September24-25, 20096.57 The summit of G-20 leaders was held in themidst of a critical transition from crisis to recoveryto turn the page on an era of irresponsibility and toadopt a set of policies, regulations and reforms tomeet the needs of the 21st century global economy.The Summit declaration, inter alia, pledged to sustaina strong policy response until a durable recovery is

secured and to adopt the policies needed to lay thefoundation for strong, sustained and balanced globalgrowth in the 21st century. The G-20 leaders agreedto:

Launch a framework that lays out the policiesand the way we act together to generate strong,sustainable and balanced global growth.

Make sure the regulatory system for banks andother financial firms reins in the excesses thatled to the crisis.

Reform the global architecture to meet the needsof the 21st century.

Take new steps to increase access to food, fueland finance among the world’s poorest whileclamping down on illicit outflows.

Phase out and rationalize over the medium terminefficient fossil fuel subsidies while providingtargeted support for the poorest.

Maintain openness and move toward greener,more sustainable growth.

6.58 The Pittsburgh Summit agreed that the G-20 would be the premier forum for internationaleconomic issues. The Summit agreed on an at least5 per cent shift in the IMF quota to underrepresentedcountries and on a new framework for global macro-balances that includes contributions that individualcountries can make through their own policies, witha process of peer review. The objective is thatmembers agree on shared policy objectives, set outmedium-term policy frameworks and work togetherto assess the collective implications of nationalpolicy for global growth, identifying potential risks tofinancial stability and based on mutual assessment,and agree on actions to meet common goals.

6.59 The G-20 leaders also announced that therewould be two meetings in 2010, in Canada in June2010 and in Korea in November 2010 to coincidewith the APEC Summit, and annual summitsthereafter.

St Andrews Meeting (Scotland): November7, 20096.60 G20 Finance Ministers and Central BankGovernors observed that though the economic andfinancial conditions have improved followingcoordinated response to the crisis, the recovery isuneven and remains dependent on policy support,with high unemployment being a major concern. Torestore the global economy and financial system to


health, it was agreed to maintain support for therecovery until it is assured.

6.61 To underscore the new approach toeconomic cooperation, the G20 has launched a‘Framework for Strong, Sustainable and BalancedGrowth’, adopted a detailed timetable and initiateda new consultative mutual assessment process toevaluate whether policies will collectively deliver theagreed objectives. The first challenge in using theFramework is the transition from crisis response tostronger, more sustainable and balanced growth,consistent with the goals of sustainable publicfinances; price stability; stable, efficient and resilientfinancial systems; employment creation; and povertyreduction. The International Financial Institutions(IFIs) will play an important role in supporting thework to secure sustainable growth, stability, jobcreation, development and poverty reduction. Inaddition to strengthening the global financial system,the G-20 agreed to work with the Financial StabilityBoard (FSB) to maintain the momentum of theprogramme of reforms, and ensure its full, timelyand consistent implementation and a level playingfield.

Achievements of the G-206.62 The G-20 has made considerable progressover a range of issues since 1999, includingagreement about policies for growth, reducing abuseof the financial system, dealing with financial crisesand combating terrorist financing. The G-20 also aimsto foster the adoption of internationally recognizedstandards through the example set by its membersin areas such as transparency in fiscal policy andcombating money laundering and the financing ofterrorism. In 2004, G-20 countries committed to newhigher standards of transparency and exchange ofinformation on tax matters. This aims to combatabuses of the financial system and illicit activitiesincluding tax evasion. The G-20 also aims to developa common view among members on issues relatedto further development of the global and financialsystem.

6.63 To tackle the financial and economic crisisthat spread across the globe in 2008, the G-20members were called upon to further strengtheninternational cooperation. Since then, the concertedand decisive actions of the G-20 have helped theworld deal effectively with the current financial andeconomic crisis. The G-20 has already delivered anumber of significant and concrete outcomes. Forexample, it committed to implementing the

unprecedented and most coordinated expansionarymacroeconomic policies, including fiscal expansionof US$ 5 trillion and establishment of the FSB, andsubstantially strengthening the IFIs, including theexpansion of resources and the improvement of theirprecautionary lending facilities.

6.64 Reflecting on these achievements andrecognizing that more needs to be done to ensure astrong, sustained and balanced global recovery, theG-20 leaders at Pittsburgh designated the G-20 asthe premier forum for international economiccooperation.

EXTERNAL DEBT6.65 India’s external debt stock stood at US $224.59 billion (Rs 1,142,618 crore) in end-March 2009,that is fractionally higher than its previous year’slevel of US$ 224.41 billion (Rs 897,314 crore).

6.66 During the first half of 2009-10, total externaldebt increased by US$ 18.2 billion (8.1 per cent) toUS$ 242.8 billion (Rs 1,166,217 crore). Long-termdebt posted an increase of US$ 19.2 billion (10.6per cent) to stand at US$ 200.4 billion, while short-term debt fell by US$ 985 million (-2.3 per cent) tostand at US$ 42.4 billion. The share of long-termdebt was higher at 82.5 per cent in end-September2009 as against 80.7 per cent in end-March 2009.Concomitantly, the share of short-term debt declinedto 17.5 per cent in end-September 2009 from 19.3per cent in end-March 2009.

6.67 The valuation effect arising due todepreciation of the US dollar against majorinternational currencies contributed an increase ofUS$ 8.3 billion in the total increase of US$ 18.2billion in external debt as in end-September 2009over the end-March 2009 level. Excluding the valuationeffect, the increase in external debt would have beenUS$ 9.9 billion.

6.68 Commercial borrowings remained thelargest component of external debt with a share of27.5 per cent in end-September 2009 (27.8 per centin end-March 2009). Reflecting the impact of anincrease in NRI deposits attributable to an upwardrevision in interest rate ceiling on these deposits,there was an improvement in their share from 18.5per cent in end-March 2009 to 18.9 per cent in end-September 2009. Multilateral debt accounted for 17.4per cent of total external debt, followed by bilateraldebt (9.1 per cent), export credits (6.3 per cent),IMF representing SDR allocations (2.6 per cent) andrupee debt (0.7 per cent) as in end-September 2009.


Table 6.11 : India’s external debtComponents (US$ billion)

End March End-June End- 2009 PR Sept.

2005 2006 2007R 2008 R 2099 PR 2009 QE

Long-term Debt 116.28 119.58 144.23 178.68 181.23 187.75 200.45Short-term Debt 17.72 19.54 28.13 45.74 43.36 42.03 42.38Total External Debt 134.00 139.11 172.36 224.41 224.59 229.78 242.82(Rupee crore)Long-term Debt 5,08,777 5,33,367 6,28,771 7,14,433 9,21,710 9,01,840 9,62,640Short-term Debt 77,528 87,155 1,22,631 1,82,881 2,20,908 2,01,234 2,03,577Total External Debt 5,86,305 6,20,522 7,51,402 8,97,314 1,142,618 1,103,074 1,166,217

R: Revised; PR: Partially Revised; QE: Quick Estimates.

Trade-related credits at US$ 39.3 billion constituted92.8 per cent of total short-term debt and 16.2 per

cent of total external debt at the end of September2009.

Box 6.5 : External commercial borrowing (ECB) policy measures during 2009-10The broad ECB policy stance towards liberalization continued during the first half of 2009-10. However, it has been decidedto roll back some of the policy measures which were introduced against the backdrop of tightness in financial marketsduring the period of financial crisis. These policy measures have become effective from January 1, 2010.

Non-banking financial companies (NBFCs), exclusively involved in financing of the infrastructure sector, were allowed toavail of ECBs from multilateral/regional financial institutions and Government-owned development financial institutionsfor on-lending to borrowers in the infrastructure sector under the approval route, subject inter alia to the condition that thedirect lending portfolio of these lenders vis-à-vis their total ECB lending to NBFCs, at any point of time, should not be lessthan 3:1 (January 2, 2009). On a review of the policy, it was decided to dispense with this condition with effect from July1, 2009 (June 30, 2009). Furthermore, it has been decided with immediate effect to allow NBFCs exclusively involved infinancing infrastructure projects to avail of ECB from the recognized lender category including international banks underthe approval route, subject to complying with the prudential standards prescribed by the Reserve Bank and the borrowingentities fully hedging their currency risk (December 9, 2009).

Payment for obtaining licence/permit for the 3G Spectrum was allowed as an eligible end-use for the purpose of ECB underthe automatic route (October 22, 2008). It has been decided to permit eligible borrowers in the telecommunication sectorwith immediate effect to avail of ECB for the purpose of payment for spectrum allocation (December 9, 2009).

It was decided to extend the permission granted to corporates engaged in the development of integrated township to availof ECBs under the approval route until December 31, 2009. This has been extended further to December 31, 2010 (December9, 2009).

Keeping in view the prevailing market conditions, the all-in-cost ceilings applicable to ECBs under the approval route weredispensed with until June 30, 2009 (January 2, 2009). On considering the continuing pressure on credit spreads in theinternational markets, it was decided in June 2009 to extend the relaxation in all-in-cost ceilings under the approval routeuntil December 31, 2009. However, in view of the improvement in credit market conditions and narrowing credit spreadsin the international markets, it has been decided to withdraw the existing relaxation with effect from January 1, 2010. Theall-in-cost ceilings under the approval route for ECBs, where loan agreements have been signed on or after January 1, 2010,will be 300 basis points and 500 basis points over six month Libor for an average maturity period of three years and up tofive years and more than five years, respectively (December 9, 2009).

Buy-back/pre-payment of foreign currency convertible bonds (FCCBs)

The procedure relating to premature buyback of FCCBs by Indian companies, both under the automatic and approvalroutes was liberalized on December 6, 2008, by which the Reserve Bank could consider proposals from Indian companiesfor buyback of FCCBs under the approval route subject to the buyback value of the FCCB being at a minimum discount of25 per cent on the book value and use of funds out of internal accruals of the company. Total amount of buyback under theapproval route is subject to a limit of US$ 50 million of the redemption value per company. The date for completing theentire procedure for buyback of FCCBs was extended from March 31, 2009 to December 31, 2009. Keeping in view theprevailing macroeconomic conditions and global developments, especially the improvement in the stock prices, it hasrecently been decided to discontinue the facility with effect from January 1, 2010 (December 9, 2009).


6.69 Short-term debt by residual maturity, whichcomprises principal repayments during a one-yearreference period under medium- and long-term debtliabilities, and short-term debt with original maturityof one year or less are important indicators of debtsustainability in volatile financial market conditions.Short-term external debt by original maturity stoodat US$ 42.4 billion in end-September, while totalshort-term debt by residual maturity was US$ 93.2billion, accounting for 38.4 per cent of total externaldebt outstanding in end-September 2009. NRIdeposits maturing within a period of one year at US$36.7 billion worked out to 39.4 per cent of total short-term debt by residual maturity. However, 69.3 percent of these deposits are denominated and payablein Indian rupees. The observed redemption patternof NRI deposits indicates that these are generallylocally withdrawn and are also renewed by NRIs.Between end-March and end-September 2009, therewas an improvement in the ratio of short-term debtby residual maturity to foreign exchange reservesfrom 37.0 per cent to 33.1 per cent.

6.70 Government debt stood at US$ 65.7 billionin end-September 2009 while non-Government debtamounted to US$ 177.1 billion. The share ofGovernment debt in total external debt declined from40.6 per cent in end-March 2004 to 24.9 per cent inend-March 2009, before rising to 27.1 per cent inend-September 2009. The external assistancecomponent of Government debt at US$ 55.1 billionin end-September 2009 was higher than its end-March 2009 level of US$ 51.8 billion. OtherGovernment external debt also recorded an increasefrom US$ 4.1 billion in end-March 2009 to US$ 10.6

billion in end-September 2009, attributable mainlyto additional SDR allocations of 3,082.51 millionunder general allocation on August 28, 2009 and214.57 million under special allocation on September9, 2009 by the IMF. The ratio of Government debt toGDP remained around 5.0 per cent in the last threeyears.

6.71 US dollar-denominated debt accounted for51.4 per cent of total external debt in end-September2009, followed by Indian rupee (16.6 per cent),Japanese yen (13.6 per cent), SDR (12.0 per cent),Euro (3.9 per cent) and pound sterling (2.1 per cent)denominated debt. The currency composition ofGovernment debt indicates predominance of SDR-denominated debt, which is attributable to borrowingfrom the International Development Association (IDA),that is the soft loan window of the World Bank underthe multilateral agencies and inclusion of SDRallocations by the IMF as an external debt liability ofthe Government. The share of the Japanese yen inGovernment debt is also higher on account ofborrowing from Japan, which is denominated inJapanese yen.

6.72 The debt sustainability indicator, that is ratioof foreign exchange reserves to total external debtshowed an improvement from 112.1 per cent in end-March 2009 to 115.4 per cent in end-June 2009 andfurther to 115.8 per cent in end-September 2009.The ratio of short-term external debt to foreignexchange reserves, which had increased from 14.8per cent in end-March 2008 to 17.2 per cent in end-March 2009, was also lower at 15.1 per cent in end-September 2009. The concessional debt portion ofexternal debt has declined steadily and worked out

Table 6.12 : Currency composition of India’s external debt and sovereign external debt(as per cent of total external debt)

Sl. Currency Total external debt Sovereign external debtNo. As at the end of

March March June Sept. March March June Sept.2008R 2009R 2009PR 2009QE 2008R 2009R 2009PR 2009QE

1. US Dollar 55.3 54.1 52.3 51.4 26.7 29.6 29.1 25.82. SDR 10.5 9.8 10.0 12.0 40.8 39.5 39.2 44.23. Indian Rupee 16.2 15.4 16.3 16.6 7.9 5.7 6.7 6.84. Japanese Yen 12.0 14.3 14.5 13.6 18.6 19.9 19.8 18.45. Euro 3.5 4.1 4.3 3.9 5.9 5.2 5.2 4.86. Pound Sterling 2.2 2.0 2.2 2.1 0.1 0.1 0 07. Others 0.3 0.3 0.4 0.4 0 0 0 0

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

R: Revised PR: Partially Revised. QE Quick Estimates


Table 6.13 : India’s key external debt indicators (per cent)Year External Ratio of Debt- Ratio of Ratio of Ratio of Ratio of

debt total service foreign conces- short-term short-(US$ external ratio@ exchange sional debt debt to term debt

billion) debt to reserves to to total foreign to totalGDP total ex- external exchnage debt

ternal debt debt reserves

1990-91 83.8 28.7 35.3 7.0 45.9 146.5 10.21995-96 93.7 27.0 26.2 23.1 44.7 23.2 5.42001-02 98.8 21.1 13.7 54.7 35.9 5.1 2.82003-04 R 112.7 18.0 16.1** 100.3 35.8 3.9 3.92004-05 R 134.0 18.1 5.9 ^ 105.6 30.7 12.5 13.22005-06 R 139.1 16.7 10.1# 109.0 28.4 12.9 14.12006-07 R 172.4 17.5 4.7 115.6 23.0 14.1 16.32007-08 R 224.4 18.1 4.8 138.0 19.7 14.8 20.42008-09PR 224.6 20.5 4.4 112.1 18.7 17.2 19.3End-June 2009 PR 229.8 - - 115.4 18.9 15.9 18.3End-Sept. 2008 PR 225.1 - - 127.2 18.4 17.7 22.5End-Sept. 2009 QE 242.8 - - 115.8 18.4 15.1 17.5

R: Revised; PR: Partially Revised; QE: Quick Estimates.- Not worked out for the broken period.@ Debt-service ratio is the proportion of gross debt service payments to External Current Receipts (net of official transfers).** Works out to 8.2 per cent, with the exclusion of pre-payment of US$ 3,797 million and redemption of Resurgent India Bonds

(RIBs) of US$ 5,549 million.^ Works out to 5.7 per cent with the exclusion of pre-payment of US$ 381 million.# Works out to 6.3 per cent, with the exclusion of IMDs repayments of US$ 7.1 billion and pre-payment of US$ 23.5 million.

Table 6.14 : International comparison of top 20 debtor developing countries 2007

Sl Countries External External Short-term Foreign ConcessionalNo. debt stock debt to GNI debt to exchange debt to total

(US $ million) (per cent) external debt reserves to external debt(per cent) external debt (per cent)

(per cent)

1 Argentina 1,27,758 49.7 29.8 36.1 1.32 Brazil 2,37,472 18.7 16.5 75.9 1.03 Chile 58,649 40.3 22.7 28.7 0.44 China 3,73,635 11.6 54.5 413.9 10.15 Colombia 44,976 22.5 11.9 46.6 2.16 Croatia 48,584 97.7 10.5 28.1 2.17 India 2,20,956 18.9 19.8 125.2 21.78 Indonesia 1,40,783 33.9 24.8 40.4 26.29 Kazakhstan 96,133 103.7 12.2 18.4 1.010 Malaysia 53,717 29.4 28.4 189.9 6.111 Mexico 1,78,108 17.7 5.1 49.0 0.612 Philippines 65,845 41.9 10.8 51.2 20.013 Poland 1,95,374 47.7 30.9 33.6 0.414 Romania 85,380 51.5 35.7 46.8 1.615 Russian Federation 3,70,172 29.4 21.4 129.1 0.416 South Africa 43,380 15.8 38.2 75.9 -17 Thailand 63,067 26.5 34.3 138.7 9.618 Turkey 2,51,477 38.8 16.6 30.4 2.119 Ukraine 73,600 52.9 31.1 44.1 2.220 Venezuela 43,148 18.7 27.1 78.2 0.5

All developing countries 34,66,045 24.5

Source : Global Development Finance 2009, World Bank.


to 18.4 per cent in end-September 2009 as against18.7 per cent in end-March 2009 (Table 6.13).

International Comparison level6.73 A cross-country comparison of external debtof 20 most indebted developing countries, based onthe data given in World Bank’s publication titledGlobal Development Finance, 2009 showed that Indiawas the fifth most indebted country in 2007 in termsof stock of external debt. The ratio of India’s externaldebt stock to gross national income (GNI) as of 2007at 18.9 per cent was the sixth lowest with Chinahaving the lowest ratio at 11.6 per cent. The elementof concessionality in India’s external debt portfoliowas the second highest after that of Indonesia.

6.74 In terms of the cover of external debt providedby foreign exchange reserves, India’s position wasthe fifth highest at 125.2 per cent after China,Malaysia, Thailand and the Russian Federation. Acomparison of the share of short-term debt in totalexternal debt across countries reveals that India’sposition was the eighth lowest with Mexico havingthe lowest ratio.

CHALLENGES

6.75 Indian economy has been one of the leastaffected by the global crisis. In fact, India is one ofthe growth engines, along with China, in facilitatingfaster turnaround of the global economy. Risks,however, remain. Firstly, despite recovery, advancedcountries continue to face risk of double-dip recessionwith high unemployment rate, growing fiscal deficitand high public debt - GDP ratios. Such risks canhave direct implications for the Indian economy, whichis increasingly integrated with the rest of the world.

6.76 Secondly, with interest rates at historic lowin most advanced economies, capital flows fromthese countries are finding their way into the fastgrowing Asian economies including India. The issuesthat arise are whether the inflows are in excess ofthe domestic absorptive capacity and whether theycould lead to overheating of the economy. The relatedissue is the need to balance the competingobjectives of price and exchange stability. This canalso be looked at as the “impossible trinity” dilemmaof policy choice between price stability, exchangerate stability and capital mobility.

International TradeCHAPTER

7

The years 2008 and 2009 were tumultuous ones for global trade. The simmeringsub-prime crisis in the US in 2007 which triggered the global financial crisis inSeptember 2008 spread its tentacles in full, leading to a full blown global recessionresulting in unprecedented fall in global trade. World trade volume (goods andservices) grew by only 2.8 per cent in 2008 compared to 7.3 per cent in 2007, withtrade growth tumbling down month after month from September 2008 onwards.While the fall seems to have been stalled with the recent recovery, world tradecontinues to be vulnerable given the nature of the recovery.

WORLD TRADE

7.2 The deepening world recession had profoundimpact on world trade. The US$16 trillion global tradeof 2008 collapsed, reaching US $ 5.8 trillion in thefirst half of 2009 compared to US$8.2 trillion in thecorresponding period of 2008. As a result, growth ofworld output and trade volume of goods and servicesfell to (-) 0.8 and (-) 12.3 per cent respectively in2009 according to the International Monetary Fund’s(IMF) World Economic Outlook (WEO) January 2010.The World Trade organization (WTO) in March 2009

forecast a 9 per cent decline in global trade for2009, the largest in over 60 years. The decline wasmore marked in the case of advanced economies(Table 7.1)

7.3 The World Bank’s Global Economic Prospects,2010, estimates world real GDP growth and worldtrade volume to fall by (-) 2.2 per cent and (-) 14.4per cent respectively in 2009. As per the World Bank,the dollar value of world trade plummeted 31 per centbetween August 2008 and its low point in March2009. After discounting for falling commodity prices

Table 7.1 : Trends in growth in trade volumes (per cent change) Projections

2008 2009 2010 2011

World Trade Volume (Goods and Services) 2.8 (-)12.3 5.8 6.3

Imports

Advanced Economies 0.5 (-)12.2 5.5 5.5

Emerging and Developing Economies 8.9 (-)13.5 6.5 7.7

Exports

Advanced Economies 1.8 (-)12.1 5.9 5.6

Emerging and Developing Economies 4.4 (-)11.7 5.4 7.8

Source: IMF:WEO, January 2010


and exchange rate fluctuations, global trade volumeswere down by 22 per cent by March 2009.

7.4 The crisis seems largely to have petered out inthe second half of 2009 and beginning of 2010 withglobal trade recovering from the troughs and theappearance of green shoots and the IMF evenprojecting a better-than-expected growth in worldtrade volume of 5.8 per cent and 6.3 per cent for2010 and 2011 respectively, which is also a reflectionof the higher-than-expected world output growthprojections of 3.9 per cent and 4.3 per cent in 2010and 2011 respectively. Though we are still not out ofthe woods, there is a greater degree of confidence,particularly in countries with strong fundamentalslike India and China which have weathered the crisiswith great dexterity and spearheaded the recovery.

7.5 Examination of the month-wise exports andimports for the world, India and some major tradingpartners of India from 2008 onwards [Figures 7.1 (Ato H)] indicates a recovery in trade with export growthbecoming positive in November 2009 over November2008 in the EU(11.4 per cent), Hong Kong (1.3percent), India (18.2 per cent), Japan (1.5 per cent) andSingapore (13.3 per cent) and remaining marginallynegative in the USA (-2.5 per cent) and China (-1.2per cent). Pick up in import growth rates was led byChina (26.7 per cent), followed by Hong Kong (6.5per cent), the EU (5.2 per cent) and Singapore (4.4per cent). Import growth also became less negativein the case of the US (-3.8 per cent), India (-2.6 percent) and Japan (- 9.9 per cent).

7.6 As observed in the previous chapter, while theglobal recession seems to be lifting, a note of cautionis needed as recovery of trade is still vulnerable andfragile given the fact that it is mainly Governmentsupport and policy driven and some policies like the“cash for clunkers” scheme in the US and similarschemes for the automobile sector in other countriescould have simply brought forward the demand.Besides, the turnaround in trade growth is largelydue to the lower base effect of the last year (2008)which was in fact a lost year on the trade front asthe progress in export sector of earlier years wasmercilessly frittered away by the onslaught of theglobal recession. This is evident if we see the actualexports and imports in the pre-recession monthsalong with those in the corresponding recession/post-recession months. It is a matter of concern thatexcept for India in the case of exports and India andChina in the case of imports, for the world and allother countries considered here, the actual monthlyexports/imports in 2007 were higher than the

corresponding monthly exports/imports in 2009 inalmost all the months. The concern is more in thecase of imports with monthly imports in 2007 beingrelatively higher than the corresponding monthlyimports for most of the trading partners of India in2009. The growth rates of exports/imports in 2009over 2007 given in Figures 7.1(A to H) also clearlyshows that while the freefall of global trade has beenstopped, real growth from pre-crisis levels is yet tohappen.

TRADE CREDIT DURING WORLDRECESSION

Impact of the crisis on trade credit7.7 The global economic crisis also impacted tradecredit. A number of banks, global buyers and firmssurveyed independently by the World Bank,International Monetary Fund (IMF) and BankersAssociation for Finance and Trade (BAFT), have feltthat lack of trade credit and other forms of finance,such as working capital and pre-export financing,has affected growth in world trade. In addition, thecosts of trade credit have substantially gone up andare higher than they were in the pre-crisis period,raising the challenge of affordability of credit forexporters. Higher funding costs and increased riskcontinue to put upward pressure on the price of tradecredit. In 2008, as the financial crisis intensified, thespreads on trade finance increased by a factor ofthree to five in major emerging markets, like China,Brazil, India, Indonesia, Mexico, and Turkey. Forexample, the spread (over the six-month LIBOR) forTurkey jumped to 200 basis points in November 2008from 70 basis points in the third quarter(Q3), whileBrazil’s spread almost trebled in 2008 (from 60 bpsto 175 bps); India’s spread increased from 50 bps to150 bps during the same year. Similarly, spreads forseveral Sub-Saharan countries jumped from 100basis points to 400 basis points. (Figure 7.2)

7.8 Small and Medium Enterprises (SMEs) andexporters in emerging markets appear to have facedthe greatest difficulties in accessing affordable credit.Increased uncertainty initially led exporters andimporters to switch from less secure forms of tradefinance to more formal arrangements. Exportersincreasingly asked their banks for export creditinsurance (ECI) or asked importers to provide Lettersof Credit (LCs). Importers were asked to pay forgoods before shipment and exporters sought moreliquidity to smooth their cash flow. Further, therealization of export proceeds was not taking place

147International Trade

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on the due date. This led firms to trim downinventories, and direct the funds so generated to meettheir working capital requirements.

7.9 While there is strong anecdotal evidence thatthe financial crisis might have reduced the availabilityof trade credit leading to decline in the volume oftrade and possibly deepening and prolonging therecession, data from the IMF indicates that the paceof decline in trade finance was just one-fourth that ofthe decline in trade volumes during the period October2008 to January 2009. The World Bank estimatesthat the shortage in trade finance in the market wouldhave accounted for 10-15 per cent of the decline intrade. A survey carried out by the IMF and BAFT inAugust-September 2009 shows that decreases inthe value of trade finance business acceleratedbetween October 2008 and June 2009. The regionsmost affected were the industrialized countries andLatin America.

Trade credit: Indian scenario7.10 As a result of difficult financing conditionsprevailing in the international credit markets andincreased risk aversion by the lending counterparties,gross inflows of short-term trade credit to Indiadeclined by 12.2 per cent to US$ 41.8 billion during2008-09. Export credit as a percentage of net bankingcredit also fell from 5.5 per cent as on March 28,2008 to 4.6 per cent as on March 27, 2009 and furtherto 4.1 per cent as on January 15, 2010 (Table 7.2).

7.11 On the other hand, short-term trade creditrepayments registered an increase of 37.9 per centduring 2008-09 to touch US$ 43.7 billion. Since thegap between the inflows and outflows of short-termtrade credit to India were limited to a net outflow of

US$ 1.9 billion during 2008-09, financing of short-term trade credit did not pose much of a problem.

7.12 This trend also continued in 2009-10. Duringthe first half of 2009-10, the gross inflow of short-term trade credit stood at US$ 21.7 billion, lower by9.2 per cent than that in the corresponding period in2008-09, while the outflows at US$ 22.3 billion werehigher by 17.5 per cent, thereby resulting in a netoutflow of US$ 0.6 billion (inclusive of suppliers’ creditup to 180 days) compared to a net inflow of US$ 4.9

Table 7.2 : Export Credit

Outstanding Export Variations Exportas on Credit (Per credit as (Rs. Crore) Cent) per cent of NBC

March 24, 2000 39,118 9.0 9.8March 23, 2001 43,321 10.7 9.3March 22, 2002 42,978 -0.8 8.0March 21, 2003 49,202 14.5 7.4March 19, 2004 57,687 17.2 7.6March 18, 2005 69,059 19.7 6.3March 31, 2006 86,207 24.8 5.7March 30, 2007 1,04,926 21.7 5.4March 28, 2008 1,29,983 23.9 5.5March 27, 2009 1,28,940 -0.8 4.6Jan. 15, 2010* 1,24,360 -3.6 4.1

Source: Reserve Bank of India (RBI).* Variation over the March 27, 2009 figureNote : 1. Data upto March 2004 relate to select banks

accounting for 90 percent of bank credit.2. March 18, 2005 onwards, data pertain to all

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billion during the corresponding period of the previousyear. Although the higher net outflows during thesecond half of 2008-09 and in the first half (H1) of2009-10 suggest some challenges in rolling overmaturing trade credits, the continuing trend in inflowsindicates no significant problem in servicing short-term debt. This is also indicative of the confidenceenjoyed by Indian importers in the internationalfinancial markets. The various policy initiatives takenby the Government and RBI have also helped easethe pressure on trade financing. This is furthercorroborated by the increase in share of short-termtrade credit (both inflows and outflows) in the overallgross capital flows with share in inflows increasingfrom 10.9 per cent in 2007-08 to 13.4 per cent in2008-09 and share in outflows increasing from 9.6per cent to 14.3 per cent, thereby indicating that theimpact of global financial crisis on trade credit wasless when compared to other forms of capital flowssuch as portfolio investment and externalcommercial borrowings (ECBs).

POLICY RESPONSE

Response of Multilateral Institutions andGovernments7.13 Governments and multilateral institutions haveresponded with a range of trade finance programmes,including a pledge by the G20 leaders at their April2009 London Summit to provide US$ 250 billion ofsupport for trade finance. The commitment of G-20leaders was reaffirmed in the Pittsburg Summit inSeptember 2009, calling for swift implementation ofthe package and a collective fight againstprotectionism as also stated in chapter 6. Multilateralagencies also responded quickly to counter the tradefinance aspect of the crisis (Box 7.1).

7.14 Governments across the world have also takenvarious policy initiatives. According to a World Banksurvey on “Trade and Trade Finance Developmentsin 14 Developing Countries Post September 2008”,these policies include various combinations of short-term solutions to provide immediate relief to firmsand banks and long-term adjustment strategies tobolster countries’ export competitiveness. Accordingto the survey, the main actions taken byGovernments can be grouped in two categories: (i)to increase banks’ liquidity to alleviate liquiditypressure including for trade finance; (ii) to enhancethe long-term competitiveness of the country’sexports by developing and expanding exportpromotion programmes.

7.15 In the wake of the crisis, most banks movedaway from funding open-account facilities to moretraditional forms of cash-backed or collateralizedletters of credit. Several countries entered intobilateral agreements to ease the strains on accessto foreign currencies, including trade credit. InDecember 2008, the US Federal Reserve enteredinto currency swap agreements with some of itscounterparts, including Brazil and Mexico. Eachpartner in the agreement received a swap line of US$30 billion. In addition, the United States and China –acting through their respective import-export banks– created a bilateral trade facility of US$ 20 billion.In March 2009, China entered into similar agreementswith its major trading partners (Argentina, Belarus,the Republic of Korea, Malaysia, Indonesia, and thePhilippines) by providing swap facilities in itscurrency.

7.16 Export Credit Agencies (ECAs) have alsogreatly helped Governments, particularly in thedeveloping countries, channel trade finance to firms.In addition, some Governments’ actions directlytargeted the reported shortage of trade finance tofirms. According to the World Bank, while someGovernments have tried to achieve this objective byestablishing rediscount and refinance facilities toincrease liquidity for trade loans and export credit,many have implemented direct measures throughthe established ECAs or Export Import (Exim) Banks.Being mostly under public sector, these entitiestypically serve as channels for the Government toissue trade credits, loans, and guarantees andinsurance to the private sector. In many emergingcountries, public ECAs and Exim Banks served as“providers of last resort” for trade finance as in Brazil,India, the Philippines, South Africa and Turkey. ECAsand Exim Banks were used by national governmentsto channel new lines of trade credit and loans. Forexample, the Brazilian government established newcredit lines via the National Bank for Economic andSocial Development (BNDES) to provide pre-exportand export finance.

7.17 In the absence of formal entities establishedby the Government, that offer trade financeinstruments, some Governments have decided toset them up or make existing ones legal and useother public bodies. For example, in Indonesia, theGovernment passed legislation in December 2008to transform an existing government agency into anofficial EximBank that would provide funding andinsurance for trade finance. In the Ukraine, theparliament passed a law that granted the


Ukreximbank the status of official export creditagency and supports plans to establish a Governmentexport insurance company, “Ukrainian ExportInsurance Company”.

Policy Response by India7.18 India has also taken many steps to ease theproblems related to trade finance due to the globaleconomic crisis (Box 7.2).

Prospects of Recovery7.19 According to the IMF and BAFT survey, theupward price pressures seem to be easing for sometrade financing instruments, with increasing evidencethat the collapse in trade is bottoming out, asdemand starts to recover and banks become morepositive about the economic outlook. For example,price increases have started to ease for export creditinsurance and LCs. The survey notes that the shift

towards bank-intermediated trade finance appearsto be continuing. It is estimated that open accounttransactions (for which exporters provide creditdirectly to importers) as a share in the total,continued to remain subdued, at less than 40 percent in the second quarter of 2009, as compared to45 per cent that prevailed at the end of 2007. Thishas been largely offset by the increasing reliance oftraders on bank finance –mainly LCs – as well as bya more modest shift toward cash-in-advancetransactions (for which importers pay for goodsbefore shipment).

INDIA’S MERCHANDISE TRADE

7.20 India’s merchandise exports have shownremarkable resilience in recent years with a growthrate of 20 per cent plus in dollar terms since 2002-

Box 7.1 : Measures by International Institutions related to Trade Finance The World Bank Group’s (WBG) support to bolster trade finance includes the following:

The Global Trade Finance Program (GTFP) has been doubled to US $ 3 billion over a three-year period to provideadditional guarantees to mitigate risks in trade transactions with local banks in emerging markets.

The Global Trade Liquidity Program (GTLP) is expected to contribute up to US $ 50 billion over a three-year periodto channel trade finance liquidity to developing countries.

The World Bank has also launched a US $ 40 million Trade Facilitation Facility (TFF) to support developing countrypriorities to improve trade facilitation systems, including infrastructure, institutions, services, procedures andregulatory systems.

World Bank Trade-Related Lending has more than doubled from US $ 1.4 billion in FY 2008 to US $ 3.4 billion in FY2009, driven by projects in the Europe, Central Asia and Africa regions, in support of trade facilitation, regionalintegration and export competitiveness. Support was also provided by the World Bank Group to select developingcountries like India, Indonesia, Kenya, Turkey, Tunisia and Ukraine. In the Indian case, the World Bank has establisheda US $ 120 million line of credit for SMEs and a small guarantee fund. This project was scheduled to close in June2009, but as a response to the crisis, the Bank recently negotiated additional financing of US$400 million to extendthe original project by four years.

The Asian Development Bank(ADB) had allocated a total of US $ 8.94 billion in crisis support for 43 projects as onOctober 31, 2009. The ADB’s crisis-related lending is expected to increase by more than US $ 10 billion in 2009-10comprising US $ 1 billion for trade finance.

The Inter America Development Bank (IDB) enhanced its Trade Finance Facilitation Program (TFFP) from US $ 400million to a maximum of US $ 1 billion in January, 2009. The IDB also added loans to its offering of guarantees and nowsupports non-dollar- denominated trade finance transactions.

The European Bank for Reconstruction and Development (EBRD) announced in January 2009 that it would raise theceiling on its Trade Finance Program (TFP) from •800 million to •1.5 billion to increase trade with and within EasternEurope, Central Asia, Russia and the Ukraine.

The African Development Bank (AfDB) established a multi-phase US $ 1 billion Trade Finance Initiative (TFI) inMarch 2009. The AfDB launched a new trade finance line of credit that will allow African commercial banks anddevelopment finance institutions to use AfDB resources to support trade finance operations. The Bank also launched a“multi-purpose” line of credit that enables the borrower to use the proceeds for trade finance as well as long-term projectand corporate finance operations.

The International Finance Corporation (IFC) doubled its Global Trade Finance Program (GTFP) ceiling to US $ 3billion in November 2008. The GTFP offers confirming banks partial or full guarantees covering payment risk on banksin the emerging markets for trade-related transactions. The IFC Global Trade Liquidity Program (GTLP) is the newestprogramme to be instituted in May 2009 in response to the crisis. The programme is designed to support up to US $ 50billion in international trade in the next three years.


03. The global recession jolted this continued upwardgrowth with initial estimates showing a growth rateof only 3.6 percent for 2008-09 as stated in last year’sEconomic Survey. However, according to revisedfigures, export growth in 2008-09 stands at arespectable 13.6 per cent, indicating that India hadweathered the crisis better than other countries. Thecompound annual growth rate (CAGR) for India’smerchandise exports for the five-year period 2004-05 to 2008-09 increased to 23.8 per cent from the14.0 per cent of the preceding five-year period. India’sranking in the leading exporters in merchandise tradewhich slipped marginally from 26th in 2007 to 27th in2008 is likely to improve in 2009 due to its reasonablygood export growth when world export growth fell.However, this overall reasonably good picture for thewhole year hides the travails through which the exportsector went in the 13 crisis-ridden months. This canbe seen by comparing India’s export performance inthe pre-recession period with that in the recessionperiod (Table 7.3).

Box 7.2 : India’s policy response related totrade financeSelect measures taken by the Government of India sincethe outbreak of crisis in September 2008 include thefollowing:

Interest rate ceiling of 250 basis points p.a. below thebenchmark prime lending rate (BPLR) for pre-shipmentrupee export credit up to 270 days and post-shipmentrupee export credit up to 180 days has been extendedto the end of April 30, 2010.

The ceiling rate on export credit in foreign currencyincreased to LIBOR plus 350 basis points.

The all-in-cost ceiling for raising trade credit wasrevised to 200 basis points over six months of LIBORfrom the then (October 2008) prevailing ceiling of 75basis points over six months of LIBOR.

The prescribed interest rate as applicable to post-shipment rupee export credit was extended to overduebills up to 180 days.

Limit for Export Credit Refinance facility wasincreased from 15 per cent to 50 per cent of eligibleoutstanding export credit to provide additionalliquidity support to banks (returned to the pre-crisislevel of 15 per cent in the Second Quarter Review ofMonetary Policy for the Year 2009-10).

A refinance facility of Rs 50 billion was established forthe Exim Bank of India on 15, December 2008 whichhas since been extended to March 2010.

Interest subvention has been extended up to March2010 for pre- and post-shipment export credit (inrupees) for certain employment-oriented export sectorssuch as textiles (including readymade garments andhandloom), handicrafts, carpets, leather, gems andjewellery, marine products and SMEs.

The period of entitlement has been extended by 90days for the first slab of pre-shipment and post-shipment rupee export credit with effect fromNovember 15, 2008 and November 28, 2008respectively.

Foreign exchange (US dollars) has been sold throughagent banks to augment supply in the domestic foreignexchange market or intervene directly to meet anydemand-supply gaps.

Special market operations have been undertaken tomeet the foreign exchange requirements of public-sectoroil marketing companies against oil bonds.

A foreign exchange swap facility with tenure up tothree months has been given to Indian public andprivate sector banks having overseas operations inorder to provide them flexibility in managing theirshort-term funding requirements at their overseasoffices (discontinued subsequent to the Second QuarterReview of Monetary Policy for the Year 2009-10).

7.21 As a result of the full-blown global recessioncoupled with the deepening of the global financialcrisis in 2008, India’s export growth rate startedplummeting from the high 40 per cent to 63 per centrange witnessed during April to August 2008 to 26.1per cent in September, turning negative from October2008 to October 2009 except for December 2008with a low 4.2 percent as per revised estimates. Thistype of situation was not witnessed in the last twentyfour years. Even in 2001-02 and 1998-99 when exportgrowths were negative at (-) 1.6 per cent, (-) 5.1 percent respectively, such a long period of continuousnegative monthly export growths was not witnessed.Only in 1985-86 when export growth was negative at(-)9.9 percent there was a similar situation withcontinuous negative growth for twelve months. TheGovernment had set an export target of US$ 200billion for 2008-09 which was revised to US$ 175billion. With merchandise exports reaching US$185.3 billion in 2008-09, the target was surpassed

Table 7.3 : Quarterly export and importgrowth

(Percentage)

2008-09 2009-10(Pre- (Recession)

Recession)

Q1 Q2 Q3 Q4 Q1 Q2 Q3

Exports 57.0 39.5 -4.0 -20.3 -38.6 -21.0 6.0

Imports 38.7 73.8 7.4 -24.0 -35.0 -33.6 1.2


by 5.9 per cent which is no mean achievement intrying times like these.

7.22 Given the uncertain global scenario, theGovernment did not fix an export target for 2009-10,instead the Foreign Trade Policy (FTP) 2009-14 setthe objective of an annual export growth of 15 percent with an annual export target of US$200 billionby March 2011. The beginning of 2009-10 sawacceleration in the fall of export growth with furtherdeepening of the global recession. The upwardlyrevised export figures for the first half of 2008-09 alsopartly contributed to this. While export growth ratewas (-) 22.3 per cent in April-November 2009-10, inthe month of November 2009, it became positive at18.2 per cent after a nearly continuous 12-monthspell of negative growth. However, this is due to thelow base figures in November 2008 (at $11.2 billioncompared to $14.1 billion in October 2008 and $13.4billion in December 2008). The month-over-monthexport growth rate in November 2009 over October2009 was marginally positive at 0.04 per cent. In

December 2009 also export growth rate overDecember 2008 was positive at 9.3 per cent andover the previous month it has been better at 10.7per cent.

7.23 While export growth in dollar termsaccelerated in 2007-08 and decelerated in 2008-09,in rupee terms it exhibited an opposite movement(Table 7.4 and Figures 7.3 and 7.4) reflecting thedirect effect of appreciation of the rupee by 12.4 percent in 2007-08 and its depreciation by 12.5 per centin 2008-09. In 2009-10 (April-December), as a resultof global recession, export growth was negative bothin dollar and rupee terms, with the latter being lessnegative due to the depreciation of the rupee by 6.7per cent.

7.24 The deceleration in export growth in rupeeterms in 2007-08 though due to slowing down ofgrowth in both volume and unit values, was more sobecause of the latter. This was mainly due to theexport unit values registering zero growth inmanufactured goods classified chiefly by materials

Expo

rt g

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Export growth and exchange rate movementFigure 7.3

2007 2009

Exportgrowth inUS$ terms

Exportgrowth inRs. terms

Exchangerate

changes(month over

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Import growth and exchange rate movementFigure 7.4

2007 2009

Importgrowth inUS$ terms

Importgrowth inRs. terms

Exchangerate

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and miscellaneous manufactured articles and lowgrowth in another major item, i.e. chemicals andrelated products, despite a very high growth in non-fuel crude materials and high growth in mineral fuels,lubricants and related materials.7.25 In 2008-09, contrary to general expectations,the highest export growth in the whole decade inrupee terms was registered which apart from thedepreciation of the rupee, was due both to volumeand unit value growth, but more so the latter whichhas registered the highest growth of 16.9 per cent inthe decade. This in turn was due to the high growthin export unit value indices of miscellaneousmanufactured articles, manufactured goodsclassified chiefly by materials, besides mineral fuels,lubricants and related materials and non-fuel crudematerials. The major data revisions for 2008-09,particularly in the new SEZs for gems and jewelleryitems where a lot of trading took place leading tohigh trade volumes could also have contributed tothis phenomenon. In fact the quantum index ofexports of pearls and precious stones shows a highgrowth rate of 19.7 per cent in 2008-09 over andabove the 26.8 per cent growth in 2007-08. This ishigher than the growth rate for manufactured goods.7.26 The region-wise quantum indices show highgrowth in export volumes to Organization ofPetroleum Exporting Countries (OPEC), the Asia-Pacific Economic Cooperation (APEC) and theEuropean Union (EU) in 2008-09. The bilateralquantum indices available for some trading partnersshow high growth in export volumes to the UnitedArab Emirates, Germany and Russia. In the case ofChina, the quantum index is very high though it isslightly lower than in 2007-08.

7.27 Import growth in rupee and dollar terms alsoshows the same see-saw movement in 2007-08 and2008-09 due to exchange rate movements. Thedeceleration of imports in rupee terms in 2007-08 ismainly due to a major slowing down in growth of unitvalue indices. This is due to the negative growth inunit value of machinery and transport equipment andmanufactured goods classified chiefly by materialsand low growth in chemicals and related products.In 2008-09 the acceleration in imports in rupee termsis due to the high growth in both volume and unitvalue indices. The sectors which contributed to thisare manufactured goods classified chiefly bymaterials, chemicals and related products, mineralfuels and non-fuel crude materials, in the case ofunit value indices; and all categories of manufacturedgoods including machinery and transport equipmentsand chemicals and related products, in the case ofthe quantum index indicating high import of machineryand inputs needed for industrial recovery in 2008-09.

7.28 The net terms of trade, which measures theunit value index of exports as a proportion of unitvalue index of imports, grew by more or less thesame percentage in both 2007-08 and 2008-09 dueto the relatively higher growth in export unit valueindices, the only difference being that the growth inboth the export and import unit value indices in 2008-09 was very high, while in 2007-08, it was very low.Income terms of trade, reflecting the capacity toimport, grew at more than 10 per cent in both 2007-08 and 2008-09, due to the combined effect ofimprovement in net barter terms of trade andmoderately high growth in export volume indices.

Table 7.4 : Trade Performance : Volume and Unit Values(Annual per cent change)

Exports Imports Terms of TradeValue Value

Rupee US$ Volume Unit Rupee US$ Volume Unit Net Incometerms terms Value terms terms Value

2001-02 2.7 -1.6 0.8 1.0 6.2 1.7 4.0 2.8 -2.1 -1.32002-03 22.1 20.3 19.0 2.9 21.2 19.4 5.8 14.3 -9.8 7.42003-04 15.0 21.1 7.3 7.5 20.8 27.3 17.4 3.1 3.6 11.22004-05 27.9 30.8 11.2 14.9 39.5 42.7 17.2 18.9 -3.5 7.32005-06 21.6 23.4 15.1 6.1 31.8 33.8 16.0 14.0 -6.0 8.22006-07 25.3 22.6 10.2 13.7 27.3 24.5 9.8 15.1 -1.3 8.82007-08 14.7 29.0 7.9 5.1 20.4 35.5 14.1 1.9 2.6 10.72008-09 28.2 13.6 9.0 16.9 35.8 20.7 20.2 13.8 2.5 11.72009-10a -13.7 -20.3 —- —- -17.6 -23.6 —- —- —- —-

Source : Computed from data of Directorate General of Commercial Intelligence and Statistics(DGCI&S), Kolkataa April-December 2009.Volume and unit value index of exports and imports are with new base (1999-2000=100)


7.29 India’s share in world merchandise exports,after remaining unchanged at 1.1 per cent between2007 and 2008, reached 1.2 per cent in 2009(January-June) mainly due to the relatively greaterfall in world export growth than India (Table 7.5). Theincrease in China’s share of world exports between2000 and 2008 at 5.0 percentage points is around39 per cent of the total increase in the share ofemerging and developing countries over this period.However, China’s export growth rate which was above25 per cent in this decade till 2007 moderated to17.3 per cent in 2008 and declined to (-) 21.7 percent in the first half of 2009, as a result of globalrecession. Although India’s export growth was alsonegative at (-)18.4 per cent in the first half of 2009 itwas lower than the negative growth of the other majoremerging and developing countries and other selectcountries except Hong Kong. However, in absoluteterms, India is way behind China with its exportsconstituting only 12.4 per cent of China’s in 2008.While India’s exports were higher than those of Chinatill 1954, they started lagging thereafter. Ironicallythe gap started widening since the 1990s, the periodof India’s reforms. In 1990, the shares in worldexports of China and India were 1.8 per cent and 0.5per cent respectively and in 2008, their respectiveshares stood at 8.9 percent and 1.1 percent. Thisgrowing gap between India and China calls for greaterintrospection on the part of India.

7.30 India’s merchandise imports were alsoaffected by the global recession though with a slight

lag and grew by 20.7 per cent to US$ 303 billion in2008-09. This was due to the moderate growth of23.5 per cent in import of non-petroleum, oil andlubricants (non-POL) products and 14.7 per cent inPOL products. POL import growth was low mainlydue to both low volume growth by 6.2 per cent andlow growth of import price of the Indian crude oilimport basket by 5.5 per cent (Figure 7.5).

7.31 International oil prices recorded unprecedentedrise during 2008 and remained considerably volatileduring the entire ensuing period. The price of Indianbasket of crude oil which moved in tune withinternational oil prices was also volatile, averagingat 83.57 per barrel during 2008-09 after reaching anunprecedented US $ 142 per barrel on July 3, 2008before declining sharply following the globalrecession. The monthly movements in oil pricesduring 2007-08 to 2009-10 (April-December) clearlyreflect this volatility (Figure 7.6)

7.32 Non-POL non-bullion imports grew by 23.6 in2008-09 per cent reflecting relatively low demand forimports for industrial activity, partly due to lowindustrial growth and partly due to the use ofinventories, and also for imports used as inputs forexports due to fall in global demand following theworld economic recession.

7.33 During 2009-10 (April-December) importgrowth was negative at (-)23.6 per cent accompaniedby a decline in both POL and non-POL imports at(-) 29.8 per cent and (-)20.7 per cent respectively.

Table 7.5 : Export growth and share in world exports : India and other select countries

Value Growth rate % Share in world exports (%) change in (US$ CAGR Annual shares

billion) 2008 2000-06 2007 2008 2009 2000 2007 2008 2009 2008/

(Jan- (Jan- 2000Jun) Jun)

China 1,429 25.4 25.6 17.3 -21.7 3.9 8.8 8.9 9.1 5.0Hong Kong 363 7.8 8.7 5.3 -16.7 3.2 2.5 2.3 2.5 -0.9Malaysia 210 8.5 9.6 19.1 -31.2 1.5 1.3 1.3 1.2 -0.2Indonesia 148 7.9 14.7 24.4 -28.3 1.0 0.9 0.9 0.9 -0.1Thailand 173 11.3 17.0 12.9 -23.4 1.1 1.1 1.1 1.2 0.0Singapore 338 12.0 10.1 13.0 -31.7 2.2 2.2 2.1 2.1 -0.1India 177 19.1 21.4 20.4 -18.4 0.7 1.1 1.1 1.2 0.4Brazil 198 16.5 16.6 23.2 -22.8 0.9 1.2 1.2 1.2 0.4Mexico 292 7.1 8.6 7.3 -30.3 2.6 2.0 1.8 1.8 -0.8Russia 472 19.3 16.6 33.1 -46.8 1.7 2.6 2.9 2.2 1.3Korea 422 11.2 14.1 13.6 -22.7 2.7 2.7 2.6 2.9 -0.1Emerging &Develop. Eco. 6,218 17.3 15.2 25.7 -27.6 25.9 35.9 38.9 38.4 12.9World 16,001 11.2 14.1 16.2 -29.5 100.0 100.0 100.0 100.0 —

Source : Computed from International Financial Statistics, IMF, November 2009.


Gold and silver imports registered negative growthof (-) 7.3 per cent. The continuous rise in prices ofgold also dampened demand. Non-POL non-bullionimports declined by 22.4 per cent due to slowdownin industrial activity and exports. Import growth ispositive in December 2009 at 27.2 per cent partlydue to the base effect, partly due to the 42.8 percent positive growth of POL products with the pickup in oil prices and industrial demand, and partlydue to growth of non-POL items at 22.4 per centincluding a high growth of gold and silver imports.

7.34 Trade deficit fell by 28.2 per cent to US$ 76.2billion (as per customs data) in 2009-10 (April–December) from US$ 106 billion in the correspondingperiod of the previous year. Net POL import growth

which has been positive since 2002-03 stood at 25.7per cent in 2008-09 compared to 32.4 per cent in2007-08. However, during 2009-10 (April-September),it fell by 40 per cent with the softening of internationaloil prices compared to the corresponding previousperiod (Table 7.6).

Trade Composition

Export composition

7.35 There were substantial changes in thecomposition of exports in 2008-09 and 2009-10(April-September) with the fall in share of petroleum, crudeand products and primary products resulting incorresponding rise in share of manufactured goods.

Valu

e (R

s.’0

00 c

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) and

qua

ntity

(MM

T)Figure 7.5

2006-07

POLimports(Rs ‘000crore )

POLimports(quantity

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(US$/bbl)

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Figure 7.6

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The share of petroleum, crude and products fell from17.8 per cent in 2007-08 to 14.9 per cent in 2008-09and 14.2 per cent in the first half of 2009-10, whilethe share of primary products fell from 15.5 per centin 2007-08 to 13.3 per cent in 2008-09 and further to12.7 per cent in the first half of 2009-10. The shareof manufactured exports increased by 2.3 percentagepoints to 66.4 per cent in 2008-09 and further to69.2 per cent in the first half of 2009-10 (Table 7.7).

7.36 India’s moderate growth of 13.6 per cent in2008-09 which was due to the high growth in thefirst half of the year prior to the setting in of globalrecession, was only due to manufactured exportsas both primary products and petroleum, crude andproducts registered negative growths of (-)2.4 percent and (-)4.6 per cent respectively. Amongmanufactured products, the major drivers were gemsand jewellery, engineering goods and chemicals andrelated products with export growths of 42.1 per cent,18.7 per cent and 7.2 per cent respectively.

7.37 The first half of 2009-10 when the globalrecession was in full swing, also saw an accentuationin the fall of India’s export growth resulting in negativegrowth of (-) 29.7 per cent compared to the positive48.1 per cent in the corresponding period of theprevious year. All the three sectors were badlyaffected during this period with petroleum, crude andproducts being the worst affected at (-)44 per centexport growth due to the low crude oil prices in thefirst half of 2009-10, which started declining from thehigh reached in the first half of 2008-09. Primaryproduct exports also registered a decline of 32.4 percent with fall in growth of both ores and mineralsand agriculture and allied products. Manufacturedgoods registered negative export growth of (-)24.9per cent, with the worst affected sectors being

engineering goods at (-)34.6 per cent, followed byhandicrafts including carpets at (-) 33.7 per cent andleather and leather manufactures at (-) 24.2 per cent.

7.38 Examination of composition cum direction ofexports in the Economic Survey 2007-08 had clearlyshown the possible effect of the US slowdown onIndia’s exports and the Economic Survey 2008-09had shown the worsening effect of the US and globalrecession on India’s exports. A comparison of thecommodity-wise growth of major exports to theUnited States, the European Union and ‘Others’ in2008-09 and 2009-10 (April-September) shows thatthe fall in the shares of petroleum crude and productsand primary products for the period was mainly inthe ‘Others’ category. The consequent rise in shareof manufactured goods during the above period wasalso in the case of ‘Others’. Though the share ofmanufactures continues to be more important in thecase of India’s exports to the US market, there is afall in the share in the first half of 2009-10 after amarginal rise in 2008-09. Exports of manufacturedgoods to the EU followed a similar pattern(Table 7.7).

7.39 The export growth performance of differentcategories of exports in 2008-09 shows that whileprimary products and petroleum products buckledunder the pressure of world recession, despite a goodgrowth in the first half of 2008-09, manufacturedgoods exports particularly to the EU and ‘Others’were more resilient, though there was a moderationin growth. However, India’s exports of manufacturesto the US market grew by only 2.2 percent. Thiswas due to the accentuation of the negative growthin textiles exports and the growth in gems & jewelleryexports to the US turning negative. Textiles exportsgrowth to the EU and ‘Others’, though low was

Table 7.6 : Growth in POL trade and non-POL imports (US$ terms)

Total POL POL Net POL Non- POL Gold & Non-POL, non- imports imports exports imports imports silver gold & silver

imports imports

2001-02 1.7 -10.5 9.8 -13.4 7.2 -1.2 8.52002-03 19.4 26.0 21.6 26.8 17.0 -6.4 20.32003-04 27.3 16.6 38.5 12.9 31.5 59.9 28.52004-05 42.7 45.1 95.9 34.4 41.8 62.6 39.02005-06 33.8 47.3 69.8 40.4 28.8 1.5 33.12006-07 24.5 30.0 59.3 19.1 22.2 29.4 21.42007-08 35.5 39.4 53.6 32.4 33.8 22.0 35.32008-09 20.7 14.7 -4.6 25.7 23.5 22.3 23.62009-10 (Apr-Sept) -32.9 -41.0 -44.0 -39.7 -28.6 -24.9 -29.2

Source : DGCI&S and own calculations.


Table 7.7 : Composition of exports by major markets Percentage share CAGR Growth ratea

2000-01 2007-08 2008-09 2008-09 2009-10 2000-01 2007-08 2008-09 2008-09 2009-10(Apr.- (Apr.- (Apr.- (Apr.- (Apr.- to (Apr.- (Apr.- (Apr.- (Apr.-Mar.) Mar.) Mar.) Sept.) Sept.) 2006-07 Mar.) Mar.) Sept.) Sept.)

I Primary ProductsWorld 16.0 15.5 13.3 13.2 12.7 16.9 38.2 -2.4 44.5 -32.4USA 9.4 7.2 7.4 7.5 7.0 8.3 5.5 4.5 18.0 -30.7EU 13.1 9.4 8.3 8.5 9.0 11.5 20.0 -0.1 20.0 -26.3Others 19.8 19.1 16.2 15.5 14.8 19.5 44.7 -3.3 51.5 -33.2

(a) Agri & Allied ProductsWorld 14.0 9.9 9.1 9.1 9.0 10.4 43.0 4.4 53.7 -30.9USA 9.0 5.5 6.2 6.2 5.8 3.9 7.6 15.2 30.9 -29.9EU 11.9 7.4 6.9 7.0 7.3 8.7 22.8 4.4 30.8 -26.8Others 16.8 11.6 10.5 10.2 10.0 12.0 52.6 3.4 62.1 -31.8

(b) Ores and MineralsWorld 2.0 5.5 4.2 4.1 3.7 40.4 30.5 -14.6 27.2 -35.6USA 0.4 1.7 1.2 1.3 1.1 45.6 -0.6 -29.7 -19.6 -34.9EU 1.3 2.0 1.4 1.5 1.6 28.8 10.4 -17.1 -13.6 -23.7Others 3.0 7.5 5.7 5.3 4.8 42.1 34.1 -13.6 34.4 -35.7

II Manufactured GoodsWorld 78.8 64.1 66.4 64.8 69.2 16.1 21.8 17.7 45.4 -24.9USA 90.6 82.1 82.9 82.4 78.9 10.9 8.2 2.2 22.2 -28.6EU 86.8 71.9 72.6 73.2 68.8 13.9 22.9 14.1 35.4 -34.5Others 70.9 58.3 63.0 59.7 67.7 19.2 25.6 23.3 56.0 -20.7

(a) Textiles incl. RMGWorld 23.6 11.2 10.2 9.2 11.1 7.5 12.0 4.4 13.0 -14.7USA 27.2 19.8 18.6 17.1 18.6 8.5 -1.0 -4.8 0.2 -18.6EU 29.2 19.2 18.4 16.3 18.3 11.3 12.4 7.9 12.4 -21.7Others 19.8 6.9 6.5 5.8 7.7 4.1 20.3 6.2 20.5 -7.3

(b) Gems & JewelleryWorld 16.6 12.1 15.1 15.9 17.8 13.7 23.2 42.1 82.4 -21.7USA 29.3 24.0 21.9 24.2 24.7 9.7 4.6 -7.7 16.8 -23.6EU 11.5 7.5 8.3 9.8 7.1 8.7 28.5 24.8 72.6 -49.6others 13.9 11.2 16.4 16.5 19.7 17.9 31.6 66.2 111.8 -16.4

( c) Engineering GoodsWorld 15.7 20.7 21.6 21.3 19.8 24.9 27.2 18.7 48.8 -34.6USA 13.4 21.0 24.1 24.5 16.5 20.3 14.7 16.1 50.4 -49.7EU 14.0 23.1 25.7 27.6 22.8 26.3 31.8 25.7 56.1 -42.5Others 17.2 19.9 20.3 19.0 19.5 25.6 28.4 16.6 45.5 -28.2

(d) Chemical & Related ProductsWorld 10.4 13.0 12.3 11.5 13.1 24.6 22.2 7.2 29.0 -20.3USA 5.7 13.4 15.0 13.4 15.9 26.8 26.8 12.8 35.7 -11.2EU 9.7 13.8 13.2 12.4 12.8 23.8 28.1 7.4 24.4 -27.8Others 12.5 12.6 11.8 11.0 12.7 24.5 19.3 6.0 29.3 -19.6

(e) Leather & Leather MnfrsWorld 4.4 2.1 1.9 1.9 2.0 7.5 16.1 1.5 17.6 -24.2USA 3.7 1.5 1.7 1.6 1.6 -1.5 -1.2 16.1 20.1 -27.4EU 11.4 6.6 5.9 5.9 6.7 7.8 20.2 1.0 17.6 -21.8Others 1.6 0.8 0.7 0.7 0.7 12.5 13.0 -2.1 16.6 -29.0

(f) Handicrafts including Carpet HandmadeWorld 2.8 0.9 0.6 0.6 0.5 1.5 7.2 -25.8 -12.2 -33.7USA 6.0 2.4 1.6 1.7 1.5 -1.2 -4.7 -30.6 -23.8 -35.0EU 4.4 1.5 1.1 1.1 1.1 3.4 -6.8 -18.0 -3.8 -33.2Others 0.8 0.4 0.2 0.2 0.2 3.4 65.8 -30.2 -6.9 -32.9

III Petroleum, Crude & ProductsWorld 4.3 17.8 14.9 17.8 14.2 46.3 53.6 -4.6 49.9 -44.0USA 0.0 3.2 0.7 1.3 1.8 230.3 136.0 -77.6 -64.5 1.4EU 0.0 11.5 10.7 10.3 12.8 883.9 99.3 5.4 65.8 -13.3Others 7.9 22.7 19.0 22.6 16.6 43.2 46.7 -4.2 52.4 -48.5Total ExportsWorld 100.0 100.0 100.0 100.0 100.0 19.0 29.0 13.6 48.1 -29.7USA 100.0 100.0 100.0 100.0 100.0 12.5 9.8 1.3 18.6 -25.4EU 100.0 100.0 100.0 100.0 100.0 16.6 28.7 13.0 38.1 -30.3Others 100.0 100.0 100.0 100.0 100.0 21.9 33.5 14.1 57.3 -30.0

Source: DGCI&S and own calculations.Note : a Growth rate in US dollar terms.


positive, while growth of gems & jewellery exportsto ‘Others’ was very robust at 66.2 per cent and wasat 24.8 per cent to the EU market. In the case ofchemicals and related products and leather andleather manufactures, India’s export growth to theUS was better than to other markets.

7.40 In the first half of 2009-10, India’s exportgrowth of all items to almost all three destinationswas negative with global recession in full swing.Among manufactured goods, textiles export growthwas comparatively less negative mainly to ‘Others’,whose share also rose. India’s gems & jewelleryexports and chemicals & related products exportswere more affected in the EU market, while the worstaffected sector was engineering goods, especiallyin the US and EU markets with negative exportgrowths of (-)49.7 per cent and (–)42.5 per cent,respectively. The performance of handicrafts(including carpets) exports which were badly affectedeven in 2008-09, worsened in all the three marketswith a negative growth above 30 per cent in all ofthem.

Import composition

7.41 The composition of imports also underwentchanges. Reflecting growing domestic concerns likeinflation, the share of food and allied products importswhich fell from 2.3 per cent in 2007-08 to 2.1 percent in 2008-09 increased to 3.5 per cent in the firsthalf of 2009-10 with the increase in imports of edibleoils and pulses (Table 7.8). The share of fuel importsfell from 34.2 per cent in 2007-08 to 33.4 per cent in2008-09 and 33.2 per cent in the first half of 2009-10. Among fuel items, the share of POL, the majoritem, fell to 30.1 per cent in the first half of 2009-10from 34.2 per cent in the corresponding period of2008-09 reflecting the relatively lower oil prices. Theshare of fertilizers increased suddenly from 2 percent in 2007-08 to 4.3 per cent in 2008-09 with growthin imports of nearly 250 per cent, but fell to 2.5 percent in the first half of 2009-10. The most notablechange is the fall in share of capital goods importsfrom 18.7 per cent to 15.5 per cent in 2008-09 andto 14.3 per cent in the first half of 2009-10. Thecommodity group ‘Others’ saw increase in share from38.9 per cent in 2007-08 to 40.0 per cent in 2008-09

Table 7.8 : Commodity composition of imports Percentage share CAGR Growth rate (per cent)a

Commodity Group 2000-01 2008-09 2008-09 2009-10 2000-01 2007-08 2008-09 2008-09 2009-10(Apr.- (Apr.- (Apr.- (Apr.- to (Apr.- (Apr.- (Apr.- (Apr.-Mar.) Mar.) Sept.) Sept.) 2006-07 Mar.) Mar.) Sept.) Sept.)

I. Food and Allied Products,of which 3.3 2.1 1.5 3.5 21.6 8.6 9.1 9.7 52.9

1 Cereals 0.0 0.0 0.0 0.0 112.4 -46.8 -93.3 32.6 -6.72 Pulses 0.2 0.4 0.3 0.6 41.1 55.2 -2.4 -10.3 40.03 Edible Oils 2.6 1.1 0.8 2.0 8.3 21.4 34.4 4.7 67.6

II. Fuel, of which 33.5 33.4 37.3 33.2 24.3 39.4 17.7 84.1 -40.34 POL 31.3 30.1 34.2 30.1 24.1 39.4 14.7 82.8 -41.0

III. Fertilizers 1.3 4.3 4.1 2.5 28.9 66.2 156.8 249.4 -59.4

IV. Capital Goods, of which 10.5 15.5 13.7 14.3 33.8 62.7 -3.9 71.7 -30.25 Machinery except Electrical

& Machine Tools 5.9 7.8 7.3 8.2 31.8 43.9 7.7 46.6 -24.26 Electrical Machinery 1.0 1.2 1.2 1.2 26.4 46.5 27.7 82.3 -29.17 Transport Equipment 1.4 4.4 3.6 2.3 54.3 113.1 -34.3 134.9 -57.3

V. Others, of which 46.3 40.0 40.8 43.4 22.9 22.7 23.8 46.5 -28.68 Chemicals 5.9 5.0 5.1 5.8 21.9 25.8 23.0 59.0 -23.39 Pearls, Precious,

Semi-precious Stones 9.6 5.5 5.7 4.4 7.7 6.5 107.7 122.2 -48.010 Gold & Silver 9.3 7.2 8.3 9.3 21.1 22.0 22.3 32.3 -24.911 Electronic Goods 7.0 7.7 7.0 8.6 28.7 26.5 15.3 31.1 -17.7

TOTAL IMPORTS 100.0 100.0 100.0 100.0 24.5 35.5 20.7 55.1 -32.9

Source: Calculated from DGCI&S data.a Growth rate in US dollar terms.


and 43.4 per cent in the first half of 2009-10. Evengold and silver and electronic goods increased theirimport shares in the first half of 2009-10 over thecorresponding period in the previous year, despitehigh negative growths, as other items in the importbasket had still higher negative growths.

