105 Mag Economic Survey

State of the Economy and Prospects
CHAPTER
he Indian economy has emerged with remarkable rapidity from the slowdown caused by the global financial crisis of 2007-09. With growth in 2009-10 now estimated at 8.0 per cent by the Quick Estimates released on 31 January 2011 and 8.6 per cent in 2010-11 as per the Advance Estimates of the Central Statistics Office (CSO) released on 7 February 2011, the turnaround has been fast and strong. Growth is strong in 2010-11(as per the Advance Estimates) with a rebound in agriculture and continued momentum in manufacturing, though there was a deceleration in services caused mainly by the deceleration in community, social, and personal services, reflecting the base effect of fiscal stimulus in the previous two years. That there has been a deceleration in industry and manufacturing, in particular, as indicated by index of industrial production (IIP) data pertaining to November 2010 is a matter of some concern. However, buoyancy in other indicators of industrial performance and the short-run nature of the IIP slowdown suggest that the deceleration is more in the nature of road bumps than indication of any long-run problem. The mediumto long-run prospect of the economy, including the industrial sector, continues to be positive. On the demand side, a rise in savings and investment and pickup in private consumption have resulted in strong growth of the gross domestic product (GDP) at constant market prices at 9.7 per cent in 2010-11. A sequenced and gradual withdrawal of the monetary accommodation is helping contain inflationary pressures. Inflation which remained at elevated levels for a large part of the current fiscal was largely driven by food items, though the goods that were inflating at the start of the fiscal year were different from the goods for which prices are rising now. Notwithstanding the tightening money markets and moderate growth in deposits, the financial situation remained orderly with a pickup in credit growth, vibrant equity market and stable foreign exchange market. A moderation in the current account of balance-of-payments position is likely with deceleration in imports and acceleration in exports as per latest monthly merchandise trade data. Though downside risks of global events, particularly movement in prices of commodities like crude oil (exacerbated by political turmoil in the Middle East), remain, the Indian economy is poised to further improve and consolidate in terms of key macroeconomic indicators.
1.2 It is important to note here that during the immediate past three years, the Indian economy has been severely buffeted by, but has successfully withstood, two shocks in rapid succession: (a) a collapse in world growth, finances, and trade with the onset of the global financial crisis in 2007-09 whose ripple effects continued into 2009-10 and persisted into 2010-11 (with fiscal stresses in Europe); and (b) domestically, following a year of
negative growth in agriculture and allied sectors in 2008-09, erratic monsoons resulted in a severe drought in 2009-10 and unseasonal late rains affecting the winter season crops in 2010-11. 1.3 This period of economic stress has severely tested citizens and policymakers alike. Yet the Indian economy is coming through with resilience and strength. While some clouds lingersuch as
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Economic Survey 2010-11
0.1 KEY INDICATORS

Data categories and components 1 GDP and Related Indicators GDP (current market prices) Growth Rate GDP (factor cost 2004-05 prices) Growth Rate Savings Rate Capital Formation (rate) Per Cap. Net National Income (factor cost at current prices) 2 Production Foodgrains Index of Industrial Production
c
Units
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
` crore % ` crore % % of GDP % of GDP `
3692485 13.9 3254216 9.5 33.5 34.7
4293672 16.3 3566011 9.6 34.6 35.7
4986426 16.1 3898958 9.3 36.9 38.1
5582623PE 12.0 4162509PE 6.8 32.2 34.5
6550271QE 17.3 4493743QE 8.0 33.7 36.5
7877947AE 20.3 4879232AE 8.6 na na
27123
31198
35820
40605
46492
54527
Mn tonnes (growth) Per cent Per cent
208.6 8.0 5.2
217.3 11.9 7.2
230.8 8.7 6.4
234.5 3.2 2.8
218.1a 10.5 6.0
232.1b na na
Electricity Generation (growth) 3 Prices Inflation (WPI) (12 month average) Inflation CPI (IW) (average) 4 External Sector Export Growth ( US$) Import Growth (US$) Current Account Balance (CAB)/GDP Foreign Exchange Reserves Average Exchange Rate 5 Money and Credit Broad Money (M3) (annual) Scheduled Commercial Bank Credit (growth) 6 Fiscal Indicators (Centre) Gross Fiscal Deficit Revenue Deficit Primary Deficit 7 Population (Year-wise projected propultion as on 1st Oct.) AE GDP figures for 2010-11 are advance estimates; na not yet available / released for 2009-10.
a b c
% change % change
4.3 4.4
6.5 6.7
4.8 6.2
8.0 9.1
3.6 12.4
9.4d 11.0d
% change % change Per cent Us$ Bn. ` / US$
23.4 33.8 -1.2 151.6 44.27
22.6 24.5 -1.0 199.2 45.25
29.0 35.5 -1.3 309.7 40.26
13.6 20.7 -2.3 252.0 45.99
-3.5 -5.0 -2.8 279.1 47.42
29.5e 19.0e na 297.3 f 45.68 g
% change
16.9
21.7
21.4
19.3
16.8
16.5h
% change
30.8
28.1
22.3
17.5
16.9
24.4h
% of GDP % of GDP % of GDP Million
4.0 2.5 0.4 1106 (2005)
3.3 1.9 -0.2 1122 (2006)
2.5 1.1 -0.9 1138 (2007)
6.0 4.5 2.6 1154 (2008)
6.3i 5.1i 3.1i 1170 (2009)
4.8 3.5 1.7 1186 (2010)
PE
Provisional Estimates.
QE
quick estimates.
Final estimates. Second advance estimates. The annual growth rates have been recompiled from 2005-06 onwards since the indices have been recompiled from April 04 onwards using new seried of WPI for the IIP items reported in value terms. Average Apr.-Dec. 2010. Apr.-Dec. 2010. as of December 31, 2010. Average exchange rate for 2010-11 (Apr.-Dec. 2010). Provisional. fiscal indicators for 2009-10 are based on the provisional actuals for 2009-10.
d e f g h i
State of the Economy and Prospects continued high food inflation and a temporary slowdown in industrial growth the dynamism in overall growth is evident, even as a series of social protection measures have considerably strengthened the ability to withstand shocks. These results owe to the counter-cyclical macroeconomic policies, structural measures to promote growth, social spending to provide a stronger foundation to protect the poor and, as always with economic progress, some luck in the form of good weather and slow but steady recovery of the global economy. In each of these areas, enormous progress was made during this crisis, and valuable lessons learnt for the future. 1.4 The estimated level of growth in the GDP at constant 2004-05 prices at factor cost (real GDP) in 2010-11 was composed of: growth of 5.4 per cent in agriculture, which rebounded from a downturn in the previous year; growth of 8.1 per cent in industry, which had a growth of 8.0 per cent in 2009-10; and a decelerated growth of 9.6 per cent in services as against 10.1 per cent in 2009-10 (Table 1.1). On the demand side, the GDP at constant prices (2004-05) at market prices is estimated to grow by 9.7 per cent. Four distinct facts emerge out of the recent macroeconomic data. First, adjusted for the base effect on community, social, and personal services, the services sector with a share of 57.3 per cent in 2009-10 has finally started to gather momentum and given the fact that it has been the power house of the Indian growth story, this portends well for the medium-term prospects. Second, the savings rate has gone up to a level of 33.7 per cent and investment rate is up to 36.5 per cent of the GDP in 2009-10, which, given the incremental capital-output ratio of about 4, indicates prospects of sustained output growth. Third, there is a marked deceleration in industry as per recent monthly IIP data, decline in imports and signs of headline inflation remaining at
elevated levels given the geopolitical risks in Middle East. All these could have implications for slowing down the momentum albeit in the short run. Fourth, fiscal policy is on the consolidation path with revenues doing well on the strength of the rebound in economic activity and, going forward, this is likely to yield growth dividends in the medium to long term setting in motion a virtuous cycle. 1.5 Headline inflation, year-on-year, as measured by the wholesale price index (WPI), remained at elevated levels from December 2009, even though it has, by and large, been on a downward trajectory since April 2010, when WPI inflation peaked at 11 per cent year-on-year. Inflation stood at 8.23 per cent in January 2011. The financial-year build-up (from March 2010) remained at 7.44 per cent upto January 2011. Inflation in primary articles, particularly food articles, was the main contributor to the elevated levels of WPI inflation. With diminishing base effect, there was gradual moderation in overall WPI inflation in November 2010 when it was placed at 7.48 per cent; there was a rise again in December 2010, driven mainly by certain food articles (fruits and vegetables, milk, egg, meat and fish) and also petroleum products. A series of steps, both structural and macroeconomic, was taken to combat the rising food inflation. 1.6 On the basis of weekly data on prices, inflation in food articles remained in double digits for 76 weeks from 5 June 2009; after briefly ruling below the doubledigit mark for three weeks between 20 November 2010 and 4 December 2010, it again was in double digits trending higher with inflation at 17.05 per cent on 22 January 2011. Between 15 January 2010 and 19 June 2010 it was ruling above 20 per cent in 22 weeks out of 23. While food inflation had remained high even last year, compositionally the higher
Table 1.1 : Growth in GDP at factor cost at 2004-2005 prices (per cent)
2005-06 2006-07 2007-08 2008-09PE 2009-10QE 2010-11AE Agriculture, Forestry & Fishing Mining & Quarrying Manufacturing Electricity, Gas & Water Supply Construction Trade, Hotels, Transport & Communication Financing, Insurance, Real Estate & Business Services Community, Social & Personal Services GDP at Factor Cost
Source : CSO.
5.1 1.3 10.1 7.1 12.8 12.1 12.7 7.0 9.5
4.2 7.5 14.3 9.3 10.3 11.7 14.0 2.9 9.6
5.8 3.7 10.3 8.3 10.7 10.7 11.9 6.9 9.3
-0.1 1.3 4.2 4.9 5.4 7.6 12.5 12.7 6.8
0.4 6.9 8.8 6.4 7.0 9.7 9.2 11.8 8.0
5.4 6.2 8.8 5.1 8.0 11.0 10.6 5.7 8.6
Economic Survey 2010-11 revisions take into account the new series of WPI with base 2004-05 and also subsequent revision in Index of industrial production (IIP)}. Growth in real GDP for 2008-09 also stands revised to 6.8 per cent (up by 0.1 percentage point). Compositionally, there are significant changes in the GDP as per the Quick Estimates with growth in agriculture at 0.4 per cent (0.2 per cent as per the Revised Estimates); growth in industry of 8.0 per cent as against 9.3 per cent in the Revised Estimates and a sharper rise in growth in services at 10.1 per cent as against the 8.5 per cent indicated in the Revised Estimates. Growth in GDP at factor cost current prices was placed at 16.1 per cent in the Quick Estimates as against a level of 12.2 per cent suggested by the Revised Estimates. 1.10 The Quick Estimates also indicate the extent of overall inflation as measured by the GDP deflator and the sectoral composition. Agriculture and allied activities were estimated to have grown by 17.3 per cent in terms of current prices in Quick Estimates 2009-10 (as against 11.8 per cent in Revised Estimates 2009-10). With growth in terms of constant prices at 0.4 per cent, the implicit inflation is placed at 16.8 per cent. In so far as the growth rates in industry are concerned, the revision was smaller and the implicit inflation is placed at 2.8 per cent in 200910. In services as per the revisions in growth in current and constant prices implicit inflation of 7.6 per cent in 2009-10 is indicated (3.8 per cent as per the Revised Estimates). The level of inflation as measured by the implicit GDP deflator have risen resulting in widening of the differential in growth between current and constant prices for key macroeconomic indicators (Figures 1.1 and 1.2 ). 1.11 The CSO has released the Advance Estimate of GDP for 2010-11 on 7 February 2011. The Indian economy grew robustly in the current financial year and is on firmer footing. With growth in real GDP at 8.6 per cent in 2010-11, which followed a revised growth of 8.0 per cent in 2009-10 and 6.8 per cent in 2008-09, the economy has moved closer to the precrisis levels. The decomposition of growth in 201011 indicated that it was relatively broad based across the major sub-sectors in industry and services, besides the rebound in agriculture. Agriculture is estimated to grow relatively rapidly on the strength of growth of 6.5 per cent in foodgrains; 11.9 per cent in oil seeds; 41.2 per cent in cotton; 15.2 per cent in sugarcane; 4.1 per cent in fruits; and 3.8 per cent in vegetables. This should help arrest the food price situation if demand does not rise at faster rates. Growth in industry was rapid in the first half of the
inflation this year is different; last year the main drivers were pulses, cereals, and sugar which could be attributed to monsoon deficiency, whereas this year inflation seems to be driven by demand factors despite higher supply levels. Inflation as measured by consumer price indices, wherein greater weights are assigned to food items, rose sharply to reach peak levels in January 2010; thereafter it has moderated broadly in tandem with movements in WPI inflation. 1.7 The inflationary pressures on the domestic front are likely to be exacerbated by the higher levels of global commodity prices and also the easy money policy being followed in several industrial nations trying to jump-start their own economies. The International Monetary Fund (IMF) forecast (as per the January 2011 World Economic Outlook [WEO] update) indicates the likely continuance of high consumer price inflation for emerging and developing economies in 2011 due to continued robust demand and a sluggish supply response to tightening market conditions. The IMF has also upped its baseline projection for petroleum prices from US $ 79/bbl in WEO October 2010 to US $ 90/bbl in the January update of the WEO. Non-oil commodity prices are forecast to increase by 11 per cent in 2011. The update also indicated that near-term risks were now on the upside for most commodity classes and for some emerging economies that had grown rapidly there was danger of overheating on account of closing of output gaps. 1.8 The IMF has revised upwards the global growth projections, which are placed now at 4.4 per cent in 2011. The Indian economy is estimated to grow by 8.4 per cent in 2011 following a growth of 9.7 per cent in 2010 (in terms of GDP at constant market prices). Under the baseline scenario in which contagion from the financial turmoil in the euro area is contained, emerging market capital inflows are expected to remain strong and financial conditions robust. Key risks to emerging markets as per the update relate to overheating, a rapid rise of inflationary pressures, and the possibility of a hard landing.
REVIEW OF ECONOMIC DEVELOPMENTS

Growth broad based, recovery on firmer footing
1.9 In its Quick Estimates released on 31 January 2011, the CSO revised growth in real GDP for 200910 from a level of 7.4 per cent to 8.0 per cent {these
State of the Economy and Prospects Figure 1.1

22 20 18 16 14 12 10 8 6 4 2 2005-06 2006-07 2007-08 2008-09 2009-10 20010-11 Growth in GDP at FC at constant prices Growth in GDP at FC at current prices Inflation based on GDP deflator
Growth in GDP at FC at current and constant prices and inflation based on deflator
Year
Figure 1.2
22 20 18 16 14 12 10 8 6 4 2
Growth in GDP at MP at current and constant prices and inflation based on deflator
Growth in GDP at MP at constant prices Growth in GDP at MP at current prices Inflation based on GDP deflator 2005-06 2006-07 2007-08 2008-09 2009-10 20010-11
Year
current fiscal in terms of national accounts as well as the IIP. Robust performance in terms of key indicators in telecom services, civil aviation, and financial services and the level of growth in services excluding community, social, and personal services in the current fiscal indicates brighter prospects for next year. With manufacturing estimated to remain at about the same levels as last year and a pickup in the construction sector estimated to offset the deceleration in the other sub-sectors, growth in industry is estimated to remain at more or less the same levels of 8 per cent that obtained last year. A part of the deceleration in year-on-year growth as per the monthly IIP data owes to the large base effect; but the quarter-on-quarter sequential deseasonalized index movements also reflect a positive but weak momentum, which needs close monitoring.
Quarterly trend
1.12 The revisions to the annual GDP estimates between the Quick Estimates released on 31 January 2011 and the Revised Estimates for 200910 released in May 2010 indicate some likely revisions in the quarterly GDP estimates for the current and previous years. These revisions to quarterly GDP are likely to be made available at a later date. The available data (reported also in the Mid-year Analysis 2010) indicated a robust growth momentum with growth in real GDP at 8.9 per cent in each of the first two quarters as well as the first half of the current fiscal. The growth in real GDP and its broad based nature indicated that economic recovery that began in 2009-10 has gathered momentum and is at the robust level that obtained prior to the global crisis. Growth in the GDP at
Economic Survey 2010-11 Growth in exports was also revised downwards for 2008-09 and 2009-10. Imports were also estimated to have declined only marginally by 1.8 per cent as against 17.2 per cent indicated in the Advance Estimates. 1.14 Demand-side GDP as measured at constant market prices is estimated to grow by 9.7 per cent in 2010-11 (Table 1.2); in terms of current market prices (nominal GDP) it is placed at 20.3 per cent. At constant market prices, while total consumption expenditure and capital formation are estimated to decelerate year-on-year in 2010-11, with private final consumption expenditure picking up, Government final consumption expenditure decelerating sharply owing to base effect and a pickup in gross fixed capital formation and net exports compositionally positive shifts are indicated. Inflation measured by the GDP deflator implicit in the demand- side estimates for 2010-11 is at 9.6 per cent. Similar estimates based on the levels of growth in the GDP at factor cost at constant and current prices was at 9.0 per cent. 1.15 The levels of shares and contribution to growth of key demand-side aggregates do indicate that in 2008-09, the demand slowdown was largely explained by gross capital formation and net exports (Table 1.3). The rebound in demand-side GDP in 2009-10 was also explained by the two and was obtained in the face of reduced levels of contribution to growth from private final consumption expenditure. A decomposition of the growth in private final consumption expenditure indicates that the subgroup food, beverages and tobacco with a share of over 30 per cent in private final consumption
constant market prices is placed at 10.4 per cent in the first half of the current fiscal. That fiscal stimulus packages were central to the recovery as attested by the demand-side aggregates, was reported in detail in the Mid-year Analysis 2010.
Aggregate demand and its composition

Pickup in private consumption and investment driving rebound in demand
1.13 The expenditure estimates of the GDP (at constant market prices) reveal the dimensions of the impact of the global crisis on the Indian economy. Though the crisis deepened only in the second half of 2008-09, the demand-side GDP grew at much lower levels than the supply-side GDP (at constant prices at factor cost) on quarterly basis and yearon-year it was placed at one-half the levels of 2007-08. The revisions to the GDP data effected by the Quick Estimates for 2009-10 entailed a change in the dimensions of the impact of the crisis and the subsequent recovery that was documented in the earlier editions of the Economic Survey. The deceleration in growth in private final consumption expenditure was lower in 2008-09 than reported earlier; the fiscal stimulus was only moderate with growth in Government final consumption expenditure at 10.7 per cent in 2008-09 (as against 16.7 per cent in the Quick Estimates of 2008-09). The real impact of the fiscal stimulus measures was felt in 2009-10 with a growth in Government final consumption expenditure at 16.4 per cent. Gross capital formation was estimated to have fallen sharply in 2008-09 and recovered equally sharply in 2009-10, mainly attributable to change in stocks.
Table 1.2 : Growth in GDP at constant market prices

2005-06 2006-07 2007-08 2008-09PE 2009-10QE 2010-11AE 1. Total final consumption expenditure 1.1 Private final consumption expenditure 1.2 Government final consumption expenditure 2. Gross capital formation 2.1 Gross fixed capital formation 2.2 Changes in stocks 2.3 Valuables 3. 4. 5. Exports Less Imports Discrepancies Growth in GDP at 2004-05 market prices
Source : CSO.
8.6 8.5 8.9 16.3 16.2 26.9 -1.4 25.8 32.5 33.6 9.3
7.6 8.3 3.7 15.3 13.8 31.5 13.7 20.0 21.3 35.5 9.3
9.3 9.3 9.5 17.2 16.2 31.1 2.8 5.9 10.2 124.8 9.8
8.2 7.7 10.7 -3.1 1.5 -48.6 26.9 14.4 22.7 -140.9 4.9
8.7 7.3 16.4 13.8 7.3 90.8 54.2 -5.5 -1.8 -133.6 9.1
7.3 8.2 2.6 8.8 8.4 7.1 19.5 12.0 6.3 -220.2 9.7
Table 1.3 : Demand side growth of GDP, growth contribution and relative share at 2004-05 market prices (per cent)
2004-05 GDP at Market Prices Consumption (Private) Consumption (Govt) Gross Fixed Capital Formation Change in Stocks Exports Imports Contribution to Growth Consumption (Private) Consumption (Govt) Gross Capital Formation Gross Fixed Capital Formation Net Exports Relative Share Consumption (Private) Consumption (Govt) Gross Capital Formation Gross Fixed Capital Formation 2005-06 9.3 8.5 8.9 16.2 26.9 25.8 32.5 54.2 10.4 57.3 49.9 -18.6 59.1 10.9 32.8 28.7 58.7 10.9 34.9 30.5 2006-07 9.3 8.3 3.7 13.8 31.5 20.0 21.3 52.5 4.4 50.4 45.5 -10.2 58.2 10.3 36.2 31.8 2007-08 9.8 9.3 9.5 16.2 31.1 5.9 10.2 54.9 10.0 67.2 52.4 -13.6 57.9 10.3 39.0 33.6 2008-09 4.9 7.7 10.7 1.5 -48.6 14.4 22.7 90.5 22.3 -44.3 10.4 -57.6 59.4 10.9 35.1 32.5 2009-10 9.1 7.3 16.4 7.3 90.8 -5.5 -1.8 47.8 19.6 72.3 26.2 -8.0 58.5 11.6 38.2 32.0
Source : CSO. Note : Does not add to 100 because only major items are included in the table.
expenditure fell sharply in terms of growth in both 2008-09 and 2009-10; this sub-group and the subgroup furniture and furnishings were the only two that had decelerated in terms of growth, year-onyear (Table 1.4). The Economic Survey 2009-10 had
indicated that sequencing the rollback of fiscal measures would be guided by recovery in investment and the latest data indicate that the pickup in gross fixed capital formation is not fuller in terms of the pre-crisis levels.
Table 1.4 : Private final consumption-annual growth and share at 2004-05 prices
2004-05 Food, Beverages & Tobacco Clothing & Footwear Gross Rent, Fuel & Power Furniture, Furnishings Etc. Medical Care & Health Services Transport & Communication Recreation, Education & Cultural Services Miscellaneous Goods & Services Total Private Consumption Food, Beverages & Tobacco Clothing & Footwear Gross Rent, Fuel & Power Furniture, Furnishings, etc. Medical Care & Health Services Transport & Communication Recreation, Education & Cultural Services Miscellaneous Goods & Services Total Private Consumption
Source : CSO.
2005-06 6.3 19.7 3.8 15.1 8.8 5.2 11.0 20.2 8.4
2006-07
2007-08
2008-09PE 3.1 5.6 4.3 12.9 6.9 9.2 11.9 20.2 7.6 34.9 7.9 11.8 4.3 4.7 18.6 3.2 14.6 100.0
2009-10QE 0.5 5.2 5.9 13.5 8.9 14.2 6.4 15.9 7.4 32.6 7.7 11.6 4.6 4.8 19.8 3.2 15.7 100.0
Annual Growth (per cent) 3.4 6.4 23.3 5.0 3.8 4.7 17.1 16.1 8.7 4.5 8.1 7.4 8.4 9.8 21.2 28.6 8.5 9.1 Share of Total (per cent) 39.2 37.4 36.4 7.3 8.3 8.0 13.2 12.7 12.2 3.6 3.9 4.1 5.0 5.0 4.8 18.7 18.7 18.4 3.0 3.0 3.1 9.9 11.1 13.0 100.0 100.0 100.0
40.0 6.6 13.8 3.4 5.0 19.3 3.0 8.9 100.0
Economic Survey 2010-11 cent in 2009-10, up from the crisis-affected levels of 34.5 per cent in 2008-09. However, gross fixed capital formation had not picked up in 2009-10. The fall in investment rate in 2008-09 was mostly due to its fall in the private sector, particularly the corporate sector. In 2009-10, as per the Quick Estimates, there has been a pickup in corporate-sector investment; household-sector investment that had shot up in 2008-09 changed tack and is back to pre-crisis levels. Thus the impact of the crisis in 2008-09 was manifest mainly in the levels of changes in stocks, which recovered in 2009-10. However, as per the Quick Estimates, gross fixed capital formation is placed at 30.8 per cent in 2009-10, which is a deceleration on a year-on-year basis.
Savings and investment

Movements in public-sector savings and corporate investment explain the slowdown and subsequent recovery
1.16 The CSOs Quick Estimates for 2009-10 placed gross domestic savings at 33.7 per cent of the GDP at current market prices (savings rate). The savings rate for 2008-09 was also revised from 32.5 per cent to 32.2 per cent. With private-sector savings more or less static, it was the savings of the public sector (essentially public enterprises) that went up from a revised level of 0.5 per cent in 2008-09 to 2.1 per cent in 2009-10 (Table 1.5). Private-sector savings had remained sticky in the range of 30.1 per cent to 31.9 per cent in the last six years and seemingly the global crisis had no significant impact. 1.17 Gross capital formation, as a proportion of the GDP at current market prices (investment rate) grew rapidly in the period 2004-05 to 2007-08. This reflected the process of fiscal consolidation undertaken by the Centre and the States, which allowed the economy to reap rich dividends in the form of higher investment rates and thus higher GDP growth rate. Investment rate was placed at 36.5 per
Savings-investment gap narrows; but still wide

1.18 The overall savings-investment gap that was implicit in these estimates was 2.3 per cent in 200809 and 2.8 per cent in 2009-10. The gap in terms of sectors indicated a widening of the public-sector balance in 2008-09 to - 9.0 per cent, which subsequently moderated to - 7.0 per cent in 200910. This reflected the expansionary polices and was partly made up by the upward shift in the privatesector savings-investment balance on the component
Table 1.5 : Ratio of savings and investment to GDP (in per cent at current market prices)
2004-05 Gross Domestic Saving Public Sector Private Sector Household Sector Financial Saving Saving in Physical Assets Private Corporate Sector Gross Capital Formation (Investment) Public Sector Private Sector Corporate Sector Household Sector Gross fixed Capital Formation Stocks Valuables Saving-investment Gap Public Sector Private Sector -5.1 6.3 -5.5 5.8 -4.7 4.6 -3.9 3.8 -9.0 7.1 -7.0 6.7 32.4 2.3 30.1 23.6 10.1 13.4 6.6 32.8 7.4 23.8 10.3 13.4 28.7 2.5 1.3 2005-06 33.5 2.4 31.0 23.5 11.9 11.7 7.5 34.7 7.9 25.2 13.6 11.7 30.3 2.8 1.1 2006-07 34.6 3.6 31.0 23.2 11.3 11.9 7.9 35.7 8.3 26.4 14.5 11.9 31.3 3.4 1.2 2007-08 2008-09 PE 2009-10QE 36.9 5.0 31.9 22.5 11.7 10.8 9.4 38.1 8.9 28.1 17.3 10.8 32.9 4.0 1.1 32.2 0.5 31.7 23.8 10.8 13.1 7.9 34.5 9.5 24.6 11.5 13.1 32.0 2.0 1.3 33.7 2.1 31.6 23.5 11.8 11.7 8.1 36.5 9.2 24.9 13.2 11.7 30.8 3.3 1.7
Source : CSO. Note : Totals may not tally due to adjustment for errors and omissions.
State of the Economy and Prospects side and on the macroeconomic side reflected relatively stronger domestic demand vis--vis external demand. While the expansionary fiscal stance was considered apposite given the level of demand slowdown arising from fall in investment, going forward, the need to deepen the process of fiscal consolidation that has resumed in the Budget for 2010-11 cannot be overemphasized. 1.19 The rates of investment across sectors indicated the varying levels of impact of the crisis and recovery. Growth in investment in the agriculture sector, even after the revisions, was strong in 200708 and 2008-09, but appeared to have dipped in 200910 (Quick Estimates) with growth at 3.7 per cent (Table 1.6). Forestry and logging continues to decline-a process that began in 2007-08--but more sharply in 2009-10. Sectoral investment in fishing was relatively static. Investment in two sectors--mining
and quarrying and construction--has picked up sharply in 2009-10. The following sectors evinced a decelerating trend in 2009-10: electricity, gas and water supply; railways; and communications. There was a decline in the rates of investment in trade, hotels, and restaurants with trade declining sharply; for the third year banking and insurance declined and real estate declined on base effect.
PRODUCTION
AND
SUPPLY
Agriculture is critical for macroeconomic stability and sustained growth

1.20 The growth of agriculture and allied sectors continues to be a critical factor in the overall performance of the Indian economy. It might be recalled that this sector had grown in excess of 5.0 per cent on average annual basis in the triennium
Table 1.6 : Sectoral investment growth rates at 2004-05 prices

Rate of growth of GCF 2005-06 Agriculture, Forestry & Fishing Agriculture Forestry & Logging Fishing Mining & Quarrying Manufacturing Registered Unregistered Electricity, Gas & Water Supply Construction Trade, Hotels & Restaurants Trade Hotels & Restaurants Transport, Storage & Communication Railways Transport by Other Means Storage Communication Financing, Insurance, Real Estate & Business Services Banking & Insurance Real Estate, Ownership Of Dwellings & Business Services Community, Social & Personal Services Public Administration & Defence Other Services Total
Source : CSO
2006-07 4.7 4.2 13.4 9.5 15.6 16.6 11.0 47.4 18.1 66.3 40.3 44.9 19.5 -7.4 12.9 -14.8 14.9 -7.8 -0.4 61.8 -3.3 12.3 14.0 10.2 15.3
2007-08 15.8 17.0 -20.2 9.5 13.3 29.5 37.3 -2.6 11.4 20.4 -17.7 -22.8 10.4 25.9 13.7 29.6 7.1 30.1 10.6 -6.8 12.0 18.4 13.4 25.0 17.7
2008-09 22.5 23.9 -4.0 9.6 -13.4 -31.6 -27.0 -58.8 12.3 -24.7 29.9 35.8 7.0 37.6 22.5 12.8 62.4 86.7 41.0 -5.0 44.0 -3.6 3.3 -11.9 -3.9
2009-10 3.7 3.4 -13.5 9.5 62.1 34.8 25.2 134.1 3.5 16.8 -27.4 -32.7 -1.0 0.9 9.3 -8.9 -1.5 6.6 -3.3 -26.1 -2.3 12.3 11.1 14.0 12.2
13.8 13.9 30.8 9.5 40.0 17.6 39.3 -36.7 21.3 5.7 26.7 22.6 49.2 20.1 14.6 12.8 -285.7 33.2 6.2 70.4 4.3 19.6 17.3 22.7 17.0
10
Economic Survey 2010-11 second green revolution is being recognized more than ever before. There is need to significantly step up both private and public investment in the agriculture sector to ensure sustained growth so as to achieve the target growth of around 4 per cent per annum. The rise in prices of agricultural produce would in part help incentivize production; the moot question remains what proportion of the rise accrues to the producer and what proportion gets appropriated by middlemen. The creation of more direct farm-tofork supply chains in food items across the country would be critical in incentivizing the farmer with higher producer prices and at the same time would lower the prices for end-consumers.
ending 2007-08 when real GDP grew in excess of 9 per cent. This sector accounted for 12.7 per cent of the real GDP in the first half of 2010-11. Despite experiencing the most deficient south-west monsoon since 1972 and a significant fall in the levels of kharif foodgrain production in 2009-10, the growth in agriculture marginally recovered to 0.4 per cent primarily due to a good rabi crop. Several measures taken in advance by the Government for raising the rabi crop output had the desired effect. The farming sector was also broadly supported by more remunerative prices and, earlier, by the waiver of loans and other measures taken. With above normal rainfall, the prospects for growth of the sector were bright in the current year with a growth of 3.8 per cent during the first half of 2010-11 as against 1.0 per cent during the first half of 2009-10. The Advance Estimates of the CSO placed the growth in agriculture and allied sectors at 5.4 per cent which implied an overall share of 14.2 per cent in real GDP in 2010-11. Even with the level of growth in the current fiscal, the full Eleventh Plan period target of 4 per cent per annum may not be realized. 1.21 For four consecutive years from 2005-06 to 2008-09, foodgrains production registered a rising trend and touched a record level of 234.47 million tonnes in 2008-09. The production of foodgrains declined to 218.20 million tonnes during 2009-10 (4th Advance Estimates) due to the long spells of drought in various parts of the country in 2009. The productivity of almost all the crops suffered considerably which led to decline in their production in 2009. As per the 1st Advance Estimates (covering only kharif crops), production of kharif foodgrains during 2010-11 is estimated at 114.63 million tonnes which is lower than the target of 125.31 million tonnes but higher than kharif foodgrain production of 103.84 million tonnes recorded during 2009-10 (4th Advance Estimates). The shortfall in the estimated kharif foodgrain production compared to the target in 201011 is mainly due to drought conditions reported in major rice-producing areas in the country. 1.22 The country has made great strides in increasing foodgrains production since the mid1960s. Today India ranks high in the production of various commodities such as milk, wheat, rice, fruits, and vegetables. However, the agriculture sector in India is at a crossroads with rising demand for food items and relatively slower supply response in many commodities resulting in frequent spikes in food inflation. The technological breakthrough achieved in the 1960s is gradually waning. The need for a
Behaviour of prices and inflation

Inflation continues to be a cause for concern
1.23 Inflation continues to be a cause for concern. The year-on-year WPI inflation that started trending up in December 2009 continued through the current fiscal. The financial year 2010-11 started with a double-digit headline inflation of 11.0 per cent in April 2010. After remaining in double digits from April to July 2010, headline inflation came down to single digits and stood at 8.8 per cent in August 2010. Headline inflation in November 2010 was 7.5 per cent; but the trend reversed and in December 2010 it was 8.4 per cent. In spite of having a good monsoon this year, headline inflation at elevated levels owed to high levels of food inflation. The inflation in food articles which had moderated to single digit in November 2010 again jumped to double digits and stood at 13.6 per cent in December 2010. 1.24 The spurt in inflation in December 2010 could be attributed to supply bottlenecks especially in vegetables, onions, tomatoes, fruits, milk, eggs, and fish. A sudden spike in prices of onions during December 2010 was witnessed on account of damage to the onion crop. It may be mentioned that food price inflation during the last financial year was mainly driven by high inflation in pulses, cereals, and sugar due to bad monsoon. The rise in the purchasing power owing to the rapid growth of the economy and inclusive programmes like the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) partly might have contributed to the upward trend in inflation. The average inflation in primary articles was reported at 18 per cent on an average during the period April 2010 to December 2010 as compared to 10 per cent last year for the same period. Recovery in the domestic economy led to demand-side pressure on
State of the Economy and Prospects inflation. The inflationary pressure persists both from domestic demand and higher global commodity prices on account of the global recovery. 1.25 Food has higher weight in consumer price indices than in the WPI. Overall consumer price index (CPI) for industrial workers (IW) inflation, year-on-year, ruled higher than WPI from November 2008; this continues through the current fiscal. In August 2010, inflation in terms of all price indices had come down to single digit after 15 consecutive months of double-digit inflation. Year-on-year inflation in the CPI-IW was 9.47 per cent in December 2010 as compared to 14.97 per cent in December 2009. On year-on-year basis, inflation in the consumer price indices for agriculture workers (CPI-AL) and rural workers (CPI-RL) was 7.99 per cent and 8.01 per cent respectively in December 2010 as compared to 17.21 and 16.99 per cent respectively in December 2009. 1.26 In terms of financial year build-up of inflation, that is per cent change in the WPI index in December 2010 over the levels in March 2010, a level of 6.11 per cent obtained as against 7.9 per cent last year in the same period. A decomposition of the year-onyear inflation in terms of base effect and price effect revealed the large base effect in the rise in the levels of inflation in 2010-11, albeit evincing a moderating trend in recent months. This was true also of a decomposition of the year-on-year inflation in primary articles. 1.27 Therefore, it is instructive to monitor the emerging trend in inflation on a sequential monthon-month basis. As there are seasonalities associated with such a measure, a deseasonalization of the data would provide indications of the change if any in the direction and the momentum embedded in it. The seasonally adjusted sequential measure of headline inflation points to a spurt in September 2010 followed by a moderation in the Figure 1.3
2.5
11
next two months; in December 2010 there is again a massive build-up; indicating a much higher momentum (Figure 1.3). Core inflation also moved up in the current fiscal indicating that the inflation in food items might have spilled over into a more generalized phenomenon. Inflation in manufactured items with a weight of 65 per cent in the WPI has been above the 4 per cent mark since January 2010 and after reaching 6.4 per cent in April 2010 has evinced a moderating trend. The rise in wage goods and levels of inflation in intermediates has implications for the industrial output.
Industry and Infrastructure

