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COUNTRY REPORT ON INDIA:

ECONOMIC PERFORMANCE IN 2002-2004

AND OUTLOOK FOR 2005-2007

For

THE ECONOMIC AND SOCIAL SURVEY OF ASIA

AND THE PACIFIC 2005

______________________________________________________________________

Dr. Tarun Das*

Economic AdviserMinistry of Finance

Government of India

New Delhi-110001.

10 November 2004

______________________________________________________________________

* The paper expresses personal views of the author and should not be attributed to theviews of the Ministry of Finance or the Government of India. Author would like toexpress his gratitude to the Poverty and Development Division, ESCAP, United Nations,

Bangkok for providing an opportunity to prepare this paper, and the Ministry of Finance,

Government of India for granting him necessary permission for accepting this work.

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CONTENTS __ PAGES

ACRONYMS 4

A Macroeconomic Performance, Issues and Policies 5-15

1. Overview 5

2. Growth performance 7(a) Overall GDP outcome in 2001-2002 and outlook for 2003-2005 7(b) Determinants of GDP performance by major sectors 8(c) Determinants of GDP performance by major industries 11(d) Demand factors- Savings and investment 12(e) Employment and unemployment situation 13

3. Inflation 15-18(a)Movements in WPI and CPI 15(b)Price movements of major categories 16(c)Determinants of inflation 16(d)Inflation outlook 18

4. Trade and Exchange Rates 18-23(a) Exports and imports in 2001 and 2002 18(b) Composition of trade 19(c) Direction of trade 20(d) Trade policies and performance 22

(e) Exchange rate policies 23

5. Capital inflows and outflows 24-27(a) Balance of payments 24(b) Foreign investment 24(c) Foreign exchange reserves 25(d) External debt and debt service 26(e) Outlook for external sector for 2003-2005 27

6. Fiscal developments 28-34(a) Overall fiscal situation in 2001 and 2002 28(b) Fiscal deficit and financing 30

(c) Contingent liabilities 32(d) Public debt 337. Money and Finance 34-36(a) Monetary policies 34(b) Financial sector performance and policies 36

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8. Key policy issues and responses 37-39(a) Development policies 37(b) Fiscal policies 37(c) Unfinished agenda of reforms 38

Statistical Tables: 40-42

Table-1: Selected Economic Indicators 40-42

Part-B: Dynamics of population ageing: how India can respond? 43-59

1. Introduction 432. Social security system in India 433. Pension reforms in India 45

4. Social health insurance in India 475. Caring for the elderly people 506. Migration 51

Statistical Tables: 52-59

Table-2: Trend of major macro-economic indicators 1999-2007 52-59

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ACRONYMS

ADB Asian Development BankBOP Balance of PaymentsCPI Consumer Price Index

CRR Cash Reserve RatioECB External Commercial BorrowingEHTP Electronic Hardware Technology ParkEOU Export Oriented UnitEPCG Export Promotion Capital GoodsEPZ Export Processing ZoneEXIM Export Import PolicyFCCB Foreign Currency Convertible BondFDI Foreign Direct InvestmentFERA Foreign Exchange Regulation ActFIIs Foreign Institutional InvestorsFTZ Free Trade ZoneGDP Gross Domestic Product

GDR Global Depository ReceiptICOR Incremental Capital-Output RatioIDA Industrial Disputes ActIDBI Industrial Development Bank of IndiaIFCI Industrial Finance Corporation of IndiaMIGA Multilateral Investment Guarantee AgencyMODVAT Modified Value Added Tax NEER Nominal Effective Exchange Rate NPA Non performing assets NRI Non-Resident IndianOCB Overseas Corporate BodyOGL Open general licensePIO Person of Indian Origin

POL Petroleum, Oil and LubricantsPPP Purchasing Power ParityRBI Reserve Bank of IndiaREER Real Effective Exchange RateSEBI Securities and Exchange Board of IndiaSEZ Special Economic ZoneSIL Special import licenseSLR Statutory Liquidity RatioSSI Small Scale IndustryUTI Unit Trust of IndiaWPI Wholesale Price Index

NOTES:

1. Years mentioned in the Report refer to fiscal years starting with April and ending with March of thenext calendar year. Thus the year 2004 implies April 2004 to March 2005.2. Currency unit Dollar ($) in the Report refers to US dollar, unless mentioned otherwise.3. The following numerical units are used in the report:

Thousand = 1000Lakh = 100 ThousandMillion = 1000 Thousand = 10 LakhCrore = 10 Million = 100 LakhBillion = 1000 Million = 100 CroreTrillion = 1000 Billion = 100000 Crore

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COUNTRY REPORT ON INDIA:

ECONOMIC PERFORMANCE IN 2002-2004

AND OUTLOOK FOR 2005-2007

DR. TARUN DAS, Economic Adviser, Ministry of Finance, India.

Part-I: Recent Economic and Social Developments

A. Macroeconomic Performance, Issues and Policies

1 Overview

The economy experienced a significant recovery in GDP growth rate from 4 per cent in2003 to 8.1 per cent in 2003 mainly driven by the rebound of agriculture with a growthrate of 8.1 per cent aided by a bumper food grains production. Industry sustained its

growth at 6.5 per cent, while services growth improved to 8.4 per cent in 2003.

The high growth could not be sustained in 2004 due to both internal and external shocks.Internal factors included monsoon failures and infrastructure constraints, while externalfactors included hardening of international prices of oil, metals and minerals induced byglobal economic recovery and rising demand in USA, EU and China.

The average annual rate of inflation in terms of the Wholesale Price Index (WPI)increased significantly from 5.4 per cent in 2003 to 6.8 per cent in 2004 mainly driver byhigher prices of minerals, petroleum products, metals, metal products, particularly ironand steel. Average inflation based on the Consumer Price Index (CPI) also increased

from 3.9 per cent in 2003 to 5 per cent in 2004 reflecting higher prices of food itemswhich account for 57 per cent weights in the CPI.

Indias external position remained comfortable in 2004, notwithstanding the pick-up ofimports by 21 per cent. Merchandised exports recorded an excellent increase by 20 percent and net invisibles by 18 per cent. The current account recorded a surplus amountingto 1.3 per cent of GDP in 2004, almost the same as 1.4 per cent of GDP recorded in 2003.

Transfers from Indians working abroad continued to remain buoyant. On the capitalaccount, direct foreign investment showed some improvement, while portfolioinvestment flows declined significantly from $11.4 billion in 2003 to only $1 billion in

2004 reflecting bearish stock markets and change in disinvestment policies of thegovernment due to ideological influence of the left parties on the new coalitiongovernment. Commercial borrowings by the corporates picked up due to lower interestrates in international markets. The combined result was an increase of foreign exchangereserves by US$20 billion in 2004 on top of an increase by $31 billion in 2003. The totalforeign exchange reserves (including gold and SDR) stand at more than US$122 billionequivalent to 15 months of imports and 25 times the short-term external debt.

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Central Government faced fiscal strain in 2004 due to revenue shortfalls caused bydelayed budget and lower realisation of government disinvestment in public enterprises.While nominal spending was kept within the budgeted amounts, there were expenditureoverruns on subsidies. The gross fiscal deficit of the Central government declined from4.7 per cent of GDP in 2003 to 4.3 per cent of GDP (due to higher growth of nominal

GDP caused by high inflation).The fiscal situation of the State governments also remained under pressure due to risingcurrent expenditure and constraints on resource mobilization. The combined gross fiscaldeficit of the States increased from 4.1 per cent of GDP in 2002 to 5 per cent of GDP in2003 and is budgeted at 3.5 per cent of GDP. As a result of fiscal incentives provided bythe Centre to the states for conditional fiscal reforms to reduce state deficits, theconsolidated deficit of the Central and State governments remained around 9.5 per cent ofGDP in both 2002 and 2003 and is expected to decline to 7.9 per cent of GDP in 2004.

Outstanding debt (including both domestic and external debt) of the general government,

excluding guarantees and other contingent liabilities, is likely to reach 95 per cent ofGDP (comprising outstanding Central government debt at 66 per cent and Stategovernment debt at 29 per cent) at the end of March 2005. Including the public sectorenterprises, the consolidated public sector deficit is estimated to have exceeded 11.5 percent of GDP and public sector debt over 100 per cent of GDP.

The budget for 2004-05 aimed at reducing the central government fiscal deficit to 4.4 percent of GDP from 4.8 per cent in 2003, with revenue deficit targeted at 2.5 per cent andprimary deficit targeted at 0.3 per cent of GDP. On the revenue side, key initiativesincluded introduction of a new tax system for textiles, increase of service tax from 8 to 10per cent and widening its scope, introduction of 2 per cent education cess on all taxes, noincome tax for assesses having income up to Rupees one lakh, introduction of the ValueAdded Tax at the state levels from April 1, 2005, replacement of long term capital gainstax by transactions tax, reduction of peak customs duty from 25 to 20 per cent, reductionsof customs duties on steel, minerals, meat and fish, and exemption of customs duties on tractors and agricultural implements and aids for physically handicapped persons.

On the expenditure side, the main initiatives included passing of a Fiscal responsibilityand Budget Management Act by the Parliament, prepayment of high cost external debt,buy back of banks holding of central government debt, a debt swap scheme for thestates, reduction of interest rates for public provident fund and small savings andexpansion of the scope of conditional fiscal and structural reforms by the states.

Reforms in agriculture and industry continued with introducing farm income insurancescheme, removal of restrictions on exports of food grains, encouraging agri-business, andde-reservation of more items from the reservation list of the Small Scale Industries (SSI).In the area of infrastructure, progress was achieved in road construction and metro railand public-private partnership was extended for development of seaports and airports.

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In the financial sector, regulations were tightened particularly for non-banking financialcorporations (NBFCs), foreign entry to the banking system was further liberalized, andlimits were raised on overseas investment by Indian companies.

