Part 1 · S. No. Chapter Name Page No. 01. Wealth Creation: The Invisible Hand Supported by the...

1 | Economic Survey-2019-20

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Part – 1

Economic Survey

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S. No. Chapter Name Page No.

01. Wealth Creation: The Invisible Hand Supported by the Hand of Trust

4-9

02. Entrepreneurship and Wealth Creation at the Grassroots

10-11

03. Pro-Business Vs Pro-Crony 12-14

04. Undermining markets - when govt intervention hurts more than it helps

15-21

05. Creating jobs and growth by specialising to exports in Network Products (NPs)

22-26

06. Targeting Ease of Doing Business in India

27-30

07. Golden Jubilee of Bank Nationalisation-Taking Stock

31-33

08. Financial Fragility in the NBFC Sector

34-34

09. Privatization and Wealth Creation

35-35

10. Is India’s GDP Growth Overstated? No!

36-36

11. Thalinomics - Economics of a Plate of Food in India

37-39

LEARN, UNLEARN

& RE-LEARN


For a majority period of economic history India has been a major wealth creator and a significant

contributor to the global GDP. Such dominance is not an outcome of chance but by design (the policymakers make policies which focus on efficient usage of resources to get higher output). However India deviated from this model of wealth creation post-independence and has returned to its roots again post the liberalization reforms taken in 1991 and since then India has experienced an exponential rise GDP and GDP per capita. This wealth creation has also coincided with the wealth generation in the stock market

Figure: India’s GDP Source: World Bank

The importance of such a wealth creation is that (economic survey has compared the wealth creation with various parameters in companies created by top 100 wealthy entrepreneurs) o There is a strong correlation between wealth created by entrepreneurs with the benefits that

accrue to the employees working in these firms o There is a strong correlation between wealth created by entrepreneurs with the benefits that

accrue to the suppliers, this is represented in the increasing sales of the raw materials o There is a strong correlation between wealth created by entrepreneurs with the increased

capital expenditure by the concerned firms (is a proxy for the benefits enjoyed by the manufacturers of the capital equipment)

o There is a strong correlation between wealth created by entrepreneurs with the foreign earnings made by the respective firms (foreign exchange enables the country to pay for its imports and keeping the current account deficit under check, thereby promoting macroeconomic stability of the country)

o There is a strong correlation between the wealth creation and the taxes paid. The wealth creation leads to higher tax revenue collection by the govt, which in turn means the expenditure of the govt in providing public goods and social welfare benefits to the citizens

India though followed form of socialism post-independence new policy approach the reforms or measures were taken to allow the invisible hand of the market to create wealth. The evidence has shown that this has a huge impact in enhancing wealth both in aggregate and within the sectors, has changed the policy since 1991. In the new policy approach the reforms or measures were taken to allow the invisible hand of the market to create wealth. The evidence has shown that this has a huge impact in enhancing wealth both in aggregate and within the sectors

01 Wealth Creation: The

Invisible Hand Supported

by the Hand of Trust


o The sectors which were liberalized have grown significantly faster compared to the sectors that have remained closed (it is because in a market economy, the allocation of resources is done based on the demand for goods or services in the market) The sectors which were liberalised have grown significantly faster compared to the

sectors that have remained closed (it is because in a market economy, the allocation of resources is done based on the demand for goods or services in the market)

The same has been observed in the mutual fund industry (after the sector was opened in 2003)

The growth in open sectors such as roads (freight and passenger traffic), steel, segment etc has been higher than the growth in closed sectors such as coal, railways etc

Figure: Increase in domestic credit to GDP after entry of private sector banks

Source: World Bank WDI and Survey calculations

Figure: Growth in Mutual funds sector after opening up in 2003

Source: AMFI data and Survey calculations


Figure: Annual Growth rates in open Sectors (Steel and cement) versus closed sector (coal)

Source: CMIF, company annual reports and survey calculations Instruments for wealth creation

One of the ways of creating wealth is by focusing on the efficiency and a dimension related to this is the opportunity for the new entrants in the market o These new firms are focused on efficient usage of resources, facilitate job growth, promote

trade growth, increase economic activity, increase the competition (in this context it is important to remember that this kind of entry of new firms will lead to competition which represents a pro-business economy, as against a pro-crony economy in which the existing companies will exhibit rent seeking behaviour because of their proximity to the corridors of power - Chapter 3)

o In this backdrop it is very important to ensure that the govt formulates the policy allowing equal opportunity for these new entrants. The govt has taken steps post 1991 to promote the entry of these new entrants

o It has been seen that a 10% increase in the new firms in a district yields a 1.8% increase in the Gross District Domestic Product (GDDP) - Chapter 2 The peninsular states dominate entry of new firms The entrepreneurship is dispersed across India New firm creation has gone up since 2014 The number of new firms have grown at a rate of 3.8% between 2006-2014 and at a rate of

12.2% from 2014 to 2018 o The govt needs to promote policies that would further allow the entry of new firms. This

would play a critical role in making India a $5 tn economy o Though India has shifted to the market economy, there are still some regulatory relics of the

pre-liberalisation era. In the case of the free market economy the focus is on efficient usage of resources (resources are scarce and there are competing opportunities, market resolves the issue) and the seller and buyers come together to strike a bargain via a price mechanism. On the other hand in command economy, the prices are regulated. Some of such measures are still present in the economy and such interventions hurt the economy. The survey has found that unshackling of economic freedom for markets augments wealth creation (Chapter 4)

Another dimension of efficiency is related to allocation of resources to ensure their optimal use. The resources are scarce and the nation has to make choices in order to use the resources in an optimal manner. For example with huge demographic dividend, should India be focused on the labour intensive or capital intensive industries. The survey notes that 4 Cr well paid jobs could be created by 2025 which could be increased to 8 Cr by 2030. This could be achieved by integrating “Assemble in India for the world” into Make in India programme of the govt (Chapter 5)

The ease of doing business has improved substantially in India. It was ranked 142nd in 2014 and has jumped to 63rd in 2019. The recently published report has recognised India as one of the ten economies that have improved the most (Chapter 6) o The pace of reforms implemented for ease of doing business needs to be enhanced


o India continues to trail in parameters such as Starting a business, Registering property, paying taxes etc.,

To increase the efficiency in the economy there is a need of efficient financial sector (Chapter 7) o Indian banking sector is disproportionately underdeveloped given the size of the economy o India has only one bank in the global top 100. The countries whose economic sizes are a

fraction of India’s have more (eg Sweden, Singapore) o 70% of the banking market share is of the PSBs (Public Sector Banks), but their performance

in various parameters is inefficient, when compared to their peers

The shadow banking sector also has grown substantially and accounts for a significant proportion of financial intermediation and accounts for a significant proportion of financial intermediation (Chapter 8)

When the companies which were earlier CPSEs (Central Public Sector Enterprises) are privatised there has been a gain in efficiency in the form of net worth, net profit, return on assets etc., (Chapter 9)

Wealth of a nation is measured in terms of its GDP (Gross Domestic Product). In recent times there have been certain concerns raised over its estimation methodology. The calculation of GDP is important as uncertainty over it can affect the investment (Chapter 10)

Any wealth creation in an economy must ultimately improve the livelihood of the common man. Ione way of measuring this improvement is the accessibility to nutritious food. The survey has shown that this plate of nourishing food has become more affordable to the common man (Chapter 11)

Breakdown of trust in the early years of millennium

Even in a market economy the state must ensure that there is a moral hand to support the invisible hand. This is critical as the private sector companies are focused on the profits and may ignore the ethics

Trust is necessary for getting access to formal and informal financing. Survey has introduced the trust as a public good

There has been an issue of trust deficit in Indian economy, the events post 2011 are a proof of this. India fared badly in the Perception of Corruption Index in 2011 (since 2013 has improved significantly)

Figure: Corruption perceptions Index for India (low score = Higher Perceived Corruption)

Source: Transparency international

There was also an issue of cronyism (which benefited the firms and the shareholders). The connected firms (Ambit Capital) outperformed the BSE 500 index before 2011 and have underperformed the BSE 500 index post 2011 and is adjusted for demergers, 2)70 companies with poltical depedence and connectivity as on Dec,06 as per ambit analyist.


Figure: Investor wealth generated by “connected” firms before and after

The survey also has shown how discretionary allocation of natural resources before 2014 led to rent seeking by beneficiaries. Post 2014 these resources are allocated through auctions, which has eliminated such opportunities for rent seeking behavior

The survey also notes that the large corporations will fully defaulted on their loan repayment. The credit offtake (as a proportion) to the corporate sector increased from 2007 to 2013 and thereafter has declined

Figure: Proportion of corporate Loan in Indian Non-Food credit

Source: RBI

Figure: Non-Performing Asset (NPA) Rate by size of the Loan

Source: TransUnion Cibil-Sidbi


In addition to this, whenever companies misreport their financials it creates a negative externality which reduces the trust of domestic and international investors in the financials of the firms in the economy. This affects the lenders including other financial system intermediaries

When corporates wilfully default, it creates a negative externality which affects all other corporates, as they will be able to get access to lesser supply of credit because of lack of trust

In June 2017 RBI identified 12 companies which accounted for 25% of India’s total Non-Performing Assets (NPAs). Usually such issues of stress in the financials of the companies are flagged by the auditors. When it does not happen it means there has been a market failure of trust

The PSBs have a much larger proportion of NPAs as compared to the New Private Sector Banks. It implies that willful defaulters have siphoned off taxpayers money

Enabling Trust

Reducing information asymmetry o The opportunistic behaviour could be reduced by having more standardising enforcement

systems and having public databases (for instance to a certain extent the issue of NPAs could have been addressed if there was a system such as CRILC - Central Repository of Information on Large Credits - before 2014; the banks could have used the cross-default clauses in their loan agreement toi recall the loans)

o Such information sharing amongst the banks has led to publicly naming and shaming the wilful defaulters

Enhancing quality of supervision o The Govt needs to take certain measures/steps to detect the opportunistic behaviour in the

market by unscrupulous elements The Competition Commission of India has one employee for every 38 listed firms and

SEBI has one for every six listed companies (on the contrary US Federal Trade Commission has one employee for every 4 listed firms and Securities Exchange Commission one employee for every listed firm). Such resource deficit needs to be reduced

SEC and FTC use Artificial Intelligence and Machine Learning to track and flag malpractices. It is not so in case of regulators in India


Entrepreneurs are seen as agents of change as they

o Create employment opportunities o Accelerate innovation

India is the 3rd largest entrepreneurship ecosystem in the world. The number of new firms in the formal sector grew at a rate of 3.8% between 2006 to 2014, thereafter the rate has been 12.2% o The growth of new firms is more pronounced in the service sector o Peninsular states dominate entry of new firms o Entrepreneurship is dispersed across India and is not restricted to few metropolitan cities o In case of spatial distribution of the firms/establishments

Agriculture o Entrepreneurial capabilities in cas elf the agriculture sector are not geographically

localized and are distributed evenly across all the districts o Better performing states are Manipur, Meghalaya, Madhu’s Pradesh, Assam, Tripura

and Orissa Manufacturing sector

o The states having highest entrepreneurial activity are Gujarat, Meghalaya, Puducherry, Punjab and Rajasthan

o High performing states such as Gujarat, Punjab and Rajasthan have been identified for their flexible labour laws

o States with lagging performance such as West Bengal, Assam, Jharkhand, Kerala etc have inflexible labour laws

o Given the connect between entrepreneurial activity and economic contribution, the states must look into reforming or restructuring these labour laws to enable the transition from low productivity informal sectors to relatively more productive formal sectors establishments

Services sector o Entrepreneurial activity is high in states such as Mizoram, Uttar Pradesh, Kerala,

Delhi etc.

However o On per capita basis, India has low rates of entrepreneurship in the formal economy o Entrepreneurial intensity is higher in developed economies o A large number of enterprises in India operate in the informal economy

Entrepreneurship and GDP o A 10% increase in the registration of new firms per district year yields a 1.8% increase in

GDDP (Gross Domestic District Product) o The results also prove that the entrepreneurial activity in emerging economies such as India

is not necessity driven and typically borne from lack of alternative employment. Rather the entrepreneurial activity in the formal sector is productive and growth focused.