Recent data indicate volatility and waning momentum
1.28 Growth in the industrial sector as per the IIP was buoyant during the first two quarters of the current financial year. The manufacturing sector, in particular, showed a remarkable robustness, growing at rates of 12.6 per cent and 9.7 per cent respectively during these two quarters. IIP data on monthly basis indicated that growth in IIP has decelerated sharply to a level of 2.7 per cent in November from 11.3 per cent in November 2009. For the current financial year (April-November), growth in the IIP was placed at 9.5 per cent as against the 7.4 per cent that obtained in the corresponding period last year. Data on the IIP has exhibited volatility in the current fiscal with growth varying widely in the range of 2.7 per cent to 16.6 per cent. While earlier the volatility was associated with capital goods in the use-based classification, components like consumer nondurables and basic goods were the main depressants in the deceleration in November 2010. The CSO has released the IIP data for the month of December 2010 on 11 February 2011. Year-on-year, the IIP has grown by 1.6 per cent in December 2010 and 8.6 per cent during April-December 2010.
Deseasonalised sequential month-on-month movement

Deseasonalised WPI
M-o-M variation
2.0 1.5 1.0 0.5 0 -0.5
Jul
May
Oct
Nov
May
Jul
Oct
Dec
Nov
Mar
Aug
Aug
2009-10
2010-11
Year
Dec
Jun
Jan
Sep
Jun
Feb
Sep
Apr
Apr
12
Economic Survey 2010-11 consumer non-durable segment in particular, though not discernible so far, is expected to materialize in the fourth quarter of this fiscal. However, a higher base effect may impact the industrial growth rate in the months of December 2010 and January 2011 and accordingly may moderate the industrial sectors contribution to the GDP for the current financial year. As there is a large base effect involved, it is useful to see the trend indicated by the quarter-on-quarter deseasonalized sequential growth momentum and direction. The quarter-on-quarter deseasonalized headline IIP indicated large volatility largely on account of the movements in capital goods and consumer goods (Figure 1.4). The short-run nature of the IIP slowdown suggests that the deceleration is more in the nature of road bumps than indication of any long-run problem.
1.29 As per the IIP, manufacturing growth rate decelerated to 9.7 per cent in the second quarter of the current financial year. Compared to the peak growth of 16.8 per cent achieved during the fourth quarter (January-March) of the last financial year, this growth rate was moderate. Within the manufacturing sector, the capital goods segment has been the main driver of growth; it has shown extreme volatility as it registered a growth of 3.5 per cent in the first quarter of 2009-10, surged up to 45.7 per cent during the fourth quarter of the last financial year, and has continued to be in double digits since then. 1.30 Post recovery, industrial output growth has been largely driven by a few sectors such as the automotive sector along with a revival in cotton textiles, leather, food products, and metal products. Some sectors have exhibited extreme month-onmonth output volatility. The impact of favourable monsoons on the domestic-demand-driven industrial sector has not been widespread. Its effect on the
Six core industries growing; but not at full steam

1.31 Six core industries that have a large bearing on infrastructure and have a combined weight of 26.7
Figure 1.4
7
Sequential (deseasonalised) rate of growth (per cent) in IIP and its components
Deseasonalised rate of growth
Rate of growth (per cent)
6 5 4 3 2 1 0 -1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
Year
Mining
7.5
Manufacturing
6
6.25 5.0 2.5 0 -2.5

Q2 2004-05 Q4 2004-05 Q2 2005-06 Q4 2005-06 Q2 2006-07 Q4 2006-07 Q2 2007-08 Q4 2007-08 Q2 2008-09 Q4 2008-09 Q2 2009-10 Q4 2009-10 Q2 2010-11
5 4 3 2 1 0 -1 -2
Q2 2004-05 Q4 2004-05 Q2 2005-06 Q4 2005-06 Q2 2006-07 Q4 2006-07 Q2 2007-08 Q4 2007-08 Q2 2008-09 Q4 2008-09 Q2 2009-10 Q4 2009-10 Q2 2010-11
5.75 1.25
-1.25

3 6 9 12 15 18 0
10
-3
-2
-1
-6
-3
-6
Q2 2004-05 Q4 2004-05 Q2 2005-06 Q4 2005-06 Q4 2005-06 Q2 2006-07 Q4 2006-07 Q2 2007-08 Q4 2007-08 Q2 2008-09 Q4 2008-09 Q2 2009-10 Q4 2009-10 Q2 2010-11 Q2 2006-07 Q4 2006-07 Q2 2007-08 Q4 2007-08 Q2 2008-09 Q4 2008-09 Q2 2009-10 Q4 2009-10 Q2 2010-11 Q2 2005-06 Q4 2004-05 Q2 2004-05
-4
-2
Q2 2004-05
Electricity
Q4 2004-05
Capital goods
Non-durables
Q2 2005-06
Q4 2005-06
Q2 2006-07
Q4 2006-07
1.5 4.5 0 3 6 9 7.5 -1.5 -3
Q2 2004-05 Q4 2004-05 Q2 2005-06 Q4 2005-06 Q2 2006-07 Q4 2006-07 Q2 2007-08 Q4 2007-08 Q2 2008-09 Q4 2008-09 Q2 2009-10 Q4 2009-10 Q2 2010-11
Q2 2007-08
Q4 2007-08
Q2 2008-09
Q4 2008-09
Q2 2009-10
Q4 2009-10
per cent in the IIP registered a growth of 6.6 per cent (provisional) in December 2010 compared to 6.2 per cent in December 2009. During April-December 2010-11, these industries registered a growth of 5.3 per cent (provisional) as against 4.7 per cent during the corresponding period of the previous year.
1 3 0 2 4 5 6 -2 -1
Q2 2004-05 Q4 2004-05 Q2 2005-06 Q4 2005-06 Q2 2006-07 Q4 2006-07 Q2 2007-08 Q4 2007-08 Q2 2008-09 Q4 2008-09 Q2 2009-10 Q4 2009-10 Q2 2010-11
Q2 2010-11

10 0 2 4 6 8 -2
-6
-4
Q2 2004-05
Durables
Q4 2004-05
Basic goods
Intermediate
Q2 2005-06
Q4 2005-06
Q2 2006-07
Q4 2006-07
Q2 2007-08
Q4 2007-08
Q2 2008-09
Q4 2008-09
Q2 2009-10
Q4 2009-10
1.32 Electricity generation by power utilities during 2010-11 was targeted to go up by 7.7 per cent to 830.757 billion KWh. The growth of power generation during April-December 2010 was about 4.5 per cent as compared to about 6.2 per cent during AprilDecember 2009. During April-December 2010, the
Q2 2010-11
13
14
Economic Survey 2010-11 been awarded for a total length of about 3780 km up to November 2010. 1.36 In the civil aviation sector, the scheduled domestic passenger traffic at 51.53 million clocked a growth rate of 19 per cent during January-December 2010 as compared to a level of 43.3 million during the corresponding period in 2009. Domestic cargo transported by air increased from 3.4 million tonnes in 2009 to 4.7 million tonnes in 2010 registering a growth of 30 per cent. At present 12 scheduled airlines are operational (10 passenger and 2 cargo). The total number of aircraft in their fleet has risen to 419 at the end of December 2010. The total number of non-scheduled operators stood at 121 in December 2010 with 360 aircraft in their fleet. 1.37 With increasing private-sector participation, the share of the private sector in total telephone connections has increased to 84.5 per cent in November 2010 as against a meagre 5 per cent in 1999. Teledensity, an important indicator of telecom penetration, rose from 7.02 per cent in March 2004 to 64.34 per cent in November 2010. Rural teledensity which was above 1.57 per cent in March 2004 has increased to 30.18 per cent at the end of November 2010. Urban teledensity has increased from 20.74 per cent in March 2004 to 143.95 per cent at the end of November 2010. 1.38 There has been steady decline in the time and cost overruns of Central-sector projects costing `150 crore and above thanks to closer monitoring and systems improvements by the Ministries concerned. An examination of cost overruns in the last twenty years as against originally approved costs shows that the former declined from 61.6 per cent in March 1991 to 12.06 per cent in March 2008. There is, however, an upward trend from March 2008 as cost overruns reached 14.72 per cent in March 2010 and further climbed to 20.7 per cent in October 2010. The rise is partly due to exclusion of projects costing less than `150 crore from the monitoring system as these had lower cost overruns compared to the bigger projects. The increase is also partly due to steep rise in prices of steel and cement in 2006-07. 1.39 Overall, the infrastructure sector has had a mixed bag of performances; some like telecommunications have done exceedingly well and in some others there has been less than targeted achievement. During 2007-08 to 2009-10, capacity addition has been lower than target in power, roads (NHDP), new railway lines, and doubling of railway lines. The sub-sectors where physical achievements
generation from nuclear, hydro, and thermal units registered growth of 33 per cent, 8 per cent, and 3 per cent respectively. The overall plant load factor (PLF) of thermal power stations during AprilDecember 2010, though lower than that achieved during April-December 2009, exceeded the target of 71.35 per cent for the first three quarters of the current financial year. During April-December 2010, the peak and total energy deficits came down to 10.2 per cent and 8.8 per cent respectively from 12.6 per cent and 9.8 per cent during the corresponding period in the previous year, mainly due to growth of availability of power exceeding the growth in its requirement. 1.33 During the current financial year (2010-11), production of crude oil is estimated at 37.96 million metric tonnes (MMT), which is about 12.67 per cent higher than the crude oil production of 33.69 MMT during 2009-10. The projected production of natural gas, including coal bed methane (CBM) for 2010-11 is 53.59 billion cubic metres (BCM) which is 12.80 per cent higher than the production of 47.51 BCM in 2009-10. The increase in natural gas production is primarily from KG deepwater block. The production of raw coal during April to November 2010 was 319.80 million tonnes (MT) against 317.79 MT in the same period of the previous year. Coking coal production during this period was 28.72 MT against 25.64 MT during the same period last year, registering a growth of 12.01 per cent. 1.34 Freight loading on Indian Railways in the period April-November, 2010 was 593.43 million tonnes as compared to 574.40 million tonnes in AprilNovember 2009an increase of 3.31 per cent. This was short of the proportionate target of 605.11 million tonnes by 11.68 million tonnes. The low growth was primarily on account of negative growth in iron ore. Iron ore loading has mainly been affected in the current year due to the restriction imposed by the State Governments of Orissa and Karnataka. Frequent bandhs by Naxalites adversely affected loading, particularly in the Bailadila sector on East Coast Railway.
Infrastructure a mixed bag of performances

1.35 About 25 per cent of the total length of National Highways (NHs) is single lane / intermediate lane; about 52 per cent is two-lane standard; and the balance 23 per cent is four-lane standard or more. In 2010-11, the achievement under various phases of the National Highways Development Project (NHDP) up to November 2010 has been about 1007 km of road. During 2010-11, under the NHDP, projects have
State of the Economy and Prospects have been above or close to targets are telecommunications, villages electrified under the Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY), railway lines electrification, railway gauge conversion, and new and renewal of roads construction under the Pradhan Mantri Gram Sadak Yojana (PMGSY). The investment in infrastructure has reached 7.18 per cent of the GDP in 2008-09 and is expected to increase to 8.37 per cent in the terminal year of the Eleventh Plan. Rapid reduction of the infrastructure deficit holds the key to competitiveness in an increasingly globalized economic environment.
15
Services Sector the potential growth engine

1.40 The services sector has played a dominant role in the Indian economy with a 57.3 per cent share in the GDP; a growth of 10.1 per cent in 2009-10; a high share in FDI equity inflows with the financial and non-financial services category alone contributing 21 per cent during April 2000 to November 2010; and a 35 per cent share in total exports with 27.4 per cent export growth in the first half of 2010-11. A comparison of shares of the services sector in the GDP of different States and Union Territories shows that the services sector is also the dominant sector in most of the States of India. 1.41 High-growth services categories are financing, insurance, real estate, and business services and transport, storage, and communication with the latter overtaking the former in 2009-10 with a high growth of 15 per cent. Growth of trade, hotels, and restaurants which slowed down in 2008-09 has recovered moderately in 2009-10. Among the subcategories, in 2008-09, double- digit growth was registered by communications (25.7 per cent), public administration and defence (22.1 per cent), banking and insurance (13.9 per cent), and storage (11.6 per cent). Negative growth was registered only by hotels and restaurants (-3.5 per cent). Among business services, the most important categories are computerrelated service; and the category consisting of many services like research and development (R&D) services, market research, business and management consultancy, architectural engineering, and advertising., with shares in the GDP of 3.26 per cent and 0.88 per cent respectively. While computerrelated services which grew by 21.2 per cent in 200809 registered a moderate growth of 5.2 per cent in 2009-10 due to the global crisis, R&D services registered good growth of 19.6 per cent and 19.9 per cent in both 2008-09 and 2009-10 respectively.
Among other services, the two important services are education and medical health in terms of relative share of the GDP; they had growth rates of 13.9 per cent and 5.3 per cent in 2009-10 respectively. While total services including construction grew by 9.7 per cent, total services excluding construction grew by 10.1 per cent in 2009-10. In 2010-11(Advance Estimates), they grew by 9.4 per cent and 9.6 per cent respectively. The outlook for the services sector which had slightly dimmed due to the fallouts of the sub-prime crisis in US and the global financial crisis has once again brightened. Recent business performance indicators of different service firms in the different services also support this healthy prognosis. Even during the crisis years, annual services growth has been around the 10 per cent mark which it has maintained since 2005-06. This is in contrast to the overall GDP growth which fell to 6.8 per cent in 2008-09 from 9.3 per cent in 200708.
External-sector developments
Global economy on the upturn; to support growth momentum
1.42 The global economy was estimated to have grown rapidly in 2010 by 5.0 per cent according to the update of the WEO (25 January 2011); which was one of the highest rates of growth in recent years and compares favourably with the robust levels in the pre-crisis period. Growth in emerging economies remains strong, while advanced countries are growing slowly and facing uncertainty with large fiscal deficit and high public debt and unemployment levels. This indicated the two-paced nature of the global growth process in the current conjuncture. While growth in 2010 was partly a rebound from weak levels in 2009, the estimate for 2011 and 2012 at about 4.5 per cent indicated the prospects. The Market Update of the Global Financial Stability Report of the IMF (January 2011) observed that global financial stability is still to be assured and significant policy challenges remain to be addressed: slow progress in the as yet incomplete balance sheet restructuring process; interaction between the banking and sovereign credit risks in the euro area; and need for more regulatory reforms to the financial sector to anchor stability. In several emerging market economies (EMEs), however, there has been surge in capital inflows with the associated risk of bubbles in asset and credit markets. There have also been signs of rising inflation, in response to strong global demand, combined with supply constraints.
16
Economic Survey 2010-11 billion during the first half of 2009-10. The lower invisible surplus combined with higher trade deficit resulted in widening of the current account deficit to US$ 27.9 billion during the first half of 2010-11 compared to US$ 13.3 billion in the first half of 200910. With merchandise trade indicators showing moderation in trade deficit, performance in transfers and information technology (IT) and IT-enabled services (ITeS) holds the key to anchoring the elevated levels of current account deficit to sustainable levels. 1.46 Net capital flows at US$ 36.7 billion in the first half of 2010-11 were higher as compared to US$ 23.0 billion in the first half of 2009-10. The increase was primarily composed of inflow of portfolio investment, mainly FIIs, short-term trade credits, and external commercial borrowings (ECBs). The large increase, however, was considerably offset by the moderation in net FDI inflows to India. Notwithstanding significant increase in net capital inflows, accretion to reserves during the first half of 2010-11 was lower, mainly due to more than doubling of current account deficit over the levels in the first half of 2009-10.
Trade developments
Imports slowing; exports gathering pace and trade deficit set to narrow
1.43 In tandem with world trade volumes, Indias exports fell rapidly following the deepening of the global financial crisis midway through 2008-09; they rose in the second half of 2009-10, which continued through 2010-11 until June 2010. Thereafter growth decelerated till October 2010 and picked up subsequently to reach 36.4 per cent in December 2010, which is the highest growth in the last two years. Nevertheless cumulative export growth in April-December 2010-11 was at 29.5 per cent with cumulative exports reaching US $ 164.7 billion during this period. Current indications are that India would not only achieve the target of US$ 200 billion but surpass it in 2010-11. Indias merchandise imports also affected by the global recession fell to US$288.4 billion with a negative growth of - 5.0 per cent in 2009-10. This was due to the fall in growth of petroleum, oil, and lubricants (POL) imports by 7.0 per cent and non-POL imports by 4.2 per cent. POL import growth was low mainly due to decline in import price of the Indian crude oil import basket by 16.5 per cent despite the increase in quantity by 7.7 per cent. 1.44 Trade deficit (on customs basis) increased by 2.4 per cent to US$ 82 billion in 2010-11 (AprilDecember) from US$ 80.1 billion in the corresponding period of the previous year. Trade deficit reached a peak of US $ 118.4 billion in 2008-09 and moderated to US $ 109.6 billion in 2009-10. With lower levels of surpluses on the invisibles balance, the relatively higher import growth compared to export growth in the first half of 2010-11 raised concerns of unsustainable current account deficit levels. With import growth slowing down from October 2010 and exports picking up in November 2010, the concerns on the trade deficit have been allayed; the concerns on the moderation in levels of invisibles surplus remain as per the latest data on balance of payments (BoP), which are for April-September 2010 and need to be closely monitored.
Foreign Exchange Reserves

1.47 Foreign exchange reserves increased from US$ 252 billion at the end of March 2009 to US$ 279.1 billion at the end of March 2010, showing a rise of US$ 27.1 billion. Of the total increase, US$ 13.6 billion was on account of valuation gain (due to decline of the US dollar in the international market) and the remaining US$ 13.5 billion on account of the BoP. During the current fiscal, reserves increased from US$ 279.6 billion at the end of April 2010 to US$ 292.4 billion at the end of November 2010. The reserves stood at US$ 297.3 billion at the end of December 2010, showing an increase of US$ 18.2 billion over the end-March 2010 level mainly on account of valuation changes.
Exchange Rate
1.48 During the current fiscal, the monthly average exchange rate of the rupee has generally been range bound, moving in the range of `44-47 per US dollar between April and December 2010. The exchange rate of the rupee depreciated by 1.5 per cent against the US dollar, from `44.50 per US dollar in April 2010 to `45.16 per US dollar in December 2010. The rupee also depreciated against other major international currencies such as the pound sterling (3.2 per cent) and Japanese yen (12.2 per cent) during the period.
BoP developments
Invisibles key to reduced deficit on the current account; capital flows easily absorbed without forex market intervention
1.45 The net invisibles surplus (invisibles receipts minus payments) was lower at US$ 39.1 billion during the first half of 2010-11 vis-a-vis US$ 42.5
17
External Debt
1.49 Indias external debt stood at US$ 295.8 billion at the end of September 2010, recording an increase of US$ 33.5 billion (12.8 per cent) over the level of end-March 2010. The rise in debt was largely due to higher commercial borrowings, short-term trade credits, and multilateral Government borrowings. The valuation effect contributed to an increase of US$ 6.3 billion in the total increase. The maturity profile of Indias external debt indicates the dominance of long-term borrowings with long-term debt accounting for 77.7 per cent of the total external debt at the end of September 2010. 1.50 In 2007-08, a surge in capital flows far in excess of the absorptive capacity and with implications for competitiveness had complicated monetary management on account of trade-offs involving the impossible trinity objectivesof open capital account, exchange rate stability, and monetary policy independence. However, with recovery in 2009-10 and in the current fiscal, the external sector broadly remained supportive as the elevated levels of current account deficits were easily financed by rising capital flows; though concerns of sustainability had emerged. Thus, with orderly conditions in the forex markets, the external sector remained supportive of the monetary policy setting.
of steps, key policy rates were raised. The RBI raised the policy rates six times during the current fiscal wherein the repo rates under its liquidity adjustment facility (LAF) was increased cumulatively by 175 basis points (bps) raising it to 6.5 per cent and the reverse repo rate was increased by 225 bps raising it to 5.5 per cent. The cash reserve ratio (CRR) was at 6 per cent of net demand and time liabilities (NDTL) of banks. 1.52 In its subsequent reviews of the monetary policy statement, the RBI has revised growth to 8.5 per cent and inflation to 7.0 per cent for end-March 2011. During the year 2010-11, the growth in reserve money (M0) at 21.6 per cent as on 28 January 2011 was higher than in the preceding year while broad money (M3) growth was lower at 16.6 per cent as on 14 January 2011.Year-on-year, non-food credit growth was up 24 per cent at the end of December 2010 and financed many sectors more broadly (from the agriculture rebound to the 3G [third generation] spectrum sales and private infrastructure projects), while the overall credit to GDP ratio rose to about 55 per cent, continuing its progress (but still structurally well below potential). 1.53 Reflecting the tightening of the policy rates and a pickup in credit demand, liquidity conditions tightened. The fiscal began with a gradual decline in the absorption mode in liquidity conditions ; and a switch to injection mode in May 2010 mainly on account of 3G spectrum and broadband wireless access (BWA) auctions and the resultant rise in Central Governments cash balance account with the RBI . The levels of injection grew in October and November 2010. The RBI moved in to address the problem of such frictional liquidity with a slew of measures like conduct of a special second LAF on 29 October and 1 November 2010, conduct of a special two-day repo auction under the LAF on 30 October 2010, and waiver of penal interest on shortfall in maintenance of the statutory liquidity ratio (SLR) (on 30-31October) to the extent of 1 per cent of NDTL for availing of additional liquidity support under the LAF. 1.54 Money markets remained orderly in the current fiscal with the call money rate remaining within the LAF corridor with some overshooting episodes. The rates in the collateralized segments have continued to move in tandem with the call rate, albeit below it, so far during 2010-11. Indias financial markets continued to gain strength in recent years, following steady reforms since 1991. Prudent regulations and
Monetary and financial sector developments

Monetary policy in tightening modefighting inflationary pressure and supportive of growth; some volatility in securities markets with broad stability in financial markets
1.51 The Reserve Bank of India (RBI) had begun the process of withdrawing from the accommodative policy stance in October 2009 itself. In its Annual Monetary Policy Statement in April 2010, it had estimated that the economy would grow by 8.0 per cent with an upward bias and that inflation as per the WPI would decline to a level of 5.5 per cent by end-March 2011. The Policy Statement sought to balance the credit demands of the private sector and the need of Government borrowing as indicated in the Budget Estimates of 2010-11 with a broad money (M3) growth of 17.0 per cent. Aggregate deposits of the scheduled commercial banks (SCBs) were estimated to grow by 18.0 per cent and credit growth was placed at 20.0 per cent. Economic events as they unfolded in the current fiscal in the form of rising food inflation and the risk of it impinging on inflationary expectations, necessitated revisions and, in a series
18
Economic Survey 2010-11 The fiscal outcome in the first nine months of the current financial year remained broadly on the consolidation track chalked out by the Budget. With growth reverting to pre-crisis levels in the current fiscal, revenues remaining buoyant, and a much higher than budgeted realization in non-tax revenues arising from telecom 3G/ BWA auctions, there was headroom for higher levels of expenditure at the given fiscal deficit targets. 1.57 The Budget for 2010-11 followed up on the Thirteenth Finance Commission (ThFC) recommendations on limiting the combined public debt to GDP ratio to 68 per cent by 2014-15 with a promise to analyse the issues in a Status Paper, which would also unveil the roadmap for the reduction. In pursuance of the announcement made in the Budget for 2010-11 to this effect, a status paper on government debt was presented in November 2010. The paper made a detailed analysis of the situation and chalked out a roadmap for reduction in overall debt as a percentage of the GDP for the General Government during the period 2010-11 to 2014-15. The Centres debt was projected to come down to 43 per cent of the GDP in 2014-15 when the fiscal deficit would be limited to 3.0 per cent of the GDP. With combined debt of the State Governments estimated to decline from 24.8 per cent of the GDP in 2009-10 to 23.1 per cent in 2014-15, consolidated General Government debt was estimated to come down from 73 per cent of the GDP in 2009-10 to 64.9 per cent in 2014-15. The recent Budgets had indicated the reform measures that would drive the process, which included subsidy reforms in fertilizers and petroleum and public expenditure management, besides the tax reforms that are on the anvil. 1.58 The fiscal outcome in the first nine months of the current financial year being robust, there was headroom for higher levels of expenditure at the given fiscal deficit targets. In the first nine months of the current fiscal,with year-on-year growth in total expenditure at 11.2 per cent as against a level of 8.5 per cent envisaged for the full year by the Budget Estimates for 2010-11, fiscal and revenue deficits are placed at ` 171,249 crore and `116,309 crore respectively, which constituted 44.9 per cent and 42.1 per cent of the Budget Estimates. With nominal GDP placed at `78,77,947 crore for the year by the Advance Estimates of the CSO, the target for the current fiscal in terms of the fiscal deficit to GDP ratio is placed at 4.8 per cent and in terms of revenue deficit at 3.5 per cent.
institutions protected the economy from the recent global financial shocks and its dynamism is now leading the current recovery. Domestic capital markets performed well in 2010, primary markets financing record levels, including the largest-ever initial public offer (IPO) (for Coal India), while secondary markets reached new highs. Record foreign inflows helped support the market. Pensions and insurance gained, with life insurance premium growing nearly 26 per cent and penetration doubling to 5.4 per cent of the GDP in 2009, from 2.3 per cent in 2000 (when insurance reforms started). Looking to the future, the twin challenges are to continue this ongoing progress on gradual financial reform and modernize regulations and institutions to ensure its continued safety and stability. 1.55 The past year saw banking deposit growth slow, as real interest rates were depressed, especially compared to returns in other fast-recovering asset markets (real estate, gold, and stock markets). The priority is to considerably extend the reach of banking to help mobilize more savings, add more depth, and more efficiently intermediate opportunities, including those in the traditional priority sectors. To move ahead,(1) financial inclusion needs to be accelerated as a next crucial step; innovative solutions are needed in this regard; (2) similar efforts are needed to deepen domestic capital markets and the role of non-bank institutions, especially in corporate bond and debt markets; (3) the rapid lowering of fiscal deficits is needed to help crowd-in such developments; and (4) the Government and the RBI have already begun a series of essential regulatory overhaul aimed at updating the modern legislation underlying financial markets and improving macroprudential safeguards and institutions. We need to continue along this path.
Fiscal developments
Fiscal consolidation on track in the current fiscal; reforms to drive the process in the medium term
1.56 With clear evidence of economic recovery in 2009-10 as indicated by the Advance Estimates of the GDP, the Budget for 2010-11 resumed the path of fiscal consolidation with a partial exit from the stimulus measures. As a proportion of the GDP, fiscal deficit was estimated at 5.5 per cent of the GDP by the Budget 2010-11 and the Medium Term Fiscal Policy Statement indicated a further reduction to 4.8 per cent and 4.1 per cent in 2011-12 and 2012-13.
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Social-sector developments
Focus on aam aadmi and higher funds for flagship programmes; implementation key to realizing the desired outcomes
1.59 The Budget for 2010-11 had indicated that inclusive development is an act of faith for the government. The entitlements for individuals backed by legal guarantees provide ample testimony to this effect. Social-sector spending has progressively been stepped up and it stood at 37 per cent of the total plan outlay in 2010-11. Sector-specific priorities of the Government are reflected in the continued higher budgetary allocations in areas like rural development, education, medical and public health, family welfare, water supply and sanitation, housing, urban development, and welfare of Scheduled Castes (SCs), Scheduled Tribes (STs), and other Backward Classes (OBCs). The share of Central Government expenditure on social services including rural development in total expenditure (Plan and non-Plan) has increased from 13.75 per cent in 2005-06 to 19.27 per cent in 2010-11 (Budget Estimates). Similarly, the expenditure on social services by the General Government (Centre and States combined) has also shown increase in recent years reflecting higher priority to social services. The expenditure on social services as a proportion of total expenditure has increased from 21.1 per cent in 2005-06 to 23.8 per cent in 2008-09 and further to 25.2 per cent in 2010-11 (Budget Estimates). 1.60 On the employment front, the country has been able to withstand the adverse impact of the global crisis and generate employment since July 2009 as reported in the quarterly quick employment surveys conducted by the Labour Bureau. The upward trend in employment has been continuously observed since July 2009. During the quarter July to September 2010, the overall employment has been estimated to have increased by 4.35 lakh. A comparison of the results of the last four quarterly surveys, i.e. September 2010 over September 2009, indicates that overall employment has increased by 12.96 lakh, with the highest increase of 9.36 lakh in IT/business process outsourcing (BPO), followed by 0.79 lakh in textiles, 0.99 lakh in metals, 1.15 lakh in automobiles, and 0.39 lakh in gems and jewellery. 1.61 The progress under the MGNREGA that guarantees wage employment on an unprecedented scale has been satisfactory. During 2009-10, 5.26
crore households were provided employment under this scheme as against more than 4.51 crore during 2008-09. During 2010-11, about 4.10 crore households have been provided employment till December 2010. Out of the 145 crore person days created under the scheme during this period, 23 per cent and 17 per cent were accounted for by SC and ST population respectively and 50 per cent by women. 1.62 The Sarva Shiksha Abhiyan (SSA) being implemented in partnership with the States for addressing the needs of children in the age group of 6-14 years seeks, inter alia: enrolment of all children in school; setting up of Education Guarantee Centres (EGC), Alternate Schools, Back-to-School camps; retention of all children till the upper primary stage by 2010; bridging of gender and social category gaps in enrolment with retention and learning; and ensuring that there is significant enhancement in the learning achievement levels of children at the primary and upper primary stage. The achievements under the SSA till September 2010 include 3,09,727 new schools, construction of 2,54,935 school buildings, 11,66,868 additional classrooms, 1,90,961 drinking water facilities, and 3,47,857 toilets, supply of free textbooks to 8.70 crore children, and appointment of 11.13 lakh teachers. Around 14.02 lakh teachers received in-service training under this programme. There has been a significant reduction in the number of out-of-school children on account of SSA interventions. 1.63 The National Rural Health Mission (NRHM) was launched in 2005 to provide accessible, affordable, and accountable quality health services to the rural areas with emphasis on poor persons and remote areas. It is being operationalized throughout the country, with special focus on 18 States which include 8 Empowered Action Group States (Bihar, Jharkhand, Madhya Pradesh, Chhattisgarh, Uttar Pradesh, Uttarakhand, Orissa, and Rajasthan), 8 north-eastern States, Himachal Pradesh, and Jammu and Kashmir. The achievements under the NRHM as on September 2010, include selection of 8.33 lakh accredited social health activists (ASHAs), employment of 1572 specialists, 8284 MBBS doctors, 26,734 Staff Nurses, 53,552 auxiliary nurse midwives (ANMs), 18,272 paramedics on contract basis and setting up of a total of 16,338 additional primary health centres (APHCs), primary health centres (PHCs), community health centres (CHCs) and other subdistrict facilities made functional on 24 x 7 basis.
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Economic Survey 2010-11 1.67 Indias determination in addressing climate change is evident from an indicative target of increasing energy efficiency by 20 per cent by 2016, now supplemented with the domestic mitigation goal of reducing emissions intensity of the GDP by 2025 per cent of the 2005 level by 2020 through proactive policies. The resources required to achieve this objective will need to be mobilized from various sources. Studies in respect of a low carbon strategy are under way as one of the key pillars of the Twelfth Five Year Plan. Second, India is taking conscious steps for diversifying the energy fuel mix such as setting up of 20,000 MW of solar power-generating capacity by 2022, doubling the present 3 per cent share of nuclear power in the energy mix over the next decade, putting in place a major market-based programme to stimulate energy efficiency, imposing clean energy cess on coal for funding R&D of clean energy technologies even though coal will continue to play a key role in our future energy strategy, and aggressively expanding the use of natural gas in power production. Third, India has been pursuing aggressive strategies for forestry and has launched a major new programme on coastal zone management to address the adaptation challenges facing over 300 million people in our country who live in vulnerable areas near our coast. In addition, India implements a number of Central sector and Centrally sponsored schemes with many elements decidedly geared to adaptation. An exercise carried out for this Survey suggests Indias expenditure on these adaptation-oriented schemes has increased impressively from 1.45 per cent of the GDP in the year 2000-01 to 2.82 per cent during 2009-10. India has also announced a National Action Plan on Climate Change (NAPCC) in June 2008including eight national missions in the areas of solar energy, enhanced energy efficiency, sustainable agriculture, sustainable habitat, water, Himalayan ecosystem, increasing the forest cover, and strategic knowledge for climate change. State Action Plans are also under way 1.68 All actions to address climate change ultimately involve costs. Funding is vital in order for countries like India to design and implement adaptation and mitigation plans and projects. One of the important outcomes of the Cancun Agreements is the decision on fast start finance, long-term finance, and Green Climate Fund. It was decided to set up a Green Climate Fund, approaching US$30 billion, for the period 2010-12, to be supported by an independent Secretariat and designed by a
1.64 While the Government has consciously undertaken a large increase in budgetary allocations for anti-poverty programmes and employment generation schemes, the delivery mechanism needs to be bolstered and streamlined to facilitate the effective implementation of these programmes. To ensure that allocations result in outputs and outputs in outcomes, initiatives like the outcome budget and the setting up of the Unique Identification Authority of India by the Government are steps in the right direction.
Climate change
1.65 Climate Change as a result of greenhouse gas (GHG) emissions has been receiving intense political attention at domestic and international levels. The industrialized countries have the largest total emissions, and Indias share of global GHG emissions is relatively small. Climate change has enormous implications for India. Various studies indicate that key sectors impacted by climate change are agriculture, water, natural ecosystem, biodiversity, and health. This is happening precisely at a time when India is confronted with huge development imperatives. A recent India-specific report warns of impacts such as sea-level rise, increase in cyclonic intensity, reduced crop yield in rainfed crops, stress on livestock, reduction in milk productivity, increased flooding, and spread of malaria. 1.66 Internationally, the United Nations Framework Convention on Climate Change (the Convention, entered into force in 1994) aimed to reduce emissions to sustainable levels and provide support to developing countries in terms of finance and technology. The Convention led to the adoption of the Kyoto Protocol in 1997.The Conference of Parties (CoP), which is the supreme body of the Convention, meets annually; during the 13th CoP held at Bali, Indonesia, in December 2007, a comprehensive programme called the Bali Action Plan was launched, followed by the Copenhagen Accord in December 2009. The most recent negotiations held at Cancun during 29 November 11 December 2010 have resulted in further decisions including mitigation adaptation, technology, and finance. The Cancun Agreements are widely perceived as a modest, small step forward and a reaffirmation of faith in the multilateral process. Decisions were taken at Cancun to set up a Green Climate Fund, a Technology Mechanism, and an Adaptation Committee at global level to support developing country actions for adaptation and mitigation.
State of the Economy and Prospects Transitional Committee with 40 members15 from developed countries and 25 from developing. It also recognized the goal of jointly mobilizing US$ 100 billion per year by 2020 as long-term finance to address the needs of developing countries. The goal of US$100 billion falls short of developing countries call for assessed contributions of 1.5 per cent of developed countries GDP. Further, developing countries had been insisting on public funds as the major source, whereas the Cancun Agreements do not specify how the finances would be mobilized by the developed countries. In this context, Indias initiatives will succeed if the global framework of actions is effective and supportive, including technology development and transfer efforts, built on sound principles of equity and common, but differentiated responsibilities.
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Prospects, short term and medium term