Share market was volatile in 2004 reflecting development in political economy, erratic

monsoon and high inflation at home and hardening of international prices of crude oil,metals and minerals. After falling in the first quarter of 2004, the stock market staged arally since the second quarter, reflecting political stability and continuity of economicreforms. International credit rating agencies upgraded Indian scrips and maintainedpositive outlooks on the basis of significant build up of foreign exchange reserves alongwith containment of fiscal deficit.For providing adequate liquidity to meet credit growth and support investment demandwith price stability, the RBI continued with its policy of active liquidity managementwith additional tool of Market Stabilisation Scheme. The cash reserve ratio and the reporate (overnight lending rate) were increased to tackle rising prices. The exchange rate of

rupee against the US dollar had a tendency to appreciate in 2004 due to weakening dollaragainst major currencies, but ended with a marginal depreciation due to acceleration ofimports. The RBI took advantage of the favorable balance of payments to accumulatereserves through partially sterilized intervention.

Despite significant reduction of the RBI bank rate in recent years, lending rates of thebanks did not fall commensurately. Bank lending and deposit rates fell by only 50-150basis points in 2003-2004. The prime lending rate (PLR) virtually remained unchanged,reflecting high transactions cost of banking operations and the rigidities in administeredrates on small savings. Banks continued to provide credits to profitable corporates atbelow PLR and reduced the maximum spread over PLR and so the effective lending ratesdeclined by 50-100 basis points. Sanctions and disbursements of the long-term credit bythe financial institutions accelerated in 2004 due to rise in investment demand. Lendingsby commercial banks, which generally consist of working capital and trade finances, alsorecorded significant growth due to acceleration of both food and non-food credits.

1. Growth Performance

(a) Overall GDP outcome in 2003-2004 and Outlook for 2005-2007

Overall GDP growth rate decelerated from 8.1 per cent in 2003 to 6 per cent in 2004mainly due to decline in agricultural value added by 2 per cent caused by deficientrainfall (Table-2.1). However, there was improvement in the growth of industry from 6.5per cent in 2003 to 7.1 per cent in 2004, and of services from 8.4 per cent to 8.8 per centdue to pick up of both consumer and investment demands and acceleration of exports.

Assuming that there would be no major internal or external shocks, which might havedestabilizing effects on the Indian economy, no monsoon failures and no politicalinstability, India would be able to sustain real GDP growth rates in the range of 7-7.5 percent in 2005-2007 supported by a growth rate of 2 to 4 per cent in agricultural valueadded, 7.5 to 8 per cent in industry and 8.5 per cent in services. Industrial production is

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expected to show modest upturn largely driven by cyclical factors and induced by a risein rural income and increased public spending on physical and social infrastructure.

Higher growth would be feasible through a sustained pace of fiscal reforms in both theCentre and States combined with second-generation reforms in labor markets, sectoral

levels and local governments. Increased public and private sector savings will boostIndias investment rate and provide necessary resources for upgrading critical areas ofinfrastructure. While some increased use of foreign capital, particularly of direct foreigninvestment and portfolio investment, is consistent with external sector viability, the bulkof the savings will be generated domestically.

2.1 Real GDP Growth by Sectors and the Inflation Rate (Per Cent)

Items 2002

Actual

2003

Actual

2004

Estimate

2005

Forecast

2006

Forecast

2007

Forecast

Real GDP growth

- Agriculture

- Industry- Services

4.0

-5.2

6.47.1

8.1

9.1

6.58.4

6.0

-2.0

7.18.8

6.8

2.0

7.38.5

7.2

3.0

7.58.5

7.5

4.0

8.08.5

Inflation rate (CPI) 4.0 3.9 5.0 4.0 4.0 4.0

Inflation rate (WPI) 3.5 5.4 6.8 4.0 4.0 4.0

Source: National Accounts Statistics 2004, Central Statistical Organisation (CSO) for2002-2003 and authors estimates/ projections for 2004-2007.

(b) Determination of GDP performance by major sectors

In 2004 agriculture and allied sectors registered negative growth due to erratic monsoonand loss of agricultural crops. However, there was some improvement in the growth rates

in secondary and tertiary sectors (Table 2.2).

Table 2.2 Growth rates of GDP in selected sectors (in per cent)

Sectors 2000 2001 2002 2003 2004Q1Actual

2004Estimate

1. Agriculture & allied sectors -0.1 6.5 -5.2 9.1 3.4 -2.0

2. Mining & quarrying 2.4 2.2 8.8 4.0 6.1 6.0

3. Manufacturing 7.4 3.6 6.2 7.1 8.0 7.2

4. Electricity, gas, water 4.3 3.6 3.8 5.4 6.3 6.0

5. Construction 6.7 3.1 7.3 6.0 3.6 4.0

6. Trade,hotels,transport,commc 6.9 8.7 7.0 10.9 11.0 10.5

7.Financial ser. & real estate 3.5 4.5 8.8 6.4 7.0 7.08. Social and personal services 5.2 5.6 5.8 5.9 9.3 9.0

Total GDP 4.4 5.8 4.0 8.1 7.4 6.0Source: National Accounts Statistics 2004, Central Statistical Organisation (CSO) for 2002-

2003 and authors estimates/ projections for 2004-2007.

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Agriculture and Allied Sectors

Prospects of agricultural production in 2004 are not considered to be bright due to erraticrainfall caused by prolonged breaks of monsoon over time and uneven distribution overregions.The seasonal rainfall in 2004 for the country as a whole was 13

per cent below the long period average and 18 per cent areaexperienced drought conditions.

Poor monsoon affected adversely the production of kharif crops (sownin June-July and grown mainly under unirrigated conditions), whichaccount for 55 per cent of the total crop output and 75 per cent ofagricultural production. Coarse grains, pulses, oilseeds, cotton andplantation are affected most, while impact is less on the production ofrice, wheat and sugarcane where access to irrigation is the greatest.Total foodgrains production is estimated to decline by 4.7 per centfrom 212 million tonnes in 2003 to 202 million tonnes in 2004 (Table

2.3).

Productions of commercial crops like jute, tea, coffee, oilseeds andsugarcane are also expected to decline, although by lower percentage. However, fruits and vegetables, horticulture and floricultureand allied sectors like fishery, poultry and animal husbandry, whichaccount for 30 per cent production in agriculture and allied sectors, areexpected to perform well and achieve a growth rate of 6 per cent.Consequently, overall value added in the primary sector is estimated to decline by 2per cent in 2004, compared to a growth of 9.1 per cent in 2003.

Table 2.3: Agricultural production in 1999-2003 (million tonnes)Crop 2000 2001 2002 2003 2004-Proj

1.Total food grains (a+b) 197 213 174 212 202

(a) Cereals

Rice

Wheat

Coarse grains

186857031

199937333

163736525

197877238

189847134

(b) Pulses 11 13 11 15 13

2. Non-food grains(a) Oilseeds(b) Sugarcane

(c) Cotton (million bales)(d) Jute / Mesta (mln bales)(e) Tea (million kilogram)(f) Coffee (million kg.)

18296

1011848301

21297

1012847301

15282

911838275

25236

1411850275

20235

1411845270

4. Annual growth rate (%)(a) All crops(b) Food grains(c) Non food grains

-6.3-6.2-5.7

7.68.26.1

-15.5-18.2-11.2

19.322.014.5

-3.3-4.7-1.0

Source: Min. of Agriculture for the years 2000-2003, and author's estimate for 2004.

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The share of agriculture in real GDP declined from around 24 per cent in 2000-2001 to22 per cent in 2002-2003 and further to 20 per cent in 2004. The enhanced availability ofbank credits through priority lending to agriculture and agro-based industries, favorableterms of trade, liberalized domestic and external trade for agricultural products attractedprivate investment in agriculture in recent years. The Budget for 2004 stepped up public

investment significantly for rural roads and rural employment programs. Major measurestaken for agriculture development included the following:

Government funding for restructuring Regional Rural Banks.

Rural Infrastructure Development Fund revived with corpus of Rs.8000 crore.

Priority for Accelerated Irrigation Benefit Program,

Launching of National Water Resources Development Project, and NationwideWater Harvesting Scheme.

Launching of National Horticulture Mission.

Introduction of National Agricultural Insurance Scheme.

Emphasis on agri-business and R&D.

Introduction of Food stamps scheme on pilot basis. Tax holiday extended to rural hospitals and agro processing industries

Industry

Despite fall of agricultural production, both industry and services performed well in 2004induced by external demand and investment demand at home. Government announcedseveral monetary and fiscal incentives in the Union Budget for 2004 to boost industrialproduction and infrastructure development. These policies included simplification andrationalization of both direct and indirect taxes, reduction of peak customs duty to 20 percent. Latest available information until August 2004 indicate that cumulative industrial

growth improved from 5.9 per cent in April-August 2003 to 7.9 per cent in April- August2004 aided by a growth rate of 5.2 per cent in mining, 8.2 per cent in manufacturing and7.7 per cent in electricity generation. Given these trends, the year-end industrial growthwould be around 7.2 per cent. Consequently, the share of industrial value added in GDPis expected to increase to 27.1 per cent in 2004 from 26.9 per cent in 2003.

Service sector

The good performance of agriculture and industry in recent years generated demand fortransport and communications, trade-related activities and financial services. A rapidincrease in expenditure on public administration, social services, rural extension services

and defense also had a favorable impact on the growth of service sector. As a result, theshare of the service sector in GDP increased continuously from a level of 28 per cent inthe early 1950s to 36 per cent in early 1980s and further to 52 per cent in 2004. Theservice sector is expected to grow at 8.8 per cent in 2004 induced by sustained industrialgrowth, substantial public investment on roads, and sustained growth in financial servicesand real estate.