7.42 In 2008-09 there was high import growth offertilizers reflecting the rise in fertilizer pricesmirroring skyrocketing POL prices in the first half ofthe year, besides chemicals, pearls, precious andsemi-precious stones and gold and silver. The highimport growth of the last two items also contributedto the high export growth of gems and jewelleryincluding diamond trading. In the first half of 2009-10, the only category showing positive and highimport growth is food and allied products to meetthe domestic needs.

Composition of Imports by Broad EconomicCategories (BEC)

7.43 The classification of imports as per BECintroduced by the UN shows that most of India’simports consist of intermediate goods followed bycapital goods. While the share of intermediate goodsis still dominant, it fell from 83.5 per cent in 2001 to76.8 per cent in 2006. In 2007, there was a marginalrise to 77.2 per cent. Share of capital goods importshas increased from 8.9 per cent in 2001 to over 14per cent in 2006 and 2007. The share of consumptionand other goods is quite low. Contrary to the generalbelief, not only is the share of consumer goods low,it has fallen from 4.3 per cent in 2001 to 3.5 per centin 2007 (see Table 7.9).

7.44 The WTO’s “International Trade Statistics2009” has indicated that increasing trade inintermediate goods is one of the major reasons forworld trade experiencing larger changes than worldGDP. The higher composition of intermediate goodsalso has tariff policy implications as higher dutieson these items make our exports and manufacturingless competitive (also see Tariff Policy section).

Export diversification7.45 In 2008, India had a global export share of 1per cent or more in 42 out of a total of 99 commoditiesat two digit Harmonised System (HS) level, but asignificant share of 5 per cent or more in eleven items(Table 7.10). Three items, vegetable textile fibresn.e.s., paper yarn, woven fabric; vegetable plaitingmaterials, vegetable products, n.e.s.; and residues,wastes of food industry and animal fodder, had anincrease in global share by 0.5 per cent point or

more in 2008 over 2007. Four items lost global shareswhich include carpets and other textiles floorcoverings; other made textile articles, sets, wornclothing, etc; lac, gums, resins, vegetable saps andextracts, n.e.s.; and pearls, precious stones, metals,coins, etc. One item, namely silk had stagnantgrowth. In the remaining 31 items, 10 lost theirshares in 2008 over 2007.

7.46 While India has diversified its export basketas well as export markets, a more systematicapproach of diversification of dynamic products todeveloped countries and non-dynamic products todeveloping countries could pay better dividends (Box7.3).

Direction of trade7.47 The directional pattern of India’s trade has beenchanging constantly during the decade with the shareof the top 15 trading partners increasing by 9.5percentage points to 61.3 per cent in between 2004-05 and 2008-09 (Table 7.11). In the first half of 2009-10, their share was 59.6 per cent. The majordevelopment in the direction of India’s trade is thatUSA which was in the first position in 2007-08 hasbeen relegated to the third position in 2008-09, withUAE becoming India’s largest trading partner,followed by China. However, in the first half of 2009-10, with oil prices moderating, China has gained aslight edge over the UAE to become India’s majortrading partner.

7.48 According to the WTO’s “International TradeStatistics 2009” the global recession reduced thetrade imbalances of many countries. Japan’s tradesurplus fell from 2.1 per cent of the GDP before thecrisis to 0.4 per cent in 2008, turning into a tradedeficit of 0.02 per cent of the GDP during the firstquarter of 2009. Germany’s trade surplus of 8 percent of the GDP until 2008 fell to 7 per cent in 2008and United States’ trade deficit of 6.8 per cent of theGDP in 2006 fell to 6.2 per cent in 2008 and furtherto 3.4 per cent in the first quarter of 2009. For theBRIC(Brazil, Russia, India and China) countries tradebalances as a percentage of the GDP were morevolatile due to trade in primary commodities, Russiaand Brazil being specific examples. The report statesthat India has faced a structural deficit inmerchandise trade that has grown especially from2000 onwards. China’s trade surplus of 7.6 per centof the GDP in 2007 fell to 6.7 per cent in 2008 and4.7 per cent in the first quarter of 2009, though initialmonthly figures indicate that it is benefitingnoticeably from the initial recovery of trade. Export-


Table 7.9 : Distribution of India’s imports according to BEC: 2001 to 2007

BEC Descriptions 2001 2006 2007 No. of Basic dutytariff (per cent)lines Unweigh- Peak

ted(Percentage of value of imports) average

Total Total Imports 100 100 1001 Food &Beverages 5.1 3.2 3

11 - Primary 2.1 1.8 1.7111 - For Industry 0 0.7 0.6 116 49.83 100112 - For Households 2.1 1.1 1.1 334 38.89 10012 - Processed 3 1.4 1.3

121 - For Industry 2.6 1.2 1.2 148 50 150122 - For Households 0.5 0.1 0.1 447 51.92 150

2 Industrial Supplies 43.9 36.8 37.421 - Primary 14.2 9.3 8.4 724 13.76 7022 - Processed 29.7 27.5 28.9 5671 9.45 150

3 Fuels & Lubricants 29.9 32.9 33.231 - Primary 26.9 27.3 26.9 13 11.54 5532 - Processed 2.9 5.6 6.3 15 8.67 10

321 - Motor Spirit 2.1 3.5 4322 - Fuels and Lubricants, Processed

(Other than Motor Spirit) 0.8 2.1 2.3 22 7.95 104 Machinery 15.4 18.3 19.1

41 - Capital Equipment 7.8 11.6 12.4 1,323 7.41 3042 - Parts 7.7 6.7 6.7 573 7.59 10

5 Transport 2.7 5.4 451 - Passenger Cars 0 0.1 0.1 37 100 10052 - Other 1.1 3.3 1.7

521 - Industrial 1.1 3.2 1.7 89 9.17 10522 - Non-industrial 0 0.1 0.1 37 63.19 100

53 - Parts 1.6 2 2.1 197 9.05 106 Consumption Goods 1.7 2.1 2.2

61 - Durable 0.4 0.8 0.7 270 9.72 1062 - Semi-durable 0.5 0.7 0.9 727 9.91 1063 - Non-durable 0.8 0.6 0.6 576 11.08 60

7 Goods n.e.s. 1.3 0.1 1.2 21 9.52 10Others (unclassified) 16 14.69Total $ bn/Nos/% 51.9 185.38 218.64 11,356 13.46 150Memorandum:Capital Goods 8.9 14.8 14.1 1,412 7.52 30(41+521)Intermediate Goods 83.5 76.8 77.2 7,454 11.14 150(111+121+21+22+31+322+42+53)Consumption Goods 4.3 3.4 3.5 2,391 22.9 150(112+122+522+61+62+63)Other Goods 3.4 3.7 5.3 58 67.24 100(321+51+7)/(51+7)

Source : Based on UN data.


Box 7.3 : Consistency of Indian Exports with Global DemandIn the recent episode of global recession, the shocks were transmitted very fast from industrialized countries to developingcountries, through international trade among other channels. The pace of export growth recovery could be relatively faster,if the export basket is in harmony with the globally dynamic products, though the depth of recession affecting differentsegments of the world economy also counts. Dynamic products play a crucial role in the global economic recovery as demandfor these products picks up very fast with change in global trade winds. Based on the twin criteria of export growth andmarket share, 1,242 export products at the four-digit level are classified into five different groups. Two sub-periods, 1999-2001 and 2004-06 are taken for computation of the CAGR. The sub-period 2004-06 is taken for global exports share ofproducts. Based on the twin criteria, five groups of products are identified as 1) trend setters, 2) champions, 3) underachievers, 4) achievers in adversity and 5) losers in declining markets. Dynamic products falling under the “trend setters”group with high CAGR and high share and “champions” group with high CAGR and relatively high share are the drivers ofglobal trade. Most of the dynamic products fall under four broad categories of exports: machinery, auto components andcinematography which are high and medium technology-intensive; chemicals and plastics which are medium technology-intensive; gems and jewellery and base metals which are mainly low technology-intensive; and mineral products which aremainly primary and resource-based products. The non-dynamic products include all the other three categories, namely the“underachievers” with high CAGR but low share and heavily concentrated in sectors like processed food, minerals,chemicals, plastics, T&C and base metals; “achievers in adversity” with high share and low or declining growth rate mostlyconcentrated in sectors like processed food, pulps of wood, T&C, machinery and auto components; and “losers in DecliningMarkets “with low share and low CAGR concentrated in sectors like vegetable products, chemicals, pulps of wood, T&C,plaster & cement, base metals and machinery with bleak prospects of revival in the medium term. Securing market access forthe last two sets of product groups is a major concern, because the global market is shrinking for these products.Global dynamic products constitute nearly 10 per cent of products but slightly less than 50 per cent of value. On the contrary,the product share of non-dynamic products is around 90 per cent and value share is slightly above 50 per cent. In the Indiancase, dynamic products constitute 10 per cent of products and 51.3 per cent of value, while non-dynamic productsconstitute 90 per cent of products and 48.7 per cent of value. Thus the general pattern of composition of dynamic and non-dynamic products is similar in India and the world. (Table 1).

Table 1 : Compositon of Dynamic & Non-dynamic products

(Percentage) Dynamic products Non-dynamic products

World Number 9.8 (121) 90.2 (1121)Value 47.6 52.4

India Number 10.0 (40) 90.0 (1217)Value 51.3 48.7

Source: Computed from PC-TAS CD, 2008, ITC, Geneva and India Trades, Online, CMIE, Mumbai.Note: World figures refer to 2006 and figures for India correspond to 2006-07. Figures in brackets indicate actual number of products.Since the Asian Crisis, dynamic export products have provided a new direction to Indian exports. Products under the “trendsetters” group have consistently improved their share in Indian exports from 21.5 per cent in 1998-99 to 35 per cent in 2006-07, posting a CAGR of 26.3 per cent during 1999/2000-2006/07 in rupee terms. The robust performance of the “trendsetters” has been supported by the sustained growth of these products in global exports. The “champions” have alsosignificantly improved their share in Indian exports from 10.8 per cent in 1998-99 to 16.3 per cent in 2006-07. This segmentof exports has registered the fastest CAGR of 27.1per cent, even better than the “trend setters”, during the period 1999/2000-2006/07. While the share of the tiny emerging products, that is the group of “under achievers”, is almost stagnant evenduring the period of global export boom, the two weak segments of the export sector, namely “achievers in adversity” and“losers in declining markets” together have a share of nearly 35 per cent.The differing performances of dynamic versus non-dynamic products are particularly important in the context of multilateralvs regional/ bilateral trade. The composition of India’s exports by the two categories in the Regional Trading Arrangements(RTAs) of India with developing countries shows that the share of dynamic products is high in value terms in all the RTAs,while the share of non-dynamic products is very high in terms of numbers and quite substantial in value terms in all the RTAs(Table 2)

Table 2 : Share of dynamic and non-dynamic products in India’s exports to RTAs.RTA (Percentage) Dynamic products Non-dynamic productsASEAN (Value) 56.2 43.8

(No.) 1 1 8 9Andean (Value) 47.7 52.3

(No.) 15.3 84.7COMESA (Value) 55.4 44.6

(No.) 11.3 88.7GCC (Value) 61.2 38.8

(No.) 10.6 89.4MERCOSUR (Value) 59.3 40.7

(No.) 14.7 85.3SAARC (Value) 37.7 62.3

(No.) 10.7 89.3Other Countries* (Value) 51 49

(No.) 10.2 89.8

Source: Computed from PC-TAS CD 2008, ITC, Geneva.Note: *Includes all other countries not in the RTAs given above.

Import preference for globally non-dynamic products is either thinly spread across the globe or heavily concentratedin some select regions. Marketing globally dynamic products could be done with ease under the multilateral set up withoutany preferential arrangement, while the regional approach could help in exporting sizeable amounts of globally non-dynamicproducts. As India is actively engaged in the process of regional trade, sizeable amounts of such products could find marketin different regional, sub-regional and bilateral trading arrangements through negotiations. Thus systematic planning couldhelp in diversification of India’s commodity basket as well as markets.


Import ratios in Table 7.11 show that among its top15 trading partners, India had bilateral trade surpluswith five countries, namely the UAE, USA,Singapore, the UK and Hong Kong in 2008-09 andthe first half of 2009-10. India’s trade deficit with theUSA and Singapore in 2007-08, turned into tradesurplus thereafter. The export import ratio fell in 2008-09 in the case of Hong Kong, though it recovered inthe first half of 2009-10. The fall in export-import ratiofrom 0.8 in 2004-05 to the present 0.3 in the case of

China needs special attention. Among the countriesnot in the top 15, Brazil is an interesting case. India’sexport-import ratio which had stabilized at above 2till 2008-09 indicating a high trade surplus for Indiahas suddenly turned into a trade deficit at 0.64 inthe first half of 2009-10. The disaggregated data forApril-June 2009 indicate that this was probably dueto the sudden fall in India’s exports of refined POL toBrazil because of softening of crude oil prices andthe sudden high rise in imports from Brazil of crude

Table 7.10 : India’s share in world exports: Commodity- wise ( share of more than 1 per cent)

Sl. HS Chapter 2007 2008 ChangeNo.

1 50 Silk 10.53 10.53 0.002 13 Lac, gums, resins, vegetable saps and extracts n.e.s. 9.48 9.45 -0.033 52 Cotton 8.51 8.84 0.344 57 Carpets and other textile floor coverings 8.74 8.51 -0.245 53 Vegetable textile fibres n.e.s., paper yarn, woven fabric 4.61 6.27 1.666 71 Pearls, precious stones, metals, coins, etc. 6.60 5.72 -0.887 63 Other made textile articles, sets, worn clothing, etc. 5.73 5.52 -0.208 14 Vegetable plaiting materials, vegetable products n.e.s. 4.66 5.48 0.839 9 Coffee, tea, mate and spices 5.23 5.30 0.0710 23 Residues, wastes of food industry, animal fodder 4.01 5.16 1.1511 67 Bird skin, feathers, artificial flowers, human hair 5.03 5.09 0.06

Source : Calculated from National Centre for Trade Information (NCTI) data based on UN-ITC Trade Map Data,2008.

Table 7.11 : India's trade and export-import ratio with major trading partnersShare in total trade Export/Import ratioa

2004-05 2007-08 2008-09 2008-09 2009-10 2004-05 2007-08 2008-09 2008-09 2009-10(Apr- (Apr- (Apr- (Apr-Sept) Sept) Sept) Sept)

1 UAE 6.1 7.0 9.8 8.7 9.2 1.6 1.2 1.0 1.5 1.52 China 6.5 9.2 8.6 7.4 9.4 0.8 0.4 0.3 0.3 0.33 USA 10.6 10.1 8.2 6.9 8.1 2.0 1.0 1.1 1.4 1.24 Saudi Arabia 1.4 5.6 5.1 5.6 4.4 1.1 0.2 0.3 0.3 0.35 Germany 3.5 3.6 3.8 3.1 3.5 0.7 0.5 0.5 0.6 0.56 Singapore 3.4 3.7 3.3 3.3 3.2 1.5 0.9 1.1 1.4 1.17 Iran 0.8 3.1 3.0 3.2 3.3 3.0 0.2 0.2 0.2 0.28 Hong Kong 2.8 2.2 2.7 1.8 2.5 2.1 2.3 1.0 2.8 2.19 Korea RP 2.3 2.1 2.6 2.2 1.9 0.3 0.5 0.5 0.5 0.010 UK 3.7 2.8 2.6 2.2 2.4 1.0 1.4 1.1 1.3 1.311 Australia 2.3 2.2 2.6 2.5 2.9 0.2 0.1 0.1 0.1 0.112 Switzerland 3.3 2.5 2.5 3.1 2.8 0.1 0.1 0.1 0.0 0.013 Japan 2.7 2.5 2.2 2.0 2.3 0.7 0.6 0.4 0.4 0.514 Malaysia 1.7 2.1 2.2 1.9 1.9 0.5 0.4 0.5 0.4 0.715 Nigeria 0.4 2.1 2.1 2.3 1.9 13.3 0.1 0.2 0.1 0.2

Total (1 to 15) 51.8 60.7 61.3 56.3 59.6 1.0 0.6 0.5 0.6 0.6

Total trade 100.0 100.0 100.0 100.0 100.0 0.7 0.6 0.6 0.6 0.6

Source : Computed from DGCI&S data.a A coefficient of export and import ratio between 0 and 1 implies that India’s imports are greater than

exports and a coefficient greater than one, that India exports more than what it imports.


petroleum, besides sugar to meet domestic needs.High growth in imports of beverages, iron and steel,fats and oils from Brazil also seems to havecontributed to the trade deficit.

7.49 The UAE has displaced the USA as thetopmost destination of India’s exports in 2008-09and 2009-10 (April-September) with an export shareof 13.1 per cent and 14.4 per cent respectively. India’sexports to all the top three export destinations—theUAE followed by the USA and China—registerednegative growth of (-) 28.7, (-) 25.3 and (-) 21.9 percent respectively. Region-wise, over half of India’sexports (55 per cent) in the first half of 2009-10 wereto Asia (including ASEAN), up from around 40 percent in 2001-02. During 2009-10 (April-September),exports to Asia (including ASEAN) declined by 27.6per cent and to Europe by 30.9 per cent. India’smerchandise exports to South Asian countriesdeclined by 30.4 per cent.

7.50 In 2009-10 (April-September), Asia andASEAN continued to be the major source of India’simports accounting for 61.3 per cent of the total.Country-wise, China remained the largest source witha share of 12 per cent in India’s total imports followedby the USA (5.95 per cent), UAE (5.93 per cent) andSaudi Arabia (5.5 per cent). As a result of globalrecession, India’s import growth from 14 of the top15 trading partners was negative, Indonesia beingthe exception.

SERVICES TRADE

7.51 Trade in some services like transportation ofgoods is directly dependent on merchandise tradewhile in some others like financial services it iscomplementary. However, some other services liketourism and software are near standalone servicesnot directly related to merchandise trade. There aremany such services and with the spread oftelecommunications and computer technology,virtually all commercial services including health care

and education have become tradeable across borderswithout movement of natural persons. The trendtowards globalization, reinforced by liberalizationpolicies and the removal of regulatory obstacles, hasfuelled steady growth of international investment andtrade in services.

World trade in services7.52 The US$ 3.78 trillion world export ofcommercial services was dominated by the developedcountries in 2008, with the exception of India andChina which were also among the top 10 exporters.As in the case of merchandise trade, India hasimproved its rank in commercial services trade. Asper the latest “International Trade Statistics2009”brought out by the WTO, world export andimport growth in services decelerated from 19 and18 per cent respectively to 12 per cent in both thecases. The deceleration was more or less similar inmost of the major regions like North America, Europeand Asia. Import growth in commercial services inthe US was particularly low at 8 per cent, while itsdeceleration in EU by 9 percentage points wasparticularly sharp. While India ranks 27th in worldmerchandise exports in 2008 compared to China at2ndposition , in commercial services exports it ranks9th compared to China at 5th rank.

7.53 The three broad categories of commercialservices, namely transport, travel and othercommercial services witnessed a decline in exportgrowth in 2008 compared to a high growth in 2007(Table 7.12).

7.54 In commercial services imports, India movedfrom 15th position in 2004 to 13th position in 2005,and remained in 13th position in 2008, with a 2.4 percent share. The United States, the European Union-15 and Japan are the major importers of services inthe world. Among top exporters/importers of services(with EU-27 taken as a single unit) India rankedamong the first five countries in the export ofcomputer and information services, commercial

Table 7.12 : World exports of commercial services trade by major category, 2008 Value Annual percentage change

(US$ billion)2008 2000-08 2006 2007 2008

Commercial services 3730 12 14 20 12Transport 890 13 11 20 16Travel 950 9 10 15 10Other commercial services 1935 14 17 22 11

Source : WTO


services, communication services includingtelecommunications services and other businessservices and in the import of computer andinformation services, financial services and transportservices (Table 7.13).

7.55 The Global Economic Prospects 2010 reportof the World Bank states that the global economiccrisis also affected services trade which, however,was more resilient than merchandise trade. However,systematic and up to date information on trade inservices is lacking. The term “Invisibles”, which isgenerally used as a synonym for services, is mostapt for this sector as regards recent data andinformation. Any analysis on the impact of the crisison trade in services has to be made from the titbitsof information available from several widely spreadout sources. Piecing these bits of informationtogether shows that the global financial crisis whichaffected trade credit and also resulted in a slump inmerchandise trade had both a direct and indirectbearing on trade in services. Some services liketransport for which goods trade itself is a barometerof performance were severely hit. The Baltic Dry Index(BDI) which reached a record high of 11440 in May2008 fell by 93 per cent in December 2008. In thecase of other services, the tight financial situation

coupled with depressed economic activity led todeceleration in growth in trade of these services

7.56 As per the WTO’s “International TradeStatistics 2009”, world exports of commercialservices which increased by 20 per cent on averageon a year-on-year basis in the first two quarters of2008, decelerated in the third quarter and droppedby 6 per cent in the last quarter. Preliminary figuresfor the first quarter of 2009 suggest a morepronounced decline of 19 per cent. Whiletransportation and Travel were severely hit due tothe global crisis, financial services plummeted dueto the turmoil in the financial sector with the WTO’spreliminary figures for the first quarter of 2009 showinga further decline in exports for the leading exportersranging from 13 per cent for the US to an estimated30 per cent for the EU. However, some of thesharpest declines in the first quarter of 2009 wererecorded in Asian economies such as Hong Kong,China (a drop of 32 per cent), Chinese Taipei (53 percent) and the Republic of Korea (56 per cent). Othercommercial services have shown more resilience tothe economic recession than transportation andtravel services as the decline in the last three monthsof 2008 was only 5 per cent. In the first quarter of2009, however, exports of commercial services were

Table 7.13 : India’s sector-wise rank and share in world exports / imports of servicesPer cent

Services Rank Share Change 2008 2000 2008 2008

Transportation Services Export 11 0.6 1.2 23Import 5 2.1 4.0 34

Travel Services Export 14 0.7 1.2 10Import 15 0.6 1.1 17

Other Commercial Services Export 4 .. 4.1 18Import 9 .. 2.0 3

Communication Services* Export 4 .. 3.3 10Import 13 .. 1.1 22

Construction Services* Exporta 9 .. 1.3 ..Importa 11 .. 1.1 ..

Insurance Services* Export 7 .. 2.1 35Import 7 .. 2.7 19

Financial Services* Export 8 .. 1.4 121Import 5 .. 2.9 175

Computer and Information Services* Exporta 2 .. 18.1 ..Importa 4 .. 4.4 ..

Other Business Services* Exporta 5 .. 4.0 ..Importa 6 .. 3.0 ..

Personal, Cultural and Recreational Services* Exporta 6 .. 1.6 .. Import .. .. .. ..

Source: Compiled from WTO, International Trade Statistics 2009. WTO.Notes: * data relate to 2007; a WTO Secretariat estimates.


estimated to have declined by 15 per cent globally,possibly due to the lagged effect of the economicrecession.

7.57 The Organisation for Economic Cooperationand development(OECD) data shows that in Q3 2008,the value growth of exports and imports of servicesin OECD countries, measured in current US dollarsdecelerated turning negative in all the subsequentquarters till Q3 2009 for which latest data are available.The fall was at its peak in Q2 2009 with both exportand import growth rates at (-)20.2 percent and (-)18.4 percent respectively, In Q3 2009 the extent ofnegative growth has been slightly less, with signs ofturnaround. The seasonally adjusted quarterly valuegrowth over previous quarter which had turnednegative since Q3 2008, both for exports and importsof services of OECD has become positive in Q2 andQ3 with growth rates of 1.8 per cent and 2.6 percentfor exports respectively and 1.6 percent and 3.3percent for imports respectively. The contraction inthe Air Transportation sector which began in the endof 2008 continued in 2009. As per the InternationalAir Transport Association (IATA), in 2009 internationalpassenger demand and cargo demand declined by4.1 percent and 13.0 percent respectively withpassenger and cargo yields plummeting by 12percent and 15 percent respectively. In 2010, whilepassenger traffic and cargo demand are expectedto grow by 4.5 percent and 7 percent respectively

and cargo yields are expected to improve by 0.9percent, passenger yields are not expected toimprove from their extraordinary low level due toexcess capacity in the market and reduced corporatetravel budgets. Thus as per IATA eventhough demandcontinues to improve, there is still a lot of ground tobe recovered.

7.58 The World Bank in a report has also givensome such examples of fall in services trade. Quotingreports of World Tourism Organization, the WorldBank states that tourism arrivals were off by 7 percent in the first six months of 2009. The outbreak ofA H1NI compounded the woes of some countrieslike Mexico which was particularly hard hit.Notwithstanding widespread efforts to supporttourism through special tax deductions, the easingof visa restrictions and investment plans, the WorldTourism Organization expects global tourist volumesto have declined by between 4 and 6 per cent during2009.

India’s services exports7.59 India, which is moving towards services-dominated GDP growth with a 9 per cent CAGR forservices which is higher than the 5.8 per cent fornon-services during 2000-01 to 2006-07, is alsomoving towards a services-dominated export growthwith a CAGR of 28.7 per cent for services during2000-01 to 2006-07 which is higher than the 19 per

Table 7.14 : India's exports of servicesCommodity Groups Percentage share CAGR Growth ratea

April- 2000-01 April-Sl. September to SeptemberNo. 2000- 2008- 2008- 2009- 2006- 2007- 2008- 2008- 2009-

01 09 09 10 07 08 09 09 10

1 Travel 21.5 10.7 10.4 12.0 17.3 24.4 -4.0 22.0 -9.22 Transportation 12.6 11.1 11.1 12.6 25.4 25.6 12.7 39.9 -10.63 Insurance 1.7 1.4 1.4 1.9 28.1 37.2 -13.4 1.8 6.14 GNIE 4.0 0.4 0.4 0.5 -14.6 30.8 17.5 30.2 -5.25. Miscellaneous 60.3 76.4 76.7 73.0 33.4 21.3 15.9 27.4 -25.2 a) Software Services 39.0 45.5 47.5 53.4 30.5 28.8 14.9 35.3 -11.5 b) Non-software Services 21.3 30.9 29.2 19.5 38.0 11.6 17.5 16.3 -47.5 of which i) Business Services 2.1 16.2 16.5 12.7 87.6 15.3 -1.9 9.9 -39.5 ii) Financial Services 2.1 3.9 4.5 4.6 44.1 3.6 22.7 58.4 -19.2 iii)Communication Services 7.0 2.1 2.5 1.8 12.1 6.5 -9.8 11.0 -42.0

Total Services Exports 100.0 100.0 100.0 100.0 28.7 22.4 12.5 27.6 -21.4

Source: Calculations based on RBI data.Note:a Growth rate in US dollar terms.GNIE = Government Not Included Elsewhere


cent for merchandise exports during thecorresponding period. Services exports reached US$102 billion in 2008-09 with a moderate growth of 12.5per cent over the previous year. Growth has beenreasonably good in the miscellaneous servicescategory which has increased its share by 16.1percentage points to 76.4 per cent in 2008-09compared to 2000-01. While the share of softwareservices increased by 6.5 percentage points to 45.5per cent, the share of non-software services increasedby 9.6 percentage points to 30.9 per cent. TheCAGR of miscellaneous services was very high at33.4 per cent during 2000-01 to 2006-07 followed byannual growth rates of 21.3 per cent and 15.9 percent respectively in 2007-08 and 2008-09 (Table7.14). While the high growth rate of the US $ 47billion (2008-09) software services exports is wellknown, the high CAGR of non-software servicesduring 2000-01 to 2006-07 is noteworthy. This wasdue to the high growth in communication servicesand business services exports, which, however, havefared very badly in both 2008-09 and the first half of2009-10 with negative growth rates ; and financialservices which registered high CAGR during 2000-01 to 2006-07 and high growth in 2008-09.

7.60 The impact of global recession was visible onIndia’s services exports, the growth of which declinedto (-)21.4 per cent in the first half of 2009-10compared to the high growth of 27.6 per cent in thecorresponding period of the previous year . Exceptinsurance, all the items witnessed a negative growth.While fall in transportation exports is a reflection ofthe fall in merchandise trade, fall in travel services isa reflection of the decline in tourist arrivals which

declined by 1.8 per cent in the first quarter of 2009-10. In 2009, Foreign Tourist Arrivals (FTAs) at 5.11million registered a negative growth of (-)3.3 percentas compared to the 4 percent positive growth in 2008.Foreign Exchange Earnings (FEE) from tourismwhich grew by 9.5 percent in 2008 fell to US $11.39billion in 2009 with a negative growth of (-)3 per cent

7.61 Services exports are expected to grow in2009-10, though at a relatively slower pace. Whilethe lower merchandise trade affected transportationexports in the first half of the year, with pick up inglobal and India’s trade, transportation exports arealso expected to pick up. Software including BPOservices after a negative export growth in the firsthalf of 2009-10 has shown a recovery with anestimated positive but tepid growth of 5 percent in2009-10 and a projected 13-15 per cent growth in2010-11, according to NASSCOM. Receipts underbusiness and professional services are also expectedto be higher. According to the Ministry of Tourism,though foreign tourist arrivals declined in the firstquarter of 2009-10, the growth rate has marginallyimproved during April-September 2009 as comparedto the corresponding period of the previous year. Infact, both FTA and FEE have picked up in Decemberwith growth rates of 21 percent and 44.4 percentrespectively over December 2008. Given the trend,travel receipts are also expected to improve in theremaining period of the year.

India’s services imports7.62 Imports of commercial services have becomeimportant in recent years reaching US$ 52.0 billionin 2008-09 though growth had decelerated to 1.1 per

Table 7.15 : India's imports of services

Percentage share CAGR Growth ratea

Sl. Commodity Group April-September 2000-01 April-SeptemberNo. to

2000-01 2008-09 2008-09 2009-10 2006-07 2007-08 2008-09 2008-09 2009-10

1. Travel 19.2 18.1 18.8 17.8 15.6 38.5 1.8 23.3 -9.82. Transportation 24.4 24.6 27.4 20.2 14.6 42.7 11.3 39.2 -29.43. Insurance 1.5 2.2 2.1 2.7 19.3 62.6 8.2 13.6 22.94. GNIE 2.2 1.5 0.8 0.9 4.0 -6.7 110.9 -13.4 12.65. Miscellaneous 52.6 53.6 50.9 58.3 24.5 2.7 -4.8 12.0 9.3

a) Software Services 4.1 5.4 6.9 3.4 25.1 48.1 -16.2 20.1 -53.4 b) Non-software Services 48.6 48.2 44.1 55.0 24.4 -1.2 -3.4 10.7 19.1

of whichi) Business Services 7.0 29.7 28.0 34.3 57.9 4.3 -6.8 7.3 16.9ii) Financial Services 13.5 5.7 6.1 8.4 7.2 4.7 -5.6 37.8 30.0iii) Communication Services 0.9 2.1 2.0 2.5 35.8 8.0 26.4 27.3 19.5

Total Services Imports 100.0 100.0 100.0 100.0 20.4 16.2 1.1 20.2 -4.6

Source : Calculations based on RBI data.Note: a Growth rate in US dollar terms.


Box 7.4 : Policy suggestions for India’s services sector Some policy suggestions for India’s services sector based on interactions with service providers and literature survey aregiven below. This is only an indicative and not exhaustive list.

FDI related

Opening some segments of the insurance sector like health insurance and removing the 10-year disinvestment clause; andliberalizing FDI in the animation sector.

Making available FDI policy on the website in a user-friendly way.

Tariff and Tax relatedRationalizing taxes in the shipping sector and addressing the issue of multiple levies and duties the in telecom sector.Rationalizing the entry fees for monuments and privatization of these services.Relocation of business of the Indian film industry from foreign countries to India by addressing the tax credit issue.Addressing the inverted duty issue in the printing sector.Allowing advance tax instead of tax deduction at source (TDS) in some services like engineering and construction.Abolishing octroi at least for capital goods used in hospitals including super speciality hospitals exporting health-careservices and in health-related research centres.Making TDS uniform for all heads of income with exemptions for small incomes up to a certain minimum limitExpediting the measures related to transfer pricing.Single return for service tax and excise tax which is being administered by the same department

Credit and Finance relatedExempting ECBs from withholding tax for financing export-related activities and overseas acquisition including of ships.Encouraging venture capital in services.Operationalizing offshore financial centres.

Other trade related

Increasing visibility of India in services through trade fairs, buyers-sellers meets and setting up convention centres;facilitating services exports by setting up joint offices with common facilities; setting up a portal for services and devotingsome SEZs exclusively to services.Speeding up 3 G technology auctions.Strengthening Indian fleets and providing long-term contracts for Indian flags.Resolving the issue of precondition in most of the overseas tenders wherein equipment to be supplied by the contractingcompany should necessarily be sourced from an approved list of suppliers from developed countries.Facilitating International accreditation for Indian health services.Tapping outsourcing opportunities in niche areas like actuarial and accounting services.Totalization agreements with target countries and necessary changes in domestic laws.Revamping the system of teaching, research, etc. in universities/ institutions, phased introduction of education reforms,allowing foreign educational institutions in higher education with proper checks and balances, etc.Skill certifying unskilled labour.

Source : Ministry of Finance, Government of India, “Draft Policy Paper on Services 2009” and “Strategy for India’sServices sectors: Broad Contours”, Working paper No.1/2007/DEA,.

cent due to global recession (Table 7.15). Businessservices is the most important category of servicesimports, followed by transportation and travel. Importgrowth of business services which declined by (-)6.8 per cent in 2008-09 picked up by 16.9 per centin the first half of 2009-10. Import growth oftransportation and travel which decelerated in 2008-09 was negative in the first half of 2009-10 andparticularly so in the case of transportation.Insurance, financial and communication serviceshave registered positive growths.

Policies related to services7.63 Given the difficult situation arising out of theglobal economic crisis, which also affected servicestrade, the Government took some specific measuresfor the services sector, besides the general measuresrelated to liquidity and trade finance. Some suchspecific policy measures in the Union Budget andForeign Trade Policy include extension of the 10Asunset clause for Software Technology Parks of India(STPI) for the financial year 2010-11 and exemption


from service tax for certain services linked to exports(see Box 7.5). Well-thought- out policy measurescould give a further boost to this sector. Whilepolicies like disinvestment of services’ PSUs andeasing domestic regulations can create theconducive atmosphere, liberalization of foreigninvestment-related policies could also help as tradein services is usually accompanied by foreigninvestment in services due to the high intra-firm tradeof multinational parent firms with affiliates. Theseshould be complemented by specific trade policiesincluding tariff, tax and credit-related policies forservices (see Box 7.4)

TRADE POLICY

Recent trade policy measures7.64 Trade policy measures taken by theGovernment and the RBI this year focused onmitigating the adverse impact of the global recessionon the Indian economy and on checking inflation.Many measures were taken including three stimuluspackages announced in 2008-09, measures by theRBI and the Government in the Union Budget 2009-10 and the Foreign Trade Policy (2009-14) to helpthe export sector in general and the employment-intensive sectors affected by the world recession inparticular (Box 7.5)

7.65 Trade Policy measures to check inflationcaused mainly by supply-side constraints includeamong others, the following–-reducing import dutiesto zero for sugar, rice, wheat, pulses, edible oil(crude) and maize; reducing import duties on refinedand hydrogenated oils and vegetable oils to 7.5 percent; allowing import of raw sugar at zero duty underopen general licence (OGL) up to December 31, 2010and opening import of raw sugar to private trade upto December 31, 2010 for being processed bydomestic factories on job basis; allowing import ofwhite/refined sugar up to 1 million tonnes by theSTC/MMTC/PEC and NAFED under OGL at zeroduty up to March 31, 2010 and also extending it toother Central/State Government agencies and toprivate trade; banning export of non-basmati rice,edible oils and pulses (except kabuli chana); use ofminimum export price (MEP) to regulate exports ofonion and basmati rice; scheme for permitted public-sector units (PSUs) to import and sell pulses;permitting sugar factories to sell processed raw sugarin the domestic market and fulfil export obligationon tonne-to-tonne basis; and not changing the tariffvalues of edible oils.

Policy for promoting State-wise exports

7.66 State-wise exports are reflected in the dataon state of origin of export goods which at presentare the only available comparable data for State-wiseexports (Table 7.16). This does not include export ofservices

7.67 In 2008-09 and the first half of 2009-10, themajor exporters were Maharashtra, followed byGujarat, Tamil Nadu and Karnataka as in 2007-08.In 2008-09, the two major exporting states, namelyMaharashtra and Karnataka, registered negativegrowth rates along with West Bengal. Kerala withgrowing SEZ exports, registered the highest growthrate with doubling of exports. This was followed byUP, Delhi, AP, Goa and Tamil Nadu with high exportgrowth rates. The importance of states likes Kerala,UP and Delhi in the export effort is rising. In the firsthalf of 2009-10, negative growth was registered byall the states except Kerala with 9.2 per cent growthand Haryana with a paltry 0.1 per cent growth.

7.68 To encourage exports by States, outlay underthe Assistance to States for Developing ExportInfrastructure and Allied Activities (ASIDE) Schemehas been increased in the Eleventh Five Year Planto Rs. 3,793 crore (tentative) as against the actualrelease of funds of Rs. 2,050.5 crore in the TenthFive Year Plan. During 2008-09, Rs. 437.84 croreand Rs. 131.4 crore were sanctioned/released underthe State and Central-Sector componentsrespectively out of an actual outlay of Rs. 570 crore.In 2009-10, as on December 22,2009, out of theoutlay of Rs. 570 crores, Rs 296.65 crore and Rs.82.83 crore have been released to the States andCentre respectively. Under ASIDE, projects aimedat setting up of critical infrastructure for exports areapproved, namely creation of new SEZs andaugmenting of facilities in existing ones, equityparticipation in infrastructure projects, developmentof complementary infrastructure such as roadsconnecting production centres to ports, setting upof ICDs and CFSs, stabilizing of power supply, etc.

7.69 State-wise allocation of funds under the ASIDEscheme for the past few years shows only slightchange. However, highest allocation to Maharashtrafollowed by Gujarat, Tamil Nadu, Karnataka, UttarPradesh and West Bengal continued. The top 15States had a share of 92.8 per cent in total allocationin 2008-09.


Box 7.5 : Trade Policy MeasuresThe latest trade policy measures for 2008-09 and 2009-10 include the following:

Interest subvention of 2 per cent from December 1,2008 to September 30, 2009 to the labour-intensive sectors of exportssuch as textiles (including handloom), handicrafts, carpets, leather, gems and jewellery, marine products andSMEs. Thiswas further extended to March 2010.

Inclusion of handicrafts items in the Vishesh Krishi and Gram Udyog Yojana (VKGUY);

Provision of an additional Rs 1,100 crore to ensure full refund of CST/terminal excise duty/duty drawback claims ondeemed exports.

Extension of the DEPB scheme till the end of December 2010.

Restoration of DEPB rates for all items where they were reduced in November 2008 and increase in duty drawback rateson certain items effective from September 1, 2008.

Provision of additional fund of Rs 1,400 crore for the textile sector to clear the backlog claims of the TechnologyUpgradation Fund (TUF).

Excise duty reduction across the board by 4 per cent for all products except petroleum products and those productswhere the current rate was less than 4 per cent.

Extension of the adjustment assistance scheme to provide enhanced Export Credit Guarantee Corporation (ECGC) coverat 95 per cent to badly hit sectors up to March 2010.

Sections 10A and 10B related to sunset clauses for STPI and EOUs schemes respectively extended for the financial year2010-11. Anomaly removed in Section 10AA related to taxation benefit of ‘unit vis-à-vis assessee’;

Additional items allowed within the existing duty-free imports entitlement for some employment-oriented sectors likesports goods, leather garments, footwear and textile items.

Measures related to service tax which include, among others, exemption from service tax on services linked to exports likethe transport of goods by road and commission paid to foreign agents.

Diversification of exports to emerging markets of Africa, Latin America, Oceania and CIS countries under the FocusMarket Scheme and Market Linked Focus Product Scheme.

Setting up a Directorate of Trade Remedy Measures to support Indian industry and exporters especially the MSMEs, inavailing of their rights through trade remedy instruments under the WTO framework.

Higher support for market and product diversification and additional resources under the MDA and MAI.

Introduction of EPCG at zero duty for engineering and electronic products, basic chemicals, pharmaceuticals, apparelsand textiles, plastics, handicrafts, chemicals and allied products and leather and leather products till March end 2011.

Duty drawback facilities on jewellery exports to neutralize duty incidence

Expanding the Market Linked Focus Product Scheme to bicycle parts, motor cars and motor cycles, apparels and clothingaccessories, auto components etc. for exports from April 4,.2009 to September 30, 2009.

Enhancement of the Export Obligation Period under the Advance Authorization Scheme from 24 to 36 months withoutpayment of composition fee.

Widening the coverage of the ECGC by making available back up guarantee to the ECGC to the extent of Rs350 crore toenable it to provide guarantees for exports to difficult markets/products.

Abolishing basic customs duty of 5 per cent on rough / unworked corals.

Constituting two high-level committees, one chaired by the Prime Minister and the other by the Cabinet Secretary forregular monitoring.

A Committee under the Chairmanship of Finance Secretary constituted to resolve all problems related to non-availablityof dollar credit to exporters by the concerned Banks.

To accelerate exports and encourage technological upgradation, additional duty credit scrips for status holders @ 1 percent of the f.o.b. value of past exports for certain specified sectors upto March end 2011.

New incentives in January 2010 by adding new products in FPS, new products and markets under MLFPS, new productsunder VKGUY and new markets under FMS.


SEZs

7.70 The Special Economic Zones (SEZs) Policysupported by the SEZ Act 2005 and SEZ Rules 2006intends to make SEZs an engine for economic growthsupported by quality infrastructure, complementedby an attractive fiscal package, both at the Centraland State levels and with the single-window clearancemechanism. The process of globalization hasenhanced the relevance of SEZs, which havebecome an important component in the export-ledindustrialization strategy, playing a crucial role inpromoting the manufacturing sector, includingproviding an enabling investment climate for SMEsand offer platform for attracting export-oriented FDI.The spin-off effects of SEZs, particularly the newgeneration ones, are creation of employment,development of infrastructure and additional economicactivity in the hinterland.

7.71 In a short span of about three years since theSEZs Act and Rules were notified in February 2006,formal approvals have been granted for setting up of571 SEZs out of which 346 have been notified. Atotal of 105 SEZs are exporting at present. Out of

these 65 are information technology(IT)/informationtechnology enabled services (ITES), 15 multi-productand 25 other sector-specific SEZs. The total numberof units in these SEZs is 2761.

7.72 Out of the total employment of 4,90,358persons in SEZs, an incremental employment of3,55,654 persons was generated after February 2006when the SEZ Act came into force. At least doublethis number obtain indirect employment outside theSEZs as a result of the operations of SEZ units.This is in addition to the employment created by thedeveloper for infrastructure activities. Physical exportsfrom the SEZs have increased by 50 per cent to Rs99,689 crore in 2008-09 with a CAGR of 48.4 percent during 2003-04 to 2008-09 compared to theCAGR of 23.4 per cent for total merchandise exportsof the country for the same period. Exports duringthe first three quarters of the current year have beento the tune of Rs. 1,51,785 crores.

7.73 Even during the current economic meltdown,SEZs have registered impressive growth in exports(Table 7.17), besides investment and employmentgeneration.

Table 7.16 : State-wise exports of top 15 states(US$ million)

(April-September) Share(%) Growth rate (%)Sl. State 2007-08 2008-09 2008-09 2009-10 2008-09 2008-09 2009-10

No. (Apr-Sept.)

1 Maharashtra 44,841 44,667 25,612 20,180 24.1 -0.4 -21.22 Gujarat 34,736 40,272 26,802 16,433 21.7 15.9 -38.73 Tamil Nadu 14,816 18,540 10,654 7,770 10.0 25.1 -27.14 Karnataka 14,641 12,296 7,877 4,181 6.6 -16.0 -46.95 Andhra Pradesh 7,427 9,897 5,231 4,585 5.3 33.3 -12.36 Delhi 5,183 8,467 4,936 2,214 4.6 63.4 -55.27 Uttar Pradesh 4,295 7,571 5,284 2,586 4.1 76.3 -51.18 West Bengal 5,679 5,583 3,554 1,808 3.0 -1.7 -49.19 Haryana 4,414 4,792 2,478 2,481 2.6 8.6 0.1

10 Kerala 2,364 4,753 2,544 2,778 2.6 101.0 9.211 Orissa 3,024 3,351 2,189 1,220 1.8 10.8 -44.312 Rajasthan 3,276 3,313 1,815 1,365 1.8 1.1 -24.813 Punjab 2,598 3,016 1,628 1,175 1.6 16.1 -27.914 Madhya Pradesh 2,915 2,946 1,596 904 1.6 1.1 -43.415 Goa 1,387 1,781 640 554 1.0 28.4 -13.5

India’s total exports 163,132 185,295 108,907 76,589 100.0 13.6 -29.7

Source : DGCI&S


Box 7.6 : Progressive reduction of peak customs dutyIndia has been progressively lowering peak customs duty. Contrary to popular belief, the fall in peak duty has neither led toa fall in revenue collections, nor a wiping out of the domestic manufacturing sector. In fact, peak duty falls have beenaccompanied by rise in customs duty collections. The trend follows the Laffer curve effect which indicates that lowering oftaxes produces higher economic activity and higher revenue realization (Table 1)

Table 1. Peak duty reductions, customs duty collection and import values

Year Peak duties Customs duty Imports Customs duty as a(per cent) collection (Rs cr.) percentage of imports

(Rs cr.)

1999-00 40 47,091 2,15,237 21.882000-01 38.5 49,066 2,30,873 21.252001-02 35 42,256 2,45,200 17.232002-03 30 44,610 2,97,206 152003-04 25 48,857 3,59,108 13.62004-05 20 55,470 5,01,065 11.082005-06 15 63,656 6,60,409 9.642006-07 12 81,015 8,40,506 9.642007-08 10 97,691 10,12,312 9.652008-09 10 1,01,710 13,74,436 7.4

Source: DGCI&S, Kolkata, Receipt Budget of Union of India and Budget Speeches of Finance Minister.

However, as a result of progressive reduction in customs duty rates and exemptions on various counts, customs duties asa proportion of imports have been falling quite rapidly, which is in fact a positive sign of liberalization. The customs dutywas only 7.40 per cent of imports in 2008-09 compared to 21.88 per cent in 1999-2000. Given the situation created by theglobal economic crisis when countries were frantically looking for avenues to export their products, a pause button waspressed to this progressive reduction of peak duties, resulting in peak duties remaining at 10 per cent in 2008-09.A small forward movement in our tariff reforms related to lowering of peak duties even during these difficult times whenrevenue concerns are important, could help our manufacturing sector and also improve the options for our trade negotiations.This can be done with considerable ease as 77.5 per cent of our imports in value terms had duties of 7.5 per cent and less,though the share was only 39.4 per cent in terms of tariff lines in 2008-09 (Table 2). The shares are similar even if only non-agricultural items are considered.

Table 2 : Tariffs, imports and notional duties in 2008-09

Capital goods Intermediate goods Consumer goods Total Share Total ShareBasic No. of Imports Notional No. of Imports Notional No. of Imports Notional no. of of notional ofDuty tariff duty tariff duty tariff duty tariff tariff duty Imports

lines lines lines lines lines(Rs cr) (Rs cr) (Rs cr) (Rs cr) (Rs cr) (Rs cr) (%) (Rs cr) (%)

7.5% or 1079 1,64,198 38358 3353 8,96,459 89046 40 3944 886 4472 39 1,28,290 78Less 10% 334 33745 10082 3429 2,14,816 64181 1522 21728 6492 5,285 47 80755 20Above 10% 15 31 9 738 24591 5842 846 14924 9292 1599 14 15143 3

Total 1428 1,97,974 48449 7520 11,35,866 1,59,069 2408 40596 16670 11356 100 2,24,188 100

Source: Customs data base, Department of Economic Affairs, Ministry of Finance & Academy of Business Studies, United Nationsand DGCI&S

Further, exemptions result in a fall in revenue by around 55 per cent of notional collections. If these are also factored into thecalculations for items with 10 per cent duty or less, the actual duties will be still less. Thus, while practically our peak dutiesare below 10 per cent in terms of number of tariff lines and in the 7.5 per cent and below categories in value terms, we are notable to use these arguments in our favour in multilateral and bilateral negotiations because of the 10 per cent peak duty tag.Leaving aside consumer goods for the present, if most items under capital goods which enjoy a concessional rate of 0-3 percent duty under the EPCG scheme and some items under intermediate goods which are inputs for exports and industrialactivity are moved from the 10 per cent duty category to 7.5 per cent duty, our peak duties could be 7.5 per cent even in termsof number of tariff lines.


Table 7.17 : Exports from special economic zonesYear Value of exports Growth rate(per cent)

from SEZs (Rs crore) (over the previous year)

2003-04 13,854 39

2004-05 18,314 32

2005-06 22,840 25

2006-07 34,615 52

2007-08 66,638 93

2008-09 99,689 50

2009-10 (up to 31.12.2009) 1,51,785 -

Tariff Reforms7.74 Tariff policy has occupied the centre stage oftrade policy for quite some time in India. Followingthe opening up of the economy, India’s customs tariffregime also underwent drastic changes. Though thetariff policy in 2008-09 was more focused on tacklinginflation caused by supply-side constraints, someforward movement could also be seen towards theobjective of making India’s tariff structure comparableto international standards, particularly to that of itsimmediate competitors. The FTA of India withAssociation of South East Asian Nations (ASEAN)countries is a move in this direction.

7.75 Bold reforms were taken by India in 1991following the balance-of-payments crisis. Further tariffreforms at present, in the aftermath of the globaleconomic crisis, could involve continuation of thetwin strategy of (i) progressively lowering the peakcustoms duty rate (Box 7.6) and (ii) reducing end-use exemptions to check revenue loss due to dutyforegone and streamlining export promotionschemes (Box 7.7). Stimulus packages for exportsexcept during crisis should be in the form of dutycuts for capital goods and intermediate goods importsneeded for exports instead of doles in different forms.Besides plugging leakages, this could also help inlowering our duties to international levels.

Contingency trade policy and non- tariffmeasures7.76 Contingency trade policy and non-tariffmeasures (NTMs) which continued to act assignificant barriers to exports from developingcountries, but with somewhat reduced intensity inrecent years, have started a comeback with theaccentuation of the global economic crisis, resultingin protectionist tendencies amongst variouscountries.

7.77 Anti-dumping investigations of all countriesafter reaching a peak in 2001 had started falling,numbering163 in 2007. However, in 2008, they haveagain started rising with 208 anti-dumping initiations.In line with the world trend, India’s anti-dumpinginitiations increased in 2008 to 54 from 47 in 2007(Table 7.18). During 2009-10( up to December31,2009) , the Directorate General of Antidumping &Allied Duties (DGAD) has initiated 11 fresh anti-dumping investigations. The products involved aresynchronous digital hierarchy(SDH) transmissionequipment, recordable digital versatile disc(DVD),circular weaving machines, barium carbonate,coumarin, pencillin-G potassium and 6-APA, phenol,1,1,1,2-tetrafluoroethane or R-134 of all types,acetone, PVC paste resin, and sodium tripolyphosphate. The countries involved in theseinvestigations are China, Israel, Malaysia, Thailand,Vietnam, Mexico, Japan, South Korea, Russia andTaiwan. During the financial year 2009-10, the DGADhas not initiated any fresh countervailing duty (anti-subsidy) investigation.

7.78 The bail-out packages of some countries havealso introduced new protectionist measures.Economic Survey 2008-09 had given a select list ofsuch trade restrictions and distortionary measuresintroduced after the global financial crisis. The mosttrade-distorting measures are those that haveclauses related to providing preference for domesticpurchases. For example, the US passed a $ 787billion stimulus package known as the AmericanRecovery and Reinvestment Act in February 2009which excludes procurement of iron, steel andmanufactured goods used in construction projectsfrom countries like India which are not members ofthe Agreement on Government Procurement (GPA)unless the procurement increases the overall costof the project by 25 per cent. Price preferences for


Box 7 .7 : Customs duty exemptions and export promotion schemesThe Budget 2009-10, while succinctly bringing out the estimates of revenue loss, observed that the amount of revenueforegone continues to increase year after year. As a percentage of aggregate tax collection, revenue foregone remains high andshows an increasing trend. The effect is severe specially in the financial year 2008-09 which is bearing the strain of thereduction in excise duties in the stimulus package. In 2007-08, only 51.1 per cent of the notional customs duties was collectedand collection percentage has worsened to 44.6 per cent in 2008-09. Thus ,while imports have gone up by 35.8 per cent in2008-09, collections have barely risen, largely due to exemptions, which has resulted in 55 per cent of notional duties beingforegone. Within customs duty, revenue foregone on account of export promotion of Rs 49,053 crore in 2008-09 is animportant head of revenue loss, while revenue leakage due to end-use exemptions other than exports is up by 125.6 per centto reach a staggering Rs 77,380 crore. Substantial revenue is foregone on account of the different export promotion schemes(Table 1). In 2009-10, revenue foregone could continue to be significant at more than Rs 50,000 crore due to enlargement ofthe scope of schemes in the Foreign Trade Policy 2009-14 (FPS/FMS/VKGUY) and improvement in the export promotionrates in the DEPB coupled with the bottoming out of the export fall.

Table 1 : Revenue foregone on account of export promotion schemes (Rs crore)

Sl.No Name of the scheme 2007-08 2008-091. Advance Licence Scheme 17,654 12,3892. EOU/EHTP/STP 18,978 13,4013. SEZ 1,804 2,3244. EPCG 10,521 7,8335. DEPB Scheme 5,341 7,0926. DFRC 607 1117. Duty Free Import Authorisation Scheme 1,359 1,2688. Duty Free Entitlement Credit Certificate 740 4189. Target Plus Scheme 923 1,22010. VKGUY 538 2,05911. Focus Market Scheme 41 40812. Served from India Scheme (SFIS) 642 531

Total 59,149 49,053Source: Receipts Budget 2009-10 of Union of India.

While some exemptions are needed particularly at this juncture to promote exports, there is scope for reducing the dutyforegone by rationalization and convergence of these schemes. One such example is related to the EPCG scheme.At present, basic duty for capital goods in the general case is 7.5 per cent. In 2007-08, more than 20 per cent of machineryimports were on EPCG account. This has come down to 12.9 per cent in 2008-09 due to significant reduction in thedifferential between normal and EPCG duty. As a result, revenue forgone was Rs10, 521 crore in 2007-08 and Rs7,833 crorein 2008-09. The EPCG duties at present are Nil for export-oriented, labour-intensive sectors and 3 per cent for others. Withimport duties of general capital goods being reduced consistently, the differential with total EPCG has come down from 35.4per cent to 21.5 per cent during the last five years (Table 2).

Table 2 : Duty foregone and imports under EPCGYear Capital Total EPCG Duty Revenue Estimated Machinery Share of

goods duty duties foregone foregone EPCG and parts EPCG induties (DoR2 imports imports in machinery(basic- estimate) on the Ch. 84, 85 of import (%)

excise-4% (Rs cr) basis of customsSAD)1 revenue tariff

foregone (Rs cr)(Rs cr)

2005-06 15- 16-4 40.369 5 35.369 5,332 15,075 1,14,286 13.22006-07 12.5-16-4 37.250 5 32.250 9,152 28,378 1,50,152 18.92007-08 7.5- 16-4 31.011 5 26.011 10,521 40,448 1,82,603 22.22008-09 7.5- 14-4 28.639 3 25.639 7,833 30,551 2,36,216 12.92009-10 7.5 -8-4 21.523 0*/3 21. 5*/ NA NA NA NA

18.5*Concession for export-oriented, labour-intensive sectors. Covers engineering and electronic products, basic chemicals andpharmaceuticals, apparels and textiles, plastics, handicrafts, chemicals and allied products, leather and leather products.1SAD= Special Additional Duty of 4 per cent for VAT. 2 Department of RevenueThe time is possibly ripe for another reduction of import duties for all capital goods preferably to the 3 per cent duty fixedunder the general EPCG with a simultaneous withdrawal of EPCG scheme. This will help in avoiding revenue leakages andserve as a major step forward in rationalizing our export promotion schemes besides giving an upfront push to the importof capital goods for modernization of the manufacturing and services sector in general and export manufacturing inparticular. The Laffer Curve effect could also help in lessening revenue impact as volumes could double in three to four years.The above is just one example and there is a lot of scope for reforms in the other schemes as well.


local companies exist in the measures of otherdeveloped country markets as well.

7.79 With non-tariff measures (NTMs) coming innew forms and with greater vigour, the need was feltto check such tendencies, lest they provedcounterproductive if retaliatory measures are takenby other countries. Leaders in fora like the G-20,World Economic Forum and the WTO expressedtheir commitment towards tackling the protectionistmeasures and ensuring an early conclusion of theDoha Round. The WTO set up a monitoringmechanism for the trade policy measures thatmembers adopted during the financial crisis.However, intentions should translate into actions andprotectionist tendencies should be nipped in the bud.The developed countries who have been thechampions of liberalization and globalization shouldtake the lead in pressing the stop button on risingprotectionism.

WTO NEGOTIATIONS AND INDIA

7.80 The Doha Round of trade negotiations at theWTO has been under way since 2001. Thenegotiations cover several areas such as agriculture,market access for non-agricultural products, trade-related intellectual property rights, rules (coveringanti-dumping and subsidies) and trade facilitation.The conduct, conclusion and entry into force of theoutcome of the negotiations are parts of a singleundertaking, that is “nothing is agreed untileverything is agreed”.

7.81 While the years 2007 and 2008 saw intensivediscussions in the WTO and progress achieved on

several complex subjects, the negotiations wereslow to resume following the December 2008 breakat the WTO. Based on discussions during the Mini-Ministerial Meeting held in July 2008, the Chairs ofthe Negotiating Groups on Agriculture and NonAgricultural Market Access (NAMA) brought out freshdrafts of modalities for Agriculture and NAMA onDecember 6, 2008. However, discussions on thesetexts began only in September 2009 partly due tonational elections in the US and India and partly dueto a general standstill in Geneva and a reluctance tonegotiate seriously with a view to narrowingdifferences.

7.82 Going by the political commitmentsexpressed by WTO members in international fora,India took the initiative and hosted a MinisterialConference in New Delhi from September 3-4, 2009which was the first occasion since July 2008 forministers representing practically all shades ofopinion and interests in the WTO to come together.There was unanimous affirmation of the need toexpeditiously conclude the Doha Round, particularlyin the present economic situation, and fordevelopment remaining at the heart of the DohaRound.

7.83 The Seventh WTO Ministerial meeting whichwas the first full Ministerial meeting of the WTO inthe aftermath of the global economic meltdown washeld in Geneva from November 30-December 3, 2009.While the Conference was not intended as anegotiating forum, it provided a platform for differentgroups and caucuses to assess the direction of thenegotiations. India and her coalition partnersreiterated their commitment to upholding the

Table 7.18 : Investigations initiated by top ten users of anti-dumping measures 1995-2008

Country 1995 2000 2001 2002 2003 2004 2005 2006 2007 2008 1995-2008

India 6 41 79 81 46 21 28 35 47 54 564United States 14 47 75 35 37 26 12 8 28 16 418European Community 33 32 28 20 7 30 25 35 9 19 391Argentina 27 43 27 14 1 12 12 11 8 19 241South Africa 16 21 6 4 8 6 23 3 5 1 206Australia 5 15 23 16 8 9 7 10 2 6 197Brazil 5 11 17 8 4 8 6 12 13 23 170Canada 11 21 25 5 15 11 1 7 1 3 145China PR 0 6 14 30 22 27 24 10 4 14 151Turkey 0 7 15 18 11 25 12 8 6 22 137All Countries 157 292 366 312 232 214 200 202 163 208 3,427

Source: WTO


development dimension, the centrality of themultilateral process and the need to safeguardlivelihood concerns, particularly of the poor,subsistence farmers in their countries.

7.84 The major issues in the current negotiationsin the WTO are related to Agriculture and NAMAdiscussions which resumed on the basis of the draftmodalities on Agriculture and NAMA issued by theChairs of the respective Negotiating Groups onDecember 6, 2008. As per the draft agriculturemodalities, developed countries would have to reducetheir bound tariffs in equal annual instalments overfive years with an overall minimum average cut of 54per cent. Developing countries would have to reducetheir bound tariffs with maximum overall average cutof 36 per cent over a larger implementation period often years. Both developed and developing memberswould have the flexibility to designate an appropriatenumber of tariff lines as sensitive products, on whichthey would undertake lower tariff cuts. The reviseddraft modalities propose a special product (SP)entitlement of 12 per cent of agricultural tariff lines.The average tariff cut on SPs is proposed as 11 percent, including 5 per cent of total tariff lines at zerocuts. This is a special and differential treatment fordeveloping countries. In the case of NAMAnegotiations, the tariff reductions are proposedthrough a non-linear Swiss formula with a three-tieredcoefficient of 20, 22 and 25 for formula reductionslinked to specific flexibilities for protecting sensitiveNAMA tariff lines of developing countries, and acoefficient of 8 for tariff reduction of developedcountries.

7.85 In services negotiations, the Services Clusterswere held in March–April 2009, June 2009, October,2009 and November, 2009 in which India participatedactively. Other than multilateral and plurilateraldiscussions, bilateral discussions were also heldwith important trading partners, wherein Indiaconveyed its disappointment over their ambiguousand inadequate signals in the key areas of ourinterest which were conveyed earlier during thesignalling conference of July 2008. India is activelyparticipating in the working party discussions onDomestic Regulations (WPDR) as disciplining of DRsis an area of its interest.

7.86 In the current negotiations on rules, takingplace in the Negotiating Group on Rules (NGR), Indiais seeking strengthened anti-dumping rules so as toprohibit the use of zeroing in dumping margincalculation, strengthening of the rules for conduct ofsunset reviews and mandatory application of lesser

duty. In the area of subsidies, India is opposed toenlargement of the scope of prohibited subsidies inthe Agreement on Subsidies and CountervailingMeasures (ASCM) and /or limiting of the existingflexibilities for developing countries. In thenegotiations on new disciplines on fisheriessubsidies, India is seeking effective special anddifferential treatment (S&D) for developing countries,particularly in the light of employment and livelihoodconcerns of small, artisanal fishing communities andfor retaining sufficient “policy space” so as to enableit to develop its infrastructure.

Bilateral and Regional Cooperation7.87 Multilateral negotiations at the WTO continueto be at the centre of India’s trade negotiations.However, given the long and protracted nature of thesenegotiations and recognizing the fact that regionalcooperation would continue to feature for a long timein world trade, India has been active in regional andbilateral trading arrangements in recent years. RTAs,which help in expanding India’s export market areconsidered as “building blocks” towards the overallobjective of trade liberalization and multilateralnegotiations.

7.88 Some of the recent developments in thecurrent year related to bilateral and regional tradeand cooperation are the following:

Indian-ASEAN CECA: A Framework Agreementon Comprehensive Economic Cooperationbetween ASEAN and India was signed by thePrime Minster of India and the Heads of Nations/Governments of ASEAN members during theSecond ASEAN-India Summit on October 8,2003 in Bali, Indonesia. The Agreement on Tradein Goods was signed on August 13, 2009. TheIndia-ASEAN Trade in Goods Agreement hascome into effect on January 1,2010. TheAgreement provides for elimination of basiccustoms duty on 80 per cent of the tariff linesaccounting for 75 per cent of the trade in agradual manner. Negotiations towards trade inservices and investment are expected toconclude by August 2010.

India-South Korea ComprehensiveEconomic Partnership Agreement (CEPA):The Agreement was signed on August 7, 2009.It is India’s first FTA with an OECD country. CEPAcovers trade in goods, investments and servicesand bilateral cooperation in areas of commoninterest. Under CEPA, tariffs will be reduced or


eliminated on 93 per cent of Korea’s tariff linesand 85 per cent of India’s tariff lines. TheAgreement will facilitate trade in services throughadditional commitments made by both countriesto ease movement of independent professionaland contractual service suppliers.

India-Japan CEPA: Agreements in goods,services and investment are under negotiation.Twelve meetings of the Joint Task Force haveso far been held. The 12th meeting of the JTFwas held during September 29 - October 1, 2009in Tokyo.

India-EU Trade and Investment Agreement:With the EU, a broad- based bilateral Trade &Investment Agreement is being negotiated.Negotiations cover trade in goods, services andinvestment, sanitary and phytosanitarymeasures, technical barriers to trade, rules oforigin, trade facilitation and customs cooperation,competition, trade defence mechanism,Government procurement, dispute settlements,Intellectual Property Rights (IPR) andGeographical Indications (GIs). Eight rounds ofnegotiations have so far alternately been held atBrussels and New Delhi respectively; the eighthround was held during January 25-29, 2010 inNew Delhi.

India-European Free Trade Association(EFTA): A broad based bilateral trade andinvestment agreement is being negotiated withEFTA Countires. First round of negotiations tookplace in New Delhi in October 2008. Fourth roundof negotiations took place in New Delhi inSeptember 2009.


7.89 The outlook for India’s trade sector in 2010has brightened with prospects of recovery in worldoutput and trade volumes. The World Bank hasforecast real GDP growth rates of 2.7 per cent and7.5 per cent for the world and India respectively for2010 and growth in world trade volume of 4.3 percent and 6.2 per cent in 2010 and 2011 respectively.The International Monetary Fund (IMF) projectionsare a tad better than the World Bank estimates,with projections of output growth for the world andIndia at 3.9 per cent and 7.7per cent respectively.The world trade volume growth projections are alsohigher at 5.8 per cent and 6.3 per cent in 2010 and2011 respectively. This is a remarkable improvementcompared to the fall in world trade volumes by 12.3

per cent in 2009. While the gap between the projectedoutput growth for advanced economies (at 2.1 percent and 2.4 per cent for 2010 and 2011 respectively)and emerging and developing economies (at 6.0 and6.3 per cent in 2010 and 2011 respectively) is ratherhigh, it is substantially narrower in projections ofimport volume of goods and services of advancedeconomies (at 5.5 per cent both for 2010 and 2011)and emerging and developing economies (at 6.5 and7.7 per cent in 2010 and 2011 respectively).