02 Entrepreneurship and

Wealth Creation at the

Grassroots


The driving force for spatial distribution of entrepreneurial heterogeneity o Prior research has shown that the following factors drive such spatial distribution of

entrepreneurial heterogeneity (or factors that drive the north of new firms) Local population characteristics District level conditions Agglomeration economies

o The survey focuses on two parameters that drive level of entrepreneurial activity in the district Social infrastructure - relate to

o General education levels - higher education levels enables development of better human capital and relates to increased supply of ideas and entrepreneurs. It also increases the supply of talent to the entrepreneurs which will enable them to manage their growing companies

Physical infrastructure o Access to basic physical infrastructure

Proportion of villages connected by tar roads Access to electricity, water/sanitation facilities, telecom services

Physical connectivity is measured in terms of mean distance between from the population centre that has at least 500000 people. This would provide for extension of the market and to scale up the operation for the companies

o Findings An increase in education levels will lead to an increase in entrepreneurial activity. This

correlation has been found to be much stronger after literacy rate crossing 72% Higher entrepreneurial activity is found after the number of colleges in the district

crosses 26 In terms of tar road connections, the entrepreneurial activity increases till the connectivity

(proportion of villages in a district connected by the road) increases till 91%, thereafter it has declined. This means that after 91% connectivity the firms are earning reduced returns because of higher competition, hence the activity gets reduced

The same finding is applicable to infrastructure also. The activity keeps on increases till a point and thereafter reduces

o In case of proximity to the markets, the activity increases monotonically when the market centre is at a distance below 42 kms. Beyond a certain point this increased access to local markets will create high competition and discourage entrepreneurship

Policy Implications for spurring entrepreneurial activity o Measures to rapidly increase literacy levels through institutions such as schools and colleges

must be taken. In this the govt can look into privatisation of education to augment the capacity at all levels. This should be given the highest priority

o Better connectivity of villages through tar roads, this will improve access to local markets and promote entrepreneurial activity

o Policies fostering ease of doing business and flexible labour regulation must be looked into


Post the 1991 LPG reforms

o The Sensex has grown and has grown at accelerating pace o The market took thirteen years to grow by incremental 5000 points (1999), the time taken for

other incremental growth has reduced o The growth of Sensex can be divided into three groups

Phase I from 1999 to 2007 - there was high acceleration in the growth of Sensex Phase II from 2007 to 2014 - saw a slowdown in the growth of the index. This phase

coincides with the unfavourable events such as global financial crisis Phase III started in 2014 and has been coinciding with the structural reforms and

improvement in global liquidity. In this phase the Sensex jumped from 30000 points to 40000 points in just two years

o This phase also saw churning if the companies included in the calculation of Sensex i.e. the list of the companies taken for calculation of index was changed often. This has been as post 1991 reforms the macroeconomic situation, performance of various sectors etc., has changed

o What benefits have accrued to the Indian economy because if this Initially the list was dominated by companies from the manufacturing sector, in the

revision that was done in 1997, some of these were replaced by new sectors such as banks and financials. Which reflects the far reaching changes that Indian economy was experiencing on the wake of liberalisation

Financials and information technology were non-existent in the Sensex in early 1990s and now they comprise more than 50% of the market share of Sensex

The diversity of sectors has increased. In the initial years of Sensex, it was dominated by Materials and Consumer Discretionary sectors, accounting for over two thirds of the firms. Today the sectors such as financials, telecommunications, information technology etc., not only are included but also are weighed higher

o The inference that can be drawn are Older established companies are being challenged by new, smaller and more agile firms Once every five years, roughly one in three firms can expect to be challenged in a massive

way by the forces of creative destruction (process of industrial mutation that constantly revolutionizes the economic structure, by destroying the old one and creating a new one; when creative destruction is promoted the whole sector outperforms the individual companies creating new wealth and maximising welfare)

The size difference between the largest and smallest firms is shrinking and the monopoly power in the economy is declining. This is leading to more competitive markets

Pro-Crony and wealth destruction o Ambit Pvt Ltd publishes a stock market index of 75 Indian firms, which have been identified

as ‘connected’ by it o The difference between being pro-business and pro-crony is that in the former the policies

will lead to competitive markets and in the latter the policies will benefit the incumbents. In case of pro-crony erode wealth

03 Pro-Business Vs Pro-Crony


Natural resources - discretionary allocation or auction o Coal

India has the 5th largest coal reserves in the world (after the USA, Russia, China and Australia)

Coal is used to meet more than half of the energy requirements The govt amended Coal Mines Nationalisation Act of 1973 in June 1993 and allowed for

captive mining. Under this the coal mines were allocated for the mining companies. In 2012 CAG report examined the effectiveness of such allocation and in 2014 Supreme Court of India cancelled 214 coal block allocations out of 218 that were done over a span of 15 years. Since then the govt has amended the act and now the mines are allocated based on the competitive auction process

Points to be noted o The related parties benefited under the earlier allocation process

Prior 2010, the investors in the company and promoters benefitted, as these performed better than the index of BSE 500 firms. The connected firms made more profits than would have been possible in a more competitive economy

Post 2011 these companies have been underperforming, this represents the inability of the companies in creating wealth for their investors

Between 2007 to 2016, the connected firms have on average made 7.5% lower returns per annum compared to BSE 500 index

This presence of connected firms in the economy is unhealthy Since these companies are focused on creating political relationships, their focus on the

growing through competition and innovation is lower, this undermines the economy's capacity for wealth creation

o The payouts in the form of commissions, consulting expenses of the higher management has increased under allocation process. The salaries of normal employees has not increased

o The market share of the companies that got access to mines under discretionary allocation, has been steadily declining

o Firms when compared against the firms which did not receive any allocation Incomes declined by 54.9% over a 3 year period Expenses reduced by 58.7% Profits After Tax (PAT) reduced by 37.8% Overall assessment is that in case of discretionary allocation, there is an increased

evidence of rent seeking, firms divert their focus towards tunnelling away these rents rather than contributing to economic activities. Rather a shift to the market based allocation of resources takes the previous issues off the table, encourages productive economic activities and generates more wealth

Riskless returns - case of Wilful defaults o Usual understanding is higher the risk, the higher are returns. In case of India many firms

enjoy profits during good times and are dependent on their lenders/financiers during the times of stress to bail them out (referred to riskless return). One way of doing this is by wilfully defaulting on the repayments

o RBI defines wilful defaulter as a firm that has defaulted in meeting its repayment obligations even though it has the capacity to honour these obligations. A firm could also be branded a wilful defaulter if it uses the funds for purposes other than what is sanctioned by the lender, siphons the money out to related parties or removes the assets used to secure the loan

o The problem with wilful defaulters is that every rupee lent to them leads to erosion of wealth and makes the cronies rich The value owed by defaulters has been steadily increasing post 2010 As of 2018, the wilful defaulters owe nearly ₹ 1.4 lakh Cr to their lenders The defaulters are spread across many sectors The outstanding wilful defaulters debt is more than the allocation done by the govt in

individual areas such as MGNREGA, fertiliser subsidy, rural development; and is slightly lesser than the allocation done in health, education and social protection


Figure: Aggregate outstanding amount owned by wilful defaulters

Source: Trans Union CIBIL suits filed database

Figure: Split of aggregateoutstanding amounts of willful defaulters by sector

Source: TransUnion CIBIL Suits filed database, CMIE Prowess database

o In case of wilful defaulters They are much more opaque than distressed defaulters (default because of genuine

distress) and non-defaulters o 60% of non-defaulters and distressed defaulters provide related party disclosures in their

annual report against 40% of wilful defaulters (these are legally required to do so) o The promoters in non-defaulting company and distressed defaulters pledge11% and 30% of

their shareholding to lenders, in case of wilful defaulters in stands at 50%. This is a peculiar practice in India as the promoters (wilful defaulters) are taking these loans for the projects of the same company. This is a practice is suboptimal for lenders as the value of collateral is related to project being funded

o Wilful defaulters make large loans to related parties The outcome of wilful defaulting

o The common man is on losing side o The equity of the PSBs is from the taxes paid by the common man o The debt is mainly composed of the deposits done by the common man o Would increase the cost of borrowing for everyone else o If the interest rate increases, genuine borrowers may exit the market and only the cronies may

get left out


In the global indices of economic freedom (acquiring and using the economic goods and

resources; economic freedom enhances wealth creation by enabling efficient allocation of entrepreneurial resources) India ranks in the lower half o In the Index of Economic Freedom brought out by Heritage Foundation, India was

categorised as ‘mostly unfree’ and was ranked at 129th out of 186 countries o In the Global Economic Freedom Index brought out by the Fraser Institute India was ranked

79th out of 162 countries

There is a case for the intervention of the govt whenever the market is not functioning properly. If the market can function well then the interference by the govt stifles economic freedom. The govt can affect the markets through o Direct participation as a market maker or as a buyer or supplier of goods and services. This

affects the dynamic interaction between the supply and demand in the markets. When the prices are low the demand is higher and the govt will not be able to meet the demand. When the prices are high there is an excessive amount of product in the market compared to what people want

o Indirect participation in private markets, through regulation, taxation, subsidy or other influence

There are a large number of areas wherein the govt is intervening even if there is no risk or market failure. In certain cases this intervention has created market failures

Figure: Strengths and weaknesses of markets

Essential Commodities Act 1955

o It controls the production, supply and distribution of, and trade and commerce in certain goods such as vegetables, pulses, edible oils, sugar etc, which are treated as essential commodities

o The power to implement the provisions of the act are relegated to the states o Under the act the regulator can

Impose stock holding limits Restrict the movement of goods

04 Undermining markets - when

Govt intervention hurts more than it helps


Mandate compulsory purchase of the commodity under system of levy o The aim of the act is to ensure that the commodities are available at affordable prices in the

market, there is no practice of hoarding and that the poor are not affected o It is an overarching legislation for agri commodities and there are certain issues

Agriculture is a seasonal activity and there is a need to store certain commodities to ensure that there is a continuous availability. When the govt changes the limits on the stock, this affects the investment in the warehousing

The stock limits apply uniformly on all the participants in the supply chains such as food processing companies, retail food chains, wholesaler’s etc and when govt changes the stock limits it affects all of these participants

It affects the participants in the commodity derivative market Such volatility affects and discourages the entry of private sector participants in the

agriculture marketing All of these factors together distort the market further and lead to exactly what was

intended under the act o Onion prices in recent times is an example

There are three harvesting seasons – Kharif (October-December), Late Kharif (January-March) and Rabi (March-May)

During September the demand has to be met by the stocks which are held by traders/wholesalers

Because of the late unexpected monsoon the production of onion was hit, the govt imposed stock limits in order to ensure the supply of onion in the market and control in the prices

However this has not been the case. The market prices of onion reached an all-time high o The same kind of effect of the imposition of stock limits has been found in the trend of prices

in pulses. If the intervention of the govt was not present then the wholesalers and traders would have stored and ensured that there is continuous supply

o The states under the act are given the power of raids to ensure the implementation of the act. There is a considerable administrative effort required for this. Moreover it has been found that raids also do not reduce the wedge between the retail price and wholesale price. It is feared that the raids must adversely affecting the stakeholders (i.e. harassment)

o The govt has implemented Price Stabilisation Fund (PSF) in which the market prices of onion, potato and pulses are covered and the market prices of these will be calibrated in the form of holding buffer stocks.

o Way forward The PSF mechanism needs to be strengthened Supporting the development of commodity future markets (would help in discovering

the future market prices of the commodities that the market is expecting) Developing effective forecasting mechanisms, stable trade policies Increasing integration of agricultural markets

Govt intervention in grain markets o The govt participates in the grain market to achieve food security. The govt ensures this by

controlling the input costs, sets output prices, undertake procurement and distributes under the Public Distribution System (PDS)

o FCI Was set up in 1965 under the Food Corporation Act of 1964 The objectives were

o Procuring food grains from the farmers at MSP o Distribution of food grains to consumers through PDS o Maintenance of buffer stocks for food security and price stability

As a result the govt has become the biggest hoarder and procures around 40 to 50% of rice and wheat (in some states the procurement reaches as high as 80 to 90%). Hence the govt has become a single biggest buyer in the market and crowds out private sector traders. As a result of this the farmers are selling the food grains to the govt at MSP rather


than selling it in the market. Hence the MSP is working as a guaranteed price rather than the floor price

The govt after taking into consideration the buffer stocks is holding high amount of stocks

FCI which is involved in acquiring, warehousing, storing and distribution incurs huge economic cost. The cost of acquiring, storing and distributing the food grains is more than 40% of the procurement cost. Govt is running the TPDS and NFSA as a result of which the economic cost of food grains has been increasing and so is the inefficiency associated with the FCI

The food subsidy bill of the govt ha increased and given the scarce nature of financials, there is always a trade-off between incurring cost in the form of subsidy and providing the financing for infrastructure

There is a need to focus on infrastructure investment as it leads to increase in the productivity in long run, the focus on subsidies is hampering the growth in agriculture sector and overall inclusive growth

As a result of all of this there is a also mismatch between the demand for agricultural commodities in the market compared to the demand for them in the market (represented by Monthly Per Capita Expenditure) i.e. there has been a decrease in the demand for cereals in a period where there has been an increase in its production. It also means that the farmers are deriving their signals from govt policies rather than the demand in the market

Way forward o These policies were implemented in a time when there was a need to increase

production. Agriculture sector has moved from scarcity to surplus. Now the time has come to change the policies to promote diversification and environmentally sustainable production

o The farmers need to be incentivised through direct investment subsidies and cash transfers, which are crop neutral and do not interfere in cropping patterns

o The coverage of NFSA needs to be reduced to bottom 20% and issue prices of others could be linked to the procurement prices

o Providing Direct Benefit Transfers to the farmers (in the global market there is a move towards Conditional Cash Transfers - CCT)

Table: Examples of Successful Conditional Cash Transfer Schemes

Source: World Bank FAQ (2017). ICRIER (2017)


Debt waivers o The practice of announcing debt waivers had died down in the 1990s but has become a

common occurrence in recent years. This is a common feature in election manifestos of the state governments

Figure: Loan Waiver Allocation as a Percent of State/Central Budget

Source: Adpted From Phadnis and Gupta (2018) o The issues with loan waivers are

The likely benefits of such waivers will go to the lenders and not in the form of increasing physical or human capital

The borrower is unlikely receive any kind of benefits as he is unlikely to repay the debt and hence the access to credit will also be a problem (this has been referred to debt overhang)

The argument in favour of debt relief is that this will lead to increased investment and provide relief to the farmers. To the contrary it has been found that neither agricultural productivity nor investment increased after the waiver

In addition to this there was little improvement in the consumption. Which means stimulus worth 2% of GDP did not have any meaningful real impact on the lives of the farmers

Impact on credit markets o The debt waivers have led to more defaults (1% increase in debt waiver has increased

the non-performing assets by 7%) o Loan performance deteriorated the most in the states which were heading for

election o Flow of the bank credit to the beneficiaries declined after the waiver

Drug price controls under ECA

o Govt to ensure availability of essential drug to the poor and to ensure that these households will not fall into poverty, controls the prices of essential drugs

o The ministry of Health and Family welfare prepares a list of essential commodities - National List of Essential Commodities (NLEM). The govt has regulates the prices of these drugs through National Pharmaceutical Pricing Authority (NPPA) and Drug (Prices Control) Order (DPCO)

o The ministry decides based on factors such as prevalence of diseases, safety and efficacy of the medicine and current affordability

o The govt issues DPCOs under the section 3 of ECA to ensure that the medicines listed under NELM are available at a reasonable price to the general public

o The issues are


The govt regulation of prices on these drugs has had no impact on the demand. These are essential and have inelastic demand, hence the changes in price will have little or in impact on the demand

The prices of the drugs that have been covered under DPCO have increased at a faster pace compared to the prices of the drugs not covered under DPCO

Legislative changes required

Table: Traversing the ‘Full Circle’ – From ‘Control to Market’


Table: Need to complete the transformation: Acts which need to be Repealed/Amended


There is a need to promote exports in order to create employment opportunities

o China created 70 mn jobs by promoting labour intensive jobs between 2001-06 o As per ILO report India has converted about 800000 informal jobs into formal between 1999

to 2011. This represents about 0.8% of the labour force

Because of the trade war between US and China, labour intensive sector companies are looking at moving to other markets. India can be a good contender as it has got huge amount labour availability

Post 1991 o India’s share in exports has increased from 0.6% to 1.7% by 2018 o The exports have grown at an annual rate of 13.2% o This share in the global market is very low compared to the share of China in the export

market which stands at 12.8% o In addition the merchandise share of exports has been consistently lower than the global

average o The imports of merchandise have grown at a faster pace than exports i.e. at 14.9% between

1991 to 2018. This has resulted in trade deficits o On the other hand the exports of services have grown faster than the imports, providing

certain cushion in the trade current account deficit

Figure: Share of exports in GDP, India versus World

05 Creating jobs and growth by specialising to exports in Network Products (NPs)


Figure: Share of exports in GDP, India versus World

So the right questions to ask would be o What kind of policy interventions would help in achieving faster export growth? o Should policies target export growth through specialisation (intensive margin) or

diversification (extensive margin)? o Is it in our interest to promote strong local linkages for domestic industries or participate in

the global value chains (GVCs) where the linkages are dispersed globally? o Which industries hold the greatest potential for export growth and employment generation? o Are free trade agreements beneficial for India?