1.69 Based on the performance of the economy over the last five years and analysis of the underlying trends of critical variables, Indias real GDP is expected to grow by 9 per cent (+/- 0.25) in 201112. The Indian economy had grown at above 9 per cent for three consecutive years starting in 2005-06. So the economy is expected to revert to pre-crisis growth levels next year. The countrys savings and investment rates had gone down a little during 200809 because of the deliberate decision by the Government to encourage consumption as an antidote to the economic downturn. The latest data on savings and investments, which pertain to 200910, show that these rates have turned around. In 2009-10 the savings rate was 33.7 per cent, up from the previous years 32.3 per cent, and the investment rate had also risen and stood at 36.5 per cent. Indias incremental capital-output ratio (ICOR) is estimated to be 4.1 for the Eleventh Plan. Given that the economy still has excess capacity, these two indicators lead to a projection of GDP growth just short of 9 per cent. Since savings and investments now show a positive momentum and the Government is implementing a gradual exit from the stimulus package, the savings and investment rates are likely to rise further. Hence it is expected that the economys growth will breach the 9 per cent mark in 2011-12. 1.70 Growth forecasts and, for that matter, all forecasts in life, however carefully made, are subject to error. A sharp deterioration in weather conditions or a disproportionate spike in the price of crude
petroleum can lead to slower growth. Equally, a sudden movement of these variables in a favourable direction can give a boost to the growth rate. Apart from the factors just mentioned, it should be pointed out that a certain amount of uncertainty continues to prevail over the economic conditions in Europe and the USA. Japan also has not yet shown definite signs of recovery from its long slowdown. The fiscal situation and level of sovereign debt in a large number of these industrialized nations are also in a somewhat tenuous situation. While Indias growing trade and finance links with emerging economies provide some insurance against a downturn in industrialized nations, our economy has vital links with the industrialized nations. Hence India will be adversely hit in the event of a serious crisis in any of the major industrialized nations. However, the expectation is that there will not be a serious downturn in industrialized nations; or, more accurately, a second dip recession is a very low probability event. Hence the point expectation for Indias growth is 9 per cent. 1.71 Looking further, into the medium to long term, the expectation is that Indias pace of economic development will pick up even more. There are two reasons for this expectation. Given the momentum in the savings and investment rates and also the fact that Indias demographic dividend is yet to peak and there is evidence that the savings rate for the working- age population of India, especially for those in the 30s and 40s, is disproportionately high, the ratio of investment to ICOR is expected to rise in the next half to one decade. Further, the fraction of investment that is going towards building up infrastructure has been rising. The importance of infrastructure for sustainable and inclusive development is now well recognized and the Planning Commission is scheduling to give this a large boost in the Twelfth Five Year Plan. 1.72 It is known that once an economy begins to operate close to its capacity, the savings and investment rates are no longer such effective drivers of GDP growth. Growth then depends much more on skill development and innovative activity in the country. Fortunately, there is awareness of this in India and efforts are afoot in terms of budgetary allocation and actual initiatives to boost the development of skill and human capital. Innovative activity in a nation is difficult to measure but, judging by patenting activity, there seems to be a pickup in research and innovation in India. Patent applications
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Economic Survey 2010-11 research. It is expected that these initiatives will gather steam and more than make up for eventually waning power of the savings rate as a driver of economic growth. As a consequence, the next two decades should see the Indian economy growing faster than it has done any time in the past and also faster than the growth in the next two years.
used, traditionally, to be few and far between. There is, however, a sharp rise in this over the last few years. In 2004-05, 17,466 patents were filed and 1911 granted. In contrast, in 2008-09, 36,812 patents were filed and 16,061 granted. There are also initiatives to bolster Indias higher education system, including universities, institutes of technology, and centres of
Micro-foundations of Macroeconomic Development
CHAPTER
This has been a classic year of economic recovery for India. The economy remained
on the path of rapid resurgence which began in 2009-10 and has virtually returned to the high growth path that it had achieved during 2005-08, before the global financial crisis and economic meltdown. Indias growth story this year has been remarkable by any standards. What makes it even more significant is that this is happening on the heels of a year in which growth was a robust 8 per cent; so there is no base effect to lay claims on this years achievement. Further, as discussed in Chapter 1, the growth prospect over the medium to long term looks excellent. However, as often happens with strong recovery, the economy has come under strain from high inflation. Since the growth is in real terms, the average person has the cushion of more goods and services. Nevertheless, inflation, especially when it is centred on food, as has been the case in recent times in India, can be a cause of considerable distress for the common man and woman. Not surprisingly, a substantial part of this chapter addresses the subject of inflation. Price rise is discussed both as a matter of overall demand management and from the point of view of productivity and marketing. The chapter also comments at some length on the efficiency of financial intermediation. Economic analysts often treat growth and development as rooted in economic policy alone. In reality, much depends on the social, political, and institutional milieu. Crafting good policy entails taking proper account of this. The chapter closes with a discussion of these extra-economic catalysts of economic development.
INCLUSIVE GROWTH
AND
INFLATION
2.2 This has been a difficult year in terms of inflation, even though the overall trend of inflation has been downwards. Inflation peaked around March and April 2010 and has since been on a downward trend despite a disturbing turnaround in December 2010. Inflation in India is measured by a wholesale price index (WPI) and four different consumer price indices (CPIs) for various categories of consumers. Interestingly, measured by all five price indices, it was in single digits from October 2010. This had not happened since April 2009. Till September 2010, for 17 months, one or the other inflation index has been in double digits. In fact, from March 2010 to July 2010 all five indices showed double-digit inflation.
So clearly there has been an easing of the overall inflationary situation even though the recent spike in food prices is a cause for concern and will be addressed in this and other chapters. On the other hand, the high growth that India has achieved this year, when much of the industrialized world is still teetering on the brink of a possible second dip, is remarkable. As always with high growth, this is also a moment of opportunities. This is the time when we have to make sure that the economy builds up strengthsfiscal, infrastructural and moreso that not only do we improve our current standard of living, we also accumulate resources and create fiscal space for bad times that may come our way in the future. In short, a part of the current recovery must be stored away to build future resilience.
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Economic Survey 2010-11 be based on the comprehensive study of available statistics, the lessons of economic theory and, not least, judgement. 2.6 Recognizing the complex nature of inflation, with roots in domestic and international factors, the Government has set up an inter-ministerial group (IMG), under the chairmanship of the Chief Economic Adviser, Ministry of Finance, to review trends in overall inflation, with particular reference to primary food articles, and make recommendations for action on fiscal, monetary, administrative and other fronts. In the mean time, in understanding and analysing inflation, it is important to distinguish between two different kinds of phenomena. The first is a shortterm relative price rise in a couple of commodities and the second is a sustained overall price increase. In fact, in much of standard economics, the former is not even called inflation. The latter, on the other hand, is classic inflation and calls for standard remedies involving monetary and fiscal policies. This is not to deny that relative price adjustments can be a contributory factor in a countrys overall inflation. However, these two kinds of phenomena call for very different kinds of policy interventions. To begin with the phenomenon of sustained overall price increase or inflation, it is important to note an interesting connection between inclusion and inflation. While the Reserve Bank of India (RBI) controls the total amount of currency in the economy and the Ministry of Finance, Government of India (GOI), controls the fiscal and revenue deficits, what is not often understood is that inflation depends on overall liquidity in the economy, and that can be affected by the decisions and behaviour of firms, farms, corporations, and ordinary citizens. 2.7 As Figure 2.1 shows, Indians continue to hold a lot of their savings as cash. In rural India, around 42 per cent of savings are held as cash. In this environment, once we initiate policies for financial inclusion and help people open bank accounts and put their money in the accounts, we will be bringing money that was earlier lying dormant into circulation. In the old set-up where lots of Indians, especially in rural areas, kept their savings as cash in their homes, the Government and the RBI had the freedom to indulge in an additional amount of spending without this giving rise to inflationary pressures. This is a case of one persons decision not to put his money into circulation enabling another agent to put her money into circulation without causing inflationary pressures. Once people are financially included, that is, they put away their money in banks and mutual funds, this money goes into circulation. Hence, the total effective money supply in the economy goes up. In this situation, even if there is no change in the behaviour of the RBI and GOI, there will be inflationary pressure. There is evidence from around the world that monetization of the economy and the desirable
2.3 When growth is as high as it has been for India this year, if it were the case that all segments of the population were partaking in the growth in exactly the same way, then inflation would not be a matter of great concern. This is because the growth being real, everybody is better off and the inflation does not take away anything from this. It is when the average growth is unevenly distributed that we have to worry about the worse-off and vulnerable segments of society. Hypothetically it is possible that while the average Indian is better off by the per capita income growth of approximately 7 per cent per annum that the country has had, some poor people are actually worse off because their nominal incomes have hardly grown and inflation has negated that growth. Given Indias objective of inclusive growth, this is a matter of concern. 2.4 According to the unit level data of the NSSO 2004-05 round of monthly consumption expenditure, based on uniform recall period, the bottom quintile of Indias rural population devotes approximately 67% of their aggregate household expenditure on food. Since food price inflation during much of the year has been over 10 per cent, it is possible that some of these people are worse off, despite the high real gross domestic product growth (GDP) growth. The way this has to be handled is by developing stronger systems of food security for the poor, more effective systems of providing cheap fertilizer to small farmers, dependable micro credit to poor households in rural and urban areas, and basic health support and other such services. There are several initiatives afoot in India right now to make sure that not only do we try to control inflation, we also try to put these supportive policy structures in place so that the vulnerable segments of Indias population are protected from the ravages of inflation. These policies are important because, though the Government aims to bring down inflation further, there may be reason to expect that in the medium term we will have to live with a little higher inflation than the 3 per cent or so that we used to have in earlier years. 2.5 In designing inflation control measures it is important to be aware that sudden, sharp policyinduced contractions in demand can cause unemployment to rise. Given that Indias inflation data are remarkably comprehensive and are published on a weekly and monthly basis, whereas our employment statistics come out with long intervals and time-lag, the trade-off between inflation and employment escapes public awareness and slants discourse. There is however, enough evidence from around the world that, at least in the short run, there is a negative relation between inflation and unemployment. This is what makes it critical for government to carefully calibrate the demand management measures when bringing down inflation. There is no known formula for doing this. This has to
Micro-foundations of Macroeconomic Development objective of bringing more and more people into systems of modern money management contribute to the overall pressure on prices. This is a case of one good development, namely, greater financial inclusion, having an undesired consequence, to wit, a greater inflationary propensity. This must not deter us from pursuing financial inclusion since the overall benefit of this can be enormous. What is being pointed out is the need to be aware of all its fallouts, and take appropriate action against possible negative side effects. 2.8 An analysis of Indias recent monetary and liquidity conditions lends credence to the foregoing analysis. Overall money supply seems to be well under control. In 2010-11 (year on year, up to 31
Figure 2.1
100 7.6 90 80 5.4 9.7 4.2 Others Post office 45.3 60 50 40 30 20 10 0 Rural Urban 41.7 23.4 62.6 Keeping at home Banks
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December) broad money (M3) growth was 16.5 per cent. This is not only reasonable but it is less than the growth in the previous year, which was 17.9 per cent. Narrow money (M1) also grew less in 2010-11 compared to 2009-10. This year (year on year, up to 31 December) the growth was 15.5 per cent and last year the growth was 17.9 per cent). During this year currency growth has been greater than deposit growth, resulting in a higher currency to deposit ratio. Also, during the year the growth in bank credit to Government has also gone down. The demand for liquidity is evident from the fact that the repo rate emerged as the operative policy rate, at least for most of the latter part of the calendar year 2010. This shows that the raising of the repo rate was being
Prefered form of cash savings by location
Per cent of cash saving
70
Source: National Council for Applied Economic ResearchCenter for Macro Consumer Research (NCAER-CMCR), NSHIE, analysis from Rajesh Shukla (2010), How India Earns, Spends and Saves: Unmasking the Real India, Sage Publications, New Delhi.
tolerated well by the real economy. The inflation that occurred despite these features point to the possible role of other non-central bank factors. 2.9 The other route through which a desirable change can have the adverse effect of creating inflationary pressures in an emerging economy is integration with the global economy and, more generally, globalization. It is well-known that in poor countries, the purchasing power parity (PPP) is low. In other words, the kind of living standard one can achieve in a poor country with 100 dollars is considerably higher than what one can achieve with the same money in the United States, Europe, or any other industrialized nation. Currently, Indias PPP correction factor is 2.9. In other words, what a person
in India can buy with 100 dollars will typically require 290 dollars in the US. We also know that by the time a country becomes industrialized, the PPP correction has to be smaller. This happens partly because of exchange rate changes but more substantially because the prices of basic non-traded goods and unskilled labour in the formerly poor country rise and partly catch up with prices in industrialized nations. 2.10 The most major break for the Indian economy occurred with the far-reaching economic reforms of the early 1990s. From 1994 India was clearly on a higher growth path than ever before. The next big step up in growth happened in 2005. If India keeps up the high growth rate it has had from 2005, it will
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Economic Survey 2010-11 spikes, it is important to take a longer-run view and be restrained in the use of such interventions. We should use each such inflationary episode to try and locate and rectify the flaws in the system of production and marketing. 2.12 Before going into this, it is important to stress that not all price increase should be met with Government interventions. Prices rise and fall in response to changing demand and supply scenarios in the country. Prices are signals to consumers and producers to alter their behaviour in response to exogenous changes in the economy. It is not advisable for Government to step in and flatten out all these price fluctuations. Trying to control these price increases by legislating price controls runs the risk of prices being lower but goods vanishing from store shelves, as happened in countries which tried this strategy in the 1970s and 1980s. In other words, we risk having low prices for no goods. Such a policy could also give rise to black markets. When an unwarranted price spike occurs, the need is to see if there are defects in our marketing system, take away lessons, and put corrective measures in place to prevent a recurrence. Some such food distribution flaws were isolated during the high inflation in foodgrains that occurred from November 2009 to May 2010 and corrective measures put in place. 2.13 It can be argued that the sharp hike in the price of vegetables seen during December 2010 and January 2011, especially of onions, reveals defects in our food production and marketing systems. What came to light during this period was the great difference in prices for the same product at the farm gate and in city retail outlets, and also across different cities and towns. On 7 January 2011, for instance, onions were selling for ` 30 in Agra and 57.5 in Delhi; for ` 35 in Nagpur and 62 in Mumbai; for ` 23 in Thiruvananthapuram and 60 in Dindigul. Surely with an efficiently functioning and competitive market such price differentials could not have survived. What these price differentials suggest more than anything else is not so much hoarding as the cartelization of trade resulting in the prevention of entry of new traders. The problem needs to be tackled using our Competition Act 2002. 2.14 When we give free rein to enforcers to check these practices in the market and among traders, the tendency often is to lump together a motley category of behaviourhoarding, entry deterrence, and collusive price hikesand treat them all as malpractices to be avoided. Yet such indiscriminate lumping together and punishing traders can do more
mean that the real per capita income of Indians will rise from the current level of approximately 1300 dollars per annum to 10,000 dollars in 2039. Using the data on PPP corrections needed for countries just above the 10,000 dollar benchmark, we would expect Indias average dollar prices to rise (see Box 2.1). If this happened entirely through the adjustment of prices with no change in real exchange rate, we would have an additional 2 per cent per annum inflation rate. In reality, there could be some exchange rate adjustment as well, though crosscountry data suggest this is dominated by the price adjustment. If simply as a rule of thumb, we take three-fourths of this to be determined by price adjustment, this will mean that we will, over the next 30 years, have an inflation rate that is 1.5 percentage points greater than would have been the case in the absence of this growth spurt. In the years immediately preceding 2003-04, from when GDP growth picked up (and went even higher after 2005), the average annual WPI inflation was just below 3.5 per cent (it was 3.61 per cent in 2001-02 and 3.38 per cent in 2002-03). This implies that, other policies remaining unchanged, we will have an average annual inflation of nearly 5 per cent during the next decade or so of the rapid growth that is widely expected to occur in India. This suggests the need to revisit some of our standard policies for managing inflation, and also underlines the need to ensure that Indias growth is inclusive and that we have better designed systems for providing basic security to the vulnerable. 2.11 Around this average inflation, there will certainly be periods of price spikes and even price declines for different commodities and different classes of commodities. The year 2010-11 has been a year of more than one such skewflationary episode. At the beginning of the calendar year 2010 and even in the first months of the fiscal year 2010-11 inflation was high for foodgrains, sugar, and pulses. During the course of the year, inflation in these commodities stabilized, but by November there was another spike in prices of another set of commodities, led by onions, cabbage, milk, and a couple of other products. While we are often forced to use the blunt instrument of controlling aggregate demand in the economy through monetary and fiscal instruments, these price spikes should be treated as occasion to investigate the micro structure of markets, in particular the production and distribution of goods from farm and factory to retail store and consumer. While political compulsions sometimes oblige Government to take short-term measures like banning exports and changing tax rates to correct the price
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Box 2.1 : The Mechanics of PPP Catch-up and Increases in Price Levels
The concept of PPP catch-up inflation arises from the empirical observation that as countries grow in terms of per capita GDP the required PPP adjustment appears to become lower (see Figure). Countries with per capita GDPs of around US$ 850 to 1200 in 2009, like India, Pakistan, Nicaragua, and Vietnam, appear to have an average PPP correction of approximately 2.3.1 In comparison, countries with per capita GDPs between US$ 8500 and US$12,000, like Turkey, Uruguay, Mexico, and Brazil, have an average PPP correction of around 1.6. It therefore appears that, as the per capita GDP of a country increases, its PPP correction becomes smaller. This would also indicate that due to this apparent fall in the PPP correction factor, there would be some increase in prices. For example, in 1980 Brazil had a per capita GDP of US$ 1371 with a PPP correction of 2.7. By 2009 it had a per capita GDP of US $ 8220 and a PPP correction of 1.3. India currently has an annual per capita GDP of around US$ 1300 with a PPP correction of 2.9. If it reaches a PPP correction level of 1.6 (average PPP correction of countries with per capita GDP US$ 8,500-12,000), over a period of around 30 years it would face an inflation of 2 per cent per annum solely on account of this PPP adjustment (provided there is no currency appreciation). The theoretical basis for this comes from the work of Balassa and Samuelson. As explained by Froot and Rogoff (1995), the Balassa-Samuelson effect posits that after adjusting for exchange rates, CPIs in rich countries will be high relative to those in poor countries and that CPIs in fast-growing countries will rise relative to CPIs in slow-growing countries. The underlying mechanism arises from the historical tendency wherein technological progress is faster in the traded goods sector than the non-traded. Rising wages in the traded goods sector lead to rising wages in the entire economy. The nontraded goods producer then needs to raise the relative PPP adjustment factor and price of non-traded goods to pay the higher wages. Suppose we consider a basket of goods in India that 6 costs ` 5000 today. Given an exchange rate of ` 50 per US dollar, this costs US$ 100 in India. With a PPP 5 correction factor of 2.9, the same basket of goods would 4 cost US$ 290 in the US. If in say 30 years there is no 3 inflation in the US, and the PPP correction factor for 2 India comes down to around 1.6, the basket costing US$ 1 290 would cost approximately US$ 181 in India. If the 0 exchange rate remains at ` 50 per US dollar, the basket would cost ` 9050. This would imply a PPP catch-up inflation of about 2 per cent per annum for 30 years Per capita GDP (2009) (in US$ thousands) (compound annual growth rate--CAGR). The other extreme possibility is that there is no inflation in India and this adjustment occurs only because the ` 5000 basket becomes worth US$ 181 because the rupee appreciates to ` 27.6 per US dollar.
per capita GDP (2009)

PPP adjustment factor
20
40
60
80
100
Between these two extreme alternatives, there would be other combinations involving a smaller appreciation and a lower inflation rate. If we consider real-world examples of current middle-income countries (Table 1), very few countries appear to have had currency appreciation as their per capita incomes increased. Brazil with its spectacular growth in per capita GDP had a depreciating currency together with very high inflation. Poland, Uruguay, Chile, Venezuela, and Mexico also had significant growth, lowering of the PPP factor, currency depreciation, and inflation. These examples lend some credence to the idea of PPP catch-up due to high growth leading to high inflation in the absence of currency appreciation. Table 1: Per capita GDPs, Currency Depreciation, Inflation and PPP Adjustment in Some Middle-income Countries. Country Per capita GDP 1980 Per capita GDP 1990 Per capita Currency GDP 2009 Depreciation (1993-2009) 8681.4 8133.9 8220.4 8711.2 9253.0 9420.5 9511.4 9515.9 9577.2 11,115.1 11,302.1 11,383.0 11,465.6 3100.7 333.7 5123.6 14,010.3 162.7 472.6 n/a 38.8 66.8 -42.8 72.2 2263.5 -25.1 Average Annual Inflation (1993-2009) 99.7 11.3 245.2 47.4 6.1 17.1 2.4 5.3 7.7 35.0 10.8 34.0 15.3 PPP Adjustment 1990 n/a 2.1 1.5 1.4 1.6 1.6 1.4 2.0 1.5 n/a 3.6 2.8 n/a PPP Adjustment 2009 1.7 1.7 1.3 1.4 2.6 1.4 1.4 1.5 1.9 1.5 1.6 1.1 1.2
Russia Mexico Brazil Turkey Seychelles Uruguay Libya Chile Equatorial Guinea Lithuania Poland Venezuela Latvia
n/a 3291.9 1371.6 2235.1 2793.5 3845.7 12,795.5 2492.9 143.9 n/a 1591.3 4650.0 n/a
n/a 3395.1 3463.9 3859.5 6366.5 3319.2 7063.1 2409.1 294.6 n/a 1625.2 2481.6 n/a
Note: Internal calculations based on International Monetary Fund (IMF) data. Data Source: IMF, World Economic Outlook (WEO) and International Financial Statistics (IFS).
Reference: Kenneth A. Froot and Kenneth Rogoff (1995), Perspectives on PPP and Long-run Real Exchange Rates, in Gene Grossman and Kenneth Rogoff (eds.) Handbook of International Economics, Volume 3, North Holland, Amsterdam.
1
Per capita GDP at current prices, not adjusted for PPP.
120
28
Economic Survey 2010-11 for small, new traders and farmers to bring their products to retail outlets. It is also believed that new traders are deterred by incumbent traders. If this is established, then section 3 of the Competition Act 2002, can be invoked to put an end to these practices. 2.16 Another, and quicker, method to curtail the margin between farm gate and retail prices is to bring in modern supply chain management systems and retail sellers into the picture. This will involve a lot of new know-how. A quick way to get at this is to allow foreign direct investment (FDI) in multi-product retail into India. We will certainly need to have a regulatory structure within which such foreign companies will be required to function, even if it were argued that large organized-sector firms would be more wary of violating the nations antitrust laws. At any rate, we are at a juncture where FDI in multi-product retail is worth considering. It could enable farmers to get higher prices and consumers to have to pay less. We could, as a first step, consider limiting international multi-product retailers to a few outlets in each major city. This will prevent them from getting full control of the market and, at the same time, set an upper bound on the prices that other retailers will be able to charge for their products. Further opening up can follow depending on the success we have with this. 2.17 The policy changes discussed in the preceding paragraphs can improve our food delivery and distribution systems and provide great benefit to consumers. They can even achieve a once-and-forall lowering of retail prices that consumers pay. But this in itself will not cure the risk of long-run inflation, which refers to a sustained across-the-board price increase. Sustained inflation is, in part, a by-product of growth and financial inclusion. As discussed earlier, with more people putting their savings in banks and mutual funds, the scope of the RBI and Government to increase money and run a fiscal deficit may go down. A deficit that earlier did not cause inflation may now do so because ordinary citizens are putting their money into circulation. In the parlance of economics, there may be a steady increase in the velocity of circulation of money. Unfortunately, there are no known formulae for how much we have to cut back on deficit and liquidity to counteract the fact of rising velocity. This will have to be achieved through trial and error. The secular lowering of inflation seen through this year suggests that the moves made by the RBI and Government have been in the right direction.
harm than good. Our enforcers have to be taught to distinguish between legitimate activities and genuine malpractices. Hoarding, for instance, like cholesterol, can be both good and bad. When ordinary citizens hoard for a rainy day, they serve the useful role of evening out price fluctuations. This falls in the category of good hoarding. When Government talks in terms of setting up new warehouses and storage facilities, it implicitly recognizes the socially useful function of this type of hoarding. On the other hand, when hoarding is done by large traders to deliberately manipulate prices, this can be detrimental to the economy and go against the interest of consumers. It is this latter kind of hoarding that we need to deter. The important press release by the Prime Ministers Office made on 13 January 2011, which led to the setting up of the IMG referred to earlier, shows awareness of the need to distinguish between different kinds of hoarding stating as it does, Government will take stringent action against hoarders and black marketers manipulating market prices. The last three qualifying words are important. The same paragraph goes on to point out the need to use not just our Essential Commodities Act 1955, but also the Competition Act 2002. 2.15 The main relevance of the Competition Act occurs in the context of the natural propensity of established traders to prevent the entry of new traders. It was observed in an earlier paragraph how the same product on the same day had vastly different prices at the farm gate and at different retails locations. This does suggest the occurrence of entrydeterrence. For a policy analyst it is important to realize that the best antidote to these large price margins and the consequent large profits made by the incumbent traders is the drive of others not currently operating in this market to make profit from the large margins. If we allow new traders to come into the market, buy where prices are low, and sell where prices are high, the large price differentials will vanish. So the critical question is why such new traders and farmers do not come into the market. Though a firm answer is not possible at this stage, it seems likely that there are barriers to their entry, caused by the rules and regulations of the Central and State governments and by deliberate barriers to entry created by the incumbent traders. It is arguable that our Agricultural Produce Market Committees (APMC) Act, by restricting the traders permitted to trade through the main mandis, facilitates collusive pricing. Also the various tolls and checks that a trader faces in bringing supplies into a city make it difficult
Micro-foundations of Macroeconomic Development 2.18 There is another novel dimension to inflation today that puts it beyond the full control of any single nation. This has to do with globalization. As barriers between economies come down, and goods, services, and capital flow more easily between nations, there is a natural tendency for each nations monetary authority to lose some of the effectiveness it earlier had. Equivalently, one nations monetary policy now has greater externalities for other nations. In earlier times, when one country increased its money supply, it boosted demand in that nation, leading to a combination of greater output and some upward pressure on prices. Nowadays, it is possible for the newly created money to flow out of the nation to other countries and give rise to greater demand there, boosting output but also creating inflationary pressures. It was realized a long time ago that for one economy to have more than one central bank with money-creating rights can be destabilizing. Starting with the founding of the Bank of England in 1694 it gradually became the norm to have one central bank for one economy. With globalization and the lowering of boundaries between nations, the world economy is gradually moving towards a single Table 2.1 : Cross-country Inflation over the Last Year
Inflation Year ago Argentina Brazil China Egypt India Indonesia Iran Pakistan Philippines Russia Thailand Turkey Ukraine Vietnam Uruguay 7.1 4.3 0.6 10.7 13.5 2.8 7.4 10.5 4.3 8.8 3.5 6.5 12.3 6.5 5.9 2010 11.0 * 5.9 ** 5.1 * 8.3 * 7.0 ** 12.5 * 15.5 ** 3.0 ** 8.8 ** 3.0 ** 6.4 ** 9.1 ** 11.8 ** 6.9 ** Food Inflation Year ago 4.7 3.3 3.2 17.6 4.7 6.6 7.5 2.2 0.8 9.3 7.6 4.6 2010 15.8 * 9.2 * 11.7 * 21.9 *** 5.4 * 13.2 20.1 6.6 *** 7.0 ** 13.1 10.1
@ @ $
29
economy. But since each nation has a central bank, we are unwittingly returning to a predicament that we had once escaped, to wit of having multiple money-creating authorities in a single economy. This has given rise to destabilizing currency competitions and may be a factor behind the recent increase in inflation in emerging economies (see Table 2.1). 2.19 It is time for the worlds major economies to get together through appropriate international agencies such as the G-20 to address this problem and have systemically important economies try and achieve greater coordination in their monetary and fiscal policies. The global economy is beginning to exhibit some troubling characteristics that need attending to. What we have is a variant of stagflation at global level. But unlike the standard melting-pot stagflation, where the stagnation and inflation occur in the same economy, the global economy is characterized by a salad-bowl stagflationstag in some nations, flation in others. This is probably a consequence of the world becoming increasingly boundaryless. Money creation in such a world is like pouring water on a flat surface. No matter where the water is poured it ends up in the same place, in this case stimulating growth and prices in those places, and not necessarily stimulating the economy where the money was created.
MICROFINANCE, FINANCIAL PRODUCTS, AND FINANCIAL INCLUSION

2.20 Over the last year, there has been a lot of effort to strengthen economic inclusion. This is as it should be. Of the Governments lynchpin for economic policy, namely inclusive growth, the country has done very well on growth, but needs to press more on the peddle for inclusion. To do better on this front we have to define this target more sharply and then pursue policies to achieve it. It was argued in last years Economic Survey that one way of formalizing the inclusion target is to evaluate the performance of an economy in terms of the performance of the bottom quintile of the population. Thus, instead of treating the overall per capita income as a target, we should aim to enhance the growth of the per capita income of the bottom 20 per cent (what is called the quintile income) of the population. Such a definition would avoid the common pitfall of treating growth and equity as pulling in different directions. Even with this clarity of definition, the question remains about how best to achieve this target? What should be the components of a policy aimed at raising the standards of the marginalized population?
11.6 *** 17.4
12.1 ***
@
3.2 ***
Source: International Labour Organization (ILO) Department of Statistics, World Bank, National Bureau of Statistics of China. Notes: *November, **December, ***September, @ October, $ August.
30
Economic Survey 2010-11 SKS Micro Finance, this sector seems to have come of age. However, in 2010-11 the sector ran into difficulty with reports of unfair practices by MFIs to recover loans and some farmer suicides attributed to these practices. 2.23 These developments have put the microfinance sector at crossroads. In regulating MFIs it has to be recalled that they have played a major role in drawing poor people into Indias mainstream finance and enabling farmers to make useful investments and marginal workers to start up small self-employed enterprises. There are approximately 30 million people throughout India who have been beneficiaries of MFI lending. There is evidence that some of these people have been subjected to unfair threats to make them repay loans. Such practices must be stopped. However, to react to this by announcing blanket amnesties and encouraging farmers to default en masse will do more damage than good. Such practices would lead to the MFI sector disappearing since no MFI, whether it be a profit-making one or a non-profit NGO, would want to give out loans knowing that these will not be recovered. While we must recognize that borrowers in special situations have the right to plead bankruptcy and not pay back, we need an intelligent regulatory structure which protects borrowers and, at the same time, allows this sector to flourish. It is with this in mind that the RBI set up a committee headed by Y.H. Malegam to study and advise on the microfinance sector (see Box 2.2). The report will, no doubt, give rise to discussion, debate, and analysis. In the light of this, it is worthwhile recounting some of the principles we have to keep in mind while regulating this important sector. 2.24 The central principle of a good system of finance is a transparent contract. Hence the first and foremost principle in drafting a regulatory system for the microfinance sector is to require that the lending MFI make the terms and conditions of the loan clear to the borrower. It is, for instance, well known that people often fail to understand the meaning of compound interest rates. A poor farmer told that he has to pay 10 per cent interest rate per month tends to believe that he will be paying an interest of 120 per cent over the year. However, if the 10 per cent interest rate is meant to be a compound rate, then this works out to an interest of 214 per cent over the year. To misunderstand this can lead the borrower to make huge losses and the lender to make huge, unfair profits. We have seen these kinds of phenomena even in advanced economies like the United States where the sub-prime home borrowers
2.21 This Government took the view that in the large agenda of inclusion, a central and in some ways pivotal feature is financial inclusion. In order to achieve such inclusion, there are plans to expand Indias banking sector, enable the creation of new financial products and use modern technology to enable the poor to keep their savings in interest earning accounts. One of the most ambitious schemes for achieving these is the Swabhimaan programme, which, takes off on the idea of financial inclusion proposed and developed in the Rangarajan Committee Report (Committee on Financial Inclusion). Swabhimaan, launched on 10 February, 2011, is an innovative scheme to take banks to the doorstep of the rural poor instead of the latter having to go in search of banks. The idea is to have business correspondents, or bank saathis, (who may be the local merchant) armed with electronic hand-held devices, which can recognize the bio-markers of bank customers. The customers can then deposit and draw money directly from the bank saathi, without having to travel long distances to get to the nearest brick and mortar bank branch. The programme will be making use of aadhaar which will make it possible for individuals to establish their identities in any part of India. By combining Indias strength in information technology with innovative ideas in banking, Swabhimaan promises to be a major catalyst for growth and inclusion. 2.22 Another constituent of financial inclusion, which could potentially benefit from Swabhimaan, is the extension of the reach of micro finance. Microfinance can empower the poor so that they can move on from relying on hand-outs to being selfsufficient and seeing their incomes grow. For microfinance this has been a year of remarkable developments. The sector has grown rapidly but it has also been mired in controversy. A micro finance institution (MFI) can take many different forms. It can be a non-government organization (NGO), a nonprofit non-banking financial company (NBFC), or a profit-making NBFC incorporated under the Indian Companies Act 1956. Following the RBI guidelines of 18 February 2000, MFIs have been taking bulk loans from banks and on-lending to small borrowers. MFIs cannot take in retail deposits and to that extent fall in the category of NBFCs. This sector has grown exponentially and on 31 March 2010, based on returns filed with the National Bank for Agriculture and Rural Development (NABARD) we know that there were 1659 MFIs availing a total credit of ` 13,955 crore from the banking system. With the success of the initial public offer (IPO) of a leading MFI, namely
31
Box 2.2 : Issues and Concerns of the MFI Sector : Extracts from the Report of the Sub Committee of RBI Central Board of Directorsthe Malegam Committee.
Main Recommendations* Categorization of MFIs

Creation of a separate category of NBFCs to be designated as NBFC-MFIs; NBFC-MFIs need to be companies providing financial services predominately to low income borrowers with not less than 90 per cent of total assets (other than cash and money market instruments) in the form of qualifying assets; Borrower can be a member of only one SHG or Joint liability group; Limits on annual family income of borrowers recommended at ` 50,000; Individual ceiling on loan to single borrower recommended to be ` 25,000; Loans to be in small amounts with more frequent repayments than bank loans; The interest charged from borrowers subject to a margin cap of 10 per cent for MFIs with loan portfolio of ` 100 crore and 12 per cent for smaller MFIs; Overall interest cap on loans at 24 per cent; Tenure of loan to vary with loan size; Restrictions recommended on the extent of other services to be provided by MFIs; Not more than two MFIs can lend to a single borrower.
Terms of credit: borrowers, size and interest rate

Resources, capital structure and provisioning

Commercial Bank lending to NBFC-MFIs to qualify as priority lending; Minimum net worth of 15 crore for NBFC-MFIs. Capital Adequacy Ratio of 15% All of the Net Owned Funds should be in the form of Tier I Capital. MFIs encouraged to issue preference capital (with a ceiling on the coupon rate to be treated as part of Tier II capital subject to capital adequacy norms
Consumer protection, code of governance and regulatory issues