7.90 The Baltic Dry Index which fell to a low of 774in December 2008 has recovered since then, with acontinuous upward trend, though with sudden upsand downs reaching 3887 in November 2009 andfalling marginally to 3118 in January 2010. Theextraordinary financial stimulus by different countries,a turn in the inventory cycle and the lead bydeveloping and emerging economies, particularlyIndia and China, with strong fundamentals have allcontributed to the recovery, which is now consideredto pick up, albeit at a slow pace. The latest importgrowth figures (December 2009) of some tradingpartners of India though operating from a lower base,are also encouraging, with growth of China’s importsfrom the world and India at 55.6 per cent and 71 percent respectively. Growth in Hong Kong’s importsfrom the world has turned positive at 19.3 per centand from India, highly positive at 58.5 per cent.Japan’s import growth rate from the world is lessnegative at (-) 4.1 percent, while growth in its importsfrom India has turned positive at 3 per cent. Even inthe case of the USA, which is still registering negativeimport growth, the extent of negative growth hasbecome less, with imports from the world and Indiagrowing at (-)3.1 and (-) 10 per cent respectively inNovember 2009.

7.91 The downside risks for world and Indian tradelie in the fact that though the fall has been arrested,both output and trade recoveries are still fragile giventhe fact that the recovery has been pumped up bythe stimulus given by different countries includingIndia, the effects of which may dry up if naturalrecovery doesn’t follow. There is also the fact thatthe early signs of pick up in output, industrial andtrade growth in India and other countries, are due tothe low base and are even lower than the absolutevalues of the pre-crisis period. The highunemployment rates in some developed countriesforcing even world leaders like the USA to resort toprotectionist measures, as in the case of the recenttax breaks for companies giving jobs in the US, couldgive wrong signals.


7.92 India which has admirably weathered thepresent economic crisis, however, need not be undulyworried. Instead it could lead from the front by takingbold steps towards reforms as it did in 1991 on theback of the balance-of- payments crisis, and thusforce the wavering leaders of liberalization andglobalization not to backtrack.

7.93 In the Indian case, while in the short-term reliefand stimulus measures have worked, somefundamental policy changes are needed. For themerchandise sector these include furthering tariffreforms by lowering the peak duties from the present10 per cent to 7.5 per cent (which has already beenattained in value terms though not in terms of numberof tariff lines) by tweaking the rates in the dominantintermediate goods category of imports besidescapital goods; weeding out unnecessary customsduty exemptions and streamlining export promotionschemes to reduce duty foregone which couldinclude reduction of tariffs on all capital goods to auniform 3 per cent while simultaneously withdrawingthe EPCG Scheme; further reduction in excise dutiesto make exports and industry competitive; givingspecial attention to export infrastructure along withrationalization of port service charges based onservices rendered by ports in tune with our competingcountries; rationalizing the tax structure includingspecific duties in a calibrated manner taking intoaccount the specific duty levels in our trading partnercountries; fine tuning the trade strategy by targetingexports of dynamic products to developed markets

and employment-intensive non-dynamic products todeveloping country markets; and continuing with ourproactive role in multilateral trade negotiations whiletaking care of livelihood concerns and the needs ofthe domestic sector.

7.94 In the case of the services sector, a moreconducive environment for trade can be created byliberalizing FDI in services like health insurance, ruralbanking and higher education as FDI inflows andtrade in services have a close relationship given thenature of intra-firm trade of multinational parent firmswith affiliates; making FDI policy available in a user-friendly manner on the official website; rationalizingtaxes in services like shipping and telecom alongwith facilitation measures like single returns forservice tax and excise tax administered by the samedepartment; continuing with the present initiative ontotalization agreements; streamlining many of ourdomestic regulations like licensing requirements andprocedures, technical standards and regulatorytransparency which can help in the growth and exportof services; continuing with our focus on services inmultilateral and bilateral negotiations; and negotiatingfor streamlining of domestic regulations in our majortrading partner countries which can increase ourmarket access. These, along with systematicmarketing of services, collection and disseminationof market information by setting up a portal forservices and streamlining the services data system,could help the services sector in making furtherstrides.

Agriculture and FoodManagement CHAPTER

8

Good monsoon between 2005-06 and 2008-09 and the efforts of our farmers led toconsistent increase in food production during the period and a record production of233.88 million tonnes of foodgrains in 2008-09. Notwithstanding the fact that thesouth-west monsoon was the most deficient since 1972, by 23 per cent compared tothe long period average (LPA), the overall agricultural gross domestic product (GDP)is estimated to have fallen by only 0.2 per cent in 2009-10 (advance estimates) asagainst the previous years growth rate of 1.6 per cent. Foodgrain area sown inkharif season declined by 6.5 per cent compared to last year and food production isexpected to be short by 16 per cent compared to the fourth advance estimates of2008-09. Rising food prices, spurred by expectations of shortfall in food production,have brought the issues of food security, food stocks management and need forimproving food production and productivity to the forefront of national strategy.

8.2 Agriculture including crop and animalhusbandry, fisheries, forestry and agro processingprovides the underpinnings of our food and livelihood

security. Agriculture provides significant support foreconomic growth and social transformation of thecountry. As one of the world’s largest agrarian

Table 8.1 : Agriculture sector: Key indicators at constant prices (2004-05) in per cent

Item 2007-08 2008-09

1 Growth in GDP in Agriculture & Allied Sectors 4.7 1.6Agriculture 5.0 1.1Forestry and Logging 2.2 2.9Fishing 6.0 6.3

2 Share in GDP - Agriculture and Allied Sectors 16.4 15.7Agriculture 13.9 13.2Forestry and Logging 1.7 1.7Fishing 0.8 0.8

3 Share of Agriculture & Allied Sectors in total GCF. 7.01 9.05Agriculture 6.43 8.39Forestry and Logging 0.07 0.09Fishing 0.51 0.58

4 Share of Agricultural Imports in Total Imports at Current Prices 2.95 2.74Share of Agricultural Exports in Total Exports at Current Prices 12.05 10.23

5 Employment in the agriculture Sector as Share ofTotal Employment in 2004-05 as per CDS 52.1

Source : Central Statistical Organization (CSO) and Department of Agriculture and Cooperation.Notes : GCF—gross capital formation; CDS—current daily status.


economies, the agriculture sector (including alliedactivities) in India accounted for 15.7 per cent of theGDP (at constant 2004-05 prices), in 2008-09,compared to 18.9 per cent in 2004-05, andcontributed approximately 10.2 per cent of totalexports during 2008-09. Notwithstanding the fact thatthe share of this sector in the GDP has beendeclining over the years, its role remains critical asit provides employment to around 52 per cent of theworkforce. The rates of growth and share of agricultureand allied activities in the GDP of the country aregiven in Table 8.1.

GROSS CAPITAL FORMATION INAGRICULTURE AND ALLIED SECTORS

8.3 The public investment in agriculture in realterms has witnessed steady decline from the SixthFive Year Plan to the Tenth Plan. Trends in publicinvestment in agriculture and allied sectors reveal

that it has consistently declined in real terms (at1999-2000 prices) from the Sixth Plan to the NinthPlan (Sixth Plan [1980-85]—Rs 64,012 crore,Seventh Plan [1985-90]—Rs 52,108 crore, EighthPlan [1992-97]—Rs 45,565 crore and Ninth Plan[1997-2002]—Rs 42,226 crore). However, this trendwas reversed in the Tenth Plan (2002-07) and publicinvestment in agriculture registered an increase ofRs 25, 034 crore and stood at Rs 67,260 crore, whichis a positive and welcome trend. Investment inagriculture and allied sector since 2004-05 is givenin Table 8.2.

8.4 The GCF in agriculture and allied sectors asa proportion of total GDP stood at 2.66 per cent in2004-05 and improved to 3.34 per cent in 2008-09.Similarly, the GCF in agriculture & allied sectorsrelative to GDP in this sector has also shown animprovement from 14.07 per cent in 2004-05 to 21.31per cent in 2008-09 (Table 8.3).

Table 8.3 : Gross capital formation in agriculture in Rs crore at 2004-05 prices

Year GDP Agriculture & allied GCF/GDP in GCF inactivities agriculture & agriculture as

GCF GDP allied per cent ofactivities total

2004-05 29,67,599 78,848 5,60,308 14.07 2.66

2005-06 32,49,130 93,121 5,89,697 15.79 2.87

2006-07 35,64,627 94,400 6,11,409 15.44 2.65

2007-08 38,93,457 1,10,006 6,40,315 17.18 2.83

2008-09 41,54,973 1,38,597 6,50,461 21.31 3.34

Source : CSO.

Table 8.2 : Public and Private Investment in Agriculture & Allied Sector at 2004-05 Prices

Year Investment in agriculture & allied Share in totalsectors (Rs crore) investment (per cent)

Total Public Private Public Private

2004-05 78,848 161,83 62,665 20.5 79.5

2005-06 93,121 199,09 73,211 21.4 78.6

2006-07 94,400 22,978 71,422 24.3 75.7

2007-08 1,10,006 23,039 86,967 20.9 79.1

2008-09 1,38,597 24,452 1,14,145 17.6 82.4

Source : CSO.

181Agriculture and Food Management

CROP PRODUCTION 2008-098.5 For three consecutive years, from 2005-06 to2008-09 (fourth advance estimates), foodgrainsproduction recorded an average annual increase ofover 8 million tonnes. Total foodgrains production in2008-09 was estimated at 233.88 million tonnes asagainst 230.78 million tonnes in 2007-08 (Table 8.4).However, the production of major commercial crops(oilseeds, sugarcane, cotton, jute and mesta)declined in 2008-09 compared to 2007-08 levels(Table 8.5)

CROP PRODUCTION 2009-108.6 Deficiency in rainfall in the south-westmonsoon season during 2009, particularly in Julyand August, severely affected kharif crops, especiallypaddy. The recovery of monsoon in September andpost-monsoon (October-December) cumulativerainfall of 8 per cent above normal protected the kharifcrops to some extent and improved the prospects ofrabi crops in 2009-10. As per the first advance

estimates (kharif only) for 2009-10, production offoodgrains is estimated at 98.83 million tonnes whichis lower than the target of 125.15 million tonnes setfor the year as also lower than the fourth advanceestimates (kharif only) of 117.70 million tonnes for2008-09.

Rice8.7 As per the first advance estimates, theproduction of kharif rice is at 71.65 million tonnes in2009-10, a decrease of about 15 per cent over 2008-09 levels and 17 per cent over the target for 2009-10.

Coarse Cereals8.8 Total kharif production of coarse cereals in2009-10 is expected to decline to 22.76 milliontonnes against 28.34 million tonnes in 2008-09 anda target of 32.65 million tonnes for kharif 2009-10.

Cereals8.9 The overall production of kharif cereals in 2009-10 is expected to decline by 18.51 million tonnesover 2008-09.

Table 8.4 : Foodgrain production (million tonnes)2007-08 2008-09

Crop Final Targets Fourth Percentage Percentageadvance increase (+) increase (+)

estimates decrease(-) decrease (-)over final vis-à-vis target2007-08 for 2008-09

1 Rice 96.69 97.0 99.15 2.5 2.22 Wheat 78.57 78.5 80.58 2.6 2.63 Coarse Cereals 40.76 42.0 39.48 -3.1 -6.04 Cereals 216.02 217.5 219.21 1.5 0.85 Total Pulses 14.76 15.5 14.66 -0.7 -5.46 Total Foodgrains 230.78 233.0 233.88 1.3 0.4

Source : Department of Agriculture & Cooperation.

Table 8.5 : Production of commercial cropsCrop Units 2007-08 2008-09

Final Targets Fourth Per cent Per centadvance increase increase

estimates over vis-a vis2007-08 target

Total Nine Oilseeds Lakh tonnes 297.55 317.50 281.57 -5.4 -11.3Sugarcane Lakh tonnes 3,481.88 3,400.00 2,739.31 -21.3 -19.4Cotton # Lakh bales 258.84 260.00 231.56 -10.5 -10.9Jute & Mesta## Lakh bales 112.11 110.00 104.07 -7.2 -5.4

Source : Department of Agriculture & Cooperation. # bales of 170 kgs each ## bales of 180 kgs.


Pulses8.10 Total production of kharif pulses is estimatedat 4.42 million tonnes in 2009-10, which is 8 percent lower than the production during 2008-09 and32 per cent lower than the targeted production for2009-10.

Oilseeds8.11 Total kharif production of the nine oilseeds isestimated at 152.33 lakh tonnes in 2009-10, whichis about 15 per cent lower than the kharif productionin 2008-09.

Sugarcane8.12 Sugarcane production in 2009-10 is estimatedat 249.48 million tonnes, which is lower than theproduction of 273.93 million tonnes during 2008-09.This represents a decline of 9 per cent over theprevious year and 27 per cent vis-à-vis the targetedproduction for 2009-10.

Cotton8.13 Cotton production in 2009-10 is estimated at236.57 lakh bales (of 170 kg each), which is higherthan the fourth advance estimates of 231.56 lakhbales in 2008-09 by 2.2 per cent.

Jute and Mesta8.14 The production of jute and mesta is estimatedat 102.43 lakh bales (of 180 kg each) in 2009-10.This is lower than the targeted production of 112.00lakh bales and also lower than the 104.07 lakh balesproduced in 2008-09.

GROWTH RATES OF AREA,PRODUCTION AND YIELD

8.15 Growth in production of agricultural cropsdepends upon acreage and yield. Limitations ofexpansion in agricultural land suggest multiplecropping as a means to increase the gross croppedarea. It is clear that the main source of long-termoutput growth can only be improvement in yields.Trends in indices of area, production and yield ofdifferent crops till 2008-09 (Base triennium ending1981-82=100) are given in Table 8.6. Trends in areaand production are given in Figure 8.1.

Rice8.16 The compound growth index of rice yield hasshown a growth of 1.9 per cent per annum during2001-08 compared to the 1990s leading to an

increase in growth in production. However, the indexof area under rice shows negative growth during theabove period.

Wheat8.17 The area under wheat that was around 25million ha in 2002-03 increased to 26.4 million ha in2005-06 and further to 28 million ha in 2008-09. Thecompound growth indices of area, production andyield during 1991-2000 and 2001-08 have shownperceptible decline.

Coarse Cereals8.18 Growth in index of area during 2001-08improved compared to the 1990s. The growth index

Table 8.6 : Compound growth rates ofarea, production and yield

(as % per annum with Base T.E 1981-82=100)

Growth 1949-50 to 1967-68 torates 1964-65 2008-09*

Rice

Area 1.21 0.50Production 3.50 2.46Yield 2.25 1.99

WheatArea 2.69 1.20Production 3.98 3.69Yield 1.27 2.46

Coarse CerealsArea 0.90 -1.41Production 2.25 0.67Yield 1.23 1.99

PulsesArea 1.72 0.01Production 1.41 0.75Yield -0.18 0.72

SugarcaneArea 3.28 1.69Production 4.26 2.64Yield 0.95 0.94

CottonArea 2.47 0.42Production 4.55 3.06Yield 2.04 2.63

Nine OilseedsArea 2.53 1.44Production 3.12 3.16Yield 0.00 1.69

Source : Department of Agriculture & Co-operation.Note: *Growth rates are based on fourth advance

estimates for 2008-09.


Area and production of principal cropsFigure 8.1

160Prod

uctio

n (M

illio

n To

nnes

)

Year

170

180

190

200

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Area

(M

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240 Food Grains8.1A

111

113

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85 Wheat8.1B

25

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25Prod

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31

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41 Coarse Cereals8.1D

27

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Area and production of principal cropsFigure 8.1

11Prod

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15 Pulses8.1E

20

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Prod

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Production

Area

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275 Cotton8.1H

7.5

8.0

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140

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300 Nine Oilseeds8.1F

21

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Area

3750

4000 Sugarcane8.1G

3.7

3.9

4.1

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4.9

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-09


of yield increased significantly, leading to an increasein growth in production.

Pulses8.19 Gram and tur are the major contributors tototal pulses production in the country. During 2000-01 to 2008-09, there has been improvement in thegrowth indices of area and yield in tur and index ofarea in gram resulting in increase in the growth ofproduction.

Sugarcane8.20 The compound growth rate index of area undersugarcane increased significantly during 2001-08.However, the growth index of yield moderated butremained positive.

Cotton8.21 The yield of cotton went up from 307 kg/ha in2003-04 to 419 kg/ha in 2008-09 (fourth advanceestimates). The compound growth rate index of yieldincreased significantly from - 0.41 per cent duringthe1990s to 13.64 per cent during 2001 to 2008.However, the growth in index of area moderated butremained positive. The combined effect on the indexof production was an increase in growth from 2.29per cent during the 1990s to 15.48 per cent during2001-08.

Oilseeds8.22 The growth in indices of yield and area underoilseeds has shown perceptible improvement during2001-08 compared to the 1990s.

AREA COVERAGE 2009-108.23 The area coverage of 667.84 lakh ha undertotal foodgrains during kharif 2009-10 compared to714.02 lakh ha during kharif 2008-09 shows a declineof 46.18 lakh ha. The area coverage under kharif riceduring 2009-10 is around 361.62 lakh ha, which is44.85 lakh ha less than the 406.47 lakh ha duringkharif 2008-09. The area coverage under oilseedsduring kharif 2009-10 is 175.19 lakh hectares, whichis lower by 9.49 lakh ha than kharif 2008-09. Thearea coverage under sugarcane during the currentyear is 41.78 lakh ha, which is also lower by about2.18 lakh ha than that in the previous year.

AGRICULTURAL INPUTS

8.24 Improvement in yield, which is key to long-term growth, depends on a host of factors includingtechnology, use of quality seeds, fertilizers,

pesticides, micronutrients and irrigation. Each ofthese plays a role in determining yield level and inturn augmentation in the level of production.

Seeds8.25 Seeds, which are considered the carriers ofnew technology for crop production and higher cropyields, are a critical input for sustained growth ofagriculture. In India more than four-fifths of the farmersrely on farm-saved seeds leading to a low seedreplacement rate. The Indian Seed Programmeincludes the participation of Central and StateGovernments, the Indian Council of AgriculturalResearch (ICAR), State Agricultural Universities, thecooperative and private sectors. There are 15 StateSeed Corporations besides two national-levelcorporations, namely National Seeds Corporationand State Farms Corporation of India. Year-wisedetails of production of breeder and foundation seedsand distribution of certified seeds are given in Table8.7.

8.26 The Ministry of Agriculture is implementing theCentral-sector Development and Strengthening ofInfrastructure Facilities for Production andDistribution of Quality Seeds scheme. The aim ofthe scheme is to make quality seeds of various cropsavailable to farmers timely and at affordable price.Under this scheme, the seed component of thePrime Minister’s Relief Package is beingimplemented in 31 suicide-affected districts ofMaharashtra, Andhra Pradesh, Karnataka andKerala, to supply certified seeds at 50 per cent ofseed cost. During the year 2008-09, Rs 445.81 crorewas released under the Prime Minister’s Relief

Table 8.7 : Production of breeder andfoundation seeds and distribution ofcertified seed

Production of Production ofYear breeder foundation Distribution

seeds seeds of certified/(quintals) (lakh quality seeds

quintals) (lakh quintals)

2004-05 66,460 6.9 113.102005-06 68,654 7.4 126.742006-07 73,829 7.96 155.012007-08 91,960 8.22 179.052008-09 1,00,000 9.69 190.00

(Anticipated) (Anticipated) (Anticipated)

Source : Department of Agriculture & Cooperation.


Package. The scheme is being implemented on all -India basis from the year 2005-06. The major thrustsunder the scheme are on improving quality of farm-saved seeds through Seed Village Programmes toenhance seed replacement rate, boosting seedproduction in the private sector and helping public-sector seed companies to contribute to enhancingseed production. Some of the remarkableachievements under the scheme during 2008-09 werethat more than 25,000 seed villages were organizedacross the country; certified/quality seed productionincreased from 194.31 lakh quintals during 2006-07to 250.35 lakh quintals during 2008-09; 52 seedinfrastructure development proposals weresanctioned for boosting seed production in the privatesector; and financial sanctions were given forestablishing tissue culture facilities in Orissa(banana) and Maharashtra (pomegranate). Further,Biotech Consortium of India Limited (BCIL) wasengaged as an expert agency to undertake publicawareness programmes in nine BT cotton- growingStates at State capital, district and tehsil levels. TheBCIL has been provided financial assistance of Rs26.65 lakh during the year 2008-09.

8.27 The Protection of Plant Varieties and Farmers’Rights (PPV&FR) Authority, established in November2005 at the National Agricultural Science Complex(NASC), New Delhi, has been mandated toimplement provisions of the PPV&FR Act 2001.Fourteen crops, namely rice, wheat, maize,sorghum, pearl millet, chick pea, pegion pea, greengram, black gram, lentil, field pea, kidney bean,cotton and jute were notified for the purpose ofregistration under the Act. There are plans to extendits operations and coverage to forestry and aromaticand medicinal plants.

8.28 Considering the vital importance of the seedssector in promoting agricultural growth, it is proposedto replace the existing Seeds Act 1966 by suitablelegislation. The new Act is expected to (i) create afacilitative climate for growth of the seed industry,(ii) enhance seed replacement rates for variouscrops, (iii) boost the export of seeds and encourageimport of useful germ plasm and (iv) create aconducive atmosphere for application of frontiersciences in varietal development and for enhancedinvestment in research and development (R&D). TheSeeds Bill was introduced in the Rajya Sabha in2004. It was referred to the Parliamentary StandingCommittee on Agriculture which recommendedseveral modifications in 2008. These would be takenup for consideration by Parliament.

Fertilizers8.29 Chemical fertilizers have played a significantrole in the development of the agricultural sector. Theper hectare consumption of fertilizers in nutrients termsincreased from 105.5 kg in 2005-06 to 128.6 kg in2008-09. However, improving the marginal productivityof soil still remains a challenge. This requires increasedNPK application and application of proper nutrients,based on soil analysis. Fertilizer consumption for thelast five years is given in Table 8.8.

8.30 The Government has taken a number ofmeasures to improve fertilizer application in thecountry. A new scheme, the National Project onManagement of Soil Health & Fertility (NPMSF), hasbeen introduced in 2008-09 with a view to setting upof 500 new Soil Testing Laboratories (STLs) and 250Mobile Soil Testing Laboratories (MSTLs) andstrengthening of the existing State STLs formicronutrient analysis. In order to ensure adequateavailability of fertilizers of standard quality to farmersand to regulate trade, quality and distribution in thecountry, fertilizers have been declared an essentialcommodity as per the Fertilizer Control Order (FCO)1985 promulgated under Section 3 of the EssentialCommodity Act 1955. The procedure for incorporationof new products has been liberalized and simplifiedto encourage manufacture and use of fortifiedfertilizers. Eight fertilizers have been specified asfortified fertilizers in FCO 1985. To encouragebalanced use of fertilizers, a new concept ofcustomized fertilizers has been introduced. Thesefertilizers are soil specific and crop specific. Organicfertilizers, namely city-based compost and vermincompost, and bio-fertilizers, namely rhizobium,azotobacter, azospirillum and phosphate solubilizingbacteria, have been recognized and incorporated inFCO 1985.

Table 8.8 : Fertilizer consumption in nutrientterms during 2005-06 to 2009-10

(in lakh tonnes)

Product 2005 2006 2007 2008 2009-10-06 -07 -08 -09 (only

kharif*)Nitrogenous (N) 127.23 137.73 144.19 150.90 74.86

Phosphatic (P) 52.04 55.43 55.15 65.06 41.32

Potassic (K) 24.13 23.35 26.36 33.13 16.07

Total (N+P+K) 203.40 216.51 225.70 249.09 132.25

Per ha Con-sumption (kg) 105.5 111.80 116.80 128.6 -

Source : Department of Fertilizers.Note : *Estimated


Irrigation8.31 Irrigation is one of the most important criticalinputs for enhancing the productivity that is requiredat different critical stages of plant growth of variouscrops for optimum production. The Government ofIndia has taken up irrigation potential creation throughpublic funding and is assisting farmers to createpotential on their own farms. Substantial irrigationpotential has been created through major and mediumirrigation schemes. The total irrigation potential inthe country has increased from 81.1 million ha in1991-92 to 102.77 million ha by March 2007.

8.32 The Central Government initiated theAccelerated Irrigation Benefit Programme (AIBP)from 1996-97 for extending assistance for thecompletion of incomplete irrigation schemes . Underthis programme, projects approved by the PlanningCommission are eligible for assistance. Further, theassistance, which was entirely a loan from theCentre in the beginning, was modified by inclusionof a grant component with effect from 2004-05. AIBPguidelines were further modified in December 2006to provide enhanced assistance at 90 per cent ofthe project cost as grant to special category States,Drought Prone Area Programme (DPAP) States/tribalareas/flood-prone areas and Koraput-Balangir-Kalahandi (KBK) districts of Orissa. Under the AIBP,Rs 34,783.7823 crore of Central Loan Assistance(CLA)/grant has been released up to March 31, 2009.An additional irrigation potential of 54.858 lakh hahas been created under the AIBP up to March 2009.As on March 31, 2009, 268 projects have beencovered under the AIBP and 109 completed.

RAINFALL AND RESERVOIR STORAGE

Rainfall8.33 Rainfall greatly influences crop production andproductivity in a substantial way. More than 75 per

cent of annual rainfall is received during the south-west monsoon season (June-September). Duringwinter (January-February) of 2009, the country as awhole received 46 per cent less rainfall than the LPA.In the pre-monsoon period of 2009 (March-May),rainfall was 32 per cent below the LPA. During thesouth-west monsoon season of 2009, the countryas a whole received 23 per cent less rainfall than theLPA. Central India, north-east India, north-west Indiaand the southern peninsula experienced 20 per cent,27 per cent, 36 per cent and 4 per cent deficientrainfall respectively. At district level, 9 per cent ofdistricts received excess rainfall, 32 per cent normalrainfall, 51 per cent deficient rainfall and 8 per centscanty rainfall. South-west monsoon (June-September, 2009) rainfall for the country as a wholeand the four broad geographical regions is given inTable 8.9.

8.34 Out of 36 subdivisions, 23 recorded deficientrainfall during the south-west monsoon in 2009. Outof the remaining 13 subdivisions, only three recordedexcess rainfall and the remaining 10 normal rainfall.Out of 526 meteorological districts for which dataare available, 215 (41 per cent) received excess/normal rainfall and the remaining 311 (59 per cent)received deficient/scanty rainfall during the season(Table 8.10).

8.35 During the post-monsoon season (October-December) of 2009, the country as a whole hasreceived 8 per cent above normal rainfall.

Reservoir storage status8.36 The total designed storage capacity at fullreservoir level (FRL) of 81 major reservoirs in thecountry monitored by the Central Water Commission(CWC) is 151.77 billion cubic metres (BCM). At theend of monsoon 2009, the total water availability inthese reservoirs was 90.48 BCM which is less thanthe water availability of 113.74 BCM at the end of

Table 8.9 : South-west monsoon season (June to September 2009) rainfallRegion Actual (mm) LPA(mm) Actual per Coefficient of variation(CV)

cent of LPA per cent of LPA

All-India 689.9 892.5 77 10North-west India 392.1 611.7 64 19Central India 795.4 995.1 80 14Southern Peninsula 692.9 722.5 96 15North-east India 1,037.7 1,427.3 73 8

Source: Indian Meteorological Department.


the monsoon in 2008 and the 100.95 BCM which isthe average of the last 10 years (Table 8.11).

PRICE POLICY FOR AGRICULTURALPRODUCE

8.37 The Government’s price policy for agriculturalcommodities seeks to ensure remunerative pricesto the growers for their produce with a view toencouraging higher investment and production, andto safeguard the interests of consumers by makingsupplies available at reasonable prices. The pricepolicy also seeks to evolve a balanced and integratedprice structure in the perspective of the overall needsof the economy. Towards this end, the Governmentannounces minimum support prices (MSPs) eachseason for major agricultural commodities andorganizes purchase operations through public andcooperative agencies. The designated Central nodalagencies intervene in the market to undertake

procurement operations with the objective of ensuringthat market prices do not fall below the MSPs fixedby the Government.

8.38 The Government decides the support pricesfor various agricultural commodities after taking intoaccount the recommendations of the Commissionfor Agricultural Costs and Prices (CACP), the viewsof State Governments and Central Ministries as wellas such other relevant factors as consideredimportant for fixation of support prices. TheGovernment has fixed the MSPs of 2009-10 kharifand rabi crops. The MSPs for paddy (common) andpaddy (Grade A) have been raised by Rs 100 perquintal and fixed at Rs 950 per quintal and Rs 980per quintal respectively. An incentive bonus of Rs 50per quintal is also payable over and above the MSPof paddy. The MSP of arhar (tur) has been raisedover the 2008-09 level by Rs 300 per quintal andfixed at Rs 2,300 per quintal while that of moong

Table 8.10 : Monsoon performance 2001 to 2009 (June – September)Year Number of meteorological subdivisions Percentage of Percentage

Normal Excess Deficient/ districts with of LPAscanty normal/ rainfall

excess for the countryrainfall as a whole

2001 29 1 5 67 922002 14 1 21 39 812003 26 7 3 77 1022004 23 0 13 56 862005 23 9 4 72 992006 20 6 10 60 992007 17 13 6 72 1052008 30 2 4 76 982009 10 3 23 41 77

Source : India Meteorological Department.Note: Excess= +20 per cent or more of LPA; Normal=+19 per cent to –19 per cent of LPA;Deficient= -20 per cent to –59 per cent of LPA; Scanty= -60 per cent to –99 per cent of LPA.

Table 8.11 : Reservoir storage (at the end of the monsoon season)Average of last

Item 2009 2008 10 yearsStorage % of Storage % of Storage % ofin BCM FRL in BCM FRL in BCM FRL

At the beginning of the monsoon 17.50 12 29.24 19 21.02 14season(as on June 4, 2009)

At the end of the monsoon season 90.48 60 113.74 75 100.95 67(as on October 1, 2009)

Increase in Storage 72.98 48 84.50 56 79.93 53

Source : Central Water Commission


has been raised by Rs 240 per quintal and fixed atRs 2,760 per quintal. The MSP of sesamum hasbeen fixed at Rs 2,850 per quintal, raising it byRs 100 per quintal. The MSPs of other kharif cropshave been retained at their 2008-09 levels. The MSPof wheat has been raised to Rs 1,100 per quintalfrom Rs 1,080 per quintal and of barley to Rs 750per quintal from Rs 680 per quintal. The MSPs ofgram and safflower have been raised by Rs 30 perquintal each. The MSPs of masur and rapeseed/mustard have been retained at their previous year’slevels of Rs 1,870 per quintal and Rs1,830 per quintalrespectively (Table 8.12).

Price Support Scheme (PSS)8.39 The Department of Agriculture & Cooperationis implementing the Price Support Scheme (PSS)for procurement of oilseeds and pulses through the

National Agricultural Cooperative MarketingFederation of India Limited (NAFED), which is theCentral nodal agency, at the MSP declared by theGovernment. NAFED is also the Central agency forprocurement of cotton under the PSS in addition tothe Cotton Corporation of India (CCI). NAFEDundertakes procurement of oilseeds, pulses andcotton under the PSS as and when prices fall belowthe MSP. Procurement under the PSS is continuedtill prices stabilize at or above the MSP

8.40 During 2009-10 (up to January 4, 2010) NAFEDhas procured 64,802 metric tonnes of various oilseedscosting Rs 278.07 crore under the PSS (Table 8.13).

Market Intervention Scheme (MIS)8.41 The Department of Agriculture & Cooperationimplements the MIS on the request of State/Union

Table 8.12 : Minimum support prices(Rs. per quintal)

Commodity MSP 2009-10 (crop year) Commodity MSP 2009-10 (crop year)

Kharif crops Rabi crops

Paddy (common) 950 + Rs. 50 per Wheat 1,100quintal bonus

Paddy (Gr.A) 980 + Rs. 50 per Gram 1,760quintal bonus

Jowar (Malindi) 860 Masur (lentil) 1,870

Maize 840 Rapeseed / mustard 1,830

Arhar (Tur) 2,300 Barley 750

Moong 2,760 Other crops

Cotton (F-414/H-777/J34) 2,500a Sugarcane 129.84b

Groundnut in shell 2,100Source: Department of Agriculture & Cooperation.Notes: a staple length (mm) of 24.5-25.5 and Micronaire value of 4.3-5.1;

b Fair and Remunerative Price.

Table 8.13 : Procurement made by NAFED under the PSS during 2009-10(up to January 4, 2010)

Sl. Commodity Crop season MSP Quantity procured ValueNo. (Rs per quintal) (in metric tonnes) (in Rs lakh)

1. Ball Copra Season -2009 4,700 1,250 638.382. Milling Copra Season -2009 4,450 47,916 23,200.923. AP Copra Season -2009 3,900 510 219.304. Cotton Kharif-2009-10 2,850 & 3,000 1,408 405.375. Sunflower Seed Kharif -2009-10 2,215 13,718 3,343.08

TOTAL 64,802 27,807.05Source: Department of Agriculture & Cooperation.


Territory (UT) Governments for procurement ofagricultural and horticultural commodities that aregenerally perishable in nature and not covered underthe PSS. The MIS is implemented in order to protectthe growers of these commodities from having tomake distress sales. In the event of a bumper cropand glut in the market, prices tend to fall beloweconomic levels/cost of production. Procurementunder the MIS is made by NAFED as the Centralagency and by State-designated agencies.

8.42 During 2009-10, the rates of most of thehorticultural crops ruled to the benefit of growers.Thus only a couple of proposals were received, onefrom the Government of Karnataka for procurementof arecanut and another from the Government ofMizoram for procurement of passion fruit.

PROGRESS OF AGRICULTURE-SECTORSCHEMES/PROGRAMMES

8.43 Agriculture being a state subject, StateGovernments have an important role andresponsibility for increasing agriculture production,enhancing productivity and exploring the vastuntapped potential of the sector. Simultaneously,the Central Government must supplement the effortsof State Governments and a number of Centrallysponsored and Central-sector schemes are beingimplemented for the enhancement of agriculturalproduction and productivity in the country, and toincrease the income of the farming community.

(i) Macro Management8.44 The Macro Management of AgricultureScheme (MMA) was formulated in 2000-01, bybringing together under one umbrella 27 Centrallysponsored schemes relating to cooperatives, cropproduction programmes, watershed developmentprogrammes, horticulture, fertilizer, mechanizationand seeds. The Scheme has been revised during2008-09 to improve its efficacy in supplementing/complementing the efforts of the States towardsenhancement of agricultural production andproductivity. The role of the Scheme has beenredefined to avoid overlapping and duplication ofefforts and to make it more relevant to the presentagricultural scenario in the States in order to achievethe basic objective of food security and to improvethe livelihood system for rural masses. The RevisedMMA comprises 10 sub-schemes relating to cropproduction and natural resource management.

Some of the salient features of the revised Schemeare:

the practice of allocating funds to States/UTs onhistorical basis has been replaced by newallocation criteria based on gross cropped areaand area under small and marginal holdings;

assistance is provided to the States/UTs as 100per cent grant;

the subsidy structure has been rationalized tomake the pattern of subsidy uniform under all theschemes implemented by the Department ofAgriculture & Cooperation;

the revised subsidy norms indicate the maximumpermissible limit of assistance. States may eitherretain existing norms, or increase them to areasonable level provided that the norms do notexceed the revised upper limits specified;

two new components have been added, namely(a) pulses and oilseeds crop productionprogrammes for areas not covered under theIntegrated Scheme of Oilseeds, Pulses, Oil palmand Maize (ISOPOM) and (b) Reclamation ofAcidic Soil along with the existing component ofReclamation of Alkali Soil;

the permissible ceiling for new initiatives has beenincreased from the existing 10 per cent to 20 percent of the allocation;

at least 33 per cent of the funds is required to beearmarked for small, marginal and women farmers;

active participation of all tiers of the PanchayatiRaj institutions (PRIs) would have to be ensuredin the implementation of the Revised MMAincluding review, monitoring and evaluation atdistrict/sub-district level.

(ii) National Food Security Mission (NFSM)8.45 With a view to enhancing the production ofrice, wheat and pulses by 10 million tonnes, 8 milliontonnes and 2 million tonnes respectively by the endof the Eleventh Plan, the Centrally sponsored NFSMhas been launched from the rabi 2007-08 season.The three major components of the Mission areNFSM-rice, NFSM-wheat and NFSM-pulses. TheMission aims to increase production through areaexpansion and productivity enhancement; restore soilfertility and productivity; create employmentopportunities; and enhance the farm-level economyto restore confidence of farmers. The NFSM ispresently being implemented in 312 identifieddistricts of 17 States of the country.


8.46 Focused and target-oriented technologicalintervention under the NFSM has made significantimpact since its inception, reflected in the increasein production of rice and wheat in 2008-09.

(iii) Rashtriya Krishi Vikas Yojana (RKVY)8.47 The RKVY, a flagship scheme of theGovernment in the agriculture and allied sectors waslaunched in August 2007 to reorient currentagricultural development strategies to meet the needsof farmers and rejuvenate the agricultural sector soas to achieve 4 per cent annual growth during theEleventh Five Year Plan. The scheme has anenvisaged outlay of Rs 25,000 crore for the Planperiod in the form of Additional Central Assistance(ACA). Funds to the tune of Rs 4,133.69 crore werereleased to the States/UTs during 2007-08 and 2008-09. For the current year, a sum of Rs 4,100.00 crorehas been allocated of which Rs 3,243.76 crore hasbeen released to the States by December 31, 2009.Up to 83 per cent and 85.95 per cent of theallocations for 2007-08 and 2008-09 respectively havebeen utilized by the end of November 2009.

8.48 During 2008-09, the areas of focus in theagriculture sector were seeds, fertilizers, IPM testinglaboratories, horticulture, farm mechanization,extension, crops, marketing and cooperatives. Awelcome feature observed during 2008–09 was thatStates have stepped up activities in the animalhusbandry, dairy and fisheries sectors. Further, about25 per cent of the approved funds was earmarked forprojects related to these allied sectors. Besidesthese, projects related to micro irrigation, agriculturalresearch, watershed and others were also approved.

8.49 Apart from the RKVY, there are many otherprogrammes and policies responsible for growth ofagriculture and allied sectors in the States; however,the RKVY is expected to play a major role. The RKVYalso incentivizes States to allocate more foragriculture and allied sectors in their plans. TheStates have indeed stepped up allocation toagriculture and allied sectors. Allocation toagriculture and allied sectors was 5.11 per cent oftotal State Plan Expenditure in 2006-07. This hasgone up to 5.84 per cent in 2008-09 (revisedestimates[RE]/Approved).

(iv) ISOPOM8.50 The Ministry of Agriculture has restructuredoilseeds, pulses, oil palm and maize developmentprogrammes into one Centrally Sponsored Integrated

Scheme of Oilseeds, Pulses, Oil Palm and Maizewhich is being implemented in 14 major States foroilseeds and pulses, 15 States for maize and 8 Statesfor oil palm. About 75-80 per cent area of pulses isalready in the NFSM-Pulses districts under 14States.

8.51 The Oil Palm Development Programme underISOPOM is being implemented in the States ofAndhra Pradesh, Karnataka, Tamil Nadu, Gujarat,Goa, Orissa, Kerala, Tripura, Assam and Mizoram.The year-wise targets and achievements for the period2007-08, 2008-09 and 2009-10 in respect of areacoverage under oil palm through implementation ofthe Oil Palm Development Programme are given inTable 8.14.

8.52 The area under maize cultivation is 81.80 lakhha with production of 192.80 lakh tonnes in 2008-09. About 90 per cent of the maize cultivated in kharifis rainfed. Maize is cultivated mainly for food, fodder,feed and industrial use. Under ISOPOM, the MaizeDevelopment Programme is being implemented in15 States, namely Andhra Pradesh, Bihar,Chhatisgarh, Himachal Pradesh, Jammu &Kashmir,Gujarat, Karnataka, Madhya Pradesh, Maharashtra,Orissa, Punjab, Rajasthan, Tamil Nadu, UttarPradesh and West Bengal.

(v) National Rainfed Area Authority (NRAA)8.53 The Government of India has also constitutedthe NRAA to give focused attention to the problemof rainfed areas of the country. The Authority is anadvisory, policymaking and monitoring body chargedwith examining guidelines in various existingschemes and in the formulation of new schemesincluding all externally aided projects in this area.Its mandate is wider than mere water conservationand covers all aspects of sustainable and holistic

Table 8.14 : Targets and achievements in areacoverage under oil palm throughimplementation of the Oil Palm DevelopmentProgrammeYear Target (ha) Achievement (ha)

2007-08 29,580 21,330

2008-09 31,500 26,178

2009-10 16,711 9,594(up to October 2009)

Source: Department of Agriculture & Cooperation.


development of rainfed areas, including appropriatefarming and livelihood systems approaches. It wouldalso focus on issues pertaining to landless andmarginal farmers, since they constitute the largemajority of inhabitants of rainfed areas. The NRAAhas formulated common guidelines for the WatershedDevelopment Project and is in consultation with allthe States for its implementation as per instructionscontained in the guidelines.

(vi) Drought Management8.54 During the year 2009-10, drought/scarcity/drought-like situation has been declared in 334districts by 14 State Governments. The States haveready availability of funds under the Calamity ReliefFund (CRF) for taking immediate necessarymeasures in the wake of natural calamities includingdrought. For natural calamities of severe nature, theState Governments can seek additional assistancefrom the National Calamity Contingency Fund(NCCF), by submitting a detailed Memorandum withrelevant details. Several steps were taken to mitigatethe hardship being faced by the States due to thedrought situation. Some of the important measureswere:

States were requested to prepare alternate plansfor unsown/germination-failed areas with short-duration/alternate crops;

The Diesel Subsidy Scheme was launched toprovide supplementary protective irrigation tosave the standing crops (50 per cent of the costof the subsidy with cap of Rs7.50/litre given bythe States was borne by the CentralGovernment);

Use of Truthfully Labelled (TL) seeds, relaxationof age for seed varieties and distribution of minikits were allowed under the NFSM, RKVY;

Area-specific approach was adopted to achievehigher production through provisioning of inputslike fertilizers, credit and pest control measuresin areas with higher rainfall;

Agricultural advisories for appropriate cropprogrammes were telecast/broadcast throughthe media for the benefit of farmers. Scientistsfrom ICAR institutions, Krishi Vigyan Kendras(KVKs) as well as experts of the National RainfedArea Authority (NRAA) helped the States in theirefforts to counter the impact of deficit rainfall/drought on agriculture;

Zonal conferences and a Rabi CampaignProgramme with the State Governments were heldto enable formulation of an appropriate action planfor the rabi season;

Funds were made available under Centrallysponsored programmes like the RKVY, NFSM,NHM, MMA and ISOPOM to enable taking up ofan agricultural reconstruction programme.

ALLIED SECTORSHorticulture8.55 India is a major producer of fruits andvegetables in the world. For the holistic developmentof the horticulture sector, a Centrally sponsoredscheme called the National Horticulture Mission(NHM) was launched in 2005-06. The objectives ofthe Mission are to enhance horticulture productionand improve nutritional security and income supportto farm households and others through area-basedregionally differentiated strategies. All States and twoUnion Territories (Andaman & Nicobar Islands andLakshadweep) are covered under the Mission exceptthe eight north-eastern States including Sikkim andthe States of Jammu & Kashmir, Himachal Pradeshand Uttarakhand which are covered under theTechnology Mission for Integrated Development ofHorticulture in the North Eastern States (TMNE). Atpresent, 344 districts have been included under theNHM. Crops such as fruits, spices, flowers, medicinaland aromatic plants, plantation crops of cashew andcocoa are included for area expansion, whereasvegetables are covered through seed production,protected cultivation, integrated nutrientmanagement/ integrated pest management (INM/IPM) and organic farming. Under the scheme, 1,710new nurseries have been set up, an additional areaof 8.26 lakh ha has been brought under varioushorticultural crops and an area of 1.2 lakh ha of oldand senile plantations has been rejuvenated. Further,organic farming and Integrated Pest Managementprogrammes have been taken up in 0.76 lakh haand 4.0 lakh ha respectively. Under the post harvestmanagement component, 898 pack houses, 46 coldstorages, 14 refrigerated vans, 7 wholesale marketsand 45 rural markets have been set up. The impactof the Mission can be seen in the increasing areaand production of fruits and vegetables.

8.56 Under the Technology Mission for IntegratedDevelopment of Horticulture in the North EasternRegion during 2008-09, an additional area of 1,48,071lakh ha has been brought under different horticultural


crops. Further, infrastructure facilities for improvingproduction and productivity of crops such as modelnurseries, community tanks, tube wells,greenhouses, model floriculture centres, mushroomunits, vermi-compost units, training of farmers/trainers, training of women and market infrastructureand processing units, which are project based, havealso been created. Apart from introduction of improvedproduction technology in traditional crops, asignificant contribution of the Mission has been inthe promotion of commercial cultivation of potentialcrops, namely citrus, fruits, banana, pineapple,strawberry, kiwi, apple, passion fruits; anthuriums,roses, liliums, orchids and other cut flowers; andhigh value vegetable crops. The most remarkabledevelopment under the scheme has been theexpansion of area under specific crops in the Statesand in clusters which will facilitate easy marketingaccess in the future.

8.57 A proposal for implementation of a pilot projectfor Replanting and Rejuvenation of Coconut Gardensin Thiruvananthapuram, Kollam and Thrissur districtsof Kerala and the Union Territory of Andaman &Nicobar Islands has been approved.

Micro Irrigation8.58 A Centrally sponsored scheme on microirrigation (MI) was launched in January 2006 forpromoting water-use efficiency by adopting drip andsprinkler irrigation. All States and Union Territoriesand all horticultural as well as agricultural crops arecovered under the scheme. The National Committeeon Plasticulture Applications in Horticulture (NCPAH)provides the required technical guidance inassociation with Precision Farming DevelopmentCentres (PFDCs) at 22 locations. The PRIs areinvolved in selecting the beneficiaries. Since itsinception, about 10 lakh ha has been covered underdrip and sprinkler irrigation and a sum of Rs 1425.23crore has been released as Government of Indiashare (40 per cent of the total cost) in the scheme.

National Bamboo Mission (NBM)8.59 The NBM is a Centrally sponsored schemewith 100 per cent Central assistance. The schemecommenced in 2006-07 and aims at holisticdevelopment of the bamboo sector in India. The thrustof the Mission is area-based regionally differentiatedstrategy for forest and non-forest areas. So far,1,05,508 ha has been covered under bambooplantation, 30,167 ha of existing stocks has beentreated for productivity improvement, 1,104 nurseries

have been established for supply of quality plantingmaterial and 29,831 farmers/entrepreneurs/fieldfunctionaries have been trained to raise qualitybamboo plantations and in marketing of bambooproduce. So far, the NBM has been concentratingon plantation and related activities; there are plansto extend the Mission to the development of handicraftand marketing of bamboo. The Mission intends toestablish 195 bamboo bazaars and 10 retail outlets(showrooms) in different metropolitan cities by theend of 2010-11, to promote marketing of bambooand its products.

Rubber8.60 India is the fourth largest producer of naturalrubber (NR) with an 8.9 per cent share in worldproduction in 2008. The smallholding sectoraccounted for 89 per cent of rubber planted area and93 per cent of NR production. Despite not havingregions geographically best suited to growing NR,India continued to record the highest productivity inthe world with an average yield of 1,867 kg/ha.Productivity is further being improved through theRubber Plantation Development Schemes in theEleventh Five year Plan. The Schemes providesubsidy on planting, supply of critical inputs withprice concession, assistance for soil and waterconservation and generation and distribution ofquality planting materials.

8.61 In 2008-09, the estimated export of NR was46,926 tonnes against an import of 77,616 tonnes.The export of NR is promoted through ExportPromotion Schemes, which include participation ininternational trade fairs, assistance to exporters toparticipate in trade fairs and, organizing buyer-sellermeets.

Coffee8.62 Among plantation crops, coffee has madesignificant contribution to the Indian economy duringthe last 50 years. Indian coffee has created a nichefor itself in the international market, particularly IndianRobusta, which is highly sought after for its blendingquality. Arabica coffee from India is also well receivedin the international market.

8.63 In India, coffee is cultivated in an area ofaround 3.94 lakh ha. The post-monsoon cropestimate for the 2009-10 season is estimated at2.90 lakh tonnes comprising 0.95 lakh tonnes ofArabica and 1.95 lakh tonnes of Robusta. Thecurrent year’s production is about 10.6 per centmore than the previous year’s.


ANIMAL HUSBANDRY, DAIRYING ANDFISHERIES

8.64 The livestock and fisheries sector contributedover 4.07 per cent of the total GDP during 2008-09and about 26.84 per cent value of output from totalagriculture and allied activities. The Eleventh FiveYear Plan envisages an overall growth of 6-7 percent per annum for the sector. In 2008-09, thissector contributed 108.5 million tonnes of milk, 55.6billion eggs, 42.7 million kg wool and 3.8 milliontonnes of meat. The 17th Livestock Census (2003)has placed the total livestock population at 485million and total of poultry birds at 489 million. The18th Livestock Census has been conductedthroughout the country with the reference date ofOctober 15, 2007, results of which are awaited.

8.65 India ranks first in world milk production, itsproduction having increased from 17 million tonnesin 1950-51 to 108.5 million tonnes by 2008-09. Theper capita availability of milk has increased from 112grams per day in 1968-69 to 258 grams per day in2008-09, but is still low compared to the worldaverage of 265 grams per day (Table 8.15). About80 per cent of milk produced in the country ishandled in the unorganized sector and theremaining 20 per cent is equally shared bycooperatives and private dairies. Over 1.33 lakhvillage-level dairy cooperative societies, spread over265 districts in the country, collect about 25.1 millionlitres of milk per day and market about 20 millionlitres. The efforts of the Government in the dairysector are concentrated in promotion of dairyactivities in non-Operation Flood areas withemphasis on building cooperative infrastructure,revitalization of sick dairy cooperatives andfederations and creation of infrastructure in theStates.

8.66 A major programme for genetic improvementof cattle and buffaloes named the National Projectfor Cattle and Buffalo Breeding (NPCBB) waslaunched in October 2000 to be implemented over aperiod of 10 years in two phases of five years eachwith an allocation of Rs 402 crore and Rs 775.9 crorerespectively. The NPCBB envisages geneticupgradation and development of indigenous breedson priority basis. At present, 28 states and one UTare participating in the project. Financial assistanceto the tune of Rs 485.73 crore was released to thesestates up to 2008-09. During the current financialyear, Rs 93.31 crore has been released under thescheme to the implementing agencies till December2009.

Livestock insurance8.67 A Centrally sponsored scheme for livestockinsurance is being implemented in all the States withthe twin objectives of providing a protectionmechanism to farmers and cattle rearers againstloss of their animals due to death and to demonstratethe benefit of livestock insurance to the people. Thescheme benefits farmers (large, small and marginal)and cattle rearers having indigenous/crossbred milchcattle and buffaloes. In 2009-10, Rs 23.28 crore hasbeen released up to December 2009 and 13.16 lakhanimals have been insured up to 2008-2009. Thescheme has been extended from 100 districts to300 districts from December 2009, covering all States.

Poultry8.68 Poultry continues to play an important role inproviding livelihood support and food security,especially to the rural population. India producesmore than 55.6 billion eggs per year, with per capitaavailability of 47 eggs per annum. As per the estimateprovided by the Food and Agriculture Organization(FAO) for 2008, the annual chicken meat productionin India is around 2.49 million tonnes. The value ofexports was around Rs 422 crore during 2008-09.Eggs and poultry are among the cheaper source ofanimal protein. During 2009-10, a new Centrallysponsored Poultry Development Scheme with anoutlay of Rs 150 crore was launched. The scheme,through its Rural Backyard Poultry Developmentcomponent is expected to cover below poverty line(BPL) sections of the society to help them gainsupplementary income and nutritional support. Inorder to encourage entrepreneurship skills ofindividuals, a Poultry Venture Capital Fund is alsobeing implemented covering various poultry activities.

Table 8.15 : Production and per capitaavailability of milkYear Per capita Milk

(grams/day) production (MT)

1990-91 176 53.92000-01 220 80.62005-06 241 97.12006-07 246 100.92007-08 252 104.82008-09 258 108.5

Source: Department of Animal Husbandry andDairying.


Livestock health8.69 Animal wealth in India has increased manifoldand animal husbandry practices have also changedto a great extent. With increased trade activity, thechances of ingress of exotic diseases into thecountry have also increased. With improvement inthe quality of livestock through launching of extensivecross- breeding programmes, the susceptibility ofthis livestock to various diseases, including exoticdiseases, has increased. To ensure maintenance ofdisease-free status and compliance with thestandards laid down by the World Animal HealthOrganization, major animal health schemes andprogrammes have been initiated. Further, for controlof major livestock and poultry diseases, theGovernment of India provides financial assistance toStates/UTs in their efforts to prevent, control andcontain animal diseases and also to strengthenveterinary services including reporting of animaldiseases. All avian influenza outbreaks reported wereeffectively controlled and the country was free fromavian influenza in October 2009. Control andcontainment operations for the recent outbreakreported on January 14, 2010 in Khargram block ofWest Bengal are in full swing.

Fisheries8.70 Fish production increased from 7.1 milliontonnes in 2007-08 to 7.6 million tonnes in 2008-09.Fishing, aquaculture and allied activities are reportedto have provided livelihood to over 14 million personsin 2006-07 apart from being a major foreign exchangeearner (Table 8.16).

Feed and fodder8.71 Adequate availability of feed and fodder forlivestock is very vital for increasing milk production

and sustaining the ongoing genetic improvementprogramme. It is estimated that there is green foddershortage of about 34 per cent in the country. Toincrease the availability of fodder, the Department ofAnimal Husbandry & Dairying is implementing aCentrally sponsored Fodder Development Schemethroughout the country to supplement the efforts ofthe States. Financial assistance to the tune ofRs 719.76 lakh (up to December 2009) has beenprovided to the States during 2009-10. A CentralMinikit Testing Programme is also being implementedunder which minikits of latest high-yielding foddervarieties are distributed free of cost to farmers fortheir popularization. During the current year (2009-10) 9.23 lakh minikits have been allotted to the Statesfor distribution to farmers.

CREDIT AND INSURANCE

Agricultural Credit8.72 In order to provide adequate and timely creditsupport from the banking system to farmers for theircultivation needs, including purchase of all inputs,in a flexible and cost-effective manner, the KisanCredit Card Scheme (KCC) was introduced in August1998. About 878.30 lakh KCCs have been issued upto November 2009. The Scheme includes areasonable component of consumption credit andinvestment credit within the overall credit limitsanctioned.

8.73 From kharif 2006-07, farmers have beenreceiving crop loans up to a principal amount of Rs 3lakh, at 7 per cent rate of interest. Additionalsubvention of 1 per cent will be paid from the currentyear, as incentive to those farmers who repay short-term crop loans on schedule resulting in bringingdown the rate of interest to 6 per cent per annum.

Table 8.16 : Production and export of fishFish production (million tonnes) Export of marine products

Year Marine Inland Total Qty Value(‘000 tonnes) (Rs crore)

1990-91 2.3 1.5 3.8 140 8932000-01 2.8 2.8 5.6 503 6,2882003-04 3.0 3.4 6.4 412 6,0872004-05 2.8 3.5 6.3 482 6,4602005-06 2.8 3.8 6.6 551 7,0192006-07 3.0 3.8 6.8 612 8,3632007-08 2.9 4.2 7.1 541 7,6202008-09 2.9 4.7 7.6 603 8,608

Source: Department of Animal Husbandry & Dairying.


8.74 In January 2006, the Government announceda package for revival of short-term Rural CooperativeCredit involving financial assistance of Rs 13,596crore. The National Agriculture and RuralDevelopment Bank (NABARD) has been designatedas the implementing agency for the purpose. Statesare required to sign memorandums of understanding(MoUs) with the Government of India and NABARD,committing to implementing the legal, institutionaland other reforms as envisaged in the revival package.So far twenty-five States have executed MoUs withthe Government of India and NABARD. This covers96 per cent of the primary agricultural credit societies(PACS) and 96 per cent of the Central cooperativebanks (CCBs) in the country. As on November 2009,Rs 7,051.75 crore has been released by NABARDas the Government of India share for recapitalizationof 37,303 PACS.

8.75 Government is implementing a rehabilitationpackage for 31 suicide-prone districts in the Statesof Andhra Pradesh, Karnataka, Kerala andMaharashtra involving financial outlay of Rs 16978.69crore. An amount of Rs16,953.04 crore has beenreleased under this package till September 2009.For the state of Kerala, the Government isimplementing separate packages for the developmentof the Kuttanad Wetland Eco-System and mitigationof agrarian distress in Idukki district with an outlayof Rs1,840.75 crore and Rs.764.45 crore respectively.

8.76 A debt waiver and debt relief scheme forfarmers announced by the Government in the UnionBudget 2008-09 is under implementation. Directagricultural loans disbursed by scheduledcommercial banks, regional rural banks andcooperative credit institutions up to March 31, 2007,overdue as on December 31, 2007 and whichremained unpaid until February 29, 2008, are eligiblefor debt waiver or debt relief as the case may be.About 3.68 crore farmers have benefited from thescheme involving debt waiver and debt relief of Rs65,318.33 crore.

Agricultural Insurance8.77 The frequency and severity of droughts, floods,cyclones and erratic climatic changes accentuateuncertainty and risk in agricultural production andlivestock breeding in India. The National AgriculturalInsurance Scheme (NAIS) is being implementedsince rabi 1999-2000, as part of the strategy for riskmanagement in agriculture with the intention ofproviding financial support to farmers in the event ofcrop failure as a result of natural calamities, pests

and diseases. The scheme is open to all the farmers-loanee and non-loanee-irrespective of their size ofholding. Loanee farmers are covered on compulsorybasis in a notified area for notified crops. For non-loanee farmers, participation in the scheme is onvoluntary basis. The scheme envisages coverage ofall food crops, oilseeds and annual commercial/horticultural crops, in respect of which past yielddata are available for adequate number of years. Thescheme is being implemented by 25 States and twoUnion Territories. During the period from rabi 1999-2000 to rabi 2008-09, 1,347 lakh farmers over anarea of 2,109 lakh ha have been covered, insuring asum of Rs 1,48,250 crore.

8.78 The pilot Weather Based Crop InsuranceScheme (WBCIS) is being implemented in 13 Statesto provide insurance protection to farmers againstadverse weather incidences which are deemed toadversely impact crop production. During five cropseasons (from kharif 2007 to kharif 2009), about 21.77lakh farmers have been covered under the pilotscheme and claims to the tune of about Rs 388crore have been paid against a premium of about Rs444 crore.

8.79 The Coconut Palm Insurance Scheme (CPIS)has been launched on pilot basis during 2009-10 inselected areas of Andhra Pradesh, Goa, Karnataka,Kerala, Maharashtra, Orissa and Tamil Nadu. Thepilot scheme will continue during 2010-11. To benefitfrom the scheme, a farmer should have at least 10healthy nut-bearing palms in the age group 4 to 60years in contiguous area/plots and to have beenenrolled by the State Agriculture/HorticultureDepartment or Coconut Development Board (CDB)or any other such agency under a rehabilitation/development/expansion scheme. The AgricultureInsurance Company of India (AIC) which isimplementing the scheme is responsible for makingpayment of all claims within a specified period. TheCDB administers the scheme.

MARKETING AND EXTENSION

Agricultural Marketing8.80 Organized marketing of agriculturalcommodities has been promoted in the countrythrough a network of regulated markets. Most of theState and Union Territory Governments have enactedlegislations (Agriculture Produce MarketingCommittee Act) to provide for regulation of agriculturalproduce markets. There are 7,139 regulated marketsin the country as on March 31, 2009. The country


has 20,868 rural periodical markets, about 15 percent of which function under the ambit of regulation.The advent of regulated markets has helped mitigatethe market handicaps of producers/sellers at thewholesale assembling level. But rural periodicmarkets in general and tribal markets in particularhave remained outside the developmental ambit ofthe APMC Act.

8.81 The Ministry of Agriculture has formulated aModel Law on agricultural marketing for guidance ofand adoption by State Governments. The legislationprovides for establishment of private markets/yards,direct purchase centres, consumers’/farmers’markets for direct sale and promotion of public-privatepartnership in the management and development ofagricultural markets in the country. Provision hasalso been made in the law for constitution of StateAgricultural Produce Marketing Standards Bureausfor promotion of grading, standardization and qualitycertification of agricultural produce. This wouldfacilitate pledge financing, direct purchasing, forward/futures trading and exports. Sixteen States/UTs haveamended their APMC Acts and the remaining Statesare in the process of doing so (Table 8.17). APMCModel Rules based on the Model Law are underformulation in consultation with States.

Extension reforms8.82 The Government supports transfer ofagricultural technologies and information to thefarming community through various initiatives. TheSupport to State Extension Programmes for theExtension Reforms scheme launched in 2005-06,aims to make the extension system farmer drivenand farmer accountable by way of new institutionalarrangements for technology dissemination in theform of an Agricultural Technology ManagementAgency (ATMA) at district level. The ATMA has activeparticipation of farmers/farmer groups, non-governmental organizations (NGOs), KVKs, PRIsand other stakeholders operating at district level andbelow. Up to January 2010, 595 districts-level ATMAshave been established. Gender concerns are beingmainstreamed by mandating that 30 per cent ofresources on programmes and activities areallocated for women farmers and extensionfunctionaries. Since inception, out of a total of 10.19crore farmer beneficiaries, 25.80 lakh women farmers(25.34 per cent) have participated in variousextension activities under the scheme. Further, theMass Media Support to Agriculture scheme isfocusing on the use of Doordarshan infrastructurefor providing agriculture-related information and

Table 8.17 : Progress of reforms in agricultural markets (APMC Act) as on 31.12.2009

Sl. No. Stage of reforms Name of State/ Union territory

Note: * APMC Act has been repealed with effect from September 1, 2006.

1. States/ UTs where reforms to the APMC Acthave been undertaken as suggested.

Andhra Pradesh, Arunachal Pradesh, Assam,Chattisgarh, Goa, Gujarat, Himachal Pradesh,Jharkhand, Karnataka, Madhya Pradesh, Maharashtra,Nagaland, Orissa, Rajasthan, Sikkim, Tripura

2. States/ UTs where APMC Act has beenpartially reformed) by amending the APMCAct/ resolution

a) Direct Marketing:NCT of Delhi

b) Contract Farming:Haryana, Punjab and Chandigarh

c) Private Markets:Punjab and Chandigarh

3. States/ UTs where there is no APMC Act andhence not requiring reforms

Kerala, Manipur, Bihar*, Andaman & Nicobar Islands,Dadra & Nagar Haveli, Daman & Diu andLakshadweep

4. States/ UTs where APMC Act already providesfor the reforms

Tamil Nadu

5. States/ UTs where administrative action hasbeen initiated for reforms

Mizoram, Meghalaya, Haryana, Jammu&Kashmir,Uttarkhand, West Bengal, NCT of Delhi and Pondicherry


knowledge to the farming community. The othercomponent of the mass media initiative is use of 96FM transmitters of All India Radio (AIR) to broadcastarea-specific agricultural programmes with 30-minute radio transmission in the evening, six days aweek. The Kisan Call Centres scheme provides thefarming community agricultural information throughtoll-free telephone lines. A country-wide commoneleven digit number “1800-180-1551” has beenallocated for the Kisan Call Centres . The Agri-clinicand Agri-business Centres Scheme launched in 2002provides extension services to farmers throughagriculture graduates on payment basis by settingup of economically viable self-employment ventures.NABARD monitors the credit support to Agri-clinicsthrough commercial banks. Provision of a credit-linked back-ended subsidy at 25 per cent of thecapital cost of the project funded through bank loanas well as full interest subsidy on the bank credit forthe first two years has recently been approved underthe scheme. The subsidy would be 33.33 per centin respect of candidates belonging to ScheduledCastes (SC), Scheduled Tribes (ST), women andother disadvantaged sections and those from thenorth-eastern and hill States. Under the scheme,19,854 unemployed agriculture graduates have beentrained up to December 2009.

FOOD MANAGEMENT

8.83 The main objectives of food management areprocurement of foodgrains from farmers atremunerative prices, distribution of foodgrains toconsumers, particularly the vulnerable sections ofsociety, at affordable prices and maintenance of foodbuffers for food security and price stability. Theinstruments used are the MSP and central issueprice (CIP). The nodal agency which undertakesprocurement, distribution and storage of foodgrainsis the Food Cororation of India (FCI). Procurementat MSP is open-ended, while distribution is governedby the scale of allocation and its offtake by thebeneficiaries. The offtake of foodgrains is primarilyunder the targeted public distribution system(TPDS)and for other welfare schemes of the Government ofIndia. Offtake of foodgrains under the TPDS has beenincreasing in the last five years and has gone upfrom 29.7 million tonnes in 2004-05 to 34.8 milliontonnes in 2008-09 (Table 8.18).

Procurement of foodgrains8.84 Overall procurement of rice and wheat whichwas 35.8 million tonnes in 2006-07, increasedmarginally to 37.6 million tonnes in 2007-08. However,increased MSP along with various other steps takenby the Government has resulted in record wheatprocurement of 22.69 million tonnes in 2008-09 and

Table 8.18 : Procurement and offtake of wheat and rice (million tonnes)

2004-05 2005-06 2006-07 2007-08 2008-09 April- Dec.2008-09 2009-10

Procurement of Wheat and Rice under the Central PoolRice 24.0 26.7 26.3 26.3 32.8 22.1 22.9

Wheat 16.8 14.8 9.2 11.1 22.7 22.7 25.4

Total 41.6 42.4 35.8 37.6 55.5 44.8 48.3

Offtake of Wheat and Rice for the TPDSRice 16.6 19.2 21.2 22.6 22.2 14.9 18.1

Wheat 13.1 12.2 10.4 10.9 12.6 8.1 14.4

Total (A) 29.7 31.4 31.6 33.5 34.8 23.0 32.4

BPL (Rice+Wheat) 17.5 15.6 14.2 15.1 15.7 10.5 12.4

APL (Rice+Wheat) 6.7 8.3 8.7 9.0 9.6 6.1 12.5

AAY (Rice+Wheat) 5.5 7.4 8.7 9.4 9.5 6.4 7.4

Offtake of Wheat and Rice for Other SchemesWelfare Scheme (B) 10.6 9.7 5.1 3.9 3.4 2.0 2.9

Open sales/ Exports (C) 1.2 1.1 0.0 0.02 1.2 0.1 0.5

Total (A+B+C) 41.5 42.1 36.7 37.4 39.5 25.1 35.8

Source: Department of Food and Public Distribution.