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(c) Determination of GDP performance by major industries

As per the index of industrial production (IIP), overall industrial growth at 7.9% in April-Aug 2004 is significantly higher than 5.9% achieved in April-Aug 2003and is aided by a

growth of 5.2% in mining (4.1% last year), 8.2% in manufacturing (6.5% last year) and7.7% in electricity (2.5% last year). As per use-based classification, there is improvementacross the board except for consumer non-durables. Capital goods (14.3%), intermediate(8.8%) and consumer durables (13%) performed well indicating rise of investmentdemand. Among 17 broad manufacturing sub-groups, five subgroups with weights of30.8% in the IIP achieved growth rates exceeding 8% in April-Aug 2004. These arebeverages & tobacco (8.5%), wool, silk & man-made fibre textiles (9.1%), chemicals &products (19.2%), machinery other than transport equipment (27.7%) and miscellaneousmanufacturing group (12.4%).

Given these trends, the end-year industrial growth in terms of physical production is

expected to be 7.2 per cent aided by a growth rate of 7.5 per cent in manufacturing(weight 79.4 per cent), 7per cent in electricity generation (weight 10.4%) and 5.5 per centin mining and quarrying (weight 10.2%).

Table 2.4 Growth of industrial production by broad sectors (per cent)

Sectors Weights(%)

2001 2002 2003 April-Aug

2004

2004

Estimate

1.Overall industrial growth

Manufacturing

Mining/ quarrying

Electricity

100.079.410.410.2

2.72.91.23.1

5.76.05.83.2

6.93.25.25.1

7.98.25.27.7

7.27.55.57.0

1. Use-based classification Basic goods

Capital goods

Intermediate goods

Consumer goods-- Consumer durable-- Non-durable goods

100.035.59.7

26.428.45.2

23.2

2.72.6-3.41.56.011.54.1

5.74.810.53.97.1-6.312.0

6.95.413.16.37.111.55.7

7.94.914.38.88.413.06.8

7.25.014.58.08.512.56.5

3.Overall industrial growth 100 2.7 5.7 6.9 7.9 7.2

IIP stands for the Index of Industrial Production.

Source: Central Statistical Organisation for the years 2001-2003 and authors estimate for the year 2004.

Six core and infrastructure industries (viz. Electricity, coal, steel, cement, crude oil andpetroleum products) having total weight of 26.7 per cent in the Index of IndustrialProduction (IIP) performed well in 2004 with an average growth rate of 5.7 per cent inthe first half of 2004 and is expected to maintain the same growth rate for the full yearcompared with a growth rate of 5.4 per cent in 2003 (Table 2.5). Other infrastructuresectors such as new mobile telephone connections, goods traffic on railways, cargohandled at both sea ports and air ports, and air passenger traffic at both domestic andinternational airports also performed well in 2004 due to sustained industrial growth andsignificant pick up of services activities.

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Table 2.5 Growth rates of major core and infrastructure industries (per cent)

Core Industries and

infrastructure

Weights

in IIP*

2001 2002 2003 April-Sept

2004

2004

Estimate

1. Electricity2. Coal

3. Steel4. Crude oil5. Petroleum products6. Cement

10.23.2

5.14.22.02.0

3.14.2

3.6-1.23.77.4

3.64.6

10.13.24.98.8

4.53.6

6.91.08.26.1

7.86.6

3.04.27.44.8

7.06.5

3.54.58.05.0

Sub-Total 26.7 3.5 5.6 5.4 5.7 5.6

Other infrastructure:

7. Cargo handled at major ports8. Landline phone connections9. Mobile phone connections10. Revenue traffic on railways11. Civil aviation

Export cargo

Import cargo

International passengers Domestic passengers

12. Upgradation of highways

2.3-4.7604.0

4.1-1.0

-5.0-5.7

-13.2

9.0-401195.3

13.318.6

4.89.653.5

9.92.91597.5

1.013.8

6.513.140

10.1-34.224.66.3

8.135.6

17.425.912.3

9.0-30.025.06.5

7.535.0

19.027.010.0

IIP stands for the Index of Industrial Production.Source: Dept of Programme Implementation for 2001-2003 and authors estimate for the year 2004.

(d) Demand factors: Savings and Investment

The rates of investment and saving in India are high as judged by its level of economicdevelopment. Gross domestic savings as per cent of GDP improved from 23.5 per cent in2001 to 24.2 per cent in 2002 and 25 per cent in 2003-2004 due to reduction of dissavingin the public sector. Gross domestic investment as per centage of GDP improvedmarginally from 23.1 per cent in 2001 to 23.3 per cent in 2002 and 23.6 per cent in 2003-2004 due to improvement in both private and public sectors (Table 2.6).

Indias private saving rate is comparable to those achieved by the high performing EastAsian economies, but its public saving is very low and is a major constraint on domesticresource mobilization. Government is restructuring public expenditures to foster domesticsavings, release resources for infrastructure development and to reduce crowding outeffect on private investment. Reforms in public sector are under-way to rationalize pricesof public goods and services, to increase efficiency of public sector operations and toreduce the capital output ratio. Strengthening legal, institutional and regulatoryframeworks in insurance, provident and pension funds, banking, capital markets,petroleum products, power, ports and telecom is also being undertaken to induce privateinvestment in infrastructure. The successive Central government Budgets for 2003-2004announced various measures for deepening the capital markets and liberalizing furtherthe non-debt creating financial flows.

There are signs that both public and private investment have started to revive and the newinvestment is more efficient and productive. Gross domestic investment as per cent ofGDP is expected to improve steadily from 23.7 per cent in 2004 to 27.8 per cent in 2007

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and gross domestic savings as per cent of GDP is also expected to improve from 25 percent in 2004 to 28 per cent in 2007 as a result of better performance by both public andprivate sectors.

Table 2.6 Gross Domestic Savings and Investment (in Per cent of GDP at current mp)

As per cent of GDP 2001 2002 2003

Estimate

2004

Estimate

2007

Forecast

Gross domestic savings (GDS)

Private sector

Public sector

23.526.2-2.7

24.226.0-1.9

25.026.0-1.0

25.025.5-0.5

28.027.01.0

Gross domestic Investment (GDI)

Private sector

Public sector

23.117.35.8

23.317.65.7

23.617.75.9

23.717.85.9

27.820.87.0

Resource gap = (GDS-GDI) 0.3 0.9 1.4 1.3 0.2

Source: National Accounts Statistics 2004, Central Statistical Organisation (CSO) for 2001-2002and authors estimates/ projections for 2003-2007.

(a) Employment and un-employment

(i) Employment Situation

Comprehensive data on employment and unemployment are collected by the NationalSample Survey Organisation (NSSO) through quinquennial surveys. As per the results ofthe 55th Round (1999-2000) of the NSSO Survey, employment growth rate declined from2.43 per cent per annum in 1987-1994 to 1.07 per cent per annum in 1994-2000 (Table-2.7). The decline in the rate of growth of employment in the 1990s was associated with acomparatively higher growth in GDP, indicating a decline in the labour intensity ofproduction. It was also associated with a sharp decline in the growth rate of labor force

from 2.29 per cent in 1987-1994 to 1.03 per cent in 1993-2000.

Table-2.7: Employment growth rates in 1972-2000 (per cent)

Period Rate of growth of population

(% per annum)

Rate of growth of laborforce

(% per annum)

Rate of growth ofemployment

(% per annum)

1972-1978 2.27 2.94 2.73

1977-1983 2.19 2.04 2.17

1983-1988 2.14 1.74 1.54

1987-1994 2.10 2.29 2.43

1994-2000 1.93 1.03 1.07Source: Planning Commission, Government of India.

Some estimates of employment available from the Annual Rounds of NSSO for theJuly-December 2002 indicate that employment increased at the rate of 2.07 per centper annum in 2000-2002 as compared to 1.02 per cent per annum in 1994-2000. In2000-2002 in absolute terms, employment increased by 8.4 million per year on an

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average, as against the target of creating approximately 50 million employmentopportunities over the Tenth Five-Year.

A major shift in the work force structure in 1977-2000 was an increase in the proportionof casual labor from 27.2% to 33.2%, and a decrease in self-employment from 58.9% to

52.9%, while the proportion of regular salaried employment in total employmentremained stationary around 13.9 per cent. The decline of self-employment in rural areasreflects the decline in proportion of farmers cultivating their own land owing tofragmentation of holdings. The increase in casual employment reflects the displacementof marginal cultivators and their conversion into agricultural labor.

In 1983-2000 the share of agriculture in total employment declined from 63 per cent to57 per cent and that of manufacturing increased from 11.6 to 12.1 per cent. In 2000, theshare of construction in total employment increased to 4.4%, that of trade and transport to15.2% and that of community services to 9.2%. In 1994-2000, trade has the highestgrowth rate (5.7%), followed by transport and communications (5.5%), financial services

(5.4%), and construction (5.2%), whereas agriculture, mining and quarrying, and publicutilities registered negative growth rates in employment.

Organised sector accounted for only 9 per cent of the total employment in 1978-1994,and its share declined to 7 per cent in 1999-2000. This was entirely due to slowing downof employment in the public sector from 1.52 per cent per annum in 1983-1994 to anegative growth rate of (-) 0.03 per cent in 1994-2000. The decline of employment in thepublic sector could be attributed to restructuring programs of the public sector andimposition of ban on new recruitment in government departments as a part of theeconomy drive to reduce expenditure. Employment in the public sector is unlikely toexpand rapidly as government is reducing its scope and many public undertakings havesurplus labour.