The government should focus on promotion of exports in the “network products” (these account for 30% of the total global exports). These are the products which are manufactured across many counties. These countries participating will lead to the creation of Global Value Chains (GVCs). These are controlled by MNEs (Multinational Entreprise) where the focus is on the producer driven network. China used this model to create millions of jobs. India can leverage this by integrating “assemble in India for the world” into Make in India, the outcome would be o Increase its exports share to 3.5% by 2025 and 6% by 2030 o Creation of 4 Cr well paid jobs by 2025 and 8 Cr by 2030 o This would lead to incremental exports which will help in India becoming a $5 tn economy

by 2015

Indian Vs China in exports

o India’s exports are highly diversified with low specialisation. Which means India is spreading its exports thinly over many products and partners. This has led to lacklustre performance of Indian exports over that of China

o India needs to specialise more in areas of its comparative advantage and achieve significant quantity expansion if it wants to become a major exporter

o In case of India the share of exports from unskilled labour intensive industries in India’s non-oil merchandise exports have declined from 30.7% in 2000 to 16.3% by 2018. The fast growing commodities in the export basket are capital and skill intensive and India’s participation in the GVCs is on lower side compared to that of China. On contrary in case of China, the exports are dominated soon the labour intensive sectors

o Because of dominance of capital intensive products and lower participation in GVCs, the exports markets have shifted for India The OECD markets accounted for 49.7% of the exports from China, in case of India it

stood at 40.2% in 2018


High income OECD and other high income countries accounted for 63.9% of China’s exports and for India it stood at 56.7%

The focus in these high income countries is on the quality and the countries with lower participation in GVCs find it difficult to export to these countries. On the other hand Chinese exports (either capital intensive or unskilled labour intensive) are able to penetrate the high, low and middle income countries

o There is a general perception that China’s exchange rate policy has helped their exports, in case of India Indian exports declined even when the rupee was depreciating. In fact China’s exports are driven an interrelated factors including high level of participation in the GVCs, high degree of specialisation in labour intensive productive activities, large scale in the chosen sector of specialisation, high level of export penetration in traditional rich country markets

Reaping benefits from participation in Global value Chains (GVCs)

o The answer to the question of whether the strong linkages for domestic industries must be developed or participation in the GVCs

o High level of participation in the GVCs can lead to higher absolute levels of domestic value addition and job creation. For example China’s dominance in assembling iPods and iPhone has created millions of jobs. Hence such a model is particularly suitable for a country with large availability of human capital such as India

o Higher participation in the GVCs will lead to higher overall exports, domestic value added and employment creation

Which industries to be focused for job creation? o Since India needs creation of employment opportunities and has advantage in labour

intensive activities, there are two groups of industries that hold the greatest potential for export growth and job creation Traditional unskilled labour intensive industries such as textiles, clothing, footwear and

toys. These are “buyer driven” networks wherein the concentration is on developing the brands, designing etc and production is sub-contracted to other countries

India can develop as a hub for potential assembly on a range of products referred to as network products. Here the GVCs are controlled by the MNEs within the “producer driven” networks. The production is not concentrated in a single country rather it is spread across many countries which have specialised in a single process of production. India can develop itself as a major player in the processes which are labour intensive

o The total NPs can be divided into two parts - Parts and Components (P&C) and Assembled End Products (AEP)

o NPs If the NPs follow the same trend the world exports will increase from the present value of

$ 5.6 tn in 2018 to $ 6.9 tn in 2025 to $8.1 tn in 2030 The global exports of NPs increased from $ 2.01 tn in 2000 to $ 5.4 tn by 2018 This increase was mainly driven by AEP whose value increased from $ 1.11 tn to $ 3.93

tn NPs account for 42% of the world manufactured exports Asia’s share of NP exports increased from 37% in 2000 to 51% in 2018

o India’s share The NP exports increased from $ 2 bn in 2000 to $ 32 bn by 2018 Though there has been an overall increase, India’s share of the total is just a minuscule

number The exports from India account for just 10% in the export basket (in case of China and

Japan they account for over 50% of the export basket) India has a trade deficit in NP If India also follows same trend of exports under NP, its exports will increase from $ 32

bn (0.6%) in 2018 to $ 248 bn (3.6%) in 2025 and to $ 490 bn (6.1%) in 2030


The employment created will move up from 4.4 mn in 2018 to 14.3 mn by 2025 and to 25.5 mn by 2030. If the secondary consumption created by the NPs is taken into consideration, there would be creation 38.5 mn jobs and 82 mn joins by 2030

Table: Impact of accelerated Growth of NP Exports on Employment and GDP in India, first and

second Order Impacts Source: Survey Calculations

Table: Impact of accelerated Growth of NP Exports on Employment and GDP in India, first and

Second Order Impacts Source: Survey Calculations

Are Free Trade Agreements (FTAs) beneficial? o In recent times there has been a lot of talk about the efficacy of the FTAs. A common

apprehension raised recently has been that the FTAs have benefitted the trading partners and has not been beneficial for the Indian economy

o So what has been the performance of these FTAs Manufactured items from India have clearly benefited from 8 out of the 14 trade

agreements; in case 4 agreements there has been no effect on exports of manufactured products. There has been a negative effect on manufacture products because of two agreements

In case of overall merchandise exports, only four agreements have shown a positive impact

The agreements that exerted a positive impact on the imports include Japan, Korea, Chile for manufactured products; and Japan, Korea, Chile, Singapore for merchandise imports

The overall impact has been o In case of imports of manufactured products the impact has been 12.7 per cent o In case of imports of merchandise products the impact has been 8.6 per cent o In case of exports of manufactured products the impact has been 13.4 per cent o In case of exports of merchandise products the impact has been 10.9. per cent o It shows that India has clearly gained in terms of 0.7% in trade surplus for

manufactured products and 2.3% in total merchandise

Figure: Overall Impact of Trade Agreements on Exports and Imports

Source: Based on the estimates reported in Figure


Table: India’s trade Agreements

Source: WTO Regional Trade Agreement Database

Way forward o India must adopt policies aimed at strengthening its involvement in exports of NPs o Short to medium term objective should be to have large scale expansion of assembly line

activities and in the long term it should be give boost to domestic production of parts and components (upgrading within GVCs) (the assembly line activity is labour intensive and domestic production of parts requires high skill jobs)

o For India to become attractive in assembly activities, the import tariffs on inputs should be zero or negligible

o The reforms undertaken by the govt to provide flexible labour market must continue o Pro-active FDI policy is also needed to attract the MNEs o Assembly processes require middle level supervisory manpower o Low level service link costs (such as transportation, communication etc) are required


The govt has to ease the constraints and gaps in the regulatory process as the economy moves

towards reaching the value of $ 5 tn

The Indian economy has been performing well in the Ease of Doing Business Rankings o It has moved up from 142nd rank in 2014 to 63rd in 2019 o It has made progress on 7 out of 10 parameters o The reforms in the insolvency resolution - Insolvency and Bankruptcy Code - tops the list of

the reforms which have helped Indian economy to perform well o However India continues to perform abysmally in parameters such as

Ease of starting business Registering property - it takes about 58 days and costs about 7.8% of the property value

to register it Paying taxes Enforcing contracts - it takes on an average 1445 days for the resolution of commercial

dispute These are much higher compared to the high-income OECD economies and therefore

impede wealth creation

Table: Capturing India’s Decade-Long Journey in the doing Business Rankings

Source: Doing business database, World Bank.

Ease of starting business

o The number of days required to start a business is has reduced from 13 to 10 over the past ten years

Targeting Ease of Doing

Business in India 06


o It takes about 18 days on average to set up a business in India (was 30 in 2009). It takes about half day to incorporate a business in New Zealand through a single window via one agency

Registering property

o It takes at least 49 days and 7.4 to 8.1% of the property value to register a property o The procedures, cost and time have increased in the last 10 years o On the other hand New Zealand has only two procedures and costs a minimal of 0.1% of the

property value

Paying taxes

o Number of annual payments has come down from 59 to 12 in the last decade o Time spent filing these taxes have not reduced by much. In India it takes around 250 to 254

hrs to pay these taxes and in case of New Zealand it just takes about 140 hrs a year

Enforcing contracts

o It takes on an average 1445 days for the resolution of commercial dispute (New Zealand takes 216 days)

o Given the potential economic and social multipliers of a well-functioning legal system, this

may be the best investment that India can make

Table: India v/s peers on EODB Parameters (2019) Source: World Bank doing Business Report, 2020

Density of legislation and statutory compliance requirements in manufacturing

o Major companies find it very difficult to navigate through complex architecture of Indian governance framework, including density of legislation and statutory compliance requirements Manufacturing units will have to abide by 6796 compliance items (number of sections

and number of rules) which is very tedious and time consuming

Regulatory hurdles in starting of a business in services sector

o The same issue of regulatory density is applicable to opening a business in services sector o As per National Restaurants Association of India (NRAI), a total of 36, 26 and 22 approvals

are required to open a restaurant in Bengaluru, Delhi and Mumbai


o In addition to this all the documents that are needed to get the licenses can be obtained through govt website only (whereas in case of New Zealand there is a website run by a third party which would provide all the information that is required)

Construction permits

o In case of Hong Kong (ranked best in case of construction permit parameter under EoDBR) the construction permits are provided within two months. As against this it takes four months to get construction permits in New Delhi

o It takes 35 days to get water and sewer connection in Delhi o Over the last five years India has worked on this parameter. It used to take approximately 186

days in 2014

Table: Construction Permits – Delhi vs Hong Kong

Source: World Bank doing business report, 2020

Achieving scale across business o Majority of the manufacturing units in India have small capacities and also have a low

manufacturing efficiency. This becomes a disadvantage in the global value chains o In India it can take 7 to 10 days to reach port whereas in case of countries like Bangladesh,

China, Vietnam takes a day o Thus the logistics gets clogged because of small consignments. This is further accentuated but

he fact that logistic pathways are inefficient

Table: Emperging Economies Comparsion – Scale and Logistics

Source: High Level Advisory Group (HLAG) Report, 2019


Trading across the borders o Globally transportation though ports is the most favoured method followed by railways and

then followed by roads. In case of India it is exactly opposite o In India it takes about 60 to 68 hrs and 82 to 88 hrs for documentary compliance at borders for

exports and imports respectively. In cas elf Italy it takes only one hour for each o The cost of compliance is zero in Italy against $ 260 to 281 and $ 360 to 373 in case of India for

exports and imports respectively o 70% of the delays are caused because of the port or border handling process

Multiple documentation Multiple agencies Procedural complexities etc All of these end up pushing up the cost of trade

o Increasing digitalisation and seamlessly integrating multiple agencies into a single digital platform can further reduce these procedural inefficiencies significantly and

also improve the user experience


In 2019 India completed the 50th anniversary of the bank nationalisation programme undertaken

in 1969. Though PSBs today account for 70% of the banking market, they lag in various parameters when compared to their peers in the private sector

Indian banks are disproportionately smaller compared to the size of the economy. In 2019, Indian economy is the fifth largest in the world and the biggest bank in India, SBI is ranked at 55th in the world (and is the only Indian bank in the top 100)

There is a dwarfism observed in the case of Indian banks o When the size Indian economy is compared to the number of Indian banks in the top 100,

India has disproportionately very less number of banks, on the other hand China has 18 banks in the top 100

o In addition to this the penetration of credit to the private sector (access to credit is mainly provided by the PSBs, hence taken as a proxy) is disproportionate in case of Indian banks

o A large economy to grow needs access to banking sector, in case of India, it can be seen that the credit growth among the PSBs has been on a decline since 2013 and has been very weak since 2016 The credit in New Private Banks (NPBs; set up after license were issued after 1991)

increased between 15% and 29% between 2010 to 2019, whereas the Public Sector Banks (PSBs) have shown a growth in single digits after 2014 and ended up at 4.03% in 2019, this anemic credit growth has affected the economic growth

The economy needs the PSBs to expand their credit activities rather than pulling back which will have detrimental effect on growth and welfare

Figure: Bank Credit Growth (per cent)