25.38 million tonnes in 2009-10 (April to December).As regards rice, the procurement in 2008-09 was32.8 million tonnes and 22.9 million tonnes in 2009-10 (April – December). The record procurement ofrice and wheat during 2007-08, 2008-09 and 2009-10 (April December) has resulted in comfortable food-stock availability to meet the TPDS needs and bufferstocks norms.

8.85 As in earlier years, procurement of foodgrainsby the FCI continues to be higher in the States ofPunjab, Haryana, Uttar Pradesh and AndhraPradesh. These four States accounted for nearly 69.7per cent of the rice procured for the Central Pool in2006-07, 69.46 per cent in 2007-08 and 67.47 percent in 2008-09 (Table 8.19).

8.86 Punjab and Haryana which accounted for 91.1per cent of procurement of wheat for the Central Poolin 2007-08, accounted for 66.88 per cent in 2008-09and 69.53 per cent in 2009-10, indicating an increasedshare in procurement by other states (Table 8.20).

8.87 The overall procurement of coarse grains inthe kharif marketing season (KMS) 2008-09 hasincreased to 13.75 lakh tonnes due to a substantialincrease in MSPs of coarse grains in KMS 2008-09(Table 8.21).

Decentralized Procurement Scheme (DCP)8.88 A number of states have opted forimplementation of the (DCP) introduced in 1997,under which foodgrains are procured and distributedby the State Governments themselves. Under thisscheme, the designated States procure, store andissue foodgrains under the TPDS and welfareschemes of the Government of India. The differencebetween the economic cost fixed for the State andthe CIPis passed on to the State Government assubsidy. The decentralized system of procurementhas the objectives of covering more farmers underMSP operations, improving efficiency of the PDS,providing foodgrains varieties more suited to localtastes and reducing transportation costs. Food

Table 8.19 : Procurement of rice (marketing year-wise)

Qty (lakh tonnes) Percentage share

State/UT 2006-07 2007-08 2008-09 2006-07 2007-08 2008-09

A & N Islands - - - - 0.00 -Andhra Pradesh 53.28 74.17 90.61 21.22 26.03 26.90Assam - - 0.03 - 0.00 0.01Bihar 4.76 5.12 10.83 1.90 1.80 3.22Chandigarh 0.1 0.09 0.10 0.04 0.03 0.03Chhattisgarh 28.65 27.43 28.48 11.41 9.63 8.46Delhi - - - - - -Gujarat - 0.19 - - 0.07 -Haryana 17.77 15.72 14.25 7.08 5.52 4.23Himachal Pradesh - - - - - -J & K - - 0.06 - - 0.02Jharkhand 0.05 0.19 1.35 0.02 0.07 0.4Karnataka 0.22 0.18 1.07 0.09 0.06 0.32Kerala 1.51 1.68 2.37 0.60 0.59 0.7Madhya Pradesh 0.74 0.69 2.45 0.29 0.24 0.73Maharashtra 0.97 1.6 2.61 0.39 0.56 0.77Nagaland - - - - - -Orissa 20.02 23.38 27.90 7.97 8.21 8.28Pondicherry 0.07 0.06 0.07 0.03 0.02 0.02Punjab 78.29 79.08 85.53 31.18 27.76 25.39Rajasthan 0.1 0.19 0.11 0.04 0.07 0.03Tamil Nadu 10.77 9.68 11.99 4.29 3.40 3.56Uttar Pradesh 25.59 28.91 36.87 10.19 10.15 10.95Uttaranchal 1.76 1.47 3.49 0.70 0.52 1.04West Bengal 6.42 15.08 16.67 2.56 5.29 4.95

Total 251.07 284.91 336.84 100 100 100

Source: Department of Food & Public Distribution


subsidy released to various States under DCPoperations from 2007-08 is given in Table 8.22.

8.89 In the case of rice, States under DCPoperations have shown a healthy trend of increasingprocurement. In KMS 2007-08, rice procurement inDCP States was 107.83 lakh tonnes as against 94.7lakh tonnes in KMS 2006-07. In KMS 2008-09, riceprocurement by DCP States was 128.84 lakh tonnes(Table 8.23).

8.90 In the case of wheat, however, the procurementin DCP States, particularly Uttar Pradesh andMadhya Pradesh, was rather low in rabi marketing

Table 8.22 : Food subsidy released to various States under DCP operations from 2007-08(Rupees crore)

State/UT 2007-08 2008-09 2009-10*

Madhya Pradesh 41.596 1,101.810 882.620Uttar Pradesh 1,625.618 2,875.640 3,978.170West Bengal 269.020 657.400 901.210Chhattisgarh 621.000 842.830 655.610Uttaranchal 68.650 98.050 180.400Tamil Nadu 272.210 592.240 524.420Orissa 503.480 724.820 727.800Kerala 97.840 31.190 224.270Karnataka 0.590 0.000 0.000

Total 3,500.00 6,923.98 8,074.50*

Source: Department of Food & Public Distribution. * as on December 29, 2009.

Table 8.20 : Procurement of wheat (marketing year-wise)State/UT Qty (lakh tonnes) Percentage share

2007-08 2008-09 2009-10 2007-08 2008-09 2009-10

Bihar 0.08 5 4.97 0.07 2.20 1.96Haryana 33.5 52.31 69.24 30.11 23.06 27.28Himachal Pradesh - - 0.01 - - -Madhya Pradesh 0.57 24.1 19.68 0.51 10.63 7.75Punjab 67.81 99.39 107.25 60.94 43.82 42.25Rajasthan 3.83 9.35 11.52 3.44 4.12 4.54Uttaranchal 0.02 0.85 1.45 0.02 0.37 0.57Uttar Pradesh 5.46 31.37 38.82 4.91 13.83 15.29Chandigarh - 0.1 0.12 - 0.00 0.05Delhi - 0.07 - - 0.00 -Gujarat - 4.15 0.57 - 1.83 0.22Maharashtra - 0.1 - - 0.04 -Jharkhand - 0.02 - - 0.01 -J&K - 0.01 - - - -

Total 111.27 226.82 253.82 100 100.00 100.00

Source: Department of Food & Public Distribution.

Table 8.21 : Details of coarse grainprocurement during last four years andthe current KMS

(lakh tonnes)

Year Procurement

2005-06 11.50

2006-07 0.0022007-08 2.032008-09 13.752009-10 (till Dec. 2009) 0.80

Source : Department of Food & Public Distribution.


Table 8.23 : Procurement of rice in DCP States (in lakh tonnes)State KMS KMS KMS KMS KMS KMS KMS

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Chhattisgarh 12.9 23.7 28.4 32.7 28.6 27.43 28.48Karnataka - - 0.2 0.5 0.2 0.18 1.07Kerala - - 0.3 0.9 1.5 1.70 2.37Orissa 8.9 13.7 15.9 17.9 19.9 23.38 27.90Tamil Nadu 1.1 2.1 6.5 9.3 10.8 9.68 11.99Uttar Pradesh 13.6 25.5 29.7 31.5 25.5 28.91 36.87Uttranchal 2.3 3.2 3.2 3.4 1.8 1.47 3.49West Bengal 1.3 9.3 9.4 12.8 6.4 15.08 16.67A&N Islands - Neg. Neg. - - 0.0 0

Total 40.1 77.5 93.6 109.0 94.7 107.83 128.84

Source: Department of Food & Public Distribution.Neg. : below 500 tonnes.

seasons (RMS) 2006-07 and 2007-08, primarily dueto aggressive purchases by private companies onexpectation of higher market prices, lower rates oftaxes and levies compared to Punjab and Haryanaand proximity to markets in southern and westernstates of the country. However, there was recordprocurement of wheat in RMSs 2008-09 and 2009-10 (Table 8.24).

Buffer stock8.91 The stock of foodgrains in the Central Poolat 15.7 million tonnes as on April 1, 2006 wasmarginally lower than the minimum buffer norm of16.2 million tonnes. This increased to 17.9 milliontonnes on April 1, 2007. The stock position as onApril 1, 2008 was 19.6 million tonnes. The stockposition of foodgrains as on April 1, 2009 was 35.0million tonnes comprising 21.6 million tonnes of riceand 13.4 million tonnes of wheat against the buffernorm of 12.2 million tonnes and 4.0 million tonnesrespectively. The stock position of foodgrains as onJanuary 2010 is 47.4 million tonnes comprising 24.3million tonnes of rice and 23.1 million tonnes of

Table 8.24 : Procurement of wheat in DCP States (in lakh tonnes)State RMS RMS RMS RMS RMS RMS RMS RMS

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Uttar Pradesh 21.1 12.1 17.4 5.6 0.5 5.5 31.37 38.82Madhya Pradesh 4.3 1.9 3.5 4.8 Neg. 0.6 24.09 19.68Uttarakhand 1.8 0.7 0.6 0.4 Neg. Neg. 0.85 1.45Gujarat 0.0 0.0 0.0 0.0 0.0 0.0 4.15 0.57

Total 27.2 14.7 21.5 10.8 0.5 6.1 60.46 60.52

Source: Department of Food & Public Distribution.Neg. : below 500 tonnes.

wheat against buffer norms of 11.8 million tonnesand 8.2 million tonnes respectively. This is adequateto meet the requirements under the TPDS andwelfare schemes during the current financial year(Table 8.25).

Economic cost of foodgrains to the FCI8.92 The economic cost of foodgrains consists ofthree components, namely MSP (and bonus) as theprice paid to farmers, procurement incidentals andthe cost of distribution. The economic cost for bothwheat and rice witnessed a significant increaseduring the last three years due to increase in MSPs.The economic costs of wheat and rice for 2009-10(budget estimates[BE]) are estimated at Rs1,504.39per quintal and Rs1,893.71 per quintal respectively(Table 8.26). The FCI is reimbursed the differencebetween the economic cost of foodgrains and theissue price in the form of food subsidy. It has beenpointed out that the high incidence of taxes and leviesof over 10 per cent ad valorem on the procurement offoodgrains in the major processing States of Punjab,Haryana and Andhra Pradesh increases the


economic costs, which have a direct bearing onmarket prices. Further, expenditure incurred by theFCI on payment of Dami/Arthia charges, as perstatutory notifications issued by some States, notablyPunjab, Haryana, Uttar Pradesh and Rajasthan, alsogets reflected in the economic costs.

Offtake of foodgrains from the Central Pool8.93 The offtake of foodgrains is primarily under theTPDS and other welfare schemes of Government ofIndia. Under the TPDS, allocation is made on a scaleof issue which is 35 kg per family for BPL andAAY(Antayodaya Anna Yojana) categories and theallocation is variable based on foodgrains availabilityfor the above poverty line (APL) category. Offtake offoodgrains under the TPDS has been increasing in

the last five years and has gone up from 29.7 milliontonnes in 2004-05 to 34.8 million tonnes in 2008-09.

Food subsidy8.94 Provision of minimum nutritional support tothe poor through subsidized foodgrains and ensuringprice stability in different States are the twinobjectives of the food security system. In fulfillingits obligation towards distributive justice, theGovernment incurs food subsidy. While theeconomic cost of wheat and rice has gone upcontinuously, the issue price has been keptunchanged since July 1, 2002. The Government,therefore, continues to provide large amount ofsubsidy on foodgrains for distribution under theTPDS, other nutrition-based welfare schemes andopen market operations (Tables 8.27 and 8.28).

Table 8.25 : Stock position of wheat and rice in the Central pool vis-à-vis minimum buffernorms

(in lakh tonnes)

WHEAT RICE TOTALAS ON Minimum Actual Minimum Actual Minimum Actual

buffer stock buffer stock buffer stock norms norms norms

January 2004 84 126.87 84 117.27 168 244.14April 40 69.31 118 130.69 158 200.00July 143 191.52 100 107.63 243 299.15October 116 142.23 65 60.92 181 203.15January 2005 84 89.31 84 127.63 168 216.94April 40 40.66 122 133.41 162 174.07July 171 144.54 98 100.71 269 245.25October 110 102.90 52 48.49 162 151.39January 2006 82 61.88 118 126.41 200 188.29April 40 20.09 122 136.75 162 156 .84July 171 82.07 98 111.43 269 193.50October 110 64 .12 52 59.70 162 123.82January 2007 82 54.28 118 119.77 200 174.05April 40 47.03 122 131.72 162 178.75July 171 129.26 98 109.77 269 239.04October 110 101.21 52 54.89 162 156.10January 2008 82 77.12 118 114.75 200 191.87April 40 58.03 122 138.35 162 196.38July 171 249.12 98 112.49 269 361.61October 110 220.25 52 78.63 162 298.88January 2009 82 182.12 118 175.76 200 357.88April 40 134.29 122 216.04 162 350.33July 171 329.22 98 196.16 269 525.38October 110 284.57 52 153.49 162 438.06January 2010 82 230.92 118 243.53 200 474.45

Source: Department of Food & Public Distribution.


Table 8.26 : Economic cost of rice and wheat(Rs/quintal)

Year 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Rice Procurement 61.67 30.68 58.48 21.25 193.66 191.81 268.02 289.00IncidentalsDistribution Cost 157.72 214.52 256.51 281.37 289.58 331.81 294.67 245.66Economic Cost$ 1,165.03 1,236.09 1,303.59 1,350.67 1,391.18 1,563.70 1,789.78 1,893.71

Per Cent Increase over Previous Year

Procurement -7.69 -50.25 90.61 -63.66 * 9.30 2.06 7.83IncidentalsDistribution Cost 31.85 36.01 19.57 9.69 6.83 9.39 5.16 -16.63Economic Cost 6.14 6.10 5.46 3.61 4.51 11.32 8.12 5.81

Wheat Procurement 137.63 138.20 182.74 163.67 180.15 163.47 198.87 212.84IncidentalsDistribution Cost 145.51 169.69 222.80 226.96 269.36 282.76 228.54 182.95Economic Cost$$ 884.00 918.69 1,019.01 1,031.51 1,177.78 1,353.24 1,392.68 1,402.51

Per Cent Increase over Previous YearProcurement 2.19 0.41 32.23 -10.44 9.60 -1.98 16.40 7.02IncidentalsDistribution Cost 14.88 16.63 31.30 1.87 23.45 1.28 3.25 -19.94Economic Cost 3.64 3.92 10.92 1.23 17.73 11.06 8.17 0.70 Notes: $ Weighted average of common and grade ‘A’ rice taken together

$$ Due to increase in MSP from Rs1,000 per quintal to Rs1,080per quintal, the economic cost wasrevised to Rs1,504.39 per quintal. As per quick estimates made by FCI on May 18, 2009.

* For rice, from 2006-07, in the procurement incidentals weightage of levy rice incidentals is alsobeing taken.

Table 8.27 : Trends in MSP and CIP(Rs/quintal)

Marketing CIP season MSP Wheat Rice

Wheat Paddy APL BPL AAY APL BPL AAY2002-03 620 a 530 a 610 415 200 795 565 3002003-04 630 550 610 415 200 795 565 3002004-05 640 560 610 415 200 795 565 3002005-06 650 b 570 610 415 200 795 565 3002006-07 750 d 580 c 610 415 200 795 565 3002007-08 1,000 645 e 610 415 200 795 565 3002008-09 1,080 850 f 610 415 200 795 565 3002009-10 1,100 950 g 610 415 200 795 565 300

Source: Ministry of Agriculture.Notes: a One-time special drought relief of Rs20 per quintal was given in the case of paddy over and above the existing MSP and

Rs10 per quintal for wheat.b An incentive bonus of Rs50 per quintal over the MSP given for wheat procured in RMS 2006-07 during the period 20.3.06 to

30.6.06.c An incentive bonus of Rs40 per quintal over the MSP allowed for paddy procured in KMS 2006-07 till 31.3.2007. Applicability

of bonus was extended up to 30.9.2007 for the states of Andhra Pradesh, Tamil Nadu, Orissa, West Bengal and Chhattisgarh.For Bihar and Kerala, it was extended up to 31.5.2007.

d An incentive bonus of Rs 100 per quintal over the MSP given for wheat procured in RMS 2007-08.e An incentive bonus of Rs 100 per quintal over the MSP allowed for paddy/rice procured in the entire KMS 2007-08.f An incentive bonus of Rs50 per quintal allowed over the MSP of paddy for KMS 2008-09.

g An incentive bonus of Rs50 per quintal allowed over the MSP of paddy for KMS 2009-10.


Allocation under the TPDS8.95 Allocations of foodgrains for BPL and AAYcategories are made at the rate of 35 kg per familyper month for all accepted 6.52 crore families in thecountry. The total BPL and AAY allocations madeduring 2009-10 were 276.77 lakh tonnes comprising181.05 lakh tonnes of rice and 95.72 lakh tonnes ofwheat. Allocations under the APL category are madedepending upon the availability of stocks of foodgrainsin the Central Pool and past offtake. Presently, theseallocations range between 10 kg and 35 kg per familyper month in different States/UTs. During 2009-10,197.17 lakh tonnes of foodgrains has been allocatedto States/UTs under the APL category as against112 lakh tonnes during 2008-09.

Open Market Sale Scheme8.96 In order to check inflationary trends in the foodeconomy, the Government took a decision in August2008 to release wheat into the open market underthe Open Market Sales Scheme (Domestic). Thesereleases have been made through (a) allocation toState/UT Governments for distribution to retailconsumers; and (b) sale to bulk consumers by theFCI through open tenders. The release of wheat underthe OMSS has helped stabilize wholesale prices ofwheat.

Sugar8.97 Sugar production in India is cyclical in nature.High production of sugar in the 2006-07 and 2007-08 sugar seasons (October- September) wasfollowed by low production in the 2008-09 sugarseason. The production in the current sugar season2009-10 is also expected to be low as compared tosugar seasons 2006-07 and 2007-08. The estimatedproduction of sugar seasons 2006-07 and 2007-08was 282 lakh tonnes and 263 lakh tonnesrespectively, whereas the production of sugar in the2008-09 sugar season is estimated at 146.8 lakhtonnes. Thus the production of sugar in the 2008-09sugar season declined by about 116.2 lakh tonnes,which put pressure on prices.

8.98 The estimated sugarcane production as perthe first advance estimates 2009-10 is 2,494.81 lakhtonnes against a production of 2,739.31 lakh tonnesas per the fourth advance estimates 2008-09. Thereis, therefore, decline in the production of sugarcaneof about 9 per cent in the current year compared tolast year. The production of sugar in the 2009-10sugar season is estimated to be about 160 lakhtonnes. The Government has accordingly taken anumber of measures to augment domestic stocksof sugar and also to moderate prices. This, interalia, includes allowing sugar mills to import duty-free raw sugar on ton to ton basis under the advanceauthorization scheme with effect from February 17,2009, which effectively implies meeting their exportobligation two-three years later; allowing import ofraw sugar at zero duty under open general licence(OGL) by sugar mills up to December 31, 2010;allowing import of white/refined sugar by STC/MMTC/PEC and NAFED up to 1 million tonnes under OGLat zero duty up to March 31,2010. Furthermore, theduty-free import of white/refined sugar under OGLhas been opened to other Central/ State governmentagencies and to private trade in addition to existingdesignated agencies and levy obligation in respectof all imported raw sugar and white/ refined sugarhas been removed.

8.99 Apart from measures taken to augmentsupplies, stockholding and turnover limits have beenimposed in March 2009 in order to moderate pricesof sugar. Further, even khandsari sugar units havebeen brought under the ambit of stockholding andturnover limits. Stockholding limits of not holdingstocks exceeding fifteen days of the requirement onlarge consumers of sugar who are using or consumingmore than 10 quintals of sugar per month have been

Table 8.28 : Quantum of food subsidiesreleased by Government

Year Food subsidy* Annual growth

(Rs crore) (per cent)

1999-2000 9,200.00 5.75

2000-01 12,010.00 30.54

2001-02 17,494.00 45.66

2002-03 24,176.45 38.20

2003-04 25,160.00 4.07

2004-05 25,746.45 2.33

2005-06 23,071.00 -10.39

2006-07 23,827.59 3.28

2007-08 31,259.68 31.19

2008-09 43,668.08 39.69

2009-10 46,906.68 7.42

* Figures up to December 29,2009.Department of Food & Public Distribution.


imposed. Futures trade in sugar in domesticexchanges has also been suspended in May 2009till September 2010.

8.100 The concept of satutory minimum price inthe case of sugarcane has been replaced by fairand remunerative price (FRP) which is to be uniformlyapplicable to all States to provide reasonable marginsto sugarcane farmers on account of “risk” and “profit”.The amendments to the Sugarcane (Control) Order1966, have come into force from October 22, 2009.For the 2009-10 sugar season, the CentralGovernment has fixed an FRP of Rs129.84 per quintallinked to a basic recovery rate of 9.5 per cent subjectto a premium of Rs1.37 for every 0.1 percentageincrease in recovery above that level.

Edible Oils8.101 Estimated production of oilseeds and netavailability of edible oils from all domestic sourcesare given in Table 8.29. In order to increase theavailability and control prices of edible oils,Government has reduced the custom duties on crudeand refined edible oils to “nil” and 7.5 per centrespectively since April1, 2008. It has been decidedthat this duty structure would continue till September30, 2010. Export of all major edible oils from thecountry has been banned since March 17, 2008 upto 30.9.2010 (except coconut oil through Cochin Portand certain oils with minor forest origins). The tariffvalues on edible oils have been frozen in 2006. TheGovernment had launched a scheme for “distributionof subsidized edible oils” in 2008-09 to provide reliefto consumers from rising prices of edible oils. Underthis scheme, imported edible oils were distributedthrough State Governments/UTs at the rate of 1 kgper ration card per month. The scheme continues inthe current year (2009-10) with a subsidy of Rs 15

per kg on imported oil up to 10 lakh tonnes and hasbeen extended till October 31, 2010.

COMMODITY FUTURES MARKET

Commodity futures market8.102 Commodities traded on the commodityfutures market during 2009 included a variety ofagricultural commodities, bullion, crude oil, energyand metal products. Several new commodities wereintroduced for futures trading in 2009, such asalmond, imported thermal coal, carbon credits andplatinum. The commodity futures market facilitatesthe price discovery process and provides price riskmanagement. Its effectiveness depends on the widerparticipation of all the stakeholders. The average dailyvalue of trades in the commodity exchangesimproved from Rs 16,400 crore during 2008 toRs 23,200 crore in 2009. Agricultural commodities,bullion and energy accounted for a large share ofthe commodities traded in the commodities futuresmarket. The total value of trades in the commodityfutures market rose from Rs 50.34 lakh crore in 2008to Rs 70.90 lakh crore during 2009. The MultiCommodity Exchange, Mumbai, recorded thehighest turnover in terms of value of trade during 2009,followed by the National Commodity & DerivativesExchange Ltd. (NCDEX) and National MultiCommodity Exchange of India Ltd. (NMCE)respectively (Table 8.30).

8.103 During the year 2009-10(up to December2009), value of trade in agricultural commodities wasabout 16.33 per cent. Agricultural commodities,however, accounted for 38 per cent of the total volumeof trade. In value terms, bullion accounted for themaximum share of commodity groups followed byenergy and metals (Table 8.31).

Table 8.29 : Production of oilseeds and net availability of edible oils(in lakh tonnes)

Oil year Production Net availability Import of Total availability/ Total estimated(Nov.-Oct.) of Oilseeds* of edible oils edible oils consumption of requirement/

from all edible oils (from demand fordomestic domestic & edible

sources** imports sources) oil

2007-08 297.56 86.54 49.03# 135.57 127.572008-09 281.57 85.98 67.20# 153.18 132.802009-10 (Estimated) 255.09 82.00 101.00** 183.00 138.18

Source : * Ministry of Agriculture;** Directorate of Vanaspati, Vegetable Oils & Fat (Nov.-Oct.);# DGCI&S, Kolkata (Financial Year).


8.104 The Forward Markets Commission (FMC),the regulator for commodity futures trading underthe provisions of the Forward Contracts (Regulation)Act,1952 continued its efforts to broad-base themarket. The participation of physical marketparticipants, especially farmers, as hedgers, tocounterbalance the speculative element in pricediscovery and increasing the awareness level offarmers and other market participants wasemphasized. The Commission undertook variousregulatory measures to facilitate hedgers’participation and promote delivery in agriculturalcommodities, such as introduction of Exchange ofFutures for Physicals (EFP) and Alternate FuturesSettlement Mechanism, allowing higher positionlimits to NAFED to facilitate hedging and delivery bythem and introduction of early delivery system inselect commodities. In addition, efforts were madeto develop an “aggregation” model in collaboration

with commodity exchanges to promote participationof farmers. The FMC also undertook severalregulatory initiatives to prevent market manipulationand ensure market integrity, financial integrity andcustomer protection. Major policy developmentsinitiated by the FMC included the issuance ofguidelines for bringing members of the commodityexchanges under the purview of the MoneyLaundering Act and guidelines for divestment of theequity by the existing national exchanges after fiveyears of their operation. A price dissemination projectwas initiated by the FMC, under which spot and futureprices of agricultural commodities would be madeavailable to farmers on real-time basis on electronicprice ticker boards placed at Agriculture ProduceMarketing Committee.

Restoration of futures trade – chana, soy oil,rubber, potato and wheat8.105 The year 2009 began on an optimistic notefor the commodity futures market with the revocationof suspension of futures trading in four of the eightcommodities, namely chana, soy oil, rubber andpotato, in December 2008. This was followed by therevocation of suspension of trading in wheat in May2009. However, futures trading in sugar has beensuspended till September 30, 2010. Agriculturecommodity futures staged a remarkable recoveryafter steady decline over the last two years, recordinga trading value of Rs 10.88 lakh crore in 2009,signifying growth of 48 per cent over the previousyear. During the year, a new National CommodityExchange called Indian Commodity Exchange (ICEX)became operational. Besides, a scheme ofupgradation of Ahmedabad Commodity Exchangeto National Commodity Exchange status has beenapproved.

Table 8.31 : Trade in commodity futures market(volume in lakh tonnes and value in Rs crore)

2007-08 2008-09 2009-10

Name of the commodity Volume Value Volume Value Volume Value

Agricultural Commodities 3,139.03 9,41,283.33 2,309.35 6,27,303.14 2,910.05 9,02,209.31

Bullion 3.46 17,25,952.45 4.19 29,73,674.60 3.36 22,10,133.08

Metals 448.46 8,97,714.34 436.17 6,18,775.61 644.89 11,78,237.54

Energy 1,976.22 5,00,942.14 3,938.17 10,26,442.05 4,088.36 12,32,612.60

Other 6.25 97.22 175.62 2,760.78 2.12 3,103.36

Total 5,573.41 40,65,989.47 6,863.49 52,48,956.18 7,648.79 55,26,295.90

Table 8.30 : Turnover on commodity futuresmarkets

(Rs crore)

Name of the Calendar yearexchange 2007 2008 2009

Multi Commodity 27,30,415 42,84,653 59,56,656Exchange, Mumbai

National Commodity 7,74,965 6,28,074 8,05,720and DerivativesExchange, Mumbai

National Multi 25,056 37,272 1,95,907Commodity Exchange Ahmedabad

Others 1,24,051 83,885 1,32,173

Total 36,54,487 50,33,884 70,90,456


DEVELOPMENT OF ELECTRONIC SPOTEXCHANGES8.106 The Government has allowed the NationalCommodity Exchanges to set up three spotexchanges in the country, namely the National SpotExchange Ltd. (NSEL), NCDEX spot Exchange Ltd.(NSPOT) and National Agriculture ProduceMarketing Company of India Ltd. (NAPMC). During2009, there was significant expansion of spotexchanges’ trading facilities in India. These spotexchanges have created an avenue for direct marketlinkage among farmers, processors, exporters andend users with a view to reducing the cost ofintermediation and enhancing price realization byfarmers. They will also provide the most efficient spotprice inputs to the futures exchanges. The spotexchanges will encompass the entire spectrum ofcommodities across the country and will bring homethe advantages of an electronic spot trading platformto all market participants in the agricultural and non-agricultural segments. On the agricultural side, theexchanges would enable farmers to trade seamlesslyon the platform by providing real-time access to priceinformation and a simplified delivery process, therebyensuring the best possible price. On the buy side,all users of the commodities in the commodity valuechain would have simultaneous access to theexchanges and be able to procure at the bestpossible price. Therefore the efficiency levels attainedas a result of such seamless spot transactions wouldresult in major benefits for both producers andconsumers. These Spot Exchanges will also providea platform for trading of Warehouse Receipts.

CHALLENGES AND OUTLOOK8.107 The country has been able to manage oneof the most deficient monsoons with concerted effortsof the State Governments and the Centre. Severalincentives and concessions allowed to farmers bythe States and the Central Government resulted inminimizing the loss in kharif production andmaximizing rabi production. Part of the loss in kharifproduction is expected to be made up in the rabiseason. The sector, however, faces variouschallenges which need to be addressed sooner thanlater.

8.108 Although the yield per hectare of foodgrainshas shown some improvement in recent years it isnot significant enough to cater to the needs of therising population particularly when income levels arealso rising. Since farm productivity is not showingdesirable growth there is urgent need to focus onresearch as well as better agricultural practices to

ensure that productivity levels are increased in theshortest time possible. Special attention may berequired for States with relatively low productivity.

8.109 Production and productivity in pulses andoilseeds are of growing concern. A sizeable proportionof these items is met through imports. The scopefor import of pulses is limited due to the limitednumber of countries producing it. Due to this supply-demand gap domestic prices fluctuate withavailability and prices in the international market apartfrom the impact of domestic production trends.

8.110 Consistent decline in the share of private-sector investment in the agriculture sector is a matterof concern. This trend needs to be reversed throughcreation of a favourable policy environment andavailability of credit at reasonable rates on time forthe private sector to invest in agriculture.

8.111 There has been substantial increase in MSPsof various crops over the last few years. This isconsidered necessary to incentivize the farmers toincrease production and productivity. At the sametime, the MSP signals the floor price for the producewhich, in turn, has the potential of increasing theprices. Addressing the welfare of agriculturalproducers and consumers simultaneously poses achallenge. Further, inability of a large number of smalland marginal farmers to directly access the agri-market puts a question mark on increases in MSPactually benefiting such farmers.

8.112 Record procurement of rice and wheat in thelast few years has helped to build up the buffer stockand strategic reserve of wheat and rice. There is,however, a huge cost involved in the process whichis met through budgetary sources in the form of foodsubsidy. This puts a lot of stress on the fiscal system.The issue of efficient food stocks management andoffloading of stocks in time needs urgent attention.

8.113 Studies indicate adverse impact of climatechange on agriculture. Crop improvement andresearch to develop drought-resistant, high-yieldingvarieties of seeds assumes importance with a viewto combating adverse impact of drought on foodproduction and to ensure food security.

8.114 To sum up, we need to address thechallenges of the agriculture sector throughcomprehensive and coordinated efforts. Renewedattention needs to be paid to improving farmproduction and productivity, better utilization ofagricultural inputs, proper marketing infrastructureand support, stepping up investment in agriculturewith due emphasis on environmental concerns andefficient food management.

Industry

Industry, especially manufacturing, was one of the key drivers of the transformationin the growth trajectory of the Indian economy witnessed during the post-2000 period.However, a cyclical slowdown began in the industrial sector in 2007-08 and wascompounded by the twin global shocks in 2008-09. The effects lingered on briefly inthe current fiscal, but growth rebound is now amply evident. Gross domestic product(GDP) growth has clearly revived in the second quarter of the current year and theindustrial sector has emerged as one of the prime movers of the process.

9.2 The recovery in the industrial sector is clearlydiscernible as corroborated by both the data onnational accounts and the index of industrialproduction (IIP). The downward trend observed inthe rate of growth of the IIP that spanned almosteight quarters (beginning the first quarter of 2007-08 and continuing through to the last quarter of 2008-09) stands reversed as gleaned from the latest data

for the current fiscal. After reaching a trough of 0.6per cent during the second half of 2008-09, growthin the IIP revived to a level of 7.7 per cent duringApril-November 2009-10.

9.3 The broad-based nature of the recovery wasevident in the pick-up in growth of almost all majorcomponents of the IIP (Table 9.1). With the exception

CHAPTER

9

Table 9.1 : Growth in the IIP and its major components

(per cent)Period Mining Manufacturing Electricity IIP

2006-07 5.4 12.5 7.2 11.6Q1 2007-08 2.7 11.1 8.3 10.3Q2 2007-08 7.4 8.9 7.1 8.7Q3 2007-08 5.5 8.9 4.6 8.3Q4 2007-08 5.2 7.3 5.5 7.0Q1 2008-09 4.0 5.8 2.0 5.3Q2 2008-09 3.8 4.9 3.2 4.7Q3 2008-09 2.0 0.5 2.9 0.8Q4 2008-09 0.9 0.3 3.0 0.5Q1 2009-10 6.8 3.4 6.0 3.8Q2 2009-10 9.0 9.3 7.5 9.1Oct-Nov. 09 9.5 11.9 4.0 11.0

Source : Central Statistical Organisation (CSO).

209Industry

0

Mining

Per

cent

Growth (per cent) in the IIP and its major components

5

10

15

20 Growth inApr-Nov 08

-5

Figure 9.1

25

Growth inApr-Nov 09

3.4 4.22.8 3.6

8.4

-0.7

5.17.3

4.1

8.3 7.76.1 6.1

7.0

11.4

1.1

7.6

21.7

ManufacturingElectricity

Basic goodsCapital goods

IntermediatesDurables

Non-durablesIIP

of consumer non-durables, while all the use-basedindustrial groups subsumed under the IIP haverecovered from slump, it was the consistentlyincreasing growth in consumer durables andintermediate goods that drove the industrial revival(Figure 9.1).

9.4 The continuing downward movement in capitalgoods and consumer non-durables, and to an extentbasic goods, suggests that their current rate ofgrowth is significantly below the pre-2007-08 levelsand that fuller recovery requires a broader anchor(Figure 9.2).

Per

cent

Year

Growth in IIP and its use-based categories (in per cent): Basic goods

0

2

4

6

8

10

12

Figure 9.2A

Growth inbasicgoods

Trend line

2006-07 2007-08 2008-09 2009-10

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

Oct-

Nov

Per

cent

Year

Growth in IIP and its use-based categories (in per cent): Capital goods

0

5

10

15

20

25

30

Figure 9.2B

Growth incapitalgoods

Trend line

2006-07 2007-08 2008-09 2009-10

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

Oct-

Nov


Per

cent

Growth in IIP and its use-based categories (in per cent): Intermediate goods

0

5

10

15

20

-10

-5

Figure 9.2C

Growth inintermediate

goods

Trend line

Year2006-07 2007-08 2008-09 2009-10

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

Oct-

Nov

Per

cent

Year

Growth in IIP and its use-based categories (in per cent): DurablesFigure 9.2D

0

5

10

15

20

25

30

Growth indurables

Trend line

2006-07 2007-08 2008-09 2009-10

-5

-10

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

Oct-

Nov

Per

cent

Year

Growth in IIP and its use-based categories (in per cent): Non-durablesFigure 9.2E

Growth innon-

durables

Trend line

2006-07 2007-08 2008-09 2009-10

0

5

10

15

20

-10

-5

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

Oct-

Nov

Per

cent

Year

Growth in IIP and its use-based categories (in per cent): IIPFigure 9.2F

Growthin IIP

Trend line

2006-07 2007-08 2008-09 2009-10

0

2

4

6

8

10

12

14

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

Oct-

Nov

211Industry

DEVELOPMENTS THAT IMPACTED THESLOWDOWN AND RECOVERY

The slowdown

9.5 A brief recap of the process of slowdown in theIIP since 2007-08 would be useful in appreciatingthe current process of recovery. The decline inindustrial growth, as measured by the IIP, started inthe first quarter of 2007-08 and continued throughthe first half of 2008-09 at a gradual pace. Persistentrise in the price of crude during January 2006-July2008 and the rise in price of other intermediates(global commodity price shock), particularly metalsand ores, from the latter half of 2006-07 to the secondhalf of 2008-09, had their effect on the cost side ofthe manufacturing sector. A comparison of the majorcomponents of expenditure for a sample ofmanufacturing companies suggests that even by thesecond half of 2007-08, the cost structure hadworsened. This got accentuated in the first twoquarters of 2008-09 (Table 9.2).

9.6 The deepening of the global financial crisisimmediately following the commodity price shockmade it increasingly difficult for companies to raiseresources in 2008-09. On the external front, there

was a sharp decline in the flow of funds fromAmerican/ global depository receipts (ADRs/GDRs)and external commercial borrowings; but the inflowsof foreign direct investment (FDI) continued.Domestically, the mobilization of resources by theprivate sector through the capital market, especiallythe equity route, saw a precipitous decline during2008-09. However, bank credit to the industrial sectorrecorded impressive growth during 2008-09 and insome ways filled the gap due to the sudden shrinkageof other sources.

9.7 The drying up of trade credit, especially offoreign banks, since mid-September 2008 and thesharp depreciation in the nominal exchange rate ofthe rupee within a short span of time made it difficultfor manufacturers to hedge their positions andfinance their ongoing operations. The shrinkage inexport demand that started from September 2008further affected the export-intensive industries. Thesharp reversal in commodity prices from the thirdquarter of 2008 adversely affected such units in termsof build-up of inventories. The decline in constructionand real estate activities affected the segments ofmanufacturing linked to them. These developmentsultimately impacted the growth of profits of themanufacturing sector. From the abridged results of

Table 9.2 : Year-on-Year Growth in Sales and Expenditure of listed public limited manufacturingcompanies in the private sector

Items 2007-08 2008-09 2009-10 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3(P)

No. of Companies 1,811 1,716 1,780 1,803 1,926 1,837 1,849 1,901 1,752 1,752 1857

Growth rates (in per cent)

Sales 17.0 12.7 15.4 18.7 30.1 32.1 6.3 0.1 -2.9 -0.3 28.7

Change in Stock-in-trade -18.2 -13.2 -0.8 151.6 131.9 230.1 @ @ -70.0 -1.3 $

Expenditure 16.0 12.0 15.9 21.0 34.3 38.8 9.3 -2.9 -6.6 -3.3 26.6

Raw Material 17.9 10.1 15.3 20.3 38.1 44.0 4.0 -9.6 -14.5 -4.7 35.5

Staff Cost 19.0 16.8 18.3 16.6 19.3 17.0 12.4 7.9 10.1 9.4 12.0

Power & Fuel 9.6 6.6 13.7 25.8 28.8 37.8 21.7 3.1 -1.4 -5.4 1.6

Interest Costs 7.8 15.1 35.6 30.8 52.0 69.9 60.5 43.3 10.1 -1.2 -4.8

Profit after tax (PAT) 27.6 19.1 30.2 15.7 6.9 -4.2 -66.4 -28.3 2.7 16.9 177.7

Ratios (in per cent)

PAT to Sales 10.5 10.6 11.4 9.5 8.7 7.6 3.6 6.7 9.4 9.0 8.0

Source : Reserve Bank of India Studies on Corporate Performance based on a abridged results of selectcompanies in the private corporate sector.

Note: P : Data for Q3 : 2009-10 is provisional; @ Numerator is negative; $ : Denominator is negative


a sample of manufacturing companies, it is seenthat while profitability (PAT / sales) was under strainsince the fourth quarter of 2007-08, it came downsharply in the third quarter of 2008-09 accompaniedby a sharp dip in growth in sales (Table 9.2).

The recovery9.8 Reflecting the continuance of the developments,the manufacturing sector remained subdued in thefirst two months of the current fiscal, which reducedthe level of growth of the IIP in the first quarter to 3.8per cent. However, there were visible signs of thereversal of the downward trend in growth in IIP growthfor the month of June 2009. Thereafter, the IIPmarched ahead, registering growth close to 10 percent during July - November 2009 (Table 9.1).9.9 The growth in sales revenues of companies,which remained quite impressive at around 30 percent during the first half (H1) of 2008-09, slowed downduring H1 2009-10 largely due to lower pricerealisation (Table 9.2). Though year-on-year nominalsales growth remained subdued between quartersending March 2009 and September 2009, the growthin sales and stock in trade adjusted for pricesreflected improvement in production which was alsocoroborated by the rise in IIP. The momentum indemand was also reflected in the sequential growthin sales revenues. The latest quarter endedDecember 2009 witnessed noticeable accelerationin sales, mostly driven by increase in volumes;supported also by low base of corresponding quarterlast year. Increase in sales revenue together withsignificantly lower input costs, lower rise in interestoutflow, lower foreign exchange-related losses andgood growth in non-core other income boosted netprofits (Table 9.2). Expenditure on raw materials thatfell during first two quarters of 2009-10 mainly onaccount of lower commodity prices showednoticeable increase as prices, firmed up again inthe third quarter. The measure of inflation in use-based industrial groups (a ‘rough’ measure becauseof lack of one-to-one correspondence between the

IIP and wholesale price index [WPI]) showed thatthe prices of items that are employed at differentstages of manufacturing have declined during April-December 2009 (Table 9.3). In contrast, the pricesof non-durable items of consumption remained firmduring the period.

9.10 Stocks in trade that were accumulated duringthe first half of 2008-09 were depleted during thelatter half indicating adjustments of inventory levelsto changes in business demand. Stock in tradepicked up slowly in the current period indicating revivalin the cycle (Table 9.2).

9.11 Mobilization of investible resources becameeasier during H1 2009-10. Despite significantdeceleration in bank credit in the current year,buoyant sources like rights and public issues,qualified institutional placements, private placementof corporate debt, mutual funds and commercialpapers as well as a steady flow of external fundsthrough FDI, ADRs/GDRs and external commercialborrowings indicate that mobilizing resources formanaging the recovery may not be an issue.

Growth in major industrial groups9.12 The major industrial groups like automobiles,rubber and plastic products, wool and silk textiles,wood products, chemicals and miscellaneousmanufacturing staged a strong recovery during April-November 2009, while machinery and textile productsreinforced their growth (Table 9.4). Led by cement,non-metallic mineral products also staged a recovery,albeit a modest one. After posting a growth of around14 per cent annually in the eight-year period ending2008-09, beverages and tobacco productsexperienced a slump in the current year. Productgroups like paper, leather, food and jute textiles didnot evince any visible recovery. Cotton textiles andmetal products have also been experiencinglacklustre growth since 2007-08. Overall, thepicture is a mixed one in the analysis of majorindustrial groups.

Table 9.3 : Inflation (in per cent) in use-based industrial groups (WPI based; year-on-year)

2006-07 2007-08 2008-09 2008 2009(April-Dec.) (April-Dec.)

Basic Goods 5.8 2.7 9.0 11.9 -6.0

Capital Goods 8.8 8.6 5.2 6.4 -2.3

Intermediate Goods 5.5 3.3 10.3 14.0 -4.7

Durables 2.0 4.3 3.2 3.5 1.6

Non-durables 3.7 1.9 7.2 7.2 9.8

Source : Department of Industrial Policy & Promotion.

213Industry

9.13 The chemical group and machinery andequipment (with high weights) together contributed53 per cent of the manufacturing growth in April-November 2009 (Figure 9.3). These two productgroups, together with transport equipment and rubber,plastic, petroleum and coal products, explained morethan three-fourths of the manufacturing growth duringthe period (contribution of a particular group to totalmanufacturing growth is determined by the weight

of the group in manufacturing, the accumulated indexof production and current growth). The distinctchanges from the previous to current year (April-November) are the sharp decline in growthcontribution of the beverages and tobacco group andthe significant improvement in contribution of rubber,plastic, petroleum and coal products.9.14 An analysis of the trends in the use-basedindustrial groups (Figure 9.1) and sectoral categories

Per

cent

Contributions of product groups to manufacturing growth (in per cent)

0

5

10

15

20

25

Figure 9.3

Apr-Nov2008

Apr-Nov2009

30

35

40

-5

-10

Food

Pro

duct

s

Beve

rage

s, to

bacc

o

Jute

text

iles

Leat

her p

rodu

cts

Pape

r pro

duct

s

Met

al p

rodu

cts

Cotto

n te

xtile

s

Woo

d pr

oduc

ts

Text

ile p

rodu

cts

woo

l, si

lk, e

tc te

xtile

s

Non-

met

min

pro

duct

s

Mis

cella

neou

s

Basi

c m

etal

s

Rubb

er, p

last

ic, p

etro

& c

oal

Tran

spor

t equ

ipm

ent

Chem

ical

s

Mac

hine

ry &

equ

ipm

ent

Table 9.4 : Growth by industrial groups (Figures in per cent based on the IIP; 1993-94=100)

2007-08 2008-09 H1 2008-09 H2 2008-09 2009-10(April-Nov.)

Overall Manufacturing 9.0 2.8 5.3 0.4 7.7High growth in 2009-10 (April-November)

Transport Equipment 2.9 2.5 12.2 -6.1 13.9Rubber, Petroleum & Plastic 8.9 -1.5 -4.0 0.9 13.5Wool, Silk & Man-made Textiles 4.8 0.0 -0.9 0.9 13.0Miscellaneous Manufacturing 19.8 0.4 -1.1 1.7 12.3Machinery & Equipment 10.4 8.8 10.1 7.6 12.1Wood Products 40.5 -9.6 -6.1 -13.2 10.5Chemicals 10.6 4.1 6.1 2.1 10.0Textile Products 3.7 5.8 5.2 6.3 9.9

Lower growth in 2009-10 (April-November)Non-metallic Mineral Products 5.7 1.2 0.6 1.8 6.4Basic Metals 12.1 4.0 6.7 1.4 4.8Metal Products -5.6 -4.0 1.9 -9.4 4.0Cotton Textiles 4.3 -1.9 0.1 -3.9 3.2Paper Products 2.7 1.8 4.6 -0.8 2.1Leather Products 11.7 -6.9 -1.8 -11.8 0.9

Decline in 2009-10 (April-November)Beverages, Tobacco 12.0 16.2 20.3 12.3 -2.2Food Products 7.0 -9.7 -1.0 -15.1 -7.2Jute Textiles 33.1 -10.0 -5.4 -14.6 -16.2Source : CSO.


subsumed under the National Industrial Classification(Table 9.4) in tandem makes the industrial scenariosomewhat clearer. Among the use-based industrialgroups, basic goods (with a weight of 35.6 per centin the IIP) are composed mainly of basic chemicals,basic metals, cement, electricity and minerals.Electricity and mining account for about 58 per centof the weight of basic goods captured by the IIP andthe growth of basic goods during April-December2009 largely reflected the growth in the two sectors.While other important basic goods like cement andfertilizers recorded reasonable growth, differentcomponents of the iron and steel industry showed amixed picture.

9.15 The strong growth in the machinery andequipment group fed into the growth in capital goods,while some automobile components like commercialvehicles exhibited slack in growth. Despite thelacklustre production performance of petroleumproducts (except natural gas) and textileintermediates, intermediate goods registered robustgrowth in H1 2009-10, aided by the strong growth inimportant items like PVC pipes, commercialplywood, chemical intermediates like paints, graniteand stone chips filament yarn, polyster fibre, viscosestaple fibre and a wide range of other items.

9.16 Growth in consumer durables has been broad-based, the robust production performance ofautomobiles being quite significant. On the otherhand, the low growth in food products, beveragesand tobacco products and cloth and footwear actedas a dampener on the growth in consumer non-durables. Paradoxically, disaggregated growth in

consumer non-durables indicates that the scenariois not as bleak as exhibited by the group as a whole.The strong contractionary movement in someimportant items like sugar, milk powder, beveragesand some pharmaceuticals has had exaggeratedimpact, leading to negative growth in consumer non-durables during H1 2009-10; otherwise, the majorityof the non-durable items of consumption have shownpositive growth during the period.

INDUSTRIAL GROWTH BY SECTORS

Food products9.17 As per the IIP, food products experienced adecline in production of 7.2 per cent in April-November 2009 on an year-on-year basis. This cameon the back of negligible growth during the sameperiod in the previous year. The main growthdampener in food products was sugar production,which declined by 59.6 per cent in the current year(April-November), following an already significantdecline during 2008-09. The other important itemsthat slowed down growth included milk powder,malted food and chocolates and sugar confectionary.Among the important items that exhibited double-digitgrowth were wheat flour/maida, salt, and edible oilslike coconut, rice bran, cotton seed, and mustard/rapeseed. Production of sunflower oil, soya bean oil,edible hydrogenated oil and groundnut oil declined.

Beverages and tobacco products9.18 Beverages and tobacco products declined byabout 2.0 per cent during April-November 2009, asper the IIP data. This group had grown by 17.7 per

Inde

x 19

93-9

4=10

0

Movement in the index of production of food products and beverages andtobacco products (Index 1993-94=100)

100

200

300

Figure 9.4

Foodproducts

Beverages& tobaccoproducts

400

500

0

600

154.5 152.0 168.7 167.9 167.3 170.6 185.2 198.2178.9

139.0

200.4 224.8

287.6312.1

345.9400.3

444.5498.0

578.5 562.4

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Apr-Nov2009

Year

215Industry

cent during the corresponding period in the previousyear. While food products showed slow growth inthe post-2000 period (compound annual growth of1.8 per cent during 2001-02 to 2008-09), thebeverages and tobacco product group achieved rapidgrowth (compound annual growth of 14.2 per centduring 2001-02 to 2008-09). Hence the slowdownshown by these two groups in April-November 2009,compared to the same period in 2008, needs to beviewed differently (Figure 9.4).9.19 Production of rectified spirit and country liquordeclined while that of beer grew by 14 per cent in2009-10 (April-November). The growth in Indian-madecountry liquor was only 3.1 per cent during the period.Cigarette production has not shown any significantgrowth since 2007-08.

Textiles9.20 As per the IIP data, the textile group consistingof cotton, wool, silk and man-made and jute textilesand textile products, grew by 7.5 per cent duringApril-November 2009, compared to 1.0 per centduring April-November 2008. While wool, silk andman-made textiles grew by 13 per cent during 2009-10 (April-November) shrugging off the weakperformance in the corresponding period last year,cotton textiles barely managed a recovery with3.2 per cent growth. Textile products achieved growthclose to 6.0 per cent in 2008-09 and topped it with9.9 per cent growth during April-November 2009.However, jute textiles which had slid by 3.9 per centin 2008-09, declined again by 16.2 per cent in 2009-10 (April-November).

9.21 Overall, the production of textile fabricsincreased by 10.7 per cent during April-November2009-10 (provisional). The highest growth wasobserved in the hosiery sector (12.8 per cent) followedby power looms (12.5 per cent), while the handloomand mill sectors could not revive from the previousyear’s slump (Table 9.5). The share of the power-looms sector in total fabric production stood at 62.5per cent during April-November 2009—with its sharegradually increasing over the years, the productionof fabric is increasingly driven by power looms.

Table 9.5 : Production of fabrics/cloth(million sq. m)Sector 2006-07 2007-08 2008-09 2009-10

(P) (Apr.-Nov.)(P)

Mill 1,746 1,781 1,796 1,192(5.4) (2.0) (0.8) (-0.1)

Handloom 6,536 6,947 6,677 4,513(7.0) (6.3) (-3.9) (1.7)

Power Loom 32,879 34,725 33,648 25,157(7.4) (5.6) (-3.1) (12.5)

Hosiery 11,504 11,804 12,077 9,047(10.4) (2.6) (2.3) (12.8)

Others* 724 768 768 320(-5.9) (6.1) (0.0) (0.0)

Total Cloth 53,389 56,025 54,966 40,229Production (7.7) (4.9) (-1.9) (10.8)

Source : O/o Textile Commissioner, Mumbai.Notes : (P) Provisional;

* Production up to August 2009; Figures inparentheses are growth in per cent, year-on-year

Table 9.6 : Export of textiles(US$ million)

Items 2006-07 2007-08 2008-09 Apr.-Sept. Growth(P) 2009 (P) Apr.-Sept.

2009 (per cent)Ready-made Garments 8,282.3 9,069.8 10,242.8 4,528.8 -10.3Cotton Textiles 5,564.2 6,858.6 4,741.6 1,788.9 -35.1Wool & Woollen Textiles 423.8 443.1 478.2 240.6 -8.7Man-made Textiles 2,398.9 3,177.1 3,280.5 1,889.8 -2.4Silk 706.0 657.7 675.5 280.7 -24.7Handicrafts* 1,364.9 1,452.3 1,074.0 401.8 -33.6Coir & Coir Manufactures 145.8 160.3 148.0 78.3 -2.7Jute Goods 260.2 327.9 299.1 109.9 -40.8Handloom Products 0.0 0.0 0.0 112.3 0.0

Grand Total 19,146.1 22,146.8 20,939.8 9,431.1 -15.5Source : Directorate General of Commercial Intelligence and Statistics (DGCI&S) Kolkata.Notes : * include only textile-based handicrafts such as, handmade carpets excluding silk; silk carpets;

handicrafts excluding handmade carpets);P : Provisional


9.22 Though the textile sector seemed to havegathered momentum consequent on the terminationof the quota regime in December 2004, theperformance of Indian textiles continues to lagsubstantially behind that of China in terms of rate ofgrowth of exports and share in world textile exports.In US dollar terms, textile exports grew by 15.7 percent during 2007-08 but declined by 5.5 per centduring 2008-09. During April-September 2009,exports of textiles and clothing were at US$ 9.43billion, recording an 15.5 per cent decline in growthvis-à-vis exports of US$ 11.15 billion in April-September 2008 (Table 9.6).

9.23 The Technology Upgradation Fund Scheme(TUFS) and Scheme for Integrated Textile Parks(SITP) are two flagship schemes of the Ministry ofTextiles. TUFS, implemented with a view tofacilitating modernization and upgradation of thetextile industry by providing credit at reduced rates,has been fine-tuned to induce investments in targetedsegments. Under the scheme, Rs 78,307 crore wassanctioned against the project cost of Rs 1,79,856crore and loans worth Rs 66,284 crore weredisbursed to 25,777 applicants up to June 30, 2009(provisional). Under the SITP, 40 integrated textilesparks of international standards, covering theweaving, knitting, processing and garmenting sectorswith project proposals worth Rs 4,141.39 crore (ofwhich assistance from the Government is Rs1,422.43 crore), have been sanctioned. So far, fivetextile parks have been inaugurated.

Wood and wood products9.24 Wood and wood products, as per the IIP data,showed 10.5 per cent growth in production duringApril-November 2009, compared to a 6 per centdecline during the same period in the previous year.Among the two components (included in the IIP),

particle board grew by 7.1 per cent, while commercialplywood grew by 46.3 per cent during the period.Wood and wood products experienced wide-rangingannual fluctuations in production during the post-2000 period and managed only a compound annualgrowth of 1.3 per cent during 2001-02 to 2008-09(Fig 9.5).

Paper and paper products9.25 Paper and paper products grew by only 2.1per cent during April-November 2009, as per the IIPdata. This followed indifferent growth during 2007-08as well as 2008-09. While paper and paper boardand corrugated boxes/cartons achieved reasonablegrowth during the current year, bleached newsprintand rayon-grade pulp declined by more than 10 percent.

Leather and leather products9.26 As per the IIP data, leather products, whichinclude finished leather, leather footwear, shoeuppers, leather garments and other leather goods,showed only 0.9 per cent growth in production duringApril-November 2009, following a 5 per cent declineduring the same period in the previous year.Production of leather and fur products almoststagnated during the post-2000 period (compoundannual growth of 0.5 per cent during 2001-02 to 2008-09) with the exception of 2007-08, while overallmanufacturing grew at a much faster rate (compoundannual growth of 7.3 per cent during 2001-02 to 2008-09) (Fig 9.6).

9.27 Finished leather declined by about 13 percent, causing much of the slowdown in the sectorduring April-November 2009. While footwear itemsshowed a mixed picture, leather garments grew by5.7 per cent during the period.

Inde

x 19

93-9

4=10

0

Movement in the index of production of wood products (Index 1993-94=100)

40

80

120

Figure 9.5

Wood &wood

products

0

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Apr-Nov2009

Year

104.392.8

76.5 81.7 74.8 70.5

91.0

127.9115.6

132.2140

100

60

20

217Industry

Inde

x 19

93-9

4=10

0Movement in the index of production of leather and fur products and theindex of overall manufacturing (Index 1993-94=100)

100

200

300

Figure 9.6

0

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Apr-Nov2009

Year

350

250

150

50

Leather &fur products

Manufac-turing

Chemicals, petrochemicals, pharmaceuti-cals and fertilizers9.28 The sector includes basic chemicals and itsproducts, petrochemicals, fertilizers, paints, gasesand pharmaceuticals. Major chemicals registered acompounded annual growth of 3.1 per cent during2002-03 to 2007-08. In the wake of the recenteconomic slowdown, production declined by 5.2 percent in 2008-09. The growth in major chemicalsstood at (-) 0.91 per cent during April-December 2009(Table 9.7).

9.29 Petrochemicals mainly comprise syntheticfibres, polymers, elastomers, synthetic detergents,intermediates and performance plastics, apart fromtheir intermediates such as synthetic fibreintermediates, olefins and aromatics. Polymersaccounted for almost 62 per cent of the totalproduction of major petrochemicals during 2008-09.The production of petrochemicals grew at 5.8 percent annually during 2002-03 to 2007-08. Registeringthe impact of the global meltdown, it declined by 5.5per cent in 2008-09. During April-December 2009,major petrochemicals except polymers recorded

positive growth of 0.76 per cent; performance plasticsand synthetic fibres registered impressive growth(Table 9.8).

9.30 The share of chemicals and petrochemicalsin total national exports diminished from 11.6 percent to 9.3 per cent during 2003-04 to 2008-09.Likewise, imports of this group in total nationalimports declined from 9.2 per cent to 7.2 per centduring 2003-04 to 2008-09 (Table 9.9).

Table 9.7 : Production of major chemicals(in 000’ MT)

Years Alkali Other Or- Pest- Dyes Totalchem- inor- ganic icides & major

icals ganic chem- (Tech.) stuffs chem-chemi- icals icals

cals

2006-07 5,269 602 1,545 85 33 7,5342007-08 5,443 609 1,552 83 44 7,7312008-09 5,442 513 1,254 85 32 7,3262009-10 4,133 382 920 58 30 5,523(Apr.-Dec.)Growth -0.72 -5.53 -5.55 -13.19 21.51 -0.91(per cent)

Source : Department of Chemicals & Petrochemcials.

Table 9.8 : Production of major petrochemicals(000’ MT)

Years Synthetic fibers Polymers Elastomers Synthetic Performance Total majordetergent plastics petro-

intermediates chemicals

2005-06 1,906 4,768 110 555 127 7,4662006-07 2,250 5,183 101 556 133 8,2232007-08 2,524 5,304 105 585 157 8,6752008-09 2,343 5,060 96 552 141 8,1922009-10 (Apr.-Dec.) 1,948 3,549 79 461 129 6,166Growth (per cent) 13.23 -6.71 9.45 9.57 26.51 0.76

Source : Department of Chemicals & Petro-chemcials.


Pharmaceuticals9.31 The Indian pharmaceutical industry has grownfrom a humble Rs 1,500 crore turnover in 1980 toapproximately Rs 1,00,611 crore in 2009-10(September 2009). The country now ranks third interms of volume of production (10 per cent of globalshare) and 14th by value. The Indian pharma

industry’s growth has been fuelled by exports whichregistered a growth of 25 per cent in 2008-09 (Figure9.7). Exports of pharmaceuticals have consistentlyoutstripped imports. India currently exports drugintermediates, active pharmaceutical ingredients(APIs), finished dosage formulations, bio–pharmaceuticals and clinical services. The top fivedestinations of Indian pharmaceutical products arethe USA, Germany, Russia, the UK and China. Thedomestic pharma sector has also expanded in recentyears.

9.32 There are five pharmaceutical Central public-sector/joint-sector undertakings under theDepartment of Pharmaceuticals which manufacturecritical bulk drugs/ formulations. These are IndianDrugs & Pharmaceuticals Limited, HindustanAntibiotics Limited, Bengal Chemicals &Pharmaceuticals Limited, Rajasthan Drugs andPharmaceuticals Ltd and Karnataka Antibiotics &Pharmaceuticals Ltd. The value of their productionincreased from Rs 340.2 crore in 2006-07 to Rs 641.8crore in 2008-09 and is projected to reach Rs 875crore in 2009-10.

Rs

cror

e

Indian Pharmaceutical Market (Rs crore)

20000

40000

60000

Figure 9.7

0

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Year

70000

50000

30000

10000

Domesticmarket

Exports80000

90000

Imports

Totalmarket size

Table 9.9 : Exports and imports–Chemicalsand petrochemicals

(Rs crore)Items 2006-07 2007-08 2008-09

Exports:

(a) Chemicals 39,351 43,482 53,738(b) Petrochemicals 21,801 22,199 24,226(c) Sub-Total (a+b) 61,152 65,681 77,964Imports:(a) Chemicals 47,914 54,422 74,857(b) Petrochemicals 16,339 18,677 24,020(c) Sub-Total (a+b) 64,253 73,099 98,877

Source : Department of Chemicals & Petro-chemcials.

Table 9.10 : Production and import of fertilizers( lakh MT)

Production ImportsYear 2007-08 2008-09 2009-10* 2007-08 2008-09 2009-10**

Urea 198.6 199.2 212.4 69.3 56.7 44.9

DAP 42.1 29.9 43.0 29.9 61.9 55.6

Complex Fertilizers 58.5 68.5 79.2

MOP Nil Nil Nil 44.2 56.7 42.3

Source : Department of FertilizersNotes : * estimated; **April-December 2009-10

219Industry

Fertilizers9.33 The availability of raw materials andintermediates has been a major bottleneck in thedomestic production of fertilizers. As there is nodomestic production of muriate of potash (MOP), itsrequirement is met fully by import (Table 9.10). About85 per cent of raw materials in Di ammoniumphosphate (DAP) or finished DAP and complexesare also being imported.

Rubber and plastic products9.34 Rubber and plastic products grew by anappreciable 25 per cent during April-November 2009as per IIP data. The factor that overwhelminglycontributed to this growth was the 54.5 per centgrowth in PVC pipes and tubes during the period, incontrast to a 17 per cent decline during April-November 2008. With the automobile sector recordingstrong growth in the current year so far, the tyresector (except bicycle tyres) too performed well onthe whole.

Non-metallic mineral products9.35 As per the IIP, this product group grew by 6.4per cent during April-November 2009, as againstnegligible growth during the corresponding period inthe previous year. Cement led the group with a closeto 11 per cent growth. This, along with strong growthin polished granite/stone chips, points towardsimproving construction activity. Among importantitems, bottles and bottle glasswares continued thedecline shown in 2008-09. Production of railway/concrete sleepers stepped up while that of graphiteelectrodes and anodes declined steeply during thecurrent year.

Steel9.36 India ranked as the fifth largest producer ofcrude steel in the world during January -November2009 (World Steel Association). Domestic crudesteel production grew at a compounded annual rateof 7.1 per cent during 2004-05 to 2008-09. Theincrease in production came on the back of capacityexpansion, mainly in private-sector plants, and higherutilization rates. During 2008-09, India added nearly5.5 million tonnes of capacity in steel production.

9.37 In 2008-09, the Indian iron and steel industrywas hit hard by the spiralling cost of imported cokingcoal/metcoke. The first half of 2008-09 witnessedrapid rise in production, consumption and prices, inkeeping with international trends. In the latter half,however, the domestic demand for steel wasadversely impacted by economic slowdown and, inparticular, by slackening demand in some of itsleading end-user segments. Domestic steel pricesstarted declining from September 2008 and the paceof growth of production slowed down considerably(Table 9.11).

Table 9.11 : Production, consumption, import and export of total finished steel and pig iron(million tonnes)

Item 2005-06 2006-07 2007-08 2008-09 Change (per cent)over 2007-08

Production for Sale TFS 46.56 52.53 56.07 57.16 1.9PI 4.69 4.93 5.284 6.21 17.52

Import TFS 4.31 4.93 7.03 5.84 -16.9PI 0.03 0.03 0.11 0.08 -27.3

Export TFS 4.80 5.24 5.08 4.44 -12.6PI 0.44 0.71 0.56 0.35 -37.5

Real Consumption1 TFS 41.43 46.78 52.12 52.35 0.4PI 4.13 4.33 4.62 5.87 27.1

Source : Joint Plant Committee.Notes : TFS= total finished steel, both alloy and carbon; PI= Pig iron1= adjusted for stock variation and double counting.

Table 9.12 : Growth in finished steel(alloy + carbon)

(per cent)2009-10* Real

Production consum- Imports Exportsfor sale ption

April-June 3.4 5.2 -1.3 -38April–September 3.3 7.0 1.2 -43April-December 3.8 7.7 16.6 -36

Source : Joint Plant Committee. Note : * provisional.


9.38 However, recovery gathered strength during2009-10 and the Indian steel industry appears tohave successfully overcome the effects of the globaleconomic slowdown (Table 9.12). India and Chinaare the only countries to have registered a positivegrowth during January-November 2009 (World SteelAssociation).

9.39 The strong growth in the GDP in the secondquarter of the current fiscal and in the IIP during April-November 2009 suggests that the demand side ofthe steel industry is back on stable footing. Indiansteel outlook for 2010 continues to be positive, sinceIndian steel consumption is expected to be rising at6-9 per cent during the current year, on account ofhigher demand from the real estate, constructionand automobile sectors.

Metal products (except machinery)9.40 The production of this group declined during2007-08 and 2008-09. During April-November 2009,production grew by 4 per cent. Important items likewell/offshore platforms, tin metal containers,agricultural implements and bolts and nuts continuedtheir declining trend during the current year. Metallicutensils including pressure cookers, LPG cylindersand drums and barrels registered robust growth duringApril-November 2009.