Table-2.8 Sectoral Employment in 1983 to 2000

Employment (per cent to total) Annual growth rate (%)

Sector 1983 1987-1988

1993-1994

1999-2000

1983 to1987-1988

1987-1988 to1993-1994

1983 to1993-1994

1993-1994 to1999-2000

Agriculture 63.2 60.1 60.4 56.7 1.8 2.6 2.2 0.02

Mining & quarrying 0.7 0.9 0.8 0.7 7.4 1.0 3.7 -1.9

Manufacturing 11.6 11.9 11.1 12.1 3.6 1.2 2.3 2.6

Electricity, gas, water 0.3 0.3 0.5 0.3 2.9 7.2 5.3 -3.6Construction 3.0 4.4 3.5 4.4 12.1 -1.4 4.2 5.2

Trade, hotels, restaurant 7.6 8.3 8.5 11.1 4.9 3.0 3.8 5.7

Transport, communication 2.9 3.0 3.1 4.1 3.2 3.5 3.4 5.5

Financial, real estate 0.9 1.0 1.1 1.4 4.7 4.5 4.6 5.4

Community/social services 9.8 10.1 11.1 9.2 3.6 4.1 3.6 -2.1

All Sector 100 100 100 100 2.9 2.5 2.7 1.1

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Growth rate of organized private sector employment accelerated from 0.45 per cent perannum in 1983-1994 to 1.87 per cent in 1994-2000. However, this was not enough tooffset the employment slowdown in the public sector, as private sector accounted for onlyone third of total organized employment.

The employment elasticity with respect to GDP declined continuously in 1980s and 1990s.Rapid growth of employment in the organized sector depends on employment growth inthe private sector. Since the potential growth of organized employment is limited, bulk ofthe employment growth has to come from unorganized sector.

(ii) Unemployment Situation

There are various concepts of unemployment viz. Usual Principal Status (UPS), UsualPrincipal and Subsidiary Status (UPSS), Current Weekly Status (CWS) and Current DailyStatus (CDS). All these concepts of unemployment indicate that unemployment ratesdiffer widely for rural and urban areas and for males and females. Generally, urban areas

have higher unemployment rates for both males and females than rural areas.

The rate of unemployment on the basis of CDS increased from 6.03 per cent in 1993-94 to7.32 per cent in 1999-2000. Unemployment rates varied sharply across the states andinter-state variations were consistent over time. States where wages are kept higher thanneighboring regions by strengthening bargaining power of labor or by provision of socialsecurity have generally high incidence of unemployment.

The differentials of rural and urban unemployment rates narrowed in 1999-2000, due tosharp increase in unemployment rates for both rural males and females. One factor for thisdevelopment was a shift from self-employment to casual labor.

3. Inflation(a) Movements in WPI and CPI

Annual point-to-point inflation rate in terms of Wholesale Price Index (WPI) declinedfrom 6.5% in 2002-03 to 4.6% in 2003-04. The current year 2004-05 started with aninflation rate of 4.5% on 3 April 2004 and declined to 4.3% on 24 April 2004. Since thenit had generally an upward trend and stood at 7.4% on 23 October 2004 compared to5.1% a year ago. The 52-week average inflation rate at 6.3% on 23 October 2004 is alsohigher than 4.9% registered a year ago.

According to some economists, WPI inflation is not an appropriate index to determine theimpact of price rise on the cost of living of common man. Rather, the Consumer PriceIndex for Industrial Workers (CPI-IW), which includes selected services and is measuredon the basis of retail prices and used to determine the dearness allowance of employees inboth the public and private sectors, would be an appropriate indicator of general inflation.In sharp contrast to the WPI, the CPI inflation had been stable and moderate. This isbecause food items constitute higher weights in CPI than in WPI and in general the priceincreases of these items have been moderate in the current year.

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Annual point-to-point inflation in terms of the CPI-IW declined significantly from 5.1 percent in April 2003-04 to 3.5 per cent in March 2003-04 and further to 2.2 per cent inApril 2004. The CPI inflation rate had an increasing trend since then and reached 4.8% inSeptember 2004, compared to 2.9 per cent a year ago, but it is substantially lower than

the average WPI inflation at 7.7% in September 2004. Given these trends, year endaverage inflation is estimated to be 6.8 per cent in terms of WPI and 5 per cent in termsof CPI in 2004.

(b) Price movements of major categories

At the end of 30th week of the current fiscal year, on the 23rd October 2004, for whichlatest information are available, point-to-point annual WPI inflation was running at 7.4per cent and the average inflation at 6.3 per cent. High inflation was basically due tosubstantial price rise for minerals, petroleum products, metals and metal products inducedby international prices. The annual rate of WPI inflation for primary articles (weights of

22 per cent) was 4.9 per cent caused by an inflation of 2.7 per cent for food articles, 2.9per cent for non-food agricultural articles and 157 per cent for minerals. Prices of fuel, power, light and lubricants (with weights of 14.2 per cent), which are mostlyadministered, increased by 11.2 per cent, and prices of manufactured items (with weightsof 63.8 per cent) increased by 7 per cent mainly due to an increase of sugar prices by 14.2per cent, basic metals and metal products by 20.3 per cent, particularly iron and steelprices by 26.1 per cent. Prices of other manufactured items remained moderate.

Given these trends, the annual average rate of WPI inflation in 2004 is expected toremain in the range of 6.8 per cent, up from 5.4 per cent in 2003, mainly due to sharpincrease in prices of minerals, petroleum products, metals and iron and steel induced byrise of domestic production cost and hardening of international prices of these goods.

The CPI inflation rate ranged between low to moderate in 2004 and reached 4.8 per centin September 2004. The average CPI inflation is expected to remain around 5 per cent in2004 compared to around 4 per cent in 2002 and 2003.

(c)Determinants of inflation

Decomposition of inflation rates indicates that minerals in the primary group, petroleum products, and sugar, metals, metal products, particularly iron and steel under themanufactured prices witnessed relatively higher price increases and contributed most tothe inflation in 2004. Inflation for the non-food manufactured items (except for iron andsteel) was moderate showing considerable correlation with global prices and was theresult of complete removal of quantitative restrictions (QRs) and other non-tariff barrierson imports and continual reduction of import duties in India to fulfill requirements underthe general agreements with the World Trade Organisation.

Thus, high inflation was not wide spread and was concentrated in a few commoditiesrelated to minerals and metals. Prices of these commodities are influenced not only by

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domestic supply and demand but also by international prices. In general, there had beenhardening of international commodity prices due to revival of world growth.

There were neither supply constraints nor demand-pull in the domestic market. Inflationin petroleum products, minerals, metals and their products appear to be cost-pushed and

driven by international prices. Broad money supply growth was around RBI target rate of14% and did not pose any problems, as it was accompanied by significant improvementin industrial and infrastructure production. Government fiscal deficit was under controland within budget targets. Ministry of Finance reduced customs and excise duties ofselected petroleum products and reduced customs duties of non-alloy steel and ships forbreaking. Given the fact that there was no demand-pull, and the high inflation was mainlycost-pushed, RBI did not adopt a restricted or contractionary monetary policy. It mademarginal upward revision of cash reserve ratio and repo rate (overnight lending of cash)without any change of the bank rate.

Table 3.1 Average Inflation Rate in terms of Wholesale Price Index (per cent)

Major Groups Weights(per cent) 2002Average 2003Average AnnualInflationPoint-to-

point on

23-10-2004

Actual

2004Average

Estimate

All commodities 100.0 3.4 5.5 7.4 6.8

1. Primary articles

Food items

Non-food items

Minerals

22.015.46.10.5

3.41.78.3-0.4

4.31.2

12.62.1

4.92.72.9

157.2

4.22.03.0150

2. Fuel, power & lubricants 14.2 5.6 6.4 11.2 11.5

3. Manufactured products

Sugar group

Edible oils

Cotton textiles

Leather products

Chemicals & products

Cement

Basic metal & alloys

Iron and steel

Machinery and tools

Transport equipment

63.8

3.92.89.81.0

11.91.78.33.68.44.3

2.8

-7.922.3-1.1-2.02.9-2.21.55.10.90.5

5.7

3.514.47.7

12.91.91.2

15.626.31.8-0.1

7.0

14.21.06.54.43.45.0

20.326.06.75.7

6.8

14.01.06.04.53.55.0

20.025.06.06.0

Table 3.2 Average Inflation Rate in terms of Consumer Price Index (per cent)

Major Groups Weights(per cent) 2002Actual 2003Actual AnnualInflation

At end

Sept 2003

2004Estimate

General 100.0 4.0 3.9 4.8 5.0

1. Food 57.0 2.1 4.1 1.8 2.0

2. Tobacco & intoxicants 3.2 1.7 3.9 2.0 2.5

3. Fuel and light 6.3 8.6 8.0 11.0 11.5

4. Housing 8.7 6.2 6.7 10.0 10.0

5. Clothing and footwear 8.5 1.7 2.3 5.0 5.0

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6. Miscellaneous group 16.4 4.7 4.6 5.0 5.0

The Governments anti-inflationary policies in recent years included a strict monetaryand fiscal discipline, an effective management of supply and demand for essentialconsumer goods and raw materials through liberal imports, and strengthening of the

public distribution system for food grains, sugar and kerosene oil. Successive budgetsprovided various fiscal concessions and extended the value added tax to ensure thatindirect taxes do not unduly add to the prices of essential items. There was also a distinctimprovement in the supply of manufactured items by sustained industrial growth and ofstocks of food grains due to continued government procurement.

(d) Inflation Outlook

The medium-term inflation risks are manageable. Given governments commitment toeconomic reforms, strict fiscal prudence, monetary discipline, orderly movement of theexchange rate of rupee, continued reduction of import duties and other indirect taxes, andremoval of all quantitative restrictions on the imports of consumer goods, the annualinflation rate in terms of both wholesale and consumer price indices is likely to have adeclining trend in the medium term and to remain around 4 per cent in 2005-2007.