Source: RBI data and Survey Calculations

07 Golden Jubilee of Bank

Nationalisation-Taking Stock


Historically the banks in countries such as the USA, Japan, and China have fuelled the growth in their economy. If the Indian banks were proportionately larger compared to the size of the economy, then India should have had six large banks in the top 100 and when India will have a GDP size of $ 5 tn, there should be eight large banks in top 100 globally

The issue with the PSBs is o The collective loss of PSBs amount to over ₹ 66000 Cr (if put in education, the budgetary

allocation would double) o The PSBs collectively account for 85% of the reported bank frauds o The gross NPAs equal ₹ 7.4 lakh Cr in 2019 (more than 150% of allocation for infrastructure) o ₹ 4.3 lakh Cr was put in by the govt in the banks in the form of equity. Four every rupee

invested, it lost the value by 23 paise in 2019 (whereas every rupee invested in equity of NPBs gained a value by 9.6 paise). As both operate in the same market there is an argument for increasing the efficiency of the PSBs

o The govt needs to recognise that the social goals can be fulfilled through financial intermediation (such as growth in micro-finance institutions - post)

Figure: Number of banks in the Global top 100 (2019)

Source: Wikipedia

Indian economy is at inflection point now as shown by the following that crores of individuals and businesses are entering into a formal financial system o There is a positive demographic dividend o Introduction of GST has brought in huge number of taxpayers under one system o Modern digital infrastructure is supported by JAM trinity of which there is almost 100%

financial inclusion Given this what India needs now is a vibrant and thriving banking sector now to support the growth, or else an inefficient banking system can severely handicap the country’s ability to achieve higher growth

Banking structure - nationalisation to today

o The banks were nationalised in 1969 and in 1980 o In 1991 the PSBs had a 91% share in the national market, with 9% share held by Old Private

Banks (OPBs) o Hole about ₹ 20 lakh Cr of govt debt o The regulation of PSBs and Pvt SBs is similar. The key difference is that PSBs have lesser

strategic and operating freedom because of majority ownership of the govt. The govt controls the PSBs in areas ranging from policies on recruitment, investments and bank financing,


governance etc. All of this will mean there is an implicit guarantee of a bailout for PSBs and this entails a cost to the taxpayer. In addition to this the decisions of the employees is open to scrutiny by the central govt agencies

o Benefits of nationalisation The allocation of resources to sectors such as agriculture, rural India, priority sectors has

increased Deposit mobilisation from rural India

Weakening of PSBs o In 2019, the PSBs accounted for 80% of NPAs in the banking sector o The gross NPAs accounted for 11.59% of their total advances (was 14.58% in 2018). The issue

of NPA has peaked and is coming down. This is because these banks increased their loan portfolio when the economy grew between 2004 to 2011, but this credit growth has been a suspicious quality. When the performance of economy slowed down, there has been a dramatic increase in the NPAs

o These banks suffered a loss of over 66000 Cr, in a year when the other scheduled commercial banks made a profit of over 42000 Cr

o The PSBs account four over 92.9% of the fraud cases and 85% of the fraud amounts of the banking sector

o The reason for such performance in the PSBs is not an immediate occurrence. The issue of asset quality has been increasing in the last couple of years and is the root of the problem for PSBs

Way forward - Enhancing efficiency of the PSBs

o There is a need to invest in developing infrastructure which will leverage various data points such as credit scores, credit information etc. to leverage such structured or unstructured data there is a need to develop data analytical, model living the skills etc. the banks also need to invest in credit recovery infrastructure NPAs in the banking sector would have been lower if data analytic were used while

lending to corporates. Larger loans (above ₹ 100 Cr) have a higher rate of default RBI identified 12 companies in 2017 accounting for 25% of the NPAs. The accounting

practices of these companies were inefficient. Data analytics would have identified such a shortfall

o Presently the employees are risk averse because of various issues. Long term way out would be enabling them to own stake in the PSBs. This would allow them to take risks and innovate continuously. This would happen because their compensation directly depends on the value of the shares in the market

o Having lateral entry practices to attract the best talent


After the default of IL&FS and DHFL, the debt market and equity market have been affected. The

debt and equity investors suffered a huge erosion in their wealth due to defaults o After this the NBFCs found it difficult to raise the funds or credit in the market, this in turn

affected the whole economy and a decline in GDP growth

Rollover risk

o The financial institutions are dependent on short term financing to fund long term investments. This leads to Asset Liability Mismatch (ALM) problem

o The ALM will expose the financial institutions to the risk of not being able to finance their business The NBFCs are dependent on LDMFs (Liquid Debt Mutual Funds) for financing The NBFCs issue short term Commercial Papers (CPs) and keep rolling over to CP debt.

Such frequent reprising will expose the NBFCs to the risk of facing higher financing costs (referred to roll over risk)

The asset side will reduce the cash flows, further intensifying the ALM, this increases the risk for the institution

Since the LDMFs have invested in short term debt instruments issued by these institutions, the systemic risk will get transferred to them also

These LDMFs may decide to sell their debt instruments at deep discounts in the market and also withdraw their funding to the NBFCs, this may quickly become a vicious cycle

At a time of refinancing stronger NBFCs can raise money by selling the short term instruments and some raise at higher cots and some are unable to raise money leading to defaults in the markets

At a fundamental level the default is because of over dependence of NBFCs on the short term funding

This also shows the interconnectedness of these sectors

Policy implications

o Regulators must employ certain methodology to detect the warning signals of impending rollover risk problems in the individual NBFCs

o Using these tools, the regulators could identify the NBFCs which require the financial assistance in the situations of liquidity which had the market experienced recently

o The regulator may set prudential thresholds

08 Financial Fragility in the

NBFC Sector


The govt goes for strategic disinvestment as a principle wherein the govt should discontinue its

engagement in the respective field in which the competitive markets have come of age. In such cases these companies would be performing well in the hands of the private sector because of various factors such as technology upgrade, efficient management practices etc. These private sector companies will be adding to economic growth and also creating wealth

The disinvestment in India was ushered in in the aftermath of LPG reforms. In the initial phase it was done through minority stake sale through auctions. This was followed up with majority stake sale of the government ownership in these CPSEs. The government now has been following an active policy on disinvestment in CPSEs o Disinvestment through minority stake in listed CPSEs o Listing the CPSEs to facilitate people’s ownership o Strategic disinvestment o Merger and acquisitions among PSUs o Launch of Exchange Traded Funds (ETFs) o Monetisation of select assets

Impact of privatization o The performance of these companies has improved after privatization

The net worth (what the company owes its equity shareholders) of the companies increased. This means the company created wealth for its shareholders

The gross revenues of these companies has improved, reflecting higher realisation of gains not only from sales of goods and also from other non-financial activities

The net profits of these companies increased after privatization

Way forward o Govt could use aggressive disinvestment preferably through strategic sale o This should be done to bring in profitability, promote efficiency, increase competitiveness etc o The disinvestment must focus on exciting from noon-strategic business and use this capital in

other areas such as roads, power etc., o The disinvestment in the non-strategic sectors or areas will also release the assets or capital

that is locked upon and may promote efficient utilisation of resources o The govt may transfer outs stake in these CPSEs into a separate corporate entity (managed by

an independent board). This would be mandated to divest the stake of the govt over a period of time

09 Privatization and Wealth

Creation


Investment (especially private investment) is critical in driving the demand, creating capacity,

increasing labour productivity, introducing new technology, generating employment etc. Hence the investment will lead to virtuous cycle of growth

In recent times the govt has taken initiatives such as FDI reforms, reducing the corporate tax rates, containing inflation, accelerating infrastructure creation, improving ease of doing business to attract investment (both from domestic and foreign sources)

The growth rate of the economy is a driver of investment decisions. The GDP of the economy will also drive the policy decisions of the govt and serves as a barometer of economy’s size and health.

The GDP calculation methodology has changed and the new base year of 2011-12 is being used. There have been a debate around the veracity of the GDP growth rates

There have been claims that Indian GDP is overestimated by 2.77% post 2011, if the same methodology is used then there is overestimation of GDP in 51 countries

The claim of overestimation is based on the connection between GDP with other parameters such as exports, imports, petroleum consumption, railway freight traffic, electricity consumption, real credit to industry etc. The analysis is done assuming there is correlation between these. The analysis has shown that the correlation keeps changing and flipping once every 3 to 5 years (between 1980 to 2015). The correlation between these indicators and GDP does not change even after the change in the methodology

Hence the concerns of misestimated Indian GDP are unsubstantiated by the data and thus are unfounded

10 Is India’s GDP Growth

Overstated? No!


Food is not an end in itself but is an essential ingredient in developing the human capital. Hence

his very important for every country in its wealth creation o Countries have set up a target of zero hunger under the SDG (SDG-2). o This goal is interrelated to many other goals such as no poverty (SDG-1), Quality education

(SDG-4), Gender equality (SDG-5), Responsible consumption and production (SDG-12) etc.

Food is a necessity and any hike in the prices of food will have the most direct and conspicuous effect on the common man. The food and beverages constitute around 45.9% of the weightage under the CPI. Hence the most effective of communicating the trends in prices to a common man is to show what’s the trend of price of a homemade meal

The survey has constructed thali prices for 25 states / UTs, taking into account the prices of cereals, sabzi, dal along with the cost the fuel that has gone into making a meal in the household o The absolute prices of vegetable thali have decreased since 2015-16 across India (though it has

increased in 2019 because of increase in the prices of vegetables and dal) o This decrease is because of the moderation of prices of vegetable and dal since 2015-16 (in the

years preceding this the prices had increased) o The affordability of vegetarian thalis has increased by 29% and non-vegetarian thalis by 18%

between 2006-07 to 2019-20

The reforms taken in the year 2015-16 have led to a shift in the dynamics of thali prices. The reforms introduced in the mentioned time period have been to enhance productivity of the agricultural sector as well as efficiency, effectiveness of agricultural markets for better and more transparent price discovery

11 Thalinomics - Economics of

a Plate of Food in India


Figure: Some Major Initiatives or Enhancing Productivity of agriculture and efficiency

Source: Ministry of Agriculture and Farmers’ Welfare, Ministry of Consumer affairs, food & public distribution

As a result of these reforms the vegetarian thali has gained around ₹ 3 per thali post 2015-16. At first this may look very small but a family consisting of 5 people and having two vegetarian thalis a month would gain ₹ 10887 in 2015-16 which on an average is 6.5% of an individual worker’s yearly wages for non-vegetarian thali, the gain came around ₹ 11787


Table: All-India Annualised Gain to a Household of five Individuals with Two Meals a Day

Source: Survey Calculations

Along with the decline in the prices of thali, it is also important to know what has happened to the earnings of common man to know whether the situation for them has improved or has become worse o An individual would have to spend 70% of his daily wage on two vegetarian thalis for a

household of five in 2006-07. The same person needs to spend 50% in 2019-20 o Similarly in case of non-vegetarian thalis it has come down from 93% to around 79% between

2006-07 to 2019-20

Thali inflation o The analysis if year on year increase in Thali prices has shown that the prices have remained

elevated during the initial years of analysis and thereafter have declined (between 2006-07 to 2019-20)

o The increase in the prices of vegetarian and non-vegetarian thali prices is temporary and should revert back as it happened in the earlier years


Part – 2

Economic Survey

volume - 2


S. No. Chapter Name Page No.

01. State of the Economy 42-45

02. Fiscal Developments 46-51

03. External Sector 52-64

04. Monetary management and Financial Intermediation

65-67

05. Prices and Inflation 68-71

06. Sustainable development and Climate Change

72-75

07. Agriculture and Food Management

76-81

08. Industry and Infrastructure 82-89

09. Service Sector 90-90

10. Social Infrastructure, Employment and Human Development

91-96

LEARN, UNLEARN

& RE-LEARN


Global economy

o Growth The World Economic Outlook (WEO), published by IMF has estimated the global growth

rate at 2.9% for 2019 (was 3.8% and 3.6% in 2017 and 2018 respectively). This would be the slowest growth rate post 2009 Global Financial Crisis (GFC). This slowdown is the result of o Decline in manufacturing activity o Uncertain trade tensions between US and China o Growth rate in developed economies has declined o Increasing trade barriers limited the trade

The report also states that the growth will rebound in 2020 to 3.3% The growth rate in the Indian economy is correlated to the growth rate of the global

economy. Since 2015-16, Indian growth rate has been tracking that of global growth As per WEO, the growth rate of Indian economy would be 5.8% for 2020

o Inflation Inflation remained muted around the global markets. This reflected a slack in the

consumer demand In case of India, it rose to 4.1% between April-December

Indian economy

o As per WEO, Indian economy is the Fifth largest o Indian economy is estimated to be $ 2.9 tn in 2019

Table: Top 10 Economies in the World in Terms of GDP at Current US$ Trillion

Source: World Economic Outlook, October 2019

o Indian economy has grown at an average growth rate of 7.5% and at an inflation rate of 4.5% in the last five years. There have been certain hurdles for growth, but the economy is expected to bounce back towards reaching the goal of $ 5 tn

01 State of the Economy


Figure: Increasing size of the Indian economy (GDP at current US$)

Source: National statistical Office, Reserve bank of India (RBI) and IMF

o GVA and GDP growth The slowdown has been contributed by majority of sectors except ‘Agriculture and Allied

Activities’ and ‘Public administration, defence and other services’ On the demand side it has been caused by decline in the growth of real fixed investment

in H1 In case of India, the length of the business cycle seems to be around 13 quarters

Figure: Quarter wise growth of real GDP

Source: National Statistical Office o Inflation

In H1 of FY20, the CPI headline inflation was 3.3%. Slightly higher than that in H2 of the previous fiscal

The headline inflation has crossed 7.35% for the month of December 2019 due to supply side factors

WPI on the other hand declined sharply from 3.2% in April 2019 to 2.6% in December 2019