RBI to prepare a draft customer protection code; Grievance redressal mechanism to be established MFIs to observe code of corporate governance; Responsibility of avoiding coercive recovery methods to rest on MFIs; Credit information bureau to be established; The Reserve Bank should have the responsibility for off-site and on-site supervision of MFIs; A four pillar approach comprising of MFIs, Industry associations, banks and RBI for monitoring compliance of regulations suggested; NBFC-MFIs should be exempted from the provisions of the Money-Lending Acts, in view of the recommendation on interest margin caps and increased regulation.
Note: *This is only a synoptic extract of the recommendations and not the full text. Source: Report of the Sub-Committee of the Central Board of Directors of the Reserve Bank of India to Study Issues and Concerns in the MFI sector, January 2011.
took on loans without understanding the terms they were signing on to. Government has to take measures to ensure that MFIs make the terms of contract transparent to the borrowers. This is more important than setting caps on interest rates and other restrictions on the terms of the contract. This is not to deny that we may have to set some limits on the terms. But the economics of this is important to understand before we go about ring-fencing the terms of the contract.
2.25 At first sight an MFI charging an interest rate of 24 per cent or 30 per cent per annum may seem extortionist since big urban borrowers manage to get money at much lower interest rates. However, there are two arguments against this reaction. First, it has to be kept in mind that lending to many small borrowers is much more costly than lending to a few large borrowers. Second, for a lot of these poor borrowers the alternative to an MFI is not a bank or an organized-sector financial institution but the rural
32
Economic Survey 2010-11 investment companies, also came under criticism. It can be argued that these CDOs caused a rating inflation, since in mixing and matching these mortgages, banks made sure that each such product making it to a certain rating category made it to just the edge of that category. In earlier times, ratings agencies, such as Standard and Poors or Fitch, used to rate whole companies or even nations. So when debt issued by some company was given an AA+rating, the lender knew that this companys quality rating was somewhere in the interval from AA+ to just below AAA. Once CDOs came into vogue, investment banks started creating new assets that were deliberately aimed at certain ratings. Since the demand for these CDOs depends on the ratings, it is not worthwhile creating tranches that lie in the middle or upper end of a rating interval. In other words, these new securities were almost invariably clustered at the bottom cut-off of each interval. It is arguable that many agents buying these assets failed to take adequate account of this change that had occurred as a consequence of structured finance. They were used to treating an AA+ asset as an asset somewhere between the start of AA+ and below AAA. But with the arrival of CDOs that was no longer the case. The average quality of assets in each rate category was invariably at the bottom end of the interval. In other words, there was rating inflation the way some universities have had grading inflation. Just as happened in the early days of grade inflation, buyers of these assets were partly deceived. In the world of finance, a small mistake per asset of this kind can amplify into big errors and, given the complicated interdependencies in this market among lenders, the total impact can be vastly amplified, as happened in 2007 and 2008. Box 2.3 discusses some other reasons for rating inflation. 2.28 One way of handling this is to go for greater granularity in grading as Standard and Poors rating system specially designed for East Asian nations does. But for India the more relevant matter right now is the status of new financial products like teaser loans. The terminology is sufficiently tainted for a neutral term to be of some value. We shall here refer to loans in which the monthly repayment instalment rises over time as a terraced loan. Unlike most industrialized countries, India has had considerable success with terraced loans. The State Bank of India (SBI), for instance, came out with two different terraced loan productsHappy Home Loan in February 2009 and Easy and Advantage Home Loan in August 2009. Both these loans hold the interest rates fixed and below the market rate in the initial years. In the case of Happy Home Loan this was
moneylender and such moneylenders often charge interest rates which, on annual basis, go up to 100 per cent or even 200 per cent. Hence to place too severe a cap on the maximum interest rate that an MFI can charge can drive some of the poorest and least bankable borrowers towards even greater extortion. 2.26 Is there then a case for having an interest rate cap or should we simply insist on transparency of the terms of the contract, whatever those terms may be? Even most industrialized nations such as the United States have usury laws which cap the interest rate that a lender can charge. Recent research in behavioural economics shows that human beings have a propensity to make inter-temporal decisions badly. Over and above the old idea of discounting through time, people have an additional propensity to value a bird in the hand disproportionately higher than all future birds in their hands. Moreover, people typically tend to underestimate the pace at which compound interest rates cause the repayment burden to rise over time. In other words, inter-temporal decision making is often done in a way which is not fully in keeping with a persons rational interest. This leads to a possible view that when a person signs onto a contract where the interest rate is too high, that in itself shows that the person has miscalculated the repayment burden. This could be a justification for why consumers sovereignty may have to be curtailed in the interest of the consumers own true interest. For this reason, there may be a case for setting some limits to the kinds of terms and conditions that go into a lending contract including a cap on interest rates. However, in figuring out the exact details of these, we have to keep in mind the two factors earlier mentioned, namely that micro lending is costly to the lender and to many a poor borrower the alternative to an MFI loan is money from the informal moneylender whose interest charges tend to be much higher. 2.27 These conceptual issues have a bearing on some matters that pertain to larger questions of organized finance. The financial crisis that began with the sub-prime housing mortgage market in the US and spread to other parts of the world has raised important questions about new financial products and structured finance. Teaser loans, in which the initial repayments are low but then escalate, over time, to larger repayments, have come under criticism. Collateralized debt obligations (CDOs), whereby new financial products are created by packaging different mortgages of differing risk profiles together and sold off in slices to other finance and
33
Box 2.3 : Securities, Seniorities, and the Lending Boom

A little less than 1 per cent of all corporate bonds get an AAA rating. During the lending boom, preceding the financial crash of 2007-09, close to 60 per cent of all assetbacked securities were rated AAA. What was the magic behind these securities being rated so highly? As discussed in the text, the ability to create packages by mixing and matching mortgages can cause some of this rating inflation. But there are other reasons as well. The popular practice of creating securities of different seniority can also contribute to this. Suppose a bank sells two mortgages of ` 100 each and suppose each of these mortgages has a risk of default equal to one-eighth. Further assume that the risks of the two mortgages are un-correlated. Now, suppose that a clever finance consultant advises the bank to put these two mortgages together and create two new securities of Rs100 each and sell them off to two buyers. These two securities are, however, given different levels of seniority. The junior security will see a default if any of the mortgages defaults. The senior security will incur a default only if both mortgages go into default. Note that the junior security is a little worse than one of the original mortgages because the risk of default is two-eighths. On the other hand, the senior security is vastly better because it is like the original mortgage but with the risk of default reduced to one-sixty-fourth. It is this method of exploiting the laws of probability and elevating certain pools of mortgages into inflated rating categories that was among the causes of the lending boom. Since by mixing and matching nothing fundamental at aggregate level is changed, the subsequent financial meltdown was all but inevitable. References: M. Brunnermeier, (2009), Deciphering the Liquidity and Credit Crunch 2007-2008, Journal of Economic Perspectives, 23. R.G. Rajan (2010), Fault Lines: How Hidden Fractures Still Threaten The World Economy, Collins Business.
fixed for the first 12 months and in the case of Easy and Advantage Home Loan interest was held constant and below the market rate for three years. Thereafter the rates were expected to move to higher and floating interest rates. The response of the market to this was very good. The number of loans offered in January 2009 was 18,780 with an aggregate value of ` 1499 crore. By November 2009 this had risen to 28,492 loans with an aggregate value of ` 3273 crore. Defaults on these have been negligible and cases of foreclosure rare. Also, these loans played a major role in promoting inclusiveness. Around 90 per cent of the home loan borrowers were first-time home buyers. 2.29 Two factors were behind the success of these terraced loans. First, despite having the shape of repayment associated with conventional teaser loans
in the US, these loans in India were not given to sub-prime borrowers. In the case of Easy and Advantage Home Loans, a borrowers repayment capacity and hence eligibility was worked out under the presumption that the person would have to pay from the beginning what she would actually have to pay from the fourth year onwards. Second, there was a lot of effort made to keep the contracts transparent so that the borrowers knew exactly what they were getting into. Given what behavioural economics has taught us, we know that this may not always be adequate, that a borrowers nod does not always mean that the borrower has fully comprehended what it is that he or she is getting into. However, especially the decision not to make these products available to the sub-prime borrowers but instead to expand the choice available to borrowers with an assured capacity to replay played a major role. The fact that this enabled many new home buyers to enter this market speaks well of the inclusiveness of the scheme, even though the subprime segment was deliberately left out. This is what enabled Indias mortgage market to remain stable even as such markets in industrialized countries faltered. The basic lesson is clear. In general, it is worthwhile giving banks and financial institutions the freedom to introduce new products and thereby expand the options available to consumers and firms. This can enhance entrepreneurship and enable ordinary citizens to achieve a higher standard of living than would otherwise have been possible. The important restriction should be that banks and even NBFCs should be discouraged from lending to categories of borrowers who are clearly not in a position to take on such debt burdens. As far as restrictions on the types of products go, these should be used minimally and with judiciousness.
CAPITAL FLOWS OPTIONS
AND
GEOPOLITICAL
2.30 Overall capital flows into India this fiscal year have been greater than ever before in the countrys history. This has been caused largely by a groundswell of money coming through the foreign institutional investor (FII) route, in response to the robust performance of the Indian economy but also because of low interest rates and returns in general in industrialized nations. Midway through the fiscal year, there was also currency competition, with China allegedly holding its exchange rate at what was believed to be a depreciated level, the US responding to this and its own sluggish growth and
34
Economic Survey 2010-11 term capital bring with them. Moreover, the kind of apprehension that India once had about foreign investment and political interference is of much less concern now since it is now a much more robust economy and has greater say in international political matters. To attract more FDI, we will have to think in terms of new areas into which we may channel these investments. But more than this, the serious stumbling block to attracting FDI into India is the fact that our bureaucratic machinery continues to be sluggish. Data released by the World Bank show that in terms of the bureaucratic efficiency for doing business, India ranks as low as 134th in the world. Clearly, this is one area with scope for improvement. If we can make our bureaucratic, administrative machinery more efficient, the benefits for the economy will be enormous. There are examples of nations that inherited the cumbersome bureaucratic system of colonial governments but managed to reform those. We can learn from those nations but, interestingly, we can also learn from within our own country. A simple calculation shows that if all of India adopted the best practices found in some part of India, for instance in terms of facilitating the opening of new business, enforcing contracts, simplifying procedures to help bankrupt firms close down quickly, it would rank 79th in terms of efficiency. In other words, we can improve our ranking by 55 positions simply by learning from within our own nation. This is not to promote the parochialism of refusing to learn from beyond our borders but to emphasize that there is a lot that can be achieved even without that. 2.33 Digressing briefly, it is worth turning to the interesting question of the economic and representational power of Governments. There was a comment earlier about Indias greater say in global economic matters. Indeed, Indias G-20 membership is recognition of this fact. The economic power of a Government is an important indicator of how much say that Government has in global fora and also how much say it ought to have. The economic power of a Government is a more complex idea than the economic power of an individual. We usually measure the latter by looking at a persons income or wealth. Taking a cue from this, we may think of a Governments power as measured by the total amount of revenue the Government earns and so is able to disburse. We may also look at the ownership of assets by a Government to get an approximate idea of the permanent income of the Government. However, a Governments economic power depends also on the amount of human capital available in the nation and so at some level available to the
high unemployment with two rounds of quantitative easing, and Japan buying up foreign exchange and releasing yens on the market. All these moves contributed to a greater flow of money our way. This was initially a matter of concern to India. However, there seems to have been no substantial appreciation of the nominal exchange rate of the rupee during the year. This is testimony to Indias growing strength and power of absorption. 2.31 This must, however, not lull us into complacency. We will have to keep open the options of having to take corrective measures should these flows affect us adversely. The most important step in this context is to work with the G-20 countries and try to figure out collective decision rules whereby each country tries to intervene minimally in the flow of capital and, when it does intervene, it does so taking into account the externalities on other nations. But till such a plan of coordinated action is worked out successfully, a nation has to be prepared to adopt policy measures on its own. In contemplating such policy measures in India two inter-related factors have to be kept in mind. First, although there is very little nominal appreciation of the rupee, our real exchange rate, especially vis-a-vis the systemically important currencies, has been on a fairly steady path of appreciation. This is likely to have contributed to the relatively slow pickup of Indias exports, even though over the last few months these have done well. It has also contributed to the large current account deficit (CAD) that the country faces. In itself this would not be a matter of concern but, in this case, a substantial part of the CAD is being financed by relatively footloose capital. One possible strategy in response to this is the market-based intervention of buying up some of the foreign exchange coming in through this route. This will limit the amount of capital available for financing the deficit and could also stabilize the real exchange rate. Against this, we will have to balance out the risk of inflationary pressures generated by the rupees that will be released on the market. However, it can be argued that since the rupees that will come on the market will be replacing other currencies, which are convertible and therefore fairly liquid, the inflationary impact of this will not be as serious as is often presumed. It is also hoped that with Indias savings rate beginning to rise, some of the pressures on the CAD will ease. 2.32 All these policies must be complemented by the effort to attract more FDI into India. FDI capital is much more stable and, therefore, does not give rise to the kind of volatility that some forms of short-
35
Box 2.4 : Government Economic Power in the Post-crisis World

The economic abilities of nations and governments have always been a force to reckon with. While the process of globalization saw government economic power supplementing the forces of the market, the global economic crisis witnessed governments playing a crucial role in stabilizing financial markets and managing to coordinate responses in order to prop up the world economy. Governments also play a critical role in ensuring redistributive equity and development. Motivated by the need to develop a set of metrics to encompass this important phenomenon, an index of government economic power was developed. The index can also be of value in deciding on the voting rights and other powers the governments of various countries ought to have in international organizations like the IMF and the World Bank. The index has been created for 10 years (2000-09) covering 112 economies. The index of government economic power (IGEP) endeavours to capture the ability of a government to project itself in the international sphere. There is also a normative content to this. Since the index shows the extent of charge a government has, it also can be used to determine how much say the Government should have in multilateral fora. The index is composed of four variables: government revenues, foreign currency reserves, export of goods and services, and human capital. These variables broadly capture a Governments ability to raise resources, its creditworthiness and credibility in international financial markets, its influence on global economic activity, and its representational strength, that is how much of the global economy, including global manpower, it can claim to represent. In order to ensure use of standard data, the index Fig 1: Index values has been constructed using three widely accepted datasets; 0.6 the IFS and WEO of the IMF, and the United Nations 0.5 Development Programmes (UNDPs) Human Development Index (HDI). 0.4 The 2009 results show that the top ten ranks are occupied by (1) the United States, (2) China, (3) Japan, (4) Germany, (5) India, (6) Russia, (7) Brazil, (8) France, (9) Italy, and (10) the United Kingdom. In 2000 the top ten places were held by (1) the United States, (2) Japan, (3) China, (4) Germany, (5) France, (6) the United Kingdom, (7) Italy, (8) (Republic of) Korea, (9) Canada, and (10) India. Among the top ranking economies some of the most dramatic rises in rank have been Brazils ascent from 13th place in 2000 to 7th in 2009 and Indias rise from 10th position in 2000 to 5th in 2009. Japan was replaced by China in the second spot in 2004. The United Kingdom went down from 6th place in 2000 to 10th in 2008 and continued there in 2009. Canada fell from 9th in 2000 to 15th in 2008. The changing dynamics of global economic power can be further seen if we analyse the index values over time for some of the larger economic entities. If we compare the three top ranking countries of 2000, the US, Japan, and China, the US and Japan had a slow rise in index values, except for the slight fall in 2009. In contrast, China has risen rapidly and, after surpassing Japan in 2004, has almost reached the same level as the US in 2009 (see Figure 1). On an analysis of the countries holding the 4th , 9th and 10th positions in 2000 (namely, Germany, Canada, and India), India moves from an index value just below Canada in 2000 to one very close to Germany by 2009 (Figure 2). Among the large economies, China and India also demonstrate remarkable robustness by not having lower index values in 2009 unlike all the other countries occupying the top ten positions in 2000. Interestingly, there is a strong positive correlation between the growth in economic power (percentage change in index value between 2000 and 2009) and the change in GDP across the post-crisis period (that is between 2009 and 2010) indicating a link between growth in economic power as measured by the index and the ability to recover from the crisis (Figure 3). This does not establish a direct causal relationship between the two variables but is of descriptive interest.
Index values
0.3 0.2 0.1 0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2008
Year
USA Japan China
Fig 2: Index values

0.14 0.12 0.10 0.08 0.06 0.04 0.02
2000 2001 2002 2003 2004 2005 2006 2007 2009
Index values
Year
Germany Canada India
Fig 3: Change in GDP growth 2009 to 2010

12 10 8
Percent
6 4 2 0 -2 -4
50
100
150
200
250
300
350
400
Percentage change in index value (2000 to 2009)
Source: A complete description of the index of government economic power and its implications is available in a forthcoming Economic Division, Department of Economic Affairs, Ministry of Finance, working paper: The Evolving Dynamics of Global Economic Power in the Post-crisis World: Revelations from an Index of Government Economic Power.
450
2009
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Economic Survey 2010-11 it comes to distribution and the mitigation of poverty, Government has to be more proactive with policy interventions. However, wherever possible, the intervention should take the form of direct transfers from the better-off sections to the poor, with as minimal a tampering with prices as possible. The fact that markets are not naturally inclined to deliver on equity and poverty eradication does not mean that we should ignore the market. The laws of the market will be there whether or not we acknowledge their presence. Good policymaking entails recognizing and understanding these laws and utilizing them to deliver on the targets that we have. 2.36 There are two reasons for having a system of a minimal amount of food procurement and distribution carried out by the State. The first is to do with evening out foodgrain availability and price fluctuations from one year to another. This is also related to the issue of self-sufficiency. In times of food shortage, we do not want to rely entirely on imports from other countries and should be able to depend on our own stocks and supply to our consumers. The second motive is to provide food security to the poor and vulnerable. No one, no matter how poor, should have to suffer from food deprivation and malnutrition. 2.37 As far as the aim of evening out food prices from one year to another goes, our success has been moderate. Thanks to our procurement policy, mainly in wheat and rice, we have not had to be held to ransom by international suppliers. However, a study of our food stocks shows that we have continued to hold these at elevated levels in good years and bad. Likewise, procurement has taken place from year to year without the cyclical features that one would expect in an effective price stabilization system. Thus, in 2006-07 the total procurement of wheat, rice, and coarse grain was 34.3 million tonnes, in 2007-08 40.1 million tonnes, in 2008-09 57.7 million tonnes, and in 2009-10 57.2 million tonnes. Clearly, given that the last fiscal year was one of high foodgrain price inflation, we would have expected lower than usual procurement and a larger offloading of stored grains. But neither of these happened. Evidently, there is ample scope for improvement in our strategy of foodgrain release. The current practice has some systemic flaws. Trying to ensure that the procured food is not released at a price which inflicts too large a loss on Government, we have often priced it so high that there were no buyers. Not releasing foodgrain defeats the purpose of bringing down market prices.
Government. A Governments power further depends on the nations level of integration with the world. A nation that is rich but largely a closed economy may not be of much importance to other nations and so not able to exercise influence in international matters. On the other hand, a nation that exports and imports a lot has the power of leverage. The potential threat of interrupting these flows gives such a Government more economic muscle than another nation that may be wealthier but has negligible trade and capital links with the world. Combining all these factors, an index was created by researchers in the Economic Division of the Ministry of Finance and is reported in the Box 2.4. It shows, as expected, that the US Government has the greatest economic power. This is followed, in descending order, by China, Japan, Germany, India, Russia, Brazil, and France. What is interesting in this story is the rapid rise in the economic power of India and, more so, China over the last decade. Box 2.4 is of interest in itself since there is so much writing nowadays on the shifting economic base of the world.
NEW INITIATIVES
2.34 The buoyant growth of the economy creates opportunities; and it is important to seize them so that the growth becomes sustainable. There are many areas with opportunities for new initiatives, and only a few of these will be discussed here for illustrative purposes. It is widely accepted outside of and within Government that we have a great distance to go in eradicating poverty and drawing into the mainstream of our economy segments of the population that are currently marginalized and live on the fringes. The first step towards this is to make sure that no one is deprived of basic food and all attain minimal nutritional standards. There have been new initiatives on this front, such as the new food security bill. 2.35 At this stage, some broad principles of economic policy are worth outlining. There is a common presumption that markets and inclusion are inimical to each other. The truth, however, is that, while markets have a natural propensity to deliver on efficiency, they do not have any innate propensity for equity or equality. Hence it is true that for eradicating poverty and creating a more equitable and inclusive society, there is need for purposive action by GovernmentCentral, State, and local. The view we take is that Government should play an enabling role vis-a-vis the market, facilitating trade, exchange, and enterprise. On the other hand, when
Micro-foundations of Macroeconomic Development 2.38 This has at times led to the suggestion that the state should just release this grain at near-zero price. At first sight, this sounds reasonable since there is excess foodgrain lying in warehouses and even in the open and going waste. But there is a problem with following this seemingly obvious policy. The way we run our minimum support price (MSP) policy is to have a fixed price and allow farmers to sell their foodgrain at that price to the Government. If with the MSP policy intact, we began the practice of selling off excess food in Government granaries at near zero price, this is bound to give rise to food recycling. That is, traders will buy the food from the Government at zero or near zero price and sell it back to the Government at the MSP and again buy it back; and so on. There is evidence that a certain amount of food recycling happens even now. But if the gap between the MSP and the release price becomes sufficiently large, this problem can get exacerbated. Our problem of foodgrain policy cannot be corrected through piecemeal action such as getting the government to release food at near zero prices without correcting other defects in the system. We need to take stock of both our release and procurement policies. Procurement should vary from year to year, depending on production. Also, the windows for procurement ought to be opened up much more widely in different parts of the country. Currently outside of a few States the MSP is a purely notional price as far as farmers are concerned. They know that they have the right to sell their food at that price but they have no access to Government granaries or take-in windows where they can sell. There is also urgent need to increase storage space so that foodgrains do not go waste. It should be clear that the act of better storage, important though it is, is not going to cure inflation. For that we have to develop effective strategies for releasing foodgrains, and the release should take place not in large bulks, which would create monopolies but in numerous small batches. 2.39 On the second objective of guaranteeing food to the poor there are several initiatives and the Government is currently considering a food security bill which will give people legal right to a certain amount of basic foods. Before venturing into this, it would be well to stress what is discussed elsewhere in the Survey and also in various Plan documents, namely, the importance of increasing agricultural productivity and production. This sector used to lag behind. But there are policies being implemented to correct this. The estimated growth of agriculture, forestry and fishing of 5.4% in 2010-11 raises hope
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that some of these are working. We must now endeavour to sustain the momentum. 2.40 Returning to the food security bill, this is an important move that can transform the face of poverty and malnutrition in India. There has been a lot of debate about how extensive the coverage of this programme ought to be. What is, however, not always appreciated is that the coverage of this programme will depend on the efficacy of the mechanism through which we try to distribute the food. The current system of handing over cheap food to the approximately 500,000 ration shops all over India, and then requiring them to sell the it at belowmarket price to poor households leads to large leakages. In the current method the subsidy is handed over to the ration shop and not directly to the poor households. Studies show (see Box 2.5) that ration shopkeepers often sell off the food at the high market price on the open market and turn away the below poverty line (BPL) households or adulterate the food that the BPL households are supposed to receive. Clearly, if we try to make the coverage of subsidized rice and wheat wide and stick to the present system of distribution, the total procurement will have to be large to the point of being unachievable. Hence the important need is to plug the seepage in the distribution mechanism; and the more effectively we manage to design this, the larger we will be able to make the coverage of cheap food to our population. 2.41 The obvious way of doing this, and this has been widely discussed in the economics literature, is to give the subsidy directly to the poor households and allow the PDS stores to sell food at market price. This will involve handing over smart cards or food coupons to poor households and then giving them the freedom to go to any PDS or other store and buy the food at the prevailing market price by using the smart card or the coupons. In this system, a poor customer is as valuable as a rich customer from the shopkeepers point of view, since both pay the same price. Also, if one shop adulterates its foodgrain supply, people will have the freedom to go to another store and this, in turn, will mean that the incentive to adulterate foodgrain will go down vastly. As the system of Aadhaar-based identification comes into activation, the smart card system will become portable. In other words, the poor can move from one part of India to another and still be able to exercise their right to subsidized food. The current system places an effective barrier on the ability of poor people to move location in response to better wages, since they risk losing out on other benefits.
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Economic Survey 2010-11 the market at market price. This will improve targeting and cut out corruption. It is true that the poor may misuse some of these subsidies on non-essentials, but it is surely better for the poor to do so than for the shopkeeper to do so using the subsidy meant for the poor. 2.43 There are other areas where new initiatives are likely to likely to yield large benefits for society. One example of this is tourism. Given the vast attractions in India, ranging from diverse natural formations to historical monuments and relics going back to more than two millennia, there is vast scope for expansion of tourism in India. Till now we have not reaped more than a fraction of this possibility. In 2010 the total number of foreign tourists that arrived in India was 5.58 million and they brought in a foreign exchange earning of ` 64,889 crore. It should be possible for India to get many times more inbound tourists than it currently does. In 2007, for instance, there were 5.1 million tourists who came to India, compared to 54.7 million to China and 20.1 million to Malaysia. Interestingly enough, India sends out more outbound tourists than it gets inbound ones. This is fairly unusual for an emerging economy. To exploit the huge potential that this sector has will require investment in infrastructure and even improvements in our immigration and visa services. But it will be unwise not to reap the large benefits that are lying unutilized in this sector. 2.44 Another sector with scope for development and large potential dividend is education, both schoollevel and higher education. India currently has a gross enrolment ratio (GER) of 13.5 per cent in higher education, often also called the tertiary enrolment ratio. That is, 13.5 per cent of all those who are aged between 18 and 23 (that is the college-going age) are actually enrolled in a college or a university. For the United States, the figure is 81.6 per cent. Even China and Malaysia over which India had a lead a few decades ago have now crossed our GER with figures of 22.1 and 29.7, respectively. India currently produces close to 6000 PhDs per annum. China, which in 1993 produced 1900 PhDs per annum, now produces close over 22,000. In principle, it is possible for India to quickly double the GER and reach 30 per cent within a decade from now. In the long run an economys growth depends on the quality of its citizenry and the human capital and innovativeness of the population. Clearly we need to invest more and more intelligently in this sector. 2.45 One large potential of our higher education sector is to develop India as a hub for global
Box 2.5 : Food Subsidies and Leakages

It is a part of common wisdom that a large amount of the subsidized foodgrain, targeted at BPL households, some APL households, and other vulnerable groups, find its way to the open market, where it is sold off at a higher price than the stipulated ration shop price. Is this true? And if so, what is the extent of the pilferage? Recent research by Reetika Khera and by Shikha Jha and Bharat Ramaswami has come out with careful statistical estimates, where earlier we had to rely on guesswork. The Ministry of Food and Consumer Affairs publishes monthly data on the offtake of wheat and rice under the public distribution system (PDS). The National Sample Survey (NSS) gives data based on random samples of the amount of PDS wheat and rice that are actually purchased by the households. The gap between the offtake and the amount actually reaching households gives a measure of pilferage or diversion from the target population. Using this method, Khera shows that in 200102 18.2 per cent of PDS rice and 67 per cent of PDS wheat was diverted. In other words, over 40 per cent of all grain targeted at the poor missed the poor. Jha and Ramaswamy, using the NSS expenditure survey of 2004-05, report an overall diversion of 55 per cent of the grain meant for the poor. No matter where the exact figure lies between 40 and 55 per cent, the fact of the matter is the leakage that currently takes place is far too high. Once we give a legal guarantee to people about the food that they are to receive, if we try to deliver on this promise using our current delivery mechanism, we shall have to send twice the targeted amount of grain towards the targeted population. References: R. Khera, (2011), Indias Public Distribution System: Utilization and Impact, Journal of Development Studies, forthcoming. S. Jha, and B. Ramaswami (2010), How can Food Subsidies Work Better? Answers from India and the Philippines, Asian Development Bank, Working Paper No. 221.
2.42 The same idea carries over to other goods such as kerosene, diesel, and fertilizers. This Governments policy of ensuring that these vital goods reach the poor, instead of leaving it all to the vagaries of the market as conservative analysts would recommend, has much to commend it. But in choosing the mechanism for reaching these goods to the poor the same principles discussed in the context of foodgrains apply. As soon as we lower the price of a commodity by Government diktat, be it for kerosene, diesel, or fertilizers, we invite adulteration, pilferage, and corruption. The need, therefore, is to design mechanisms of delivery which are incentive-compatible and minimize these distortions. For the most part this means that it is best not to distort prices to subsidize the poor but to give the subsidy to the poor directly. We may as a first step try this on one product, such as kerosene, by handing over the subsidy to the poor in the form of a smart card; and letting them buy kerosene from
Micro-foundations of Macroeconomic Development education. Given that historically we have been very strong in higher education and also our advantage in the English language, it is possible for India to develop as a major centre for higher education where students come from all over the world to study. Given the high cost of education in industrialized nations (annual tuition fees in leading US universities are around $40,000), it is possible for India to attract students not only from developing and emerging countries but even from the United States and other industrialized nations. We can offer these students education at a price where we will cover all our costs and have a profit left over and they will get education at a price which is vastly less than what they would have paid in the United States, or the Government would have paid for them in many European countries. The profit can then be used to expand our universities and colleges for the enrolment of our own students. For all this, we need complementary investments. There will have to be quality hostels and broadband internet connectivity. We will also need to tone up our bureaucratic processes. We will, for instance, need to give students visas for multiple years because no one will want to come to study for two years with a one-year visa and live under the uncertainty of it being extended. These investments in infrastructure and in creating a more efficient bureaucracy can not only boost the higher education sector, but all these initial costs will be more than made up for by the high returns they will yield in the medium to long term. 2.46 As just discussed, underlying both the above initiatives and other developmental projects is the need for better infrastructure. This being the eve year of the Twelfth Five Year Plan, it is a good moment to take stock of Indias infrastructural needs. As discussed elsewhere in this Survey, India has, over the last few years, made special effort to enhance the countrys infrastructural base. The initiatives cut across rural infrastructure, railways, highways, power, and the development of our cities, small and large. East Asian economies financed a lot of this through public land sales implemented through well-designed auctions. There is a lesson in this for us to make sure that such large infrastructural expansions remain fiscally viable. 2.47 The Planning Commission is working to give a major thrust to infrastructure over the next Five Year Plan. To ensure that this happens, the big need is not so much a matter of bricks and mortar as of finance and mechanism design. Infrastructural investments require long-term loans because some
39
of these investments may need 5, 10, or even 15 years to become financially viable. Banks are understandably wary of making such long-maturity loans. The need, therefore, is to create appropriate systems for drawing domestic and international, and private and public investments into infrastructure. For private money to be directed into any form of investment the critical ingredient is the reliability of contracts. Having put your money into an investment, can you be reasonably sure that the borrower will not renege? Of course, there will have to be clauses under which a borrower can get legitimate bankruptcy cover, but the legal administrative set-up must be such as to ensure that there is no spurious reneging on contracts. This is important not only for micro finance but even to ensure that more money flows into infrastructural investments.
SOCIAL BASIS OF ECONOMIC PROGRESS

2.48 The foregoing analysis emphasised that in crafting good economic policy it is important to treat the various players on the market the policeman, the ration-shop owner and the ordinary citizenas reasonably self-seeking, rational agents. If these agents get the opportunity to earn some extra money with little effort, they will seize the opportunity. Hence, to cut down on corruption and pilferage, we have to design policies in such a way that there is no incentive for ordinary citizens and the enforcers of the law to cheat. Accordingly, good mechanism design is the heart of the problem. Many a noble plan to reach out to the poor and increase the welfare of our citizens has fallen on hard times because of the policymakers propensity to assume that the policies are delivered by flawlessly moral agents or perfectly- programmed robots. Models based on such faulty assumptions are destined to fail. It is important for Indian citizens to understand this because, in democracies, popular opinion plays an important role in promoting progressive policies. 2.49 This analysis must not be taken to imply that uncompromising self-seeking behaviour is innate in human beings. This dismal assumption, widespread in some early mainstream economics, is, fortunately, not true. Recent research shows that human beings have a natural propensity to cooperate, to be trustworthy, and to be honest. They are often willing to give up some personal gains in order to demonstrate pro-social behaviour. These qualities of honesty and trustworthiness can, however, vary from one society to another and, even within one
40
Economic Survey 2010-11 job, people may prefer to leave their homes unpainted for longer stretches of time. A person lends money to a company with the company making a promise of paying a certain interest rate over the next 10 years and then paying back the principal. In a country where such contracts are not dependable and companies are likely to renege on the contract, it is unlikely that people will invest money in companies. The bond market will flounder and companies will be able to invest less than what is optimal. In brief, a modern, vibrant economy relies critically on contracts and our ability to have trust in the contracts. A part of the responsibility for enforcing contracts lies with the State and the Judiciary. Long-term contracts, like a mortgage for buying a house with the promise of repayment over the next 20 years, necessarily have to rely on the State machinery for enforcement.
society, over time and depending on the context (see Box 2.6). What is increasingly recognized is that successful economic development has a strong correlation with these human qualities of honesty and trustworthiness. The drive for greater profit and greater personal ulility, devoid of these social qualities, creates a dysfunctional and chaotic society. 2.50 There are studies showing that societies in which interpersonal trust is greater are societies that exhibit faster economic growth. It is not difficult to see why this is so. A modern and efficient economy critically depends on contracts and the ability of individuals to rely on these contracts. An individual gives money to a painter to paint her home. If the risk is high that the painter will breach the contract by taking the money and then doing an insignificant
Box 2.6 : Pro-Social Behaviour and Economic Development