4. Trade and Exchange Rates

(a) Exports and Imports in 2000 and 2001

Indian exports remained buoyant with a growth of 19.9 per cent in 2003 due to anincrease of exports of both primary and manufactured products. India emerged as thefastest growing exporter after China among the leading exporting countries. Importsincreased by 21.8 per cent in 2003 driven by pick up industrial activities and investmentdemand. The net result was a decline in the trade deficit from 2.5 per cent of GDP in2002 to 2.7 per cent of GDP in 2003 (Table 4.2). The net invisible surplus improvedfrom 3.3 per cent of GDP in 2002 and to 4.2 per cent in 2003 with buoyant privatetransfers and software exports commensurate with global recovery. Consequently, thecurrent account balance (including official transfer) was in surplus for the thirdconsecutive year in 2003 and amounted to 1.4 per cent of GDP.

Export growth in terms of US dollar accelerated from 8.8 per cent in April-September2003 to 24.4 per cent in April-September 2004, while imports growth accelerated from21.4 per cent in April-September 2003 to 34.3 per cent in April-September 2004contributed by a growth of oil imports by 57.8 per cent and that of non-oil imports by25.8 per cent. As a result, trade deficit increased from $7.4 billion in April-September

2003 to $12.7 billion in April-September 2004.

Given these trends, exports are expected to achieve a growth of 20 per cent in 2004(Table 4.1) due to buoyancy in world demand, resurgence in world trade andimprovements in world commodity prices. In addition, various export facilitatingmeasures, good performance in key manufacturing sectors like engineering goods,chemicals, automobiles, ore and minerals, basic metals and petroleum products alsocontributed to the growth of exports. Imports also recorded a substantial growth by 21 per

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cent in 2004 mainly due to higher imports of crude oil, export related products, andcapital goods imports. As a result, trade deficit as a per centage of GDP is expected toincrease from 2.7 per cent in 2003 to 3 per cent in 2004.

Net invisible earnings are expected to have a robust growth of 18 per cent in 2004 and

amount to 4.3 per cent of GDP in 2004. The overall current account balance is once againexpected to have a surplus amounting to 1.3 per cent of GDP in 2004, almost the samelevel as in 2003.

Table 4.1 Trends of Foreign Trade

Foreign trade Value inUS$ million

2003

Value inUS$ million

2004 Est.

Growth rate2002

(Per cent)

Growth rate2003

(Per cent)

Est. GR2004

(Per cent)

Merchandised exports 62952 75542 16.9 19.9 20.0

Merchandised imports 79658 96386 13.5 21.8 21.0

Services exports 51939 58635 18.2 19.7 12.9

Services imports 26514 28635 13.4 0.7 8.0

Source: RBI Annual Report 2003-2004 for the years 2002-2003, and authors estimatefor 2004.

Table 4.2 Trade and Current Account Balance

Items 2002US$

Million

2002As %

Of GDP

2003US$

Million

2003As %

of GDP

2004EstUS$

Million

2004EstAs %

of GDP

Merchandised trade balance -12910 -2.5 -16706 -2.7 -20844 -3.0

Net invisible balance 17047 3.3 25425 4.2 30000 4.3

Current account balance 4137 0.8 8719 1.4 9156 1.3

Net capital inflows 12843 2.5 22703 3.7 10650 1.5

Overall balance of payments 16980 3.3 31421 5.1 19806 2.9

Source: RBI Annual Report 2003-04for the years 2002-2003 and author's estimatefor 2004.

(b) Composition of Trade

The share of primary products in total exports declined continuously from 24 per cent in1996 to 16 per cent in 2000 and further to 15 per cent in 2003-2004 due to continualdecline of share of agricultural exports from 20 per cent in 1996 to 11 per cent in 2004.The share of minerals in total imports increased marginally from 3 per cent in 1999-2001to 4 per cent in 2002-2004. The share of manufactured items in exports decreased from

81 per cent in 1999 to 77 per cent in 2004. The major exports of manufactured goodsconsisted of engineering goods, chemicals and chemical products, iron and steel, drugsand pharmaceuticals, labor intensive products such as gems and jewellery, textileproducts, readymade garments and handicrafts, and also traditional categories of leatherand leather products. In recent years, software exports and petroleum products haveemerged as major export earners and accounted for 12 per cent of total exports in 2004.

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There was significant change in the composition of imports in 1997-2000, but thecomposition remained more or less unchanged in 2000-2004. Share of bulk imports,which consist of crude oil, petroleum products and other consumption goods and somekey raw materials and intermediate goods, declined significantly from 41 per cent in 1997to 31 per cent in 1998, but it continuously increased and regained its share around 40 per

cent in 2004 due to substantial increase in imports of petroleum, oil and lubricants (POL)from 17 per cent in 1998 to 31 per cent in 2004. Share of bulk consumer goods declinedfrom 7 per cent in 1998 to 4 per cent in 2004. Share of other bulk imports which consistof fertilizers, non-ferrous metals, paper, rubber, pulps, ores, iron and steel declinedcontinuously from 12 per cent in 1998 to 7 to 8 per cent in 2002-2004.

Non-bulk items, which consist of capital goods, precious stones, export related products,chemicals and chemical products, textiles, plastics, scientific instruments and medicinesconstituted 62 per cent of total imports in 2004 compared with 61 per cent in 2001. Shareof capital goods declined continuously from 25 per cent in 1996 to 12 per cent in 1999,followed by an increasing trend thereafter and reached 22 per cent in 2002-2004 driven

by investment demand. Share of export related products remained stable around 17-18per cent in 1996-1999 but declined to 16 per cent in 2001-2004. Share of other non-bulkitems which consist of gold and silver, plastics, scientific instruments, coal and coke,medicines and drugs, chemicals and non-metallic mineral products increasedcontinuously from 17 per cent in 1996 to 38 per cent in 2004.

(c) Direction of Trade

There were significant changes of direction of trade in 2000-2004 compared with that in1990s. Destination of exports changed with lower shares of OECD countries and highershares of African and Asian developing countries. Asia and Oceania has now emerged asmajor partners of Indian trade.

The sources of imports have also undergone significant changes in recent years. Importsfrom the USA and EEC declined marginally, that of OPEC countries declinedsignificantly from 23 per cent in 1999 to 6 per cent in 2004, while imports fromdeveloping Asian and African countries increased substantially and those from of Japanand East Europe remained more or less unchanged.

Another major feature of the Indian direction of trade was that Indias trade with theSouth East Asian region, particularly with China, Hong Kong, Indonesia, Korea,Malaysia, Thailand and Singapore increased significantly in 2000-2004, as thesecountries recovered from the exchange rate, financial and economic crisis of 1997-1999.

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Table-4.3: Composition of Indias Exports (per cent)

Commodity Groups 1999 2000 2001 2002 2003 2004

1. Primary products1.1 Agriculture/ allied

1.2 Ores and minerals

1815

3

1614

3

1613

3

1713

4

1512

4

1511

42.Manufactured products

2.1 Leather & products2.2 Chemicals & prod.2.3 Engineering goods2.4 Textiles2.5 Gems and jewelry2.6 Handicrafts2.7 Carpets2.8 Others

814

13142521229

77413152417212

764

14162217111

76414172117111

753

15191917110

773

15192017111

3. Petroleum & lubricants 0 4 5 5 6 6

4. Others as unclassified 2 3 3 2 4 2

Total exports 100 100 100 100 100 100

Table-4.4: Composition of Indias Imports (per cent)Commodity Groups 1999 2000 2001 2002 2003 2004

1. Food and allied products2. Fuels- Coal and POL3. Fertilizers4. Paper and newsprint5. Capital goods6. Chemicals7. Precious metals8. Iron and steel9. Non-ferrous metals10. Professional instruments11. Gold and silver12. Ores13. Textile yarn & fabric

14. Others as unclassified

62731

128

11212

1021

15

43421

187

10112921

8

53011

1989212921

10

4311122710212721

8

428112269212922

11

4311121710212822

8Total exports 100 100 100 100 100 100

Table-4.5 Direction of Indias Foreign Trade 1990-1999 (per cent)

Region/ Country Destination of exports: Sources of Imports:

2002 2003 2004 2002 2003 2004

1. West Europe2. East Europe3. Asia and Oceania4. Africa5. America6. Non-specified countries

Total

243436250

100

243466210

100

243446230

100

2522961028

100

242354926

100

243

364

1023

100

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(d) Trade and Tariff Policies

The Medium Term export Strategy (MTES) announced in 2002 set out a road map for theIndian exports in the Tenth Five Year Plan (2002-2007). The MTES aims at increasing

Indias share in world trade from the present level at 0.8 per cent to one per cent by 2006-07. This implies doubling of Indias exports in this period. Export market diversificationis a major objective of MTES and the Export-Import (EXIM) Policy with special focuson sub-Saharan Africa and the Commonwealth of Independent Nations.

The modified Five Year EXIM policy for the period 2002-2007 announced in January2004 aimed at consolidation and acceleration of exports growth so as to make India amanufacturing hub for producing quality goods and services. Measures focused onsimplification of operational procedures and imparting greater transparency with forreduction of transaction costs for exports. Some restrictions on imports of gold and silver,electrical energy and air guns were removed. Under the duty free replenishment

certificate (DFRC) scheme, duty free import of fuel was allowed with actual userconditionality. Procedures for Export Promotion Capital Goods (EPCG) scheme weresimplified. Deemed exports benefits were granted for fertilizers, refinery products anditems attracting zero per cent customs duty. Various measures were announced to boostexports. Facilities for special Economic Zones (SEZs) were widened.

A new trade policy called the National Foreign Trade Policy 2004-09 was announced onAugust 31, 2004 with an objective of doubling Indias share in global trade by 2009 andto act as an effective instrument of economic growth by giving thrust to employmentgeneration, particularly in semi-urban and rural areas. Key strategies included removal ofall controls, simplification of rules and procedures and identification of focus areas withpotentials for both employment generation and exports. Special package for agricultureincluded duty free imports of capital goods and seeds, special funds for Agri ExportZones and incentives for exports of fruits, vegetables, flowers and forest products.Special incentives were announced for exports of gems and jewellery, handlooms andhandicrafts and leather products. To encourage service exports, existing scheme ofutilizing a part of export earnings for importing related items was revamped and hotelswere allowed to use their duty credit entitlement for import of food items and alcoholicbeverages. Other important measures included the following:

EPCG scheme was liberalized for service providers.