Machinery and equipment9.41 Growth of the machinery and equipmentgroup has been at the core of the growth in capitalgoods, as it constitutes around 65 per cent of thetotal weight of capital goods in the IIP. Growth in thisgroup is critical for growth in the overall IIP for the

coming years. The growth in machinery andequipment has consistently been above the 10 percent mark since 2003-04 and it achieved a compoundgrowth of 14.4 per cent during the quinquenniumending 2007-08, compared to a corresponding rateof 8.7 per cent in the overall IIP. The index ofproduction of machinery and equipment gallopedahead of the overall IIP after the year 2002-03(Figure 9.8).

9.42 Though it fell below the 10 per cent mark in2008-09, growth in the group remained one of thehighest at 8.8 per cent. During 2009-10 (April-November), this segment gained further strengthwith a 12.1 per cent growth. Important items likeindustrial machinery, tractors, ball and rollerbearings, power transformers, insulated cables andwires, boilers, electric generators, turbines, electricmotors, power-driven pumps, material-handlingequipment, cutting tools, conductors, electric fans,washing machines and TV receivers and picturetubes buoyed growth in this manufacturing groupduring 2009-10 (April-November). On the other hand,products like diesel engines, telephone instrumentsand telecom-munication cables, protectionsystems, control panels, cranes, lifts, hydraulicmachines and cylinders, dumpers, furnaces, valves,cooling towers, refrigerators and air conditioningplants, air and gas compressors and computersystems dampened its growth.

Electronics and Information Technology9.43 The economic recession in leading exportdestinations adversely impacted the performance ofIndian IT companies.

Inde

x 19

93-9

4=10

0

Movement in the index of production of machinery and equipment and theoverall IIP (Index 1993-94=100)

100

200

300

Figure 9.8

0

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Apr-Nov2009

Year

350

250

150

50

Machinery&

equipment

IIP

400

450

500

221Industry

9.44 The increase of 14.6 per cent in software andservices exports in 2008-09 (Table 9.13) was the neteffect of a growth of 35.3 per cent in the first sixmonths and a decline of 1.9 per cent in the next sixmonths (Table 9.14). The decline continued in thefirst half of 2009-10 as well.

9.45 During 2008, electronics hardware productionin India constituted around 1.5 per cent of globalelectronics production. The production of electronicshardware in the country stood at Rs 94,690 crore in2008-09 (Table 9.15), registering a growth of 12.1per cent, compared to a growth of 27.8 per cent in2007-08; the decline is attributable to the globaleconomic slowdown.

Micro, small and medium enterprises(MSMEs)9.46 MSMEs contribute about 8 per cent of theGDP of the country, about 45 per cent ofmanufactured output and about 40 per cent ofexports. This, coupled with a high labour to capitalratio, high growth and high dispersion makes themcrucial for achieving the objective of inclusive growth.As per the Quick Results of the 4th All India Censusof MSMEs (2006-07), there were 26 million MSMEsin the country, which provided employment to about60 million persons. Of the total, 28 per cent were in

Table 9.14 : Software & services exportsYear Growth (per cent)

(first half) (second half)2006-07 37.21 27.562007-08 26.27 32.942008-09 35.35 -1.872009-10 -11.5

Source : RBI & NASSCOM.

Table 9.13 : Growth in IT-ITeS industries(US$ billion)

Item 2006-07 2007-08 2008-09

IT-IT-enabledServices Revenue 47.8 64.1 70.5(including Hardware) (34.1) (9.9)

Software & ServicesIndustry (excluding 39.3 52.1 58.7hardware) (32.6) (12.7)

Total Software andServices Exports 31.1 40.4 46.3(including ITeS-BPO) (28.9) (14.6)

IT BPO Revenuefrom the Domestic 8.2 11.7 12.4Market (42.7) (5.9)

IT Software andServices 1.62 2.01 2.20Employment (million)Source : Department of Information Technology (DIT);Note: Figures in parentheses represent change inper cent.

Table 9.15 : Electronics & IT production(Rs crore)

Items 2005-06 2006-07 2007-08 2008-09*

1. Consumer Electronics 18,000 20,000 22,600 25,9902. Industrial Electronics 8,800 10,400 11,910 12,7403. Computers 10,800 12,800 15,870 13,4904. Comm. & Broadcasting Equipment 7,000 9,500 18,700 26,0005. Strategic Electronics 3,200 4,500 5,700 6,8406. Components 8,800 8,800 9,630 9,630Subtotal 56,600 66,000 84,410 94,6907. Software for Exports 1,04,100 1,41,000 1,64,400 2,16,3008. Domestic Software 29,600 37,000 47,010 57,230Total 1,90,300 2,44,000 2,95,820 3,68,220Electronics & IT exports1. Electronics Hardware 9,625 12,500 13,200 19,0002. Computer Software 1,04,100 1,41,000 1,64,400 2,16,300Total 1,13,725 1,53,500 1,77,600 2,35,300Source : DIT Annual Report, 2008-09.Note : * Estimated


the manufacturing sector and 72 per cent in theservice sector. This is the first Census after theenactment of the MSMED Act 2006 and includes,for the first time, medium enterprises.

Central Public-sector Enterprises (CPSEs)9.47 There were altogether 246 CPSEs under theadministrative control of various ministries/departments as on March 31, 2009. The cumulativeinvestment (paid-up capital plus long-term loans) inall the CPSEs together stood at Rs 5,28,951 croreas in end-March 2009 (Table 9.16). The largestshare in this investment belonged to the servicesector (46.1 per cent) followed by electricity (26.2per cent), manufacturing (18.1 per cent) and mining(8.8 per cent). A great deal of investment in CPSEsis being made through internal resources rather thanthrough investment from outside.

9.48 Of the total, 158 CPSEs made net profit and54 net loss in 2008-09. The year witnessed severefinancial under-recoveries by public-sector OilMarketing Companies (OMCs) as they had to keepthe prices low on sale of petroleum products in thedomestic market. The foreign exchange outgoexceeded the foreign exchange earnings of CPSEsduring 2008-09 (Table 9.16).

Tourism9.49 The global financial crisis affected growth intourism in 2008-09. The Ministry of Tourism madeconcerted efforts including a series of promotionalinitiatives to counter the impact of the slowdown.Foreign tourist arrivals and foreign exchange earningshave so far registered positive growth in the year2009-10 (Table 9.17).

9.50 Initiatives have been taken to develop worldclass tourism infrastructure through Central financial

Table 9.17 : Number of foreign and domestictourists

Year Foreign *Foreign *Domestictourist exchange tourist

arrivals earnings visits (lakh) (million (lakh)**

US$)

2006-07 46.7 (13.8) 9,123 ( 16.2) 4,623.1

2007-08 51.7 (10.7) 11,666 (27.9) 5,265.6

2008-09 50.7 (-1.9) 10,543 (-9.6) 5,629.2

2009-10 37.2 (1.1) 8,663 (10.9) NA(April-Dec.)

Source : Ministry of Tourism.Note : * Figures in parenthesis are growth rates (per cent).

** Domestic tourist visits for calendar years.

Table 9.16 : Performance of CPSEs during 2008-09(Rs crore)

Sl. Particulars 2008-09 2007-08 Per cent changeNo. over previous year

1. Investment(long-term loan + equity) 5,28,951 4,55,367 16.22. Capital Employed (net fixed assets +

working capital) 7,93,096 7,23,719 9.63. Total Turnover 12,63,405 10,94,484 15.44. Profits of Profit-making CPSEs 98,652 91,571 7.75. Losses of Loss-making CPSEs 14,424 10,257 40.66. Net Worth 5,84,072 5,18,530 12.67. Dividend Declared 25,493 28,081 -9.28. Corporate Tax 1,51,728 1,65,994 -8.69. Interest Paid 40,330 32,200 25.210. Contribution to Central Exchequer 1,51,728 1,65,994 -8.611. Foreign Exchange Earnings 74,184 67,678 9.6

11.1 Oil Companies 48,422 46,051 5.111.2 Other Companies 25,762 21,627 19.1

12. Foreign Exchange Outgo 4,28,821 3,68,228 16.512.1 Oil Companies 2,78,989 2,57,723 8.312.2 Other Companies 1,49,832 1,10,505 35.6

Source : Department of Public Enterprises.

223Industry

assistance to States/Union Territories for identifiedcircuits and destinations. These include megaprojects, human resource development, augmentingaccommodation infrastructure, positioning Indiantourism products in domestic and overseas marketsand promoting India as a round-the-year tourismdestination through an integrated media strategyunder the “Incredible India” brand. The new initiativesinclude development of heliports, cruise, caravan,wellness and MICE (meetings, incentives,conferences and exhibitions) tourism. In order toensure environmental sustainability and createemployment opportunities, “responsible tourism” isbeing pursued by enhancing stakeholder orientationin rural, eco-adventure, wildlife and wellness tourism.

9.51 The Ministry of Tourism continued its effortsto reinforce its brand through Incredible Indiacampaigns. Print media and advertising campaignshave been undertaken in overseas locations. TheMinistry has also launched the “Visit India 2009”scheme whereby attractive incentives are beingoffered to foreign tourists. Market developmentassistance (MDA) being given to tourism serviceproviders for sales-cum-study tours, participation infairs and exhibitions and publicity through printedmaterials, has been liberalized. Through socialawareness campaigns, attempt was made to

sensitize stakeholders to the importance of tourismand protection of heritage sites and through genericcampaigns, awareness about various destinations/sub-tourism products was generated. For identifieddestinations/circuits covered by the Jawaharlal NehruUrban Renewal Mission (JNURM) convergence ofresources is being ensured so that tourism-relatedinfrastructure and urban civic infrastructurecomplement each other.

Financing and investment9.52 Gross capital formation (GCF) inmanufacturing grew at a compound annual rate of26.2 per cent during 2003-04 to 2007-08. As theNational Accounts data on capital formation areavailable only till 2007-08, it is not possible to analysethe trends beyond that year. However, the increasein the investment demand is evident from the stronggrowth in capital goods recorded during June-November 2009. In the absence of hard data oncapital formation and capacity addition in industryfor the current period, information on the mobilizationof investible resources by the sector from differentsources would be instructive.

9.53 In recent years, especially from 2004-05, theIndian private corporate sector has started to raiseexternal capital (i.e. other than internal resources)

Table 9.18 : Flow of financial resources to commercial sector

Item April-November*2007-08 2008-09 2008-09 2009-10

Domestic Sources (in Rs crore)

Public Issues and Rights issues (except Banks/FIs) 56,074 16,220 12,686 19,496

Qualified Institutional Placements (QIPs) 25,525 189 75 34,167

Gross Private Placements by NFIs 68,249 77,891 44151 81617#

Net Issuance of CPs Subscribed by Non-banks 10,660 5,590 22,187 51,012#

Bank Credit to Industry (incl. Infra) 1,69,536 1,87,515 1,43,300 99,332Systemically Important Non-deposit taking NBFCs(net of Bank Credit) 36,460 76,828 37,744 17,990 ^

Mutual Funds Investments in Debt (Non-Gilt) 88,457 -32,168 19,896 1,01,956#

LIC’s Gross Investment in Corporate Debt,Infrastructure and Social Sector 24,275 65,815 10,686 18,027 ^

Foreign sources (in US $ million)FDI 34,835 35,180 24,693 26,506$

ADR/GDR issues (excluding Banks & FIs) 6,645 1,162 1,142 3,152$

External Commercial Borrowings / FCCB 30,293 15,244 6,332 5,168

Source : RBI/SEBI.Note : * Comparable period for respective items. ^ Data pertain to April-August.

# Data pertain to April-September. $ Data pertain to April-DecemberData for 2006-09 and 2009-10 are provisional.


mainly to fund its investment and this includes foreigninstitutional sources. Data on sources and uses offunds for a sample of non-financial public limitedcompanies available till 2006-07 (in a study by theRBI) shows that the share of external finance wasas much as 64.1 per cent of the total sources. Someof the predominant sources, other than banks andfinancial institutions, include resource mobilizationthrough the issue of equities and bonds, privateplacement, private equity and commercial papers,and foreign sources like FDI, ADRs/GDRs andexternal commercial borrowings (Table 9.18). It isdifficult to compare quantities as sources ofexclusively financing the industrial sector (includinginfrastructure), as most of these quantities combinethe total commercial mobilization of resources, ofwhich industry forms only a part.

9.54 Given the caveat, three tentative conclusionsseem contextually relevant for the current year sofar. First, the growth in bank financing of the industrialsector decelerated significantly during April-November 2009-10. Second, the mobilization offinancial resources from the domestic non-banksector, including the capital market, has beensignificantly higher during the period compared tothe corresponding period in 2008-09. Third, the inflowof investible resources from external sources was

comparable with higher flows from ADRs/GDRsand FDI.

Industrial credit9.55 The growth in credit to industry declinedsteeply from 37.0 per cent in November 2008 to 14.2per cent in November 2009, on an year-on-year basis(Table 9.19). The sectoral composition of the grossdeployment of bank credit to industry, includinginfrastructure, shows widely varying patterns. It isthe infrastructure sector that kept growth in industrialcredit at the level of 14.2 per cent during November2009 (Table 9.19). Net of infrastructure, the growthin industrial credit was significantly lower, that is 4.6per cent in November 2009, compared to 36.5 percent during the corresponding period of the previousyear.

9.56 With the organized sector having access tovarieties of financial instruments to raise resources,the implications of a deceleration in credit growth forsmaller-scale enterprises can be more pronounced.Industrial credit to micro and small enterprises(including service-sector enterprises) grew at a higherrate (19.3 per cent) in November 2009 compared tothe credit growth in the overall industrial sector.Further, industrial credit to micro and smallenterprises in the manufacturing sector also grew at

Table 9.19 : Industry-wise deployment of gross bank credit

Sector % Growth (y-o-y) Share in outstandingcredit to industry(%)

Nov. 2008 Nov. 2009 Nov. 2008 Nov. 2009

Mining and Quarrying (incl. Coal) 53.0 2.6 1.5 1.3Food Processing 23.2 5.9 5.0 4.6Beverage & Tobacco Products 45.2 49.2 0.7 0.9Textiles 21.2 7.4 10.0 9.4Leather & Leather Products 12.5 -0.5 0.6 0.5Wood and Wood Products 47.2 4.1 0.4 0.4Paper & Paper Products 29.7 11.0 1.5 1.5Petroleum, Coal Products and Nuclear Fuels 149.2 -22.0 8.6 5.9Chemicals and Chemical Products 39.2 1.0 7.5 6.6Rubber, Plastic & their Products 33.4 6.5 1.3 1.2Cement and Cement Products 80.5 18.3 1.8 1.8Basic Metals and Metal Products 27.0 18.3 12.3 12.8All Engineering 26.5 4.7 6.2 5.7Transport Equipment 42.5 -2.9 3.7 3.1Construction 59.9 8.9 3.4 3.2Infrastructure 38.6 47.2 22.5 29.0Industry Total (Small, Medium & Large) 37.0 14.2 100.0 100.0Industry Total minus Infrastructure 36.5 4.6 77.5 71.0

Source : RBI.Notes : Data are provisional and relate only to select banks.

225Industry

19.0 per cent. The corresponding figures duringNovember 2008 stood at 20.0 per cent and 21.5 percent respectively.

FDI9.57 FDI inflows to India, which remained robust in2008-09 despite the slump in global financial flows,have also continued to flow smoothly during thecurrent year so far. During April-November 2009-10,total FDI equity inflows stood at Rs 93,354 crore(US$ 19,379 million) as against Rs 85,700 crore (US$19,791 million) during the corresponding period in2008-09, signifying a growth of 9 per cent in rupeeterms and a decline of 2 per cent in US dollar terms;the divergent patterns in growth rates beingattributable to exchange rate changes during theperiod. During 2008-09, total FDI equity inflows stoodat Rs1,22,919 crore (US$ 27,309 million) as againstRs 98,664 crore (US$ 24,579 million) during 2007-08, signifying a growth of 25 per cent in rupee termsand 11 per cent in US dollar terms (Table 9.20).

9.58 The sectoral shares of FDI inflows havefluctuated significantly in recent years. Sectors likeagricultural services, sea transport and electricalequipment have shown a quantum jump in FDI inflowsduring 2009-10.

POLICY DEVELOPMENTS ANDPROGRAMMES

9.59 The developments in terms of policy responsesduring 2008-09 were to an extent shaped by theeffects of the global financial crisis on Indian industry.Measures taken specifically for the industrial sectorincluded fiscal measures and measures to ensureavailability of credit. Broadly, the effort in this regardwas to mitigate the sharp impact of the globalrecession on industry, especially the export-orientedsectors that were the most directly affected. Apartfrom the general stimulus measures announced bythe Government and the RBI for the industrial sector,the following sector-specific measures andprogrammes have been undertaken.

Textiles9.60 Stimulus measures announced on December7, 2008 that benefited the textile sector includedgeneral reduction of 4 per cent in Central value addedtax (CENVAT ) rates; abolition of 4 per cent optionalCENVAT on cotton textiles; extension of the benefitof service tax refund to service provided by clearingand forwarding agents to exporters; increase in thethreshold limit of refund of service tax paid byexporters on foreign commission agent service;

Table 9.20 : Sectors attracting highest FDI flows(Rs crore)

Sector April-November Growth(per cent)

2007-08 2008-09 2009-10 in 2009-10

Services Sector 9,121 1,5919 16,566 4.06Telecommunications 3,963 9,231 10,811 17.12Housing & Real Estate 5,161 8,353 10,565 26.48Construction 3,593 7,490 8,380 11.88Agriculture Services 426 16 6,327 39,443.8Power 208 3,420 5,994 75.26Automobile Industry 1,191 3,401 4,499 32.28Computer Software & Hardware 4,217 6,670 2,763 -58.58Electrical Equipment 2,432 900 2,724 202.67Hotel & Tourism 830 1,427 2,246 57.39Information & Broadcasting(including Print Media) 747 1,711 2,015 17.77Trading 2,108 2,427 1,982 -18.34Metallurgical Industries 1,909 3,420 1,485 -56.58Consultancy Services 606 825 1,341 62.55Sea Transport 363 127 1,293 918.11Petroleum & Natural Gas 234 947 1,084 14.47Chemicals (other than Fertilizers) 731 1,991 1,000 -49.77Grand Total of All FDI Flows

Source : Department of Industrial Policy and Promotion.


making available drawback benefit simultaneouslywith refund of service tax paid for exports; makingpre- and post-shipment export credit for certainspecific sectors including textiles belonging to thesmall and medium sector more attractive with interestsubvention; additional allocation of Rs 1,400 croreto clear the entire backlog in TUFS; inclusion of allhandicrafts items under the Vishesh Krishi & GramUdyog Yojana (VKGUY); and boost to collateral-freelending.

9.61 The stimulus scheme announced on January2, 2009 included extension of the Duty EntitlementPassbook Scheme (DEPB) scheme till December31, 2009 and restoration of the rates to thoseprevailing prior to November 5, 2008 and increase inthe duty drawback rates on certain knitted fabricsand specified categories of yarn with retrospectiveeffect from September 1, 2008.

9.62 The Interim Budget 2009-10 announcedmeasures like reduction in general rate of Centralexcise duty from 10 per cent to 8 per cent, whichbenefited textile machinery and reduction in rate ofservice tax on taxable services from 12 per cent to10 per cent.

9.63 Highlights of the Trade Facilitation Measuresannounced under the Foreign Trade Policy (onFebruary 26, 2009), inter alia, included provision ofRs 325 crore under promotional schemes for leather,textiles, etc., for exports made with effect from April1, 2009; notification of the benefit of 5 per cent dutycredit script on free on board value of exports underthe Focus Product Scheme (FPS) for exports ofhandmade carpets, in lieu of the 3.5 per cent benefitallowed earlier under the VKGUY; inclusion oftechnical textiles under the High-Tech ProductsExport Promotion Scheme; announcement ofBhilwara in Rajasthan as the Town of ExportExcellence for Textiles; enabling recognizedassociation of units to access funds under the MarketAccess Initiative (MAI) scheme for creating focusedtechnological services; reduction in the threshold limitfor recognition as a premier trading house to Rs 7500crore from Rs 10,000 crore; proportionate reductionof the export obligation of a product under the ExportPromotion Capital Goods (EPCG) scheme, in caseof decline in exports of that product by more than 5per cent; extension of DEPB/duty credit scriptutilization for payment of duty on import of restricteditems; simplification of procedure for claiming dutydrawback refund and refund of terminal excise duty;allowing re-credit of 4 per cent special additional duty,in case of payment of duty by incentive scheme

scrips such as the VKGUY, Focus Product andFocus Market; and extension of the export obligationperiod against advance authorizations up to 36months.

9.64 On March 4, 2009, the Governmentannounced the facility of refund of service tax paidon all input services to special economic zone (SEZ)units and developers (which was earlier restricted toservices that were consumed within the zone).

9.65 The incentives introduced under the ForeignTrade Policy 2009–2014 included extension ofincentive schemes by addition of new products andmarkets; addition of 26 new markets under the FocusMarket Scheme (FMS); raising the incentive availableunder the FMS from 2.5 per cent to 3.0 per cent;raising the incentive available under the FPS from1.25 per cent to 2.0 per cent; expansion of the MarketLinked Focus Product Scheme (MLFPS); extensionof MLFPS benefits to export to additional marketsfor certain products; providing higher allocation forthe MDA and MAI schemes; introduction of theEPCG scheme at zero duty for apparels and textilesamong others; extension of the DEPB scheme tillDecember 31, 2010; and removal of the requirementof ‘Handloom Mark’ for availing of benefits under theFPS.

Chemicals and Petrochemicals9.66 The Assam Gas Cracker Project, approvedby the Government in April 2006 at a fixed cost ofRs.5,461 crore, with GAIL (India) Ltd. as the mainpromoter, is expected to generate substantialemployment and investments in downstream plastic-processing industries. The project is scheduled forcommissioning in April 2012. The financial closureof the project has been successfully completed inOctober 2009. The capital subsidy for the project isbeing released by the Government in the years from2007-08 to 2012-13. Of the Rs 429.1 crore cumulativeexpenditure on the project till October 2009, Rs 208crore has been released in 2009-10 (till October2009).

9.67 India, a signatory to the Chemical WeaponsConvention (CWC), has a fairly large chemicalindustry which falls under the ambit of the CWC.The Department of Chemicals and Petrochemicalshas so far successfully hosted 73 OPCW(Organization for the Prohibition of ChemicalWeapons) inspections including 13 in 2009-10. Helpdesks have been set up at Vadodara, Mumbai andChennai for facilitating compliance with CWCobligations. A sector-specific investment region,

227Industry

‘Petroleum, Chemicals and PetrochemicalsInvestment Region’ (PCPIR) has been set up toensure adoption of a holistic approach to promotethe petroleum, chemicals and petrochemicals sectorsin an integrated and environment -friendly manner.The PCPIR region would be a combination ofproduction projects, public utilities, logistics,environmental protection, residential areas andadministrative services. Proposals have beenreceived from the Governments of Andhra Pradesh,Gujarat, Karnataka, Orissa, Tamil Nadu and WestBengal. The Andhra Pradesh, Gujarat and WestBengal proposals have been approved in February2009 and Memoranda of Agreement (MoA) signedbetween the Central Government and the three StateGovernments .

Pharmaceuticals9.68 In pursuit of excellence in pharmaceuticaleducation and research, six new National Institutesof Pharmaceutical Education & Research (NIPERs)have been set up, in addition to the existing one atMohali. These NIPERs will award masters anddoctoral degrees and encourage R&D activities. TheNIPERs have been set up in collaboration with mentorinstitutes so that advanced curricula and pedagogicalmethodologies are brought into practice for high-endteaching. Some of the new R&D initiatives in thesector include the launching of an educationprogramme for drug regulators and industry andpreparation of a Venture Finance and IncubationFund for innovative R&D.9.69 An Environmental Cell has been created inthe Department of Pharmaceuticals to collect anddisseminate information on pharma-relatedenvironmental matters, identify issues and solutions,create awareness on environmental issues andcoordinate with other stakeholders.9.70 The Department of Pharmaceuticals incollaboration with the Ministry of MSME hasintroduced a Scheme for Schedule ‘M’ Complianceby small-scale industrial (SSI) units in the pharmasector under the overall umbrella of the Credit LinkedSubsidy Scheme (CLCSS). Under the scheme,pharma SSI units are eligible for 15 per cent upfrontcapital subsidy on institutional finance up to Rs1.00crore availed of by them for adoption of improvedtechnology to make themselves Schedule ‘M’Compliant.9.71 Other new initiatives that have been taken /are being contemplated by the Department includethe launching of the access to affordable medicineJan Aushadhi Campaign, measures for setting up

world class pharma infrastructure in India throughpublic-private partnership (PPP) and providingimpetus for manufacturing of new medical devicesand pharma machinery.

Fertilizers9.72 The government has decided to examine thefeasibility of revival of the Hindustan FertilizerCorporation Ltd (HFCL) and Fertilizer Corporation ofIndia Ltd (FCIL), subject to confirmed availability ofgas. An Empowered Committee of Secretaries,constituted to look into the various financial modelsfor revival of the closed units, has recommended therevenue-sharing model (RSM) with an upfront fee forthe revival of each unit through the Build Own andOperate (BOO) mode. Action is being taken by therespective companies for finalization of a fully tiedup revival proposal for each unit. Revival of MadrasFertilizers Ltd (MFL), Fertilizers & ChemicalsTravancore Ltd (FACT) and Brahmaputra ValleyFertilizer Corporation Ltd (BVFCL) is also underconsideration.

9.73 The New Pricing Scheme-III (NPS-III) forindigenous urea seeks to rationalize distribution andmovement of urea and to lay down a definite plan forconversion of all non-gas-based urea units to gas.The Government has announced a new investmentpolicy for urea units to attract investment in thefertilizer sector that is based on import parity pricebenchmarking. Besides, a policy for encouragingproduction and availability of fortified and coatedfertilizers was notified.

9.74 To ensure easy availability of fertilizers in allparts of the country, a uniform freight subsidy policywas announced under which rail freight will be paidon actuals and road freight on a normative averagedistrict lead.

9.75 The Revised Concession Scheme fordecontrolled phosphatic and potassic fertilizers wasannounced, under which final rates for concession,to be worked out on a monthly basis, for indigenousDAP would be the same as those for imported DAP.Further, mono ammonium phosphate, triple superphosphate and ammonium sulphate have beenincluded in the concession scheme. The maximumretail price has been left open to be decided by themanufactures with effect from October 1, 2009. Anamount of Rs 2,000/MT has been allowed asconcession on Single Super Phosphate (SSP).

9.76 Possibilities for setting up of joint ventureammonia/urea projects in countries abroad where


adequate gas is available, are being explored. Indianentities are in dialogue for joint ventures in the fieldof phosphatic and potassic fertilizers in countriessuch as Jordan, Moracco, Tunisia, Australia, Syriaand Canada.

Steel9.77 Responding to the changed scenario, theGovernment of India removed the export duty on allsteel items, reintroduced import duty of 5 per centon steel, restored DEPB benefits, reduced exciseduty to 8 per cent, placed imports of hot-rolled coilson the “restricted list”, making them available todirect users only and withdrew the exemption fromcountervailing duty on import of thermo-mechanicallytreated (TMT)bars and structurals. In recent times,to ensure adequate domestic availability, export dutyon iron lumps has been increased from 5 per cent to10 per cent and a 5 per cent export duty has beenimposed on iron ore fines to regulate exports of thematerial. Moreover, an Inter-Ministerial Group (IMG)has been set up to facilitate interaction betweeninvestors and the various agencies in matters ofacquisition of land, mining rights, power andtransportation including the rail, road and port sectors.

Electronics and information technology9.78 Approved in May 2006, there are 27 MissionMode Projects (MMPs) under the National e-Governance Plan (NeGP) consisting of 9 CentralMMPs, 11 State MMPs and 7 integrated MMPs(including 8 programme support components) which,inter alia, achieved the following by December 2009.Out of the 100,000 broadband Internet-enabledCommon Service Centres (CSCs) planned to berolled out in rural areas on PPP basis, 58,954 havebeen rolled out. Eleven States/ Union Territories havecompleted implementation of the State Wide AreaNetworks (SWANs) scheme which is envisaged toprovide secured network from State headquarters upto block level with a minimum bandwidth capacity of2 Mbps. Proposals of State Data Centres (SDC) for31 States/ Union Territories have been approved witha total outlay of Rs 1,378.50 crore. Twenty States/Union Territories have completed the institutionalframework for State-level strategic decision makingincluding setting up of State e-Governance MissionTeams (SeMT) and deployed SeMT personnel.

9.79 Under the initial phase of the NationalKnowledge Network (with scalable multi-gigabitcapabilities to connect 1,000 nodes covering alluniversities, research institutions, libraries,

laboratories, hospitals and agricultural institutionsacross the country), a core backbone consisting of15 Points of Presence (PoPs) has been establishedwith 2.5 Gbp capacity. Fifty-seven institutions ofhigher learning and advanced research have beenconnected to the network and six virtual classroomshave been set up at six IITs. Under the National SkillDevelopment Policy, a target has been laid down toskill 10 million people by the year 2022 in the areaof IT. The Information Technology Research Academyprogramme has been conceived for advancingcapacity and capability building in the area ofinformation and communication technology andelectronics.

9.80 Through the Nanotechnology Programme, R&Dcapacity and infrastructure is being built up at theIndian Institute of Science Bangalore and IIT Bombay.Application-oriented projects for specific users/industries with technology demonstration andtechnology transfers are mostly carried out by R&Dsocieties of the Department of InformationTechnology like the Centre for Development ofAdvanced Computing (CDAC) and Society for AppliedMicrowave Electronic Engineering and Research(SAMEER) with active collaboration from academics.C-DAC commissioned a high performance computingsystem called PARAM “Yuva”. The “PARAMSheersh” Supercomputing Facility at the NorthEastern Hill University (NEHU), Shillong conductsscientific and engineering research in strategicareas in the North-East region. The nationwidegrid-computing initiative, Garuda, aggregatessupercomputing and storage resources nationwide,provides a problem-solving environment, and enablescollaborative R&D for research and user community.Garuda connects 45 premier institutions across17 cities.

9.81 The Information Technology (Amendment) Act2008 has been enforced and rules of importantsections have been notified in October 2009addressing the needs of national cyber security. TheAct has, inter alia, added provisions to deal withnew forms of cyber crimes like publishing sexuallyexplicit material in electronic form, video voyeurismand breach of confidentiality. The Indian ComputerEmergency Response Team (CERT-In) has beendesignated as the nodal agency for coordinatingmatters related to cyber security and emergencyresponse. CERT-In has published a crisismanagement plan for countering cyber attacks andcyber terrorism. It has also created a panel of IT

229Industry

security auditors. The Certifying Authorities (CAs)licensed by the CCA have issued more than14,00,000 Digital Signature Certificates. These arebeing used in applications such as Real Time GrossSettlement System & Electronic Fund Transfer,email, e-procurement, share trading and issue ofimport/export licences and filing of companyreturns.

MSMEs9.82 In accordance with the provisions of theMSMED Act 2006, the MSMED (Furnishing ofInformation) Rules, 2009 were notified in October2009. These provide for furnishing of informationrelating to investment in plant and machinery orequipment by enterprises. Further, the AdvisoryCommittee, as provided in the MSMED Act has beenreconstituted in September 2009.

9.83 The National Manufacturing CompetitivenessProgramme (NMCP) has ten components targetedat enhancing the entire value chain of the MSMEsector. Of these, five were already under operation,which included Quality Management Standards(QMS) and Quality Technology Tools (QTT), buildingawareness on Intellectual Property Rights forMSMEs, Support for Entrepreneurial and ManagerialDevelopment of SMEs through Incubators, MarketingSupport Assistance to MSMEs and Mini-ToolRooms. During 2009-10, two more components havebeen made operational, namely, the LeanManufacturing Competitiveness Scheme for MSMEsand the Design Clinic Scheme. Of the remainingthree schemes, two–Technology and QualityUpgradation Support to MSMEs and the MarketingAssistance and Technology Upgradation Schemefor MSMEs–have been approved.

9.84 Skill development has been accorded highpriority in line with the overall target set by the PrimeMinister’s National Council on Skill Development.The agencies under the Ministry of MSME willconduct skill development programmes for about 3.62lakh trainees during 2009-10.

9.85 The cluster approach has been adopted as akey strategy for enhancing the productivity,competitiveness and capacity building of MSEs andtheir collectives. Under the MSE Cluster DevelopmentProgramme, 27 new clusters were taken up fordiagnostic study, 27 for soft interventions and 8 wereapproved for setting up of common facility centres(CFCs) during 2009-10. Cumulatively, 441 clustersin 28 States and 7 UTs have so far been taken up for

diagnostic study, soft interventions and setting up ofCFCs under the programme.

9.86 Under the Credit Guarantee Fund Scheme forMicro and Small Enterprises, over 1 lakh MSEproposals for an amount of Rs 4,465 crore have beenapproved for extending loans without collateral/third-party guarantee during April-December 2009,registering substantial growth over the previous year’slevels. Cumulatively, about 2.50 lakh MSE proposalsfor loans amounting to Rs9,200 crore havebeen approved under the scheme tillDecember 2009.

9.87 Under the Credit Linked Capital SubsidyScheme (CLCSS), which aims at facilitatingtechnology upgradation of the MSE sector, 1,403MSEs have been assisted and subsidy amountingto Rs 81.53 crore has been sanctioned during April-November 2009. Cumulatively, 7,910 MSEs havebeen assisted and subsidy amounting to Rs 344.84crore sanctioned till November 2009.

9.88 A loan agreement for $ 150 million was signedbetween the Government of India and the AsianDevelopment Bank in December 2009 forimplementing the comprehensive Khadi ReformProgramme, under which the khadi and villageindustries (KVI) sector is proposed to be revitalizedwith enhanced sustainability, income, employmentand artisan welfare.

9.89 Under the Prime Minister’s EmploymentGeneration Programme (PMEGP) launched inAugust 2008, cumulatively 4.56 lakh applicationshave been received by various implementing agenciesup to November 2009, of which 1.63 lakh have beenrecommended to banks. A total of 50,207 projectsinvolving margin money of Rs 833.86 crore have beensanctioned by the banks up to November 2009.

9.90 A new scheme, namely Strengthening ofInfrastructure of Existing Weak Khadi Institutionsand Assistance for Marketing Infrastructure, has beenintroduced, envisaging renovation of 30 selected khadisales outlets and providing assistance forstrengthening of infrastructure of 100 existing weakinstitutions.

9.91 The recent global economic slowdown hashad an adverse impact on the Indian economy,including the MSME sector. In this context, therepresentatives of 19 prominent MSME Associationsmet the Prime Minister on August 26, 2009 tohighlight various concerns and issues. The PrimeMinister announced the setting up of a Task Force


to reflect on the issues and formulate an agenda foraction within a period of three months afterdiscussions with all stakeholders. Accordingly, aTask Force under the chairmanship of the PrincipalSecretary to the Prime Minister has been constitutedto address the issues of MSME sector. The TaskForce classified the common issues into followingmajor thematic areas (namely credit, marketing,labour, rehabilitation and exit policy, infrastructure,technology and skill development and taxation) andconstituted separate Sub-Groups for detailedexamination. A separate Sub-Group was constitutedto look into the development of MSMEs in the North-East and Jammu & Kashmir. The Task Forcesubmitted its report to Hon'ble Prime Minister onJanuary 30, 2010. The recommendations of the TaskForce have been made with a view to not only helpthe MSMEs in meeting the challenges of globaleconomic slowdown but will also facilitate theirgrowth and development.

CPSEs9.92 The Government has been delegatingenhanced financial and operational powers to theNavratna, Miniratna and other profit-making CPSEs.There are 18 Navratna enterprises. Six more CPSEs,namely the Airport Authority of India Limited, EnnorePort Ltd, Tehri Hydro Development Corporation,Security Printing and Minting Corporation Ltd, SatlujJal Vidut Nigam Ltd and Indian Railway Catering andTourism Corporation Ltd. were granted Miniratnastatus during the year, raising the total number ofMiniratna CPSEs to 62.

9.93 Besides endeavouring to professionalize theBoards of Directors of these enterprises, theGovernment has issued guidelines on corporategovernance of CPSEs. The Board for Reconstructionof Public Sector Enterprises (BRPSE), establishedto advise the Government, inter alia, on revival /restructuring of sick and loss-making CPSEs, maderecommendations on 58 cases until December 31,2009. The Government has approved proposals forthe revival of 37 CPSEs and closure of two. The totalassistance approved in this regard up to March 31,2009 was Rs 15,275 crore, which comprised Rs 2,935crore as cash assistance and Rs 12,340 crore asnon-cash assistance.

9.94 Nearly one-fourth of the employees in CPSEsare in the managerial and supervisory cadres. Thetotal number of employees in all CPSEs came downto 15.35 lakh (excluding casual and contract labour)as on March 31, 2009 compared to 15.66 lakh as on

March 31, 2008. The average per capita emolumentsin CPSEs stood at about Rs 5,45,500 per annum.

SOME CRITICAL DIMENSIONS OFINDUSTRIAL DEVELOPMENT

Industrial pollution and environment9.95 Industries, large, medium and small scale,have been a significant source of air and waterpollution. Out of 2,715 industries identified under the17 categories of highly polluting industries, 1,940have installed pollution control devices to complywith standards, 479 have been closed and legalaction has been taken against 296 defaulting units.Necessary measures – both preventive andpromotional – have been taken for control of industrialpollution. These, inter alia, include notification andenforcement of emission and effluent standards;setting up of clean technology mechanisms andeffluent treatment plants; establishment of wasteminimization circles in clusters of small-scaleindustries; regulation of location of industries;implementation of the charter on CorporateResponsibility for Environmental Protection (CREP)in the 17 highly polluting categories; introduction ofthe voluntary Eco Mark scheme; implementation ofan auto fuel policy that controls vehicular pollution;use of economic instruments to internalize cost ofpollution; and fiscal incentives for pollution controlequipments.

9.96 Air quality data (annual average) of designatedcities/towns reveal that the levels of sulphur dioxidewere within the National Ambient Air QualityStandards (NAAQS). The NAAQS of nitrogen oxidewas violated at 14 per cent of monitoring stations inindustrial areas. High levels of respirable suspendedparticulate matter were the more prevalent airpollutant. Similarly, based on the primary waterquality criteria evolved in terms of Bio-ChemicalOxygen demand (BOD), 150 stretches on 105 rivershave been identified as polluted.

9.97 Prior environmental clearance of developmentprojects based on impact assessment is mandatoryfor designated sectors/projects. Table 9.21 givesfigures for projects appraised in various sectors duringApril-November 2009.

9.98 The recent policy initiatives that havebeen taken by the Government to mitigate theimpact of environmental pollution include thefollowing.

231Industry

The Government has recently revised theNAAQS and limits for 12 pollutants havebeen notified. Area classification based onland use has been done away with so thatthere are uniform ambient air quality normsfor residential and industrial areas. Therevised standards are based on global bestpractices and local Indian conditions.Towards a revamped river conservationstrategy, the Government has accorded theGanga the status of a “national river” andhas constituted a National Ganga RiverBasin Authority (NGRBA) to ensure effectiveabatement of pollution and conservation ofthe river. The NGRBA has resolved that bythe year 2020, no untreated municipalsewage or industrial effluent will flow intothe Ganga.The Environment Impact Assessment (EIA)Notification 2006 has been amended inDecember 2009. The amendments madeinter alia include decision of the State LevelEnvironment Impact Assessment Authority(SEIAA) to be taken by majority; coal-mineprojects with lease area up to 150 ha to beappraised by the SEIAA; biomass-basedpower plants up to 15 MW and power plantsbased on non-hazardous municipal solidwastes have been exempted from EIAnotification; and information regarding grantof environmental clearance to be put in thepublic domain for Category ‘A’ projects.A National Green Tribunal has beenproposed for expeditious disposal of casesrelating to environmental protection andconservation of forests and other naturalresources including enforcement of anylegal right relating to environment and giving

relief and compensation for damages. Theproposal to set up a National EnvironmentProtection Authority to strengthencompliance and enforcement ofenvironmental statutes and to improveenvironmental planning and management isin a conceptual stage.

Labour relations9.99 The current year, reckoned by the number ofman days lost because of strikes and lockouts, hasso far been a good year. The number of man dayslost because of lockouts has continuously been onthe decline (Table 9.22). In regard to the spatialdispersion of the incidences of strikes and lockouts,it is observed that Gujarat, Andhra Pradesh, Keralaand Rajasthan are the most affected States. Amongsectors, financial intermediaries (excluding insurance& pension funds) recorded the maximum number ofstrikes and lockouts.

Table 9.21 : Projects appraised during April-November 2009

Nature of Project Cleared Pending Rejected/ Returned/withdrawn

EC TOR EC TOR EC TOR

1. Industry 296 284 67 144 282. Thermal Power 26 50 29 37 123. River Valley and Hydroelectric 09 28 09 13 024. Mining (Coal & Non-coal) 97 171 85 68 715. Infrastructure and Miscellaneous 68 35 47 05 026. Construction & Industrial Estates 46 04 17 03 01

Total 542 572 254 270 116

Source : Ministry of Environment and ForestsEC – Environmental clearance; TOR - Terms of Reference

Table 9.22 : Strikes and lockouts(Man-days lost, in million)

Year Strikes LockoutsNumber Man- Number Man-

days dayslost lost

2004 236 4.83 241 19.04

2005 227 10.81 229 18.86

2006 243 5.32 187 15.01

2007 210 15.06 179 12.11

2008 (P) 250 7.02 182 10.46

2009(P) 91 2.05 31 0.84(Jan-Nov.)

Source : Labour Bureau, ShimlaNote : P - Provisional



9.100 The cyclical slowdown in the industrial sectorthat began in 2007-08 got compounded by the twinglobal shocks in 2008-09. The effects lingered onbriefly in the current fiscal; but growth rebound isamply evident. Given the size of the Indian marketand the unmet demand for industrial products,coupled with the fact that the overall GDP has startedto exhibit growth momentum, there is reasonablehope that demand would not by itself be aconstraining factor. Besides, despite the significantstep-up in the Government borrowing programme,domestic financial market and external resource flowshave given the impression that raising investibleresources would not be a major problem. All thesefactors, combined with the inherent strength ofindustrial corporates exemplified by the resilienceshown by them against adversities in the recent pastbrighten the industrial outlook in the medium term.

9.101 The emerging investment picture is yet tobecome clear. Growth in the production of capitalgoods is improving, but different components of the“capital goods” group have shown a mixed pictureduring the current year so far. In any case, growth inthe indigenous production of capital goods cannotby itself be used to comment on investment andcapacity expansion, because, there has, of late, beensignificant growth in imported capacity addition.

9.102 Industry-agriculture linkages are well knownin the Indian context. It appears that there is alreadysome spill over of the slowdown in the agriculturesector affecting some segments of industry. Whilethe ongoing industrial recovery is observed to bebroad-based, it should also be noted that some ofthe sectors that failed to revive in the current year,like food products, paper products, leather products,

jute and cotton textiles and metal products (to anextent), are labour intensive. Ensuring balanced andsustained growth of the Indian economy is predicated,to a great extent, on the ability of manufacturing toabsorb the vast surplus labour in the farm sector.Apart from the need for sustaining the high growth inlabour-intensive sectors with the vast pool of talentavailable within the country, another critical challengein this respect would be to erase the skill deficit witha multi-faceted programme for skill upgradation.

9.103 Manufacturing inflation, especially of pricesof industrial inputs, remained mild in the current year.It has predominantly remained an inflation story offood products, which may have partly spilled overfrom the slowdown in the farm sector. Theimprovement in the cost structure of manufacturingcompanies seems to have catalysed the process ofrecovery. However, indications are that despite theprice levels of food products remaining firm, theircontribution to manufacturing inflation has beencoming down, suggesting a slightly moredecentralized movement in manufacturing prices.While higher prices are an incentive to the producer,they also have implications for the cost structureand the demand for manufactured products. Thistrade-off needs to be carefully managed.

9.104 Capacity addition in some of the keyinfrastructure sectors like power and roads is lagging;however, it is expected that with the completion ofthe large number of projects in progress, the targetswould be achieved. One of the biggest challenges tosustaining and stepping up industrial growth lies inremoving the infrastructural impediments. Growth ininfrastructure not only alleviates the supply-sideconstraints in industrial production, but alsostimulates additional domestic demand required forindustrial growth.

Energy, Infrastructureand Communications CHAPTER

10

In tandem with the pick-up in overall industrial growth, core industries andinfrastructure services have also evinced signs of recovery with easing of supplybottlenecks in certain sectors and demand recovery in others. The robust growthmomentum in telecommunications, particularly the wireless segment, continues withmonthly additions exceeding 17.6 million connections. In the midst of the worst-ever slowdown in the history of world civil aviation, even the modest levels of growthin India are indicative of resilience. Core industries like power, coal and otherinfrastructure like ports and roads are also reviving. Available evidence points to asteady revival of flows of investible resources. However, the levels of broadbandpenetration, capacity creation in some crucial infrastructure sectors and the state ofdevelopment of markets for longterm finance remain causes for concern. There isneed to develop infrastructure to complement and sustain the economic growthmomentum. Efforts—legislative, administrative and executive—are on to minimizethe infrastructure deficit, ameliorate bottlenecks in completion of projects and nurturecore industrial intermediates and infrastructure services.

10.2 The stimulus measures announced by thenational authorities worldwide to combat theeconomic slowdown contained infrastructure build-up plans. In line with the rest of the world, the UnionBudget for 2009-10 substantially stepped upallocation for many infrastructure sectors over theBudget estimates for the previous year, especiallyfor the National Highways Development Programme(NHDP), Jawaharlal Nehru National Urban RenewalMission (JNNURM) and Accelerated PowerDevelopment and Reform Programmes (APDRP).

OVERVIEW OF PERFORMANCE10.3 Construction of rural roads under the PrimeMinister’s Gram Sadak Yojana (PMGSY) proceededapace and remained on course to achieving theEleventh Five Year Plan targets for expenditure onrural roads. As against the target of developing about3,165 km length of national highways under theNHDP in 2009-10, the achievement till November

2009 has been about 1,490 km (Table 10.1). Againstthe target of awarding projects for a length of about9,800 km under the NHDP during 2009-10, projectshave been awarded for about 1,285 km up toNovember 2009. Capacity creation in the powersector seems to have gone up in the current year;however, the actual capacity addition during April-December 2009 was only 43.9 per cent of the targetof 14,507 mega watt (MW) for the current fiscal,with the corresponding achievements by the Central,State and private sectors being at 29.4 per cent,40.5 per cent and 54.8 per cent respectively.

10.4 The Department of ProgrammeImplementation monitors the progress in Central-sector projects costing Rs100 crore and above, ona monthly basis. The Progress Report for October2009 indicated that projects such as roads, power,railways, petroleum, telecom, coal and steelconstituted about 94 per cent of the total number of


591 monitored projects. Over time, project delayshave been creeping up (Fig 10.1)

10.5 In the current year, core industries andinfrastructure services, in general, seem to havecome out of the slump witnessed amidst the generalslowdown of the economy in the previous fiscal. Inthe current fiscal, electricity generation emerged fromthe lacklustre growth witnessed in the previous yearand equalled its performance in 2007-08. That thiswas achieved despite constraints imposed by theinadequate availability of coal and dismal hydelgeneration owing to the failure of monsoons, atteststo its potential. This improved performance wasfacilitated by the improved availability of gas for thepower sector. The coal sector grew at a reasonable

rate during the current year (Table 10.2); but the factthat the power sector as a major consumer felt acuteshortage of domestic coal availability, raisedquestions about the required growth in coalproduction. Rail freight traffic grew at 7.4 per cent,year-on-year, mainly on account of the buoyant growthin traffic in coal, pig iron and finished steel, cementand container services, pointing towards renewedeconomic activity (Table 10.2). In airways, thesituation improved visibly in both cargo and passengertraffic from that obtained in the second half of theprevious year; the passenger traffic in the domesticterminals seems to have revived. The rising trend inwireless phone connectivity, which remainedunaffected amidst the general slowdown during the

Per

cen

t

Progress in Central - sector projects (Rs 100 crore and above)

0

10

20

30

40

50

60

Figure 10.1

Ahead ofschedule

Ontime

Delayed

Year2007 2009

Oct

Nov

Dec Jan

Feb

Mar

Apr

May Jun

Jul

Aug

Sep

Oct

Nov

Dec Jan

Feb

Mar

Apr

May Jun

Jul

Aug

Sep

Oct

2008

Source: MoSPI

Table 10.1 : Indicators of infrastructure capacity creationItem 2006-07 2007-08 2008-09 April-Dec.2009

Power Capacity Addition (MW) 6,853 9,263 3,454 6,375

Addition to Refinery Capacity- Petroleum 5.1 16.5 29.0 Nil

Road Length Upgraded -NHAI (km). 636 1,683 2,203 1,486*

Road Length Upgraded NIH (O) & BRDB- km. 1,686 1,897 2,226 1,294*

Road Works Completed under PMGSY (km) 30,710 41,231 52,405 36,273

Route km RKMs electrified–Railways 361 502 787

Additional Locations with Computerized 82 234 88 189*Passenger Reservation–Railways

New Lines (km)–Railways 250 156 357

Doubling of Lines (km)–Railways 386 426 363

Gauge Conversion (km)–Railways 1,082 1,549 563

Addition to Port Capacity (MTPA) 48.5 27.3 42.7

Net Addition to Switch Capacity–Telecom (000 lines) 9,603 7,159 14,393 7,105*

Sources : Ministry of Power, Ministry of Petroleum & Natural Gas, Ministry of Statistics and ProgrammeImplementation (MoSPI), National Rural Roads Development Agency & Ministry of Railways.* April-November.

235Energy, Infrastructure and Communications

previous year, continues at a robust pace during thecurrent year too.

POWERGeneration10.6 Electricity generation by power utilities during2009-10 has been targeted to go up by 9.1 per centto 789.5 billion KWh. The growth of power generationduring April–December 2009 was about 6.0 per cent(Table 10.3) as compared to about 2.7 per cent duringApril-December 2008. Decline in hydroelectric powergeneration was mainly due to poor monsoons. Coal-based generation of power constituted around

80 per cent of thermal generation and around 66 percent of the total generation of power (Table 10.4).The power sector is a major consumer of coal using74 per cent of the coal production. Coal- based powergeneration was constrained by the shortage indomestic supply of coal and the non-materializationof planned imports during April-December 2009. Thetotal consumption of coal by the power sector duringthe period was 271.0 million tonnes. About 16.7million tonnes of coal was imported. Apart frombridging the demand-supply gap, blending of importedhigh quality coal with high ash domestic coal helpsthermal power stations adhere to environmentalstipulations of using coal with less than 34 per centash content.

Table 10.3 : Power Generation by Utilities (Billion KWh)

Category 2007-08 2008-09 April-December Growth2008-09 2009-10 (per cent)

Power Generation* 704.5 723.8 540.0 572.5 6.0

i) Hydroelectric 123.4 113.0 92.4 85.4 (-) 7.4

ii) Thermal 559.0 590.0 430.7 468.5 8.8

iii) Nuclear 16.8 14.8 11.3 13.4 18.6

iv) Bhutan Import 5.3 5.9 5.6 5.1 (-) 8.3

Source : Ministry of Power

* Excludes generation from captive and non-conventional power plants and thermal power plants below 20MW units and hydro power plants below 2 MW.

Table 10.2 : Growth in core industries and infrastructure services (in per cent)2007-08 2008-09 H1 2008-09 H2 2008-09 April-Nov.

2009

Power 6.3 2.7 2.6 2.9 6.3Coal 6.0 8.1 7.9 8.3 9.3Finished Steel 6.8 0.6 4.3 -2.7 1.5Railway Revenue-earning Freight Traffic 9.0 4.9 8.5 1.8 7.4Cargo Handled at Major Ports 12.0 2.1 7.2 -2.4 4.7Telephone Connections 83.7 10.1 31.3 -4.9 -Cell Phone Connections 38.3 44.8 25.9 60.3 52.4Fertilizers -8.6 -2.5 -1.2 -3.9 11.1Cement 7.8 7.5 6.0 9.0 10.5Crude Oil 0.4 -1.8 -0.8 -2.7 -1.4Refinery 6.5 3.0 4.5 1.5 -1.2Natural Gas 2.1 1.4 4.8 -1.9 32.7Air Export Cargo 7.5 3.4 8.0 -1.2 5.6Air Import Cargo 19.7 -5.7 5.9 -16.9 -4.5Passengers at International Terminals 11.9 3.8 7.2 0.7 2.8Passengers at Domestic Terminals 20.6 -12.1 -7.5 -16.4 10.7

Source : MoSPI


10.7 The availability of gas from the KG (KrishnaGodavari) basin (D6) and utilization of surplus gasavailable on fallback basis resulted in betterutilization of capacity and higher plant load factor(PLF) as also high growth in electricity generatedfrom gas-based plants. The overall PLF also improvedduring April-December 2009 (Table 10.4). A sector-wise and region-wise break-up of PLF, a measure ofefficiency, from 2007-08 to 2009-10 (April–December)

indicates the continuity and change over time andregional variation (Fig 10.2).

10.8 Out of the total installed generation capacityin the country, about 11 per cent is based on gas orliquid fuel (excluding diesel). The commencementof production of gas from D-6 fields of the KG basinsince April 2009 has improved gas availability forelectricity generation (Table 10.5).

Power deficit10.9 The deficit in power supply in terms of peakavailability and total energy availability rosecontinuously from 2003-04 to 2007-08, a periodcharacterized by high growth in peak demand andtotal energy requirement. Despite modest growth inelectricity generation, the peak deficit came downsignificantly in 2008-09 on account of a slowdown ingrowth of peak demand. During April-December 2009,the peak and total energy deficits came downconsiderably to 12.6 per cent and 9.8 per centrespectively from 13.8 per cent and 10.9 per centduring the corresponding period in the previous year(Figure 10.3). This happened mainly on account ofthe increase in growth of electricity generation.

Table 10.5 : Coal and gas input for the power sectorYear Coal (in million tonnes) Gas (in MMSCMD)*

Consumption Imports Required at Shortfall Generation90 per cent PLF loss (BUs)

2006-07 302.5 9.7 61.2 26.1 26.32007-08 329.6 10.2 65.7 27.5 31.22008-09 358.0 16.1 66.6 29.2 33.7Apr-Dec 2009 ** 271.0 16.7 76.5 24.3 18.2

Source : Ministry of Power.*Based on normative gas requirements; ** Figures for gas refer to April-November 2009;BU–billion units; MMSCMD–million metric standard cubic metre per day.

Pe

r c

en

t

Plant load factor of thermal power stations (Sector wise)

0

10

20

30

40

50

60

70

Figure 10.2A

80

90

Apr-Dec2009

100

2007-08

2008-09

State Central Private All India

Pe

r c

en

t

Plant load factor of thermal power stations (Region wise)

0

10

20

30

40

50

60

70

Figure 10.2B

80

90

Apr-Dec2009

100

2007-08

2008-09

Northern Western Southern Central North Eastern

Table 10.4 : Thermal power generationduring April-December 2009

Components Generation Growth PLF (in per cent)(MUs) Apr.- Apr.-

Dec. Dec.2008 2009

Coal 376.6 5.5 75.9 76.5Lignite 18.0 17.1 62.7 74.5Gas Turbine 70.3 30.9 58.0 65.9Multi-fuel 0.4 -56.5 53.0 23.1Diesel 3.2 -9.0 - -Thermal Total 468.5 8.8 75.2 76.2

Source: Ministry of Power.


Table 10.6 : Capacity addition during theEleventh Five Year Plan (with high levelof certainty) (MW)

Status Central State Private TotalPlan Target 36,874 26,783 15,043 78,700Commissioned 4,990 9,112 4,990 19,092(as on 31.12.2009)Under Construction 16,232 12,243 14,807 43,282

Source : Ministry of Power.

Capacity addition10.10 The Eleventh Five Year Plan envisaged acapacity addition of 78,700 MW, of which 19.9 percent was hydel, 75.8 per cent thermal and the restnuclear. Projects under execution in various sectorsfor the Eleventh Five Year Plan have made steadyprogress (Table 10.6).

10.11 The target for 2007-08, the first year of theEleventh Plan, was initially fixed at 16,335 MW andsubsequently reduced to 12,039 MW. Against thisrevised target, a capacity addition of 9,263 MW wasachieved during the year. A capacity addition targetof 11,061 MW comprising 9,304 MW thermal, 1,097MW hydro and 660 MW nuclear was originallyplanned for 2008-09. On account of revision in the

definition of commissioning of thermal projects, thecapacity addition target for the year 2008-09 wasrevised as 7,530 MW, against which a capacity of3,454 MW was added up to March 31, 2009. In thecurrent fiscal, the hydel and nuclear segments madelittle progress and the progress in the thermalsegment was uneven across the three sectors (Table10.7).

10.12 The main reasons for underachievement ofcapacity addition targets during 2007-08 and 2008-09 were delayed and non-sequential supply ofmaterial by suppliers, shortage of skilled manpowerfor construction and commissioning of projects,contractual disputes between project authorities,contractors and their sub-vendors, delay in readinessof balance of plants by the executing agencies,design problems in CFBC boiler and shortage of fuel.

10.13 The Ministry of Power has adopted amonitoring system of capacity addition at differentlevels: the Central Electricity Authority (CEA),Ministry of Power, Power Project Monitoring Paneland Advisory Group. The CEA and Ministry of Powerhold review meetings periodically with developers andother stakeholders.

Per

cent

Power supply position: All India

0

2

4

6

8

10

12

14

Figure 10.3

16

18

Energydeficit

20

Peakdeficit

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

Apr-

Dec

2008

Apr-

Dec

2009

Year

Table 10.7 : Capacity addition target (original) and achievement during April-December 2009(in MW)

Sector Thermal Hydro Nuclear TotalTarget Actual Target Actual Target Actual Target Actual

Central 2,490 1,000 252 Nil 660 Nil 3,402 1,000State 4,679 1,979 301 39 Nil Nil 4,980 2,018Private 5,833 3,357 292 Nil Nil Nil 6,125 3,357

Total 13,002 6,336 845 39 660 Nil 14,507 6,375Source : Ministry of Power.


Ultra Mega Power Projects (UMPPs)10.14 Nine UMPPs of 4,000 MW each haveoriginally been identified for development under theinternational competitive bidding route. Four UMPPs,namely Sasan in MP, Mundra in Gujarat,Krishnapatnam in Andhra Pradesh and Tilaiya inJharkhand have already been awarded. One unit of660 MW of the Sasan UMPP and two units of 800MW each of the Mundra UMPP are expected to becommissioned in the Eleventh Five Year Plan. Inrespect of the UMPP at Sarguja district inChhattisgarh, all the pre-Request for Qualification(RfQ) activities have been completed. For the UMPPin Sundergarh district, Orissa, most of the pre-requisites for issuing the RfQ are already in place,except issuance of Section 4 Notification. Withrespect to the UMPP in Tamil Nadu, the site hasbeen finalized at Cheyyur, along with the captive portwhich is under finalization. For the second UMPP inAndhra Pradesh, the site at Nayunipalli, PrakasamDistrict has been finalized by CEA/PFC inconsultation with State Government. For UMPPs tobe located in Karnataka and Maharashtra, secondUMPP in Gujarat and two additional UMPPs inOrissa, requisite inputs regarding land availabilityand water linkage are being examined.

Mega Power Policy10.15 Guidelines under the Mega Power Policy,introduced in 1995, were modified in 1998 and 2002and further amended in April 2006 to encourage powerdevelopment in Jammu & Kashmir and the north-eastern region. In the wake of the important statutoryand policy- level changes, some of the provisions ofthe present Mega Power Policy were revisited,bringing them in line with the National ElectricityPolicy 2005 and Tariff Policy 2006. With a view torationalize the procedure for grant of mega certificateand facilitate quicker capacity addition, followingmodifications to the Mega Policy have been made.

(i) The existing condition requiring privatizationof distribution by power-purchasing stateswill be replaced by the condition that theyshall undertake to carry out distributionreforms as laid down by the Ministry ofPower.

(ii) The condition requiring inter-State sale ofpower for getting mega power status will beremoved.

(iii) The present dispensation of 15 per cent pricepreference available to domestic bidders in

case of cost plus projects of public-sectorundertakings (PSUs) will continue. However,the price preference will not apply to tariff-based competitively bid projects of PSUs.

(iv) Developers of mega power projects will notbe required to undertake internationalcompetitive bidding for procurement ofequipment for the mega power project if therequisite quantum of power has been tiedup through tariff-based competitive biddingor the project has been awarded throughtariff-based competitive bidding.

(v) All benefits, except a basic custom duty of2.5 per cent only, available under the MegaPower Policy would be extended toexpansion unit(s) of existing mega powerprojects even if the total capacity ofexpansion unit(s) is less than the threshold-qualifying capacity, provided the size of theunit(s) is not less than that provided in theearlier phase of the project. All otherconditions for grant of mega power statusshall remain the same.

(vi) Mega power projects may sell power outsidelong-term power purchase agreements(PPAs) in accordance with the NationalElectricity Policy 2005 and Tariff Policy2006.

Induction of supercritical technology throughbulk ordering10.16 The Government approved proposals for theinduction of supercritical technology through bulkordering of 11 units of 660 MW (totalling 7,260 MW)by the National Thermal Power Corporation (NTPC)Ltd. for itself and on behalf of its joint venture (JV)companies and on behalf of the Damodar ValleyCorporation (DVC). Following this, NITs for bulk tenderof Steam Generator Packages and Steam TurbineGenerator Packages were issued by the NTPC onOctober 16, 2009. The award process is likely to becompleted by July 2010.

Development of hydro power10.17 Forty-six hydro projects with an aggregatecapacity of 13,675 MW are under construction inthe country. The main reasons for their slowdevelopment include difficult and inaccessiblepotential sites, difficulties in land acquisition,rehabilitation, environmental and forest –relatedissues, inter-State issues, geological surprises and


contractual issues. Private-sector participation inhydel power projects has been increasing; there are14 schemes with an installed capacity of 4,383 MWunder construction in the private sector. Privatedevelopers have been allotted 129 schemes with aninstalled capacity 36,123 MW by States which areyet to be taken up for construction. The bulk of thepotential which is in the Himalayan region is yet tobe tapped. Out of the 162 projects for whichpreliminary feasibility reports were prepared underthe 50,000 MW Hydro Electric Initiative, 77 (33,951MW) have been taken up for detailed survey andinvestigation and preparation of detailed projectreports (DPRs)/implementation. So far, DPRs for 21schemes have been prepared.

10.18 Some of the features of the new hydro policyinclude making available the dispensation for projectdevelopment allowed for PSUs to the private sectorfor a period of five years; better relief and rehabilitationpackages for affected families; risk mitigation fordevelopers and facilitation of early financial closure.A Task Force under the Chairmanship of the Ministerof Power has been constituted to look into all issuesrelating to the development of hydro power. AnotherTask Force constituted to develop the model contractdocuments for hydro power projects has sinceprepared them.

Transmission, Trading, Access andExchange10.19 An integrated power transmission grid helpsto even out supply-demand mismatches. Theexisting inter-regional transmission capacity is about20,800 MW. This has enabled inter-regional energyexchanges of about 36,815 MUs during April-December 2009.

Trading of Electricity10.20 Power trading facilitates disposal of surpluspower with distribution utilities and meeting the short-term peak demand. The Central and State Electricity

Regulatory Commissions have powers to grant inter-State and intra-State trading licences respectively.The Central Electricity Regulatory Commission(CERC) has so far granted 44 inter-State tradinglicences, of which 40 are in existence as on July 31,2009. Electricity trading by licensed inter-Statetraders is picking up (Table 10.8).

Inter-State trading margin regulations 201010.21 The CERC has issued new regulations fixingtrading margins for inter-State trading in electricity.The main features of the new regulations are: i) thetrading margin shall apply only to short-term buy –short–term sell contracts for inter-State trading.ii) the Trading margin shall not exceed 4 paise perunit if the sell price of electricity is less than or equalto Rs.3 per unit. The ceiling of trading margin shallbe 7 paise per unit in case the sell price of electricityexceeds Rs 3 per unit. iii) if more than one tradinglicensee is involved in a chain of transactions, theceiling on the trading margin shall include the tradingmargins charged by all the traders put together. Inother words, traders cannot circumvent the ceilingby routing the electricity through multipletransactions. iv) long-term agreements have beenexempted from trading margins to facilitate innovativeproducts and contracts for new capacity additionwhich involve higher risk in transactions.

Open access10.22 The regulations on open access in inter-Statetransmission and those on inter-State trading areissued by the CERC while the responsibility forintroducing open access at distribution level restswith State Electricity Regulatory Commissions(SERCs). States have been asked to take steps toring fence the State Load Dispatch Centres (SLDCs)so that they are not be under any pressure fromutilities to counter open access.

10.23 Open access in inter-State transmission isfully operational. To boost open access, the CERC

Table 10.8 : Electricity tradingPeriod Volume of Weighted average Weighted average Trading

electricity purchase price sale price margintraded (MUs) (Rs./kWh) (Rs./kWh) (Rs./kWh)

2005-06 14,188.8 3.14 3.23 0.092006-07 15,022.7 4.47 4.51 0.042007-08 20,964.8 4.48 4.52 0.042008-09 21,916.9 7.25 7.29 0.04April-Oct. 2009 15,551.7 5.32 5.36 0.04



has recently notified a regulation on Connectivity,Long-term Access and Medium-term Open Accessin inter-State Transmission. The regulation hasintroduced medium-term open access to the inter-State grid. A transmission corridor can now be availedof for a period ranging from three months to threeyears. Provisions have also been made for seekingconnectivity to grid. The new dispensation hasabolished the discrimination between public-sectorand private-sector generators in the matter ofconnectivity to grid. Also, now any 100 MW andabove consumer can be connected directly to theCentral Transmission Utility grid without having togo to SLDCs.

10.24 The volume of approved open accesstransactions (in energy terms) in inter-Statetransmission has increased over the period. Theenergy approved for open access through the bilateralroute involving trade through electricity traders ordirectly between distribution licencees was 16,441MUs in 2004-05, 27,756 MUs in 2008-09 and 24,443MUs in 2009-10 (up to Dec 2009). With theintroduction of power exchanges in 2008, openaccess is approved separately for collectivetransactions in the exchanges. The approved energyfor open access through such collective transactionswas 2,765 MUs in 2008-09 and 4,831 MUs in 2009-10 (up to December 2009). There has been migrationof the volume of energy approved from bilateral tocollective transactions. The total volume of energyapproved for open access in inter-State open access(including bilateral and collective transactions) was30,521 MUs in 2008-09 and 29,274 MUs in 2009-10(up to December 2009).