There has been a moderation in core inflation to 4.3% in Q2FY20 (reflects weakening demand)

o Employment A comparison between the data of PLFS and earlier EUS has been made There has been shift towards increased employability in formal sector jobs As per recent data there has been an increase in the share of formal employment

o Monetary policy The liquidity condition in the banking sector has become comfortable after June 2019 and

has remained healthy since then RBI has infused liquidity through Forex Swaps, Open Market Operations (OMOs)


RBI reduced the repo rate by 135 bps since February 2019 and has continued accommodative stance

Figure: Policy Rate, Yield and lending rate

Source: RBI o Credit growth

The credit growth has continued to decelerate across all the major segments of non-food credit (except personal loans)

The credit declaration was highest in services sector The deceleration is tied with growing apprehension in the banking sector over the build-

up of NPAs and risk aversion. This has continued despite the implementation of IBC

First Advance Estimates for 2019-20

o Growth for FY20 in real GDP is estimated at 5.0%. The nominal GDP is estimated to be 7.5% o Fixed investment is estimated to be 28.1% of GDP (lower than 29.3% in 2018-19) o The growth in H2 of current fiscal will witness an uptick over H1

Secondary market is upbeat (reflected in increase of BSE Sensex) which means the market is still reinforcing its confidence on Indian economy

Foreign investors have continued to show their confidence on Indian economy. There is a net FDI of $24 bn in April-November 2019 (was $ 21 bn during the same tenure last fiscal)

The effect of previous rate cuts is showing in increased demand, reflecting in increasing core inflation

Industrial activity is on rebound reflecting in the IIP growth rates The merchandise exports are improving The gross GST collections have registered a growth rate of 6% and 9% for the months of

November and December respectively

The recent growth deceleration o A higher rate of investment would lead to higher consumption. This in turn would increase

the investment outlook leading to a higher rate of investment, this would increase the GDP growth rate. This is referred to as an Virtuous cycle of growth, generating economic development in the country

o Conversely when the virtuous cycle rotates slowly i.e. decline rate of fixed investment decelerates the GDP growth rate but with a lag. In case of India the lag period is seen to be three to four years

o When the GDP growth rate reduces, it will reduce the consumption but with a lag. In case of India the lag period is seen to be one or two years

o The Indian economy since 2011-12 has been under the influence of slowing cycle of growth o The fixed investment rate has started declining sharply since 2011-12 and has plateaued from

2016-17 onwards. The deceleration has been found in growth since 2017-18 o The household fixed investment rate has declined from 14.3% to 10.5%. This has contributed

to the overall decline in fixed investment rate between 2009-14 to 2014-19 o Fixed investment rate in the public sector has marginally declined from 7.2% of GDP to

7.1%during the two periods


o Private consumption (as a percentage of GDP) increased from 2009-16, particularly in 2014-16. Thereafter it has declined in 2017-18 and rose again in 2018-19. It has declined sharply in H1FY20

Figure: Virtuous cycle of growth

Outlook

o An uptick in GDP growth rate is expected in H2FY20 compared to the H1 of the same fiscal o Downside risks

Continued global trade tension may delay recovery in global output. This may constrain the export performance

Escalation in geo-political tensions may make crude costly and depreciate Indian rupee. Apart from this net FPI may weaken further depreciating rupee

The conventional monetary policies are not effective in many of the developing countries. To control inflation if they increase the lending rates, it may lead to capital outflow from India, making imports costlier. All of this may adversely affect the investment and consumption in the domestic market

The IBC has to be much more efficient or the risk aversion of the banks may not change Increased public sector is expected with the announcement of the National Infrastructure

Pipeline. If govt borrows from the domestic market the fiscal deficit would increase and may lead to crowding out of the private sector. If the private sector borrows from the external market the CAD would expand, depreciating the rupee

o Upside risks There are signals of manufacturing activity and global trade is bottoming out. This would

positively impact exports from India In addition to this there is a renewed focus of the govt to boost exports The govt is promoting the affordable housing sector. If the household’s consumption

increases, the fixed investment would increase Global sentiment continues to favour India. Reflected in robust net FDI and net FPI

flows Boosting Make in India would promote exports and also reduce imports. This means

there is expansion in manufacturing Reduction in base corporate tax rate to 15% for new manufacturing companies may

increase the rate of return on investment Merger of PSBs may increase the financial strength of merged entities

o Base on this assessment Growth rate for FY20 - 5%

Growth rate for FY21 -6% to 6.5%


The govt in the budget presented in 2019-20 (in the Medium Term Fiscal Policy framework)

o Pegged the fiscal deficit (FD) target at 3.3%. This would be reduced to 3% of GDP by in 2020-21 and would continue at the same level at 2021-22

o The central govt liabilities were projected to come down to 48% of GDP in 2019-20. It would be reduced to 46.2% and 44.4% in 2020-21 and 2021-22 respectively

o This declining debt trajectory is based stable inflation regime and reduction in fiscal deficit

Figure: Medium Term fiscal Polity Statement: Fiscal INdictors

Source: Medium Term Fiscal Policy Statement, Budget 2019-20 (July 2019)

Central govt finances o Compared to the FD of 2018-19 at 3.4% of GDP, the govt targeted to bring it down to 3.3% for

FY20 o The ratio of revenue deficit to fiscal deficit has remained same for FY19 and FY20 (it

represents the extent of borrowings used for financing current expenditure) o The factors such as better tax administration, widening of TDS, anti-tax evasion measures and

increase in effective tax payers has led to direct tax buoyancy o Along with this, widening of the tax base due to GST has led to improved tax buoyancy. In

the coming years the sustainability of the tax collection will depend upon the revenue buoyancy of GST

o Taxation Reforms Corporate tax rate

o On September 2019, the govt announced reduction in corporate income tax (CIT) rate reduction

o Govt introduced two new sections 115BAA and 115 BAB in the income tax act

02 Fiscal Developments


o The existing companies have been given an option of foregoing the deductions and pay lower CIT

Table: Comparison of exisiting

Figure: Corporate Tax Rate across ASEAN Countries

Basic Customs Duty (BCD)

o In many cases the Tariff Commission has not found any case of invested duty structure. In other areas where recommendations were made appropriate corrections have been done

o The equipment’s imported by Ministry of Defence or Armed Forces have been exempted from BCD

o To promote make in India certain imports have been imposed with BCD, so as to provide level playing field

o To promote exports, the export duties on some of the goods has either been reduced or abolished

o To raise revenues the customs duty on precious metals has been increased from 10% to 12.5%

GST o The rates of goods has been rationalised to make GST structure much more simpler o Filing of returns has been made convenient with the introduction of GSTR 3B o Sabka Vishwas (Legacy Dispute Settlement Scheme)


Has been announced to address the issue of past disputes indirect taxes such as central excise, service tax etc

The eligible persons shall declare and pay the unpaid dues according to the provisions of the scheme

o To boost the demand in real estate, the GST rates have been reduced to 1% (affordable residential apartment) and 5% (residential apartments outside affordable segment)

o To provide benefit to MSMEs, the service sector has been covered under composition scheme The traders with an annual turnover of up to ₹ 50 lakh are eligible No ITC (Input Tax Credit) The rate of GST will be 6%

Figure: Trends in deficits

Source: Union Budget Documents & CGA BE: Budget Estimate, PA: Provisional Actuals FD: Fiscal Defieit

o Trends in expenditure

It is important for every govt to allocate the resources without compromising on the crucial developmental and macroeconomic goals

India’s tax to GDP ratio is very low, hence the govt faces an issue of providing sufficient funds for investment and infrastructure expansion, while controlling fiscal deficit. In this context it is important for the govt to focus on the quality of expenditure o Govt expenditure under pensions, interest payments, subsidies, defence services etc

account for over 60% of the total expenditure o Expenditures such as interest payment, pensions, salaries etc are committed

expenditures. Hence have very little probability of being reduced o The govt has tried to rationalise the subsidies and increase the efficiency of

expenditure in defence (there’s still a room of rationalising food subsidies) o There has also been a considerable movement in reclassification of central sector and

centrally sponsored schemes o The share of capital expenditure (proxy for quality of expenditure) is expected to

come down by a percentage point between FY19 to FY20) o Transfer to states

Centre transfers the funds to the states o States share in union taxes o Finance commission grants o Centrally sponsored schemes (CSS) and other transfers o Till 2013-14, the funds for states were transferred either through the consolidated

funds for the states or through the implementing agency of the state (second route has been discontinued)

o The total transfers to the states have increased


Figure: Transfers to states

Source: Union Budget documents

Figure: Central Government transfers to states

Source: Union Budget Documents

o Disinvestment Listing of shares of Indian Railway Catering and Tourism Corporation (IRCTC) and Rail

Vikas Nigam Ltd (RVNL) was done Exchange Traded Funds (ETFs) were issued Initiatives taken by Department of Investment and Public Asset Management (DIPAM)

o Strategic disinvestment o Reducing the shareholding of CPSEs below 51% while retaining the management

control o For asset monetisation of CPSEs/PSUs etc, the union cabinet has approved new

mechanism for Asset monetization o Debt ETFs was approved by the union cabinet, as a result Bharat Bond ETF was

launched in December 2019

o Central govt debt Includes the liabilities of the central govt on the consolidated fund of India (public debt)

and liabilities in public account The total liabilities have been decreasing, especially after the enactment of FRBM Act

2003. This is because of fiscal consolidation and higher GDP growth The debt is characterised by low currency and interest rate risk

o A small portion of debt is external and is from institutional sources, hence the debt is insulated from currency risk

o Most of the public debt is borrowed on fixed interest rate, hence insulated from interest rate risk

o Another important point to note here is that, the maturity period is getting elongated which reduced the rollover risk The proportion of securities with a maturity period of less than 5 years is

reducing


Table: Debt Position of the central Government

Source: Various issues of status paper on Government Debt and Quarterly Report on Public Debt for December

Figure: GDP growth and growth in Outstanding Liabilities

Source: Various issues of status paper on Government Debt; P: Provisional

Figure: Maturity Profile of (Outsanding Dated central Government Securities (as Per cent of Total)

State finances

o There is a rising trend in revenue and capital expenditure. The rising trend in revenue expenditure is because of rising committed expenditure in pension, interest payments etc

o As per RBI report on state finances, there has been a fiscal consolidation in state’s finances in the last 4 to 5 years. This decline is because of reduction in capital expenditure. This is an issue because such reduction have a limiting impact on the growth and development

o The debt to GDP ratio has increased since 2014-15 because of issuance of UDAY bonds, farm loan waivers, implementation of pay commission awards etc. teh debt to GDP ratio is expected to remain at around 25% for FY20. This would be a bigger fiscal challenge for the states


General govt finances

o General govt (centre plus states) is expected to continue with the path of fiscal consolidation o The FD is expected to come down from 6.2% of GDP in FY19 to 5.9% of GDP in FY20 o The combined liabilities have increased from 68.5% of GDP (end of March 2016) to 69.8% of

GDP end of March 2019

Outlook

o The global growth is expected to weak and in addition to this the slowdown in the domestic market will add to the revenue stress for the states

o There is a need to have counter-cyclical fiscal policy in order to create demand o The geopolitical situations in west Asia are expected to have implications for oil prices, which

would affect various macro-economic parameters in India


The GDP growth accelerated to 7.5% between 2014 to 2019. This period also has coincided with

the growth in the foreign exchange earnings, the forex reserves increased from $304 bn at the end of 2013-14 to $412 bn by the end of 2018-19

For a developing country such as India, the improvement in Balance of Payments (BoP) is important o To finance for essential imports o Reflects the local sentiment that believes India’s growth story

The BoP has increased from $ 412 bn at the end of march 2019 to $ 461 bn in January 2020. However there is an underlying issue - unlike the inflows which were strong because of decline in crude price and inflow of FDI, this improvement has happened because of lower growth of imports on the back of slowdown. This weakening poses a challenge to FDI and FPI inflows. If these flows weaken because of the change in investor sentiment, it would make accessibility to foreign savings much more difficult o The CAD has improved between 2009-14 and this has even continued between 2014-19. The

CAD further imported in the first half of FY20

Figure: Current Account Deflcit (CAD) as per cent of

Source: Reserve Bank of India

Table: Current account deficit (CAD)


o The biggest component of CAD is the merchandise trade deficit In recent years the escalation of global tensions leading to slowdown in the global trade

has increased the fragility of India’s trade deficit The trade deficit has improved between 2014 to 2019. This has been contributed to by

decline in crude oil prices

03 External Sector


Figure: Merchandise Trade Balance as per cent of GDP

Source: Department of Commerce & Central Statistics Office (CSO)

Table: Merchandise Trade Balance as per cent of GDP

Source: Department of Commerce & Central Statisties Office (CSO)

Figure: Terms of Trade (Base Year 1999-2000)

Source: Directorate General of Commercial Intelligence and Statisties (DGCI&S), Kolkata

India’s top ten trading partners account for over 50% of total India’s merchandise trade

o India has a trade surplus with the USA and UAE. With other countries such as China, Germany, Saudi Arabia, South Korea etc it has a trade deficit

Figure: top 10 Trading partner of India in 2019-20 (April-november)(in per cent)

Source: Computed from latest data available on Department of Commerce’s website,

The ratio of merchandise exports to GDP has declined which has a negative impact on the BoP position

Table: Merchandise exports as per cent

Source: Department of Commerce & Central Statistics Office (CSO)


In addition to the global growth slowdown, there has been an appreciation in Real Effective Exchange Rates (REER). Which has impacted exports

Table: Real effective Exchange rate

(base 2004-05=100) Source: Reserve Bank of India

Petroleum products continued to be largest exported commodity

Figure: Commondity-wise composition of exports (by share in per cent)

Source: Department of Commerce

The USA continued to be the largest export destination

Top 10 export Destinations in 2011-12 and 2019-20 (April-November)


The merchandise imports have been declining as a percentage of GDP. This has a positive

impact on the BoP position. However this decrease may also have certain negative undertones, as it reflects the slowdown in the GDP growth. The decline in Non-POL non-gold imports is an issue


Table: India’s Merchandise Imports as percent of GDP Source: Department of Commerce & Central Statistics Office (CSO)

Table: Share of POL Import in total Imports

Source: Department of Commerce and Ministry of Petroleum and Natural Gas.