Import of fuel under DFRC entitlement was allowed to be transferred to marketing

agencies. Export Oriented Units (EOUs) were exempted from service tax.

A new scheme was announced to establish Free Trade and Warehousing Zones andFDI to the extent of 100% was allowed for establishment of such zones.

Imports of second hand capital goods were allowed without any age restrictions.

A Service Exports Promotion Council was established.

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(e) Exchange rate policies

In international categorizations by the International Monetary Fund (IMF), India isregarded as one of the countries having independent floating exchange rate arrangement.

The day to day fluctuations in the exchange rate of Indian rupee are determined by freemarket forces for supply and demand for foreign exchange; such fluctuations reflect botheconomic fundamentals and short term speculation. The rupee is also fully convertible oncurrent account and almost fully convertible on capital account for the non-residents. Theyear 2004 posed several challenges for the exchange rate management in the face of thecontinued increase in international prices of crude oil and petroleum products andsubstantial rise of Indian oil import bill.

The broad principles that guided Indias exchange rate policy include the following:

Careful monitoring and management of exchange rates without a fixed target or a

pre-announced target or a band. Flexibility in the exchange rate together with abilityto intervene, if and when necessary;

A policy to build a higher level of foreign exchange reserves which takes intoaccount not only anticipated current account deficits but also liquidity at riskarising from unanticipated capital movements;

A judicious policy for management of capital account.

In 2004 government further liberalized the movement of cross-border capital flows,especially in the area of outward foreign direct investment, inward direct and portfolioinvestment, non-resident deposits and external commercial borrowings. Other policiesinclude the following:

FDI limit was raised from 40% to 49% in civil aviation. Tax was imposed on interest earned on the deposits by the Non-Resident Indians.

Interest rates on public provident funds and small savings were maintained at 8%.

Prepayment of External Commercial Borrowing by the corporates was allowedwithout any limit.

Rupee depreciated by 6.3 per cent in April-July 2004. But these interventions along withhuge foreign exchange reserves and continual depreciation of US dollar vis--vis majorinternational currencies led to an appreciation of the Indian rupee by 2 per cent in terms ofUS dollar in August-November 2004. Given these trends, rupee is expected to depreciatemarginally in terms of US dollar in 2004.

The nominal effective exchange rate of rupee (NEER) depreciated by 8 per cent in 2002-2003 followed by an depreciation by 1.8 per cent in 2004. The real effective exchange rate(REER) of the rupee depreciated by only 2.4 per cent in 2002-2003 and appreciated in2004 due to widening price differentials between India and its major trading partners. Thehigh level of REER has become an issue of some concern as the authorities try to findways to promote exports, and the recent appreciation of the rupee in both nominal and realterms had reduced the competitiveness of the Indian exports in international markets.

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5. Capital inflows and outflows

(a) Balance of Payments

Despite difficult international environment and hardening of international prices of crude

oil, Indias external trade and payments situation in recent years was marked by anoticeable structural change towards a more stable and sustainable balance of payments.There was continual improvement in the invisible account and in the coverage of importpayments through export earnings. The current account earned surplus every year since2001, and the surplus as a percentage of GDP increased from 0.2 per cent in 2001 to 1.4per cent in 2003-2004. In the capital account, there was a major shift in favor of long-termand non-debt creating financial flows such as FDI and portfolio investment.

Table 5.1 Net Capital inflows (in US$ million)Net capital inflows 2001 2002 2003 2004 Est.

External assistance, net 1117 -2480 -2661 1900

Foreign direct investment (FDI), net 4741 3611 3137 3500

Portfolio investment, net 1951 944 11355 1000

Commercial bank credits, net -1576 -2344 -1853 850

Other capital inflows, net 4743 13112 12725 3700

Total capital inflows, net 10976 12843 22703 10950

Official grants 384 410 559 500

Capital inflows including grants 11360 13253 23262 11450

Source: RBI Annual Report 2003-2004 for the years 2002-2003, and authors estimate for 2004.

(b) Foreign investment

Foreign investment inflows (as per balance of payments definition) increased two and

half times from $4.5 billion in 2002 to $14.5 billion in 2003 attracted by the sound macroeconomic environment in India, the stability of the exchange rate of rupee, furtherliberalization of foreign investment policies, and relatively high return of investment inIndia compared to other host countries. The increase was attributable to increases in bothdirect foreign investment and portfolio investment as a result of upgrading of Indian scripby some international credit rating organizations and bullish stock exchange markets athome. Foreign investment inflows declined to $4.5 billion in 2004 due to decline ofportfolio investment mainly influenced by political economy and bearish stock markets inthe first half of 2004.

The source and direction of foreign direct investment flows remained by and large

unchanged in the 1990s. Companies registered in Mauritius and the USA were theprincipal source of foreign direct investment in India in 2000-2003 followed by UnitedKingdom, Japan and Germany (Table 5.3). The bulk of foreign investment went intocomputers (both hardware and software), engineering industries, services, electronics andelectrical equipment, chemicals and allied products, food and diary products (Table 5.4).

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Table 5.2 Foreign Investment Inflows (in US$ million)

Items 2000 2001 2002 2003 2004-Est.

A. Foreign Direct Investment (FDI)

Through govt. approval

RBI automatic route

NRI investments Acquisition of shares

Reinvested earnings

40291456454

674231629

61312221767

3510722036

4660919739

-10421960

4675928534

-7351800

3500800500

-6001600

B. Portfolio investment

GDRs/ ADRs

FIIs

Off-shore funds

27608311847

82

2021477

150539

979600377

2

11377459

10918-

1000200800

-

C. Total Foreign Investment 6789 8152 5639 16052 4500

Note: Data in this table donot tally those in the balance of payments table due to differences in definitions.

Table 5.3: Country wise inflows of foreign Direct Investment (US $ million)

Home country 1999 2000 2001 2002 2003

GermanyUnited KingdomJapanMauritiusNetherlandsSouth KoreaUSAOthers

31112142501828

355350

113611568437624320317

7445143

1863683

364428

103224665349415268354

6915767

38119722

297272

Total 1581 1910 2988 1658 1462

Note: FDI inflows in this table include only those through government approval and RBI automatic route.

Table 5.4: industry-wise inflows of foreign Direct Investment (US$ million)

Sectors 1999 2000 2001 2002 2003

Chemical & alliedComputersEngineeringElectronics & electricalsFinanceFood & diary productsPharmaceuticalsServicesOthers

12099

32617220

12154

116553

137306273213407562226578

67368231659224969

1128398

5329726295543544509309

4615127410356379431311

Total 1581 1910 2988 1658 1462

Note: FDI inflows in this table include only those through government approval and RBI automatic route.

(c) Foreign Exchange Reserves

After a build up of foreign exchange reserves (including gold and SDR) by $17 billion in2002, there was a substantial build up of the foreign exchange reserves by $31.4 billion in2003, and further by $19.8 billion in 2004. This was mainly due to improvement in currentaccount balance. The stock of foreign exchange reserves (including gold and SDR) stoodat $121 billion at the end of October 2004 and is estimated to increase to $122 billionequivalent to 15.2 months of imports at the end of March 2005, from $102 billionequivalent to 15.4 months of imports at the end of March 2004.

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The policy for reserve management is judiciously built upon a host of identifiable factorsand other contingencies. Such factors include the size of the current account deficit; thesize of short-term liabilities; the possible variability in portfolio investment and othertypes of capital flows; the unanticipated pressures on the balance of payments arising out

of external shocks; and movements in the repatriable foreign currency deposits of Non-Resident Indians (NRIs). Taking these factors into account, Indias foreign exchangereserves are at present comfortable and consistent with the rate of growth, the share of theexternal sector in the economy and the size of risk-adjusted capital flows.

It may also be mentioned that most of the increase in reserves in recent years is throughnet purchases by RBI in the domestic forex market, for which an equivalent amount ofdomestic currency has been released to the concerned domestic entities, including publicsector units, corporate bodies and individuals. The decision on the use of this counterpartdomestic currencyreleased by RBI (i.e., for investment, deposits or as liquid assets, etc.)is the responsibility of the entities. Needless to add that to the extent this counterpart local

currency is used by recipient entities for further investment in the economy, the impacton industrial demand and growth would be favorable.

(d) External debt and debt-service

Trends of various debt indicators such as debt/GDP and debt/service ratios indicate amarked improvement in Indias external indebtedness. Indias external debt consisting ofboth short-term and long-term liabilities on Government and non-Government accountsincreased from $104.9 billion at the end of March 2003 to $112.6 billion at the end ofMarch 2004, and is expected to increase to $114.5 billion at the end of March 2005.Multilateral and bilateral debt constituted 44 per cent of total debt stock and the share ofconcessionary debt was 36 per cent of the total debt stock in 2004. The share of short-termdebt declined continuously in recent years, and stood at 2.5 per cent of total external debtin 2004. India improved its rank among the top 15 debtor countries from third in 1991 toeighth in 2002. Importantly, among the top 15 debtor countries, Indias short-term debt toforeign exchange reserve ratio are the lowest.

The changing composition of capital account in favor of non-debt financial flows led to animpressive improvement in debt indicators. The debt-to-GDP ratio declined continuouslyfrom 38 per cent in 1991 to 18.4 per cent in 2003 and further to 16.6 per cent in 2004. Thedebt-service ratio (i.e. the ratio of total debt services to gross receipts on the currentaccount of the external sector) also declined continuously from 35 per cent in 1990 to 18.3per cent in 2003 and further to 13.5 per cent in 2004. The World Bank now classifies Indiaas a low indebted country.