10.25 Status of applications received for openaccess in distribution varies across select States(Table 10.9). The open access charges vary widelyacross States.

Power exchange10.26 The CERC has issued power marketregulations which focus on creating an overall powermarket structure and role of power exchanges andtraders and provide for market oversight andsurveillance. The two power exchanges, namely theIndian Energy Exchange Ltd. (IEX), New Delhi, andthe Power Exchange India Ltd. (PXIL), Mumbai, havebeen in operation from June 27, 2008 and October22, 2008 respectively. Increasing volumes ofelectricity transacted through power exchangeswould indicate the progress in this regard (Table10.10).

Table 10.10 : Volume of electricitytransacted by power exchanges duringApril-October 2009 (in MUs)

Day-Ahead Market IEX 3,047.5PXIL 384.7

Term-Ahead Market * IEX 17.5PXIL 2.2

Source : Ministry of Power.* Term-Ahead Contracts introduced at the two

power exchanges from September 15, 2009.

Promotion of green power10.27 The CERC has notified tariff regulations forelectricity generated from renewable energy (RE)sources (Box10.1).These regulations assume

Table 10.9 : Status of applications received for open access in distribution(November 30,2009)

States Received Approved ImplementedNo. MW. No. MW. No. MW.

Andhra Pradesh 11 1,055.8 4 51.3 4 51.3Chhattisgarh 16 404.3 6 66.0 5 53.0Gujarat 44 5,534.0 40 5,523.2 40 5,523.2Madhya Pradesh 30 60.2 30 60.2 30 60.2Maharashtra 64 14,452.0 57 14,310.5 7 163.0Rajasthan 31 277.6 29 264.3 29 264.3Tamil Nadu 16 1,752.0 1 18.0 0 0.0Other States (*) 56 2,195.1 45 1,457.2 38 1,357.3

Total 268 25,731.0 212 21,750.8 153 7,472.4Source: Forum of Regulators.* Other States include Haryana, Himachal Pradesh, Jharkhand, Kerala, Orissa, Punjab, Uttar Pradesh, West

Bengal and Karnataka.


Box 10.1 : Terms and conditions for tariffdetermination from ResourcesThe CERC has notified tariff regulations for electricitygenerated from RE sources. Salient features of theregulations are as under:

Control Period of three years, except for solar projectsfor which capital cost shall be reviewed every yearin view of technological advancement;Tariff Period is 13 years for RE technologies;excluding SHP below 5 MW (35 years), SolarPhotovoltaic (PV) and Solar Thermal (25 years) asthese technologies need handholding support for alonger time;Thirteen Years tariff period covers the debtrepayment obligation; beyond the tariff period, REproject is to compete.Provision for generic levellized tariff based on suomotu petition for RE technology such as wind energy,small hydro power, biomass power (based onrankine cycle technology), non-fossil fuel co-generation; and solar PV and solar thermal.Provision for project-specific tariff for municipalsolid waste projects, solar PV and solar thermalpower projects, (if the developer so opts), hybridsolar thermal power plants and biomass projectsother than those based on rankine cycle technologyapplication with water cooled condenser.

special importance in view of the National ActionPlan on Climate Change which stipulated thatminimum renewable purchase standards be set at 5per cent of the total power purchases in year 2010and increase thereafter by 1 per cent every year forten years. The Commission has issued generic tarifffor various RE technologies for 2009-10.

10.28 The Forum of Regulators has evolved aRenewable Energy Certificate (REC) mechanism atnational level to facilitate inter-state transaction ofRE sources. The CERC has notified the RECRegulation for implementing an REC framework. Thisis a market-based instrument to promote renewableenergy and facilitate compliance with renewablepurchase obligations under inter-State transactionsof RE generation. The REC mechanism is aimed ataddressing the mismatch between availability of REresources in a State and the requirement of theobligated entities to meet the renewable purchaseobligation.

AT&C losses and Restructured APDRP10.29 The focus of the Restructured AcceleratedPower Development Reforms Programme (RAPDRP)is on actual, demonstrable performance in terms ofreduction in aggregate technical and commercial(AT&C) losses. Projects under the scheme will be

taken up in two parts in towns and cities withpopulation more than 30,000 (10,000 in case ofspecial category States).

Part A10.30 Part A shall include projects forestablishment of baseline data and informationtechnology (IT) applications for energy accounting/auditing and IT-based consumer service centres.Preparation of baseline data covering consumerindexing, GIS mapping, metering of distributiontransformers and feeders, and automatic datalogging for all distribution transformers and feedersand SCADA (Supervisory Control and DataAcquisition) / DMS (Distribution ManagementSystem) system is only for big cities. It wouldinclude asset mapping of the entire distributionnetwork at and below the 11Kv transformers andadoption of IT applications for meter reading, billingand collection, energy accounting and auditing,redressal of consumer grievances and establishmentof IT-enabled consumer service centres. The baselinedata shall be verified by an independent agencyappointed by the Ministry of Power.

10.31 A steering committee has been constitutedunder the Secretary (Power) in order to sanctionprojects, monitor and review implementation, approveguidelines for operationalizing the components ofthe scheme, approve and sanction activities to betaken up under Part C of the scheme, appointagencies for verifying and validating baseline datasystems andfor verifying fulfilment of programmeconditions by utilities, and approve conversion of loaninto grant upon fulfillment of necessary conditions.The steering committee has approved 1,344 projectsfor 22 states under Part A at the cost of Rs 4,859.60crore. The budget allocation for 2009-10 is Rs 1,730crore (Rs 1,650 crore as loan and Rs 80 crore asgrant). Six States, namely West Bengal, MadhyaPradesh, Rajasthan, Karnataka, Uttarakhand andGujarat have awarded the work for implementationof projects approved under Part A of the RAPDRP tothe IT Implementing Agency.

Part B10.32 Part B shall include regular distribution-strengthening projects. These include renovation,modernization and strengthening of 11 Kv- level sub-stations, transformers/transformer centres, re-conductoring lines at 11Kv level and below, loadbifurcation, load balancing, high voltage distributionsystem (HVDS) and installation of capacitor banksand mobile service centres. In exceptional cases,where sub-transmission system is weak,


strengthening at 33 Kv or 66 Kv level may also beconsidered.

10.33 Expected investment in Part A is Rs 10,000crore and that in Part B Rs 40,000 crore. Initially100 per cent funds for Part A and 25 per cent (90 percent for special category States) for Part B projectsshall be provided through loan from the Governmentof India. The balance funds for Part B projects shallbe raised from financial institutions. The entireamount of loan for Part A projects shall be convertedinto a grant once the establishment of the requiredbaseline data system is achieved.

10.34 Up to 50 per cent (90 per cent for specialcategory States) of the cost of Part B projects shallbe converted into a grant in five equal tranches onachieving the 15 per cent AT&C losses in the projectarea on a sustainable basis for a period of five years.In addition, utility level loss reduction (AT&C losses)@ 3 per cent per annum for utilities with baselineloss levels exceeding 30 per cent and @ 1.5 percent for utilities with baseline loss levels less than30 per cent have to be achieved.

Part C10.35 Part C is an enabling component forimplementation of the APDRP. A provision of Rs 1,177crore through Gross Budgetary Support has beenmade in the scheme. This part is to be implementedby the Ministry of Power/nodal agency. The PowerFinance Corporation has been appointed as the nodalagency for operationalizing the programme. Theactivities under Part C include:

Preparation of template for system requirementspecifications for subdivision automation andcustomer relations management module, as wellas for automated baseline data collectionsystems;

validation of the baseline data to be done byindependent agencies;appointment of project advisors and projectmanagement consultants to assist in monitoring,to validate project proposals submitted bydistribution companies (project advisers) and toassist distribution companies in formulatingdetailed project reports (DPRs), in standardizingbidding/contract documents, managing the bidprocess, etc. (project management consultants);project evaluation for which a panel of evaluatorswill be finalized through a bidding process;

capacity building and development of franchiseesin the distribution sector; and

carrying out consumer attitude survey to assessthe impact of the measures taken.

Part D10.36 Under Part D of the scheme, there is provisionfor incentive for utility staff in towns where AT&C losslevels are brought below the baseline. An amountequivalent to 2 per cent of the grant for part B projectsis proposed as incentive for utility staff in projectareas where AT&C loss levels are brought below 15per cent.

Rural electrification10.37 Under the Rajiv Gandhi GrameenVidyutikaran Yojana (RGGVY), 69,963 villages havebeen electrified and connections have been releasedto 88.8 lakh BPL households up to January 15, 2010.Under Tenth Plan, 235 projects covering 68,763villages and 83.10 lakh BPL connections weresanctioned at a cost of Rs. 9732.90 crore. In Phase-I of the Eleventh Five Year Plan period 332 projectshave been sanctioned for implementation at a costof Rs 16,506 crore for electrification of 49,736 un-electrified villages and release of electricityconnections to 162.96 lakh BPL households. TillJanuary 15, 2010, 328 projects have been awarded.Franchisees are in place in 1,02,255 villages in 16States as on January 15,2010.

Energy Conservation and efficiency10.38 Several measures have been taken by theMinistry of Power and the Bureau of EnergyEfficiency to promote energy conservation and itsefficient use targeting 5 per cent reduction in demandduring the Eleventh Five Year Plan through schemesbeing implemented by the Bureau of EnergyEfficiency ( Table 10.11).

10.39 The Ministry of Power has also launched anawareness programme which includes givingincentives for efficiency and conservation efforts byway of National Energy Conservation Awards,painting, debate and essay competitions forschoolchildren and creating general awarenessthrough the media on the need for energyconservation. The National Mission for EnhancedEnergy Efficiency is one of the eight missions underthe National Action Plan on Climate Change. Thescheme has been approved and its implementationwill commence in 2010-11. The objective of theMission is to achieve growth with ecologicalsustainability by devising cost-effective strategiesfor end-use demand side management.


PETROLEUM

Oil and gas production10.40 With around 75 per cent of total oilconsumption in the country being met throughimports, the dependence on imports for petroleumand petroleum products continued to be high. Thedomestic supply of crude oil remained around 34million metric tonnes (MMT) and natural gas at about

32 billion cubic metric tonnes (BCM) during the pastfive years. With 15 new oil and gas discoveries duringthe current financial year, domestic availability isexpected to improve. During 2009-10, the projectedproduction for crude oil is 36.7 MMT, which is about11 per cent higher than the actual crude oil productionof 33.5 MMT in 2008-09. This is primarily due toincrease in crude oil production from Rajasthan (2.4MMT) and the KG deepwater (0.8 MMT). The

Bachat Lamp Yojna Provides high-quality compactfluorescent lamps to consumersat rate comparable to that ofincandescent bulbs

The pilot scheme was approved by the CDM(Clean Development Mechanism) ExecutiveBoard of the UNFCCC (United NationsFramework Convention on Climate Change)in 2008-09. Avoided capacity generation of104 MW achieved.

Standards & LabellingScheme

Lays down minimum energyperformance standards for highenergy equipment andappliances.

Labelling of ACs, refrigerators, TFLs andtransformers made mandatory from January7, 2010. Labelling of geysers, motors,pumps, colour TVs, LPG stoves, ceiling fansintroduced on a voluntary basis. About1,744.84 MW of avoided capacity generationachieved.

Energy Conservation,Building Code (ECBC) inexisting buildings

ECBC sets performancestandards for new commercialbuildings with connected load ofmore than 500 KW or 600 KVA ofelectricity consumption, energyconservation measures inexisting buildings proposedthrough Energy ServiceCompanies (ESCOs) underperformance contracting.

Forty-four architects have been empanelled.Investment grade audits have been initiatedin 35 Central Government buildings and 400buildings in States. Thirty-five ESCOs havebeen empanelled and accredited. Avoidedcapacity generation of 7 MW achieved.

Demand SideManagement (DSM)

DSM in agriculture &municipalities

Approval for implementing the scheme wasreceived in the last quarter of 2008-09 and itis now operational.

Strengthening state-designated agencies

Financial assistance to SDAs forstrengthening institutionalcapacities

Action plans for 28 states are underimplementation. Avoided capacitygeneration of 787 MW achieved.

National EnergyConservation Awards

For specified sectors, large,medium and small industries,SDAs and municipalities

Avoided capacity generation of 834 MWachieved.

Table 10.11 : Measures for energy conservation & efficiency

Initiative Components Achievements/developments

Energy efficiency inenterprises

For small and mediumenterprises

Approval for the scheme was received in thelast quarter of 2008-09. Now operational.

State Energy ConservationFund

Central Government to contributeto the State Conservation Fundonce it is set up by the respectiveState for energy conservation onactivities.

Approval for the scheme was recentlyobtained.



projected production for natural gas (including coalbed methane [CBM]) for 2009-10 is 50.2 BCM whichis 52.8 per cent higher than the actual production of32.8 BCM in 2008-09. The increase in natural gasproduction is primarily from the KG deepwater block.

Progress of the New Exploration andLicensing Policy (NELP) and Coal BedMethane Policy10.41 Of the estimated sedimentary area of 3.14million sq. km, at present 1.17 million sq. km isheld under petroleum exploration licences. Sinceoperationalization of the NELP in January 1999, 72oil and gas discoveries have been made by private/joint venture (JV) companies in 21 blocks. Underthe NELP, more than 600 MMT of oil equivalenthydrocarbon reserves has been added.

10.42 As on April 1, 2009, investment made byIndian and foreign companies was of the order of US$ 11.9 billion. After concluding seven rounds of NELP,203 production-sharing contracts (PSCs) have beensigned. The area awarded under the NELP forexploration was 46 per cent of the Indian sedimentarybasin. The eighth round of the NELP was launchedin April 2009 offering the highest number ofexploration blocks ever, that is 70 blocks covering asedimentary area of about 1,63,535 sq. km. Theoffered blocks included 24 deepwater blocks, 28shallow water blocks, 8 on-land blocks and 10 Type-S blocks. As part of the CBM policy approved inJuly 1997, 26 CBM blocks have been awarded inthe first three rounds. As part of CBM IV, theGovernment offered 10 blocks covering an area ofabout 5,000 sq. km. spread over seven states,namely Assam, Jharkhand, Orissa, MadhyaPradesh, Chhattisgarh, Maharashtra and Tamil Nadu.

10.43 The Government has received 76 bids for 36blocks out of 70 blocks offered under NELPVIII and26 bids for 8 blocks out of 10 blocks offered underCBMIV by the bid-closing date, that is October 12,2009. In respect of 16 deep water blocks, 15 shallowwater blocks and 3 on-land blocks, no bidswere received. A total of 62 companies comprising10 foreign and 52 Indian companies have madebids.

Domestic reserves and production10.44 Balance recoverable crude oil and naturalgas reserves in the country are 736.45 MMT and1,119.55 BCM respectively. New oil and gas reservesfound by private/JV companies in the KG deepwaterand Rajasthan are in production.

Gas Production from KG-D6 Basin10.45 Gas production from KG-D6 began on April1,2009. It is expected that production would be rampedup to 80 MMSCMD by the end of 2009-10. AnEmpowered Group of Ministers (EGOM) constitutedto decide commercial utilization of gas under theNELP has allocated 61.611 MMSCMD of gasproduced from KG-D6 on firm basis and 30MMSCMD on fall-back basis to various prioritysectors.

Crude oil production from Rajasthan10.46 Crude oil production by the Rajasthan CairnEnergy India Pty. Ltd. has started in block RJ-ON-90/1 with effect from August 29, 2009 at the initialproduction rate of 3,500 barrels per day. Productionfrom this block, which is of very high quality, is likelyto increase during 2009 through 2011. TheGovernment has designated IOC, MRPL and HPCLfor lifting part of the crude oil production from thisblock after ascertaining the capacity of receivingrefineries of the nominees. The production expectedfrom this block during 2009-10 is 2.4 MMT.

Improved oil recovery/enhanced oil recovery(IOR/EOR)10.47 Work programmes have been undertakenprimarily by the Oil and Natural Gas Corporation(ONGC) for IOR/EOR in its 15 largest fields, whichaccount for 80 per cent of its reserves and production.Eighteen IOR/EOR schemes of have already beenapproved to increase the recovery factor from 14ageing oil & gas fields of the ONGC at an estimatedcost of about Rs14,510 crore.

Development of marginal fields10.48 Concerted efforts have been made to put newand marginal fields in production through in-houseresources as well as through service contract. Outof a total of 165 marginal fields, ONGC has alreadymonetized 56. Of the remaining 109 fields, 68 arebeing monetized in-house by ONGC, 20 throughservice contracts and 21 are likely to be offered. Themarginal field policy is being finalized.

Underground coal gasification (UCG)10.49 ONGC entered into an Agreement ofCollaboration with the National Mining ResearchCentre-Skochinsky Institute of Mining in Russia. Inthe selected Vastan mine block, a seismic surveywas carried out and 18 boreholes were drilled fordetailed UCG site characterization. Vastan in Gujaratand Hodu Sindri in Rajasthan have been found suitablefor UCG stations. Pilot production of UCG at Vastanby the ONGC would commence in 2010.


Gas hydrate10.50 India is a pioneer in the field of gas hydrate.In accordance with the roadmap for the National GasHydrate Programme (NGHP), India has alreadyacquired core samples with the help of the US drillship JOIDES Resolution. In December 2008, amemorandum of understanding (MOU) was signedbetween the Directorate General of Hydrocarbonsand the U S Geological Survey for cooperation onexchange of scientific knowledge and technicalpersonnel in the field of gas hydrate and research.The second NGHP expedition has been planned in2010 to map the prospects of gas hydrate in KrishnaGodavari and Mahanadi deepwater areas.

Equity oil & gas from abroad10.51 The Government is encouraging national oilcompanies to aggressively pursue equity oil and gasopportunities overseas. The Oil & Natural GasCorporation Videsh Limited (OVL) produced about8.75 MMT of oil and equivalent gas in 2008-09 fromits assets abroad in Sudan, Vietnam, Venezuela,Russia, Syria and Colombia. In 2008-09, OVL hasacquired seven blocks in five countries comprisingtwo blocks each in Brazil and Columbia and oneeach in Myanmar, Venezuela and Trinidad & Tobago.The largest ever acquisition of a foreign company,Imperial Energy Plc. UK. (IEC) by an oil PSU, OVLhas taken place. OIL-IOC alliance has also acquiredone block in Timor Leste and two blocks in Egypt.BPCL along with Videocon has acquired participatinginterest in 10 blocks in Brazil.

Refining & pipeline capacity10.52 The total installed capacity of refineriesincreased to 177.97 MMTPA as on April 1, 2009.The new refineries at Bhatinda, Paradip and Binawill further augment domestic refinery capacity. Bythe end of the Eleventh Five Year Plan, refinerycapacity is expected to reach 240.96 MMTPA. Thecountry has a network of 24 product pipelines with alength of 10,514 km and capacity of 62.91 MMT; 3LPG pipelines of 2,197 km length and 4.50 MMTcapacity; 6 crude oil pipelines of 5,795 km lengthand 52.75 MMT capacity.

Rajiv Gandhi Gramin LPG Vitrak Yojana(RGGLVY)10.53 The Ministry of Petroleum & Natural Gas hasformulated a vision for the year 2015 ‘CustomersSatisfaction & Beyond’ wherein it is targeted to cover75 per cent of the population with LPG by that year.

The LPG customer base is targeted to increase from10.6 crore as on April 1, 2009 to 16.0 crore by theyear 2015. The focus would be on States and regionswhere coverage is below the national average. A newlow-cost LPG distributor scheme, the RGGLVY waslaunched on October 16, 2009 with a view to releasingLPG connections in rural areas where operationswith the present norms are economically unviable.The scheme has been launched at locations havingpotential of up to 600 refills per month.Advertisements inviting applications for distributorshiphave been released in eight States covering 1,215locations.

Public grievances redressal system in OilMarketing Companies (OMCs)10.54 In order to streamline the public grievancesredressal system, OMCs have started unique toll-free telephone numbers that are provided to registercomplaints and follow up. Customer contact withsenior company officials is fixed on prescribed daysof the month. For booking refill cylinders 24x7, SMSand interactive voice response system (IVRS)facilities have been introduced.

Special efforts towards energy (oil & gas)conservation10.55 The Petroleum Conservation ResearchAssociation (PCRA) is mandated to formulate andspread awareness on energy / petroleumconservation. This is carried out through field- levelactivities like energy audit, fuel oil diagnostic studies,service to small-scale industries, institutional trainingprogrammes, seminars, exhibitions, paintingcompetitions and workshops. During 2009-10, 3,572activities have so far been conducted. The PCRAhas carried out technical/R&D interventions aimedat reducing energy intensity in the small and mediumenterprises. A Technology Conservation Centre hasbeen set up at the PCRA, New Delhi, for effectiveinformation dissemination on energy-efficientproducts and technologies for the general public.The Centre has been attracting a large number ofvisitors including international visitors.

10.56 The PCRA media campaign “Save Fuel YanniSave Money” was adopted to develop a strongmotivation for attitudinal change in favour of fuel-efficient measures in petroleum-intensive sectors.An impact assessment survey showed that thePCRA campaign was very successful and resultedin significant fuel saving.


stakeholders especially captive blocks and largePSUs like Coal India Ltd. (CIL) and SingareniCollieries Company Ltd (SCCL). During 2008-09, theimport and export of coal was about 59 million tonnesand 1.66 million tonnes respectively. Thecorresponding figures stood at 18.85 million tonnesand 0.39 million tonnes during April-June 2009.

10.58 Under the e-auction scheme, SCCL and CILhave started e-auction of coal. During 2008-09, SCCLsold 3.63 million tonnes of coal through e-auction(Table 10.12).

10.59 The Government has approved formation ofa Special Purpose Vehicle (SPV) , namelyInternational Coal Ventures Limited (ICVL ) forsecuring metallurgical coal and thermal coal assetsoverseas by PSUs including CIL. Aspects like thefunctioning of ICVL and strength of personnel arebeing finalized. The Empowered Committee ofSecretaries constituted for considering the proposalsof ICVL for acquiring coal properties abroad will alsoconsider CIL’s proposals for investing in coal assetsabroad which are more than Rs 1,000 crore.

10.60 For increasing the output of washed cokingand non-coking coal, CIL has envisaged setting upof 20 new coal washeries for an ultimate raw coalthroughput capacity of 111.10 million tonnes perannum with an estimated capital investment of aboutRs 2,500 crore. These include seven coking coalwasheries and 13 non-coking coal washeries.

10.61 For increasing production from undergroundmines, initiatives like identification of high capacityunderground mines for development with latesttechnology, restart of mining in abandoned minesforming joint ventures with reputed miningcompanies, introduction of continuous miners andPSLW as a mass production technology in moremines, introduction of high wall mining andupgradation of equipment size are being taken.

10.62 As of now, 213 coal blocks with geologicalreserves of about 49.07 billion tonnes have beenallocated to public/private companies. However, the

Box 10.2 : Major Initiatives in the petroleumsector at a glance

In the eighth round of the NELP (NELP-VIII), 1.62sq. km area will be covered comprising 70 blocks.Out of 70 blocks, 36 have been awarded underNELP-VIII.In CBM-IV, out of 10 new blocks 8 have beenawarded.During 2009-10, crude oil production is projectedto increase by 11 per cent and natural gas productionby 53 per cent.Crude oil production commenced in block RJ-ON-90/1 in August 2009.Eighteen new IOR/EOR schemes have beenapproved to increase the recovery factor from 14ageing oil & gas fields of the ONGC at a cost of Rs14,510 crore.The first natural gas production from block D6 ofthe KG Basin, undertaken by Reliance IndustriesLimited (RIL) and NIKO Resources Limited,commenced in April 2009.The Empowered Group of Ministers has decided toallocate 61.6 MMSCMD of gas produced from KG-D6 on firm basis and 30 MMSCMD on fall-backbasis to various priority sectors.The RGGLVY has been launched in October 2009 toincrease rural penetration of LPG.Vision-2015 for LPG to focus on providing 5.5 crorenew connections till 2015 to raise populationcoverage from 50 per cent to 75 per cent.

COAL10.57 More than 92 per cent of the coal productionin India is of non-coking coal. Raw coal productionduring April-November 2009 was 325.87 milliontonnes as against 289.69 million tonnes in the sameperiod of the previous year, registering a growth of12.5 per cent. Coking coal production for the periodwas 25.60 million tonnes against 18.85 million tonnesof the same period in the previous year. The growthrate in the production of raw coal increased from 6per cent during 2003-04 to 2007-08 to 8.4 per centin 2008-09, due to enhanced production by all the

Table 10.12 : E-auction by CIL & SCCL during April-December 2009 (million tonnes)Company Offered Quantity Sold Quantity up Per cent Increase on

up toDec.2009 to Dec.2009 notified price up to Dec. 2009

CIL 37.13 30.66 60.3

SCCL 1.29 1.07 45.0

Source: Ministry of Coal.


effective allocation is only of 208 coal blocks. Out ofthe 208 coal blocks allocated, 95 with geologicalreserves of about 27,388 million tonnes have beenallocated to public-sector companies and the restto private-sector companies. Out of the totalallocated blocks, 25 have commenced production.The production from these coal blocks during April-November 2009 was 23.66 million tonnes (provisional).

10.63 The Government granted Miniratna Status(Category-II) to Central Mine Planning & DesignInstitute Limited (CMPDIL), Ranchi, in May 2008.

RAILWAYS10.64 Indian Railways is the third largest railnetwork in the world under a single management.Better resource management, through increasedwagon load, faster turnaround time and a morerational pricing policy led to a perceptibleimprovement in the performance of the Railways.Out of freight and passenger traffic, the freight

segment accounts for about 70 per cent of revenue.Within the freight segment, bulk traffic accounts fornearly 84 per cent of revenue-earning freight traffic(in physical terms), of which about 44 per cent iscoal (Table 10.13).

Rationalization of freight rates andpassenger fares10.65 There has been no across-the-board increasein freight rates in recent years. Railways has takena number of steps to attract additional traffic, one ofwhich is the dynamic pricing policy through whichdifferential tariff is charged to take care of skeweddemand during different periods of the year andbetween different regions. Besides, a slew of freightincentives schemes have been launched, particularlyin the traditional empty-flow direction and during leanseason. The procedure for availing of the benefitshas been simplified. The freight for export of iron orehas been reviewed and the rate brought downsignificantly.

Table 10.13 : Performance of the Indian RailwaysChange (per cent)

Particulars 2007-08* 2008-09* Apr.-Nov. 2008-09 Apr.-Nov.(P) 2009 (P)* 2009

1. Revenue-earning Freight Traffic (million tonnes) 793.9 833.4 573.5 5.0 7.4i) Coal 336.8 369.6 252.8 9.7 8.4ii) Raw material for Steel Plants (excl. Iron Ore) 11.2 10.9 7.8 -3.0 5.6iii) Pig Iron & Finished Steel 25.8 28.2 20.0 9.4 15.7

(a) from Steel Plants 20.8 22.0 15.6 6.0 16.8(b) from Other Points 5.0 6.2 4.5 23.4 11.8

iv) Iron Ore for Export 136.7 130.6 88.6 -4.5 3.7(a) for Export 53.7 45.8 30.1 -14.9 6.7(b) for Steel Plants 43.6 42.9 29.7 -1.6 1.4(c) for Other Domestic Users 39.3 41.9 28.7 6.6 3.2

v) Cement 79.0 86.3 59.6 9.2 9.1vi) Foodgrains 38.2 35.6 22.7 -6.8 4.0vii) Fertilizers 35.8 41.3 30.1 15.4 5.3viii) Petroleum Oil Lubricants 35.9 38.1 26.2 6.1 2.2ix) Container Service 21.1 27.8 22.6 31.7 16.9

(a) Domestic Container 3.7 6.5 5.5 74.6 49.5(b) Export-Import Container 17.4 21.3 17.1 22.4 9.2

x) Balance (Other Goods) 73.3 65.0 43.2 -11.4 6.72. Net Tonne km (billion) 521.4 551.4 378.4 5.8 9.63. Net tonne km/wagon/day (BG) 3,539@ 8,762$ 8,958# — 3.74. Passenger Traffic Orig. (million) e 6,524.0 6,920.0 4,849.8 6.1 4.75. Passenger km(billion) 770.0 838.0 612.0 8.8 7.8

Source : Ministry of Railways. Notes: P - Provisional ; e excluding Metro Kolkata; * excluding Konkan Railway Loading; $ calculated in termsof 8 wheelers; @ calculated in terms of 4 wheelers;


10.66 Similarly, passenger fares have also beenrationalized. With effect from April 1, 2009, theexisting basic fares up to Rs 50 per passenger fornon-suburban mail/express including super-fasttrains and non-suburban ordinary passenger trainswere reduced by giving a discount of Re 1. Faresbeyond Rs 50 per passenger were reduced by givinga discount of 2 per cent.

Launch of new trains10.67 Indian Railways has launched a new classof passenger-carrying Duronto trains in September2009. Seven Duronto trains have already beenintroduced. Duronto is a non-stop super fastpassenger-carrying train, ensuring better speed,comfort and security for passengers.

10.68 The first-ever Yuva trains which are targetedmainly at unemployed youth have been introducedbetween Howrah and Delhi and Hazrat Nizamuddinand Bandra. These Yuva trains are being introducedto ensure that youth of low-income groups can travelat low rates between major cities. The Yuva faresare applicable to unemployed persons between theage group 15 and 45 and 60 per cent of the seatsare reserved for them. The total chargeable fare forYuva passengers inclusive of all other charges likeReservation Fee, super fast train charge anddevelopment charge will not exceed Rs 299 up to adistance of 1,500 km and Rs 399 for distance morethan1,500 and up to 2500 km.

10.69 Indian Railways has introduced the Izzatscheme of uniformly priced monthly seasons tickets(MSTs) at Rs 25 inclusive of all surcharges whichwill be issued for a distance up to 100 km to personsworking in the unorganized sector with monthlyincome not exceeding Rs 1,500. These MSTs arebeing issued for journeys with effect from August 1,2009.

10.70 Indian Railways introduced only ladiesMatrabhumi train services in Delhi, Chennai andKolkata suburban on the pattern of Mumbai suburbanas working women face considerable difficulties intravelling to work. These services will run during officehours.

10.71 To attract high-value and transit-sensitive non-bulk parcel traffic, Indian Railways introduced Delhi-Howrah-Delhi, Delhi-Ahmedabad/ Vapi-Howrah fasterparcel services/premium parcel express trains namedTejshree Parcel Sewa as a pilot project. This isenvisaged as a time-tabled service from dedicatedterminals with guaranteed transit time.

Upgradation of passenger amenitiesAdarsh Stations10.72 Indian Railways has decided that 17 morerailway stations would be added to the existing listof 358 Adarsh Stations. Railways will develop AdarshStations with basic facilities such as drinking water,adequate toilets, catering services, waiting roomsand dormitories especially for lady passengers andbetter signage. The work has started at variousstations.

Quality food in trains

10.73 Indian Railways Catering and TourismCorporation Limited (IRCTC), a PSU of the Ministryof Railways, has started a centralized 24x7 toll-freetelephone No. 1800-111-139 for railway users to makesuggestions on catering services on Indian Railways.For meeting the catering requirements of commonpassengers, Janta meals priced at Rs 10 has beenrevamped. On an average 1.1 lakh Janata meals aresold every day on Indian Railways. Besides,Railways has plans to open Janahaar cafeteriasexclusively to sell economy meals and Janta meals.Six Janahaar cafeterias have been commissionedat Howrah, Bangalore, Secunderabad, Chennai,Lucknow and Gorakhpur railway stations and fivemore will be set up shortly at Sealdah, Patna,Kharagpur, New Jalpaiguri and Mysore. Cateringservices similar to Rajdhani/Shatabdi express areprovided in Duronto Trains. All sleeper-classpassengers of Duronto trains are also provided mealsonboard.

Multifunctional complexes

10.74 Multifunctional complexes are beingdeveloped at 50 railway stations serving places ofpilgrimage, industry and tourist interest in differentparts of the country this year. Multifunctionalcomplexes in station premises will provide rail usersfacilities like shopping, food stalls and restaurants,book stalls, PCO/STD/ISD/fax booths, medicine andvariety stores, budget hotels and undergroundparking.

10.75 The authorized enquiry for Indian Railways,139 – Rail Sampark, has recently introduced SMSfacility, which is a premium service. The users canobtain information regarding PNR status, fare, seatavailability and arrival/departure by sending SMSsin the specified syntax to 139.


Train information10.76 Real-time train running information topassengers is proposed to be provided throughOnline Coach Indication Display Boards and TrainArrival/Departure Display Boards. The trial of one ofthe pilot projects, Satellite Imaging for Rail Navigation(SIMRAN) using real-time train tracking through GPSand mobile (GSM) technologies has beensuccessfully carried out by the Research Designand Standards Organisation (RDSO), Lucknow, incoordination with IIT/Kanpur.

Computerization of passenger and freightservicesPassenger reservation system (PRS)

10.77 The computerized PRS of Indian Railwaysis the largest passenger reservation network in theworld, available at 1,910 locations with more than7,245 terminals. On an average, 3.5 crorepassengers per month are booked through the PRSwith an average earning of Rs 1,410.8 crore permonth. Further, Railways has tied up with India Postfor operation of PRSs through post offices.

Unreserved ticketing system (UTS)

10.78 The computerized UTS, initiated to providea fast, flexible, and secure method of issuingunreserved tickets, enables passengers to getunreserved tickets up to three days in advance fromany counter and any station to any station in adefined cluster. Computerized UTS is available at2,911 locations with approximately 6,239 countersprovided till November 2009. Automatic ticket-vendingmachines have been installed at 375 locations.

Freight operations information system (FOIS)

10.79 The FOIS gives an account of all demands,number of loads/rakes/trains and their pipeline, freightlocos, stock at aggregate level, etc. FOIS Phase I(Rake Management System – RMS) module,implemented at 243 locations, covers all major yards/lobbies and control offices at divisions and zones.FOIS Phase II (Terminal Management System – TMS)has been commissioned at 523 locations.

Rail SafetyReduction in accidents10.80 As a result of continuing steps to preventaccidents, the number of consequential trainaccidents came down from 415 in 2001-02 to 177 in2008-09. April to November 2009, the number ofconsequential train accidents decreased from 117

to 102, compared to the corresponding period of theprevious year. Accidents per million train kilometers,an important index of rail safety, also came downfrom 0.55 in 2001-02 to 0.20 in 2008-09.

Improving communication system on Railways10.81 RailTel was set up for creating optical fibrecable (OFC)-based communication infrastructure formodernizing the communication system for traincontrol, operations and safety and to generaterevenue through commercial exploitation of surpluscapacity. RailTel has set up an OFC network of37,000 route kilometres, of which 26,650 is of highbandwidth capacity. Till date, 231 important stationsand about 3,276 other stations have been connectedon the OFC network.

Modernization of signalling system10.82 Improvements and modernization of thesignalling system carried out to increase efficiencyand safety include provision of an electrical/electronicinterlocking system replacing the overagedmechanical/multi cabin signalling system at 198stations during April-November 2009; replacementof outdated filament-type signals with long life, highlydurable LED signals at 561 stations, improvementof the reliability and visibility of signals; introductionof a centralized online monitoring/diagnostic systemwith provision of Data Loggers at 337 stations;provision of automatic block signalling to increaseline capacity on 52route km; commissioning of theOn-board Train Protection System at Chennai-Gummiddipundi suburban section (50 route km) asa pilot project to prevent “Signal Passing at Danger”cases and enforce speed restrictions (a second pilotproject of the Train Protection Warning System on amain line—Delhi-Agra section of Northern/NorthCentral Railways—is under way); provision ofautomatic clearance of block section at 276 sectionsthrough use of axle counters reducing dependenceon the human element and enhancing safety;interlocking of 260 level-crossing gates; and provisionof track circuiting for enhancing safety by reducinghuman dependence at 656 locations.

Investment in capacity10.83 The Railways is setting up new productionunits–Rail Coach Factory at Rae Bareilly, CoachFactory at Kanchrapara, Diesel Locomotive Factoryat Marhowra, Electric Locomotive Factory atMadhepura and Rail Wheel Factory at Chhapra. It isalso setting up two ancillary units at Dankuni tomanufacture components and sub-assemblies forelectric and diesel locomotives.


10.84 The Dedicated Freight Corridor (DFC) projectenvisaging a Western DFC (1,483 km) from Mumbaito Dadri/Tughlakabad catering largely to thecontainer transport requirement and an Eastern DFC(1,806 km) from Ludhiana to Dankuni largely servingcoal and steel traffic, is being implemented by theDedicated Freight Corridor Corporation of India Ltd.(DFCCIL). The project is funded through a debt toequity ratio of 2:1. Along the Western DFC alignment,the Delhi-Mumbai Industrial Corridor is also comingup. Considering the need for DFCs on other importantroutes, feasibility studies have been completed onNorth-South, East-West, East-South and SouthernCorridors and traffic projections, cost and viabilityare under examination.

10.85 Railways have set up the Rail LandDevelopment Authority for commercial developmentof vacant Railway land and air space which is notimmediately required by the Railways. Railways alsoplans to utilize its vacant land, wherever feasible, forsetting up infrastructural projects through innovativefinancing to earn revenue, create additionalinfrastructure and generate employment.Consultation with State Governments is undertakenwherever required.

10.86 During the Eleventh Five Year Plan period,electrification of 3,500 route km is planned with anoutlay of Rs3,000 crore, taking the percentage ofelectrified network to 33.4 per cent. In the first twoyears of the Five Year Plan, 1,299 route km hasbeen electrified.

10.87 Following the opening of railway lines fromAnantnag to Mazhom (66 km) and Mazhom toBaramulla (35 km), the newly constructed 18 km-long rail line between Anantnag and Quazigund, thelast stretch of railway line in the Kashmir Valley,was commissioned in October 2009, making theentire 119 km-long rail line from Baramulla toQuazigund operational.

Use of bio-fuel in Railways10.88 Indian Railways is the largest singleconsumer of high-speed diesel (HSD) oil in thecountry (Table 10.14). There is huge potential forusing bio-diesel in lieu of HSD. Indian Railways hastested various bio-fuels up to B10 blend on diesellocomotives and found that B10 blend, that is 10 percent bio-diesel in HSD oil, can be used inthe existingdiesel engines without any modification.

10.89 As part of the bio-diesel initiative of IndianRailways, plantation of Jatropha curcas on vacant

Railway land has been taken up in a significant way.Railways is going to set up four esterification plantsfor converting Jatropha curcas oil into bio-diesel.Railways also plans to introduce the use ofcompressed natural gas (CNG) in diesel multipleunit (DMU) commuter trains. One DMU power carhas been converted to run on dual fuel mode usingCNG and diesel. The operating cost of CNG-basedDMUs is expected to be 25 per cent less than thatof diesel-based DMUs with salutary effect on carbondioxide emission as well.

ROADS10.90 Road transport accounted for around 87 percent of passenger movement and 60 per cent offreight movement in 2005-06. The country’s roadnetwork consists of national highways (NHs), statehighways, major district roads, other district roadsand village roads.

National Highways Development Project(NHDP)10.91 About 27 per cent of the total length of nationalhighways is single-lane/intermediate lane, about 54per cent is two-lane standard and the balance 19per cent is four-lane standard or more. In 2009-10,as against the stipulated target of developing about3,165 km length of NHs under various phases of theNHDP, the achievement up to November 2009 hasbeen about 1,490 km. Against the target of awardingprojects for a total length of about 9,800 km undervarious phases of the NHDP during 2009-10, projectshave been awarded for a total length of about 1,285km up to November 2009 (Table 10.15).

10.92 Steps taken to expedite the progress of theNHDP include regular monitoring of contracts andprogress reviews, appointment of senior officials byState Governments as nodal officers for resolvingproblems associated with implementation of theNHDP, setting up of a Committee of Secretaries under

Table 10.14 : Diesel (HSD) oil consumption(in million litres)

Year Traction Non-traction

2004-05 2,080.6 34.22005-06 2,111.2 39.12006-07 2,211.5 39.92007-08 2,284.1 43.72008-09 2,312.0 46.2

Source : Ministry of Railways


the Cabinet Secretary to address inter-ministerialand Centre-State issues such as land acquisition,utility shifting, environment approvals and clearanceof ROBs, simplification of the procedure of issue ofland acquisition (LA) notifications and posting ofRailways officer to the National Highways Authorityof India (NHAI) to coordinate with the Ministry ofRailways in expediting the construction of ROBs.Decision to not allow non-performing contractors tobid for future projects unless they improveperformance in existing contracts and steps toimprove cash flow problems of contractors bygranting interest-bearing discretionary advance,release of retention money against bank guaranteeof equal amount, deferment of recovery of advances(on interest basis) and relaxation in minimum IPCamount were some of the other steps taken.

10.93 Reasons for delay in the award of projectsunder the NHDP included new procedure for approvalof PPP projects, modifications in the modelconcession agreements (MCA), new request forqualification (RFQ) process and new MCA conditions,cap on maximum number of pre-qualified bidders,and time involved in evaluation of voluminousinformation. Besides shortage of financialconsultants due to conflict of interest clause, needfor evaluation of request for proposal (RFP)documents for individual packages and factors thataffected the bankability of projects like lenders’perception of high risk due to provision relating topremature termination of concessions, lingeringdoubts of lenders on interpretation of many provisionsof the new MCAs and inadequate availability of long-term debt funds were the other reasons.

10.94 Recent initiatives taken includedrestructuring of projects to reduce total project cost(TPC) to make them financially viable, increase ofup to 20 per cent in TPC case-of-project costs basedon old DPRs, release of entire viability gap funding(VGF) (maximum up to 40 per cent) during theconstruction period, removal of provision in RFQslimiting the maximum numbers of pre-qualifiedbidders, urging lenders to resolve issues inhibitingfinancial closure, expeditious land acquisitions andshifting of utilities. These are expected to increasethe pace of award under the NHDP.

Revised Strategy for Implementation of theNHDP10.95 With a view to expediting the progress ofthe NHDP, the Ministry of Road Transport &Highways has set a target of completion of 20 km ofNHs per day, which translates to 35,000 km at therate of 7,000 km per year during the next five years(2009-14). The NHAI formulated Work Plans (WorkPlan I & II) for awarding 12,000 km each during theyears 2009-10 and 2010-11. These Plans lay downa specific timeframe for various activities and arebeing monitored very closely at various levels. WorkPlan I (2009-10) covers balance stretches of NHDP-PhasesII, III & V. So far, 14 projects for a length ofabout 1,300 km have already been awarded, bids for20 projects covering a length of about 2,000 km havebeen received and are under process and another23 projects for a length of about 1,700 km arepresently on offer. After the last review of the roadsector by the Prime Minister, a Committee (underShri B.K. Chaturvedi, Member, PlanningCommission) was set up. Based on the

Table 10.15 : National highways development projects (as in November 2009)(length in km)

NHDP Component Total length Completed Under Balance for award4 lane implementation of civil works

GQ 5,846 5,743 103 —NS-EW 7,142 4,439 2,066 637Port Connectivity 380 244 130 6Other NHs 965 868 77 20NHDP Phase-III 12,109 1,089 2,714 8,306NHDP Phase-V 6,500 148 886 5,466NHDP Phase-VII 700 — 19 681Total 33,642 12,531 5,995 15,116

Source: Ministry of Road Transport and Highways.Notes: GQ= Golden Quadrilateral(connecting Delhi, Mumbai, Chennai and Kolkata); NS-EW=North-South & East-West corridor (Srinagar to Kanyakumari).


recommendations of the Committee, appropriatechanges in RFQs, RFPs and MCAs are beingconsidered by the NHAI.

10.96 The NHAI is setting up 192 Special LandAcquisition Units (SLAU) in various States forexpediting the LA process, which is identified asmajor bottleneck in the implementation of theprojects. Seventy-two such units have already beenset up. The NHAI has also decided to set up sixzonal offices headed by Executive Directors tocoordinate with State Governments in regard to LAand other pre-construction activities. Further, theNHAI has set up 10 regional offices to be headed byChief General Managers for improvement in liaisonwith State Governments and for expediting pre-construction activities. Besides, Chief Ministers havebeen requested to set up High Level CoordinationCommittees under Chief Secretaries to sort outissues involving coordination between departments.It has also been decided to take up some megaprojects of about 400 km to 500 km each costing upto US $ 1 billion to attract investment by internationalcompanies. Two mega projects would be put up forbidding in the current financial year.

Financing of the NHDP10.97 A part of the fuel cess is allocated to theNHAI to fund the implementation of the NHDP (Table10.16). The fund allocated from the cess is leveragedto borrow additional funds from the domestic market.The Government of India has also taken loans forfinancing various projects under the NHDP from theWorld Bank (US$ 1,965 million), Asian DevelopmentBank(ADB) (US$ 1,605 million) and Japan Bank forInternational Cooperation (32,060 million yen), whichare passed on to the NHAI partly in the form of grantand partly as loan. The NHAI has also negotiated adirect loan of US $165 million from the ADB for oneof its projects.

Special Accelerated Road DevelopmentProgramme in the North-eastern Region(SARDP-NE)10.98 The SARDP-NE aims at improving roadconnectivity to State capitals, district headquartersand remote places of the north-east region. Itenvisages two- / four-laning of about 5,184 km ofNational Highways and two-laning / improvement ofabout 4,756 km of State roads. This will ensureconnectivity of 85 district headquarters in the north-eastern States to 2 National Highways/ two-laneState roads. The programme has been divided intoPhase ‘A’, Phase ‘B’ and the Arunachal PradeshPackage of Roads & Highways.

10.99 Phase A consists of improvement of 2,796km of roads consisting of 2,039 kmof NHs and 757km of State roads at an estimated cost of Rs 17,749crore. Out of the 2,796 km, the Border RoadsOrganization (BRO) and State Public WorksDepartments (PWDs) have been assigned thedevelopment of 1,580 km. (The remaining length of1,216 kmwill be built by the NHAI, Ministry/ArunachalPradesh PWD and BRO.) Out of the 1,580 km,projects covering a length of 1,158 km have beenapproved till November 2009 and work is in differentstages of progress. Phase B, involving two- laning of1,673 km of NHs and two-laning / improvements of3,152 km of State roads, is approved only forpreparation of DPRs. Till November 2009, a DPRwas prepared for 900 km.

10.100 The Arunachal Package covering a 2,319km stretch of road was approved by the Governmentas part of the SARDP-NE on January 9, 2009. Outof this, 776 km has been approved for execution onbuild-own-transfer (BOT) (annuity) basis and theremnant for tendering on Engineering Procurementand Construction (EPC) basis. An RFQ have beeninvited for the stretch to be taken up on BOT (Annuity)basis and an RFP in respect of 748 km has beenissued. For the other stretches to be taken up onEPC basis, DPRs are under preparation.

Initiatives for development of the entire NHnetwork to minimum acceptable standardof two lanes10.101 Initiatives have been taken to develop NHshaving less than two lanes to minimum acceptable2-lane standards by December 2014 by proposing aWorld Bank Loan and also through budgetaryallocations. Proposals have been invited from theconsultants for preparation of a DPR for the about3,800 km length proposed to be developed under

Table 10.16 : Financial structure of NHAI(amount in Rs. crore)

Year Cess External Borro- Budge-Funds Assistance wings tary

Grant Loan Support

2005-06 3,269.7 2,400.0 500.0 1,289.0 700.0

2006-07 6,407.5 1,582.5 395.5 1,500.0 110.0

2007-08 6,541.5 1,788.8 447.2 305.2 265.0

2008-09 6,972.5 1,515.0 379.0 1,096.3 159.0

2009-10 8,578.5 272.0 68.0 492.4 200.0

Source : Department of Road Transport & Highways.


World Bank assistance. The Ministry of RoadTransport and Highways has also initiated action forimprovement of the remaining 2,500 km of single /intermediate lane NHs through budgetary resources.In order to make a visible impact, the corridordevelopment approach is being adopted wherebyapart from widening to two lanes, strengthening ofthe existing two lanes in these corridors as alsoremoval of other deficiencies are being covered.

Development of roads in Left WingExtremism (LWE)-affected areas10.102 The project covering 1,202 km of NHs and4,362 km of State roads in LWE-affected areas isspread over 33 districts in eight States, that is AndhraPradesh, Bihar, Chhattisgarh, Jharkhand, MadhyaPradesh, Maharashtra, Orissa and Uttar Pradesh.An allocation of Rs 500 crore has been made fromthe gross budgetary support (GBS) under AnnualPlan 2009-10 for the programme. As against thetarget of approval of projects for a total length of about1,600 km at an estimated cost of Rs 1,900 croreunder the LWE scheme up to December 2009,projects have been sanctioned / processed for a totallength of 1,584 km at an estimated cost of Rs 1,784crore till end-November 2009.

Other new initiativesA Joint Task Force of the Confederation of IndianIndustry (CII) and Ministry of Road Transport andHighways has been constituted to serve as aninstitutionalized framework for constant industry– Government interaction on issues related todevelopment of NHs.The Ministry had awarded a consultancy servicein December 2008 with the objective of preparinga Master Plan for a National Expressway Network.The Final Report submitted by the consultants inNovember 2009, inter-alia, recommended a totalExpressway Network of about 18,637 km forcompletion in a prioritized manner in three phasesup to the years 2012, 2017 and 2022. The Reporthas been accepted by the Government.The current numbering of NHs is not being doneon a scientific basis. The Committee set up inthis regard finalized its report in August 2009, dulyconsidering the best global practices. Initiativeshave been taken for publishing notification in thisregard.

In order to further address the dispute redressalmechanism of the NHAI, restructuring andstrengthening of the NHAI and other tax-related

issues, the Chaturvedi Committee has beenfurther requested to suggest measures in itssecond report.The proposal for setting up an ExpresswayAuthority of India (EAI) is under activeconsideration. An Expressways Division hasalready been set up in the NHAI. Further actionhas been initiated to prepare a legislative frameworkfor the EAI.Keeping in view the developments in the roadtransport sector it has been decided to review theMotor Vehicles Act 1988 (MVA) comprehensivelyvis-à-vis similar laws applicable in leading Asiancountries such as China and Japan so as to meetthe modern-day requirement of regulation ofvehicular traffic. A committee has been constitutedto carry out this exercise.The Government proposes to provide financialassistance to States for implementation of IT suchas GPS, electronic ticket-vending machines anda computerized reservation system, subject tocertain reforms to be undertaken by the StateGovernments. A scheme in this regard has beenapproved by the Planning Commission and theExpenditure Finance Committee.About 84 per cent of the Regional Transport Officesacross the country have so far been computerized.

Keeping in view the lack of proper infrastructurefor enforcement of a strict inspection andmaintenance regime for motor vehicles to checktheir roadworthiness, the Central Governmentproposes to assist the States to set up modelInspection and Certification (I&C) Centres. Ascheme in this regard has been approved by thePlanning Commission and the ExpenditureFinance Committee.

Construction of rural roads under the PrimeMinister ’s Grameen Sadak Yojana(PMGSY)10.103 The Eleventh Five Year Plan has projectedan investment requirement of Rs 41,347 crore (at2006-07 prices) for rural roads. During the first threeyears of the Eleventh Five Year Plan, the flow ofexpenditure under the PMGSY seems to be oncourse for meeting the Plan target (Table 10.17). Inaddition to the PMGSY there are roads built byPWDs and Panchayati Raj institutions in rural areas,the data on which are available only with a lag.

10.104 It may be seen that among the States, 57.3per cent of the expenditure incurred under the


PMGSY and 62.5 per cent of the road workscompleted during 2005-06 to April-December 2009were in six States, namely Rajasthan, MadhyaPradesh, Uttar Pradesh, Chhattisgarh, Maharashtraand Orissa (Figure 10.4). Efforts are made topersuade the State Governments to increase theirabsorptive capacity through institutional andorganizational development. Shortage of contractorsto undertake rural works on a large scale is a criticalconstraint in certain States though need-basedrelaxation in the bidding capacity and packaging ofworks has helped marginally in overcoming theproblem. The constraint of inadequate availability oftrained human resources has been sought to beovercome through need-based training programmesand more than 19,600 engineering personnel haveso far been trained.

CIVIL AVIATION10.105 The civil aviation sector had shown signsof slowdown in passenger traffic during 2008 due to

the steep rise in fuel cost coupled with the impact ofglobal economic slowdown. Signs of recoverybecame visible in the second past of 2009. Thescheduled domestic passenger traffic has increasedfrom 40.8 million in 2008 to 43.3 million in 2009,while scheduled cargo traffic showed almost nogrowth.

Fleet Size10.106 There are 15 scheduled operator’s permitholders including two regional ones and two in thecargo category, with 419 aircraft endorsed on theirpermits. The number of non-scheduled operator’spermit holders in different categories, namelypassenger, cargo and charter, has gone up to 118,with 332 aircraft endorsed on their permit. The numberof non-scheduled flight clearances granted to foreignnon-scheduled operators in 2009 was 11,183. During2009, a total of 1,18,064 tourists visited the countryby 557 Inclusive Tourist Package (ITP) tourist charterflights.

Airport Development10.107 Development of airports at Delhi and Mumbaihas been taken up under PPP mode. It is plannedto fund the capital expenditure through private equity,borrowings and internal resources of joint venturecompanies. The development work is likely to becompleted by 2010 at Delhi airport and 2012 inMumbai at a total cost of Rs 20,000 crore.Development of Kolkata and Chennai internationalairports has been taken up by the Airports Authorityof India (AAI) at the approved cost of Rs 1,942 croreand Rs 1,808 crore respectively. The work is inprogress and is scheduled to be completed by May

Table 10.17 : Progress under the PMGSY

Year Length of road Expenditureworks completed

(km) (Rs. crore)

2005-06 22,891 4,100.42006-07 30,710 7,304.32007-08 41,231 10,618.72008-09 52,405 15,162.0

Apr.-Dec. 2009 36,273 12,993.1

Source : National Rural Roads Development Agency.

Per

cent

Share (in per cent) in length and expenditure under the PMGSYduring 2005-06 to 2009-10 (Apr-Dec)

0

2

4

6

8

10

12

14

Figure 10.4

16

18

Share inexpendi-

ture

20

Share inlength

Raja

stha

n

Mad

hya

Prad

esh

Utta

r Pra

desh

Chha

ttisg

arh

Mah

aras

htra

Oriss

a

Andh

ra P

rade

sh

Him

acha

l Pra

desh

Assa

m

Wes

t Ben

gal

Karn

atak

a

Biha

r (NE

A)

Othe

r sta

tes

Note: Other states include Gujarat, Tamil Nadu, Haryana, Punjab, Jharkhand, Uttaranchal, Manipur, Arunachal Pradesh,Bihar (REO), Nagaland, Jammu & Kashmir, Sikkim, Mizoram, Tripura, Kerala, Meghalaya and Goa.


2010 and January 2011 respectively. Bangalore andHyderabad international airports have beendeveloped on PPP mode as greenfield airports.These two airports have been put in operation.

Greenfield Airports in the North-easternregion10.108 The AAI plans to construct of greenfieldairports in the north-eastern region with budgetarysupport. Construction work has already commencedat Pekyong Airport in Sikkim at a cost of Rs 309.46crore and is likely to be completed by January 2012.Approval is being obtained for construction ofgreenfield airports at Cheitu (Nagaland) and Itanagar(Arunachal Pradesh).

Development of 35 Non-metro Airports10.109 The AAI has taken up the development of35 non-metro airports at an estimated cost of Rs4,662 crore. Of them, 9 have been completed andput in operation. The other projects are in progressand likely to be completed by 2010-11. TheCommittee of Infrastructure has identified 24 of the35 non-metro airports for city-side developmentthrough PPP. It has been decided that in the firstinstance city-side development of 10 selectedairports, namely Ahmedabad, Kolkata, Jaipur,Lucknow, Amritsar, Indore, Vishakapatnam,Hyderabad, Guwahati and Bhubaneswar, should beundertaken. It has been proposed to carve out thesurplus land available with the AAI on the city sideof the selected airports and lease out the samethrough open tenders.

Creation of Heliport10.110 Pawan Hans Helicopters Ltd. proposes toconstruct a heliport in New Delhi to provideconnectivity to tourists and the business community,especially during the Commonwealth Games 2010,and for emergency/disaster management.Possession has been taken of the land allotted bythe Delhi Development authority (DDA) at Rohini andM/s RITES Ltd has been engaged for preparation ofa feasibility study.

Progress made by the National AviationCompany of India Ltd (NACIL)10.111 Post amalgamation of Air India (AI) withIndian Airlines (IA), the NACIL has made progress insome of the key areas identified as part of the mergerplan.

Economies of scale: These have been achievedin the procurement of goods and services bycombining procurement and thereby availing of‘volume discount’ in areas such as fuel in-flightservice items, aviation and non aviation insurance.

Progressive integration of network/schedules: The NACIL has been progressivelyreducing the overlaps between routes operatedby the erstwhile companies. All overlaps betweenschedules of erstwhile AI and IA except Del/DXB(Delhi/Dubai) and BOM/DXB (Mumbai/Dubai) havebeen eliminated. The overlaps between routes offull service carriers (AI, IA code) and low costcarriers (Air India Express) are progressively beingreduced.

Progressive cross-utilization of aircraft fleet:Fleet planning is now done across the entireNACIL fleet leading to more optimal fleetdeployment.

Opportunity to join Star Alliance: The NACILhas the opportunity to become part of the ‘StarAlliance’ network and is investing in and upgradingits products and facilities to satisfy the minimumrequirements of Star Alliance.

10.112 Out of the combined acquisition of 111aircraft, most of the new aircraft have been inductedas scheduled, but the B787 deliveries have beendelayed. Boeing has revised the delivery schedulewith the first aircraft to be delivered in April 2011 andthe induction of 27 units to be completed by thesecond quarter of 2014.

Financial Surveillance of Air Operators10.113 The Air Transport Directorate in the Officeof the Director General of Civil Aviation (DGCA) hasstarted an evaluation of the financial health of thescheduled airlines. A one-time comprehensive auditof NACIL (I), Kingfisher and Jet Airways has alsobeen carried out.

Transparency in Air Fare Advertising10.114 In order to have transparency in airfareadvertising, Rule 135 of Aircraft Rules 1937 has beenamended wherein airlines shall display tariff in aconspicuous manner to show the total amountpayable by a passenger and complete break-up ofthe total amount, indicating the fare, tax, fees orany other charge, if any, separately. Scheduleddomestic airlines have complied with the provisionsof Rule 135.


Tariff Monitoring10.115 The DGCA has started monitoring tariffs ofscheduled domestic airlines. A group has beenconstituted comprising tariff analysis experts whocarry out the analysis of fares on major routes ondaily basis.

India-EU Civil Aviation CooperationProgramme10.116 Under the Joint Action Plan, a Civil AviationCooperation Project-II has been agreedupon. Itsterms of reference (TOR) have been finalized. Theproject called “Institutional Capacity Building in theCivil Aviation Section in India” is likely to commenceduring 2010.

India-USA Aviation CooperationProgramme (ACP)10.117 The India-US ACP was signed in June 2007with the objective of promoting safety, operationalefficiency and system capacity and facilitating andcoordinating aviation industry training and technicalties between the US and India. The first phase of theACP was completed in 2008 and its second phaseis under way.

PORTS10.118 India has 12 major ports and 200 non-majorones. Of the non-major ports, about 66 are handlingtraffic. The total traffic carried by both the major andnon-major ports during 2007-08 was estimated ataround 723 million tonnes. The 12 major ports carryabout three-fourths of the total traffic, withVisakhapatnam as the top traffic handler in each ofthe last seven years.

Traffic growth10.119 In 2008-09, the cargo handled by major portsregistered a growth of 2.1 per cent against 12.0 percent in 2007-08. About 80 per cent of the total volumeof traffic handled was in the form of dry and liquidbulk, with the residual consisting of general cargo,including containerized cargo (Table10.18). There wasan impressive growth of 11.05 per cent per annum incontainer traffic during the five years ending 2008-09. Half of the world’s traded goods are containerized,and this proportion is expected to increase further.

Capacity addition10.120 The annual aggregate cargo-handlingcapacity of major ports increased from 532.07 million

tonnes per annum in 2007-08 to 574.77 milliontonnes per annum in 2008-09. The averageturnaround time decreased from 3.93 days to 3.87days.

10.121 The average output per ship berth-dayimproved from 10,071 tonnes in 2007-08 to 10,473tonnes in 2008-09. The pre-berthing waiting time atmajor ports on port account decreased from 11.40hours in 2007-08 to 9.55 hours in 2008-09. Significantinter-port variations in pre-berthing waiting timepersisted (Table 10.19).

10.122 Despite adequate capacity and modernhandling facilities, the average turnaround time ofmajor Indian ports was 3.87 days in 2008-09,compared to 10 hours in Hong Kong. This underminesthe competitiveness of Indian ports. Since ports arenot adequately linked to the hinterland, the evacuationof cargo is slow, leading to congestion. To this end,all port trusts have set up groups with representativesfrom the NHAI, Railways and State Governments toprepare comprehensive plans aimed at improvingroad-rail connectivity of ports. The NHAI has takenup port connectivity as major component of theNHDP.

10.123 Traditionally, most ports in the world areowned by the public sector. But privatization of portfacilities and services has now gathered momentum.An enabling policy framework has been put in placeby the Government. Depending on the nature offacility/service, private operators can enter into aservice contract, a management contract, a

Table 10.18 : Traffic at major ports(million tonnes)

Commodity 2006- 2007- 2008- Growth%07 08 09 over

2007-08

PoL 154.3 168.7 176.1 4.4Iron Ore 80.6 91.8 94.0 2.4Fert. & rawmaterials 14.1 16.6 18.2 9.6Foodgrains 5.0 2.2 1.8 -18.2Coal 60.0 64.9 70.4 8.5Vegetable Oil 3.6 3.8 4.8 26.3Other Liquids 10.9 12.8 11.9 -7.0ContainerizedCargo 73.4 92.3 93.1 0.9Others 61.9 66.2 60.2 -9.1

Total 463.8 519.3 530.5 2.1

Source : Department of Shipping.


concession agreement or a divestiture to operateport services. Areas that have been opened up tothe private sector on BOT basis include constructionof cargo-handling berths and dry docks, containerterminals and warehousing facilities and ship-repairfacilities.

TELECOMMUNICATIONS

Growth10.124 The opening of the telecom sector has notonly led to rapid growth in subscriber base but alsohelped a great deal towards maximization ofconsumer benefits, particularly in terms of pricediscovery following the forbearance approach in

tariffs. From only 54.6 million telephone subscribersin 2003, the number increased to 429.7 million atthe end of March 2009 and further to 562 million ason October 31, 2009 showing addition of 2.49 millionduring the period from March to December 2009.Figure 10.5 shows that this increase has beenentirely due to the spectacular increase in wirelessconnections at a compound annual growth rate(CAGR) of 60 per cent per annum since 2004. With525.1 million wireless connections, Indian telecomhas become the second largest wireless network inthe world. Approximately 85 per cent of the EleventhFive Year Plan target of 600 million connections hasalready been achieved at the halfway point. Wireline connections, however, declined in recent years(Figure 10.5).

Table 10.19 : Inter-port variations at Indian ports

Name of port Average pre-berthing waiting Average turnaroundtime (hours) (on port A/c) time (days)

2006-07 2007-08 2008-09 2006-07 2007-08 2008-09

Kolkata 0.13 0.24 1.27 3.89 4.87 4.60Haldia Dock 26.05 33.44 24.45 3.97 4.26 4.21Mumbai 5.22 5.07 7.37 4.63 4.44 4.95JNPT 5.45 10.20 9.50 1.67 1.85 1.97Chennai 0.80 1.00 0.90 3.40 4.60 4.20Cochin 0.29 1.21 1.31 2.19 1.99 2.08Visakhapatnam 4.78 5.10 4.35 3.65 3.91 3.93Kandla 35.28 32.64 28.08 5.46 5.13 5.20Mormugao 19.34 18.35 11.48 4.46 4.03 3.61Paradip 1.41 1.48 1.30 3.54 5.54 4.78New Mangalore 1.87 1.92 0.90 3.14 3.21 3.00Tuticorin 3.22 4.32 3.36 3.67 3.80 3.66Ennore 0.31 0.75 0.74 1.89 2.08 2.35

All Major Ports 10.05 11.40 9.55 3.62 3.93 3.87

Source : Department of Shipping

Mill

ion

Growth of telephones over years (in million)

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Figure 10.5

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200

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Major trends10.125 The share of the private sector in totaltelephone connections has increased to 82.3 percent in December 2009 as against a meagre 5 percent in 1999. Teledensity, an important indicator oftelecom penetration, increased from 12.7 per centin March 2006 to 37.0 per cent in March 2009 and47.9 per cent in December 2009. Rural teledensity,which was above 1.2 per cent in March 2002,increased to 9.5 per cent in March 2008 and furtherto 15.1 per cent in March 2009 and 21.2 per cent atthe end of December 2009. Urban teledensityincreased from 66.4 per cent in March 2008 to 88.8per cent in March 2009 and stands at 110.7 per centin end- December 2009.

10.126 With the penetration of mobile services andflourishing of private service providers, rural telephoneconnections have gone up from 12.3 million in March2004 to 123.5 million in March 2009 and further to174.6 million in December 2009. Their share in totaltelephone connections has steadily increased fromaround 14 per cent in 2005 to 31 per cent as onDecember 31, 2009. During 2008-09, the growth rateof rural telephones was 61.5 per cent as against a36.7 per cent growth of urban telephones. The privatesector has contributed crucially to the growth of ruraltelephones by providing about 81.5 per cent of ruraltelephones as on December 31, 2009.

10.127 Internet / Broadband : With supportivepolicies, broadband subscribers grew from 0.2 millionin 2005 to 6.2 million by end-April 2009 and about to7.98 million by end-December 2009. India facestechnological and commercial challenges inbroadband penetration, the most important of whichare low PC penetration and affordability issues dueto high cost. The government has issued guidelinesfor Broadband Wireless Access (BWA) Services;the introduction of which will enhance broadbandpenetration. Wi-Max has been making headway inwireless broadband connectivity.