There is a growing literature in economics arguing that pro-social behaviour, which includes altruism and trustworthiness, is innate to human beings and, moreover, forms an essential ingredient for the efficient functioning of economies. In other words, human beings have a natural ability to forego personal gains for the sake of other people or because that is what is required because of a promise the person had made. This trait may well have evolutionary roots but its existence is now well demonstrated in laboratory tests. The broad idea behind these laboratory experiments is the following. The experimenter pairs up all the subjects in a laboratory and then asks each pair to have the following interaction. One of the two persons, call him A, is asked to hand over if he wishes a certain amount of money (which may be called As investment) to B. If A refuses to invest anything, their interaction is over, A and his partner, B, get nothing and they go home. If A invests a certain amount of money, that is gives this to B, then the experimenter adds some more money and lets B have it all. B is then asked whether B wants to hand a part of the total money she received back to A. In other words, B is given an opportunity to pay back to A some of Bs gains, since B would have got nothing if A had not made the first move. In the Trust Game, once B decides how much to give A, that is given to A, and that is the end of the interaction. (The Hold-up game is a variant of this with a slightly different closure rule.) In a totally selfish world, we would expect B to offer nothing to A and for A, anticipating this, not to give any money to B to start with. However, experiments conducted all over the world with this or related games demonstrated that in a large number of cases, the first player does give money to the second player and the second player does give back a part of her income to the first player. Moreover, there are conditions which lead to a higher propensity among the players for this kind of cooperative behaviour. Recently, Hodaka Morita and Maros Servatka conducted an experiment on 258 undergraduate students at the University of Canterbury in the New Zealand Experimental Economics Laboratory, using the Hold-up game. They found that people typically did make positive investment and the person receiving the investment did give back some return to the investor. Moreover, if the players are initially primed so as to believe that they share a common group identity, they tend to be more cooperative. What is not widely recognized but deserves mention is that one of the earliest statements of the Trust Game and the critical role of morality and trustworthiness in the efficient functioning of an economy occurred in David Humes 1739 classic, A Treatise on Human Nature (Book III, Part II, section iv): [The] commerce of mankind is not confind to the barter of commodities, but may extend to services and actions, which we may exchange to our mutual interest and advantage. Your corn is ripe today; mine will be so tomorrow. Tis profitable for us both, that I shoud labour with you to-day and that you shoud aid me tomorrow. I have no kindness for you, and know that you have as little for me. I will not therefore take pains on your account; and shoud I labour with you on my own account, in expectation of a return, I know I shoud be disappointed, and that I shoud in vain depend on your gratitude. Here then I leave you to labour alone: You treat me in the same manner. The seasons change; and both of us lose our harvests for want of mutual confidence and security. References: R.Benabou, and J. Tirole (2006) Incentives and Prosocial Behavior, American Economic Review 96. T. Ellingsen and M. Johannesson (2008), Pride and Prejudice, American Economic Review 98. E.Fehr and S. Gachter (2000) Fairness and Retaliation, Journal of Economic Perspectives 14. F. Fukuyama,(1996) Trust: The Social Virtues and the Creation of Prosperity. Free Press. H. Gintis, S. Bowles, R. Boyd, and E. Fehr (2003) Explaining Altruistic Behavior in Humans, Evolution and Human Behavior 4. H. Morita and M. Servatka (2011) Group Identity and Relation-Specific Investment, Mimeo: University of New South Wales.
Micro-foundations of Macroeconomic Development However, these are not the only kinds of contracts. Economic life is full of little promisesI will supply you X today, and you will pay me Y tomorrow. For these, it is impossible each time to bring in the policeman and the judge to ensure enforcement. The best enforcer of these little contracts is our word of honour and the culture of honesty and trustworthiness. If a particular citizenry is known to be trustworthy, people will be more likely to cut deals with the people of that nation and, over time, the nation will do better and prosper economically. 2.51 For India to develop faster and do better as an economy, it is therefore important to foster the culture of honesty and trustworthiness. Thanks to the fact of this social prerequisite of economic development remaining unrecognized for a very long time, this has not received adequate attention in the scientific literature. Fortunately, a large body of recent economics research has been stressing the importance of these social and cultural factors. While
41
it is true that we do not as yet have a hard science of how to develop these cultural qualities in a population, we know that even the mere understanding of the importance of certain qualities for promoting the economic development of a group of people, helps nurture these qualities in people. After all, people have learnt not to smoke in a crowded room even when not smoking is not in their self-interest simply because they have come to understand that this is not in their collective interest. These good values are then further supported in society through mechanisms of social stigma, which help bring individual and social interests into alignment. So once we recognize that honesty, integrity, and trustworthiness are not just good moral qualities in themselves but qualities which, when imbibed by a society, lead to economic progress and human development, people will have a tendency to acquire these qualities; and that should help build a more tolerant and progressive society.
42
Fiscal Developments and Public Finance
CHAPTER
The fiscal outcome in the first nine months of the current financial year remained
broadly on the consolidation track charted by the Budget. It might be recalled that the Budget for 2010-11 had begun the process of fiscal consolidation with a partial withdrawal of the stimulus measures as at that juncture there was clear evidence of economic recovery. The policy stance was to continue to aid the growth momentum in the short run to facilitate its attaining pre-crisis levels and simultaneously to address long-run sustainability concerns. With growth reverting to pre-crisis levels in the current fiscal, revenues remaining buoyant, and a much higher than budgeted realization in nontax revenues arising from telecom 3G/ BWA (third generation/broadband wireless access) auctions, there was headroom for higher levels of expenditure at the given fiscal deficit targets. The combined deficits of State Governments also indicated the overall consolidation process at State level. With continued growth momentum, the prospects for sustaining and deepening the consolidation process remain bright.
3.2 The macroeconomic impact of the global financial and economic crisis and the expansionary fiscal stance was clearly visible in the demand-side components of the national income aggregates. A contraction of the aggregate demand was manifest in the rates of growth of private final consumption expenditure (PFCE) and gross capital formation in 2009-10, which had shares of 58.4 per cent and 35.4 per cent respectively in 2008-09. Net indirect taxes minus subsidies, an important component of the nominal gross domestic product (GDP), also declined. The lower levels of point contribution to growth from
these could be partly compensated by the rise in Government final consumption expenditure (GFCE) (Figure 3.1). As the crisis impacted the economy in the second half of 2008-09, movements in quarterly estimates of the demand side of the GDP provided better indication of the recovery process and thus the Budget for 2010-11 envisaged a partial exit from the stimulus measures on the strength of the outcome of the second quarter of 2009-10. This response was broadly in line with the international practices in this regard, which had preferred fiscal policy instruments for counteracting the adverse economic impact of the crisis.
Figure 3.1
Point contribution per cent
20 15 10 5 0 -5
2005-06
Point contribution to GDP at current market prices

GDP (CMP) PFCE GFCE
2006-07 2007-08 2008-09 2009-10
Indirect tax subsidy
Year
Fiscal Developments and Public Finance 3.3 As a proportion of the GDP (purchasing power parity [PPP]), the overall fiscal balance of the world was estimated by the International Monetary Fund (IMF) (Fiscal Monitor 2010) to have risen from 0.4 per cent in 2007 to - 2.0 per cent and - 6.8 per cent respectively in 2008 and 2009; it was estimated to have moderated to - 6.0 per cent in 2010 and projected at - 4.9 per cent in 2011. At a major grouping level, advanced economies accounted for the bulk of the fiscal expansion. Among the emerging economies, India had one of the largest fiscal expansions of the order of about 10 per cent of the GDP in both 2009 and 2010. In terms of proportions of potential GDP also, the expansion was sizeable in 2009 in the case of India; it was estimated to have declined to - 8.7 per cent in 2010. Going forward, the Fiscal Monitor indicated that the fiscal adjustment in emerging economies in general which was driven by economic recovery in 2010 would be driven by discretionary policies in 2011--a development that would be noteworthy in light of the fact that the discretionary impulse of the expansion was estimated to be small. 3.4 In actual terms, the Budget for 2010-11 had estimated the level of fiscal deficit at ` 3,81,408 crore and revenue deficit at ` 2,76,512 crore. At the time of presentation of the Budget for 2010-11 it was envisaged that nominal GDP (GDP at current market prices) would grow by 12.5 per cent and was estimated at ` 69,34,700 crore. As proportions of the nominal GDP, fiscal and revenue deficits were estimated at 5.5 per cent and 4.0 per cent respectively. As per the advance estimates (AE) released by the Central Statistics Office (CSO) on 7 February 2011, the nominal GDP for 2010-11 was placed at ` 78,77,947 crore, which represents a
Figure 3.2
7 6
43
year-on-year growth of 20.3 per cent, and was 7.8 percentage points higher than envisaged at the time of Budget formulation. As proportions of the GDP as per the AE, budgeted fiscal and revenue deficits work out to 4.8 per cent and 3.5 per cent for the current fiscal. Thus, as proportions of the GDP, the recent trends in deficit indicators, post-crisis, have been influenced to some extent by the swings in the levels of aggregate demand (Table 3.1 and Figure 3.2). Table 3.1 : Trends in Deficits of Central Government
Year Revenue Deficit Fiscal Deficit Primary Deficit Revenue Deficit as per cent of Fiscal Deficit
(As per cent of GDP)
Enactment of FRBM Act 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10(P) 2010-11(BE) 3.6 2.4 2.5 1.9 1.1 4.5 5.1 3.5 4.5 3.9 4.0 3.3 2.5 6.0 6.3 4.8 0.0 0.0 0.4 -0.2 -0.9 2.6 3.1 1.7 79.7 62.3 63.0 56.3 41.4 75.2 80.7 72.5
Source: Union Budget documents. BE-Budget estimates P: Provisional actuals (unaudited) FRBM : Fiscal Responsibility and Budget Management Note: The ratios to GDP at current market prices are based on the CSOs National Accounts 2004-05 series.
Trends in deficits of Central Government

Fiscal deficit
Per cent of GDP
5 4 3 2 1 0 -1
Revenue deficit
Primary deficit
2009-10 (Prov)
Year
2010-11 (BE)
2004-05
2005-06
2006-07
2007-08
2008-09
44
Economic Survey 2010-11 initiatives in expenditure. First, below-the-line issuance of bonds for financing under-recoveries of petroleum oil companies (as also other such bonds) was discontinued and all such funds were brought into the Budget as subventions booked as cash expenditure. Second, the nutrient-based subsidy policy for fertilizers was put in place. Third, given the elevated levels of prices of international crude petroleum, it was proposed that the level of administered prices for domestic petroleum products would be calibrated to international prices.
CENTRAL GOVERNMENT FINANCES

3.5 The key driver of the rapid fiscal consolidation after the notification of the FRBM Rules in July 2004 was the buoyancy in tax revenues. As a proportion of the GDP, gross tax revenue rose from a level of 9.2 per cent in 2003-04 to reach a peak level of 11.9 per cent in 2007-08; after falling to 10.8 per cent and 9.6 in 2008-09 and 2009-10 respectively, it was estimated to recover to 10.8 per cent in 201011 (BE) as per the then estimated levels of GDP. However, as a proportion of the GDP as per the advance estimates of the CSO, it is at 9.5 per cent. Two significant developments in the recent past in terms of the composition of taxes have been the growth in direct tax revenues, particularly corporate income tax, and in service tax revenues. Union excise duties that have traditionally been the single largest revenue earner ceded place to corporate income tax in 2006-07. In 2009-10, owing to the fiscal stimulus package which envisaged significant reduction in duties and a demand slowdown, union excise duties declined substantially. In 2010-11, with partial restoration in rates and surge in demand, union excise duties have done exceedingly well. With continuance of high growth in corporate income tax and a higher than budgeted outcome in personal income tax in the current year, the prospects of revenue-led medium-term consolidation appears bright. 3.6 While tax revenues provided the anchor for deepening of the fiscal consolidation process in the post FRBM period (2004-05 to 2007-08), there was also some compression in the expenditure to GDP ratio (Table 3.2 and Figure 3.3). Average annual growth in expenditure in the four-year period was 11.2 per cent, below the 16 per cent growth in the nominal GDP. Besides, there were significant reform
Figure 3.3
16.0 14.0
Budgetary developments in 2010-11

3.7 Against the backdrop of the fast-paced recovery of the economy in 2009-10 and the elevated levels of food inflation as well as the recommendations of the Thirteenth Finance Commission (ThFC), the budget for 2010-11 resumed the path of fiscal consolidation to make economic growth more broad based and ensure that supply-demand imbalances are managed better. Acting on the ThFC recommendation for limiting the combined public debt to GDP ratio to 68 per cent by 2014-15, the Union Budget for 2010-11 came up with a promise to analyse the issues in a Status Paper, which would also unveil the roadmap for reduction. 3.8 The Budget for 2010-11 indicated that effective management of public expenditure by bringing it in line with the Governments objectives, particularly through proper targeting of subsidies, was a key factor in fiscal management. The Budget for 201011 also announced the operationalization of the Nutrient Based Subsidy Policy for fertilizers effective 1 April 2010 and indicated that the recommendations of the Expert Group on a Viable and Sustainable System of Pricing of Petroleum Products would also be operationalized in due course.
Receipts and expenditure of the Central Government

Revenue expenditure Revenue receipts Capital receipts Capital expenditure
Per cent of GDP
12.0 10.0 8.0 6.0 4.0 2.0 0
2009-10 (Prov)
Year
2010-11 (BE)
2004-05
2005-06
2006-07
2007-08
2008-09
Fiscal Developments and Public Finance Table 3.2 : Receipts and Expenditure of the Central Government
2005-06 2006-07 2007-08 2008-09* (` crore) ` 1. Revenue Receipts (a+b) (a) Tax Revenue (net of States share) (b) Non-tax Revenue 2. Revenue Expenditure of which: (a) Interest Payments (b) Major Subsidies (c) Defence Expenditure 3. Revenue Deficit (2-1) 4. Capital Receipts of which: (a) Recovery of Loans (b) Other Receipts (mainly PSU disinvestment) (c) Borrowings and Other Liabilities** 5. Capital Expenditure 6. Total Expenditure [2+5=6(a)+6(b)] of which: (a) Plan Expenditure (b) Non-plan Expenditure 7. Fiscal Deficit [6-1-4(a)-4(b)] 8. Primary Deficit [7-2(a)] 1. Revenue Receipts (a+b) (a) Tax Revenue (net of States share) (b) Non-tax Revenue 2. Revenue Expenditure of which: (a) Interest Payments (b) Major Subsidies (c) Defence Expenditure 3. Revenue Deficit (2-1) 4. Capital Receipts of which: (a) Recovery of Loans (b) Other Receipts (mainly PSU disinvestment) (c) Borrowings and Other Liabilities** 5. Capital Expenditure 6. Total Expenditure [2+5=6(a)+6(b)] of which: (a) Plan Expenditure (b) Non-plan Expenditure 7. Fiscal Deficit [6-1-4(a)-4(b)] 8. Primary Deficit [7-2(a)] Memorandum Items (a) Interest Receipts (b) Non-plan Revenue Expenditure 22032 327518 22524 372191 21060 420861 3.8 9.9 4.0 0.4 4.0 9.6 3.3 -0.2 4.1 10.2 2.5 -0.9 4.9 10.9 6.0 2.6 (` crore) ` 20717 559024 19174 618834 22018 654188 5.6 11.9 6.8 3.0 4.6 10.9 6.3 3.1 0.3 0.0 4.0 1.8 13.7 0.1 0.0 3.3 1.6 13.6 0.1 0.8 2.5 2.4 14.3 0.1 0.0 6.0 1.6 15.8 0.1 0.0 6.8 2.1 17.4 0.1 0.4 6.3 1.7 15.5 3.6 1.2 1.3 2.5 4.3 3.5 1.2 1.2 1.9 3.5 3.4 1.4 1.1 1.1 3.4 3.4 2.2 1.3 4.5 6.2 3.9 1.8 1.5 4.8 6.9 3.2 1.9 1.4 5.1 6.8 140638 365100 146435 13805 9.4 7.3 2.1 11.9 169860 413527 142573 -7699 10.1 8.2 1.9 12.0 205082 507589 126912 -44118 10.9 8.8 2.1 11.9 275235 608721 336992 144788 9.7 7.9 1.7 14.2 325149 695689 400996 175485 10.5 8.1 2.4 15.3 302199 716327 412307 200664 8.8 7.0 1.8 13.9 10645 1581 146435 66362 505738 5893 534 142573 68778 583387 5100 38795 126912 118238 712671 6139 566 336992 90158 883956 4225 1120 400996 123606 1020838 6204 24557 412307 110515 1018526 132630 44480 48211 92299 158661 150272 53495 51682 80222 149000 171030 67498 54219 52569 170807 192204 123581 73305 253539 343697 225511 106004 86879 282735 406341 211643 123396 90668 332553 443068 347077 270264 76813 439376 434387 351182 83205 514609 541864 439547 102317 594433 540259 443319 96940 793798 614497 474218 140279 897232 575458 459444 116014 908011 2009-10 (BE) 2009-10 (P)
45
2010-11 (BE) 682212 534094 148118 958724 248664 109092 87344 276512 426537 5129 40000 381408 150025 1108749 373092 735657 381408 132744 8.7 6.8 1.9 12.2 3.2 1.4 1.1 3.5 5.4 0.1 0.5 4.8 1.9 14.1 4.7 9.3 4.8 1.7 19253 643599
Source: Union Budget documents. BE-Budget estimates P: Provisional actuals (unaudited) * Based on provisional actuals for 2008-09. ** Does not include receipts in respect of the Market Stabilization Scheme, which will remain in the cash balance of the Central Government and will not be used for expenditure. Note: 1. The ratios to GDP at current market prices are based on the CSOs National Accounts 2004-05 series. 2. The figures may not add up to the total due to rounding/approximations.
46
Economic Survey 2010-11 the ratios were 58.6 per cent and 39.5 per cent respectively (Table 3.3 and Figure 3.4).
Revenue and capital receipts

3.9 The full impact of the fiscal stimulus measures relating to excise duty cuts and the indirect impact on gross tax revenues became evident only in 200910. As a proportion of the GDP, gross tax revenues declined from 10.8 per cent in 2008-09 to 9.6 per cent in 2009-10; the levels would have been even lower in 2008-09 had the nominal GDP grown at trend levels. Thus the Budget for 2010-11 partially restored the excise duties and with economic recovery gaining momentum envisaged a rise in the tax to GDP ratio to 10.8 per cent in the current fiscal; this implied a year-on-year growth of 19.1 per cent and amounted to ` 7,46,651 crore. The restoration of excise duty levels, albeit partial, was expected to result in a year-on-year growth of 26.1 per cent in 2010-11 as against a level of 29.4 per cent envisaged by the RE. It was also estimated that revenue from customs would grow at 36.5 per cent in 2010-11. With service tax estimated to grow by 16.3 per cent to reach a level of ` 68,000 crore, indirect taxes were estimated at ` 3,15,000 crore, implying an overall growth of 19.1 per cent in 201011 over 2009-10. Overall revenue from direct taxes was expected to grow by 15.0 per cent in 2010-11 to reach ` 4,22,500 crore. In part, this owed to some positive developments arising from the economic recovery and growth in manufacturing/ industry on the one hand and the higher levels of exemption arising from broadening of the income tax brackets on the other. This was reflected in the budget estimates of year-on-year growth of 23.2 per cent in corporate income tax and decline of 1.4 per cent in personal income tax. The varying levels of growth in the different components of tax revenues, given the levels of their relative shares in gross tax revenues, indicate changes in the composition of taxes. 3.10 At the beginning of the economic reforms process in 1991-92, the ratio of direct and indirect taxes in gross tax revenue was 22.6 per cent and 74.8 per cent respectively. As part of the larger economic reforms, the reforms in the tax structure effected through a gradual and sequenced reduction in the rates of duties in both customs and excise together with the increase in the levels of income resulted in a gradual shift in the composition of taxes. As a result in 2004-05--the year when the FRBM regime was operationalized--the ratios of direct and indirect taxes were 56.1 per cent and 43.3 per cent of gross tax revenue; in 2009-10,
Direct taxes
3.11 The Budget for 2010-11 carried forward the thrust on maintaining moderate levels of taxation and expanding the tax base. The tax slabs under personal income were broadened and the surcharge on corporate income tax was reduced from 10 per cent to 7.5 per cent. At the same time, the rate of minimum alternate tax was raised to 18 per cent to expand the tax base and improve inter-se equity in the taxation of corporates. 3.12 The Government had signalled its intention to consolidate and comprehensively amend the existing Income Tax Act 1961 and Wealth Tax Act 1957 through a single legislation, by releasing a draft Direct Taxes Code (DTC) and a discussion paper for public comments in August 2009. Based on analysis of the numerous inputs received from stakeholders, a revised discussion paper was released in June 2010 followed by the introduction of the Direct Taxes Code Bill 2010 in Parliament in August 2010. It has now been proposed to make it effective from 1 April 2012 (Box 3.1).
Indirect taxes
3.13 The Budget for 2010-11 had indicated that the formulation of indirect tax proposals was guided by the need to return to the path of fiscal consolidation without affecting the growth momentum of the economy and moving forward on the road to a goods and services tax (GST). There was accordingly a recalibration of the rates and certain rationalization and relief measures in the Budget. 3.14 The following were the important measures taken in the Budget for 2010-11:
The standard rate of excise duty (CENVAT) which was brought down to 8 per cent after two successive reductions in December 2008 and February 2009 was increased to 10 per cent. Excise duty on petrol and diesel was increased by ` 1 per litre so as to restore it to pre-June 2008 levels. Full or partial excise duty exemptions/ concessions available on some items were withdrawn and duty imposed on them at the rate of 4 per cent or 10 per cent.
Fiscal Developments and Public Finance Table 3.3 : Sources of Tax Revenue
2005-06 2006-07 2007-08 2008-09 (` crore) ` Direct (a) Personal Income Tax Corporation Tax Indirect(b) Customs Excise Service Tax Gross Tax Revenue * 157557 55985 101277 199348 65067 111226 23055 366151 219724 75093 144318 241538 86327 117613 37598 473512 295938 102644 192911 279031 104119 123611 51301 593147 319859 106046 213395 269433 99879 108613 60941 605298 370000 112850 256725 269477 98000 106477 65000 641079 367415 122280 244630 247357 84244 104659 58454 626916 2009-10 (BE) 2009-10 (P)
47
2010-11 (BE)
422500 120566 301331 315000 115000 132000 68000 746651
Tax Revenue as a Percentage of Gross Tax Revenue Direct (a) Peronal Income Tax Corporation Tax Indirect(b) Customs Excise Service Tax 43.0 15.3 27.7 54.4 17.8 30.4 6.3 46.4 15.9 30.5 51.0 18.2 24.8 7.9 49.9 17.3 32.5 47.0 17.6 20.8 8.6 52.8 17.5 35.3 44.5 16.5 17.9 10.1 57.7 17.6 40.0 42.0 15.3 16.6 10.1 58.6 19.5 39.0 39.5 13.4 16.7 9.3 56.6 16.1 40.4 42.2 15.4 17.7 9.1
Tax Revenue as a Percentage of Gross Domestic Product Direct(a) Personal Income Tax Corporation Tax Indirect(b) Customs Excise Service Tax Gross Tax Revenue *
Source: Union Budget documents. BE-Budget estimates * P: Provisional actuals (unaudited)
4.3 1.5 2.7 5.4 1.8 3.0 0.6 9.9
5.1 1.7 3.4 5.6 2.0 2.7 0.9 11.0
5.9 2.1 3.9 5.6 2.1 2.5 1.0 11.9
5.7 1.9 3.8 4.8 1.8 1.9 1.1 10.8
6.3 1.9 4.4 4.6 1.7 1.8 1.1 10.9
5.6 1.9 3.7 3.8 1.3 1.6 0.9 9.6
5.4 1.5 3.8 4.0 1.5 1.7 0.9 9.5
includes Taxes referred to in (a) & (b) and Taxes of Union Territories and other Taxes. 1. Direct Taxes also include Taxes pertaining to expenditure, interest, wealth, gift, and estate duty. 2. The ratios to GDP at current market prices are based on the CSOs National Accounts 2004-05 series.
Note:
Figure 3.4
Per cent of gross tax revenue
45 40 35 30 25 20 15 10 5 0
Composition of gross tax revenue

Excise Customs Corporate tax Personal income tax Service tax
2009-10 (Prov) 2010-11 (BE)
1990-91
1995-96
2003-04
2004-05
2005-06
2006-07
2007-08
Year
2008-09
48
Box 3.1 : Direct Taxes Code (DTC)

The Direct Taxes Code Bill, 2010 introduced in Parliament, seeks to consolidate and amend the laws relating to all direct taxes, that is income-tax, dividend distribution tax, and wealth tax so as to establish an economically efficient, effective, and equitable direct tax system which will facilitate voluntary compliance and help increase the tax to GDP ratio. The salient features of the DTC are : 1.0 It consolidates and integrates all direct tax laws and replaces both the Income Tax Act 1961 and the Wealth Tax Act 1957 with a single legislation. 1.1 It simplifies the language of the legislation. The use of direct, active speech, expressing only a single point through one sub-section and rearranging the provisions into a rational structure will assist a layperson to understand the provisions of the DTC. 1.2 It indicates stability in direct tax rates. Currently, the rates of tax for a particular year are stipulated in the Finance Act for that relevant year. Therefore, even if there is no change proposed in the rates of tax, the Finance Bill has still to be passed indicating the same rates of tax. Under the Code, all rates of taxes are proposed to be prescribed in Schedules to the Code, thereby obviating the need for an annual finance bill, if no change in the tax rate is proposed. The Code proposes a corporate tax rate of 30 per cent against the current effective rate of 33.2 per cent and raises the exemption limit as well as broadens the tax slabs for personal income tax. 2.0 It strengthens taxation provisions for international transactions. In the context of a globalized economy, it has become necessary to provide a stable framework for taxation of international transactions and global capital. This has been reflected in the new provisions. The new provisions with regard to international taxation are: 2.1 Advance Pricing Agreements for International Transactions--This will bring in certainty in transfer-pricing issues as any taxpayer can enter into an agreement with the tax administration, which will be valid for a period up to five years, regarding the manner in which the taxpayer would compute arms length price in respect of the taxpayers international transactions. 2.2 Alignment of concept of residence (of a Company) with Indias tax treaties by introduction of concept of place of effective management instead of wholly controlled in India. 2.3 Controlled Foreign Company Regulations--This is a provision which will assist in taxation of profits of a foreign company in the hands of resident shareholders who may have incorporated such a company in low tax jurisdictions and are accumulating passive income (i.e. interest, dividends, capital gains, etc.) in the company without repatriating the income to India. 2.4 Branch Profit Tax on Foreign Companies-Currently, foreign companies are taxed at the rate of 42.2 per cent (inclusive of surcharge and cess) while domestic companies are taxed at the rate of 33.2 per cent (inclusive of surcharge and cess) plus a dividend distribution tax at the rate of 16.6 per cent when they distribute dividend from accumulated profits. It is proposed to equate the tax rate of foreign companies with that of domestic companies by prescribing the rate at 30 per cent and levying a branch profit tax (in lieu of dividend distribution tax) at the rate of 15 per cent. This will provide tax neutrality between a branch and a subsidiary of a foreign company in India. 2.5 Taxation of assets held abroad under wealth taxIt is proposed to include certain assets of residents which are held abroad, such as deposits in bank accounts in the case of individuals and interest in a foreign trust or in a controlled foreign corporation. This will create a reporting requirement mechanism for assets held abroad. 3. Phasing out Profit-linked Tax Incentives and Replacing them by Investment-linked Incentives--It has been observed that profit-linked deductions are inherently discriminatory, prone to misuse by shifting of profits from non-exempt to exempt entity or by reporting higher profits in exempt income entity, and also lead to high level of litigation and revenue foregone. They also impede the Governments efforts to give a moderate tax rate to other taxpayers as the higher taxes paid by others by implication cross-subsidize the lower tax rates of the profit-linked deduction sectors. Such profit-linked deductions are being phased out of the Income Tax Act and have also been dropped in the DTC. They are being replaced by investment-linked deductions for specified sectors. Investment-linked incentives are calibrated to the levels of creation of productive capacity and therefore are superior instruments. Profit-linked deductions currently being availed of have been protected for the unexpired period in the DTC. 4. Rationalization of Tax Incentives for Savings--In order to focus savings incentives on long-term savings for social security of the taxpayer during his non-working life, deduction of up to Rs 1 lakh has been provided for investments in approved provident funds, superannuation funds, and pension funds. 5. General Anti Avoidance Rule to Curb Aggressive Tax PlanningDirect tax rates have been moderated over the last decade and are in line with international norms. A general anti-avoidance rule assists the tax administration in deterring aggressive tax avoidance in a globalized economy. Such general anti-avoidance rules already form a part of the tax legislation in a number of G-20 countries. 6. Taxation of Non-profit Organizations: It is proposed to tax non-profit organizations set up for charitable purposes on their surplus (at the rate of 15 per cent), after allowing for accumulation of a specified proportion for creation of assets or for long-term projects, a further carry forward for receipts of the last month of the year, and also after a basic exemption limit of Rs 1 lakh. Donations to these non-profit organizations will be eligible for tax deduction in the hands of the donor.
49
Excise duty on cigarettes and other tobacco products was increased. Ad-valorem component of excise duty on large cars, multi utility vehicles, and sports utility vehicles was increased from 20 per cent to 22 per cent. Customs duty was increased on crude petroleum from nil to 5 per cent; petrol and diesel from 2.5 per cent to 7.5 per cent; and other specified petroleum products from 5 per cent to 10 per centonce again to restore these duties to pre-June 2008 levels. Customs duty on gold, silver, and platinum increased by 50 per cent of the earlier applicable specific rates. Eight new services were brought under the service tax net to broaden the tax base. In addition, scope of some existing taxable services was expanded.
Full exemption from basic customs duty for truck refrigeration units for the manufacture of refrigerated vans/trucks. Such units are already exempt from excise duty. Reduction of basic customs duty from 7.5 per cent to 5 per cent on specified agricultural machinery such as paddy transplanters, laser land levellers, cotton pickers, reaper-cumbinders, straw or fodder balers, sugarcane harvesters, tracks used for manufacture of track-type combine harvester, etc. Full exemption from excise duty on specified equipment for preservation, storage, or transportation of apiary, horticultural, dairy, poultry, aquatic and marine produce, and meat and processing thereof. Exemption from service tax for transportation of cereals and pulses by road. Exemption from service tax for testing and certification of seeds. Concessional basic customs duty rate of 5 per cent on machinery items, instruments, and appliances required for initial setting up of solar power generation projects or facilities. These items are also exempt from excise duty. Full exemption from basic customs duty and special additional customs duty for ground source heat pump to tap geo-thermal energy. Full exemption from excise duty on additional specified raw materials for the manufacture of rotor blades for wind-operated electricity generators. Mono Rail Projects for urban transport granted project imports status with concessional rate of 5 per cent basic customs duty. Concessional customs duty rate of 5 per cent presently available up to 6 July 2010 on specified machinery for tea, coffee, and rubber plantations extended up to 31 March 2011. Excise duty exemption has also been reintroduced on these items up to 31 March 2011. A uniform concessional rate of duty of 4 per cent prescribed for parts, required for manufacture of all categories of electrical vehicles including cars, two wheelers, and three wheelers (like Soleckshaw) subject to actual user condition. Such vehicles will also be charged excise duty at the rate of 4 per cent.
3.15 Fiscal concessions were given to priority/ thrust areas of the economy like agriculture, food processing, renewable energy and conservation of energy, and infrastructure. The objective was to attract fresh investments in the agricultural/food processing and other related sectors like horticulture/ apiary/diary/poultry for: (a) creation of farm to market supply chains; (b) prevention of wastage of produce; and (c) infusion of technology to boost production. In the energy sector, the aim was to reduce dependence on fossil fuels and harness the new and clean sources of energy. In specific terms, the following major fiscal concessions were granted:
Project imports status, with concessional rate of basic customs duty of 5 per cent, for installation of mechanized handling systems and pallet racking systems in mandis or warehouses for foodgrains and sugar along with exemption from additional customs duty and special additional customs duty . Installation and commissioning of such systems is also exempt from service tax. Project imports status, with concessional rate of basic customs duty of 5 per cent, and full exemption from service tax for the initial setting up or substantial expansion of a cold storage, cold room (including farm pre-coolers) for preservation or storage or an industrial unit for processing of agricultural, apiary, horticultural, dairy, poultry, aquatic and marine produce, and meat.
50
Economic Survey 2010-11 Excise duty reduced from 8 per cent to 4 per cent on LED lights/lighting fixtures. from basic customs duty and CVD. Project imports status was accorded to Setting up of Digital Head End with 5 per cent concessional basic customs duty and nil special additional customs duty .
3.16 As regards simplification of procedures, with effect from 1 April 2010 small-scale industrial (SSI) units were allowed to take full CENVAT credit on capital goods in one instalment in the year of receipt of such goods. Facility of payment of excise duty on quarterly basis was extended to SSI units. The relaxation from brand name restriction under the general SSI exemption scheme was extended to plastic bottles and plastic containers used as packing material. 3.17 The following important relief and rationalization measures were also extended:
Basic customs duty on rhodium which is used primarily for the manufacture of gold jewellery, was reduced from 10 per cent to 2 per cent. The limit of ` 1 lakh per annum on duty-free import of samples was enhanced to ` 3 lakh per annum. The list of exempted components, raw materials, and accessories for the manufacture of sports goods was enlarged by including some additional items.
Varying rates of customs duty on medical equipment were done away with and now all medical equipment (with some exceptions) attracts 5 per cent basic customs duty, 4 per cent countervailing duty (CVD)/excise duty, and nil special additional customs duty (i.e. effective duty of 9.2 per cent). Parts required for the manufacture and accessories of medical equipment were also charged 5 per cent concessional basic customs duty with nil special CVD. Prior to the Budget, umbrellas attracted 4 per cent excise duty while umbrella parts were charged 8 per cent excise duty and umbrella cloth was fully exempt. The rate of excise duty on umbrellas and all umbrella parts was unified at 4 per cent in the Budget. Full exemption from excise duty was provided on articles of bedding wholly made of quilted textile materials; toy balloons made of natural rubber; betel nut product known as supari; dementholised oil, deterpenated mentha oil, spearmint/ mentha piperita oils, and all intermediates and by-products of menthol. Excise duty was reduced from 8 per cent to 4per cent on replaceable kits for all householdtype water filters (except those operating on RO technology); corrugated boxes/ cartons manufactured by stand-alone manufacturers; and latex rubber thread Basic customs duty was reduced from 10 per cent to 5 per cent on magnetrons of up to 1000 kw for the manufacture of microwave ovens. Promotional material like trailors of films are imported free of cost in the form of electronic promotion kits /betacams were fully exempted
Collection rates
3.18 Various measures like simple average tariffs, weighted average tariffs, and tariff dispersion indicate the levels of protection in an economy and are often used for cross-country comparisons. In many emerging economies, the level of nominal tariffs as indicated in the schedule under the customs acts might be very different from the applied levels as there are numerous exemptions. It is therefore useful to refer to such measures as collection rates for understanding the inter-temporal changes within the country better. The collection rates have steadily declined over the years. Given the fact that the rates include CVDs, which are not counted as protection, the real levels of protection in India are much smaller. Barring chemicals, man-made fibres, metals, and capital goods, the collection rates are in single digit (Table 3.4 and Figure 3.5).
Service Tax
3.19 Since its introduction in 1994-95, service tax has helped widen the tax base of indirect taxes. There has been an increase in the number of services over the years (Table 3.5). The Budget for 2010-11 announced the following measures: (a) Rate of service tax was retained at 10 per cent (which had earlier been reduced from 12 per cent in February 2009 as part of the fiscal stimulus package). (b) Eight new services were brought under the service tax net: (i) Services of promoting, marketing, or organizing of games of chance, including lottery.
Fiscal Developments and Public Finance Table 3.4 : Collection Rates for Selected Import Groups*
51
(per cent)
Sl. No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.
Commodity Groups Food Products POL Chemicals Man-made Fibres Paper & Newsprint Natural Fibres Metals Capital Goods Others Non-POL Total
1990-91 47 34 92 83 24 20 95 60 20 51 47
2004-05 22 10 22 39 7 11 26 16 6 12 11
2005-06 32 6 20 34 9 13 25 13 5 12 10
2006-07 23 5 22 28 10 12 24 14 6 12 10
2007-08 19 6 22 30 10 13 24 16 6 13 10
2008-09 4 3 16 17 8 6 17 13 4 9 7
2009-10 (Prov.) 3 2 14 22 8 4 17 11 4 8 6
Source: Department of Revenue, Ministry of Finance * Collection rate is defined as the ratio of revenue collection (basic customs duty + countervailing duty) to value of imports unadjusted for exemptions, expressed in percentage. POL-Petroleum oil and lubricants Sl.No. 1 includes cereals, pulses, tea, milk and cream, fruits, vegetables, animal fats, and sugar. Sl.No. 3 includes chemical elements, compounds, pharmaceuticals, dyeing and colouring materials, plastic and rubber. Sl.No. 5 includes pulp and waste paper, newsprint, paperboards and manufactures, and printed books. Sl.No. 6 includes raw wool and silk. Sl.No. 7 includes iron and steel and non-ferrous metals. Sl.No. 8 includes non-electronic machinery and project imports and electrical machinery.
(ii) Health services, namely health check up undertaken by hospitals or medical establishments for the employees of business entities and health services provided under health insurance schemes offered by insurance companies. (The tax on these health services would be payable only to the extent payment for such medical checkup or preventive care or treatment, etc. is made directly by the business entity or the insurance company to the hospital or medical establishment); Figure 3.5
70 60 50
(iii) Services provided for maintenance of medical records of employees of a business entity; (iv) Services of promoting of a brand of goods, services, events, business entity, etc.; (v) Services of permitting commercial use or exploitation of any event organized by a person or organization; (vi) Services provided by electricity exchanges;
Collection rates for selected import groups

Capital goods Total Food products POL
Per cent
40 30 20 10 0
Year
2009-10 (Prov)
1990-91
1995-96
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
52
Table 3.5 : Service Tax-A Growing Revenue Source