On considering high transactions cost and stringent conditionalities, and the present levelof foreign exchange, previous government took a policy decision in 2003 to borrow onlyfrom 5 bilateral countries viz. Japan, UK, Germany, USA and Russian Federation.However, the new government after taking charge in June 2004 removed conditionalitiesof country origin for borrowing. India is also participating actively in the international

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initiative for economic development of HIPC (Heavily Indebted Poor Countries) andother developing countries. Under the HIPC, India is providing credit lines to seveneligible HIPC countries viz. Mozambique, Tanzania, Zambia, Ghana, Guyana, Nicaraguaand Uganda. The government has waived the outstanding dues from these countries. Inaddition India provides credit lines to a number of developing countries.

5.5 Outstanding External Debt (millions of US dollars)Items March 2002 March 2003 March 2004 March 2005

Proj.

External debt 98757 104869 112593 114507

Long termPublicPrivate

960124361952393

1003004371656584

1078574430363554

1095074610363404

Short term 2745 4569 4736 5000

Debt servicesIn US dollarsAs % of gross exports

As % of GDP

1086313.4

2.3

1440715.1

2.8

2094918.3

3.4

1700013.5

2.5Source: Status Report on Indias External Debt, June 2004, Ministry of Finance and ReserveBank of India Annual Report 2003-04 for the years 2002-2004, and author's estimate for 2005.

(e) Outlook for the External Sector for 2004-2006

Assuming a moderate depreciation of the real effective exchange rate for Indian rupee in2005-2007, Indias trade performance is expected to improve in response to a recovery ininternational economic activity, trade deepening, and further integration of the countryinto the global economy. Exports in terms of US dollar are projected to grow by 16 percent on an average per annum in 2005-2007 while imports are likely to grow by 17 per

cent in the period. The trade deficit as per centage to GDP is expected to remain in therange of 3.4 to 4 per cent of GDP and the invisible surplus is expected to remain around4.3 per cent of GDP in 2005-2007 due to sustained growth in remittances from abroad.Consequently, the current account balance is expected to generate marginal surplus in therange of 0.2 per cent to 0.5 per cent of GDP in 2005-2007.

On capital account, access to commercial markets would be renewed as internationalcredit ratings improve, and the composition of capital inflows would continue to shift infavor of non-debt creating financial flows in response to the sustained reforms inindustry, infrastructure and factor markets. Total capital flows are expected to increasefrom 1.5 per cent in 2004 to 1.7 per cent of GDP in 2007 and flows of foreign investment

to remain at 1 per cent of GDP in the period. The stock of foreign exchange reserves isexpected to increase from $122 billion equivalent to 15.2 months imports at the end of2004 to $178 billion equivalent to 14 months imports at the end of 2007.

The stock of external debt is expected to increase to $120 billion amounting to 13.3 percent of GDP at the end of 2007. The debt-service ratio would remain at its normal levelaround 10 per cent in 2005 (despite maturing of the India Millennium Bonds in 2005,

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which were issued to non-residents in 2000 and generated $5.5 billion) and decline to 9.3per cent of current receipts (exports and gross invisibles) in 2007.

6. Fiscal Developments

(a) Fiscal situation in 2003 and 2004

Tax revenues of the Central government in 2003-04 RE exceeded BE by 1.8% (due tohigher realisation of corporate tax), and non-tax revenues also exceeded BE by 8.2%(due to higher realisation of dividends and grants). Total expenditure exceeded BE by8%. While revenue expenditure was short of BE by 0.9%, capital exp exceeded BE by53.5%. Defense, interest payments and subsidies lower than BE by Rs.12, 946 crore.Consequently, there was an improvement in fiscal deficit to 4.8% of GDP in 2003-04 REfrom BE at 5.6% of GDP, and improvement in revenue deficit to 3.6% of GDP in 2003-04 RE from BE at 4.1% of GDP.

The Union Budget for 2004 continued the on-going fiscal adjustment by targeting the

fiscal deficit at 4.4 per cent of GDP and attempted to stimulate balanced growth ofagriculture, industry and services. Fiscal policies included rationalization of customs andexcise duties and reduction of the maximum tariff rate from 30 per cent to 25 per cent.The Budget attempted to stimulate the economy by leaving direct taxes unchanged andincreasing public expenditure on agriculture, infrastructure and rural development.Policies were announced to promote agri-business, small enterprises and ruraldevelopment. Budget had also a strong commitment to the development of social sectorsfor achieving distributive justice, strengthening the public distribution system and povertyalleviation programs, improving rural infrastructure and generation of employment.

Welfare schemes for the poor included the following:

Additional plan outlay of Rs.10, 000 crore for Food for Work Program, sarva Shiksha Abhiyan,

Mid-day Meal scheme, basic health care, drinking water etc. Antyodaya Anna Yojana expanded to 2 crore families.

Strengthening of public distribution system.

A new Food for Work Program in 150 backward districts.

Allocation of Rs.1180 crore for programs concerning SCs, Rs.1146 crore for STs, additional Rs.50crore for minorities.

A special Group Insurance Scheme of Rs.10, 000 at a premium of only Rs.120 per person.

A new Universal Health Insurance Scheme for poor.

An education cess of 2% on taxes.

No tax for individuals with taxable income up to Rs.1 lakh.

Tax holiday extended to rural hospitals and agro processing industries

Major fiscal measures announced in the budget for 2004 include the following:Fiscal consolidation:

Fiscal deficittargeted at 4.4% of GDP in 2004-05 BE compared to 4.8% in 2003-04RE.

Revenue deficit targeted at 2.5% compared to 3.6% in 2003-04 RE.

Primary deficit kept at the same level at 0.3% of GDP in 2004-05 BE as in 2003-04 RE.

Blue print to target subsidies to be prepared.

Rate of interest on central government loans to states reduced from 10.5% to 9%.

States would be allowed to raise fresh loans and repay high cost loans.

Passing on external loans to States on a back-to-back basis.

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Tax reforms: Value Added Tax will be introduced at the state levels w.e.f. April 1, 2005.

No one with a taxable income up to Rs.1 lakh is required to pay income tax.

Acquisition of agricultural land is exempted from capital gains tax.

Tax on long-term capital gains abolished. Instead, a tax on transactions in securities on stocks tobe levied at the rate of 0.15%.

Service tax rate increased to 10% and more services brought under the tax net. Tax exemptions on NRE accounts abolished.

Gifts from unrelated persons to be taxed.

Customs duty on non-alloy steel reduced from 15 to 10%,

Peak rate on alloy steel, copper, zinc and base metals reduced to 15% and customs duty on rawmaterials and minerals reduced to 15%.

Tractors and agricultural implements are fully exempted from import duties.

Import duty on refined palm oil raised to 75%, that on crude palm oil retained at 65%.

Excise duty reduced from 16 to 8% on meat, poultry, and fish preparations.

Aids for physically handicapped persons fully exempt from import duty..

Full excise duty exemptions for computers

New tax regime for textiles: Mandatory CENVAT chain abolished.

No mandatory excise duty on pure cotton, wool, silk, whether it is fiber, yarn, fabric or garment.

Blended textiles and pure non-cotton to have different tax regime.

Mandatory excise duty on man-made fiber at 16%, polyester filament yarn at 24% and other man-made filament yarn at 16%.

The tax-GDP ratios of the Centre suffered a steady deterioration in 1990s (Table-6.1)reflecting a decline in tax buoyancy. The restructuring of both direct and indirect taxeseffected since 1991 coupled with a structural shift in the composition of GDP towards theless taxed services sectors affected adversely the growth of tax revenues. However there

has been some increase in the ratios of non-tax revenues to GDP due to restructuring ofpublic sector enterprises and rationalization of user charges for public utilities such aspower, water and transport.

For medium term management of the fiscal deficit, the government passed a FiscalResponsibility Bill in the parliament. The Bill proposes limit on fiscal deficit, limit ongovernment borrowing, limit on total stock of public debt and complete elimination ofdeficit on the current account of the Budget within next five years.

Table-6.1 Gross Revenue Receipts of the Central government (as % of GDP)

Year Major Taxes Gross taxrevenue

Non-taxrevenue

Totalrevenuereceipts

Incometax

Corporation tax

Exciseduties

Customsduties

1990-91 0.9 0.9 4.3 3.6 10.1 2.1 12.2

1995-96 1.3 1.4 3.4 3.0 9.4 2.4 11.8

2000-01 1.5 1.7 3.3 2.3 9.0 2.7 11.7

2001-02 1.4 1.6 3.2 1.8 8.1 3.0 11.1

2002-03 1.5 1.8 3.5 1.8 8.8 3.0 11.7

2003-04 1.5 2.3 3.6 1.8 9.3 2.7 12.0

2004-05 1.6 2.4 3.7 1.9 9.8 2.3 12.1

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In the first half of 2004 i.e. April-Sept 2004 tax revenues amounted to only 33.3 per centof the budget estimates (BE) for the year, while non-tax revenues amounted to 38 per centof BE. However, personal income taxes increased by 73 per cent and service tax by 69 percent in April-Sept 2004 over April-Sept 2003. Due to various economy measures, total

expenditure was generally under control and amounted to 41 per cent of BE ( Table 6.2)and the fiscal deficit amounted to 39 per cent of the budget estimate.