New Horizons for Growth10.128 3G Telecom services : The explosivegrowth of the telecom industry has kindled the urgeto move towards better technology. One of the keyfrontiers is the launch of 3G technology. Thegovernment has recently announced guidelines forpenetration of 3G telecom services. This will provideexisting operators a good opportunity as also foreignplayers to make an entry into the Indian market andbring in new technology and innovations.

10.129 Mobile Number Portability (MNP) : MNPallows any subscriber to change his service providerwithout changing his mobile phone number. Withthe announcement of guidelines for MNP, telecomservice provider will be forced to improve quality ofservice to avoid losing subscribers.

10.130 Value added Services (VASs): MobileVASs include, text or SMS, menu-based services,downloading of music or ring tones, mobile TV,videos, streaming, and sophisticated m-commerceapplications. Prior to 2008, a majority of VASrevenues were attributable to SMS. With greaterpenetration of new services, availability of relativelyinexpensive, feature-rich handsets and consumereducation, VASs other than SMS are gainingimportance. It is expected that over the next fewyears, non-SMS services would become a dominantcontributor to VAS revenue.

10.131 Manufacturing: The Indian telecomindustry manufactures a vast range of telecomequipment using state-of-the-art technology. The lastfive years saw many renowned telecom companiessetting up manufacturing bases in India. Theproduction of telecom equipment in value termsincreased from Rs 41,270 crore (2007-08) to Rs48,800 crore during 2008-09 and is further expectedto increase to Rs 57,584 crore during 2009-10.Favourable factors such as facilitative policies, largetalent pool in R&D and low labour cost can providean impetus to the telecom manufacturing industryin the country. Exports increased from Rs 402 crorein 2002-03 to Rs 1,10,00 crore in 2008-09 accountingfor 21 per cent of the equipment produced in thecountry.

MAJOR POLICY INITIATIVES

10.132 No cap on the number of access providersin any service area. In 2008, 122 new Unified AccessService (UAS) licences were granted to 17companies in 22 service areas of the country.

Permission for use of dual technology spectrumunder the same UAS/Cable Modern TerminationSystem (CMTS) licence was granted to eightcompanies including Bharat Sanchar NigamLimited (BSNL) and Mahanagar Telephone NigamLimited (MTNL). BSNL and MTNL were exemptedfrom the prescribed fee for such usages.

On July 11, 2008, provision of mobile servicewithin 500 meters of the international boarderwithin Indian territory has been permitted.


With a view to regulating unsolicited calls fromtelemarketers, a regulation has been implementedwhereby a National Do Not Call Registry (NDNC)has been put in place. With this, there has beensubstantial reduction in the number of unsolicitedcalls.

It has been decided to introduce the NationalIntegrated Directory Service (NIDQS). This facilitywould be useful to subscribers/users.

Revised subscriberbased criteria for allocation ofGlobal System for Mobile Communications (GSM)and Code Division Multiple Access (CDMA).spectra were issued in January 2008.Committees have been constituted for allocationof spectrum to access service providers andspectrum pricing.

Foreign direct investment (FDI) ceilings have beenraised from 49 per cent to 74 per cent. In the areaof telecom equipment manufacturing and provisionof IT-enabled services, 100 per cent FDI ispermitted. This has made telecom one of majorsectors attracting FDI inflows.

Allocation of spectrum for 3G and BWA servicesto be through a controlled, simultaneous,ascending e-auction process. The Department ofTelecom has taken the pioneering decision oflaunching of 3G services by BSNL and MTNL andinitiation of process for auction of spectrum for3G and BWA services to private operators.

Activities under Universal ServiceObligation (USO) Fund10.133 The USO Fund (Table 10.20) continues tobe used to subsidize telecom development in ruralareas in the following ways;

Operation and maintenance of village publictelephones (VPT) in the revenue villages identifiedas per Census 1991 and installation of VPTs inevery revenue village as per Census 2001. About5.7 lakh VPTs are currently eligible for financialsupport for operation and maintenance.Agreements were signed with BSNL to providesubsidy support for provision of VPTs in 62,302uncovered villages. As on December 31, 2009,61,186 VPTs have been provided by BSNL.

Provision of additional rural community phones(RCPs) is another important activity under theUSOF. Out of the target of 40,705 RCPs, 40,694have been provided till December.

Another important activity under the USOF relatesto replacement of Multi Access Radio Relay(MARR) technology VPTs installed before April2002. Out of a total of 1,85,121 MARR basedVPTs, 1,84,521 have been replaced till December31, 2009.

Support from the USOF is being given for provisionof rural direct exchange lines (RDELs) in all the1,685 net cost positive short distance chargingareas. As on December 31, 2009, about 70.5lakh RDELs have been provided.

To provide infrastructure support for mobileservices, a scheme has been launched to providesupport for setting up and managing 7,436infrastructure sites spread over 500 districts in27 states. As on December 31, 2009, about 6,956towers have been set up under this scheme.Utilizing the infrastructure so created, BTSs arebeing commissioned and mobile services startedby universal service providers in a phased manner.

In order to provide broadband connectivity to ruralareas under the purview of the USOF, 95,011broadband connections out of the proposed8,88,832 wire-line broadband connections and fourkiosks have been provided till December 2009.

10.134 It is proposed to achieve rural tele-densityof 25 per cent by means of 200 million ruralconnections by the end of the Eleventh Five YearPlan. Recognizing the potential importance ofbroadband services, the Eleventh Five Year Plantargets providing broadband to all secondary andhigher secondary schools, Public Health CareCenters and Gram Panchayats. It is also envisagedthat internet and broadband subscribers will increaseto 40 million and 20 million respectively by 2010.

Table 10.20 : USO Fund: Collections anddisbursements (Rs crore)

Year Allocation Disbursements

2005-06 1,766.9 1,766.9

2006-07 1,500.0 1,500.0

2007-08 1,290.0 1,290.0

2008-09 1,600.0 1,600.0

2009-10* 2,400.0 1,846.9

Source : Department of Telecommunications.Note : * As on December 31,2009.


POST10.135 New mail paradigm: The mail profile in IndiaPost has changed substantially with increase involume of mail in Business-to-Customer andBusiness-to-Business segments. In line with this,India Post has leased three dedicated freighteraircraft for carriage of mail, parcel and logistics toand from the North-Eastern region operating six daysa week on the Kolkata-Guwahati-Imphal-Agartala-Kolkata route and the metro cities such as Delhi,Mumbai, Chennai, Kolkata and Bangalore withNagpur serving as the mail exchange hub. India Posthas also set up 162 Mail Business Centres and plansto set up Automatic Mail Processing System atDelhi, Kolkata, Hyderabad and Bengaluru andupgrade the existing ones at Mumbai and Chennai.

10.136 IT induction: Out of a total of 25,531departmental post offices, 12,604 have beencomputerized. So far 1,304 post offices have beennetworked through leased lines with the National DataCentre. Further, 5,170 post offices have beennetworked through broadband. The strong IT basehas enabled Indian Post to offer a range of e-enabledservices such as electronic Money Order (eMO), e-payment and instant Money Order (iMO) tocustomers. India Post is planning to computerizeand network all its post offices in the next two years.

10.137 Banking and insurance services: India Postis pursuing the objective of financial inclusion throughits 39,173 post offices in rural areas and 15,862 postoffices in urban areas. The total number of accountswith post offices has increased from 14.23 crore in2003-04 to 20.50 crore in 2008-09. The outstandingbalance in Post Office Savings Bank accounts in2008-09 was Rs 5,47,904 crore. India Post hasalready computerized its savings bank operationsin 8,000 post offices. The post offices also provideinsurance services to Government and semi-government employees and to the rural populaceunder the banners of postal life insurance (PLI) andrural Postal Life Insurance (RPLI). The number ofRural Postal Life Insurance policies has increasedfrom 26.66 lakh in 2003-04 to more than 70 lakh in2008-09.

10.138 Premium services: The revenue frompremium products such as Speed Post, Bill MailService and Business Post has consistently beengrowing. From Rs 425.74 crore revenue booked in2003-04, these services achieved Rs 1,435 crore in2008-09. One of the premium products, Speed Post,which covers more than 1,200 towns has a marketshare of 27 per cent in the courier segment.

Leveraging of the postal network10.139 National Rural Employment GuaranteeScheme (NREGS): The Department of Posts hasbeen given the responsibility of disbursing wages toNREGS beneficiaries through Post Office SavingsBank accounts. Starting with Andhra Pradesh PostalCircle in 2006, the payment of wages under theNREGS is currently operational in 19 Postal Circlescomprising 21 States. The scheme is operationalthrough 90,000 post offices. Nearly 4 crore NREGSaccounts have been opened up to November 2009,and the amount disbursed in this financial year (April-Nov 2009) amounts to more than Rs 5,600 crore.

10.140 Tie-up with the State Bank of India (SBI):India Post has tied up with the SBI to sell its assetsand liability products through identified post offices.Initially started in five States, the scheme was laterextended to 23 States and Union Territories. Thetotal liability products and total asset products soldso far amount to Rs 37 crore and Rs 12.98 crorerespectively.

10.141 Tie-up with NABARD: The Department ofPosts in collaboration with NABARD is providingmicro-credit facility to Self-Help Groups (SHGs)through identified post offices on agency basis. Thecorpus fund for implementing this project is given byNABARD. The pilot is in operation in five districtsinvolving seven divisions of Tamil Nadu Circle. Sofar, 800 SHGs have been provided with a loan ofmore than Rs 1.9 crore.

10.142 Sale of Gold Coins: In a tie-up with RelianceMoney Limited, sale of gold coins was launched inOctober 2008 in selected post offices. The schemeis available in 468 post offices in 16 circles.

10.143 Old age pension: Old age pension is beingpaid through 20 lakh Post Office Savings accountsin Bihar, Delhi, Jharkhand and the north-east, andthrough money order in Jammu & Kashmir,Karnataka, Himachal Pradesh, Gujarat, Rajasthanand Tamil Nadu.

10.144 Online Acceptance of Right to Information(RTI) Applications: The Department of Posts hasbeen assisting other public authorities under theCentral Government in implementing the RTI Act byproviding the services of its designated CentralAssistant Public Information Officers (CAPIOs). SubPost Masters at Tehsil level act as CAPIOs foraccepting RTI requests and appeals. TheDepartment has designated 4,000 post offices aspoints for receiving RTI applications and forwardingto public authorities. An RTI software has beendeveloped to deal with such applications.


10.145 Railway Ticket Reservation: The schemefor sale of railway tickets through post offices ispresently operative at 78 locations and will beextended to rural areas also.

10.146 Collection of Rural Price Index Data: TheMinistry of Statistics and Programme Implementation(MoSPI) has entrusted the collection of statisticsfor ascertaining the Rural Price Index to 1,183 postoffices across the country with effect from October2009. The data so collected would be electronicallytransmitted to MoSPI.

International relations10.147 To improve quality of international mailprocessing, all Foreign Post Offices and Sub ForeignPost Offices have been computerized. InternationalParcel Post Hubs have also been established atDelhi, Mumbai and Kochi for specialized handling ofparcels.

10.148 International Electronic Money OrderService: Indian Post is in the process of replacingits paper-based international money order servicewith the Electronic International Money Order Servicethrough Universal Postal Union software. As per theagreement signed between India and the UAE forexchange of Electronic International Money Orders,the service was launched in April 2008. Initially, theservice is being offered from the UAE to India throughall head post offices in Delhi, Mumbai, Chennai,Kolkata, and the State of Kerala covering 97 headpost offices.

10.149 Launch of World Net Express: A bilateralagreement has been signed between Indian Postand Deutsche Post AG on November 27, 2008 forproviding new services to domestic and internationalcustomers. Under this, articles will be booked byselected post offices for delivery in about 200countries around the world using the DHL network.

10.150 Launch eMO Videsh: With the launch ofthe new international remittance service eMO Videshin October 2009, Indian Post now offers its customersan opportunity to send money in cash to a recipientabroad payable in cash or in his account. This serviceis in tie-up with the EURO GIRO for both outwardand inward international remittance.

10.151 Global Business Division: A GlobalBusiness Division has been set up in the Departmentof Posts to provide focus to its internationaloperations.

10.152 Indian Post has implemented certainrecommendations of the R.S. Nataraja Murthy

Committee on the service conditions of Gramin DakSewaks (GDS), which include enhancement ofemoluments of all categories of GDS andenhancement of certain allowances.

Urban Infrastructure10.153 As per the 2001 Census, about 27.8 percent of the population lives in urban areas. Further,the Registrar General of India estimated in 2006 that67 per cent of the population growth in the next 25years is expected to take place in urban areas alone.Hence improving urban infrastructure including basiccivic services assumes critical importance.Municipal institutions responsible for providing thesecivic services are facing acute shortage of capacityand resources.

Jawaharlal Nehru Urban Renewal Mission(JNNURM)10.154 The JNNURM was launched in December2005. In order to provide reforms-linked Centralassistance to State Governments for the developmentof urban infrastructure, a Mission Mode approachwas adopted in 63 selected cities, which includecities with 4 million plus population (7), cities with 1million plus but less than 4 million population (28cities) and other selected cities like State capitalsand cities of religious/historic and tourist importance(28). During 2009, two more cities, that is Tirupatiand Porbandar were included as Mission Cities,taking the total number to 65. The Mission has twocomponents, Urban Infrastructure and Governance(UIG) and Basic Services for the Urban Poor (BSUP).UIG Sub-component addresses the needs of UrbanInfrastructure.

10.155 During 2008-09, the seven-year allocationfor additional Central assistance (ACA) for the UIGcomponent was increased from Rs 25,500 crore toRs 31,500 crore. Since inception and till December2009, as many as 515 projects across 31 States ata cost of Rs 58,038 crore were sanctioned underthe UIG, comprising interalia 147 water supplyprojects, 108 sewerage projects, 70 drainage/ stormwater drainage projects, 41 solid waste managementprojects, 85 roads /flyovers projects and 34 urbantransport projects. So far, the committed ACA underthe UIG for approved projects is Rs 27,040.3 crore,against which Rs 10,261.7 has been released tillDecember 2009.

10.156 The Mission has achieved significantprogress in triggering reforms in the urban sector.So far, 38 per cent of State-level reforms, 55 per


cent of urban local bodies (ULB)-level reforms and54 per cent of optional level reforms–all threecommitted up to the fourth year–have been achieved.Maharashtra, Gujarat, Tamil Nadu and AndhraPradesh have shown good progress. Some of theachievements are that 29 cities have migrated to adouble-entry accrual-based accounting system, 15cities have achieved 85 per cent coverage in propertytax collection, 45 cities have internal earmarking offunds for services to urban poor and 20 States havetaken steps to establish District PlanningCommittees. Five cities have achieved 100 per centcost recovery in water supply. Stamp duty has beenreduced to 5 per cent in 8 States including UnionTerritories and enhanced community participation indevelopment programmes has been realized byenacting the Community Participation Law in 5States and Public Disclosure Law in 11 States.

10.157 The Mission cities have agreed to includepromotion of PPP through appropriate policies andprojects. States such as Andhra Pradesh, Assam,Bihar, Gujarat, Jharkhand, Karnataka, Kerala,Maharashtra, Orissa, Rajasthan, West Bengal, hasadopted a PPP policy. PPP initiatives have beentaken by Indore, Vadodara, Pune and Ahmedabadfor establishing city bus services.

10.158 The Urban Infrastructure DevelopmentScheme for Small and Medium Towns (UIDSSMT)is a sub-component of the JNNURM for developmentof infrastructural facilities in all towns and cities (otherthan the Mission cities). The UIDSSMT subsumedthe erstwhile Integrated Development of Small andMedium Towns (IDMT) and Accelerated Urban WaterSupply Programme (AUWSP) schemes. Forobtaining assistance under the UIDSSMT, Statesand urban local bodies (ULBs) need to sign amemorandum, committing to reforms. During 2008-09, the seven-year allocation for the UIDSSMT wasraised from Rs 6,400 crore to Rs 11,400 crore toenable the Centre to consider the "backlog" ofprojects which State Governments hadrecommended to the Central Government. From itsinception till December 2009, as many as 753projects across 636 towns and cities at a cost of Rs12,824.6 crore were sanctioned under the UIDSSMT,comprising inter alia 416 water supply projects, 97sewerage projects, 65 storm water drainage projects,51 solid waste management projects, and 103 roadprojects. So far, the committed ACA under theUIDSSMT for approved projects is Rs 10,340.5 crore,against which Rs 5,862.1 crore had been releasedtill December 2009.

Initiatives under the JNNURM10.159 A National Mission Mode Project under theNational e-Governance Plan is being implementedin 35 JNNURM mission cities with more than onemillion population across 15 States on a pilot basis.The services covered for e-Governance reforms atState/ULB level under the scheme includeregistration and issue of building plan approvals, e-procurements and monitoring of projects, health,licences, solid waste management, accountingsystems and personal information systems.

10.160 The Peer Experience and ReflectiveLearning (PEARL) programme was launched to fosterknowledge sharing through networking among theMission cities. The Mission supported formation ofgroups/networks amongst Mission cities havingsimilar socio-economic profile and urban issues,along with natural affinity to peer pair. The NationalInstitute of Urban Affairs (NIUA) has been appointedas National Coordinator for the PEARL programme.Under the programme, the network of heritage citieshas organized knowledge-sharing workshops. Awebsite has been made operational providing toolsto support networking and knowledge sharing andthe NIUA has brought out a newsletter called PEARLUpdate.

10.161 Other innovations for better implementationand monitoring of projects under the JNNURM interalia include supporting a professionally mannedprogramme management unit at State level andprogramme implementation unit at ULB level; thirdparty monitoring through appointment of independentreview and monitoring agencies; capacity buildingand communication activities for slow performingcities through rapid training programmes and theCommunity Participation Fund (CPF) for enhancingengagement of citizens in urban management.

Other Urban Infrastructure Schemes and ini-tiatives in Urban Governance10.162 A new pilot scheme for infrastructuredevelopment (water supply, solid waste managementand sewerage) in "satellite towns" around sevenmegacities (which exclude those towns and citiesthat have taken up projects under the UIDSSMT)has been launched. The selection of the cities/townshas been done in consultation with StateGovernments, subject to their commitment toimplement reforms. These are Vikarabad (AndhraPradesh), Vasai Virar (Maharashtra), Sri Perumbudur(Tamil Nadu), New Town (West Bengal), Hoskote


(Karnataka), Sanand(Gujarat) Sonepat (Haryana) andPilkhua (Uttar Pradesh).

10.163 To assist the north-eastern States inmeeting their development challenges in the urbansector, the ADB-assisted North Eastern RegionUrban Development Programme (NERUDP) hasbeen launched. Phase I of the project covers fivecapital cities, Agartala, Aizawl, Gangtok, Kohimaand Shillong. Arunachal Pradesh, Assam andManipur will be covered in Phase II. While 30 percent of the cost will be borne by the CentralGovernment and the balance given by the ADB asloan, 90 per cent of the project cost in the hands ofthe States will be a grant, and only 10 per cent willbe a loan.

10.164 The Ministry of Urban Developmentprescribed service-level benchmarks for water supplyand sewerage services in 2008. A pilot project onimplementation of municipal service- levelbenchmarks in the urban water and sanitation sectorhas been initiated in 28 cities and the first stage,that is establishment of baseline levels ofperformance has been completed. During 2009,service-level benchmarks have been laid down alsofor e-governance of key municipal services. Underthe Capacity Building in Urban Local Bodies (C-BULB) project, nine Centres of Excellence with focuson identified aspects of urban development have beenset up across reputed institutions. Under the NationalUrban Sanitation Policy 2008, three importantinitiatives have recently been launched, namely ratingof cities on sanitation, communication campaign andformulation of state sanitation strategies and citysanitation plans.

10.165 Under the Pooled Finance DevelopmentFund (PFDF) Scheme, which provides creditenhancement to ULBs to access market borrowingsthrough a state-level pooled finance mechanism,eight states have set up their "State Pooled FinanceEntity". The first proposal for issue of a tax-freePooled Finance Development Bond worth Rs 45.0crore by the Water and Sanitation Pooled Fund ofTamil Nadu was notified and appropriate releasestowards the Fund and project development cost weremade in February 2008. However, only Rs 6.7 crorewas subscribed. In the present economic scenario,the progress of the scheme has generally been slow.

10.166 The Constitution (112th Amendment) Bill2009 to provide for 50 per cent reservation of womenin ULBs was introduced in the Lok Sabha onNovember 24, 2009. The Bill seeks to increase therepresentation of women from the present level of

one-third to 50 per cent which would also includeenhancement of reservation for women up to 50 percent in seats reserved for Scheduled Castes,Scheduled Tribes, and 50 per cent reservations forwomen in the posts of Chairperson.

Urban Transport10.167 With the objective of guiding and facilitatingimplementation of the National Urban TransportPolicy 2006 right from the planning stage, Centralfinancial assistance to the extent of 80 per cent ofthe cost of studies in the area of urban transport isbeing provided under a revamped scheme, with 50per cent of such assistance being admissible forpreparation of detailed project reports.

10.168 Four Centres of Excellence have been setup for urban transport, one each at IIT Delhi andChennai, the National Institute of TechnologyWarangal and CEPT University, Ahmedabad. UrbanBus Specifications were circulated to all States andUnion Territories, JNNURM Mission cities and StateRoad Transport Corporations. Service-levelbenchmarks for urban transport have recently beenlaid down.

10.169 To provide better public transport and easecongestion, proposals for Bus Rapid Transit Systems(BRTS) have been approved for Ahmedabad, Bhopal,Indore, Jaipur, Pune, Rajkot, Surat, Vijaywada andVishakhapatnam under the JNNURM covering alength of more than 422 km with total estimated costof approximately Rs 4,770 crore, out of which Centralassistance is around Rs 2,195 crore. A number ofother cities are also coming up with BRTS proposalsto be funded under the JNNURM.

10.170 As part of the stimulus package, purchaseof buses for public transport in a time-bound mannerwas permitted under the JNNURM for the Missioncities. So far, a total of 15,260 buses have beenapproved for 61 Mission cities at a cost of about Rs5,000 crore, out of which total admissible Centralassistance would be Rs 2,100 crore. The financingis meant exclusively for city bus services and BRTS.Till January 2010, delivery of 4,883 modern ITS-enabled buses has taken place. This has transformedthe bus transport scenario in those cities. As a resultof the scheme, 34 cities in India would be gettingorganized city bus services for the first time.

Metro Rail Projects10.171 Delhi and Kolkata have introduced MetroRail systems in their cities. Delhi Metro is a jointventure company of the Government of India and


Government of the National Capital Territory of Delhi.While the existing Kolkata Metro is presently underthe direct control of the Ministry of Railways, theEast-West Metro Corridor Project for Kolkata is onthe Delhi model and is being implemented through ajoint venture company of the Government of Indiaand Government of West Bengal. The Delhi MetroRailways (Amendment) Act 2009 came into effect inSeptember 2009, providing an umbrella "statutory"safety cover for metro work in all the metro cities ofIndia. The Act was extended to the National CapitalRegion, Bangalore, Mumbai and Chennaimetropolitan areas with effect from October 16, 2009.The details of metro rail projects approved by theGovernment of India are presented in Table 10.21.

FINANCING OF INFRASTRUCTURE

Debt financing10.172 Net bank credit to infrastructure in 2008-09, defined as the difference between outstandinggross deployment of bank credit to infrastructure inMarch 2008 and March 2009, increased substantiallyin the current fiscal (Table 10.22). Considering thatthere has been a steep decline in total industrialcredit during the current year, this is particularlyimportant.

10.173 In the stock of infrastructure investmentmade by insurance companies in end-2007-08 ( Rs93,924.2 crore), public-sector companies had a shareof 94.3 per cent. Private-sector investment shareincreased from 2.5 per cent 2004-05 to 5.7 per centin 2007-08. In 2006-07, public-sector companiessignificantly stepped up in their infrastructureinvestment, but could not sustain the momentum in

Table 10.21 : Metro rail projects approved by the Government of India

Project Length Commissioning Cost(km) schedule range ( Rs crore)

National Capital Region

Delhi MRTS Phase I 65.1 3/2004 to 11/2006 10,571Delhi MRTS Phase II 54.7 6/2008 to 6/2010 11,691Extension of Delhi Metro to Gurgaon 14.5 3/2010 15,89Extension of Delhi Metro to NOIDA 7.0 11/2009 827Central Secretariat to Badarpur 20.2 9/2010 4,012Metro Link (Dwarka Sector-9 to Sector-21) 2.8 9/2010 356Airport Metro Express Link 22.7 9/2010 3,869Total for Delhi & NCR 186.8 32,916

Metro rail projects other than National Capital Region

Bangalore Metro 42.3 9/2012 8,158Kolkata East-West Metro Corridor 14.7 1/2015 4,875Chennai Metro 45.0 2014-15 14,600Mumbai Metro Line-1 11.1 10/2010 2,356Mumbai Metro Line-2 31.9 7,660Total outside NCT 145.0 37,649Grand total (NCT+ outside NCT) 331.8 70,564

Source: Ministry of Urban Development.

Table 10.22 : Increment Flow of Bank Creditto Infrastructure

(Rs. crore)

Net Infra- Power Tele- Roads Otherbank struc- com & Infra-

ture Ports struc-(Total) ture

2006-07 30,122 12,659 991 5,246 11,226

2007-08 61,745 21,909 18,597 9,546 11,692

2008-09 64,852 29,380 12,283 12,530 10,680

2008 21,918 13,107 -3,823 4,593 8,042(April-Nov)

2009 64,321 37,806 761 18,408 7,326(April-Nov)

Source : Reserve Bank of India (RBI).Note : Data relate to select banks.


2007-08 (Table 10.23). With public-sector companiesachieving a 36.6 per cent growth in infrastructureinvestment, the year 2008-09 witnessed a modestrecovery, but private-sector insurance companies areyet to make large-scale investments in theinfrastructure sector.

10.174 Flow of resources to the infrastructuresectors through external commercial borrowings(ECBs) had quadrupled from 2005-06 to 2007-08 butwent down drastically during 2008-09 (Table 10.24).The picture that emerged during the first half of thecurrent fiscal does not lend support to any recoveryin ECB flows to the infrastructure sectors on thewhole, from the decline seen in the previous year.

10.175 Infrastructure industries have startedderiving significant amounts of resources throughprivate placement of debt. (While private placementhas equity and debt components, the sector-specific

information on equity components is not available.)It may be seen that all infrastructure sectors raisedsubstantially higher resources during 2008-09through private placement of their debt, comparedto earlier years (Table 10.25). The flow of debt privateplacement to infrastructure sectors has so farremained stable during the current year.

Equity financing of infrastructure10.176 Corresponding to the steep decline in thetotal capital raised through public and rights issuesobserved in 2008-09, there was a considerabledowntrend in the capital raised through public andrights issues in infrastructure also. However, as theprimary markets revived in the current year, equityfinancing of the infrastructure sector also seems tohave gathered momentum (Table 10.26).

Table 10.23 : Investment by insurancecompanies in infrastructure

(Rs. crore)*

2005-06 2006-07 2007-08 2008-09

Public-sector 3,933.7 27,656.7 8,309.0 11,353.5Companies

Private-sector 775.3 1,249.3 2,090.8 1,735.1Companies

Total 4,709.0 28,906.0 10,399.8 13,088.6

Source : Insurance Regulatory Authority of India.

Table 10.25 : Funds through privateplacement (only debt) in infrastructure

(Rs. crore)

Sector 2007- 2008- Apr.-Dec.08 09 2009*

Power generation & 3,468.0 12,670.7 7,674.6supplyRoads & Highways 388.1 1,551.9 1,185.0Shipping Nil 436.0 2,250.0Telecommunications Nil 4,350.0 1,092.0

Total 3,856.1 19,008.6 12,201.6

Source: PRIME Database. Note: *provisional.

Table 10.26 : Capital raised through public and rights issues (Rs crore)

(April-Nov.)

Sector 2006-07 2007-08 2008-09 2008 2009

Power 30 13,709 958 959 10,584Telecommunication 2,994 1,000 100 100 Nil

Source: Securities and Exchange Board of India (SEBI).

Table 10.24 : Flow of external commercial borrowings to infrastructure (US$ million)

Sector 2007-08 2008-09 H1 2008-09 H2 2008-09 H12009-10

Air Transport 4,739.9 1,650.2 650.7 999.6 1,003.8Telecommunications 3,022.2 1,678.2 587.1 1,091.1 558.5Power 863.5 719.2 241.0 478.2 521.1Shipping 664.7 791.5 310.7 480.7 125.9Railways 1.4 100.0 0.0 100.0 450.1Other Infrastructure Sectors 864.6 285.4 220.1 65.4 77.2

Source: RBI.Notes: Figures are revised figures; Other infrastructure sectors included maritime transport, energy, portdevelopment, roads & bridges and other infrastructure projects.


10.177 The total FDI flows during the first eightmonths of the previous and current fiscal yearsremained at comparable levels, but the FDI flows tothe infrastructure sectors during April-November 2009were distinctly higher than those during thecorresponding period of the previous year. In recentyears, a large chunk of these flows has beenappropriated by the power and telecommunicationsectors (Table 10.27).

INFRASTRUCTURE DEVELOPMENT ANDPUBLIC PRIVATE PARTERSHIPS (PPPS)10.178 The recent economic downturn reinforcedthe need for enhancing infrastructure investment forgreater productivity and growth. This in turnunderscored the importance of PPPs in effectivelyharnessing the required resources. PPPs offer anumber of advantages in terms of leveraging publiccapital to attract private capital and undertake a largernumber of infrastructure projects, introducing private-sector expertise and cost-reducing technologies aswell as bringing in efficiencies in operation andmaintenance. Hence, more than their fiscalimplications, PPPs are tools to fulfill the basicobligations of Governments to provide betterinfrastructure services (with large externalities), byincreasing the accountability of the private sectoras a service provider.

10.179 Yet, attracting private capital through PPPis neither easy nor automatic. A key pre-requisite isto lay down a policy, legal and regulatory frameworkthat assures a fair return for investors, protects the

interests of users, especially the poor, and assuresquality supply at reasonable cost. For this purpose,it is important that issues relating to the overarchingPPP policy, incorporating inter alia the models to beused, contract documents to be adopted,procurement strategies and templates to beemployed and mechanisms for financial structuringto be considered, are clearly outlined ab initio at thelevel of the sponsoring agencies, including StateGovernments.

10.180 The Government of India has identified aset of constraints in promoting PPPs, namely policyand regulatory gaps, inadequate long-term finance(debt and equity), inadequate shelf of bankableprojects, inadequate capacity in the public andprivate sectors to manage PPP processes andprojects and inadequate advocacy to create greateracceptance of PPPs by the stakeholders. To addressthese constraints, several initiatives have been takenby the Government of India to create an enablingframework for PPPs. The Government hasestablished a streamlined system for clearance ofPPP projects developed by Central agencies throughsetting up of the Public Private Partnership AppraisalCommittee (PPPAC). Standardized bidding andcontractual documents have been notified. Thefinancing needs of projects are supported by providingViability Gap Funding (VGF) to PPP projects andlong tenor loans through India Infrastructure FinanceCompany (IIFC) Limited. IIFC (UK) Ltd., a subsidiaryof IIFCL in London, has been established with theobjective of borrowing funds from the RBI and lendingto Indian companies implementing infrastructure

Table 10.27 : FDI flows to infrastructure (US$ million)

(April-Nov.)

Sector 2006-07 2007-08 2008-09 2008 2009

Power 157.5 968 984.8 594.2 1237.8Non-conventional energy 2.1 43.2 85.3 31.8 67.0Petroleum & natural gas 89.4 1,426.8 412.3 211.9 218.7Telecommunications 477.7 1,261.5 2,558.4 2,052.1 2,223.3Information & broadcasting * 43.6 321.5 762.3 400.3 420.1Air transport ** 92.1 99.1 35.2 35.1 14.1Sea transport 72.5 128.4 50.2 29.5 274.2Ports 0 918.2 493.2 484.7 65.4Railway related components 25.8 12.4 18.0 15.0 25.1

Total (of above) 960.7 5178.8 5,399.6 3,854.6 4,545.8

Source: Department of Industrial Policy & Promotion.Notes: * Information & broadcasting including print media; ** Air transport including air freight


projects in India solely for meeting capital expenditureoutside India. For providing financial support for qualityproject development activities to the States and theCentral Ministries, the India Infrastructure ProjectDevelopment Fund (IIPDF) supports up to 75 percent of the project development expenses in the formof interest-free loan. The projects, sponsored byState Governments and municipalities, representvarious sectors where PPPs are increasingly beingadopted, namely the urban sector, health andeducation, civil aviation and roads. A panel ofTransaction Advisers for PPPs has been notified foruse by the States and other entities who areundertaking PPP transactions.

10.181 The Department of Economic Affairs (DEA)Ministry of Finance, in collaboration with the ADBinitiated the PPP Pilot Projects Initiatives where theprocess of structuring the PPP project is handheld

by the Central Government to develop demonstrablePPP projects in challenging sectors. Thirty projectsin States, municipalities and Central Ministries havebeen identified and are thus being developed. A seriesof measures have been initiated to strengthen thecapacities of PPP cells, established in CentralMinistries and State Governments. The assistance/expertise is being utilized by State Governments forbetter identification of PPP projects, oversight of theprocurement process, contract management andoversight, development of database and repositoryof knowledge resource and best practices, capacitybuilding and policy support.

10.182 To intensify capacity building of publicfunctionaries and integrate a capacity-buildingprogramme on PPPs at State level, the DEA isdeveloping a comprehensive capacity- buildingprogramme, in collaboration with the World Bank

Table 10.28 : State-wise and sector-wise PPP projectsBelow Between More Value of

Rs 250 Rs 251 to than Rs contactsState/sector Number crore 500 crore 500 crore (in crore)

StatesAndhra Pradesh 63 2,617 3,189 33,474 39,279Delhi 10 95 408 10,374 10,877Gujarat 29 407 3,361 14,944 18,712Karnataka 97 2,673 12,203 24,616 39,492Kerala 12 226 616 11,131 11,973Madhya Pradesh 39 2,144 2,695 2,949 7,789Maharashtra 31 865 1,100 32,062 34,026Orissa 16 235 500 6,888 7,623Pudducherry 1 0 419 1,867 2,286Punjab 19 972 572 0 1,544Rajasthan 51 1,308 833 3,113 5,253Sikkim 24 734 2,669 13,708 17,111Tamil Nadu 30 699 6,413 5,340 12,452Uttar Pradesh 6 0 1,459 649 2,108West Bengal 5 200 1,214 641 2,055Other States 17 1,324 1,638 0 2,962Inter-State 13 355 2,295 5,984 8,634Total 450 14,939 41,583 1,67,739 2,24,176

SectorAirports 5 0 303 18,808 19,111Energy 24 734 2,669 13,708 17,111Ports 43 1,066 2,440 62,993 66,499Roads 271 8,689 32,862 60,454 1,02,005Urban Development 73 2,753 2,404 10,132 15,288Other sectors 34 1,613 905 1,644 4,162


and KfW Development Bank, which would bedelivered through the Lal Bahadur Shastri NationalAcademy of Administration (LBSNAA), Mussoorie,State Administrative Training Institutes and CentralTraining Institutes. The programme componentsinclude training needs' assessment; development ofcourse content; training of trainers (ToT); and roll-out of the programme through a few demonstrationmodules for the initial handholding of Trainers. Twolevels of training would be imparted through thetraining institutes, namely sensitization courses onPPPs and specialized modules on managing PPPs.PPP Toolkits for four sectors (highways, ports, solidwaste management and urban transport), risk andcontingent liability frameworks and communicationstrategy for PPPs are being developed.

10.183 Many State Governments haveinstitutionalized measures to encourage private-sector engagement in creation of infrastructure anddelivery of services. Infrastructure Development andEnabling Acts have been developed by AndhraPradesh, Bihar, Gujarat and Punjab. PPP policiesand guidelines to facilitate PPP projects have beennotified by Karnataka, Orissa, Assam, Goa andMadhya Pradesh. Other measures includedevelopment of sectoral policies for promoting PPPs,establishing nodal departments/ PPP cells,establishing VGFs(to supplement VGF provided bythe Government of India), establishing ProjectDevelopment Funds (to supplement Government ofIndia grant under the India Infrastructure ProjectDevelopment Fund (IIPDF) and establishing panelsof transaction advisers and developing standardizedbid documents, sectoral templates and handbookson PPPs. Awareness of schemes, guidelines,initiatives and resource materials prepared is beingcreated through PPP websites of Central and StateGovernments. The measures have resulted in arobust pipeline of over 450 projects in diverse sectorswith an estimated project cost of over Rs 2, 24, 175.8crore (Table 10.28).

Development of PPP toolkits10.184 The Government of India has beendeveloping several enabling tools to promote PPPs.These tools are vital to catalyze investments forbuilding new infrastructure and improve the efficientoperation and management of assets over theirlifetime and ensure real focus on service delivery.With a view to supporting and guiding Urban LocalBodies (ULBs) in the development of PPP projects,

a Water Supply toolkit and Urban Transport toolkitwere launched in January 2010. The toolkits act asa ready reference guide to all ULBs in the countryand aim to ensure widespread access toinfrastructure financing through the PPP framework.For the purpose of preparation of the toolkit, service-level assessment of 16 sample cities in the state ofMaharashtra was undertaken.

10.185 The toolkit has been developed after areview of existing PPP documentation and drawsexperience from existing PPP projects such as theperformance-based management contract in Latur,concession for water supply and sewerage in SaltLake city and city bus transport in Indore. Termsheets have been drafted for each PPP structurebased on the learning of the documentation reviewand the study of concession contracts. Each termsheet contains a brief reference guide forunderstanding the key clauses applicable under thespecific PPP structure. The clauses presented inthe term sheet aim at guiding a service provider indrafting a contract for the selected PPP structurefor the identified projects in urban water supply/urbantransport sectors.

10.186 The toolkit details the key processes suchas steps involved in identification of suitable PPPstructure and processes involved in implementation;preparatory work to be done for the identification ofa PPP structure; viability assessment of projectsidentified on PPP basis; process a public entityshould follow to decide whether it should opt for publicfunding or PPP; identification and allocation of risksamongst the public entity and private operator/developer and selection of a suitable contractstructure; and procurement process to be followed ifthe ULB decides to implement the project on a PPPbasis.

CHALLENGES AND OUTLOOK10.187 Infrastructure services that were affectedby the slowdown in general economic activity duringthe previous year have gradually revived in the currentfiscal with easing of supply bottlenecks in certainsectors and with demand recovery in others.However, considering the dimensions of theinfrastructure deficit in the country, growth ininfrastructure capacity and services will need to beaccelerated on a big scale.

10.188 Raising the capacity creation in somecritical infrastructure sectors to the desired level isa major challenge. Initiatives required are


multifaceted, and include those promoting flow ofdomestic and global resources to infrastructure,facilitating formulation, approval, financial closure andaward of projects and easing implementation hurdlesin terms of disputes in land acquisition,rehabilitation, contractual issues, shortage of rawmaterials, capital goods and fuel, environmentaldisputes and inadequate availability of skilledmanpower. The foregoing analysis indicates thatefforts--legislative, administrative and executive--areon, with a view to ameliorating the bottlenecks inrealization of infrastructure projects. The need of thehour is to expedite, synergize and consolidate theseefforts so as to sufficiently and promptly meet thedemands of increasing population and urbanmigration and faster economic growth.

10.189 The Planning Commission has estimatedthat as compared to 4.5 per cent in 2003-04,investment in infrastructure as a proportion of thegross domestic product (GDP) rose to 6 per cent in2007-08. The collapse of markets worldwide and thedampening of equity markets acted as deceleratorson the mobilization of resources by infrastructuresectors during the previous year. Available evidencepoints towards a steady revival of flows of investibleresources to infrastructure sectors during the currentyear. However, reaching the target of an infrastructuralinvestment of 9 per cent of the GDP fixed by theEleventh Five Year Plan (2007-2012) would be anextremely challenging task. Efforts are required tochannelize the long-term contractual savings toinfrastructure sectors on a much larger scale.

Human Development, Povertyand Public Programmes CHAPTER

11

The ultimate objective of development planning is human development or increased socialwelfare and well-being of the people of a nation. This goal is also important because thesustainability of the development process hinges upon the quality of life enjoyed by the people.A healthy and educated population leads to increased productivity which, in turn, can contributeeffectively to output growth. Development strategy, therefore, needs to continuously strive forbroad-based improvement in standards of living. High growth is essential to generate resourcesfor social spending. However, the fruits of growth need to be shared equitably among allsections of society. Especially, it needs to be ensured that the weaker and disadvantaged sectionsare not left out of the benefits of growth. The inclusive growth strategy being pursued in theEleventh Plan has this very objective as it aims to ensure that higher growth of the economyhelps overcome the problems of chronic poverty, ignorance and disease.

11.2 This chapter brings out the comparativeinternational standing of India in terms of humandevelopment and the areas needing greateremphasis for better performance. It also studies therecent trends in social sector spending by Centraland State Governments. Thereafter, it highlights theimportant issues concerning poverty andemployment followed by the progress made invarious public programmes in the social sector.These include rural infrastructure and development,education, health, women and child development,welfare and development of weaker sections ofsociety, social security and related issues. Thischapter also briefly reviews the status ofinternational negotiations on climate change as wellas India’s stand and the action being taken toaddress this important issue.

HUMAN DEVELOPMENT AND THEGENDER SITUATION

11.3 As per the United Nations DevelopmentProgramme (UNDP) Human Development Report2009 (HDR 2009), the Human Development Index

(HDI) for India in 2007 was 0.612 on the basis ofwhich India is ranked 134 out of 182 countries ofthe world placing it at the same rank as in 2006.The HDI is based on three indicators, namely GDPper capita (PPP US $), life expectancy at birth, andeducation as measured by adult literacy rate andgross enrolment ratio (combined for primary,secondary and tertiary education). The value of HDIfor India gradually increased from 0.427 in 1980 to0.556 in 2000 and went up to 0.612 in 2007. Themovement of the index value in some of thecomparable countries (Table 11.1) indicates thatimprovement in HDI in India in recent years hasbeen better than in most of them.

11.4 This trend indicating improvement in the HDIpowered by per capita income growth for India isheartening though there is no room for complacencyas India is still in the Medium Human Developmentcategory with even countries like China, Sri Lankaand Indonesia having better ranking. India’s HDI rankis also lower than its per capita GDP (PPP US $)rank by six notches, indicating that our humandevelopment effort still needs to catch up with the

271Human Development, Poverty and Public Programmes

progress made in GDP per capita. The existing gapbetween the health and education indicators of Indiaand those in the developed world and even manydeveloping countries needs to be bridged at a fasterpace. According to the Report, life expectancy atbirth in India was 63.4 years in 2007 as against 80.5years in Norway, 81.4 years in Australia, 74.0 yearsin Srilanka and 72.9 years in China. Adult literacyrate (aged 15 and above) in 1999-2007 was 66.0 percent in India as against near 100 per cent in many ofthe developed nations, 93.3 per cent in China and92.0 per cent in Indonesia. Combined grossenrolment ratio in education in 2007 was 61 per cent

in India as against 99.3 per cent in Canada, 98.6 percent in Norway, 78.0 per cent in Thailand and 76.4per cent in Egypt (Table 11.2).

11.5 In terms of the Gender Development Index(GDI), with an index value of 0.594, India ranks 114out of 155 countries. When the HDI ranks used arerecalculated for the countries with a GDI value, azero count for HDI rank minus GDI rank is obtainedfor India which is indicative of the same status ofworld ranking in terms of gender development andhuman development. Therefore, continued efforts arecalled for in the area of gender development.

Table 11.1 : Human development index trendsAvg. annual

growthrate

Country 1980 1985 1990 1995 2000 2005 2006 2007 2000-07Poland …. ….. 0.806 0.823 0.853 0.871 0.876 0.880 0.45Brazil 0.685 0.694 0.710 0.734 0.790 0.805 0.808 0.813 0.41Russia …. …. 0.821 0.777 …. 0.804 0.811 0.817 …..Turkey 0.628 0.674 0.705 0.730 0.758 0.796 0.802 0.806 0.87Thailand 0.658 0.684 0.706 0.727 0.753 0.777 0.780 0.783 0.57China 0.533 0.556 0.608 0.657 0.719 0.756 0.763 0.772 1.00Sri Lanka 0.649 0.670 0.683 0.696 0.729 0.752 0.755 0.759 0.57Indonesia 0.522 0.562 0.624 0.658 0.673 0.723 0.729 0.734 1.25Vietnam …. 0.561 0.599 0.647 0.690 0.715 0.720 0.725 0.71Egypt 0.496 0.552 0.580 0.631 0.665 0.696 0.700 0.703 0.81

India 0.427 0.453 0.489 0.511 0.556 0.596 0.604 0.612 1.36

Source: HDR 2009.

Table 11.2: India’s global position in human development 2007Country HDI GDP Life Adult Literacy Combined per capita Expectancy Rate Gross Enrol. (PPP US $) at birth(yrs) (% aged 15 Ratio in yrs & above) education(%)

2007 2007 2007 1999-2007 2007

Poland 0.880(41) 15,987 75.5 99.3 87.7Brazil 0.813(75) 9,567 72.2 90.0 87.2Russia 0.817(71) 14,690 66.2 99.5 81.9Turkey 0.806(79) 12,955 71.7 88.7 71.1Thailand 0.783(87) 8,135 68.7 94.1 78.0China 0.772(92) 5,383 72.9 93.3 68.7Sri Lanka 0.759(102) 4,243 74.0 90.8 68.7Indonesia 0.734(111) 3,712 70.5 92.0 68.2Vietnam 0.725(116) 2,600 74.3 90.3 62.3Egypt 0.703(123) 5,349 69.9 66.4 76.4India 0.612(134) 2,753 63.4 66.0 61.0

Source: HDR 2009.Figures in parentheses in col.2 give ranking among 182 countries.


TRENDS IN INDIA’S SOCIAL-SECTOREXPENDITURES

11.6 Central government expenditure on socialservices and rural development has gone upconsistently over the years (Table 11.3). The shareof Central Government expenditure on socialservices including rural development in totalexpenditure (Plan and non-Plan) has increased from10.46 per cent in 2003-04 to 19.46 per cent in 2009-10 (BE). Central support for social programmes hascontinued to expand in various forms although mostsocial-sector subjects fall within the purview of theStates. Major programme specific funding is availableto the States through centrally sponsored schemes.

11.7 Expenditure on social services which includeeducation, sports, art and culture, medical and publichealth, family welfare, water supply and sanitation,housing, urban development; welfare of ScheduledCastes (SCs), Scheduled Tribes (STs) and otherBackward Classes (OBCs), labour and labour welfare,social security and welfare, nutrition, relief for naturalcalamities, etc. by the General Government (Centreand States combined) has also shown increase inrecent years (Table 11.4) reflecting higher priority tosocial services. Expenditure on social services as aproportion of total expenditure increased from 19.9

per cent in 2004-05 to 21.6 per cent in 2006-07 andfurther to 23.8 per cent in 2009-10 (BE). Expenditureon education as a proportion of total expenditure hasincreased from 9.7 per cent in 2004-05 to 10.6 percent in 2009-10 (BE). The share of health in totalexpenditure has also increased from 4.3 per cent in2004-05 to 4.8 per cent in 2009-10 (BE).

POVERTY AND INCLUSIVE GROWTH

11.8 The Planning Commission estimates theincidence of poverty on the basis of the large samplesurveys on household consumer expenditureconducted by the National Sample SurveyOrganisation (NSSO) at an interval of approximatelyfive years. The Uniform Recall Period (URP)consumption distribution data of the NSS 61st Roundyields a poverty ratio of 28.3 per cent in rural areas,25.7 per cent in urban areas and 27.5 per cent forthe country as a whole in 2004-05. The correspondingpoverty ratios from the Mixed Recall Period (MRP)consumption distribution data are 21.8 per cent, 21.7per cent and 21.8 per cent respectively. While theformer consumption data uses a 30-day recall/reference period for all items of consumption, thelatter uses a 365-day recall/reference period for fiveinfrequently purchased non-food items, namelyclothing, footwear, durable goods, education and

Table 11.3 : Central Government expenditure (Plan and non-Plan) on social services andrural development

(as per cent of total expenditure)ITEM 2003-04 2004-05 2005-06 2006-07 2007-08 2008- 2009-

Actual Actual Actual Actual Actual 09(RE) 10(BE)

1. Social services a. Education, Sports, Youth Affairs 2.32 2.81 3.71 4.28 4.24 4.07 4.37b. Health & Family Welfare 1.53 1.64 1.89 1.87 2.08 1.86 1.99c. Water Supply, Housing, etc. 1.67 1.81 2.08 1.72 2.06 2.34 1.99d. Information & Broadcasting 0.28 0.26 0.30 0.25 0.22 0.21 0.24e. Welfare of SCs/STs and OBCs 0.24 0.27 0.33 0.34 0.38 0.35 0.42f. Labour & Employment 0.18 0.20 0.25 0.32 0.27 0.27 0.23g. Social Welfare & Nutrition 0.50 0.52 0.84 0.85 0.84 0.73 0.70h. North-eastern Areas 0.00 0.00 0.00 0.00 0.00 1.58 1.60i. Other Social Services 0.15 0.34 0.40 -0.17 1.29 1.79 1.82Total 6.86 7.85 9.79 9.47 11.39 13.19 13.35

2. Rural Development 2.59 1.91 3.12 2.84 2.56 4.55 4.303. I) Pradhan Mantri Gramodaya Yojana 0.51 0.56 0.00 0.00 0.00 0.00 0.00

(PMGY) II) Pradhan Mantri Gram Sadak Yojana 0.49 0.49 0.83 1.08 1.54 1.70 1.81

(PMGSY)* 4. Social Services, Rural Dev., PMGY and 10.46 10.81 13.75 13.38 15.48 19.44 19.46

PMGSY 5. Total Central Government Expenditure 100.00 100.00 100.00 100.00 100.00 100.00 100.00Source : Budget documents and Ministry of Rural Development.* Launched in 2000-01 as a new initiative for basic rural needs.However, the PMGY has been

discontinued from 2005-06.


institutional medical expenses, and a 30-day recall/reference period for remaining items. The percentageof poor in 2004-05 estimated from the URPconsumption distribution of NSS 61st Roundconsumer expenditure data is comparable with the

poverty estimates of 1993-94(50th round), which was36 per cent for the country as a whole. Thepercentage of poor in 2004-05 estimated from theMRP consumption distribution of NSS 61st Roundconsumer expenditure data is roughly comparablewith the poverty estimates of 1999-2000 (55th round),which was 26.1 per cent for the country as a whole(Table 11.5).

Methodology for estimation of poverty andBPL households11.9 The official estimates of poverty and thenumber of BPL households have been criticized onvarious counts. Keeping this in view, two committeeswere constituted to look into these issues.

Report of the Planning Commission ExpertGroup

11.10 The Planning Commission set up an expertgroup to examine the issue and suggest a new

Table 11.5 : Poverty ratios by URP and MRP(per cent)

Sl. Category 1993-94 2004-05No.

By URP Method1 Rural 37.3 28.32. Urban 32.4 25.73. All India 36.0 27.5

By MRP Method1999-2000 2004-05

4 Rural 27.1 21.85 Urban 23.6 21.76 All India 26.1 21.8

Source : Planning Commission

Table 11.4 : Trends in social services expenditure by Central Government (Central and State Governments combined)

(Rs. crore)ITEMS 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Actual Actual Actual Actual (RE) (BE)

Total Expenditure 8,69,757 9,59,855 11,09,174 12,95,903 16,59,109 18,70,955Expenditure on

Social Services 1,72,812 2,02,672 2,39,340 2,88,500 3,98,828 4,45,751of which:

i) Education 84,111 96,365 1,14,744 1,27,547 1,67,981 1,98,842ii) Health 37,535 45,428 52,126 60,869 76,489 89,314iii) Others 51,166 60,879 72,470 1,00,084 1,54,358 1,57,595

As per cent of GDPTotal Expenditure 26.85 25.90 25.89 26.19 29.76 30.35Expenditure on

Social Services 5.33 5.47 5.59 5.83 7.15 7.23of which:

i) Education 2.60 2.60 2.68 2.58 3.01 3.23ii) Health 1.16 1.23 1.22 1.23 1.37 1.45iii) Others 1.58 1.64 1.69 2.02 2.77 2.56

As per cent of total expenditureExpenditure on

Social Services 19.9 21.1 21.6 22.3 24.0 23.8of which:

i) Education 9.7 10.0 10.3 9.8 10.1 10.6ii) Health 4.3 4.7 4.7 4.7 4.6 4.8

iii) Others 5.9 6.3 6.5 7.7 9.3 8.4 As per cent of social services expenditure

i) Education 48.7 47.5 47.9 44.2 42.1 44.6ii) Health 21.7 22.4 21.8 21.1 19.2 20.0iii) Others 29.6 30.0 30.3 34.7 38.7 35.4

Source: RBI as obtained from Budget Documents of Union and State Governments.BE: budget estimates; RE: revised estimates.


poverty line and estimates. The expert group hassubmitted its report (Box 11.1) which is beingexamined by the Government.

Committee for the Estimation of BPLhouseholds in Rural areas

11.11 The committee constituted by the Ministryof Rural Development for suggesting a methodologyfor estimation of BPL households in rural areasobserved that the national poverty line at Rs 356 percapita per month in rural areas and Rs 539 per capitaper month in urban areas at 2004-05 prices permittedboth rural and urban people to consume about 1,820k calories as against the desired norm of 2,400/2,100k calories. Hence, a large number of the rural poorgot left out of the BPL status benefits as in order toconsume the desired norm of 2,400/2,100 k calories,the cut-off line for determining BPL status shouldhave been around Rs 700 in rural areas andRs 1,000 in urban. The committee, thereforerecommended that the percentage of people entitledto BPL status should be revised upwards to at least

50 per cent though the calorie norm of 2,400 wouldrequire this to be 80 per cent. The Committee, basedupon available studies, also observed, inter-alia, thefollowing:

At any given point of time, the calorie intake ofthe poorest quartile continues to be 30 to 50 percent less than the calorie intake of the top quartileof the population, despite it needing morecalories because of harder manual work.

Calorie consumption of the bottom 50 per centof the population has been consistentlydecreasing since 1987, which is a matter ofconcern.

11.12 Thus the recommendations of bothcommittees suggest an increase in BPL familiescoverage. This in turn implies automatic expansionin the coverage of the public distribution system(PDS) and other Government schemes wherebeneficiaries are decided on BPL basis. Theadditional Government expenditure implications arealso apparent.

Box 11.1 : Important recommendations and estimates of the Planning Commission Expert Group(Tendulkar Committee) regarding poverty lines

Poverty estimates to continue to be based on private household consumer expenditure of Indian households collectedby the National Sample Survey Organization (NSSO).

Need to move away from anchoring the poverty lines to a calorie intake norm.Since for canvassing household expenditure on a recall basis, the NSSO has decided to shift to an MRP-basedestimates for all its consumption surveys in future, there is need to adopt the MRP-based estimates of consumptionexpenditure as the basis for future poverty lines as against the previous practice of using URP estimates. This changecaptures the household consumption expenditure of poor households on low- frequency items of purchase moresatisfactorily.MRP equivalent of the urban poverty line basket (PLB) corresponding to 25.7 per cent urban headcount ratio as thenew reference PLB to be provided to rural as well as urban population in all the states after suitable adjustments.The proposed reference PLB takes into account all items of consumption (except transport and conveyance) forconstruction of price indices. Separate allowance for private expenditure on transport and conveyance has been madein the recommended poverty lines.The proposed price indices are based on the household-level unit values (approximated price data) obtained from the61st round (July 2004 to June 2005) of the NSS on household consumer expenditure for food, fuel and light, clothingand footwear at the most detailed level of disaggregation and hence much closer to the actual prices paid byconsumers in rural and urban areas. Price indices for health and education were also obtained from unit-level datafrom related National Sample Surveys. The proposed price indices (Fisher Ideal indices in technical terms) incorporateboth the observed all-India and state-level consumption patterns in the weighting structure of the price indices. Forrent and conveyance, the actual expenditure share for these items was used to adjust the poverty line for each state.The new poverty lines seek to enable the rural as well as urban population in all the States to afford the recommendedall-India urban PLB after taking due account of within-State rural-urban and inter-State differentials (rural andurban) incorporating observed consumer behaviour both at the all-India and State levels.The all-India rural headcount ratio and all-India combined headcount ratio using the recommended procedure is 41.8per cent and 37.2 per cent in comparison with official estimates of 28.3 per cent and 27.5 per cent respectively. Povertyat all-India level in 1993-94 was 50.1 per cent in rural areas, 31.8 per cent in urban areas and 45.3 per cent in the countryas a whole as compared to the 1993-94 official estimates of 37.2 per cent rural, 32.6 per cent urban and 36.0 per centcombined. Thus, even though the suggested new methodology gives a higher estimate of rural and combined rural-urban headcount ratio at the all-India level for 2004-05, the extent of poverty reduction in comparable percentagepoint decline between 1993-94 and 2004-05 is not very different from that inferred using the old methodology.


INEQUALITY

11.13 Inequality in India in comparison to othercountries as reflected in the Gini Index, which is ameasure of unequal distribution of income (orconsumption) among individuals or households,is given in the HDR 2009. The lower (higher) thenumber, the more equal (unequal) is the distribution.At 36.8, India’s Gini index was more favourablethan that of comparable countries like Brazil(55),Turkey(43.2), Thailand(42.5), China(41.5),Indonesia(39.4), Vietnam(37.8) and even the USA(40.8), Singapore(42.5), Hong Kong(43.4) andPortugal(38.5), which are otherwise ranked veryhigh in human development. At 8.6, the ratio of therichest 10 per cent of population to the poorest 10per cent was also lower than in these countries.

11.14 Inter-State inequality in India as reflected inthe Lorenz ratio ( which like Gini Index is used asa measure of relative inequality) has been estimatedby the NSSO based on household consumerexpenditure for 2004-05. For rural India, the Lorenzratio for total consumption expenditure was 0.30while for urban India, it was 0.37 indicating, asexpected, higher relative inequality in urban areas.Lower inequality was seen in rural areas of Assam(0.197), Meghalaya(0.155) and Manipur(0.158) thanin Kerala(0.341), Haryana(0.323), Tamil Nadu(0.315)and Maharashtra(0.310). Similiarly, lower inequalitywas seen in the urban areas of ArunachalPradesh(0.243), Jammu & Kashmir(0.244),Meghalaya(0.258) and Manipur(0.175) than inChattisgarh(0.439), Goa(0.405), Kerala(0.400), andMadhya Pradesh(0.397). As expected, disparity inconsumption of durable goods was much higherthan in the consumption of cereals.

EMPLOYMENT

11.15 As noted in Economic Surveys of previousyears based on NSSO data, employment on acurrent daily status (CDS) basis during 1999-2000to 2004-05 had accelerated significantly ascompared to the growth witnessed during 1993-94to 1999-2000. During 1999-2000 to 2004-05, about47 million work opportunities were createdcompared to only 24 million in the period between1993-94 and 1999-2000. Employment Growthaccelerated from 1.25 per cent per annum to 2.62per cent per annum. However, since the labour forcegrew at a faster rate of 2.84 per cent than thework force, unemployment rate also rose. Theincidence of unemployment on CDS basis increased

from 7.31 per cent in 1999-2000 to 8.28 per cent in2004-05.

Unemployment11.16 A comparison between the differentestimates of unemployment (Table 11.6) indicatesthat the CDS estimate of unemployment rate beingthe broadest is the highest. The higherunemployment rates according to the CDS approachcompared to the weekly status and usual statusapproaches indicates a high degree of intermittentunemployment. It captures the unemployed days ofthe chronically unemployed, the unemployed daysof the usually employed who become intermittentlyunemployed during the reference week andunemployed days of those classified as employedaccording to the criterion of current weekly status.

Employment in the Organized Sector11.17 Employment growth in the organized sector,public and private combined, has declined duringthe period between 1994 and 2007. This has primarilyhappened due to the decline of employment in thepublic organized sector. Employment inestablishments covered by the Employment MarketInformation System of the Ministry of Labour grewat 1.20 per cent per annum during 1983-94 butdecelerated to -0.03 per cent per annum during 1994-2007. However, the latter decline was mainly due toa decrease in employment in public-sectorestablishments from 1.53 per cent in the earlier periodto -0.57 per cent in the later period, whereas theprivate sector showed acceleration in the pace ofgrowth in employment from 0.44 per cent to 1.30per cent per annum (Table 11.7).

Table 11.6 : All-India rural & urbanunemployment rates* for NSS 61st round:Different estimates 2004-05

Sl. No. Estimate** Rural Urban

1 UPS 2.5 5.3

2 US(adj.) 1.7 4.5

3 CWS 3.9 6.0

4 CDS 8.2 8.3

Source: NSS Report No. 515(part I).* as per cent of labour force **UPS–Usual PrincipalStatus, US(adj.)–Usually unemployed excl. SubsidiaryStatus workers,CWS–Current Weekly Status and CDS–Current DailyStatus.


the Indian economy, including employment, andseveral measures, financial and fiscal, were taken.The latest sample survey of the Labour Bureauindicates job gains in the sectors covered (Box 11.2).

SOCIAL-SECTOR INITIATIVES

Poverty-alleviation and employment-generation programmes11.19 Several poverty-alleviation and employment-generation programmes are being implemented bythe Government. The important among these arelisted below.

(i) The National Rural Employment GuaranteeScheme (NREGS), was launched in February2006 in 200 most backward districts in the firstphase and was expanded to 330 districts during2007-08. The coverage was extended to allrural districts of the country in 2008-09. Atpresent, 619 districts are covered under theNREGS. During the year 2008-09, more than4.51 crore households were providedemployment under the scheme. As against the

Effect of global financial crisis and economicslowdown11.18 Employment opportunities in the currentfinancial year were affected by the global financialcrisis and economic slowdown in India. Whilecomprehensive employment data for the currentfinancial year are not available, some sample surveysconducted by the Labour Bureau, Ministry of Labourand Employment, indicated employment losses inthe wake of the global financial crisis and economicslowdown. The Government was concerned aboutthe possible impact of the global financial crisis on

Box 11.2 : Estimates of job losses/gains during the global economic crisis and recent recovery.The findings of the Report on Effect of Economic Slowdown on Employment in India(July-September 2009) based upon thefourth quarterly quick employment sample survey conducted by the Labour Bureau, Ministry of Labour and Employment,are:

The fourth quarterly quick employment survey was launched in the third week of October 2009 and all the unitscovered in the previous survey were revisited. In the survey, information was collected from 2,873 units by covering 21centres spread across 11 States/UTs. Eight sectors, namely textiles, leather, metals, automobiles, gems & jewellery,transport, IT/BPO and handloom/powerloom were covered.

At overall level, employment has increased by about 5 lakh during July-September, 2009 over June 2009. During theprevious quarter of April-June 2009 employment had declined by 1.31 lakh at overall level.

All the seven sectors, except leather, have registered an increase in employment during the quarter July-September2009 over June 2009. On the contrary, during April-June 2009 quarter all sectors, except leather, automobiles andhandloom/powerloom, experienced a decrease in employment, probably due to seasonality.

Employment during the July-September 2009 quarter has increased substantially in textiles (3.18 lakh) followed bymetals (0.65 lakh) and gems & jewellery (0.58 lakh). However, the previous quarterly survey for the period April-June2009 found that employment had declined in all three sectors by 1.54 lakh, 0.01 lakh and 0.20 lakh respectively.

The previous quarterly survey results for the period April-June 2009 over March 2009 showed a substantial decline inthe employment of direct category workers. As a departure from the April-June 2009 quarter wherein the employmentof direct category of workers had declined, a significant increase was observed during the July-September 2009quarter. About 80 per cent of the increase in employment that occurred during the July-September 2009 quarter wasin direct category workers.

Though increase in employment is more in non-exporting units, exporting units have also shown a significant recoveryby registering an increase in employment to the extent of 2.04 lakh during July-September 2009 over June 2009.

By comparing the results of the different quarters studied, it may be observed that employment declined by 4.91 lakhduring the October-December 2008 quarter, increased by 2.76 lakh during January-March 2009, again declined by1.31 lakh during April-June 2009; and then increased by 4.97 lakh during the July-September 2009 quarter. Thus, evenon the basis of this small sample, estimated employment in the selected sectors has experienced a net addition of 1.51lakh during the last one-year period from October 2008 to September 2009.

Table 11.7 : Rate of growth of employmentin organized sector

(per cent per annum)1983-94 1994-2007

Public Sector 1.53 -0.57Private Sector 0.44 1.30Total Organized 1.20 -0.03Source: Eleventh Five Year Plan Document and

Ministry of Labour and Employment


budgeted outlay of Rs 39,100 crore for the year2009-10, an amount of Rs 24,758.50 crore hasbeen released to the States/UTs till December2009. During the year 2009-10, 4.34 crorehouseholds have been provided employmentunder the scheme. Out of the 182.88 croreperson days created under the scheme duringthis period, 29 per cent and 22 per cent were infavour of SC and ST population respectively and50 per cent in favour of women.

(ii) Swarnjayanti Gram Swarozgar Yojana (SGSY):The Swarnjayanti Gram Swarozgar Yojana(SGSY) was launched in April 1999 afterrestructuring of the Integrated RuralDevelopment Programme (IRDP) and alliedprogrammes. It is a self-employmentprogramme for the rural poor. The objective ofthe SGSY is to bring the assisted swarozgarisabove the poverty line by providing themincome-generating assets through bank creditand Government subsidy. The scheme is beingimplemented on a cost-sharing basis betweenthe Centre and States of 75:25 for non-north-eastern states and 90:10 for north-easternstates. Up to December 2009, 36.78 lakh self-help groups (SHGs) had been formed and132.81 lakh swarozgaris have been assistedwith a total investment of Rs 30,896.08 crore.