No. of Services* Tax Rate in per cent Revenue (` crore) ` Growth in per cent over Previous Year** 80.0 62.4 63.1 36.4 18.8 -4.1
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10(P) 2010-11 (AprilDecember)
75 78 93 100 106 109
10 10 12 12 12*** 10
14200 23055 37598 51301 60941 58454
An explanation was added in the definition of the taxable service Commercial Training or Coaching Service to clarify that the term commercial appearing in the relevant definitions only means that such training or coaching is being provided for a consideration whether or not such training or coaching is conducted with a profit motive. This change was given retrospective effect from 01.07.2003; In the definition of the taxable service Sponsorship Service, the exclusion relating to sponsorship pertaining to sports was removed; In the definition of Construction of Complex Service, and Commercial or Industrial Construction Service, it was provided that unless the entire consideration for the property is paid after the completion of construction (i.e. after issuance of completion certificate by the competent authority), the activity of construction would be deemed to be a taxable service provided by the builder/promoter/developer to the prospective buyer and the service tax would be charged accordingly; Amendments were made in the definition of the taxable service Renting of Immovable Property to: (i) provide explicitly that the activity of renting itself is a taxable service. This change was given retrospective effect from 1June 2007; and (ii) provide that renting of vacant land, where the agreement or contract between the lessor and lessee provides for undertaking construction of buildings or structures on such land for furtherance of business or commerce during the tenure of the lease, shall be subject to service tax; The definitions of the taxable services, Airport Services, Port Services, and the Other Port Services were amended to provide that (a) all services provided entirely within the airport/port premises would fall under these services; and (b) an authorization from the airport/port authority would not be a precondition for taxing these services;
117
10
44081
19.2
Source : Receipts Budget and Controller General of Accounts. * Based on new entries added each year. ** Growth for 2010-11 (April-December) is over corresponding period previous year. *** Reduced to 10 per cent w.e.f. 24-2-2009. P : Provisional actuals (unaudited)
(vii) Services related to two types of copyrights hitherto not covered under existing taxable service Intellectual Property Right (IPR), namely those on (a) cinematographic films; and (b) sound recording; (viii) Special services provided by a builder, etc. to prospective buyers such as providing preferential location or external or internal development of complexes on extra charges. (c) Certain modifications were made in the definition of existing taxable services to widen the scope of the levy of service tax:

The scope of the taxable service Air Passenger Transport Service expanded to include domestic journeys and international journeys in any class; Prior to the Budget, Information Technology (IT) Software Service was subject to tax only in cases where such IT software is used for furtherance of business or commerce. The scope of the taxable service expanded to tax such service even if the service provided is used for purposes other than business or commerce;
53
An explanation was added in the definition of the taxable service Auctioneers Service to clarify that the phrase auction by Government means an auction involving sale of Government property by any auctioneer and not when the Government acts as an auctioneer for sale of a private property; The definition of Management of Investment under ULIP Service was amended to provide that the value of the taxable service for any year of the operation of policy shall be the actual amount charged by the insurer for management of funds under ULIP or the maximum amount of fund management charges fixed by the Insurance Regulatory and Development Authority (IRDA), whichever is higher;
These conditions include that either the customs duty (in case of import) or excise duty (in case of domestic production) has been paid on the entire amount received from the buyer;
scope of exemption from service tax available for transport of fruits, vegetables, eggs, or milk by road by a goods transport agency was expanded by including foodgrains and pulses in the list of exempted goods; Exemption from service tax was provided to Indian news agencies under Online Information and Database Retrieval Service and Business Auxiliary Service subject to specified conditions ; Exemption from service tax for Technical Testing and Analysis Service and Technical Inspection and Certification Service provided by Central and State seed testing laboratories, and Central and State seed certification agencies; Exemption from service tax provided for transmission of electricity.
(d) Certain exemptions from service tax were provided:
Statutory taxes charged by any Government (including foreign Governments, where a passenger disembarks) on air passengers were excluded from taxable Value for the purpose of levy of service tax under the Air Passenger Transport Service; Exemption was provided from service tax on air transport of passengers for journeys originating from the north-eastern Region; Exemption from service tax was provided to services relating to Erection, Commissioning or Installation of,
Tax Expenditure
3.20 Tax expenditure statement (Statement of revenue foregone on account of tax incentives or preferences) was first placed before Parliament in the Budget for 2007-08. The estimates are somewhat counterfactual in nature and seek to quantify the potential revenue (including through a sampling process) had these exemptions been not given; assume that tax base and other conditions remain unaltered. Subsequently this continued to be published every year and in the Budget for 201011, tax foregone on account of exemptions under corporate income tax for 2008-09 and 2009-10 was estimated at ` 66,901 crore and ` 79,554 crore respectively. Accelerated depreciation, deduction of export profits of units located in software technology parks and of export-oriented units (EOUs) were some of the major items under such corporate exemptions. Tax foregone on account of exemptions under personal income tax was estimated at ` 33,216 crore and ` 36,186 crore respectively in 2008-09 and 2009-10 with deduction on account of certain eligible investments and expenditures under section 80C of the IncomeTax Act being the main exemptions.
Mechanized Food Grain Handling Systems, etc.; Equipment for setting up or substantial expansion of cold storage; and Machinery/equipment for initial setting up or substantial expansion of units for processing of agricultural, apiary, horticultural, dairy, poultry, aquatic, marine, or meat products;
Packaged IT software, pre-packed in retail packages for single use, was exempted from service tax leviable under IT Software Service, subject to specified conditions.
54
Economic Survey 2010-11 expenditure, pay, and pensions. As a proportion of the GDP, defence expenditure and interest payments have been more or less stable. Given the committed nature of other expenditure, the immediate and real compression under this classification could only come from subsidies; hence the focus on reforms in subsidies in recent budgets. Front loading of Plan expenditure was possible in 2008-09 and 2009-10 in view of the fiscal expansion to combat the adverse impact of the global crisis. Though an amount of ` 3,25,149 crore (equivalent of 5.6 per cent of the GDP) was earmarked as Plan expenditure in Budget estimates for 2009-10, as per the provisional actual data released by the Controller General of Accounts (CGA), plan expenditure was at ` 3,02,199 crore (equivalent of 4.6 per cent of the GDP). As per the Budget for 2010-11, plan expenditure for the current fiscal was placed at ` 3,73,092 crore, equivalent of 4.7 per cent of the GDP. (Figures 3.6 and 3.7)
3.21 Revenue foregone estimates in excise and customs broadly correspond to the differences in statutory or Schedule rates of duties and the effective or applied rates of duties multiplied by the value assessed. Total revenue foregone in excise for 2008-09 was estimated at ` 1,35,496 crore, of which area-based exemptions amounted to ` 10,589 crore. Tax expenditure is estimated to have risen to ` 1,70,765 in 2009-10 with area-based exemptions accounting for only ` 5,882 crore. In customs, revenue foregone under various exemptions was estimated to be of the order of ` 2,02,240 crore in 2008-09 and ` 2,18,191 crore in 2009-10. The following sectors benefited the most from such exemptions: crude oil and mineral oils; machinery; diamond, gold and jewellery; edible vegetable, fruits, cereals, edible oils; chemicals and plastics; and primary metals and articles thereof. Revenue foregone on account of various export promotion schemes was estimated at ` 44,417 crore in 200809 and ` 37,970 crore in 2009-10. Overall, tax expenditure as a proportion of aggregate tax collection was placed at 68.6 per cent in 2008-09 and is estimated to have risen to 79.5 per cent in 2009-10.
Interest payments
3.23 The levels of outstanding liabilities in endMarch and assumption of incremental liabilities during the fiscal have a crucial bearing on the levels of interest payments in a given year. Reflecting the less than prudent fiscal management of the past, interest payments have been growing at a steady rate and appropriating about 35 per cent of the revenue receipts in the last five years. Given the fact that the levels of outstanding liabilities could only come down in the medium to long term with fiscal consolidation, one of the important targets of the FRBM framework was the progressive reduction in assumption of incremental liabilities. Reflecting this, as a proportion of the GDP, interest payments came down from 4.5 per cent in 2003-04 to 3.4 per
Expenditure trends
3.22 In a 2x2 schema of classification of public expenditure into revenue and capital, and Plan and non-Plan, the thrust of public expenditure management policies, particularly in terms of FRBM commitments, has been on containing non-Plan revenue expenditure and raising the levels of Plan expenditure, preferably the capital variety. Non-Plan revenue expenditure has five major components, namely interest payments, subsidies, defence
Figure 3.6
400 350 300 250 200 150 100 50 0
Trends in Centre's revenue expenditure

Others Interest payments Major subsidies Defence expenditure Grants to states and UTs
R thousand crore
2009-10 (Prov)
Year
2010-11 (BE)
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
Fiscal Developments and Public Finance Figure 3.7

100 80 28.4 13.4 11.9 40 20 0 12.0 29.9 31.9 33.9 32.5 35.4 37.6 37.4 Others
55
Composition of revenue expenditure
Per cent
60
14.0 11.4 11.6
16.8 11.0 10.1
16.5 10.0 10.4 29.2 2006-07
18.2 9.1 11.4 28.8 2007-08
15.6 9.2 15.6 24.2 2008-09
15.5 10.0 13.6 23.3 2009-10 (Prov.)
16.1 9.1 11.4 25.9 2010-11 (BE)
Grants to states and UTs Defence expenditure
34.3 2003-04
33.0 2004-05
30.2 2005-06
Major subsidies Interest payments
Year
cent in 2007-08. Net of the interest payments on the National Small Savings Fund (NSSF), the average cost of borrowing has risen to 7.9 per cent from 7.7 per cent in 2010-11 in the current fiscal reflecting the higher levels of debt outstanding last year (Table 3.6 and Figure 3.8).
Supplementary demands for grants

3.25 Supplementary demands for grants are placed before the Parliament to include all those expenditure proposals (excess or fresh or reappropriations) that were not envisaged at the time of presentation of the Budget and have to be incurred in the current year. Two supplementary demands for grants have so far been presented in the current fiscal. The first batch was approved by Parliament in August 2010 Table 3.6 : Interest on Outstanding Internal Liabilities of Central Government
Outstanding Internal Liabilities Interest on Internal Liabilities Average Cost of Borrowings (per cent per annum)
7.2 7.0 7.3 7.6 7.6 7.7 7.9
Subsidies
3.24 As a proportion of the GDP, subsidies have grown from 1.4 per cent in 2004-05 to 2.3 per cent in 2008-09 (Figure 3.9). Below-the-line bonds issued in lieu of subsidies also rose to a level of ` 1,10,510 crore in 2008-09 (2 per cent of the GDP). This rise in subsidies owes to the elevated levels of global crude oil prices and the less than full pass through of the international prices to the domestic markets and is also reflected in fertilizer subsidies as cost of feedstock is the major cost. Following the global financial crisis, there was a brief respite; nevertheless global crude prices have started to trend up. Some of the subsidies were also not targeted properly. The Budget for 2010-11 also announced the intent of bringing all subsidy-related liabilities to fiscal accounting. It was in this context that the recent Budgets have focused on restructuring the subsidy regime in fertilizers and petroleum. As a first step, pricing of petrol (motor spirit) was liberalized and a modest hike in administered prices of kerosene and LPG (liquefied petroleum gas) was announced. The retail selling price of public distribution system (PDS) kerosene was increased by ` 3 per litre in Delhi with corresponding increase in the rest of the country and the price of domestic LPG was increased by ` 35 per cylinder (14.2 kg) in Delhi with corresponding increase in the rest of the country.
(` crore) `
2004-05 2005-06 2006-07 2007-08 2008-09* 2009-10(RE) 2010-11(BE) 1603785 1752403 1967870 2247104 2565991 2902990 3306626 105176 111476 128299 149801 170388 198797 227942
Source: Union Budget documents. * Excludes ` 563 crore towards premium on account of domestic debt buyback scheme and prepayment of external debt. Note: 1. Average cost of borrowing is the percentage of interest payment in year t to outstanding liabilities in year t-1. 2. Outstanding internal liabilities exclude NSSF loans to States,with no interest liability on the part of the Centre. 3. The figures of interest payments reported in the earlier issues may differ as these figures are net of interest payments on NSSF paid by the Government since 1999-2000 i.e. constitution of the NSSF.
56
Figure 3.8
250 200
Interest on internal liabilities and average interest cost of borrowing

12 11 10 Interest on internal liabilities (R) Average cost of borrowing (%)
150 9 100 8 50 0 7 6
2009-10 (RE)
Year
(61 grants and two appropriations) for total gross additional expenditure of ` 68,294.3 crore, of which those with a net cash outgo aggregated to ` 54,588.6 crore. The main items entailing cash outgo included compensation to oil companies (` 14,000 crore); additional requirement of the Pradhan Mantri Gram Sadak Yojana(PMGSY) (` 7,337.5 crore); and transfers to State and Union Territories Governments (` 6,379 crore). The second batch of supplementary demands for grants approved by Parliament in December 2010 included 56 grants and two appropriations. Total gross additional expenditure approved by Parliament was ` 44,945.5 crore. This involves a net cash outgo aggregate of ` 19,812.4 crore and technical supplementary involving gross additional expenditure, matched by savings of the ministries/departments or by enhanced receipts/ recoveries aggregates of ` 25,132.5 crore. The main items entailing cash outgo included compensation to the Department of Fertilizers (` 5,000 crore) and the Department of Food and Public Distribution (` 5,000 crore); additional requirement for Central Figure 3.9
140
paramilitary forces (` 2,000 crore); and additional requirement of the PMGSY (` 3,000 crore).
Central Plan outlay

3.26 With a higher level of gross budgetary support (GBS) of ` 2,29,163 crore and internal and extra budgetary resources (IEBR) of Central public-sector enterprises (CPSEs) of ` 1,96,427 crore, Central Plan outlay was placed at ` 4,25,590 crore for 200910 ( revised estimatesRE). The GBS constituted 53.8 per cent of the total outlay. With a growth of 23.2 per cent over 2009-10 (RE), the Central Plan outlay now stands at ` 5,24,484 crore in the Budget for 2010-11. The outlay comprised budgetary support of ` 2,80,600 crore and IEBR of CPSEs of ` 2,43,884 crore. The broad sector-wise allocations for important sectors included energy (27.9 per cent); social services (24.3 per cent); transport (19.4 per cent); communication (3.5 per cent); rural development (10.5 per cent); industry and minerals (7.4 per cent); agriculture and allied activities (2.3 per cent); and irrigation and flood control (0.1 per cent). Central
Subsidies as per cent of GDP

3.5 2.5 2.0 1.5 1.0 0.5 0
2010-11 (BE)
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
R thousand crore
100 80 60 40 20 0
Per cent of GDP
120
3.0
Per cent per annum
R thousand crore
Subsidies
Subsidies as % of GDP
2009-10 (RE)
Year
2010-11 (BE)
2004-05
2005-06
2006-07
2007-08
2008-09
Fiscal Developments and Public Finance assistance to State and UT Plans in 2010-11 (BE) is placed at ` 92,492 crore, a growth of 7.5 per cent over 2009-10 (RE).
57
Government debt
3.27 In many countries, the fiscal rules also include a debt reduction target. The FRBM Rules 2004 contain an incremental assumption rule for public debt which states that the Central Government shall not assume additional liabilities (including external debt at current exchange rate) in excess of 9 per cent of GDP for the financial year 2004-05 and in each subsequent financial year, the limit of 9 per cent of GDP shall be progressively reduced by at least one percentage point of GDP. There is, however, no explicit rule targeting reduction in the overall level of public debt. As a proportion of the GDP, public debt could come down through limiting its growth relative to growth in nominal GDP or through lower assumption of incremental liabilities or retirement of debt. The ThFC had recommended limiting the combined debt of the Centre and States to 68 per cent of the GDP by 2014-15. The Budget for 2010-11 announced the intent of bringing out a status paper giving detailed analysis of the situation and a roadmap for curtailing overall public debt within six months. A status paper was presented to the Parliament on November 2010 (Box 3.2). 3.28 As a proportion of the GDP, the outstanding internal liabilities of the Central Government fell from a level of 58.7 per cent in 2005-06 to 51.5 per cent in 2009-10 (RE). They were budgeted at 48 per cent of the GDP in 2010-11 (Table 3.7A and Figure 3.10). There has been steady decline in the levels till 2007-08 subsequent to the operation of the FRBM Act. Thereafter there has been moderation in decline following the fiscal expansion in 2008-09 and 2009-10; a modest deterioration is evident in 2010-11 (BE) (Table 3.7B). This is also reflected in the assumption of incremental liabilities, which have significantly gone up in the last two years.
and Functional Classification of the Central Government Budget details the impact of the operations of the Central Government on the levels of consumption expenditure and capital formation. Of the total expenditure of ` 10,79,985 crore in BE 2010-11 (equivalent of 13.7 per cent of the GDP), 21 per cent was used up as consumption expenditure (amounting to ` 2,24,027 crore or 2.8 per cent of the GDP) and 18 per cent resulted in capital formation (amounting to ` 1,94,473 crore or 2.5 per cent of the GDP) with the rest being accounted for as transfer payments (mainly to States).The levels of dissavings of the Government came down progressively and in 2007-08 became positive savings; however, the fiscal expansion resulted in the re-emergence of dissavings in 2008-09 (Table 3.8). After briefly going up in 2008-09 to a level of ` 2,53,712 crore, the dissavings of the Government were estimated at ` 1,92,705 crore in 2010-11 (BE). As the gap between the level of savings and capital formation is financed preponderantly by draft on the other sectors of the domestic economy, the reversal of dissavings is an imperative.
Fiscal outcome
3.30 The outcomes in terms of key fiscal indicators were much better than was envisaged by the Budget estimates on account of the higher than estimated revenue from telecom 3G/BWA auctions and indirect taxes. The headroom so available facilitated additional expenditure proposed through supplementary demands for grants. The data on Union finances for April-December 2010 released by the CGA on 31 December 2010 indicated that the key fiscal indicators were broadly on the consolidation track charted by the Budget for 201011. Growth in gross tax revenue in the nine months of the current fiscal was 26.8 per cent (year-onyear) as against a level of 17.9 per cent envisaged for the fiscal by the BE. Non-tax revenues grew by 136.4 per cent in the first nine months of current fiscal as against a level of growth of 23.7 per cent in the corresponding period last year and 32 per cent envisaged by the BE. Revenue receipts grew by over 50 per cent in the first nine months (Table 3.9). In major taxes the following were the year-onyear growth rates (as against growth envisaged by the BE): customs 65.8 per cent (36.1 per cent); Central excise 36.5 per cent (29.4 per cent), service tax 19.7 per cent (17.2 per cent); corporate income tax 20.4 per cent (18.1 per cent), and personal
Economic and functional classification of the Budget

3.29 While analysis on the basis of fiscal indicators are instructive in understanding the fiscal situation and management thereof, the macroeconomic dimensions of fiscal policies are better understood though a reclassification of the fiscal magnitudes in terms of national income aggregates. The Economic
58
Box 3.2 : Government Debt Report

In pursuance of the announcement made in the Budget for 2010-11 to this effect, a status paper on Government debt was presented in November 2010. The paper made a detailed analysis of the situation and chalked out a roadmap for reduction in overall debt as a percentage of the GDP for the General Government during the period 2010-11 to 201415. The salient features of the report are detailed as follows:
The objectives of the debt management policy are to meet Central Governments financing need at the lowest possible long-term borrowing costs and also to keep the total debt within sustainable limits . Additionally, it aims at supporting development of a well-functioning and vibrant domestic bond market. The three important attributes of Government debt include source of financing, fixed interest nature of debt, and long residual maturity. Of the overall Central Government debt, about 92 per cent is internal debt and 8 per cent is external debt. Internal debt largely consists of market loans in the form of dated securities which are contracted through auction. Most of the dated securities (97 per cent) are fixed coupon and only the balance 3 per cent are floating rate bonds. The weighted average maturity of these dated securities is about 10 years while the weighted average interest rate is about 7.8 per cent per annum. Subsequent to the Report of the ThFC which had estimated debt to GDP ratios and a roadmap for its reduction, the CSO revised the nominal GDP significantly and as per the revised data the reduction in the levels of debt as proportion of the GDP could be made even with higher than recommended fiscal deficits. As such, a higher than ThFC recommended target was preferred whereby the fiscal deficit of the Centre would be reduced to 3 per cent of the GDP by 2014-15 and accordingly debt as a proportion of the GDP would come down from 50.5 per cent in 2009-10 to 43 per cent in 2014-15. The outstanding debt of State Governments is estimated at 26.3 per cent of the GDP for 2009-10. However, after netting of the liabilities on account of investments made in 14-days treasury bills of Central Government, this comes down to 24.8 per cent of the GDP. The roadmap for States has been prepared with fiscal deficit as a percentage of the GDP at the level recommended by the ThFC. With the foregoing assumption on fiscal deficit, consolidated debt for State Governments is estimated to reduce from 24.8 per cent of the GDP in 2009-10 to 23.1 per cent in 2014-15. After factoring in the impact of Central loans to States, the consolidated debt of General Government has come down from 79.3 per cent in 2004-05 to 68.7 per cent in 2007-08. However, it has subsequently increased during the global economic crisis period to 71.1 per cent in 2008-09 and further to 73 per cent of the GDP in 2009-10. It may be recalled that the 12th Finance Commission had recommended a consolidated debt for the Centre and State Governments at 74 per cent of the GDP for the year 2009-10. Even with slippage in 2008-09 and 2009-10 on fiscal deficit targets, the overall General Government debt at 73 per cent of the GDP in 2009-10 has remained within the recommended target. The suggested roadmap for consolidated General Government debt sets a target of reduction from 73 per cent of the GDP in 2009-10 to 64.9 per cent in 2014-15. This shows a reduction of 8.1 per cent of the GDP in the consolidated debt for the General Government. In the roadmap suggested for debt reduction during the period 2010-11 to 2014-15, the Governments commitment towards fiscal consolidation has been reiterated. With the reduction in fiscal deficit for 2010-11, the trend witnessed in the last two years of increasing debt has been arrested. The Government has undertaken concerted efforts to reduce the fiscal deficit gradually so as to bring down the debt as a proportion of the GDP to the pre-crisis level of 68.7 per cent by 201314 and further improve to about 65 per cent of the GDP in 2014-15.
Figure 3.10
70
Debt GDP ratios

Total outstanding liabilities Internal liabilities Market borrowings External debt (outstanding)
Per cent of GDP
60 50 40 30 20 10 0
2009-10 (RE)
Year
2010-11 (BE)
2004-05
2005-06
2006-07
2007-08
2008-09
Fiscal Developments and Public Finance Table 3.7A : Outstanding Liabilities of the Central Government
59
(end-March) 2005-06 2006-07 2007-08 2008-09 2009-10 (RE) 2010-11 (BE)
(` crore) ` 1. Internal Liabilities # a) Internal Debt i) Market Borrowings ii) Others b) Other Internal Liabilities 2. External Debt (Outstanding)* 3. Total Outstanding Liabilities (1+2) 4. Amount Due from Pakistan on Account of Share of Pre-partition Debt 5. Net Liabilities (3-4) 1. Internal Liabilities a) Internal Debt i) Market Borrowings ii) Others b) Other Internal Liabilities 2. External Debt (Outstanding)* 3. Total Outstanding Liabilities Memorandum Items (a) External Debt (` crore)@ (as per cent of GDP) (b) Total Outstanding Liabilities (adjusted) (` crore) (as per cent of GDP) 2165902 1389758 862370 527388 776144 94243 2260145 300 2259845 58.7 37.6 23.4 14.3 21.0 2.6 61.2 194078 5.3 2359980 63.9 2435880 1544975 972801 572174 890905 102716 2538596 300 2538296 56.7 36.0 22.7 13.3 20.7 2.4 59.1 201204 4.7 2637084 61.4 2217671 51.6 2418875 56.3 109826 2725394 1808359 1092468 715891 917035 112031 2837425 300 2837125 54.7 36.3 21.9 14.4 18.4 2.2 56.9 210083 4.2 2935477 58.9 2471396 49.6 2681479 53.8 104872 3036132 2028549 1326094 702455 1007583 123046 3159178 300 3158878 54.4 36.3 23.8 12.6 18.0 2.2 56.6 264076 4.7 3300208 59.1 2687037 48.1 2951113 52.9 113335 3376325 2337682 1734505 603177 1038643 139581 3515906 300 3515606 51.5 35.7 26.5 9.2 15.9 2.1 53.7 249311 3.8 3625636 55.4 3041134 46.4 3290445 50.2 n.a. 3782553 2736754 2079535 657219 1045799 162045 3944598 300 3944298 48.0 34.7 26.4 8.3 13.3 2.1 50.1 272779 3.5 4055332 51.5 3447362 43.8 3720141 47.2 n.a.
(c) Internal Liabilities(Non-RBI)(` crore)## 1969106 (as per cent of GDP) 53.3 (d) Outstanding Liabilities (Non-RBI)(` crore)## Outstanding Liabilities (Non-RBI) (as per cent of GDP) (e) Contingent Liabilities of Central Government (` crore) Contingent Liabilities of Central Government (as per cent of GDP) (f) Total Assets (` crore) Total Assets (as per cent of GDP) 2163184 58.6 110626
3.0 1194446 32.3
2.6 1339119 31.2
2.1 1571668 31.5
2.0 1569043 28.1
n.a. 1590027 24.3
n.a. 1754040 22.3
Source: 1. Union Budget documents. 2. Controller of Aid Accounts and Audit. 3. Reserve Bank of India. n.a. : not available * External debt figures represent borrowings by Central Government from external sources and are based upon historical exchange rates. @ Converted at year end exchange rates. For 1990-91, the rates prevailing at the end of March,1991; For 1999-2000, the rates prevailing at the end of March, 2000 and so on. # Internal debt includes net borrowing of ` 29,062 crore for 2005-06, ` 62,974 crore for 2006-07, ` 1,70,554 crore for 2007-08, ` 88,773 crore for 2008-09, ` 2,737 crore for 2009-10(RE) and ` 50,000 crore for 2010-11(BE) under the Market Stabilisation Scheme. ## This includes marketable dated securities held by the RBI. Note : The ratios to GDP at current market prices are based on the CSOs National Accounts 2004-05 series.
60
Table 3.7B : Incremental Net Liabilities of the Central Government*

2005-06 Target as per FRBM Rules (as per cent of GDP) Actual ( ` crore) Actual as per cent of GDP 8 265723 7.2 2006-07 7 278451 6.5 2007-08 6 298829 6.0 2008-09 2009-10 (RE) 5 321753 5.8 4 356728 5.4 2010-11 (BE) 3 428692 5.4
*Incremental net liablities assumed has been compiled from data on liabilities given in Annex 3(i) of Receipts Budget, 2010-11.
income tax 13.1 per cent (-3.6 per cent). 3.31 Year-on-year growth in total expenditure in the first nine months of the current fiscal was at 11.2 per cent as against a level of 18.5 per cent in 2009-10 (April-December) and 8.5 per cent envisaged for the full year by BE 2010-11. While Plan expenditure grew by 18.9 per cent in April-December 2010-11 as against 23.0 per cent in 2009-10 (April-December), non-Plan expenditure grew by 7.9 per cent as against 16.6 per cent. As per the CGA, 84.7 per cent of the gross market borrowings were completed by end of December 2010. Reflecting the above trend in revenue and expenditure, revenue deficit was placed at ` 1,16,309 crore, which was 42.1 per cent of its BE and lower by 53.7 per cent than the April-December 2009 level. Fiscal deficit was ` 1,71,249 crore, which came to 44.9 per cent of its BE (Table 3.10) and represented a decline of 44.8 per cent over the level in April-December 2009. The deficit indicators would thus remain at targeted levels even with a pickup in expenditure in the next three months.
crore posted a growth of 9.1 per cent over 200809. Taking into account further accumulation of ` 141 crore in the traffic outstandings, the gross traffic receipts of the Railways for 2009-10 stood at ` 86,964 crore. 3.33 Ordinary working expenses at ` 65,810 crore during 2009-10 showed an increase of 21.1 per cent over the preceding year. This higher growth in ordinary working expenses was primarily attributable to payment of the second instalment (60 per cent) of arrears of the Sixth Central Pay Commission. The total working expenses including appropriations for Depreciation Reserve Fund and Pension Fund at ` 82,915 crore recorded an increase of 15.4 per cent over the preceding year. 3.34 Taking into account the net variation of the miscellaneous receipts and miscellaneous expenditure, Railways net revenue in 2009-10 was ` 5,544 crore. After fully discharging the dividend liability of ` 5,543 crore for the fiscal, Railways during 2009-10 generated an excess of around ` 1 crore. Lower growth of traffic revenues on account of prevailing economic conditions, stiff increase in working expenses due to implementation of the Sixth Central Pay Commission recommendations and inflationary factors have adversely affected the financial health of the Railways in 2009-10, which is reflected in its Operating Ratio1 deteriorating to 95.3 per cent as against 90.5 per cent in 2008-09. The net revenue as a proportion of capital-at-charge and investment from the Capital Fund for the fiscal was 4.5 per cent. 3.35 The Plan Outlay for 2009-10 stood at ` 39,235 crore including internally generated resources of ` 12,196 crore (31 per cent of the total outlay) and market borrowings of ` 9,323 crore by the Indian Railway Finance Corporation which also includes borrowing for Rail Vikas Nigam Limited. Apart from strengthening of the golden quadrilateral under the
PERFORMANCE OF DEPARTMENTAL ENTERPRISES OF THE CENTRAL GOVERNMENT

Railways
3.32 Indian Railways achieved a freight loading of 887.79 million tonnes in 2009-10 with an incremental loading of 54.40 million tonnes over the levels in 2008-09. However, freight loading during 2009-10 fell short of the revised target by 2.2 million tonnes. Consequently freight earnings at ` 58,502 crore, though registering a growth of 9.5 per cent over 2008-09, fell short of the revised target for 2009-10 by ` 214 crore. Passenger earnings (excluding other coaching earnings) during 200910 were ` 23,488 crore as against ` 21,931 crore in 2008-09, registering an increase of 7.1 per cent. Overall traffic revenues for 2009-10 at ` 87,105
1
The Operating Ratio represents the percentage of working expenses to traffic earnings.
61
Table 3.8 : Total Expenditure and Capital Formation by the Central Government and its Financing
(As per Economic and Functional Classification of the Central Government Budget) 2005-06 2006-07 2007-08 2008-09 2009-10 (RE) 2010-11 (BE)
(` crore) ` I. II. Total Expenditure Gross Capital Formation out of Budgetary Resources of Central Government (i) Gross Capital Formation by the Central Government (ii) Financial Assistance for Capital Formation in the Rest of the Economy III. Gross Savings of Central Government IV. Gap (II-III) Financed by a. Draft on Other Sectors of Domestic Economy (i) Domestic Capital Receipts (ii) Budgetary Deficit/Draw Down of Cash Balance b. I. Draft on Foreign Savings 84757 34450 50307 -61431 146188 87885 36487 51398 -33918 121803 143892 43652 100240 13674 130218 136935 51464 85471 -176082 313017 154827 61190 93637 -253712 408539 194473 71537 122936 -192705 387178 501083 570185 688908 864530 1005297 1079985
109799 130687 -20888 36389 13.6 2.3 0.9 1.4 -1.7 4.0 3.0 3.5 -0.6 1.0
110801 106284 4517 11002 13.3 2.0 0.8 1.2 -0.8 2.8 2.6 2.5 0.1 0.3
118180 145351 -27171 12038 13.8 2.9 0.9 2.0 0.3 2.6 2.4 2.9 -0.5 0.2
299208 246612 52596 13809 15.5 2.5 0.9 1.5 -3.2 5.6 5.4 4.4 0.9 0.2
361926 367507 -5581 46613 15.3 2.4 0.9 1.4 -3.9 6.2 5.5 5.6 -0.1 0.7
362654 362654 0 24524 13.7 2.5 0.9 1.6 -2.4 4.9 4.6 4.6 0.0 0.3
(As per cent of GDP) Total Expenditure II. Gross Capital Formation out of Budgetary Resources of Central Government (i) Gross Capital Formation by the Central Government
(ii) Financial Assistance for Capital Formation in the Rest of the Economy III. Gross Savings of Central Government IV. Gap (II-III) Financed by a. Draft on Other Sectors of Domestic Economy (i) Domestic Capital Receipts (ii) Budgetary Deficit/Draw Down of Cash Balance b. Draft on Foreign Savings II. Gross Capital Formation out of Budgetary Resources of Central Government Memorandum Items 1 2 1 2 Consumption Expenditure Current Transfers Consumption Expenditure Current Transfers
(increase over previous year) -8.7 116305 297267 3.1 8.1 3.7 121609 356560 2.8 8.3 63.7 (` crore) ` 131396 408676 2.6 8.2 -4.8 174345 543347 3.1 9.7 13.1 226987 594989 3.5 9.1 25.6 224027 651168 2.8 8.3
Source: Ministry of Finance, An Economic and Functional classification of the Central Government Budget-various issues. Notes: (i) Gross capital formation in this table includes loans given for capital formation on a gross basis. Consequently domestic capital receipts include loan repayments to the Central Government. (ii) Consumption expenditure is the expenditure on wages and salaries and commodities and services for current use. (iii) Interest payments, subsidies, pension etc. are treated as current transfers. (iv) Gross capital formation and total expenditure are exclusive of loans to States/UTs against States/UTs share in the small savings collection. (v) The figures of total expenditure of the Central Government as per economic and functional classification do not tally with figures given in the Budget documents. In the economic and functional classification, interest transferred to DCUs, loans written off etc, are excluded from the current account. In the capital account, expenditure financed out of Railways, Posts and Telecommunications own funds, etc. is included. (vi) The ratios to GDP at current market prices are based on the CSOs National Accounts 2004-05 series.
62
Table 3.9 : Central Government Finances