Table 6.2 Union Government Account in April-September 2004

ItemsBE

Rs.billionActual

Rs.billionAs %of BE

BE As %of GDP

RE As %of GDP

1.Revenue receipts (2+3) 3093 1065 34.4 9.7 3.3

2.Tax revenue 2339 779 33.3 7.3 2.4

3.Non-tax revenue 754 286 38.0 2.4 0.9

4.Capital receipts 1685 891 52.9 5.3 2.8

5.Non-debt cap.receipts 311 358 115.2 1.0 1.1

Interest payments 1295 554 42.8 4.1 1.7

6.Other capital receipts 1374 532 38.7 4.3 1.77.Total receipts (1+4) 4778 1956 40.9 15.0 6.1

8.Total expenditure (9+10) 4778 1956 40.9 15.0 6.1

9.Revenue expenditure 3855 1665 43.2 12.1 5.2

10.Capital expenditure 923 291 31.5 2.9 0.9

11.Revenue deficit 761 600 78.7 2.4 1.9

12.Fiscal deficit 1374 532 38.7 4.3 1.7

13.Primary deficit 79 -22 -27.4 0.2 -0.1

14.GDP at current mp 31825 31825 100.0 100.0

Fiscal deficit in the first half of the year accounted for 39% of the government's estimatefor the year. The revenue deficit reached 78% of its end of year target, largely as a resultof slow growth. This has increased concerns that the government's plans to bolster publicspending in infrastructure, education, and rural development may increase fiscal deficit.An expected rise in interest rates could further harm the fiscal position and thegovernment may feel more pressure to press ahead with its plans to strengthen the taxsystem and its divestment programme.

Given these developments, the actual fiscal deficit of the Central Government in 2004 islikely to be contained at 3.6 per cent of GDP compared with the budget estimate at 4.3 percent of GDP (Table 6.3). Although both non-tax receipts and personal income taxes werebuoyant, the performance of indirect taxes was poor due to weaker growth of excise dutiesthan expected. There was also a shortfall in realization of disinvestment targets due to the

lack of agreement regarding the mode of disinvestment among the political parties.

(b) Fiscal Deficit and Financing

Combined fiscal deficit of the Centre and State governments decreased from 9.9 per centof GDP in 2001 to 9.5 per cent of GDP in 2002 and further to 9.4 per cent of GDP in2003 and is budgeted to decrease to 7.9 per cent of GDP in 2004 (Table 6.4). However,

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given the present trends of expenditures and revenues, actual fiscal deficit of the generalgovernment might reach 9.6 per cent of GDP in 2004, almost the same level as in 2003.

Market borrowings emerged as the major financing item of the fiscal deficit of the centralgovernment since the mid 1990s with a corresponding decline in the shares of otherliabilities and external finance (Table-6.5). There was net outgo in external finance in2002-03 due to pre-payment of a part of external debt borrowed from the multilateral and bilateral organizations. Among domestic sources, amounts mobilized through smallsavings and provident funds have generally been at higher costs than the marketborrowings. The share of market borrowing in financing fiscal deficit of the states alsoincreased in 1990s with a corresponding decline in that of loans from the centralgovernment (Table-6.6). However, the receipts of small savings remained the majorsource of financing.

6.3 Fiscal Situation of the Central Government (As % of GDP)

Central government budget

as per cent of GDP

2001 2002 2003

Rev.Est.

2004

(BE)

2004

Est.

1. Tax revenue 5.9 6.5 6.7 7.3 8.12. Total non-debt revenue 9.7 10.9 12.2 10.7 11.1

3. Current expenditure 13.2 13.8 12.9 12.1 11.2

4. Total expenditure & net lending 15.9 16.8 16.9 15.0 14.7

5. Overall budget balance (2-4) -6.2 -5.9 -4.7 -4.3 -3.6

Source: Central Government Budget 2004-2005, Ministry of Finance for the years 2001-2004and authors estimates for 2004.

6.4 Fiscal Deficit of Centre and States combined (as per centage of GDP)

Items 2001 2002 2003

Rev.Est.

2004

(BE)

2004

Est.

1. Gross fiscal balance [Deficit ( -)] 9.9 9.5 9.4 7.9 9.62. Revenue balance [Deficit ( -)] 7.0 6.6 6.2 4.0 6.2

3. Primary balance [Deficit ( -)] 3.7 3.3 2.9 1.7 3.2

Table-6.5 Financing of gross fiscal deficit of the central government (in per centage)

Sources of financing 1990-91 1995-96 2002-03 2003-04RE

2004-05BE

1. Domestic finance (a+b+c) 92.9 99.5 108.2 108.9 94.1

(a) Market borrowings 17.9 54.9 71.8 64.9 65.8

(b) Other liabilities 49.5 28.3 35.2 51.8 18.5

(c) Use of cash with RBI 25.4 16.3 1.3 -7.8 9.9

2. External finance 7.1 0.5 -8.2 -8.9 5.93. Total (1+2) 100 100 100 100 100

Note: Other liabilities comprise small savings raised from the people, state providentfunds, reserve funds, treasury bills issued.

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Table-6.6 Financing of gross fiscal deficit of the state governments (in per centage)Sources of financing 1990-91 1995-96 2002-03 2003-04

RE2004-05

BE

1. Loans from central govt. 53.1 47.1 -1.8 -15.1 -6.5

2. Market borrowings 13.6 18.7 27.9 32.1 23.0

3. Other liabilities 33.3 34.2 73.9 83/0 83.6

4. Total (1+2+3) 100 100 100 100 100Note: Other liabilities comprise small savings raised from the people, state provident funds, reserve

funds, deposits and advances, and loans from Financial Institutions. With the change in the system of

accounting with effect from 1999-2000, state share in small savings, which were hitherto included

under loans from the central government, is included under other liabilities.

(c) Contingent liabilities of the government

In 1990s there was a steady decline of the contingent liabilities of the central government,but an increase in the liabilities of the states (Table-6.7). Many states have now initiatedmeasures to contain the growth of guarantees such as discretion and selectivity for theprovision of guarantees, disclosing comprehensive information in budget documents,

setting up of guarantee redemption funds, fixing statutory and administrative limits onguarantees and charging guarantee commissions on outstanding guaranteed amounts.

A Group to Assess the Fiscal Risk of State Government Guarantees (2002) made thefollowing suggestions to contain state guarantees and fiscal risk:

Guarantees to be met out of budgetary resources should be identified and treatedas equivalent to debt.

For other guarantees, projects and associated costs need to be identified..

Guarantees need to be mapped for future devolvement.

Data need to be published for generating public debate.

A State level centralized unit should be set up to track and monitor guarantees.

At least one per cent of outstanding guarantees to be transferred to the GuaranteeRedemption Fund every year.

Table 6.7 Outstanding Government Guarantees (as per centage of GDP)

Year Centre States Total

1992-93 7.8 5.7 13.4

1993-94 7.3 5.7 13.0

1994-95 6.2 4.8 11.0

1995-96 5.5 4.4 9.9

1996-97 5.1 4.6 9.71997-98 4.9 4.8 9.7

1998-99 4.3 5.6 9.9

1999-2000 4.3 6.8 11.2

2000-01 4.1 8.1 12.2

2001-02 4.2 7.2 11.4

2002-03 3.7 7.5 11.2

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(d) Public Debt

The high level of fiscal deficit of the Central Government has led to steady accumulationof debt by the Central Government, as indicated by rise in debt-GDP ratio from 92 percent (comprising domestic debt at 82 per cent and external debt at 9 per cent) at the endof March 2002 to 97 per cent (comprising domestic debt at 88 per cent and external debtat 8 per cent) at the end of March 2004 (Table 6.8). The debt-GDP ratio of the Centralgovernment is estimated to be 66 per cent (comprising domestic debt at 60 per cent andexternal debt at 6 per cent) at the end of March 2005.

Table-6.8 Domestic Debt of the centre and state combined at end March

Items 2000 2001 2002 2003 2004 2005

Domestic debt combined (Rs.billion) 13827 16007 18815 21857 24828 28420

Centre 9626 11026 12949 14996 16771 19311

State 4201 4981 5867 6861 8057 9109

External debt combined (Rs.billion) 2044 2052 2130 2019 1834 1735

Centre 2044 2052 2130 2019 1834 1735

State 0 0 0 0 0 0

Total govt. debt combined (Rs.billion) 15871 18059 20946 23876 26662 30155

Centre 11670 13078 15079 17015 18605 21046

State 4201 4981 5867 6861 8057 9109

Domestic debt as % of GDP (combined) 71.4 76.6 82.4 88.5 88.3 89.6

Centre 49.7 52.8 56.7 60.7 59.6 60.9

State 21.7 23.8 25.7 27.8 28.6 28.7

External debt as % of GDP (combined) 10.6 9.8 9.3 8.2 6.5 5.5

Centre 10.6 9.8 9.3 8.2 6.5 5.5

State 0.0 0.0 0.0 0.0 0.0 0.0

Total govt.debt as % of GDP (comb) 81.9 86.4 91.8 96.7 94.8 95.1

Centre 60.3 62.6 66.1 68.9 66.2 66.3

State 21.7 23.8 25.7 27.8 28.6 28.7

Interest payments combined (Rs.billion) 1105 1247 1424 1584 1800 1917

Centre 902 993 1075 1178 1246 1295

State 202 254 349 406 554 622

Revenue receipts combined (Rs.billion) 3437 3788 4002 4505 5292 6054

Centre 1815 1926 2014 2317 2630 3093

State 1623 1862 1987 2187 2662 2961

Interest payment as % GDP 5.7 6.0 6.2 6.4 6.4 6.0

Centre 4.7 4.8 4.7 4.8 4.4 4.1

State 1.0 1.2 1.5 1.6 2.0 2.0

Interest payment as % revenue 32.1 32.9 35.6 35.2 34.0 31.7

Centre 49.7 51.6 53.3 50.8 47.4 41.9

State 12.5 13.6 17.6 18.6 20.8 21.0

Notes: (1) States are not allowed to borrow directly from external sources. Centre government borrows externally onbehalf of the state governments and lends it to the state governments as domestic debt. Therefore, all external debt isshown on the central government account. (2) General government public debt may not add up to the respective publicdebt of the Centre and States on account of inter-government transfers.

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The combined domestic debt of the general government is expected to increase from 88per cent of GDP in 2003 (comprising domestic debt of the centre at 60 per cent and stategovernment debt at 29 per cent) to 90 per cent in 2004 (comprising central governmentdomestic debt at 61 per cent and state government debt at 29 per cent) (Table-6.8).

The combined public debt