Table: Share of gold Imports in total Imports and Slondon gold Price

Source: Department of Commerce & World Bank Pink Sheet

Table: Non-POL, Non-Gold Imports and Growth in real GDP

Source Department of Commerce & central statistics office (CSO)

In the import basket, the crude petroleum has been the largest. In recent times the share of electronic imports has been growing at a faster pace

Figure: Commodity-wise Composition of Import in (by share in per cent)


China continues to be top exporting country to India


Figure: Top 10 Import Origins of India in 2011-12 and 2019-20 (April-Nov)


Net services as a proportion of GDP has been declining, this is because the net services

surplus from India has been declining in relation to GDP. This surplus has been instrumental in financing the merchandise trade deficit (two thirds in 2016-17)

India and WTO o The 12th Ministerial Conference of WTO will be held in 2020 in Kazakhstan o India has underscored the need of permanent solution for food security and for subsidies in

fisheries o India ratified Trade Facilitation Agreement in 201y and to implement and optimize the gains

has set up (National Trade Facilitation Action Plan) NTFAP 2017-20. This contains various activities to further ease the bottlenecks in trade. With these reform India's ranking under "trading across border" parameter of EoDBR has improved from 143rd in 2016 to 68th in 2019 (as per UN survey on Digital and Sustainable Trade Facilitation, India has increased its score from 69% to 80%) Only 3 documents are mandatory for imports or exports E-Sanchit for lodging the supporting documents online 24×7 online customs clearance facility Athithi mobile app for international passengers Direct Port Delivery scheme for imports and Direct Port Entry for exports are facilitating

faster clearance at the ports Up-gradation of the port infrastructure Faster and faceless custom clearance under 'Turant'


Source: Departemnt of Commerce

Trade related logistics o The logistics sector is a sunshine industry o Is expected to grow at 8-10% over the medium term o Currently is estimated to be around $ 160 bn and is expected to reach $ 215 bn by 2020 o Warehousing and logistic market has received around $ 3.4 bn of institutional capital between

2014 to 2018 o Logistics is expected to be the largest job creator by 2022 (currently provides jobs for 22 mn) o As per World Bank's Logistics Performance Index India ranks at 44th in 2018 o To improve govt has taken a large number of initiatives and has announced National

Infrastructure Pipeline (NIP)


Table: World Bank Logistics Performance Index in 2018

Source: World Bank

Anti-dumping and Safeguard measures o India imposes anti-dumping investigations on the basis of applications filed by domestic

industry o The initiation of these duties is done by DGTR o DGTR ha introduced an online portal - ARTIS (Application for Remedies in Trade for Indian

Industry and Other Stakeholders)

Remittances o The net remittances from Indian employed overseas has been increasing o The remittances arevpo-cyclical with crude oil prices. Hence there was dip in remittances in

2018-19 o The Migration Report of UN has classified India as a leading country of origin of

international migrants o The remittances have increased in the first half of FY20

Table: Net Remittances (US$ billion)


Foreign Direct Investment (FDI) o The net FDI has increased in the first 8 months of this fiscal o The inflow of FDI has doubled between 2009-14 and then between 2014 to 2019 o Reforms by the govt have helped this FDI buoyancy

Table: Net FDI (US$ billion)


Foreign Portfolio Investment (FPI) o The inflow of FPI has increased o However FPI is referred to as hot money as they keep on moving across the markets o In relation to FDI, reliance of FPI to bridge the CAD was less in 2014-19 o The inflows of FPI have turned positive because of the dovish monetary policy of Federal

Reserve of USA, enhanced liquidity in global markets, reinforced growth prospects for India post budget announcements

Table: Net FPI (US$ billion)



External Commercial Borrowings o ECB was negative during 2014-19, as a result had a negative effect on BoP position o There has been a matching amount of ECB inflow in the first half of FY20 o The credit off take in the domestic banking sector has been subdued and the corporates have

preferred borrow from the external market under ECB. This is because of lower global interest rates and higher liquidity overseas

o In this scenario the claim that higher fiscal deficit crowds out the private sector is questioned. In an open economy such as India, there is always an access to capital, hence the claim that corporate sector did not invest because of higher fiscal deficit may not hold true

o Higher fiscal deficit will lead to Crowding out of the private sector Higher borrowings will widen the CAD and push India towards the twin deficit

challenge

Table: Net ECB (US$ billion)


Figure: 30 ECBs, Scheduled Commercial Bank (SCB) credit (y-o-y) and CAD


External debt and external liabilities o An increase in the external debt to GDP increases the debt servicing cost and draws from the

forex reserves, worsening the BoP position o India's external debt to GDP slightly increased in the first half of this fiscal on account of

higher ECB, non resident deposits etc o India's external debt to GDP remains in the lower side compared to the average of developed

countries (25.6%) o The rise in short term debt makes BoP vulnerable as the interest rates are higher. The short

term debt has declined o External liabilities is much more comprehensible as includes dividend payments apart from

the debt servicing (as in external debt). Any rise in this reduces the forex reserves and increases the vulnerability of BoP. If reduced between 2014 to 2019. Has increased in the first half of FY20, this indicates that the total external liabilities are skewed towards equities

Table: External Debt (per cent of GDP)

Source: Reserve Bank of India, Quarterly external debt report, DEA, M/o Finance


Figure: External Debt/GDP and Foreign Exchange Reserves

Source: Reserve Bank of India, Quarterly External debt report, DEA, M/o Finance

Figure: Short term debt

Source: Reserve Bank of India, Quarterly external debt report, DEA, M/o Finance

Table: External Liabilities (Debt + Equity)/GDP (End Period)

Source: IMF (based on latest data available)

Figure: External Liabillities (Debt + Equity)-End Period (EP)

Source: Reserve Bank of India, IMF (based on latest data available)

Outlook o India's external sector has gained stability in the first half of FY20 o The external debt remains low at 20% of GDP o In recent times trading partners have demanded that India reduce the tariffs, which govt has

defended in the context of protecting domestic industry. However the govt has indicated


reduction in tariffs to correct the inverted duty structure. This is expected to increase the exports, add to the stability of BoP

Source: Department of Commerce.


Monetary developments in 2019-20

o Monetary policy in this fiscal was conducted based on the revised statutory framework o At the end of FY20, five meetings of MPC had taken place

In the first four meetings, the committee decided to cut the lending rates and in fifth decided to hold the rate

It also changes the stance from neutral to accommodative The reduction was guided by low inflation rate and need to drive up the investments. In

fifth meet the decision to hold was taken based on higher retail inflation rate o Various surveys along with the one done by RBI have indicated slowdown in the domestic as

well as global markets, hence the growth estimates have been revised downwards to 5% for the current fiscal

Table: Revision in policy Rates

Liquidity conditions and it's management

o Durable liquidity has been done by undertaking Open Market Operations (OMO), swap auction

o In addition to this the SLR has been reduced by 25 bps to 18.25 percent of NDTL

G-sec

o RBI has conducted version of "Operation Twist" to reduce the term premium on long term g-securities and increase the credit off take

Banking sector

o Gross Non Performing Advances (GNPAs as a percentage of Gross Advances) has stayed flat at 9.3% at the end of September 2019 (as it was at the end of March 2019)

o Capital to Risk Weighted Asset Ratio (CRAR) of SCBs increased from 14.3% to 15.1% between March to September 2019 The SCBs CRAR has improved

o Monetary transmission - has been weaker in current fiscal Rate structure - the Weighted Average Lending Rate of SCBs has not reduce despite repo

rate being reduced by 135 bps since January 2019 o The WALR of PSBs on outstanding is 10.4% in October 2019

04 Monetary management and

Financial Intermediation


o The WALR on fresh rupee loans has been reduced by 47 bps and by 40 bps in case of Private Sector Banks (Pvt SBs) between January to October 2019

o The credit spread (difference between repo rate and WALR) has increased and stands at 525 bps. This suggests no transmission

o The Term Deposit rates has decreased by only 16 bps between January to October 2019. An important limiting factor in this context is the interest rates on small saving scheme such as PPF

Term structure o The yields on short term securities has declined much faster compared to that of long

term govt securities. In fact after August 2019, the yields on long term govt securities have not declined by much

Credit growth o The credit growth has been declining since the beginning of this year o The banks' credit growth has come down from 12.9% (YOY) in April 2019 to 7.1% in

December 2019 o The credit growth has been moderating since December 2018. This moderation of

credit growth has been observed in all the non-food segments except the personal loans

o The credit growth to industries has been very low in recent months

Figure: Weighted Average Lending rate on outstanding loans and Repo rate

Source: RBI.

Table: Growth in Industry – wise Deployment of bank Credit by

Major sectors (YoY, per cent) Source: RBI

Non-banking financial companies (NBFC) o The sector grew rapidly in 2017-18 and in the first half of FY19. since then there has been a

deceleration in the sector o The third quarter of 2018-19 witnessed liquidity stress o There is an observable shift in the source of funding of NBFCs. The bank borrowing increased

from ₹ 5.6 lakh Cr to ₹ 7.13 lakh Cr between October 2018 to October 2019. However this growth is much slower compared to the growth rate at the end of October 2018


o The deployment of mutual funds is decreasing since October 2018 o The regulatory requirement of CRAR is NBFCs, the NBFCs collectively maintained 19.5% at

the end of March 2019 o The NPAs have increased from 5.8% at the end of March 2018 to 6.3% by end of September

2019

Insolvency and Bankruptcy Code (IBC)

o Government brought into force the IBC. This has consolidated the insolvency resolution process. It’s been over three years since the implementation and boasts of a strong ecosystem with IBBI as an adjudicating authority, three insolvency resolution professional agencies, over 2900 insolvency professionals etc

o The debtors and creditors alike have initiated the insolvency process in over 2500 companies o As of September 2019, about 743 of them have been completed (either resolution and

liquidation) o The IBC has been amended three times

In the recent amendment the insolvency resolution process has to be completed within 330 days


The global economy has been witnessing a decline in inflation in the last five years

o Inflation has declined in almost all the countries around the world

o The emerging economies have seen a steep decline during the same period o Reasons for decline

Adoption of more resilient monetary and fiscal policy frameworks Structural reforms in labour and product markets that strengthen the competition Adoption of monetary policy framework for inflation targeting (24 countries have

introduced inflation targeting since late 1990s) o India

Has introduced inflation targeting for a period of five years Starting from 5th August 2016 and ending on 31st March 2021 The inflation has been moderation since 2014 and in recent times has seen an uptick CPI-C inflation has increased to 4.1% in 2019-20 (April to December 2019) as against 3.7%

for the same period in 2018 The decline has been majorly because of drop in food prices between FY15 and FY19 In addition to this, there has been a shift in the inflation dynamics

o The average rate of inflation and peak levels of inflation has been much lower o There has been a convergence between headline and core CPI inflation from 2012

onwards

Figure: Trends in CPI-C Headline, Core and food inflation

Source: NSO.

Current trends o CPI

CPI-C has been sliding on a downward path since 2014 The CPI-C averaged at 5.9% in FY15, has fallen continuously to around 3.4% in 2018-19 This decline has been led by decline in food inflation which was 6.4% in FY15 to 0.1% in

FY19 In FY20, there has been a slight uptick in the headline inflation. The food inflation rate

was at 14.1% in December 2019. This was mainly driven by rise in vegetable prices The core inflation also has increased to 3.8% in December 2019

05 Prices and Inflation


o CPI - Urban and Rural Since July 2018, CPI-U has been higher than CPI-R. This is in contrast to the

earlier situation This divergence has been mainly because of the difference in food prices between

urban and rural areas The decline in rural inflation could be because of fall in real wage for workers The divergence can be seen in other components as well

Figure: CPI Rural and Urban inflation

Source: NSO

Figure: Rural Urban CPI food inflation

Source: NSO

o WPI In FY20, WPI based inflation has been declining. It reduced from 3.2% in April 2019 to

0.6% in November 2019, but increased to 2.6% in December 2019

Figure: WPI inflation

Source: Office of Economic Adviser, DPIIT


Drivers of inflation

o In FY19, the CPI-C inflation has been driven by miscellaneous group o In FY20, food and beverages emerged as the main contributor to CPI-C inflation (54% of the

inflation during this period is because of food and beverages

o Second largest contributor to the inflation during this period has been Miscellaneous group o The crude oil prices declined during April to December 2019 (because of weak global

demand). The minerals oils group saw an inflation of 5.8% in April 2019, thereafter experienced a decline to end at -3.2% in December 2019

Figure: Contributions to CPI-C inflation in 2018-19 (April-Dec) and 2019-20 (April-Dec)

Source: NSO

Cobweb phenomenon in pulses

o The cobweb theory provides for fluctuations in supply which casuses a cycle of rising and falling prices

o The farmers are caught in a cobweb phenomenon when they base their sowing decisions based on teh market prices

o When the prices of crops are high in the present year, farmer would sow and cultivate higher amount in the next cycle, which would increase the supply and reduce the prices. Now the farmer would decide cultivate the crop in less quantity, which in turn would reduce the supply in next cycle and increase the market prices

Figure: WPI inflation rate of pulses from April 2012 to December 2019

Source: Office of Economic Advisor, DPIIT


Volatility in essential commodity prices

o Prices of rice remained stable since 2014 because of adequate supply and buffer stocks. Hence the price volatility was lower in rice and wheat

o The volatility of prices was highest for vegetables o There was a significant rise in volatility for pulses, sugar, tomatoes during 2014-19 o Reasons for volatility

Supply and demand elasticities Stockholding and speculation Perishability of commodities