Budget Estimates 2010-11 1 2 April-December 2009-10 3 (` crore) ` 1. Revenue Receipts Gross Tax Revenue Tax (net to Centre) Non Tax 2. Capital Receipts of which: Recovery of Loans Other Receipts Borrowings and Other Liabilities 3. 4. Total Receipts (1+2) Non-Plan Expenditure (a)+(b) (a) Revenue Account of which: Interest Payments Major Subsidies Pensions (b) Capital Account 5. Plan Expenditure (i)+(ii) (i) 6. Revenue Account (ii) Capital Account Total Expenditure (4)+(5)=(a)+(b) (a) Revenue Expenditure (b) Capital Expenditure 7. 8. 9. Revenue Deficit Fiscal Deficit Primary Deficit 248,664 108,667 42,840 92,058 373,092 315,125 57,967 1,108,749 958,724 150,025 276,512 381,408 132,744 130,005 96,740 37,465 36,411 210,159 179,555 30,604 707,540 640,525 67,015 251,254 309,980 179,975 146,304 94,318 40,210 49,206 249,954 212,885 37,069 786,852 700,577 86,275 116,309 171,249 24,945 58.8 86.8 93.9 53.5 67.0 67.6 63.9 71.0 73.1 57.5 42.1 44.9 18.8 12.5 -2.5 7.3 35.1 18.9 18.6 21.1 11.2 9.4 28.7 -53.7 -44.8 -86.1 5,129 40,000 381,408 1,108,749 735,657 643,599 3,983 4,306 309,980 707,540 497,381 460,970 8,591 22,744 171,249 786,852 536,898 487,692 167.5 56.9 44.9 71.0 73.0 75.8 115.7 428.2 -44.8 11.2 7.9 5.8 682,212 746,651 534,094 148,118 426,537 389,271 416,094 307,591 81,680 318,269 584,268 527,782 391,148 193,120 202,584 85.6 70.7 73.2 130.4 47.5 50.1 26.8 27.2 136.4 -36.3 2010-11 4 Col.4 as per cent of 2010-11 (BE) 5 Per cent change over 2009-10 6
Source: Controller General of Accounts, Ministry of Finance.
National Rail Vikas Yojana, certain important projects and land acquisition work on dedicated freight corridors are in progress. Railways has also started work on setting up of some mega workshops to meet its rolling stock requirements. It is also modernizing and upgrading its systems to augment rail services.
yielding a deficit of ` 6,641.3 crore. In the current fiscal as per BE 2010-11, the gross receipts are budgeted to go up to ` 6,955.5 crore and with gross and net working expenses estimated at ` 11,328.8 crore and ` 10,892.1 crore respectively, the deficit is projected to be ` 3936.6 crore. 3.37 India Post is the largest Postal network in the world and provides access to postal services at affordable rates to all citizens in the country through its vast network, which has grown from 23,344 post offices at time of Independence to 1,54,979 post offices as on 31 March 2010. Of the total, 1,39,173
Department of posts
3.36 The gross receipts of the Department of Posts in 2009-10 were placed at ` 6,266.7 crore. The gross and net working expenses during the year were ` 13,346.9 crore and ` 12,908 crore respectively,
63
AprilDec.
Table 3.10 : Trends in Cumulative Central Government Finance (April-December) for 2010-11
Budget Estimates 1. Revenue Receipts (` crore) 682212 ` Per cent to BE 2. Capital Receipts (` crore) 426537 ` 3. Total Receipts (` crore) 1108749 ` Per cent to BE 4. Non Plan Expenditure (` crore) 735657 ` Per cent to BE 5. Plan Expenditure (` crore) 373092 ` Per cent to BE 6. Total Expenditure (` crore) 1108749 ` Per cent to BE 7. Revenue Expenditure (` crore) 958724 ` Per cent to BE 8. Revenue Deficit (` crore) 276512 ` Per cent to BE 9. Fiscal Deficit (` crore) 381408 ` Per cent to BE April AprilMay AprilJune AprilJuly AprilAugust AprilSept. AprilOct. AprilNov.
12979 1.9 54247 67226 6.1 48206 6.6 19020 5.1 67226 6.1 63617 6.6 50638 18.3 53993 14.2
44657 6.5 102252 146909 13.2 100101 13.6 46808 12.5 146909 13.2 125877 13.1 81220 29.4 100907 26.5
199810 29.3 42398 242208 21.8 154148 21.0 88060 23.6 242208 21.8 210387 21.9 10577 3.8 40196 10.5
238524 35.0 94176 332700 30.0 222900 30.3 109800 29.4 332700 30.0 288599 30.1 50075 18.1 90915 23.8
290799 42.6 156904 447703 40.4 311249 42.3 136454 36.6 447703 40.4 391151 40.8 100352 36.3 151425 39.7
398234 58.4 139743 537977 48.5 368270 50.1 169707 45.5 537977 48.5 473155 49.4 74921 27.1 133252 34.9
447625 65.6 169810 617435 55.7 424893 57.8 192542 51.6 617435 55.7 542455 56.6 94830 34.3 162336 42.6
476716 69.9 213971 690687 62.3 479771 65.2 210916 56.5 690687 62.3 616874 64.3 140158 50.7 186522 48.9
584268 85.6 202584 786852 71.0 536898 73.0 249954 67.0 786852 71.0 700577 73.1 116309 42.1 171249 44.9
Source: Controller General of Accounts, Ministry of Finance.
post offices are in rural areas and 15,797 in urban. India Post has introduced franchisee outlets to cater to the growing demand for postal services where it is not possible to open departmental post offices. As on 31 March 2010, 1082 franchised outlets have been opened. The Department of Posts has been given the responsibility of disbursing wages to the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) beneficiaries through post office savings bank accounts. Nearly 4.67 crore MGNREGS Accounts have been opened up to October 2010 and the wages amounting to ` 7113 crore have already been disbursed during the current financial year (up to October 2010). A total of ` 18,876 crore has been disbursed as wages to MGNREGS beneficiaries through post offices since the inception of the scheme.
and catering to the advertising needs of various entities through a single window facility. Doordarshan as Host Broadcaster for the Commonwealth Games (CWG) provided the entire TV coverage of the CWG in HDTV format, a noteworthy achievement in the broadcasting sector. As Right Holder Broadcaster, Doordarshan provided customized TV coverage of CWG for Indian viewers besides launching an HDTV channel called DDHD to provide high quality services. Digitalization of the All India Radio network is one of the major thrust areas of the Eleventh Plan. There is an approved scheme of digitalization of transmitters, studios, and connectivity which, inter alia, envisages digitalization of 98 studios and connectivity and 100 watts FM digital compatible transmitters at 100 locations. Government has allocated a total ` 2,050 crore including CWG 2010 in BE 2010-11 to cover the resource gap in Prasar Bharati.
Broadcasting
3.38 Prasar Bharati, a public service broadcaster, incurred a total expenditure of ` 2949.4 crore in 2009-10 (excluding charges on account of the space segment and spectrum charges and interest and depreciation costs). The total gross revenue earned in 2009-10 was ` 1352.7 crore and the net revenue worked out to ` 1176.3 crore. Prasar Bharati has taken a number of steps to increase revenue generation by adopting aggressive marketing strategy
State-level finances
3.39 In the post-FRBMA period the performance of combined States was impressive with fiscal deficit declining to 2.4 per cent of the GDP in 2005-06 and further to 1.5 per cent in 2007-08. With the exception of 2009-10 (RE), the level of fiscal deficit had remained below the 3 per cent of GDP mark. In 2010-11 (BE), it has been estimated at 2.5 per cent of the GDP (Table 3.11 and Figure 3.11). A more
64
Economic Survey 2010-11 exemptions in central excise; widening of service tax base through inclusion of eight new services and expansion of scope of some of the existing ones; reduction in excise duty from 16 per cent to 10 per cent on medicines and toilet preparations containing alcohol (excise duty on medicinal and toilet preparations is one of the taxes to be subsumed under the GST); approval of a Mission Mode Project for the computerization of State Commercial Tax Departments. 3.42 Though considerable progress has been made in moving towards a comprehensive GST, the timeline of April 2011 for its introduction is not likely to be met. This is because the convergence of views between the Centre and States needed for the introduction of legislation for a constitutional amendment in this regard is yet to be achieved. In the meantime, the working groups involved in developing the IT architecture, business processes, and draft legislations for the effective implementation of GST are continuing their work. An empowered group under the Chairmanship of Dr Nandan Nilekani, Chairman UIDAI, is working out the modalities for creation of a special purpose vehicle (SPV) which envisages the setting up of a common portal for the Centre and State Governments through which taxpayers could interact with the two tax administrations. Work is also under way to create and strengthen the IT infrastructure in State VAT(value-added tax) departments so that their transition to the GST becomes easier.
noteworthy feature has been that a surplus on revenue account has been recorded in the threeyear period 2007-08 and 2008-09. Revenue receipts grew at the rate of 17.6 per cent and 10.7 per cent for 2007-08 and 2008-09 respectively. Buoyant revenues of the States (as also Centre) and non-tax receipts combined with a moderate growth in revenue have helped in this regard. However, there are significant variations among States in respect of these indicators.
State-level Reforms
3.40 Given the exceptional circumstances of 200809 and 2009-10, the fiscal consolidation process of the States was disrupted. States would be able to get back to their fiscal correction path by 2011-12, allowing for a year of adjustment in 2010-11. The stimulus packages of the Central Government as well as those announced by individual States coupled with the increased transfers recommended by the ThFC have implications for the financial position of the States in the medium term. The recommendations of ThFC for the period 2010-15 are presently under implementation. The recommendations take into account the current and likely macroeconomic and fiscal scenarios so as to secure fiscal stability and adequate resource availability for the Centre, the States, and the local bodies. The higher levels of devolution of taxes and the inter-se sharing thereof together with higher levels of non-Plan grants under Article 275 of the Constitution which include specific grants like grants for elementary education, outcomes and environment related grants, maintenance grants, and state-specific grants are likely to bring the combined deficit of the States down to the targeted levels faster. The borrowing ceiling for each State for the year 2010-11 has been fixed by the Government of India, keeping in view the recommendations of the ThFC based on targets for fiscal deficit. Besides, the ThFC has also provided a basis for the finances of local bodies through a basic grant and a performance grant based on a percentage of the divisible pool of the preceding year. The estimated total grant recommended for local bodies aggregates to ` 87,519 crore over the award period of the ThFC. 3.41 In this years Budget, measures were also taken to facilitate movement towards a goods and services tax (GST). These included unification of rates between central excise (goods) and service tax (services) at 10 per cent; removal of certain
CONSOLIDATED GENERAL GOVERNMENT

3.43 Given the grant dependance of local bodies and limited availability of data, consolidated General Government finances are taken to be the aggregation of Union and combined State finances after due process of netting of inter-Governmental transactions. The macroeconomic impact of the Governments fiscal operations is thus evaluated by looking at consolidated General Government finances. As with the Centre and States individually, collectively also a revenue buoyancy and relatively limited growth in expenditure helped in the fiscal consolidation phase in the post-FRBM period up to 2007-08. In 2007-08, the gross fiscal deficit of the consolidated General Government was placed at 4.1 per cent of the GDP on a cash basis (Table 3.12 and Figure 3.12); and revenue deficit was close to zero. After the fiscal expansion in 2008-09 and 2009-10,
Fiscal Developments and Public Finance Table 3.11 : Receipts and Disbursements of State Governments*
2005-06 2006-07 2007-08 2008-09 2009-10 (RE)
65
2010-11 (BE)
(` crore) ` Total Receipts(A+B) A. Revenue Receipts (1+2) 1. Tax Receipts of which: States Own Tax Revenue 2. Non-tax Receipts of which: Interest Receipts B. Capital Receipts of which: Recovery of Loans & Advances II. Total Disbursements (a+b+c) a) Revenue b) Capital c) Loans and Advances III. Revenue Deficit IV. Gross Fiscal Deficit Total Receipts(A+B) A. Revenue Receipts (1+2) 1. Tax Receipts of which: States Own Tax Revenue 2. Non-tax Receipts of which: Interest Receipts B. Capital Receipts of which: Recovery of Loans & Advances II. Total Disbursements (a+b+c) a) Revenue b) Capital c) Loans and Advances III. Revenue Deficit IV. Gross Fiscal Deficit I. I. 595,628 431,021 306,332 212,307 124,690 9,380 164,607 8,904 561,682 438,034 109,224 14,424 7,013 90,084 16.1 11.7 8.3 5.7 3.4 0.3 4.5 0.2 15.2 11.9 3.0 0.4 0.2 2.4 673,605 530,556 372,841 252,548 157,714 11,825 143,049 7,579 657,280 505,699 137,793 13,789 -24,857 77,508 15.7 12.4 8.7 5.9 3.7 0.3 3.3 0.2 15.3 11.8 3.2 0.3 -0.6 1.8 765,735 623,748 437,948 286,546 185,799 12,637 141,987 886,875 690,581 481,854 321,351 208,727 16,594 196,294 1,049,437 802,708 529,740 364,997 272,968 16,782 246,728 7,960 1,073,800 849,571 207,073 17,155 46,863 214,137 16.0 12.3 8.1 5.6 4.2 0.3 3.8 0.1 16.4 13.0 3.2 0.3 0.7 3.3 1,149,031 906,495 624,380 426,014 282,114 16,331 242,536 4,208 1,167,404 932,683 220,022 14,699 26,189 198,097 14.6 11.5 7.9 5.4 3.6 0.2 3.1 0.1 14.8 11.8 2.8 0.2 0.3 2.5
7,770 11,068 752,324 877,747 580,805 678,856 157,258 183,013 14,261 15,879 -42,943 -11,725 75,455 134,245 (As per cent of GDP) 15.4 15.9 12.5 12.4 8.8 8.6 5.7 3.7 0.3 2.8 0.2 15.1 11.6 3.2 0.3 -0.9 1.5 5.8 3.7 0.3 3.5 0.2 15.7 12.2 3.3 0.3 -0.2 2.4
Source: Reserve Bank of India. *: Data from 2008-09 onwards pertain to 27 State Governments. RE: Revised Estimates. Note: (1) Negative (-) sign indicates surplus in deficit indicators. (2) The ratios to GDP at current market prices are based on the CSOs National Accounts 2004-05 series. (3) Capital receipts include public accounts on a net basis. (4) Capital disbursements are exclusive of public accounts.
Figure 3.11
4
Revenue and fiscal deficit of states

Gross fiscal deficit Revenue deficit
Per cent of GDP
3 2 1 0 -1 -2
2009-10 (RE)
Year
2010-11 (BE)
2004-05
2005-06
2006-07
2007-08
2008-09
66
Economic Survey 2010-11 for the economy as whole is bright with continued fiscal consolidation.
both revenue and fiscal deficits are estimated to decline sharply in 2010-11 (BE). Thus the outlook Figure 3.12
12
Combined (centre and states) revenue and fiscal deficit

Gross fiscal deficit Revenue deficit
Per cent of GDP
10 8 6 4 2 0
2009-10 (RE)
Year
Table 3.12 : Receipts and Disbursements of Consolidated General Government

2005-06 2006-07 2007-08 2008-09 2009-10 (RE) 2010-11 (BE)
` (` crore) I. Total Receipts (A+B) A. Revenue Receipts (1+2) 1. Tax Receipts 2. Non-tax Receipts of which: Interest Receipts B. Capital Receipts of which: a) Disinvestment Proceeds b) Recovery of Loans & Advances II. Total Disbursements (a+b+c) a) Revenue b) Capital c) Loans and Advances III. Revenue Deficit IV. Gross Fiscal Deficit I. Total Receipts (A+B) A. Revenue Receipts (1+2) 1. Tax Receipts 2. Non-tax Receipts of which: Interest Receipts B. Capital Receipts of which: a) Disinvestment Proceeds b) Recovery of Loans & Advances II. Total Disbursements (a+b+c) a) Revenue b) Capital c) Loans and Advances III. Revenue Deficit IV. Gross Fiscal Deficit 1,014,689 1,125,252 1,329,654 1,604,238 1,885,017 2,052,774 707,054 576,596 130,458 18,735 307,635 1,590 11,651 877,075 1,061,892 724,023 153,052 21,744 248,177 2,440 -773 877,496 184,396 22,584 267,762 45,750 4,682 1,112,877 925,173 187,704 25,462 491,361 832 8,935 1,250,511 1,446,332 994,843 1,158,475 255,668 287,857 24,774 634,506 26,319 9,505 25,120 606,442 43,155 5,520
959,855 1,109,174 1,316,246 1,595,110 1,909,380 2,071,147 806,366 932,441 1,071,518 1,354,691 1,626,434 1,749,031 132,585 157,316 225,803 217,476 257,787 296,787 20,904 19,417 18,925 22,943 25,159 25,329 99,312 239,560 27.5 19.1 15.6 3.5 0.5 8.3 0.0 0.3 26.0 21.8 3.6 0.6 2.7 6.5 55,366 230,432 26.2 20.4 16.9 3.6 0.5 5.8 0.1 0.0 25.8 21.7 3.7 0.5 1.3 5.4 9,626 203,922 26.7 21.3 17.6 3.7 0.5 5.4 0.9 0.1 26.4 21.5 4.5 0.4 0.2 4.1 241,814 472,466 28.7 19.9 16.6 3.4 0.5 8.8 0.0 0.2 28.6 24.3 3.9 0.4 4.3 8.5 375,923 623,045 28.8 19.1 15.2 3.9 0.4 9.7 0.4 0.1 29.1 24.8 3.9 0.4 5.7 9.5 302,699 576,140 26.1 18.4 14.7 3.7 0.3 7.7 0.5 0.1 26.3 22.2 3.8 0.3 3.8 7.3
Source: Reserve Bank of India. Note: The ratios to GDP at current market prices are based on the CSOs National Accounts 2004-05 series.
2010-11 (BE)
2004-05
2005-06
2006-07
2007-08
2008-09
67
THE NATURE OF FISCAL CONSOLIDATION

3.44 The impact of the global financial crisis brought to the fore the criticality of fiscal policies in combating economic shocks. With little monetary headroom in advanced economies and given the transmission lags in emerging market economies, fiscal policies were the preferred policy instruments across the globe. As per international institutional research on the subject, advanced economies were able to put in place large doses of fiscal stimuli as they had the advantage of automatic stabilizers while emerging markets, including India, had large fiscal expansion
given the very low discretionary fiscal stimuli. In the fiscal consolidation phase in the post-FRBMA period (2004-05 to 2007-08), there was considerable fiscal space generated that facilitated the high levels of expansion that India had. It is therefore instructive to analyse the nature of fiscal deficits in India through their decomposition into structural and cyclical components (Box 3.3).
PROSPECTS/OUTLOOK
3.45 With significant levels of reduction envisaged
Box 3.3 : Decomposition of Fiscal Deficit into Structural and Cyclical Components
The Government budget balance is basically influenced by both cyclical (temporary) and structural (permanent) factors, entailing that change in the fiscal deficit could arise either in response to cyclical changes in output or to structural factors. The cyclical changes in output have a transitory effect on the fiscal deficit, whereas the structural factors have a more durable impact. A structural deficit occurs when a country generates a deficit even when the economy of the country is operating at its full employment level. On the other hand, a cyclical deficit occurs when an economy is not performing to its potential, for example if an economy is struggling through a recession. A structural deficit means that a deficit will be posted regardless of how well an economy if functioning-recession or boom. When the economy is functioning strongly, revenue generation is higher due to more jobs, more spending, etc. but with structural deficit the good and strong health of the economy is irrelevant--a deficit will be generated regardless. Structural deficit could be further decomposed into three parts that is (a) fiscal drag, (b) discretionary fiscal policy action, and (c) base year balance, to gain still more insight into the determinants of the structural deficit. Of the three listed components, the first two are important from the point of understanding fiscal stance.
Fiscal Drag
Among the components of the structural deficit, the fiscal drag is important and normally refers to increase in average tax rates in a progressive income tax scheme as a consequence of increase in nominal income over time-either on account of higher levels of inflation or real GDP growth. It has been observed that fiscal drag is the dominant contributory factor for structural deficit of Central Government balances.
Discretionary Fiscal Policy Action

On the other hand, the second component, i.e. discretionary fiscal policy actions, after remaining relatively weak up to 2007-08, had shown increases in 2008-09 and 2009-10 which can be attributed to revenue losses due to slowdown in the economy and duty cut together with higher expenditure to provide fiscal stimulus to sustain economic growth. Traditional deficit indicators normally do not discriminate between these two effects, and hence fail to correctly evaluate and portray the impact of fiscal operations on the economy as a whole. The decomposition of the budget balance into its structural and cyclical components is obtained normally through the application of two important methodologies, namely the IMF and Organization for Economic Cooperation and Development (OECD) methodologies. The earlier research on the subject that had been done mostly in the pre-FRBMA period had indicated the presence of the large structural rigidities in the composition of fiscal deficits in India and a very small cyclical component. The preliminary findings of the study on this subject commissioned in the post-FRBMA period using OECD methodology too have indicated continued dominance of the structural component in the budgetary balance of the Government; this observation holds good in the decomposition of primary deficits of the Centre, combined States, and consolidated General Government. (Contd....
68
Box 3.3 Contd....)
Estimates of Structural and Cyclical Components of the GFD

(As per cent of GDP) Year Structural Cyclical Deficit(SD) Deficit(CD) 8.0 5.7 5.4 6.9 5.4 4.6 4.3 5.3 5.9 4.9 -0.4 -0.3 -0.2 -0.1 0.1 0.3 0.4 0.3 0.4 0.4 Gross Fiscal Deficit(GFD) 7.6 5.4 5.2 6.8 5.5 4.9 4.7 5.7 6.3 5.2 Year Structural Cyclical Deficit(SD) Deficit(CD) 5.4 6.1 6.1 4.7 4.2 4.2 3.4 2.5 6.0 6.1 0.1 -0.1 -0.4 -0.4 -0.3 -0.3 -0.1 0.1 0.0 0.2 Gross Fiscal Deficit(GFD) 5.5 6.0 5.7 4.3 3.9 4.0 3.3 2.5 6.0 6.3
1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Decomposition of gross fiscal deficit into structural and cyclical components (As per cent of GDP)
9 8 7 Gross fiscal deficit (GFD) Structural deficit (SD) Cyclical deficit (CD)
Per cent of GDP
6 5 4 3 2 1 0 -1
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
Year
in the combined State Government deficit in 201011 (BE) and the progress in the current fiscal in respect of Central Government finances, the resumption of the process of fiscal consolidation at both Centre and State levels as also of the consolidated General Government has really begun after two years of purposive expansion. With the roadmap laid out by the Medium Term Fiscal Policy Statement coupled with that indicated in the Government Debt Report 2010, the prospects of extending this process to the medium term and beyond are bright. While the roadmap in terms of deficit indicators is important in itself, these being in the nature of derived indicators, it is useful to look at the process by which the reduction is sought to be achieved. The Government Debt Report 2010 indicates that between 2010-11 (BE) and 2014-15
the terminal year of the award of the ThFC, the proportion of total expenditure to the GDP is to go down by 2.5 percentage points to reach 13.5 per cent of the GDP in 2014-15 and at the same time the proportion of tax to GDP is set to rise by 1.4 percentage points to reach 12.2 per cent of the GDP in 2014-15. This estimated level of growth in tax revenues seems likely given the recovery in the economy to the pre-crisis levels and the fact that it was at the same levels before the crisis. Thus it is critical to anchor expenditure reforms to realize the projected deficit levels. A beginning has already been made with the reforms announced in subsidies, some of which have already been implemented. Going forward, deepening the reform process would hold the key to sustaining the fiscal consolidation process.
2009-10
Prices and Monetary Management

A
CHAPTER
s the world economy has begun to stabilize in the aftermath of the global crisis, inflation has re-emerged as a major concern particularly in the fast- recovering developing economies. At present, the major pressure on prices is emanating from the food and energy sectors both at global and domestic levels. However, the risk of its slippage into the core sector has increased and needs to be mitigated proactively. Notwithstanding slow recovery in the advanced economies, international commodities particularly, oil, food, industrial inputs, and metals have witnessed rising prices towards the end of 2010. International crude prices also briefly crossed US$ 90 a barrel in the wake of an unusually cold winter, putting pressures on the Government to take a relook at domestic fuel prices. The renewed inflationary pressure became evident in December 2010 as headline wholesale price index (WPI) inflation increased to 8.4 per cent from 8.1 per cent in November 2010. However, in January 2011 it has moderated to 8.2 per cent. In addition to fuel, metal and mineral prices are also putting pressure on the domestic economy. Food inflation in particular has remained stubbornly in double digits for over a year now, which has welfare costs. There is need to remain cautious and be prepared to take proactive steps as the emerging scenario warrants, with the objective of bringing down inflation. Going forward, inflation is likely to moderate in line with the monetary tightening measures taken by the Reserve Bank of India and other steps taken by the Government to address the supply-side bottlenecks.
PRICES
Main features of the new WPI series
4.2 A new WPI series with 2004-05 base was released on 14 September 2010. A representative commodity basket comprising 676 items has been selected and weighting diagram derived for the new series. The total number of price quotations has also increased from 1918 in the old series to 5482 in the new series, indicating better representation of the prices in the wholesale markets. Sector-wise price quotations have increased from the old to new series from 455 to 579 in primary group and from 1391 to 4831 in the manufactured products group. A comparison of the weighting diagram and number of commodities between the old and new series for the major groups is drawn in Table 4.1.
4.3 Some of the important items included in the new series basket are flowers, lemons, and crude petroleum in primary articles and ice cream, canned meat, palm oil, readymade/instant food powder, mineral water, computer stationery, leather products, scooter / motorcycle tyres, polymers, petrochemical intermediates, granite, marble, gold and silver, construction machinery, refrigerators, computers, dish antenna, transformers, microwave ovens, communication equipment (telephone instruments), TV sets, VCDs, washing machines, and auto parts in manufactured products.
General wholesale price situation

4.4 During the first half of 2009-10, the headline year-on-year inflation remained significantly low at 0.36 per cent on account of sharp increases in prices recorded in 2008-09. The second half of 2009-10
70
Table 4.1 : Major Changes in the Weights and Commodities in the Revised WPI Series
Weights Items New Series (base: 2004-05) 100.00 20.12 14.34 5.78 14.91 64.97 9.97 55.00 Old Series (base: 1993-94) 100.00 22.03 15.40 6.63 14.23 63.75 11.54 52.21 No. of Commodities New Series (base: 2004-05) 676 102 55 47 19 555 57 498 Old Series (base: 1993-94) 435 98 54 44 19 318 41 277 New Items Added/ Revised 417 11 1 10 0 406 25 381
All Commodities Primary Articles Food Articles Non-Food & Minerals Fuel and Power Manufactured Products Food Products Non-Food Products
Source : The Office of the Economic Adviser, Ministry of Commerce and Industry.
showed increasing food prices on account of unfavourable agricultural supply conditions coupled with the waning of base effect, leading to sharp increase in inflation. Thereafter, the headline WPI inflation reached 10.23 per cent in March 2010. 4.5 Financial year 2010-11 started with 11 per cent headline inflation in April 2010.During 201011, the monsoon situation has been better than last year. As per the Second Advance Estimates, production of foodgrains in 2010-11 is likely to be 232.07 million tonnes as compared to 218.11 million tonnes last year. However, demand pressures became visible in early 2010. 4.6 At disaggregate level, the price behaviour of three major commodities groups has been in marked contrast to the previous year when inflation remained low on account of global decline in commodity prices. From March to July 2010, headline inflation remained in double digits. The major contributors to this were primary articles
Figure 4.1
25 20 15 10 5 0 -5 -10 -15
whose inflation hovered in the range of 14.7 per cent to 21.5 per cent and fuel which recorded inflation in the range of 10.3 per cent to 14.4 per cent. However, the inflation in manufactured products remained in the lower range of 4.5 to 6.4 per cent during the current year (Figure 4.1). 4.7 The Government is committed to ensuring availability of cooking fuels to the common man at affordable prices. In view of the importance of household fuels, namely kerosene and domestic liquefied petroleum gas (LPG), the Government has decided that the subsidies on these products will be continued. The PDS Kerosene and Domestic LPG Subsidy Scheme 2002 as well as the Freight Subsidy (for Far-flung Areas) Scheme 2002 have been extended till 31 March 2014. However, in order to reduce the burden of under-recoveries, it has been decided to increase the retail price of public distribution system (PDS) Kerosene by ` 3 per litre and of domestic LPG by `35 per cylinder, at Delhi, with corresponding increases in other parts
Inflationary trend in major subgroups of WPI

Primary articles Fuel & power Manufactured products All commodities
Inflation (per cent)
May
Jul
Oct
Nov
May
Dec
Mar
Aug
Aug
2009-10
2010-11
Year
Dec
Jul
Nov
Jan
Oct
Feb
Jun
Jun
Apr
Apr
Sep
Sep
Prices and Monetary Management of the country. Prices of petrol and diesel, both at the refinery gate and retail level, will be market determined. However, it is proposed that increase in prices of diesel will be staggered over time to minimize the overall impact on the poor and vulnerable. It has also been decided that in case of a high rise and volatility in international oil prices, Government will suitably intervene in the pricing of petrol and diesel.
71
Table 4.2 : Annual Average Inflation Ratebased on WPI

(per cent) Year Primary Articles 20.12 2.8 3.6 3.3 4.3 3.7 3.5 4.3 9.6 8.3 11.0 12.7 9.2 6.4 9.8 18.0 Fuel & Power 14.91 28.5 8.9 5.5 6.4 10.1 11.9 13.5 6.5 0.0 11.6 -2.1 5.9 8.9 -5.8 12.3 ManufacAll tured CommoProducts dities 64.97 3.3 1.8 2.6 5.7 6.3 3.9 2.3 5.6 4.9 6.2 1.8 4.1 4.0 0.7 5.3 100 7.2 3.6 3.4 5.5 6.5 5.2 4.3 6.5 4.8 8.0 3.6 5.5 5.3 1.7 9.4
Average trends in WPI inflation

4.8 The ten-year average of headline WPI inflation was around 5.3 per cent from 2000-01 to 2009-10; in this decade 2000-01, 2003-04, 2004-05, 200607, and 2008-09 had higher inflation relative to the decadal average. In the current financial year, the average inflation (AprilDecember 2010) of 9.4 per cent was also much higher than the decadal rate. The ten-year average inflation in fuel was around 8.9 per cent. The major portion of that was contributed by the high inflation of 2000-01. The years 2003-04, 2004-05, 2006-07, and 2008-09 also witnessed high inflation in manufactured products mainly on account of high prices of raw materials such as basic metal alloys and metal products, nonmetallic mineral products, and machinery and machine tools. The year 2008-09 was different from the previous three years as inflation in all the three sectors remained high on account of high international fuel and commodity prices. The year 2009-10 was an abnormal one due to global slowdown and unfavourable monsoon. Notwithstanding, the average inflation was 3.6 per cent backed by negative inflation in fuel. In the current financial year (2010-11), overall average inflation from April-December 2010 at 9.4 per cent, is the highest recorded in the last ten years (Table 4.2).
Weights(%) 2000-01 2001-02 2002-03 2003-04 2004-05 1st 5 Years Average 2005-06 2006-07 2007-08 2008-09 2009-10 2nd 5 Years Average Decadal Average 2009-10 (Apr.-Dec.) 2010-11 (Apr.-Dec.)P
Source: The Office of the Economic Adviser, Ministry of Commerce and Industry. Note: PProvisional
Food Inflation in WPI

4.9 The food index consists of two sub components, namely primary food articles and manufactured food products. The overall weight of the composite food index in the WPI is 24.31 per cent, comprising primary food articles with a weight of 14.34 per cent and manufactured food products with a weight of 9.97 per cent. A major concern in the domestic economy has been a sharp rise in food price inflation during the year 2010-11. The WPI food inflation has moderated to 8.59 per cent in December 2010 after reaching its peak of 20.22 per cent in February 2010. Of its two components, primary food price inflation touched a historic high
in the revised series at 21.9 per cent in February 2010, thereafter declining to 9.4 per cent in November 2010 and once again rising to 13.6 per cent in December 2010 (Table 4.3). However, manufactured food products exhibited a decline in inflation from 19.3 per cent in December 2009 to 0.4 per cent in December 2010. Among food items, sharp rise in prices was observed in onions, fruits, eggs, meat and fish, and milk. The prices of foodgrains, however, remained low on the back of good monsoons with a year-on-year inflation of -2.6 per cent in December 2010.
Main drivers of food inflation

4.10 In 2010-11, inflation in primary food articles was mainly driven by rice, vegetables, potatoes, onions, fruits, milk, eggs, meat and fish, condiments and spices, and tea. However, the WPI of manufactured food products with 2004-05 base is in the comfortable zone. It was 142.7 in December 2010 as against 142.2 in December 2009. This has marginally increased due to vanaspati oil, groundnut oil, sunflower oil, rice bran extraction,
72
Box 4.1: An Unexpected Surge in Food Inflation

Food inflation has been unexpectedly high in recent weeksdriven by surging prices of vegetables, fruits, dairy, oilseeds, and spices. It was unexpected because good rainfall in 2010 was expected to bring down prices. It did: for cereals (wheat, rice) and pulses, which together provide most of the energy and protein intake of households in India, especially of the poor. But the surging prices of other foods caused the overall food inflation to rise. Given the critical importance of food in Indias settingwith high rates of malnutrition and household food spending accounting for above 40 per cent of total household expenditure (versus some 7-8 per cent in richer countries)we disentangle in this Box the relative importance of some competing and popular sets of explanations or factors. (1) Rising International PricesDemand-Supply Shocks or Generalized Commodity Surge? There was a sudden surge in global food prices in 2006-08, which subsequently crashed with the global financial crisis. Prices, however, again started surging since late 2009, and have now surpassed the 2008 peakled by sugar, oils and fats, and cereals (but not dairy and meat). What is driving this global increase? A July 2010 study (Baffes and Haniotis) looking at the previous 2006-08 price rise provides evidence that it was due to a generalized commodity price rise, especially in oil, itself caused by a world awash with liquidity and a falling dollar. It also provides evidence that it was not, as popular explanations would have us believe, because of (1) rising demand in emerging markets (such as China and India); (2) a shift to biofuels; and (3) a trend rise (because price variability dominates any trend). Nevertheless, the previous 53 per cent fall in real food prices between 1975 and 2001 was probably overdone and some adjustment was inevitable. The 2009-10 price resurgence is very similar. Everything from a poor summer wheat harvest in Russia to the recent Australian floods, dry spell in Argentina, Indonesian flooding, poor US maize yields, and rising demand in China and India is being blamedbut sudden price rises of this magnitude across such a variety of food products are difficult to attribute to any specific supply or demand problem except in the context of a generalized commodity price surge (whose solutions lie elsewhere).
FAO Annual Real Food Price Index

300 300 FAO annual real food price index
Food Price Index (2002-04=100)
300 295 290 285 280 275 270

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Year
Food Commodity Price Indices

Index (2002-04=100)
350 300 250 200 150 100
May Oct Mar Dec Nov Jul Aug Dec Jan Feb Jun Apr Sep
FAO Food Price Index

Index (2002-04=100)
200 180 160 140 120 100

May Oct Nov Mar Aug Dec Jan Jun Feb Apr Jul Sep
2009-10 Meat price index Dairy price index Cereals price index
2010-11 Oils price index Sugar price index
2006
2007
2008
2009
2010
(2) Is India buffeted by rising international prices? While some spillovers of global prices to Indian markets are inevitable, world trade in agriculture is often very thin, with large trade restriction and tariff wedges between domestic and international prices. While domestic food prices cannot be fully insulated from global ones, local markets do differ,

(Box 4.1 Continued)
73
Wholesale price of wheat, India and Brazil

550 475
US$/ton
Wholesale price of rice: India, Thailand and China

900 800 700 600 500 400 300 200
400 325 250 175 100

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
US$/ton
Jul 2005
Jul 2006
Jul 2007
Jul 2008
Jul 2009
Jul 2010 45
India
Brazil
India
Thailand
China
the volatility of global prices is far greater than that of domestic prices, and Indias prices have been much more stable, avoiding the highs and lows. Indeed, recent cereals prices have been declining in India relative to global ones. (3) So, what caused the unexpected surge in non-cereal prices? Fundamentals versus uncompetitive markets. One popular explanation for suddenly rising prices of vegetables, spices, dairy, and similar products is rising incomes in India driving prices higher, as consumers are presumed to be shifting from low-value products to higher value ones (consistent with Engels Law). While this may certainly be true as a general demand-side explanation, it merits deeper examination because of two other factors: (1) the sudden spike in prices; and (2) the generally high supply elasticities in such products that should prevent this. Instead, consistent with what is evident globally, when some unexpected supply or demand shocks happen, it is often easier for commodity prices to spike temporarilyunrelated to fundamentals and driven sometimes by local cartelization or other conditions such as sudden flows of speculative capital into thin commodity futures markets. The case of onion prices is a good example of the former, and spices of the latter. Onion prices surged from Rs 15 per kg to over Rs 80 per kg over a matter of weeks, attributed popularly to the effects of extended rainfall and damaged crop in Nashik. However, onions are in fact grown all over India, and the all-India market is generally well-behaved and competitivein that local prices converge to national ones. However, in the presence of unanticipated supply or demand shocks, local onion markets do fragment and become much more ill-behaved and it is possible to observe sudden temporary spikes and divergence that is more consistent with local cartelization conditions, supported by cascading entry barriers along the supply chain (including the restrictions of the Agricultural Produce Marketing Act [APMC] and the restrictions and fees at mandis). Fundamentals, however, catch up, as evident in onion prices crashing in recent weeks to about Rs. 25/kg at the retail level and even lower at wholesale market. Similar conditions apply in commodity exchanges where sudden speculative activity can drive futures prices temporarily higheruntil supplies and fundamentals bring spot and hence futures prices back to reality. Even vegetable prices (such as tomatoes), which had risen dramatically, are easing back, as supply catches up.
Well behaved and convergent regional series of onion retail prices, Andhra Pradesh, 2006-2008
18 16 14 12 10 8 6 4 2
Temporarily less "well-behaved" weekly retail onion price movements, Northern India, Delhi versus Amritsar, Dec 2009 - Dec 2010
70
Price: R/Kg Retail
R/Kg.
60 50 40 30 20 10 0
1 5 9 13 17 21 25 29 33 37 41 48
Average
Jul 2006
Oct 2006
Jul 2007
Jan 2006
Jan 2007
Oct 2007
Jan 2008
2006-07
Apr 2006
Apr 2007
Viziana-garam & Chittivalasa Tirupathi & Renigunta
Kakinada & Rajahmundry Nizamabad & Bodhan
Jaggaiahpet & Miryalguda Kothagudem & Palwaneha
Apr 2008
Weeks
Amritsar Delhi
Nov 2010
Jan 2005
Jan 2006
Jan 2007
Jan 2008
Jan 2009
Jan 2010
74
(Box 4.1 Continued)
Daily trading value futures surge for spices