(iii) Swarna Jayanti Shahari Rozgar Yojana(SJSRY) : The Government has recentlyrevamped the SJSRY with effect from April 1,2009. The scheme provides gainful employmentto the urban unemployed and underemployedpoor, by encouraging the setting up of self-employment ventures by the urban poor andalso by providing wage employment andutilizing their labour for construction of sociallyand economically useful public assets. Therevamped SJSRY has five components: (a) theUrban Self-Employment Programme (USEP)which targets individual urban poor for settingup of micro enterprises; (b) the Urban WomenSelf-help Programme (UWSP) which targetsurban poor women self-help groups for settingup of group enterprises and providing themassistance through a revolving fund for thrift andcredit activities; (c) Skill Training forEmployment Promotion amongst Urban Poor(STEP-UP) which targets the urban poor forimparting quality training so as to enhance theiremployability for self-employment or bettersalaried employment; (d)the Urban Wage

Employment Programme (UWEP) which seeksto assist the urban poor by utilizing their labourfor the construction of socially and economicallyuseful public assets, in towns having populationless than 5 lakh as per the 1991 census; and(e) the Urban Community Development Network(UCDN) which seeks to assist the urban poorin organizing themselves into self-managedcommunity structures so as to gain collectivestrength to address the issues of poverty facingthem and participate in effective implementationof urban poverty-alleviation programmes. Budgetallocation for the SJSRY scheme for 2009-10is Rs 515.00 crore of which Rs 363.12 crorehad been utilized till December 31, 2009. During2009-10, as reported by States/UTs, 28,613urban poor have been assisted to set upindividual enterprises, 13,453 urban poor womenhave been assisted in setting up groupenterprises, 27,463 urban poor women havebeen assisted through a revolving fund for thriftand credit activities and 85,185 urban poor havebeen imparted skill training.

Social Protection Programmes11.20 In view of the predominance of informal-sectorworkers in the workforce, there is need for expansionin the scope and coverage of social securityschemes for these unorganized workers so that theyare assured of a minimum level of social protection.Many measures were taken by the Government ofIndia along these lines (Box 11.3).

Rural Infrastructure and Development11.21 Substantial progress was made by the CentralGovernment in creating rural infrastructure during theyear. This was in accordance with the commitmentto faster social-sector development to removedisparities under the Eleventh Five Year Plan. Theseinclude Bharat Nirman, the Total SanitationCampaign (TSC) and the National Rural HealthMission. It is evident that the focus of theseprogrammes is on providing better facilities andquality of life to rural population.

Bharat Nirman

11.22 This programme, launched in 2005-06 forbuilding infrastructure and basic amenities in ruralareas, has six components,namely rural housing,irrigation potential, drinking water, rural roads,electrification and rural telephony. It is an importantinitiative for reducing the gap between rural and urban


areas and improving the quality of life of people inrural areas. The allocation in 2009-10 for BharatNirman was stepped up by 45 per cent over 2008-09(BE). Up to December 2009, a total length of about2,50,554 km of roads has been completed underthe PMGSY with a cumulative expenditure of Rs59,800 crore. Under rural roads component of BharatNirman 33,812 habitations have been provided allweather road connectivity upto December, 2009 andprojects for connecting 20,067 habitations are atdifferent stages. Under phase I of the rural housingcomponent of Bharat Nirman, 60 lakh houses wereenvisaged through the Indira Awaas Yojana all overthe country during the four years from 2005-06 to

2008-09. Against this target, 71.76 lakh houses wereconstructed with an expenditure of Rs 21,720.39crore. It has now been proposed to double this targetand to construct 120 lakh houses during the nextfive-year period starting from the current year 2009-10. During the current financial year, as against thetarget of construction of 40.52 lakh houses, 18.57lakh houses have been constructed so far. UnderBharat Nirman for rural water supply, Rs 4,098 crorein 2005-06, Rs 4,560 crore in 2006-07, Rs 6,441.69crore in 2007-08 and Rs 7,276.29 crore in 2008-09have been utilized. In 2009-10, a budgetary provisionof Rs 8,000 crore has been made out of whichRs 5,669.88 crore has been utilized (Table 11.8).

Box 11. 3 : Recent measures for social protectionAam Admi Bima Yojana (AABY): Under this scheme launched on October 2, 2007, insurance will be provided againstnatural as well as accidental death and partial/permanent disability to the head of the family of rural landless householdsin the country. Up to September 30, 2009, the Scheme had covered 81.99 lakh lives.Rashtriya Swasthya Bima Yojana (RSBY): The RSBY was launched on October 1, 2007 for BPL families (a unit of notmore than five) in the unorganized sector. The total sum insured is Rs 30,000 per family per annum. The premium is sharedon a 75:25 basis by the Centre and the State Government. In case of north-eastern States and Jammu & Kashmir, thepremium is shared in a 90:10 ratio. The beneficiary is entitled to cashless transactions through a smart card. The RSBYbecame operational from April 1, 2008. Till January 12, 2010, 26 States/Union Territories have initiated the process ofimplementing the scheme. Out of these, 22 States/UTs, namely Assam. Rajasthan, Haryana, Punjab, NCT of Delhi,Gujarat, Bihar, Himachal Pradesh, Kerala, Maharashtra, Tamil Nadu, Uttar Pradesh, Jharkhand, Uttarakhand, WestBengal, Goa, Nagaland, Chattisgarh, Meghalaya, Tripura, Orissa and Chandigarh Administration, have started issuingsmart cards and more than 97.19 lakh cards have been issued.The Unorganized Workers’ Social Security Act 2008: The Act has the objective of providing social security to unorganizedworkers. The Unorganised Workers’ Social Security Rules 2009 have also been framed. The Act has come into force w.e.f.May 16, 2009. It provides for constitution of a National Social Security Board and State Social Security Boards which willrecommend social security schemes for these workers. The National Social Security Board has since been constituted andhas met twice. The Board has made some recommendations regarding extension of social security schemes to certainadditional segments of unorganized workers.Bilateral social security agreements: Bilateral social security agreements have been signed with Belgium, France, Germany,Switzerland, Luxemburg and Netherlands to protect the interests of expatriate workers and companies on a reciprocalbasis. Negotiations for similar agreements with other countries like Czech Republic, Norway, Hungary, Denmark, Canadaand Republic of Korea have been completed. Negotiations are in progress with several other countries. These agreementshelp workers by providing exemption from social security contribution in case of posting, totalisation of contributionperiods and exportability of pension in case of relocation to the home country or any third country.

Table 11.8 : Bharat Nirman - Rural drinking water-cumulative achievements

Component Target Cumulative(at the begining of Bharat Nirman) achievements*

Uncovered habitations to be provided 55,067 54,589with potable waterSlipped-back habitations to be 3,31,604 3,83,106a

provided with potable waterQuality-affected habitations to be 2,16,968 3,15,132a

addressed with potable water

Total 6,03,639 7,52,827a Higher achievement reported cumulatively as some states have reported coverage of habitations other

than those included in Bharat Nirman Programme.* As on December 23, 2009.


11.23 In the case of quality-affected habitations,as reported by States, 52,428 habitations have beenfully covered by safe water supply. Projects to cover2,57,512 habitations have been given technical andadministrative approval and are under execution. Thegoal is to cover all water quality-affected habitationswith safe drinking water by the end of 2011.Sustainability of drinking water sources and systemshas been accorded high priority. In order to enablethe rural community to shoulder responsibility inmanagement, operation and maintenance of watersupply systems at village level, a decentralized,demand-driven, community-managed approach hasbeen adopted.

11.24 To enable rural schools to provide safe andclean drinking water for children, the Jalmaniprogramme was launched on November 14, 2008and Rs 100 crore was provided to the States in2008-09. Under the programme, 100 per cent financialassistance has been provided to States to instalstandalone water purification systems in ruralschools to allow children access to safe and cleanwater. During 2009-10, another Rs 100 crore hasbeen made available and allocated to the States.

Rural Sanitation: Total Sanitation Campaign(TSC)

11.25 The annual budgetary support for the TSCwas increased from Rs 202 crore in 2003-04 to Rs1,200 crore in 2009-10. With the scaling up of theTSC, combined with higher resource allocation,programme implementation has improvedsubstantially. Since 1999, over 6.01 crore toilets havebeen provided to rural households under the TSC. Asignificant achievement has also been theconstruction of 9.37 lakh school toilets and 2.95 lakhAnganwadi toilets. The number of households beingprovided with toilets annually has increased from only6.21 lakh in 2002-03 to 115 lakh in 2008-09. In 2009-10 (up to December 22, 2009), more than 62 lakhtoilets were provided to rural households. Thecumulative coverage till now is 61 per cent as againstonly 21.9 per cent rural households having accessto latrines as per Census 2001 data.

11.26 The TSC follows a community-led and people-centred approach. The components of the TSCinclude start-up activities, Individual householdlatrines, community sanitary complexes, schoolsanitation and hygiene education and Anganwaditoilets. To encourage Panchayati Raj institutions(PRIs) to take up sanitation promotion, there is theNirmal Gram Puraskar (NGP) incentive scheme under

which an award is given to those PRIs that attain a100 per cent open defecation-free environment. TheNGP has been acclaimed internationally as a uniquetool of social engineering and communitymobilization.

Skill Development11.27 In the Eleventh Five Year Plan, acomprehensive skill development programme withwide coverage throughout the country has beeninitiated by the Government. The Coordinated ActionPlan for Skill Development has a target of 500 millionskilled persons by the year 2022. In this regard, athree-tier institutional structure consisting of (i) thePrime Minister’s National Council on SkillDevelopment, (ii) the National Skill DevelopmentCoordination Board(NSDCB) and (iii) the NationalSkill Development Corporation(NSDC), has alreadybeen set up to take forward the skill developmentmission. The NSDCB has addressed to five coreareas of skill development, namely (i) curriculumrevision on a continuous basis, (ii) vocationaleducation, (iii) apprenticeship training, (iv)accreditation and certification system and (v) skill-gap mapping. The NSDC has been set up to promoteprivate-sector action for skill development, aninstitutional arrangement in the form of a non-profitcorporation in the Ministry of Finance. TheCorporation was registered on July 31, 2008 underSection 25 of the Companies Act 1956. The NationalSkill Development Fund (NSDF) was incorporatedas a Trust on January 7, 2009 as a receptacle forfunds for the NSDC. A sum of Rs 995.10 crore wassubsequently transferred to the Trust. An InvestmentManagement Agreement was concluded between theNSDC and NSDF on March 27, 2009, and a sum ofRs 200 crore from the overall corpus of the Trustwas transferred to the NSDC for implementation ofits work programme. The NSDC has been mandatedto train about 150 million persons by 2022 under theNational Skill Development Policy which is now inplace. The NSDC Board has received a large numberof proposals for providing funding support for skilldevelopment and due diligence in respect of theseproposals is under way.

Unique Identification Authority of India(UIDAI)11.28 On June 25, 2009 the Cabinet approved thecreation of the position of Chairperson, UniqueIdentification Authority of India (UIDAI). On July 30,2009 the Prime Minister has also constituted a


council under his chairmanship to advice the UIDAIand ensure coordination between the ministries,stakeholders and partners. The council will advicethe UIDAI on programme, methodology andimplementation to ensure coordination betweenministries/departments, stakeholders and partners.It will also identify specific milestones for earlycompletion of the project. Initiatives like setting upof the UIDAI have been taken to bring in efficiency inthe implementation of Government programmes.Once fully operational, the scheme will, besidesfacilitating financial inclusion, ensure bettergovernance and improved service delivery so thatthe targeted group of people is actually benefited bythe schemes implemented by the Centre and States.Subsequently, the Government constituted a CabinetCommittee on UIDAI on October 22, 2009. TheCommittee, inter-alia, will look into all issues relatingto the UIDAI including its organisation, plans,policies, programmes, funding and methodology tobe adopted for achieving the objectives of theAuthority. The main features of the UIDAI model asper the strategy paper prepared by the UIDAI andbroadly endorsed by the Prime Minister’s councilon the UIDAI are given below.

The UID number will only provide identity:The UIDAI’s purview will be limited to the issueof unique identification numbers linked to aperson’s demographic and biometric information.The UID number will only guarantee identity, notrights, benefits or entitlements.

The UID will prove identity, not citizenship:All residents in the country can be issued aunique ID. The UID is proof of identity and doesnot confer citizenship.

A pro-poor approach: The UIDAI envisions fullenrolment of residents, with a focus on enrollingIndia’s poor and underprivileged communities.The Registrars that the Authority plans to partnerwith in its first phase – the NREGA, RSBY andPDS – will help bring large numbers of the poorand underprivileged into the UID system. TheUID method of authentication will also improveservice delivery for the poor.

Enrolment of residents with properverification: Existing identity databases in Indiaare fraught with problems of fraud and duplicate/ghost beneficiaries. To prevent this from seepinginto the UIDAI database, the Authority plans toenrol residents into its database with properverification of their demographic and biometric

information. This will ensure that the datacollected is clean from the start of theprogramme. However, much of the poor andunderserved population lacks identitydocuments, and the UID may be the first form ofidentification it has access to. The Authority willensure that the Know Your Resident(KYR)standards don’t become a barrier for enrollingthe poor, and will devise suitable procedures toensure their inclusion without compromising onthe integrity of the data.

A partnership model: The UIDAI approachleverages the existing infrastructure ofGovernment and private agencies across India.The UIDAI will be the regulatory authoritymanaging a Central ID Data Repository (CIDR),which will issue UID numbers, update residentinformation and authenticate the identity ofresidents as required.

Enrolment will not be mandated: The UIDAIapproach will be a demand-driven one, wherethe benefits and services that are linked to theUID will ensure demand for the number. This willnot, however, preclude Governments orRegistrars from mandating enrolment.

The UIDAI will issue a number, not a card:The Authority’s role is limited to issuing thenumber. This number may be printed on thedocument/card that is issued by the Registrar.

Process to ensure no duplicates: Registrarswill send the applicant’s data to the CIDR forde-duplication.The CIDR will perform a searchon key demographic fields and on the biometricsfor each new enrolment, to ensure that noduplicates exist.

Timelines: The UIDAI will start issuing UIDs in12-18 months, and it plans to cover 600 millionpeople within four years from the start of theproject. This can be accelerated if moreRegistrars partner with the Authority for bothenrolment and authentication.The adoption ofUIDs is expected to gain momentum with time,as the UID number establishes itself as the mostaccepted identity proof in the country.

Education11.29 The 86th Constitutional Amendment Act2002 led to insertion of Article 21-A in Part III of theConstitution that made free and compulsoryeducation for all children between 6 and 14 years ofage, a fundamental right. The Right of Children to


Free and Compulsory Education Act 2009 to providefor free and compulsory education for all children ofthe age 6 to 14 years, was published in the Gazetteof India on August 27, 2009 and has the followingsalient features:

Every child of the age 6-14 years shall have aright to free and compulsory education in aneighbourhood school till completion ofelementary education ;

The appropriate Government and the localauthority shall establish, within such area or limitsof neighbourhood, a school where it is not soestablished, within a period of three years;

The Central and State Governments shall haveconcurrent responsibility for providing funds forcarrying out the provisions of this Act;

It shall be the duty of every parent or guardian toadmit or cause to be admitted his or her child orward to an elementary education in theneighbourhood school;

No school or person shall, while admitting achild, collect any capitation fee and subject thechild or his or her parents or guardians to anyscreening procedure;

No teacher shall engage himself or herself inprivate tuition or private teaching activity;

The Central Government shall constitute bynotification a National Advisory Council,consisting of members to be appointed fromamongst persons having knowledge andpractical experience in the field of elementaryeducation and child development for advising theCentral Government on implementation of theprovisions of the Act in an effective manner.

Elementary and Secondary Education Schemes

11.30 Universalization of elementary education ofadequate quality to ensure satisfactory learningstandards among children is an objective that needsto be pursued vigorously. Keeping this objective inview, the progress made in some of the importantelementary and secondary education schemes isgiven below :

Sarva Shiksha Abhiyan (SSA): The SSA is beingimplemented in partnership with the States toaddress the needs of children in the age groupof 6-14 years. The achievements of the SSA tillSeptember end 2009 are opening of 2,88,155new schools, construction of 2,40,888 school

buildings, construction of 10,26,831 additionalclassrooms, 1,84,652 drinking water facilities,construction of 2,86,862 toilets, supply of freetextbooks to 9.05 crore children, appointmentof 10.11 lakh teachers and in-service training for21.79 lakh teachers. There has been significantreduction in the number of out-of-school childrenon account of SSA interventions.

Rashtriya Madhyamik Shiksha Abhiyan (RMSA):A new centrally sponsored scheme, the RMSA,to enhance access to secondary education andimprove its quality was launched in March 2009.The objectives of the scheme are to achieve anenrolment ratio of 75 per cent for Classes IX-Xwithin five years by providing a secondary schoolwithin reasonable distance of every habitation,to improve quality of education imparted atsecondary level through making all secondaryschools conform to prescribed norms, to removegender, socio-economic and disability barriers,universal access to secondary level educationby 2017, i.e. by the end of 12th Five Year Planand universal retention by 2020. The CentralGovernment shall bear 75 per cent and the StateGovernments 25 per cent of the projectexpenditure during the Eleventh Five Year Plan.The funding pattern will be 90:10 for the north-eastern States.

National Programme of Midday Meals inSchools: Under this programme, theGovernment has revised the food norm for upperprimary children by increasing the quantity ofpulses from 25 to 30 g, vegetables from 65 to75 g and decreasing the quantity of oil and fatfrom 10 to 7.5 g. Upward revision of the cookingcost (excluding labour and administrativecharges) for primary to Rs 2.50 and for upperprimary to Rs 3.75 has also been made. Thecooking cost now includes the cost of pulses,vegetables, oil and fats, salt and condimentsand fuel. A separate provision for payment ofan honorarium to a cook-cum-helper @ Rs 1000per month has been made. Transportationassistance for 11 Special Category States—Assam, Arunachal Pradesh, Himachal Pradesh,Jammu & Kashmir, Manipur, Meghalaya,Nagaland, Sikkim, Uttarakhand and Tripura—has been revised to the rate prevalent under thePublic Distribution System (PDS) in theseStates in place of the existing assistance at aflat rate of Rs 125 per quintal. The new ratesare effective from December 1, 2009. Besides


the cost of construction of kitchen-cum-storehas been revised. The cooking cost, honorariumand cost of construction of kitchen-cum-storewill be shared between the Centre and thenorth-eastern States on a 90:10 basis and otherStates / UTs on a 75:25 basis.

The Kasturba Gandhi Balika Vidyalaya (KGBV):The KGBV scheme was launched in July 2004for setting up residential schools at upperprimary level for girls belonging predominantlyto the SC, ST, OBC and minority communities.There are 2573 KGBVs reported to have beensanctioned in the States and 1.96 lakh girlsbelonging to the SC,ST,OBC & minoritycommunities enrolled in them.

Model Schools: Under the centrally sponsoredscheme to establish 6000 high-quality modelschools at block level as benchmarks ofexcellence, the first phase of which waslaunched in November 2008, 419 schools in 12States have been approved by the Grants-in-aidCommittee (GIAC) during 2009. So far 167schools in six states have been sanctioned.

Girls Hostels In Educationally BackwardBlocks: Under another centrally sponsoredscheme to set up Girls Hostels with 100 seatsin about 3,500 educationally backward blocks,launched in October 2008, 647 hostels in 14States have been approved by the GIAC during2009. So far 163 hostels in seven states havebeen sanctioned.

Examination Reform

11.31 Government policies have been focusing onproviding quality education and upgrading skills aswell as creating a more child-friendly educationalenvironment. After wide consultations held by theCentral Board of Secondary Education (CBSE)with various stakeholders including principals,teachers, parents, students, academics and thepublic, some important decisions were taken(see Box 11.4).

11.32 The Annual Status of Education Report(ASER) facilitated by Pratham, a non-governmentalorganization (NGO), is an annual survey of ruralchildren conducted by the citizens of India everyyear since 2005. In 2009 which is its fifth year, theASER was conducted in 575 districts, over 16,000villages and 3,00,000 households, surveying almost7,00,000 children. Over five years, the ASER hasobserved a clear rise in enrolment (Box 11.5).

Box 11.4 : Examination reformsImportant decisions taken for reforming the examinationsystem are as follows:

There will be no Class X board examination with effectfrom 2011 in CBSE schools.

The students of Classes IX and X will be assessed onthe basis of CCE (Continuous and ComprehensiveEvaluation) to be implemented at school level. CCEwill be applicable to Class IX students from the session2009-10.

For students who wish to move out of their schoolsand for students in schools that have no highersecondary classes, on-demand examination will beoffered by the CBSE from 2011 onwards. Though it isnot required for students continuing in the sameschool in Class XI, they will have the option to appearfor on-demand examination to get themselvesassessed.

It has been decided to replace the present system ofawarding marks by grades in all subjects in the ClassX board examination to be conducted by the CBSE in2010. Such grading would be continued for on-demandexamination of 2011 and beyond and also for CCE.

Higher and Technical Education

11.33 Quality higher and technical educationincreases the employability of the youth and canhelp reap the benefits of India’s looming demographicdividend. Some recent steps (see also Box 11.6) inthis direction are given below :

Scheme of Sub-Mission on Polytechnics underCoordinated Action for Skill Development: During2009, 175 districts have been covered forestablishment of New polytechnics under theScheme with financial support of Rs 425.00crore.

Community Development through Polytechnics:Under this revamped scheme, 703 polytechnicshave been included for implementation of thisscheme.

Indian Institutes of Technology (IITs) : Two newIITs at Indore and Mandi started functioning fromthe academic session 2009-10.

Indian Institutes of Management (IIMs): Duringthe Eleventh Five Year Plan, one new IIM,namely the Rajiv Gandhi Indian Institute ofManagement (RGIIM), Shillong (Meghalaya), hasbeen established and has commenced its first


Box: 11.5 Main findings of ASER 2009In 2009, 96 per cent of children in the age group 6 to 14 in rural India are enrolled in school.Fewer girls in the age group 11-14 years were out of schoolIn 2009 as in 2008, well over 50 per cent of 5 year olds enrolled in school.Learning levels have been improving in Std 1. Overall, the percentage of children in Std 1 who can recognize letters ormore has increased from 65.1 per cent in 2008 to 68.8per cent in 2009. Similarly there is an increase in numberrecognition, with the percentage of children recognizing numbers or more increasing from 65.3 per cent in 2008 to 69.3per cent in 2009.The all-India figure for the percentage of all rural children in Std 5 reading Std 2-level text shows a decline from 56.2 percent in 2008 to 52.8 per cent in 2009. This means that well over 40 per cent of all rural children in Std 5 in India are atleast three grade levels behind.In reading, for government school children in Std 5 in Tamil Nadu there is an 8 percentage point increase over 2008levels. Karnataka and Punjab also show improvements over the last year. There is hardly any change in other states inreading as compared to 2008.In maths, for children in Std 5, for the country as a whole, the ability to do division problems has hardly improved.However , seven states show increases of 5 to 8 percentage points. These states are Himachal Pradesh, Punjab, Assam,West Bengal, Orissa, Andhra Pradesh and Karnataka.Nationally, between 2007 and 2009, the percentage of children taking paid tuition increased for every class, in bothgovernment and private schools. Only Kerala and Karnataka show a small but consistent decline in the incidence oftuition across government school children in most classes.There is an increase in useable toilets and improvements in availability of drinking water. All-India figures indicate thatoverall, the percentage of schools with no water or toilet provision is declining over time. Water is available in 75 per centof government primary schools and 81 per cent of upper primary schools.Comparisons across the three years (2005, 2007 and 2009) indicate that children’s attendance in school, as observed ona random day in the school year, varies considerably across states. There are states like Bihar where less than 60 per centof enrolled children were attending on the day of the visit compared to southern states where average attendance is wellabove 90 per cent. In addition, states like Rajasthan, Uttar Pradesh, Jharkhand, Orissa and Madhya Pradesh need topay more attention to raising attendance in schools. In most states, on the day of the visit, close to 90 per cent ofappointed teachers were present in the school.

Source : ASER 2009 Press release dated January 15, 2010 as obtained from website http://asercentre.org/asersurvey/aser09/pdfdta/......

Box 11.6 : Technical education reforms: Initiatives by the All-India Council for Technical Education(AICTE)In order to overcome imbalances in technical education, the AICTE has taken certain initiatives. In order to reduce theimbalance between engineering education and polytechnic education, the Council has permitted a second shift of polytechnicin an existing polytechnic institution and also a second shift of polytechnic in an existing engineering institution. Keepingin view the regional imbalance in student intake among various States of the country, the Council has allowed a secondshift of engineering in existing colleges only in those States where the number of seats available in engineering colleges perlakh of population is less than the all-India average. For a balanced growth of various streams of education in engineeringand technology, the Council has taken a policy decision to allow establishment of new engineering institutions with at leastthree conventional branches as a mandatory requirement in States where the number of seats available in engineeringcolleges per lakh of population is more than the all-India average, whereas in states where the number of seats available inengineering colleges per lakh of population is less than the all-India average, no such restriction is applicable.

academic session from 2008-2009 and theremaining will be set up in Tamil Nadu,Jharkhand, Chhattisgarh, Haryana, Uttarakhandand Rajasthan.

Establishment of New Central Universities : TheCentral Universities Ordinance 2009 waspromulgated by the President on January 15,

2009 for the conversion of three State Universitiesin Madhya Pradesh, Chhattisgarh andUttarakhand into Central Universities andestablishment of a new Central University eachin twelve States. The Ordinance wassubsequently replaced by the CentralUniversities Act 2009. While the three States


Universities stood converted immediately onpromulgation of the Ordinance, 11 new CentralUniversities have also been set up in Bihar,Gujarat, Haryana, Himachal Pradesh,Jharkhand, Karnataka, Kerala, Orissa, Punjab,Rajasthan and Tamil Nadu, which did not have aCentral University. Most of them have alreadystarted their academic activities from temporarypremises. The Central Universities (Amendment)Ordinance 2009 was promulgated on October20, 2009 to rename the Central University ofJammu & Kashmir the Central University ofKashmir with territorial jurisdiction limited toKashmir division and to establish a new universityby the name of the Central University of Jammuhaving territorial jurisdiction extending overJammu division.

National Institute of Technology (NITs): TheGovernment of India decided to set up 10 newNITs during the Eleventh Five Year Plan in theStates/UTs which do not at present have NITs.Accordingly, the Government has approvedsetting up of 10 new NITs in Meghalaya, Manipur,Mizoram, Nagaland, Sikkim, Arunachal Pradesh,Goa (also catering to the needs of Daman &Diu, Dadra & Nagar Haveli and Lakshadweep),Puducherry (also catering to the needs of A&NIslands), Delhi (also catering to the needs ofChandigarh) and Uttarkhand.

One Regional Centre of the Indira GandhiNational Tribal University (IGNTU) Amarkantakhas been started in Manipur.

A scheme to provide interest subsidy for a limitedperiod on the educational loans for studentsbelonging to economically weaker section forpursuing professional studies has been launched.

Health11.34 An assessment of the performance of thecountry’s health-related indicators would suggest thatsignificant gains have been made over the years(Table 11.9). However, despite the progress, Indiafares poorly in most of the indicators in comparisonwith a number of developing countries like China andSri Lanka. In addition, the progress in healthindicators has been quite uneven across regions(large-scale inter-State variations), gender (male-female differences) as well as space (with significantrural-urban differences).

11.35 The country has a well-structured three-tierpublic health infrastructure, comprising CommunityHealth Centres (CHCs), Primary Health Centres(PHCs) and sub-centres (SCs) spread across ruraland semi-urban areas and tertiary medical careproviding multi-speciality hospitals and medicalcolleges located almost exclusively in urban areas.Improvements in health indicators can be attributedin part to this network of health infrastructure.However, inadequacies in this infrastructure includingshortage of personnel, resulted in glaring gaps incoverage and outreach of services, particularly inthe rural areas. In order to bridge this gap and provideaccessible, affordable, equitable health care, theGovernment has launched a large number ofprogrammes and schemes.

Table 11.9 : India — Selected health indicators

Sl. No. Parameter 1981 1991 Current level

1. Crude Birth Rate (CBR) (Per 1000 Population) 33.9 29.5 22.8 (2008)

2. Crude Death Rate (CDR)(Per 1000 Population) 12.5 9.8 7.4 (2008)

3. Total Fertility Rate (TFR)(Per women) 4.5 3.6 2.7 (2007)

4. Maternal Mortality Rate (MMR) (Per 100,000 live births) NA NA 254 (2004-06)

5. Infant Mortality Rate (IMR)(Per 1000 live births) 110 80 53 (2008)

Male 52

Female 55

6. Child (0-4 years) Mortality Rate per 1000 children) 41.2 26.5 16.0 (2007)

7. Life Expectancy at Birth: (1981-85) (1989-93) (2002-06)Total 55.5 59.4 63.5

Male 55.4 59.0 62.6

Female 55.7 59.7 64.2

Source : Ministry of Health and Family Welfare / RGI


National Rural Health Mission (NRHM)

11.36 The NRHM was launched in 2005 to provideaccessible, affordable and accountable qualityhealth services to rural areas with emphasis on poorpersons and remote areas. It is beingoperationalized throughout the country, with specialfocus on 18 states, which include eight EmpoweredAction Group States (Bihar, Jharkhand, MadhyaPradesh, Chhattisgarh, Uttar Pradesh, Uttarakhand,Orissa and Rajasthan), the eight north-easternStates, Himachal Pradesh and Jammu & Kashmir.

11.37 Among major innovations of the NRHM arethe creation of a cadre of Accredited Social HealthActivists (ASHA) and improved hospital care,decentralization at district level to improve intra andinter-sectoral convergence and effective utilizationof resources through PRIs, NGOs and thecommunity in general. The NRHM further aims toprovide an overarching umbrella to the existingprogrammes including the Reproductive Child HealthProject (RCH-II), Integrated Disease Surveillanceand other programmes for treatment of malaria,blindness, iodine deficiency, filaria, kala azar, TBand leprosy by strengthening the public healthdelivery system at all levels. The SCs, PHCs andCHCs are proposed to be revitalized through betterhuman resource management, including provision

of additional manpower, clear quality standards,revamping of existing medical infrastructure, bettercommunity support and untied funds to facilitatelocal planning and action so as to achieve the goalslaid down in the National Population Policy 2000.Further, the Mission, in a sector-wide approachaddressing sanitation and hygiene, nutrition and safedrinking water as basic determinants of good healthseeks greater convergence among the relatedsocial-sector departments, i.e. AYUSH, Women andChild Development, Sanitation, ElementaryEducation, Panchayati Raj and Rural Development.The expected outcomes of the Mission includereduction of IMR to below 30 per1,000 live births,MMR to below 100 per1,00,000 live births and TFRto 2.1 by 2012. ( Box 11.7).

11.38 The NRHM has many achievements as statedabove. The Comptroller and Auditor General (CAG)Report on the basis of a performance audit has alsoobserved that the increased patient inflow at PHCsand CHCs and improved institutional deliveries andimmunization were an indicator of the Mission’spositive impact on health care delivery. The innovativepractice of engaging ASHAs has had a positiveimpact on taking health care to and enhancingawareness of the patient. However, as per the CAGreport, the programme also suffers from certain

Box 11.7 : Achievements under the NRHMASHAs/Link Workers: So far 7.36 lakh ASHAs have been selected, 6.92 lakh trained at least in the first module andthere are 4.95 lakh with drug kits in their respective villages.

Addition of Human Resources: Under the NRHM, 2,474 specialists, 8,782 MBBS doctors, 26, 253 staff nurses, 46,296 auxiliary nurse midwives (ANMs), 12,485 paramedics have been employed on contract .

Conversion of Health Facilities into 24 X 7: A total of 14,716 Additional Primary Health Centres (APHCs), PHCs,CHCs and other sub- district facilities are functional 24 x 7.

Janani Suraksha Yojana Beneficiaries: Over 2 crore women have so far been covered under the Janani SurakshaYojana (JSY).

Rogi Kalyan Samitis (RKSs): So far 573 district hospitals (DHs), 4,217 CHCs, 1,111 other than CHC hospitals and16,568 PHCs have their own Rogi Kalyan Samitis (RKSs) with untied funds for improving quality of health services.

Village Health and Sanitation Committees: So far 4.41 lakh villages (68 per cent) have their own Village Health &Sanitation Committees and each has been provided Rs 10, 000/- as untied grant per year.

Village Health and Nutrition Days(VH&NDs): There have been 35 lakh VH&NDs in 2006-07, 49 lakh VH&NDs in2007-08, 58 lakh VH&NDs in 2008-09 and 29 lakh VH&NDs so far in 2009-10 to reach basic health services.

Mobile Medical Units (MMUs): 343 MMUs functional so far.

Ayurveda, Yoga & Naturopathy, Unani, Siddha and Homeopathy (AYUSH) services have been co-located in 9,608health facilities and 7,399 AYUSH doctors and 3,110 AYUSH paramedics have been added to the system.

Programme Management Units: Under the NRHM, 580 District Programme Managers, 577 District AccountsManagers, 525 District Data Managers, 639 District Programme Management Units (DPMUs), 3004 Block Managers,3691 Accountants, 2896 Block PMUs have been added.


weaknesses which need to be addressed to makethe NRHM more beneficial. These include thefollowing:

The NRHM initiated decentralized bottom-upplanning. However, district-level annual planswere not prepared during 2005-08 in nine Statesand in 24 States/UTs, block- and village-levelannual plans had not been prepared at all.

Village-level health and sanitation committeeswere still to be constituted in nine States.

The RKSs formed at many health centres, aimingto develop community ownership of the healthcare delivery system, were characterized byweak or absent grievance redressalmechanisms, outreach and awareness-generation efforts.

Funds for local action through untied grants andannual maintenance grants to health centresremained mostly unspent. The NRHM adoptedan inter-sectoral convergence approach to healthcare. However, the committee on inter-sectoralconvergence did not meet frequently.

Release of funds to State Health Societies(SHSs) and consequently to district and blocklevels required further streamlining to ensureprompt and effective utilization of funds. Fundsadvanced by the SHSs to lower- level formationscontinue to be treated as expenditure by theSHSs, regardless of whether these have actuallybeen utilized.

The Mission has developed the Indian PublicHealth Standards (IPHSs) to assist healthcentres improve their quality of health care andthus upgrade the capacity of the health deliverysystem. However, the ratio of population to healthcentres remained low with the targeted numberof new health centres not being established.Basic facilities (proper buildings, hygienicenvironment, electricity and water supply, etc.)were still absent in many existing health centreswith many PHCs and CHCs being unable toprovide guaranteed services such as in-patientservices, operation theatres, labour rooms,pathological tests, X-ray facilities andemergency care.

Quick response MMUs, meant to take medicalcare to the patient’s doorstep in far-flung regions,had not been operationalized in many Stateseven though substantial funds had been releasedfor the purpose.

The shortage of service providers at different levelsexisted. While contract workers have beenengaged to fill vacancies, there are stillshortages of specialist doctors at CHCs,adequate staff nurses at CHCs/PHCs and ANMs/multi-purpose workers at SCs.

In nine States, stocks of essential drugs,contraceptives and vaccines adequate for twomonths as required under norms were notavailable at any of the test-checked PHCs andCHCs.

Strengthening Primary Health Infrastructureand improving service delivery

11.39 There has been a steady increase in healthcare infrastructure available over the plan period(Table-11.10 ). However, there is still a shortage of20,486 SCs, 4,477 PHCs and 2,337 CHCs as perthe 2001 population norm. Further, almost 29 percent of the existing health infrastructure is in rentedbuildings. Poor upkeep and maintenance and highabsenteeism of manpower in rural areas are the mainproblems in the health delivery system in the publicsector. The NRHM seeks to strengthen the publichealth delivery system at all levels.

Janani Suraksha Yojana( JSY)11.40 This 100 per cent centrally sponsored schemewas launched with a focus on demand promotion forinstitutional deliveries in States and regions wherethese are low. It targeted lowering of the MMR byensuring that deliveries were conducted by skilledbirth attendants. The JSY scheme has shown rapidgrowth in the last three years. The increase ininstitutional deliveries, coupled with improvement ininfrastructure, manpower and training has resultedin significant improvement of Institutional deliveriesin all major States except Jharkhand as per theDistrict Level Household and Facility Survey (DLHS)III data as compared with DLHS II including in thefive major states of U P, Rajasthan, M P, Orissa and

Table 11.10 : Health care infrastructure

SC/PHC/CHC*(March 2007) 1,73,770

Dispensaries and hospitals 33,855(all) (April 1, 2008)**

Nursing personnel (2008)** 15,72,363

Doctors (modern system) (2008)** 84,852

* RHS : Rural Health Statistics in India 2008.** National Health Profile, 2008.


Bihar. A mid-term evaluation of the Reproductive andChild Health (RCH) II programme also confirmedthe increase in the number of JSY beneficiaries.

Pradhan Mantri Swasthya Suraksha Yojana(PMSSY)

11.41 The PMSSY was launched with the objectiveof correcting regional imbalances in the availabilityof affordable/reliable tertiary health care services andto augment facilities for quality medical educationin the country. The PMSSY has two componentsin its first phase: (i) Setting up of six All-IndiaInstitute of Medical Science (AIIMS)-likeinstitutions—Under the first phase of the PMSSY,the Government has decided to set up six AIIMS-like institutions, one each in the States of Bihar(Patna), Chhattisgarh (Raipur), Madhya Pradesh(Bhopal), Orissa (Bhubaneshwar), Rajasthan(Jodhpur) and Uttranchal (Rishikesh). These Stateswere identified on the basis of their socio-economicvulnerabilities. (ii) Upgradation of 13 existingGovernment medical colleges/ institutions in tenStates. In most of the colleges, most of the workis expected to be completed this year, while in therest, it would be completed in 2010-11.

National AIDS Control Programme (NACP)11.42 It was estimated that there were 2.31 millionpersons living with HIV/AIDS (PLHA) in India in2007. While the prevalence of HIV in the generalpopulation is estimated to be 0.34 per cent (HIVSentinel Surveillance 2007), it is much higher inhigh-risk groups like female sex workers, menhaving sex with men and injecting drug users, SingleMale Migrants and Long Distance Truckers are alsovulnerable to HIV/AIDS. In India, the major mode ofHIV transmission is heterosexual which accountsfor 85.6 per cent of cases followed by mother tochild transmission (6 per cent) while injecting druguse, blood and blood products and homosexualroute account for 1 to 1.4 per cent of HIV positivecases. Based on the Sentinel Surveillance, 156districts have been identified as category A districtswhere prevalence of HIV amongst antenatal clinicattendees (proxy for general population) is greaterthan 1 per cent; and 39 districts are category Bdistricts where prevalence amongst high-riskpopulation is greater than 5 per cent. These districtsare given high priority in the implementation of theProgramme. The NACP-III is being implemented forthe period 2007-12 with an investment of Rs 11,585crore.. Major achievements during 2009-10 includescaling up of targeted interventions for high-risk

groups to 1,281,counselling and HIV testing 91.9lakh persons including 38.8 lakh pregnant womenand providing anti-retroviral treatment to around 2.88lakh patients as of November 2009. New strategiesinitiated during the year include setting up of theDistrict AIDS Prevention and Control Unit (DAPCU),scheme of link workers in rural areas of category Aand B districts, collaboration with the NRHM andother National Health Programmes, preferred privateprovider scheme for management of sexuallytransmitted infections among high risk groups andsetting up of link anti-retroviral (link ART) centresto facilitate ARV drug dispensing.

11.43 Other programmes like the Revised NationalTuberculosis Control Programme (RNTCP), NationalVector Borne Disease Control Programme(NVBDCP), National Programme for Control ofBlindness (NPCB) and National Leprosy EradicationProgramme have also been strengthened.

11.44 Mainstreaming of AYUSH under the NRHMreceived topmost priority during the year. AYUSHfacilities were co-located with 1, 834 PHCs; 128CHCs; and 29 District Hospitals. Keeping in viewthe strengths of the AYUSH systems, new publichealth campaigns including Control of MaternalAnaemia through Ayurveda, Yoga for Health andUnani for Skin Diseases have been launched.Further, a National Yoga School Programme hasbeen launched in more than 100 schools in thecountry. The Government has also given priority toimplementing the National Mission on MedicinalPlants. A National Campaign on Amala waslaunched recently. Eight States have been coveredso far under this programme. The Government hasalso taken steps to accredit hospitals andeducational institutions to improve their standardsin collaboration with the Quality Council of India(QCI). To improve the quality, safety and efficacy ofAyurveda, Siddha and Unani drugs, a programmefor voluntary certification was launched from October1, 2009 in collaboration with the QCI. Around 5,000AYUSH practitioners were reoriented and trained sofar this year. Public-private partnership (PPP) hasbeen promoted as an important strategy in theAYUSH sector. A number of new projects includingtele-medicine projects in Homoeopathy in Tripuraand Bihar have been taken up. In order to promotethe AYUSH as well as provide employmentopportunities to people, especially women, in ruralareas of the country, ten AYUSH industrial clustershave been taken up at a proposed investment of Rs100 crore in different parts of the country. The


Government has granted recognition to the SowaRigpa (Amachi) system practised in the sub-Himalayan regions of the country in order to helpimprove health care as well as the economicconditions of the people of the area.

Women and Child Development11.45 The Integrated Child Development Services(ICDS) Scheme, was launched in 1975 with 33Projects and 489 Anganwadi centres (AWCs). Ithas been continuously expanded to uncovered areasand has now been universalized with theGovernment of India approving 7,076 projects and14 lakh AWCs including a provision for 20,000AWCs on demand. The Scheme has also beenrevised with respect to cost norms, feeding normsand the sharing pattern between States and theGovernment of India. Alongside gradual expansionof the Scheme, its budgetary allocation hasincreased. The Annual Plan outlay for 2009-10 forthe ICDS was Rs 6,705 crore which was enhancedto Rs 8,162 crore (RE). During 2009-10, an amountof Rs 5,299.53 crore has been released under theICDS to States/UTs up to January 14, 2010. Ofthe total number of 7,073 sanctioned ICDS projects,6,196 were operational by September 30, 2009. Of 13,56,027 sanctioned AWCs/mini-AWCs,10,78,973 were operational as on September 30,2009.

11.46 Two schemes are being implemented for thedevelopment of adolescent girls, namely the KishoriShakti Yojana (KSY) and the Nutrition Programmefor Adolescent Girls (NPAG). The KSY is anintervention for adolescent girls and aims ataddressing the self-development and nutrition andhealth status needs, literacy and numerical skillsand vocational skills of adolescent girls in the agegroup 11-18 years. The scheme is currentlyoperational in 6,118 ICDS projects. The NPAG isbeing implemented in 51 identified districts acrossthe country to provide 6 kg of free foodgrains perbeneficiary per month to undernourished adolescentgirls (11-19 years) irrespective of financial status oftheir families. Both the schemes are currently beingimplemented through the ICDS infrastructure. Theywill now be subsumed within a new scheme foradolescent girls, namely the Rajiv Gandhi Schemefor Empowerment of Adolescent Girls also namedSABLA. The new Scheme aims at empoweringadolescent girls along with an improvement in theirnutritional and health status and upgrading ofvarious skills like home, life and vocational skills(for girls aged 16 and above).

11.47 The Rajiv Gandhi National Creche Schemefor Children of Working Mothers provides forsupplementary nutrition, emergency medicines andcontingencies to children in the age group 0 – 6years. Up to March 31, 2009, 31,718 creches withapproximately 7,92,950 beneficiaries had beensanctioned to the implementing agencies. . Thefinancial norms have been enhanced from Rs 18,480to Rs 42,384 per creche per annum. Thehonorarium to creche workers has been enhancedfrom Rs 800 to Rs 2000 per month for two crecheworkers. The supplementary nutrition componenthas been raised from Rs 1.05 to Rs 2.08 per childper day for 25 children for 26 days in a month. TheIntegrated Child Protection Scheme (ICPS)launched in 2009-10 provides a safe and secureenvironment for comprehensive development ofchildren in the country who are in need of care andprotection as well as children in conflict with thelaw. The ICPS brings several existing child protectionprogrammes under one umbrella with some newinterventions. The scheme is now beingimplemented by the State Governments. The CentralGovernment is providing funds in a pre-defined cost-sharing ratio to the State Governments for settingup and running the various programme components.The budget allocation for the scheme during theEleventh Plan period is Rs 1,073 crore. A numberof States have so far agreed to implement thescheme by signing memorandums of understanding(MOUs) with the Government of India. The Schemefor the Welfare of Working Children in Need of Careand Protection provides for non-formal education,vocational training, etc. to working children tofacilitate their entry/re-entry into mainstreameducation. There are 121 projects currently beingfunded under the Scheme, covering 12,100 children.

11.48 A conditional cash transfer scheme,Dhanlakshmi, for the girl child was launched as apilot project in March 2008. The scheme providesfor cash transfers to the family of a girl child onfulfilling certain specific conditionalities relating tobirth and registration, immunization and enrolmentand retention in schools up to Class VIII. Thescheme is being implemented in 11 blocks acrossseven States. An amount of Rs 5.95 crore wasreleased during 2008-09, which is expected tobenefit 79,555 girl children in identified blocks ofAndhra Pradesh, Chattisgarh, Orissa, Jharkhandand Punjab. At present, 56 ministries/departmentshave set up Gender Budget Cells and 28 ministries/departments have reflected allocations for women


in the Gender Budget Statement of the UnionBudget in 2009-10.

11.49 The Support to Training and EmploymentProgramme for Women (STEP) seeks to provideupdated skills and new knowledge to poor womenin 10 traditional sectors for enhancing theirproductivity and income generation. During the year2008-09, 31,865 women have benefited from thescheme. Up to December 31, 2009 11 new projectshave been sanctioned and 12,866 beneficiariescovered under STEP in 2009-10. As of December31, 2009, 318 Swadhar homes and 237 helplinesare functioning across the country under theSwadhar Scheme which aims to provide the primaryneeds of shelter, food, clothing and care tomarginalized women/ girls who are without anysocial and economic support. The Scheme alsoseeks to provide them emotional support andcounselling and to rehabilitate them socially andeconomically through education, awareness, skillupgradation and personality development throughbehavioural training. Ujjawala, a comprehensivescheme for prevention of trafficking and for rescue,rehabilitation, re-integration and repatriation ofvictims of trafficking for commercial sexualexploitation, was launched in December 2007.During the current year, up to December 31, 2009,financial assistance was provided for 17 newprojects to NGOs, taking the total number ofapproved projects to 96. The total number ofrehabilitation centres under these projects went upto 58 as compared to 48 in 2008-09, creatingcapacity for care and rehabilitation of 2,900 victimsof trafficking.

Welfare and Development of SCs, STs,OBCs and other weaker sections11.50 Programmes for educational development,and economic and social empowerment of sociallydisadvantaged groups and marginalized sectionsof society are implemented through StateGovernments, UT Administrations, and NGOs.Public Private Partnership approach is also one ofthe strategies for attaining the objective ofdevelopment of the targeted groups.

Scheduled Castes (SCs)

11.51 The Government is committed towards theeducational development of SCs. A number ofschemes are being implemented to encourage SCstudents to continue their studies from school tohigher education level. During the year 2009-10,

the physical target under the Scheme of Pre-MatricScholarships was about 6.60 lakh beneficiaries/students. Against an allocation of Rs 80 crore, anamount of Rs 60.99 crore was released to StateGovernments/UT Administrations for providingscholarships to SC students during the year uptoDecember 31, 2009. The rates of scholarship,annual ad hoc grant, pattern of funding and eligibilitycriteria have been revised with effect from April 1,2008. Under the Scheme of Post MatricScholarships the physical target was 38 lakhbeneficiaries during 2009-10. Rs728.91crore wasreleased to State Governments/UT Administrationsagainst a revised allocation of Rs 830 crore up toDecember 2009 during the financial year. The earliercentrally sponsored scheme of hostels for SC boysand girls was revised and renamed Babu JagjivanRam Chhatravas Yojna with effect from January 1,2008. As part of this revision, Central assistancefor the construction of girls hostels was raised from50 per cent to 100 per cent. During 2009-10, thephysical target under the scheme was to construct44 hostels for girls and 30 hostels for boys. Rs 5.98crore was released under the scheme against anallocation of Rs 90 crore up to December 2009during the financial year. During 2009-10, anamount of Rs. 80 crore was released by December2009 as against the revised allocation of 105 croreunder the Rajiv Gandhi National Fellowship for SCstudents for 1,333 new fellowships and 5,332renewals for SC students pursuing M Phil and PhD courses.

11.52 The Scheme of Top Class Education forScheduled Castes(SCs) provides financialassistance for quality education to SC students up todegree/ post degree level without any burden on thepupil or his/her family. SC students who secureadmission in the notified institutions are awardedscholarships. During 2009-10, the amount releasedup to December 2009 was Rs 2.83 crore to assistabout 1,520 SC students studying in institutions likethe IITs and IIMs as against a revised allocation of Rs10 crore. The Scheme of National OverseasScholarships for Scheduled Caste Candidatesprovides financial assistance to finally selectedcandidates pursuing master-level courses and Ph.Dsin engineering, technology and sciences abroad.Thirty awards are given per year. During 2009-10, theamount released was Rs 0.81 crore as against anallocation of Rs 5 crore up to December 2009.

11.53 Special Central assistance is given to theScheduled Caste Sub-Plan, a major scheme for


economic advancement of SCs. During 2009-10, thephysical target was to cover 6 lakh beneficiaries.An amount of Rs 381.60 crore was released toState Governments/UT Administrations against arevised allocation of Rs 480 crore up to December2009. The National Scheduled Castes Finance &Development Corporation provides credit facilities toSC beneficiaries who are living below double thepoverty line. During 2009-10, an amount of Rs 44crore was released to the Corporation uptoDecember 31, 2009 to enhance its equity to Rs1,089 crore. The Corporation has the target ofproviding loans to about 29,453 beneficiaries duringthe year. The National Safai Karamcharis Finance& Development Corporation provides credit facilitiesto safai karamcharis, scavengers and theirdependants for income-generating activities throughState channelizing agencies. During 2009-10, Rs 30crore was provided to enhance the equity of theCorporation to Rs 260 crore. The target of theCorporation is to benefit 23,270 persons during theyear.

Scheduled Tribes (STs)

11.54 For the welfare and development of the STs,an outlay of Rs 3,205 crore has been provided inthe Annual Plan for 2009-10, which is 33.82 percent higher than the outlay of Rs 2,121 crore for2008-09. The 2009-10 outlay has a Rs 900.50crore component provided as Special CentralAssistance (SCA) to the Tribal-Sub Plan (TSP),which includes Rs 100 crore for development offorest villages. An Additional Central Assistance(ACA) of Rs 500 core was also provided during2009-10 for a special initiative of providing residentialeducation to tribal children in Schedule V andNaxal-affected areas. The SCA to the TSP is a100 per cent grant extended to States as additionalfunding for family-oriented income-generatingschemes, creation of incidental infrastructure,extending financial assistance to self-help groupsfor community-based activities, and developmentof forest villages. Grants-in-aid under Article 275(1) are also being provided to States with anobjective to promote the welfare of the STs andimprove administration to bring them on par withthe rest of the States, and to take up such specialwelfare and development programmes which areotherwise not included in the Plan programmes.Under the Scheme of Post-Matric Scholarships, 100per cent financial assistance is provided to STstudents whose family income is less than or equalto Rs 1.08 lakh per annum to pursue post-matric-

level education including professional and graduateand postgraduate courses in recognized institutions.The Scheme of Top Class Education for STsprovides financial assistance for quality educationto 625 ST students per annum to pursue studiesat degree and post degree level in any of the 125identified institutes. The family income of thebeneficiary ST students from all sources shouldnot exceed Rs 2.00 lakh per annum. Financialassistance is also provided to 15 eligible STstudents for pursuing higher studies abroad inspecified fields at Masters and Ph.D level underthe National Overseas Scholarship scheme.

11.55 Economic empowerment of the STs bymeans of extension of financial support through theNational Scheduled Tribes Finance and DevelopmentCorporation (NSTFDC) continued. Financial supportis being extended to ST beneficiaries/ entrepreneursin the form of loans and micro-credit atconcessional rates of interest for income-generatingactivities. The Tribal Cooperative MarketingDevelopment Federation of India Limited (TRIFED)is engaged in marketing development of tribalproducts and their retail marketing through its salesoutlets. The responsibility for implementing theScheduled Tribes and Other Traditional ForestDwellers (Recognition of Forest Rights) Act vestswith the State/UT Governments. As per informationcollected from the States till December 31, 2009,more than 26.63 lakh claims have been filed andmore than 6.88 lakh titles have been distributed.Around 37, 000 titles are ready for distribution.There is great emphasis on the education of STgirls, especially in the low literacy areas and ascheme for Strengthening of Education among STgirls in Low Literacy Districts to bridge the gap inliteracy levels between the general female populationand tribal women is being implemented.

Minorities11.56 Five communities, namely Muslims,Christians, Sikhs, Buddhists and Parsis, werenotified by the Government as minority communitiesunder section 2(c) of the National Commission forMinorities Act 1992. As per the 2001 Census,minority communities constitute 18.42 per cent ofthe total population. For the development ofminorities, the Plan outlay was raised from Rs 1,000crore in 2008-09 to Rs 1,740 crore in 2009-10. Threescholarship schemes have been launchedexclusively for the minorities with a total provisionof Rs 450 crore in 2009-10 as against Rs 305 crorein 2008-09. A multi-sectoral development programme


to address the ‘development deficits’, especially ineducation, skill development, employment,sanitation, housing and drinking water, in 90minority-concentration districts (MCDs) has beenlaunched from 2008-09. The outlay for thisprogramme was Rs 990 crore in 2009-10. Thecorpus of the Maulana Azad Education Foundation(MAEF) has been enhanced from Rs 100 crore in2005-06 to Rs 425 crore in 2009-10 to expand itsactivities for implementation of educational schemesfor educationally backward minorities. Theauthorized share capital of the National MinoritiesDevelopment & Finance Corporation (NMDFC) hasbeen raised from Rs 650 crore in 2006-07 to Rs1,000 crore in 2009-10 for expanding its loan andmicro-finance operations to promote self-employment and other economic ventures amongbackward sections of the minority communities.Three new Plan schemes, namely (i) the MaulanaAzad National Fellowship for Minority Students, (ii)Computerization of records of State Wakf Boardsand (iii) Leadership Development of Minority Womenhave been launched during 2009-10.

Other Backward Classes(OBCs)11.57 The Government provides central assistanceto State Governments/UT Administrations foreducational development of OBCs. During 2009-10,under the Scheme of Pre-Matric Scholarships forOBCs, it was proposed to provide scholarship to10.80 lakh OBC students. An amount of Rs19.32crore was released against an allocation of Rs 30crore to the State Governments/ UT Administrationsup to December 2009 during the financial year.Under the Scheme of Post-Matric Scholarships forOBCs, it was proposed to provide scholarship to9.35 lakh OBC students. An amount of Rs 124.48crore was released against a revised allocation ofRs 180 crore to the State Governments/ UTAdministrations up to December 2009 during thefinancial year. In order to provide hostel facilitiesto OBC students studying in middle and secondaryschools, colleges and universities to enable themto pursue higher studies, during 2009-10 an amountof Rs 8.58 crore was released against a revisedallocation of Rs 30 crore for construction of 160hostels, out of which 53 are for girls. The NationalBackward Classes Finance & DevelopmentCorporation extends credit facilities to personsbelonging to backward classes for undertakingvarious income-generating activities includingagricultural and allied activities, artisanal andtraditional occupations, technical trades, self-employment, small-scale and tiny industry, small

businesses and transport services. During 2009-10, Rs 35 crore was provided as equity support tothe Corporation enhancing its equity to Rs 765crore. During the year, the Corporation aims toassist about 1.06 lakh persons.

Persons with Disabilities

11.58 A large number of programmes areimplemented through national and apex institutesdealing with various categories of disabilities. Theseinstitutes conduct short-term and long-term coursesfor various categories of personnel for providingrehabilitation services to those needing them. Underthe scheme of Assistance to the Disabled forPurchase/ Fitting of Aids and Appliances (ADIP),approximately 2 lakh persons with disabilities areprovided assistive devices every year. During 2009-10, an amount of Rs 23.02 crore was released toimplementing agencies up to December 2009against a revised allocation of Rs 70 crore forproviding assistive devices to persons withdisabilities. The target is to cover 2 lakh personswith disabilities. Rs 6.79 crore has been releasedup to December 2009 against a revised allocationof Rs 92.99 crore during 2009-10 under the DeenDayal Disabled Rehabilitation Scheme to voluntaryorganizations for running special schools for childrenwith hearing, visual and mental disability, vocationalrehabilitation centres for persons with variousdisabilities and manpower development in the fieldof mental retardation and cerebral palsy.

11.59 The Scheme of Incentives to Employers inthe Private Sector for Providing Employment toPersons with Disabilities was launched with effectfrom April 1, 2008. Under the Scheme, theGovernment will have to make payment of theemployer’s contribution to the Employees ProvidentFund and Employees State Insurance for the firstthree years as an incentive for every employee withdisabilities appointed on or after April 1, 2008 withmonthly emoluments up to Rs 25,000. During 2009-10, an amount of Rs 1 crore was released up toDecember 2009 against a revised allocation ofRs 3 crore under the scheme.

11.60 The National Handicapped Finance &Development Corporation provides credit facilitiesfor economic empowerment of persons withdisabilities with family income not exceeding Rs 2lakh in urban areas and Rs 1.6 lakh in rural areas.The Corporation provides loans at concessionalrates of interest to about 5,000 persons withdisabilities annually. During 2009-10, an amount ofRs 9 crore was released as equity support to the


Corporation. The target of the Corporation is toprovide loans to 7,000 persons with disabilities andtraining to 555 persons with disabilities during thefinancial year.

Social Defence Sector

11.61 Under the Scheme of Integrated Programmefor Older Persons, grants- in-aid are given to NGOsfor running old age homes (OAHs), day-care centres(DCCs) and mobile medical units (MMU). Thescheme has been revised with effect from April 1,2008. Besides an increase in the amount of financialassistance of existing projects, several new projectshave been made eligible for financial assistance underthe revised scheme. During 2009-10, Rs 8.80 crorewas released upto December 2009 against theallocation of Rs 22.00 crore. The Scheme targets toprovide support to 0.35 lakh beneficiries. TheMaintenance and Welfare of Parents and SeniorCitizens Act 2007 was enacted in order to ensureneed-based maintenance for parents and welfaremeasures for senior citizens. The Act has beennotified by 22 States and six UTs so far. Section 19of this Act enjoins State Governments to establishat least one old age home for 150 indigent seniorcitizens per district.

11.62 Keeping in view the changes in the drug abusescenario all over the world, the Scheme for Preventionof Alcoholism and Substance (Drugs) Abuse hasbeen extensively revised and merged with theScheme of Assistance to Voluntary Organisations forGeneral Grants-in-aid in the Field of Social Defence.The new Central Sector Scheme of Assistance forPrevention of Alcoholism and Substance (Drugs)Abuse and for Social Defence Services has come intoeffect from October 1, 2008. One of the salientfeatures of the Scheme is introduction of the provisionof food in the Integrated Rehabilitation Centres forAddicts to persons below the poverty line. Thehonorarium to service providers has also beenimproved. During 2009-10, Rs 10.15 crore wasreleased up to December 2009 against a revisedallocation of Rs 25 crore during the financial year. Thescheme targets benefiting 1.2 lakh persons. Foreffective implementation of social defenceprogrammes, personnel engaged in delivery ofservices in this area are being trained under varioustraining programmes being organized by the NationalInstitute of Social Defence. During 2009-10, anamount of Rs 5 crore was released up to December31, 2009 to the Institute against an allocation of Rs6 crore.

CLIMATE CHANGE

Status of Climate Change Negotiations11.63 Climate change has emerged as a highlydebated and controversial subject in recent times.Climate change by affecting the livelihood and healthof the people is intricately connected to humandevelopment and poverty issues.The United NationsFramework Convention on Climate Change(UNFCCC) 1992 and its Kyoto Protocol 1997 havelaid down the existing international regime foraddressing climate change. The UNFCCC requiresthe industrialized countries listed in Annex I of theConvention to reduce their emissions from 1990levels. The Kyoto Protocol mandates Annex Icountries to reduce their emissions by 5.6 per centover 1990 levels by 2012. The UNFCCC alsorecognizes that the extent to which developingcountry parties will take action to mitigate emissionswill depend on the effective implementation bydeveloped country parties of their commitmentsrelating to provision of financial resources and transferof technology.

11.64 Despite the commitments made bydeveloped countries as inscribed in the UNFCCCand its Kyoto Protocol, the available data show thatemissions in most of the Annex I countries, excepta few European countries, have been rising since1990. In recognition of the fact that climate changeis irreversible and that the developing countries arelikely to be impacted most if it is not urgentlyaddressed, the 13th Conference of Parties (CoP) tothe UNFCCC held at Bali in December 2007 adoptedthe Bali Action Plan (BAP) to enhance theimplementation of the Convention. The BAPexpected the developed countries (including theKyoto Protocol Parties and the US) to undertakecommitments to reduce emissions and encouragedthe developing countries to take nationallyappropriate mitigation actions as supported andenabled in terms of finance and technology providedby the developed countries. The BAP had mandatedthe parties to reach an agreed outcome on all itselements at the CoP 15 at Copenhagen in December2009 (Box 11.8).

Actions taken by India on climate change11.65 India’s total CO2 emissions are about 4 percent of total global CO2 emissions. India’s per capitaemissions, even with 8-9 per cent GDP growth everyyear for the next decade or two, are likely to be wellbelow developed country averages. Its energy


social, economic and technological measures foraddressing climate change. NATCOM I waspresented in 2004. The Government is engaged inpreparing NATCOM II, which will be presented to theUNFCCC in 2011. An expert committee set up bythe Government of India has studied the impact ofanthropogenic climate change on India and has comeout with its first set of findings and the researchagenda that the ministries need to follow andimplement in order to address India’s vulnerability toanthropogenic climate change impacts.

11.68 India has prepared a comprehensive NationalAction Plan on Climate Change (NAPCC) with a viewto achieving sustainable development with co- benefitin terms of climate change. Eight national missionsin the areas of solar energy, enhanced energyefficiency, sustainable agriculture, sustainablehabitat, water, Himalayan eco-system, increasingthe forest cover, and strategic knowledge for climatechange form the core of the National Action Plan.Besides, there are several initiatives envisaged inthe sectors pertaining to energy generation,transport, renewable energy, disaster managementand capacity building that are to be integrated withthe development plans of the ministries. The PrimeMinister’s Council on Climate Change, set up in June2007 monitors the preparation of the nationalMissions and coordination and implementation ofclimate change-related actions in India.

11.69 India’s Five Year Plans include a strategyfor sustainable growth resulting in low-carbonsustainable development. The Eleventh Five YearPlan includes an indicative target of increasing energyefficiency by 20 per cent by 2016-17. The NationalMission on Enhanced Energy Efficiencyimplemented by the Ministry of Power through theBureau of Energy Efficiency seeks to pursue thisgoal. Planning Commission estimates suggest thatIndia’s emission intensity has declined by 17.6 percent between 1990 and 2005 and that a 20 to 25 percent reduction in emission intensity between 2005and 2020 is possible. This will require that necessaryactions in specific sectors are undertaken to reduceemission intensity with necessary provisions offinancial and technological resources includingdomestic and international support for achieving low-carbon sustainable development.


11.70 The Government strategy of inclusive growthin recent years is reflected in programmes like BharatNirman aimed at improving the quality of life of people

Box 11.8 : CoP 15 at CopenhagenThe Copenhagen conference on climate change was heldfrom December 7-18, 2009 to discuss and reach an outcomeon climate change issues. At the Copenhagen conference,the Danish Presidency of the CoP15 had invited some ofthe Parties for a discussion on the relevant aspects ofclimate change and presented the results to the CoP in theform of a “Copenhagen Accord”. The talks centred onissues relating to a shared vision for long-term cooperativeaction of the Parties including a long-term emissionreduction goal to address climate change, mitigationactions of the Parties including specific measures neededto reduce deforestation in developing countries andsupport conservation and sustainable forestrymanagement, sectoral approaches to mitigation actionsincluding market and non-market based measures,adaptation to climate change, finance and technologyrequired to address climate change, and the necessarymechanism needed to facilitate the flow of such supportto the developing countries. An outcome could not bereached at Copenhagen. The CoP did not adopt the resultsof the discussion and only took note of the “Accord”. Ithas been decided to continue the negotiations with a viewto concluding them at the next CoP scheduled in Mexicofrom November 29 to December 10, 2010.

intensity of production has been falling withimprovements in energy efficiency, autonomoustechnological changes and economical use of energy.Its climate modelling studies show that its per capitaemissions will be around 2-2.5 tonnes of carbondioxide equivalent by 2020 and around 3-3.5 tonnesof carbon dioxide equivalent by 2030, as comparedto around 1-1.2 tonnes presently. India has conveyedthat its per capita emission levels will never exceedthe average levels of developed countries.

11.66 While engaging constructively with theinternational community on the issue, India has alsopursued a strong domestic agenda for addressingclimate change. It recognizes that a strategy foraddressing climate change has to be based onsustainable development. This is reflected in manyof the major programmes addressing climatevariability concerns. Current Government expenditurein India on adaptation to climate variability exceeds2.6 per cent of the GDP, with agriculture, waterresources, health and sanitation, forests, coastalzone infrastructure and extreme events being specificareas of concern.

11.67 As part of its international obligations underthe UNFCCC, India periodically prepares the NationalCommunication (NATCOM) that gives an inventoryof the greenhouse gases (GHG) emissions in India,and assesses the vulnerability and impacts andmakes appropriate recommendations regarding


living in rural areas. Besides, schemes like theNREGS have ensured that the rural poor are left withsufficient purchasing power for their basicrequirements, especially food, through guaranteedemployment. The recent revamp of the SJSRYreflects the Government commitment towardsalleviation of urban poverty also. However, theGovernment needs to look into further convergenceof schemes. There is also need to reduce the overlapbetween schemes being implemented by differentdepartments at the Centre and in the States as wellas between those implemented by the Centre andStates.

11.71 In spite of increased Government outlays inthe social sector in recent years, lack of identity

proof results in harassment and denial of services tothe poor and marginalized. As a result, there arestill leakages in the programmes/schemes and thebenefits do not reach the intended target groups ofindividuals/people in full. Providing identity proof tothe poor and the marginalized through the UIDAI willenhance their access to Government services, bothat State and Central levels, and will enable smootherdelivery of direct benefits to the poor and underserved.Specifically, it will improve the delivery of the flagshipschemes of the Central Government. This will alsoprevent leakages as well as wastages in theimplementation of these schemes. Success inreaching this objective can be further assured throughinvolvement of local communities and PRIs.

E-Survey 2011

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Transcript of E-Survey 2011