Measures to contain prices of essential commodities

o Govt uses trade and fiscal policy measures such as import duty, Minimum Export Price (MEP), export restrictions, imposition of stock limits etc to regulate the domestic availability and moderate prices

o To incentivise the production govt announces Minimum Support Price (MSP), National Mission on Oilseeds and oil Palm (NMOOP), Mission for Integrated Development for Horticulture (MIDH) etc

o To moderate the market prices the govt has implemented Price Stabilisation Fund (PSF) o To control the market prices of onion

Buffer stock was created and distributed to the states Onion was supplied to states such as Haryana, Kerala, Andhra Pradesh etc at no profit no

loss basis The benefits given to exporters under Merchandise Exports from India Scheme (MEIS)

was withdrawn Minimum Export Price as imposed and subsequently teh exports were banned

Govt imposed stock limits on the traders imported onion through MMTC from countries

such as Egypt, Turkey


2019 marked 4th anniversary of adoption of 2030 Agenda for Sustainable Development and the

Paris Agreement

Indian govt is striving to combine the element of sustainability to economic development through implementation of policies such as electrifying households, augmenting usage of renewable energy sources, eliminating malnutrition, eradicating poverty etc

India has been moving towards the implementation and achievement of SDGs and India’s success will contribute to the global success of these measures

India and SDGs

o Performance of India is measured under SDG India Index 2019. Performance of the states / UTs under 100 indicators spread across 16 goals is measured

o As per the index, Kerala, Himachal Pradesh, Tamil Nadu, Andhra Pradesh etc are front runners

o None of the states have fallen into Aspirant Category (score of less than 50) o SDG Nexus

There is a connection between the SDGs and targets Education and electricity

o Globally it has been found that the schools with electricity connection have outperformed the non-electrified schools (staff retention, drop outs etc)

o Electricity will promote the scholl’s access to modern tools, methods and techniques. This is expected to increase the students attraction towards learning

o It is also found that states with low literacy rates are the ones with low electricity rates and vice versa

Health and energy o Many of the health improvement schemes such as providing paediatric care,

newborn emergency services etc are heavily dependent on availability of electricity o There is a positive relationship between electricity consumption and fall in infant

mortality rate (IMR0 o Climate change

India has submitted Nationally determined Contributions (NDC) under Paris Climate Agreement o To reduce the emissions intensity of its GDP by 33 to 35 percent by 2030 from

2005 level o To achieve about 40 percent cumulative electric power installed capacity

from non-fossil fuel based energy resources by 2030 o To create an additional carbon sink of 2.5 to 3 billion tonnes of CO2

equivalent through additional forest and tree cover by 2030 Govt has ensured that the growth path followed will help it in achieving

sustainable development while protecting environment by investing in schemes that are aligned with NDC (Swachh Bharat Mission, AMRUT, Smart Grid Mission etc)

Progress

06 Sustainable development

and Climate Change


o All the urban areas of 35 states/UTs have become ODF. The waste processing has increased from 18% (2014) to 60%

o Of the targeted 175 GW of renewable energy capacity, India has already achieved 83 GW (the PM has announced that the renewable energy target would be expanded from 175 GW to 450 GW)

o The emissions has reduced by 21% over the period of 2005-14

o Progress in India’s climate change policies National Action Plan on Climate Change (NAPCC)

o Launched in 2008 o National missions have been launched. These simultaneously advance

development and climate change related objectives o Govt has decided to revise the NAPCC in line with the NDCs under Paris

agreement


o Climate Change Action Plan (CCAP)

Launched in 2014 as a central sector scheme for five years Objectives

o To build and support capacity at central and state levels for strengthening scientific and analytical capacity for climate change assessment

o Establishing appropriate institutional framework o Implementing climate actions

Energy Conservation Building Code (ecbc) o Estimated energy savings is 84.34 mn kWh o Reduction in GHG emissions

UJALA for LED bulb distribution has crossed more than 360 mn bulbs

Aligning financial system with sustainability

o Globally more than a trillion dollars are required to achieve the goals under SDGs o In 2012, SEBI mandated Annual Business Responsibility Reporting (ABRR) based on National

Voluntary Guidelines (NVGs) on Social, Economic and Environmental Responsibilities of Business released by the Ministry of Corporate Affairs. SEBI has mandated adoption of NVGs by the listed companies

o Green Bonds are debt securities issued by financial, non-financial or public entities where the proceeds are used to finance 100% green projects and assets India has the second largest green market bond market after China Many govt agencies have contributed to the issuance

o In order to scale up the environmentally sustainable investments, India in October 2019 joined the International Platform on Sustainable Finance (IPSF). The platform links such projects with global funding

o Green Climate Fund (GCF) In 2009, the developed countries committed to mobilising $ 100 bn by 2020 to address the

needs of the developing countries and decided that significant part of this funding should flow through GCF o In the Initial Resource Mobilization (IRM) period the pledges were around $ 10.3 bn o The GCF Board has approved 111 climate change projects totalling a funding of $ 5.2

bn


o The first replenishment period (2020-23) has witnessed 28 countries pledging resources to the tune of $ 9.7 bn

India's initiatives at the global level o International Solar Alliance(ISA)

Is a first treaty based intergovernmental organisation headquartered in India It has 83 signatories It will promote the demands of the member countries for developing solar generation,

storage and technologies It has aimed to mobilize $ 100 bn by 2030 It will also help the member countries in achieving the NDCs

o Coalition for Disaster Resilient Infrastructure (CDRI) India launched CDRI on the sidelines of Climate Action Summit in September 2019 It is an international partnership of national governments, UN agencies, multilateral

development banks, private sector and knowledge institutions It will promote resistance of new and existing infrastructure’s climate and disaster risks,

thereby ensuring sustainable development

Agriculture residue burning

o India is the 2nd largest agri-based economy and cultivates crops round the year. Burning of agricultural wastes especially crop residues creates environmental problems

o About 50% of all the crop residues burnt is residue of rice crop o Agri waste burning contributes significantly to PM2.5 concentration. As huge quantities of

wastes are burnt in a very short duration, there is a sudden spike in the concentration of PM2.5 and leads to deterioration of ambient air quality (especially during Kharif harvest season)

o How to address the issue Promote practice of conservation of agriculture where cultivation of crops with low

lignocellulosic crop residue (maize, wheat etc). Farmers can sow the seeds in the next cycle without having to be worried about residues of the last crop

Create markets for crop residue based briquettes Mandate the nearby thermal power plants to procure and use the reside for electricity

generation Create special credit line for financing farm equipment and working capital for private

sector participation Promote usage of residue based biochar briquettes in local industries such as hotel, dhaba

as an alternate fuel

Way forward

o India’s national agenda mirrors the SDGs and its policies are framed to ensure balance among the three pillars of development - economic, social and environmental

o In order to implement the and achieve various goals, both centre and states are working together

o Despite continuous and definitive efforts of the stakeholders, scarce financial resources continue to be the biggest constraint. In this regard the developed countries must honour their obligations under various international agreements

o Technology transfer at affordable costs is also important for the developing countries


Importance of agriculture

o Plays a significant role by providing rural livelihoods o Population employed (either directly or indirectly) is the highest o Around 70% of the rural households depend upon agriculture for their livelihood o 82% of the farmers are small and marginal

Overview of agriculture o Share of agriculture and allied sectors in Gross Value Addition (GVA) has declined from

18.2% in 2014-15 to 16.5% in 2019-20 (at current prices) This is on account of relatively higher growth in non-agricultural sectors (as structural

changes are taking place) o Gross Capital Formation (GCF) in agriculture and allied sectors has been fluctuating from

16.5% in FY13 to 15.2% in FY18

Minimum Support Price (MSP) o The govt announces MSP for 23 crops o Has decided that MSP would be one and half times the cost of production

07 Agriculture and Food

Management


Mechanisation in agriculture o Indian tractor industry is the largest in the world accounting for around a third of the global

production. In the past four decades it has grown by 10 per cent o Farm mechanisation has been growing at CAGR of 7.53% during 2015-18 due to thrust of the

govt policies o Govt has launched a sub-mission on Agricultural Mechanization in FY15

Assistance to be provided to the states to impart training and demonstration of agricultural machinery

Assistance to the farmers for procurement various agricultural machinery ES and equipment

Setting up of Custom Hiring Centres

Micro-Irrigation o There is a need to promote efficiency of water usage through micro-irrigation o Govt launched Pradhan Mantri Krishi Sinchayee Yojana (PMKSY) in 2015 to promote end to

end solutions in irrigation supply chain o The benefits of micro-irrigation will add to the revenues or earnings of the farmers o In addition to this wasteland and undulating land areas can be brought under the cultivation

due to ease of irrigation o The benefits of micro-irrigation are

Saving of irrigation water from 20 to 48 % Energy saving from 10 to 17% Saving of labour cost from 30 to 40% Saving of fertilizers from 11 to 19% Increase in crop production from 20 to 38% Increase in net annual income of the farmer beneficiaries

Figure: Year-wise Area Covered under

Micro irrigation through Centrally Sponsored Scheme (in Ha) Source: DAC & FW


Crop Insurance o Has been in implementation since 2016 o Provides comprehensive coverage of risks from pre-sowing to post harvest against non-

preventable risks o The insurance premium paid is the lowest (remaining has been shared between centre and

states) o It envisages to increase the coverage from 23% to 50% of Gross Cropped Area (GCA) of the

country o Direct Benefit Transfer (DBT)

Was introduced by the govt in April 2017 It has been done to ensure that the farmers would receive the claims directly into their

bank accounts This has been done by the govt to weed out duplicate or ghost beneficiaries

o Revised guidelines Provision of 12% interest rate per annum to be paid by the Insurance Company to

farmers for delay in settlement of claims beyond 10 days of prescribed cut-off date for payment of claims

State Governments have to pay 12% interest rate for delay in release of State share of subsidy beyond three months of prescribed cut-off date/submission of requisition by Insurance Companies

Agricultural trade

o India’s agri exports account for over 2.15% of world agri trade o Major export destinations are USA, Saudi Arabia, Iran, Nepal and Bangladesh o Post 1991, India has been a next agri exporter o Steps or measures taken in the last few years

Import duty has been raised from 0 to 10%on tur, 0% to 50% on peas, 0% to 60% on gram (chana) and 0% to 30% on lentils

Quantitative restrictions of 4 lakh tonnes per year has also been imposed on import of tur and 1.5 lakh tonnes on import of peas, urad & moong per year

Export of all varieties of pulses have been allowed with effect from 22/11/2017 to ensure the greater choice in marketing as well as the better remuneration for farmers’ produce

Restriction on export of all types of edible oils (except mustard oil) has been lifted on 6/4/2018 to encourage export of indigenous edible oils and their industries

Government has imposed a Minimum Import Price (MIP) on pepper and arecanut. MIP of ` 500/kg was fixed on pepper imports on 6/12/2017 and MIP of 251/kg was fixed on arecanut on 17/1/2017 to protect the domestic growers and their livelihood from cheap import of the commodity as well as to save the domestic industries of pepper and arecanut

Under Foreign Trade Policy 2015-20, rates of reward under merchandise exports from India (MEIS) were enhanced on export of various agriculture items on 1/11/2017 to offset high transit cost

Government has recently initiated a comprehensive “Agriculture Export Policy” aimed at doubling the agricultural exports and integrating Indian farmers and agricultural products with the global value chains

Created agri cells in many Indian embassies abroad to take care of agricultural trade related issues


Table: India’s export of principal agri and allied Commodities

(Value in Rs. ‘000’ crore & Quantity in lakh metric tonnes) Spirce: DAC & FW

Food processing sector o Benefits of higher food processing

Reduction of wastages Improves value addition Promotes crop diversification Ensures better returns to the farmers Promotes employment Increases export earnings

o In the last six years ending in FY18, the sector has grown at an average rate of 5.06% o As per ASI, total people engaged in the sector is 18.54 lakh o Pradhan Mantri Kisan Sampada Yojana

Has been allocated with ₹ 6000 Cr for period of 2016 to 2020 Provides subsidy based support for creation of agri based industries along entire value /

supply chain Components are - Mega Food Park scheme, Integrated Cold Chain and Value addition

Infrastructure, Creation and Expansion of Food Processing and Expansion of Food Processing and Preservation Capacities etc

Fertilizers o Govt has introduced New Urea Policy 2015 to

Maximize indigenous urea production Promoting energy efficiency in urea production Rationalizing subsidy burden on the government

o Govt has introduced Direct Benefit Transfer (DBT) system in fertilizers w.e.f October 2016 Under this the subsidy is released to the producers on the basis of actual sales of the

fertilizers

Food management o Economic cost of food grains (ECFG)

Consists of three components - pooled cost of food grains, procurement incidentals and cost of distribution

ECFG for rice and wheat has seen a significant increase in the last few years

o Food Subsidy Includes subsidy given to FCI for procuring food grains to be given under NFSA and

other such programmes, maintaining strategic reserves of foodgrains and subsidy given to the states for decentralised procurement

Food subsidy incurred by the govt has increased


Figure: Economic cost of food grains to FCI

Source: FCI annual Plan, 2019-20

Figure: Food Subsidy released and its annual Growth

Source: Department of food & Public Distribution


Way forward

o To double the income of the farmers some challenges faced by the agri sector have to be addressed Investment in agriculture, water conservation, improved yields through better farming

practices, access to market, availability of institutional credit, increasing linkages between agricultural and non-agricultural sectors etc need attention

As proportion of small and marginal farmers is high, there is need to implement land reforms to free up land markets

Coverage of irrigation facilities needs to be improved Need to support the farmers through direct income or investment support There is a need to reallocate the surplus labour to other sectors FCI stocking is above the buffer norms, this has to be revisited

The rates under NFSA and coverage needs to be looked into


Performance of industries is important if India were to become a $ 5 tn economy. The sector is

vulnerable to internal and external economic challenges

Trends

o The real GVA for H1FY20 grew by 1.6% as against 8.2% in H1FY19. The low growth of the industries is primarily because of manufacturing sector which registered a negative growth rate of 0.2%

o IIP during April to November has grown at a rate of 0.6% compared to 5% in the corresponding period in the last fiscal. This is because of Subdued manufacturing because of slower credit flow to medium and small industries Reduced lending to NBFCs owing to liquidity crunch Tapering of domestic demand in sectors such as automobiles, pharmaceuticals,

machinery and equipment Volatility in crude oil prices Prevailing trade uncertainties etc

o Index of Eight Core Industries (ICI) stood flat this year during April to November compared to a growth rate of 5.1% in the corresponding period in the last fiscal

Corporate Sector o Gross Capital Formation (GCF)

As per NSO report released in January’s 2019, o The rate of growth of Gross Capital Formation (GCF) in industry has increased to

7.6% for FY18 The gross credit of banking sector to industrial sector has risen by 2.7% in September 2019

(Y-o-Y) Ease of doing business

o To promote ease of doing business, the focus has been on simplification and rationalisation of the existing rules and introduction of information technology to make governance more efficient and effective

o India’s ranking has improved to 63rd position out of 190 countries in the Ease of Doing Business Report 2020 published by the World Bank (ranking has jumped by 14 positions compared to the earlier report). Performance of India has improved in 7 out of 10 parameters

08 Industry and Infrastructure


Figure: India’s Ranking in World Bank ease of doing business Reports

Source: World Bank

Figure: India’s Progress in Ease of doing Business Reports Ranking

Source: World Bank

Start-up India o Startups drive economic growth, create employment and foster a culture of innovation and

entrepreneurship among the enterprising youth o Govt has launched startup India, stand up India in 2015 o In this regard a plan of action containing 19 points was unveiled in 2016 o As of January 2020

27084 startups have been recognised across 551 districts 55% are from Tier I cities, 45% are from Tier II and Tier III cities 43% of the recognised startups have at least one woman director

o Steps taken Exemptions from income tax on the investments raised by the startups Implementing 32 regulatory reforms to improve the ease of doing business for startups Self-certification for six labour laws and three environmental laws


Figure: Major State-wise distribution of recognized startups in India (in per cent)

Source: DPIIT

Figure: Major Industry-wise distribution of recognized startups in India (in per cent)

Source: DPIIT

Micro, Small and Medium Enterprises (MSME)

o Contribute in economic and social development by fostering entrepreneurship and generates large number of employment opportunities

o In 2018, govt announced 12 key measures top promote growth in this sector


Table: Status of key initiatives for faster growth of MSMEs and promoting ease of doing business


Infrastructure

o Investment in infrastructure is necessary for growth. Issues or shortages in infrastructure will limit growth prospects for any economy. Hence there is a need to provide adequate Infrastructure for growth and for making growth inclusive

o India recently launched National Infrastructure Pipeline for the period from 2020 to 2025


o Roads At the end of FY18, India has a total road length of 59.64 lakh Km Of this 1.32 lakh Kms was length of national highways

o Railways Is the third largest rail network in the world Rail safety is accorded the highest priority and steps are being taken to reduce the

number of accidents and enhance the passenger safety Modernisation and upgradation of railways is being undertaken on continuous basis

o Power As a result of the reforms undertaken by the govt considerable progress has been made

under universal electrification; generation, transmission of electricity Thermal power accounts for 63% of installed capacity and roughly half of the generation

capacity Roughly half of the generation capacity is in the private sector The peak deficit has decline from 9% (in 2012-13) to 0.7% during 2019-20 Govt has launched PM Samaj Bijli Har Ghar Yojana to provide electricity access to the

households


Figure: Total Power Generation Capacity as on October 2019

(Fuel-wise & Sector-wise) Source: Ministry of Power.

Note: RES- Renewable Energy Sources

o Housing and Urban Infrastructure India is one of the fastest growing countries in the world with rapid urbanisation. There

were around 37 Cr people residing in urban habitats of India as per census 2011 (31% of the total population), this is expected to increase to 60.6% Cr by 2030

Urban centres are epicentres of economic growth. Around 60% of the India’s GDP comes from these centres

Housing o In order to provide for pucks houses to the urban poor, govt has launched Pradhan

Mantri Awas Yojana - Urban (PMAY-U) o PMAY-U is being implemented through four verticals o The vision of the govt is to provide a pic a house to every household by 2022 o So far 1.03 houses have been approved

Figure: Different verticals of PMAY (U)

Source: Ministry of Housing and Urban Affairs

o mart Cities Mission (SCM) All the 100 cities under SCM have incorporated Special Purpose Vehicles (SPVs), City

Level Advisory Forums (CLAFs) and appointed Project Management Consultants (PMCs)

Since the launch more than 5000 projects worth more than ₹ 2 lakh Cr are at various stages of implementation


o Way forward

In order to keep the growth momentum, India needs to develop industries and Infrastructure

Industry 4.0 and next level Infrastructure have a huge potential for a country such as India. Hence the go cut needs to address those issues which are hindering the development of these

For a smooth and faster development, there is a need to have adequate and timely investment in quality infrastructure

To reach the goal of $ 5 tn economy, there is a need to invest $1.4 tn in infrastructure


Performance

o In the first advance estimates on the Gross Value Addition (GVA), the services sector has continued to grow at 6.9% YoY

o The services sector continues to outperform agriculture and industry sector growth, contributing around 55% to the GVA and GVA growth

o The credit growth of the banking sector to services sector was 4.8% as on November 2019 as compared to 28.1% a year ago

o The performance of the services sector at the state level accounts for over 50% of the GVA in 15 out of 33 states and UTs. In 8 states it accounts for over 60% of GSVA

FDI in services sector

o Gross FDI equity inflows into the services sector witnessed a strong recovery during April to September 2019 (had declined in 2018-19)

o Gross FDI equity inflows jumped by 33% YoY during April to September 2019 to reach $ 17.5 bn

Trade in services sector

o India’s services exports remained concentrated in software services. It accounts for over 40% of the total service exports in 2018-19. However the share of software exports has declined by 4 percentage points in the last decade

o Since the exports are concentrated in one sector, software sector has become susceptible to the volatility in the exchange rates, global expenditure on IT services, US Visa norms etc. though the global IT spending is expected to increase in 2020, rising production costs, uncertainty related to BREXIT, USAs visa norms pose downward risks to India’s software exports

Tourism sector o Is a major engine of growth contributing to GDP, foreign exchange earnings and

employment o India ranks 22nd in terms of international tourist arrivals in 2018. India accounts for 1.2% of

the world’s international tourist arrivals o The tourism sector grew between 2015 to 2017, since then the growth has decelerated to 5.2%

in 2018 and 2.7% between January to October 2019 o This trend has been observed in the global market as the tourist arrivals globally slowed

down from 7.1% in 2017 to 5.4% in 2018 o Corresponding foreign exchange earnings also have gone down

o To facilitate international tourism e-Tourist Visa regime was introduced in 2014 to cover 46

countries

09 Service Sector


There is a need for the govt to invest in social Infrastructure to achieve inclusive growth and

employment. Govt has set a target of 2022 for achieving access to electricity, a clean cooking facility and housing for all. In addition to this, there are also measures being taken to ensure piped water supply to all the rural households by 2024, solid waste management in every village

Trends in social sector expenditure o The overall expenditure (centre + states) in social; services (education, health and others) has

increased from 6.2% to 7.7% of GDP during the period 2014-15 to 2019-20 Increase in expenditure was observed across all of the sectors during this period In education it increased from 2.8% to 3.1% of GDP In health it increased from 1.2% to 1.6% of GDP

o The share of expenditure out of the total budget has increased from 23.4% in FY15 to 26% in FY20

Human development

o India’s ranking in Human Development Index (HDI) has improved from 130 in 2017 to 129th in 2018

o The value of HDI has reached 0.647 in 2018 o India is one of the fastest improving countries o To improve its performance and to promote development role of public sector is critical

Figure: Average annual HDI Growth rate during 2010-2018 (per cent)

Source: HDR, 2019

Education for all

o Sustainable Development Goal 4 (SDG4) seeks to ensure inclusive and equitable quality education and promote lifelong learning opportunities for all by 2030

o Free and compulsory education is provided in India under the ambit of Right to Education ACT 2009 from the age of 6 till the age of 14 years. The act also mandates that All weather building in elementary education At least one classroom for every teacher One room for office-cum-store-cum-head teacher’s room Separate toilets for boys and girls Safe and adequate drinking water facility and playground for all the children

10 Social Infrastructure, Employment & Human Development


o Unified District Information System for Education (U-DISE) collects data on various indicators on school education. As per U-DISE 2017-18 98.38% of the govt elementary schools have girl’s toilet 96.23% of the govt elementary schools have boy’s toilets 97.13% of the govt elementary schools have provisional drinking water facility 38.62% of Government elementary schools have ramps 58.88% of Government elementary schools have boundary wall 56.72% of Government elementary schools have playground facility 79.23% of Government elementary schools have library 61.75% of schools are having electricity connection

o As per National Sample Survey (NSS) Report, increased participation in education system has shown certain challenges such as affordability, quality of education and distribution of educational infrastructure etc. as per this report (2017-18) There were 13.6% people in the age group of 3 to 35 years who have never enrolled. The

reason cited were o Not interested in education o Financial constraints o Among those who are enrolled, the dropout rate was as high as 10% at primary level,

17.5% at upper primary/middle and 19.8% at secondary level o The govt has initiated process of formulating a new education policy to meet the changing

dynamics of the requirements of the population o Some of the reforms or initiatives taken by the govt in education sector are


Skill development and employment o Skill training enhances the employability and equip the population to tackle the requirements

of the labour market o As per Periodic Labour Force Survey (PLFS), only around 13.53% of the workforce has

received training (2.26% formal and 11.27% informal)


o Under Skill India Mission, govt is implementing Pradhan Mantri Kaushal Vikas Yojana (PMKVY). So far 69.03 lakh candidates have been trained

o Govt has introduced comprehensive reforms under Apprenticeship Rules 1992

Status of employment o As per PLFS

Regular or salaried employees has increased by 5 percentage points from 18% (2011-12) to 23% (2017-18)

Proportion of women workers in regular or salaried employees category has increased from 13% (2011-12) to 21% (2017-18)

o With introduction of many reforms such as GST, digitisation of payments etc formalisation has increased As per ASI, the employment in organised sector has increased


Figure: Employment in Organized Manufacturing in India (in lakh)

Sorrce: Annual Survey of Industries various issues (P: Provisional Estimates), MoSPI

The Female Labour Force Participation Rate (LFPR) has declined from 33.1% in 2011-12 to

25.3% by 2017-18 o The female LFPR is higher in urban areas than rural areas o The decline has been sharper in rural areas compared to urban areas o Reasons for decline

Large number of female youth are enrolled for education and to acquire the skill sets

Number of women engaged in domestic activities also has increased

The increased or higher wages in rural market has forced the women to withdraw from the labour market

Cultural norms, restrictions, constraints and patriarchal norms. All of these could have restricted the mobility of women

Wage gaps, absence of sufficient quality jobs etc Female Worker Population Ratio (WPR) stood at 23.8%. Was 25.5% in rural areas and

19.8% in urban areas for 2017-18 (was 32.2% in 2011-12) Reforms taken to improve female work participation

o Maternity Benefit (Amendment) Act

Paid maternity leave increased from 12 weeks to 26 weeks

Provisions for mandatory crèche facility etc o The Sexual Harassment of Women at Workplace (Prevention, Prohibition and

Redressal) has been passed to protect all the women (irrespective of employment status or age) against sexual harassment (in public and private sector - organised and unorganised)

All workplace with more than 10 workers to constitute Internal Complaints Committee (ICC) for receiving complaints of sexual harassment

o Mahila Shakti Kendra Scheme aims to empower rural women through community participation

o Women Helpline (launched in 2015) will provide 24 hrs of emergency and non-emergency response to women affected by violence

o To promote female entrepreneurship govt has launched MUDRA, Stand Up India etc o One Stop Centre (OSC) provides access to a range of services such as police, medical,

legal etc to women affected by violence


Health for all

o Govt has launched National Health Policy 2017 and Ayushman Bharat o The focus of healthcare is on four pillars

Preventive healthcare o Govt has proposed setting up of 1.5 lakh Ayushman Bharat - Health and Wellness

Centres (AB-HWCs) by 2022. The focus will be on delivering comprehensive primary health care services

o Under Mission Indradhanush more than 3 Cr children have been vaccinated Providing affordable healthcare

o Out of Pocket (OoP) expenditure on healthcare has reduced from 64.2% (2013-14) to 58.7% (2016-17)

o As per Health Policy 2017, govt should spend at least two thirds of health expenditure in primary healthcare

o Ayushman Bharat - Pradhan Mantri Jan Arogya Yojana (PM-JAY) is the largest health insurance scheme

Building medical infrastructure o The Government operates Centrally Sponsored Scheme–establishment of New

Medical Colleges attached with existing District/Referral Hospitals’ with fund sharing between Centre and States

o To add to tertiary healthcare capacity, govt has launched Pradhan Mantri Swasthya Suraksha Yojana (PMSSY)

Mission mode intervention for maternal health, child health and to combat communicable and non-communicable diseases

Housing for all, Drinking water and sanitation

o As per NSO survey (2018), 76.7% of the households in rural India and 96% in urban India has the house in put a structure

o Govt has launched Pradhan Mantri Awas Yojana (Gramin and Urban) to achieve housing for all by 2022

o The Department of Drinking water and Sanitation has launched a 10 year Rural Sanitation Strategy (2019 to 2029). The focus will be on sustaining the sanitation and behavioural change achieved under Swachh Bharat Gramin Over 10 Cr toilets have been built in rural areas 5.9 lakh villages, 699 districts and 35 states/UTs have been declared as Open Defecation

Free (ODF) o Jail Shakti Abhiyan has been launched to accelerate progress on water conservation activities

in the most water stressed blocks and districts in India

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