200 180 160 140 Daily trading value futures for spices grouped together: chillies, jeera, dhaniya, castor, turmeric and pepper.
11 Oct 10 22 Oct 10 02 Nov 10 13 Nov 10 24 Nov 10 05 Dec 10 16 Dec 10 27 Dec 10 07 Jan 11 18 Jan 11
R crores
120 100 80 60 40 20 0
References: John Baffes and Tassos Haniotis (2010), Placing the 2006/08 Commodity Price Boom into Perspective, Policy Research Working Paper 5371, The World Bank. Food and Agriculture Organization (FAO), Global food price monitor, 14 January 2011 and Global Information and Early Warning System (GIEWS) Country Data.
Table 4.3 : Monthly Break-up of WPI Food Inflation

(per cent) All Commodities Wt% Period Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan. Feb. Mar. 2009-10 0.89 1.21 -0.71 -0.62 0.31 1.09 1.48 4.50 6.92 8.53 9.68 10.23 100 2010-11 11.00 10.60 10.28 10.02 8.82 8.93 9.12 7.48P 8.43P 2009-10 8.69 8.91 11.28 12.74 14.36 13.92 12.47 16.73 20.76 20.19 21.85 20.65 (A) Food Articles 14.34 2010-11 20.49 21.37 20.97 18.48 14.96 16.29 14.64 9.41P 13.55P 2009-10 8.86 10.12 9.05 8.46 10.73 12.08 12.97 17.94 19.30 19.16 17.68 15.11 (B) Food Products 9.97 2010-11 9.09 7.09 6.13 7.34 4.58 3.62 3.75 0.57P 0.35P 2009-10 8.76 9.37 10.42 11.10 12.97 13.21 12.66 17.17 20.21 19.80 20.22 18.50 (A+B) Food Combined 24.31 2010-11 16.09 15.85 15.30 14.31 11.06 11.49 10.56 6.11P 8.59P
Source: The Office of the Economic Adviser, Ministry of Commerce and Industry. Note: PProvisional.
Prices and Monetary Management Table 4.4 : Main Drivers of Food Inflation
WPI y-o-y Inflation Dec. 2010 144.1 188.9 186.9 166.4 171.6 189.0 224.9 176.3 391.1 163.8 178.5 195.9 270.6 156.7 142.7 167.3 119.6 147.8 128.4 231.2 160.4 167.1 Dec. 2010 8.43 16.46 13.55 1.16 -5.09 -10.89 24.94 -26.57 45.82 20.44 18.21 19.23 33.50 -5.49 0.35 -9.91 11.46 11.13 10.88 9.94 7.94 10.74 y-o-y *Financial WC year inflation Dec. Apr. 2010 Dec. 2010 100.00 47.96 28.55 0.30 -0.92 -1.48 6.96 -1.15 1.95 5.23 7.95 6.81 3.45 -0.09 0.45 -2.85 0.79 0.40 0.20 0.17 0.75 0.22 6.11 13.86 14.24 1.90 -0.69 -4.98 70.38 67.27 128.31 12.50 6.76 13.83 32.06 21.38 0.71 -8.88 10.23 12.40 14.13 9.89 14.00 11.10
75
Items
Weight%
Dec. 2009 132.9 162.2 164.6 164.5 180.8 212.1 180.0 240.1 268.2 136.0 151.0 164.3 202.7 165.8 142.2 185.7 107.3 133.0 115.8 210.3 148.6 150.9
Mar. 2010 135.8 165.9 163.6 163.3 172.8 198.9 132.0 105.4 171.3 145.6 167.2 172.1 204.9 129.1 141.7 183.6 108.5 131.5 112.5 210.4 140.7 150.4
Financial year WC Dec. 2010 100.00 55.75 40.25 0.67 -0.16 -0.85 19.43 1.72 4.71 4.62 4.41 6.92 4.50 0.37 1.20 -3.41 0.96 0.60 0.33 0.23 1.69 0.31
All Commodities Primary Articles Primary Food Articles Rice Wheat Pulses Vegetables Potatoes Onions Fruits Milk Eggs, Meat, & Fish Condiments & Spices Tea Manufactured Food Sugar Vanaspati Oil, Groundnut Oil, Sunflower Rice Bran Extraction Tea & Coffee Process Malt Liquor
100.00 20.12 14.34 1.79 1.12 0.72 1.74 0.20 0.18 2.11 3.24 2.41 0.57 0.11 9.97 1.74 0.71 0.30 0.17 0.09 0.71 0.15
Source: The Office of the Economic Adviser, Ministry of Commerce and Industry. Note: WC weighted contribution.
tea and coffee process, and malt liquor. The movement of index, inflation, and their contribution to overall inflation among food groups, may be seen in Table 4.4. 4.11 Core inflation is a measure of inflation that excludes items that face volatile price movement, notably food and energy. It is, therefore, a preferred tool for framing long-term policy. Core inflation, which was 0.55 per cent in November 2009, reached its peak in April 2010 at 8.07 per cent (Table 4.5). Thereafter it has moderated in response to monetary measures taken by the Reserve Bank of India (RBI). However, inflation in non-food manufactured products (weight 55.00 per cent) had not increased much and remained in the range of 5.1 to 5.9 per cent in the current financial year. Notwithstanding, year-onyear inflation in the composite non-food index (weight 75.7 per cent) has increased to 8.36 per cent in December 2010 after moderating to 7.96
per cent in September 2010 from 9.18 per cent in April 2010. 4.12 Main items of concern in non-food inflation are raw cotton, raw jute, raw silk, copra, castor seed, sunflower, raw rubber, copper ore, zinc, iron ore, cotton textiles, petrochemical intermediate, and industrial machinery and machine tools. Movement of index of non-food components in the WPI is presented in Figure 4.2. 4.13 In the fuel and power group the major contribution to inflation is from mineral oils accounting for over 90 per cent (Table 4.6).
Annual inflation as per different price indices

4.14 The inflation in terms of the consumer price index for industrial workers (CPI-IW) remained in double digits from July 2009 to July 2010. The inflation in terms of the CPI-AL (Agricultural
76
Table 4.5 : Movement in WPI Non-food Inflation during 2010-11

(per cent) Non-food Composite Index Weight Apr.2010 May-10 Jun.2010 Jul. 2010 Aug.2010 Sep.2010 Oct.2010 Nov.2010 Dec.2010 75.69 9.18 8.71 8.47 8.43 7.97 7.96 8.57 8.02 8.36 Non-food Articles 4.26 18.08 14.76 15.83 15.30 15.81 20.75 25.74 23.22 22.31 Minerals Fuel & Power Core inflation Non-food Manufactured 55.00 5.92 5.77 5.55 5.41 5.21 5.09 5.25 5.41 5.34
1.52 34.56 25.34 22.08 31.60 23.77 26.77 29.38 21.54 27.69
14.91 13.61 14.42 13.92 13.26 12.55 11.06 11.02 10.32 11.19
60.78 8.07 7.27 7.09 7.16 6.77 7.13 7.91 7.40 7.60
Source: The Office of the Economic Adviser, Ministry of Commerce and Industry. Note: Core Index= Total WPI (Total food+ Fuel & power).
Figure 4.2
Index (2004-05=100)
180 170 160 150 140 130 120
Movement of non-food WPI during 2010

Primary non-food articles (Wt. 4.26%) Fuel & power (Wt. 14.91%) Manufactured nonfood (Wt. 55.00%) Total nonfood index (Wt. 75.69%)
May 10
Oct 10
Jul 10
Nov 10
Mar 10
Dec 09
Aug 10
Year
Table 4.6: Index and Contribution of Fuel and Power (disaggregated to overall inflation)
Items Weight % Fuel & Power Coal Mineral Oils Electricity 14.91 2.09 9.36 3.45 Dec. 2009 135.0 162.7 138.6 108.6 WPI:2004-05=100 Mar. 2010 140.1 163.0 146.6 108.6 Dec. 2010 150.1 163.0 160.5 114.0 Dec.2010/Dec.2009 Y-o-Y Inflation 11.19 0.18 15.80 4.97 Y-o-Y WC 20.10 0.06 18.31 1.66 Dec.2010/Mar.2010 FY Inflation 7.14 0.00 9.48 4.97 FY WC 17.96 0.00 15.68 2.25
Source: The Office of the Economic Adviser, Ministry of Commerce and Industry. Note: Y-on-Yyear-on-year. WC- Weighted Contribution
Labourers) and CPI-RL (Rural Labourers) had reached double digits in May 2009 and continued so until July 2010. Further, inflation in terms of the CPI-AL and CPI-RL was higher than inflation based on the CPI-IW during all these months. In August 2010, the inflation in terms of all price indices has
come down to single digit for the first time in 15 months (Table 4.7). 4.15 At 9.47 per cent, inflation in the CPI-IW has substantially declined in December 2010 from its peak of 16.22 per cent in January 2010. The CPI
Dec 10
Jan 10
Jun 10
Feb 10
Apr 10
Sep 10
Prices and Monetary Management Table 4.7 : Year-on-Year Inflation Based on Different Consumer Price Indices
Month WPI (2004-05=100) 2009-10 APR. MAY JUN. JUL. AUG. SEP. OCT. NOV. DEC. JAN. FEB. MAR. Average (Apr-Mar) 0.89 1.21 -0.71 -0.62 0.31 1.09 1.48 4.50 6.92 8.53 9.68 10.23 3.57 2010-11 11.00 10.60 10.28 10.02 8.82 8.93 9.12 7.48P 8.43P CPI(IW) (2001=100) 2009-10 8.70 8.63 9.29 11.89 11.72 11.64 11.49 13.51 14.97 16.22 14.86 14.86 12.37 2010-11 13.33 13.91 13.73 11.25 9.88 9.82 9.70 8.33 9.47 CPI(AL) (1986-87=100) 2009-10 9.09 10.21 11.52 12.90 12.89 13.19 13.73 15.65 17.21 17.57 16.45 15.77 13.91 2010-11 14.96 13.68 13.02 11.02 9.65 9.13 8.43 7.14 7.99
77
CPI(RL) (1986-87=100) 2009-10 2010-11 9.09 10.21 11.26 12.67 12.67 12.97 13.51 15.65 16.99 17.35 16.45 15.52 13.76 14.96 13.68 13.02 11.24 9.66 9.34 8.45 6.95 8.01
Source: Labour Bureau, Shimla and the Office of the Economic Adviser, Ministry of Commerce and Industry. Note: P : Provisional.
maintained higher levels last year relative to the WPI, mainly because of the larger weight assigned to food items. In consumer price indices, food items contribute a weight of 46.20 per cent in the CPI-IW and 69.15 per cent in the CPI-AL as against 24.31 per cent in the WPI. The food inflation has decelerated after reaching its peak in January 2010. As a result CPI inflation rates have gone down substantially.
of relatively high inflation is concentrated in food, pan, supari, tobacco and intoxicants, and housing. Two major contributors to high CPI-IW inflation were food and housing. The housing sector is the third major contributor after food and the miscellaneous group, having a 15.3 per cent weight in the CPI-IW commodities basket. However, the average inflation (April-December 2010) was lower than in the corresponding period last year (Table 4.8). 4.17 The non-food inflation in CPI-IW has increased during April-December 2010 to 11.64 per cent as against 8.78 per cent in the corresponding period last year. During April-December 2010, food
Disaggregated Consumer Price Inflation

4.16 Analysis at this level has assumed importance in view of the fact that the current phase
Table 4.8 : Quarterly Inflation Trend in CPI-IW by Major Commodity Groups (Base: 2001=100)
2009-10 Weights General index Food Group Pan, Supari, Tobacco & Intoxicants Fuel & Light Housing Clothing, Bedding & Footwear Miscellaneous Group Total Non-food
Source: Labour Bureau, Shimla.
2010-11 Apr.Dec. 11.67 14.70 8.34 4.08 16.82 4.34 6.11 8.78 Apr. Jun.13.66 13.99 12.93 6.00 33.1 4.51 5.03 13.33 Jul.Sep. 10.31 10.34 12.13 11.26 21.08 5.51 4.72 10.27 Oct.Dec. Apr. Dec.
Apr.Jun.8.87 11.47 7.44 4.59 5.97 4.14 7.11 6.45
Jul. Sep. 11.75 13.97 8.80 3.02 22.06 4.38 5.95 9.64
Oct. Dec. 13.06 16.56 7.86 3.91 22.06 4.22 4.30 9.62
100.00 46.20 2.27 6.43 15.27 6.57 23.26 53.80
9.16 10.96 7.01 10.29 11.26 12.10 10.84 7.05 5.35 9.41 5.70 5.03
21.08 24.68
11.42 11.64
78
Figure 4.3
700 600 500 400 300 200 100
Onions movement in Dec 2010: state wise CPI and Y-o-Y inflation
180 150 120 90 60 30 0
Y-o-Y inflation (per cent)
CPI-IW (2001=100)
Inflation (%) Dec 10/ Dec 09
CPI Dec 09
CPI Dec 10
Himachal Pradesh
Jammu & Kashmir
Madhya Pradesh
Uttar Pradesh
Chhattisgarh
West Bengal
Maharashtra
Chandigarh
Jharkhand
inflation has declined to 10.29 per cent as compared to 14.70 per cent during the corresponding period last year (Table 4.8). Inflation in the CPI-IW has increased in December 2010 to 9.47 per cent as against 8.33 per cent in November 2010. Food inflation in the CPI-IW has also increased to 7.98 per cent in December 2010 from 5.35 per cent in November 2010. 4.18 Inflation in fruits and vegetables and onions based on the CPI-IW in December 2010 was 15.3 per cent and 77.6 per cent respectively as against 22.77 per cent and 45.82 per cent respectively based on the WPI. State-wise CPI-IW and year-on-year inflation in December 2010 for onions shows
unprecedented rise in inflation in the northern region, particularly Punjab (Figure 4.3).
Introduction of CPI-Urban and CPI-Rural

4.19 The Central Statistics Office (CSO) has taken up a new initiative of compilation of CPI (urban), CPI (rural), and CPI (rural+urban) for all States/UTs and all India by considering all sections of the urban and rural population. These indices would reflect the true picture of price behaviour of various goods and services consumed by the urban and rural population. Box 4.2 is a short note on the CPI (urban), CPI (rural), and national CPI giving salient features of this new series of indices.
Box 4.2 : New Series of CPI numbers

1. The CSO has taken an initiative for compilation of new series of urban, rural, and combined (rural+urban) CPI at State/UT/all India level with increased scope and coverage. 2. CPI (rural) and CPI (urban) would be compiled for each State/UT as well as at all India level. Weighting diagrams (consumption pattern) of the indices have been derived from the results of the National Sample Survey (NSS) 61st round of Consumer Expenditure Survey (2004-05). 3. In urban areas, all cities/towns having population (2001 Population Census) more than 9 lakh and all state/UT capitals not covered therein were selected purposively. In all 310 towns have been selected either on purposive or random basis from which 1114 quotations (price schedules) are canvassed every month. 4. In rural areas, with a view to having a manageable workload and considering that the CPI (rural) would provide the price changes for the entire rural population of the country, a total of 1183 villages have been selected at all India level. The broad criterion of selection of villages is to have representation of all the districts within the State/UT and therefore two villages from each district adjusted based on rural population of the State/UT have been selected randomly from different tehsils. 5. The CSO has also decided to bring out a national CPI by merging CPI (urban) and CPI (rural) with appropriate weights, as derived from NSS 61st round of Consumer Expenditure Survey (2004-05) data. 6. The Technical Advisory Committee on Statistics of Prices and Cost of Living (TAC on SPCL) in its 49th meeting held on 10 November 2010 decided to take 2010(January-December) as the base year for a new CPI (urban), CPI (rural) and CPI(rural+urban)series .Indices for January 2011 are likely to be released by February 2011.
Rajasthan
Haryana
All India
Gujarat
Bihar
Delhi
Kerala
Punjab
Assam
Prices and Monetary Management Figure 4.4

Indices (2004-05=100)
170 160 150 140 130 120 110 100 2004-05 PFCED 100.0 CPI-IW 100.0 CPI-RL 100.0 2005-06 103.4 104.4 103.9 2006-07 109.9 111.4 111.7 2007-08 115.4 118.3 119.7 2008-09 122.8 129.1 131.9 2009-10 132.9 145.0 150.0 2010-11 145.9 158.3 163.0 PFCED CPI-IW CPI-RL
79
Annual trend in price indices and PFCED
Sources: Labour Bureau and CSO Note: The PFCED for 2010-11 is based on advance estimates, CPI-IW and CPI-RL for 2010-11 are for the period April-December 2010.
Private Final Consumption Expenditure Deflator (PFCED)

4.20 The gross domestic product (GDP) or gross domestic income (GDI) is the market value of all final goods and services produced within a country in a given period. It is often positively correlated with the standard of living. Movement of the consumption pattern of a country can be analysed through its deflator generated by the Private Final Consumption Expenditure (PFCE) at current prices over constant prices base 2004-05. Annual price indices data for the CPI-RL, CPI-IW and PFCED from 2004-05 onwards indicate an upward swing in the standard of living (Figure 4.4). 4.21 Price changes may cause consumers to switch from buying one good to another. Whereas the fixed basket CPI does not account for altered spending habits caused by price changes, the PFCE
Figure 4.5
Y-o-Y inflation (per cent)
40 30 20 10 0 -10 -20 -30 -40
deflators ability to account for such substitutions makes it the preferred measure of inflation. The CPI-RL represents rural areas, where price indices are reigning higher than the CPI-IW in response to improvements in purchasing power and consumption pattern on account of various employment generation schemes of the Government like the Mahatma Gandhi National Rural Employment Guarantee Scheme (MNREGS).
Global and domestic inflation

4.22 From April 2009 global food prices showed much lower volatility than the WPI-based domestic food inflation. However, a higher volatility was seen in international food inflation from September 2010 as compared to domestic food inflation in India. Costlier imports could push up domestic inflation (Figure 4.5 and Table 4.9).
Global and domestic food inflation

Global food inflation Domestic food inflation
May
May
Jul
Oct
Jul
Jan
Jun
Nov
Jan
Jun
Oct
Mar
Dec
Mar
Nov
Aug
Aug
2008-09
2009-10
2010-11
Year
Dec
Feb
Feb
Apr
Sep
Apr
Sep
80
Table 4.9 : Domestic and Global Y-o-Y Inflation Trend (per cent)
(base: 2004-05=100 ) Commodity Agriculture Beverages Energy Fats & Oils Fertilizers Food Grains Metal & Minerals Non-fuel Raw Materials Timber Other Raw materials Other Food Domestic Dec-09 18.5 6.5 4.6 -0.7 7.0 20.2 19.5 -7.1 7.4 11.1 -1.3 18.3 16.3 Global Dec-09 28.5 27.8 55.4 34.6 -41.7 23.8 5.0 42.8 27.8 36.5 -9.2 88.4 30.7 Domestic Mar-10 20.6 8.2 13.8 3.3 6.2 18.5 13.2 3.4 9.6 26.1 8.8 44.2 7.0 Global Mar-10 17.8 23.0 60.1 18.2 -27.1 8.5 -10.3 41.4 23.0 44.0 -5.6 91.1 16.9 Domestic Dec-10 15.3 5.3 11.2 5.0 5.5 8.6 -2.6 12.4 7.9 24.1 50.3 33.6 -0.5 Global Dec-10 27.8 32.4 19.7 35.4 39.6 25.3 25.3 38.6 32.4 45.8 13.4 63.5 10.2
Sources : Pink sheet of the World Bank and the Office of the Economic Adviser, Ministry of Commerce and Industry.
4.23 A comparison of the global food inflation and WPI-based domestic food inflation gives the actual picture of food inflation (Table 4.9). 4.24 During the current year, high inflation in food articles is not unique to India and is widespread. The domestic food price situation could get exacerbated by the increase in global food prices because of dependency on import of some food items like edible oils. Current growth and inflation trends warrant persistence with an anti-inflationary monetary stance.
The pilot study covered 5 cities, namely Bengaluru, Bhopal, Delhi, Kolkata, and Mumbai. Thereafter, compilation of RESIDEX has been expanded to ten more cities, namely Ahmedabad, Faridabad, Chennai, Kochi, Hyderabad, Jaipur, Patna, Lucknow, Pune, and Surat. RESIDEX is now being updated on a quarterly basis with 2007 as base year. The latest data cover 15 cities and have been updated up to June 2010 (April June). 4.27 The movement in prices of residential properties has shown a mixed trend in the 15 cities covered under the NHB RESIDEX in the first half of 2010. Residential housing prices in 10 cities have shown an increasing trend compared to the base year. They are Surat, Mumbai, Lucknow, Ahmedabad, Chennai, Pune, Kolkata, Patna, Faridabad and Bhopal. However, the 5 cities that have shown correction in prices in first half of 2010 are Jaipur, Bengaluru, Kochi, Delhi and Hyderabad. Jaipur has shown the maximum price correction in residential property prices (Figure 4.6).
Housing Price Index (NHB- RESIDEX)

4.25 As one of the most populous and fastestgrowing countries in the world, India has promising conditions for a vibrant housing market with considerable growth potential. The housing sector contributes more than 9 per cent of national employment. Housing finance in India, however, remains underdeveloped. The challenge in the Indian housing market is primarily in the low and moderate income segments. Though there is no lack of demand for housing, there is shortage of credit flow. 4.26 RESIDEX was first launched in 2007 by the National Housing Bank (NHB) to provide an index of residential prices in India across cities and over time. Initially a pilot study was conducted with 2001 as base year during the period 2001- 05 to capture the trend of price movements in residential property.
Measures to contain inflation

4.28 The Government monitors the price situation regularly as price stability remains high on its agenda. Measures taken to contain prices of essential commodities include selective ban on exports and futures trading in foodgrains, zero import duty on select food items, permitting import
81
Box 4.3 : Measures to Contain Inflation, Particularly Food Inflation

(A) Monetary Measures As part of the monetary policy review, the RBI has taken suitable measures to moderate demand to levels consistent with the capacity of the economy to maintain its growth without provoking price rise. It has already raised its key policy rates several times and has narrowed the liquidity adjustment facility (LAF) corridor to reduce volatility of rates. The economy has witnessed aggressive tightening since March 2010. As per the announcement of the RBI on 25January 2011, the repo rate and reverse repo rate are 6.5 per cent and 5.5 per cent respectively. (B) Fiscal Measures 1. Import duties reduced to zero on rice, wheat, pulses, edible oils (crude), butter, and ghee and to 7.5 per cent on refined and hydrogenated oils and vegetable oils; 2. Import of raw sugar allowed at zero duty under open general licence (OGL). (C) Administrative Measures 1. Levy obligation in respect of all imported raw sugar and white/refined sugar removed. 2. Export of non-basmati rice, edible oils (except coconut oil and forest based oil) and pulses (except Kabuli chana) banned. 3. Minimum export price (MEP) used to regulate exports of onion (at US$1200 per tonne for December 2010) and basmati rice (at US$900 per MT); 4. Futures trading in rice, urad, and tur suspended by the Forward Market Commission. 5. Stock limit orders extended in the case of pulses, paddy, and rice up to 30 September 2011 and edible oil and edible oilseeds up to 31March 2011. 6. Export of Onion (all varieties) not permitted with effect from 22 December 2010 until further orders. 7. Full exemption from basic custom duty, special additional duty and education cess provided to onions and shallots with effect from 21 December 2010. 8. NAFED and NCCF to undertake sale of onions at Rs 35 per kg from their retail outlets at various locations, with suitable budgetary support to be provided for this purpose. 9. Other measures with a wider horizon include the following: a. A scheme to support the State Governments in the setting up of farmers mandis and mobile bazaars and improve the functioning of civil supplies corporations and cooperatives will be finalized urgently. b. The existing PDS will be suitably strengthened through computerization and other steps, including opening more procurement windows across the country. c. State Governments would be urged to review the APMC Acts and, in particular, consider exempting horticultural products from their purview thereby mitigating marketing and distribution bottlenecks in this crucial sector. State Governments will also be urged to consider waiving mandi tax, octroi, and other local levies which impede smooth movement of essential commodities, as well as to reduce commission agent charges. d. Investment will be encouraged in supply chains, including provisions for cold storages, which will be dovetailed with organized retail chains for quicker and more efficient distribution of farm products, minimizing wastage. The DIPP, Department of Food and Public Distribution, Ministry of Food Processing Industries, and the Planning Commission will jointly work out schemes for this purpose. e. An Inter-Ministerial Group (IMG) has been set up under the Chief Economic Adviser, Ministry of Finance, to review the overall inflation situation, with particular reference to primary food articles. The IMG will, inter alia, review production/ rainfall trends and build an institutional machinery to read warning signals, assess international trends, recommend action on the fiscal, monetary, production, marketing, distribution, and infrastructure fronts to prevent price spikes, and suggest measures to strengthen collection and analysis of data and forecasting. f. The Committee of Secretaries under the Cabinet Secretary will review the prices situation with individual States, and advise the Departments concerned of the Central Government to maintain close coordination with State agencies to get direct feedback with a view to taking suitable remedial measures on a fast track.
82
Figure 4.6
190
Movement in city-wise average RESIDEX

2007 2008 2009 2010 H-1
Index (2007=100)
170 150 130 110 90 70 50

Hyderabad Bengaluru Faridabad Chennai Kolkata Mumbai Lucknow Bhopal Jaipur Delhi Ahmedabad Patna Kochi Surat Pune
of pulses and sugar by public-sector undertakings, distribution of imported pulses and edible oils through the PDS, and release of higher quota of non-levy sugar. In addition, State Governments are empowered to act against hoarders of food items by holding in abeyance the removal of restrictions on licensing, stock limits, and movement of food articles under the Essential Commodities Act 1955. Some of the important anti-inflationary measures taken are given in Box 4.3.
scheduled commercial banks (SCBs) to its precrisis level. 4.30 As there were clear signs that the recovery was consolidating, it was felt that the main policy instruments were at levels more consistent with a fast recovering economy than a crisis economy and it was imperative therefore to carry forward the process of exit from an accommodative policy stance. Taking this consideration into account, during 2010-11 the RBI raised the policy rates six times whereby the repo rate under the LAF has cumulatively been increased by 175 basis points (bps) to stand at 6.5 per cent and the reverse repo rate by 225 bps to 5.5 per cent. The RBI has moreover retained the cash reserve ratio (CRR) at 6 per cent of the net demand and time liabilities (NDTL) of banks. Thus in 2010-11, the persistently high inflation above the comfort level of the RBI , together with growth buoyancy, necessitated that the monetary policy focus remain on containing inflation and inflationary expectations. 4.31 The RBI indicated in its First Quarter Review of Monetary Policy (27 July 2010) that it will now undertake mid-quarter reviews roughly at the interval of one and half months after each quarterly review. By instituting these, it was the Banks intention to take the surprise element out of offcycle actions. Accordingly, the Reserve Bank announced the mid quarter monetary policy review on 16 September 2010 and 16 December 2010. 4.32 In 2010-11, the RBI continued its policy of maintaining adequate liquidity in the system so that all legitimate credit requirements for productive purposes were met, consistent with the objective of price and financial stability. The management of liquidity was achieved through appropriate use of
MONETARY DEVELOPMENTS DURING 2010-11

4.29 In response to the global financial crisis beginning mid-September 2008, the RBI adopted an accommodative monetary policy stance that helped instil confidence among market participants and ensure that the economy recovered as quickly as possible. The Indian economy exhibited acceleration in the momentum of recovery during the course of 2009-10. Despite a deficient monsoon, the expansionary monetary and fiscal stance adopted in response to the global crisis contributed to the recovery. After remaining subdued during the first half of the year, headline inflation spiked in the second half, initially driven by high food prices but turning more generalized over successive months. In view of rising food inflation and the risk of it impinging on inflationary expectations alongside the consolidating recovery, the RBI stated a clear shift in stance from managing the crisis to managing the recovery and announced the first phase of exit from the expansionary monetary policy in its Second Quarter Review of October 2009 by terminating some sector-specific facilities and restoring the statutory liquidity ratio (SLR) of
Prices and Monetary Management open market operations (OMOs), the Market Stabilization Scheme (MSS), LAF, and a slew of special facilities. While the overall liquidity in the system has remained in deficit consistent with the policy stance, the extent of tightness has been beyond the comfort level of the RBI of (+)/(-) 1 per cent of NDTL, mainly due to the persistence of large Government cash balances. In addition, the liquidity deficit has been accentuated by structural factors such as significantly above-trend currency expansion and relatively sluggish growth in bank deposits even as the credit growth accelerated in 2010-11. While the liquidity deficit improved transmission of monetary policy signals with several banks raising deposit and lending interest rates, excessive deficits induce unpredictability in both availability and cost of funds, making it difficult for the banking system to sustain credit delivery. 4.33 In view of the persistent liquidity pressures, the RBI in November 2010 implemented some measures such as additional liquidity support to SCBs under the LAF up to 2.0 per cent of their NDTL, continuation of the second LAF (SLAF), and OMO purchase of Government securities. Subsequently in the mid quarter review, 16 December 2010, the RBI reduced the SLR of SCBs from 25 per cent of their NDTL to 24 per cent with effect from 18 December 2010. Furthermore, it decided to conduct OMO auctions for purchase of government securities for an aggregate amount of ` 48,000 crore in the next one month. It was also clearly communicated that as the economy expands, it needs primary liquidity, which will have to be provided in a manner consistent with the monetary policy stance. Such provision of liquidity should not be construed as a change in the monetary policy stance since inflation continues to remain a major concern. 4.34 To sum up, the underlying growth momentum of the Indian economy remains strong. Even as inflation has moderated, it remains significantly above the comfort level of the RBI. Moreover, risks to inflation remain on the upside, both from domestic demand and higher global commodity prices. There is, therefore, a need for continued vigilance on the inflation front against the build-up of demand-side pressures. A major challenge for the RBI in recent times has been liquidity management. It is the RBIs endeavour to alleviate the liquidity pressure in a manner consistent with the monetary policy stance of containing inflation and anchoring inflationary expectations.
1
83
4.35 The current monetary policy stance, as indicated in the Banks Second Quarter Review (November 2010) was as follows: a. Contain inflation and anchor inflationary expectations while being prepared to respond to any further build-up of inflationary pressures. b. Maintain an interest rate regime consistent with price, output, and financial stability. c. Actively manage liquidity to ensure that it remains broadly in balance, with neither a surplus diluting monetary transmission nor a deficit choking off fund flows. In the same document the RBI observed that based purely on current growth and inflation trends, the Reserve Bank believes that the likelihood of further rate actions in the immediate future is relatively low. This indication of pause will not deter it from taking further policy actions if required and, accordingly, it also indicated that however, in an uncertain world, we need to be prepared to respond appropriately to shocks that may emanate from either the global or domestic environment. In continuation of that announced policy, and renewed inflationary pressures, especially in food prices, the RBI raised policy rates again in January 2010 by 25 bps in their Third Quarter Review.
Trends in Monetary Aggregates

4.36 During the year 2010-11, the growth rates of reserve money (M0) and narrow money (M1)1 have been higher as compared to the preceding year while broad money (M3) growth has been lower (Table 4.10). The moderation in growth of narrow and broad money is largely on account of the deceleration in growth of deposits, both demand and time (up to 3 December 2010).
Reseve Money (M0)

4.37 During 2010-11, on a financial-year basis, M0 expanded by 8.4 per cent (up to 10 December 2010), compared to an increase of 1.6 per cent during the corresponding period of the preceding year (Table 4.11). 4.38 The net foreign assets (NFA) of the RBI increased by 6.1 per cent during this period, as against an increase of 1.5 per cent during the corresponding period of the previous year. On a yearon-year basis, as on 11 December 2010, the NFA of the RBI marginally increased by 0.6 per cent compared to a 6.8 per cent increase a year earlier (Figure 4.7).
For the period up to 19 November 2010.
84
Table 4.10 : Movement of select monetary parameters

(per cent) Items Yearly Variation 2008-09 2009-10 2009-10 M0 M1 M3
Source : RBI
Growth rates as on December 3, 2010 Financial-year basis 2010-11 6.3 3.1 8.2 Year-on-year basis 2009-10 15.3 18.3 18.6 2010-11 22.2 16.5 15.3
6.4 9 19.3
17 18.6 16.8
1.7 5.1 9.6
Table 4.11 : Sources of change in reserve money

(per cent) Growth rate Financial-year basis Dec. 11 Dec. 10, 2009 2010 over over March 31, March 31, 2009 2010 1.6 8.4 Year -on-Year Dec. 11 2009 over Dec. 12, 2008 12.8 Dec. 10, 2010 over Dec. 11 2009 24.8
2009-10 Reserve Money A. Components a) Currency in Circulation b) Bankers Deposits with RBI c) Other Deposits with RBI B. Select Sources of Reserve Money 1. Net Foreign Exchange Assets of RBI 2. Governments Currency Liabilities to the Public 3. Net Non-monetary Liabilities of RBI
Source: RBI.
17
15.7 21 -31.1
10.8 -19.6 -34.4
14 -4.1 0.3
17.2 1.2 -28
19 44.2 5.5
-3.8 12.1 -22.3
1.5 7.7 -1.5
6.1 4.4 17.1
6.8 10.6 19.5
0.6 8.6 -7.6
Figure 4.7
30 25 20
Reserve money and RBI net foreign exchange assets-annual growth rate
RM NFA
Per cent
15 10 5 0 -5 -10
May
Jul
May
Oct
Oct
Nov
Dec
Mar
Mar
Aug
Aug
2009-10
2010-11
Year
Dec
Jul
Nov
Jun
Jun
Jan
Feb
Apr
Sep
Sep
Apr
Prices and Monetary Management 4.39 Net RBI credit to the Central Government increased by ` 70,856 crore during the financial year so far (up to 10 December 2010). This was mainly on account of increase in repo operations under the LAF and open market purchases of the Bank, partly offset by increase in the cash balances of the Central Government. On a year-on-year basis, increase in the net RBI credit to the Central Government, as on 10 December 2010, was ` 2,10,714 crore as against an increase of ` 98,273 crore a year earlier.
85
cent during the corresponding period of the previous year. On a year-on-year basis, as on 3 December 2010, the growth of currency with the public was higher at 18.7 per cent as compared to 17.2 per cent a year earlier. For the same period, growth in demand deposits was 13.7 per cent as compared to 19.9 per cent a year earlier.
Broad money (M3)

4.42 Broad money (M3) supply increased by 16.8 per cent during 2009-10 which was lower than the 17.0 per cent indicative growth envisaged in the Annual Policy Statement of the Reserve Bank for 2009-10. 4.43 The main components and sources of broad money are indicated in Table 4.12. 4.44 Time deposits with banks during 2010-11 grew at a lower rate of 10.1 per cent (up to 3 December 2010) as compared to 11.2 per cent during the corresponding period of the previous year. On a year-on-year basis also, as on 3 December 2010, the growth in time deposits moderated to 14.9 per cent from 18.7 per cent a year earlier (Table 4.12). 4.45 During the current financial year 2010-11 (up to 3 December 2010) the growth in M3 was 8.2 per cent as compared to 9.6 per cent during the corresponding period of the previous year. On a year-on-year basis, M3 grew by 15.3 per cent on 3 December 2010, as against growth of 18.6 per cent on the corresponding date of the previous year (Table 4.12 and Figure 4.9). This is lower than the indicative 17.0 per cent target set in the Second Quarter Review of the Annual Policy Statement for 2010-11.
Narrow Money (M1)

4.40 Narrow money (M1) increased by 18.6 per cent in 2009-10 as compared to an expansion of 9.0 per cent during 2008-09. During 2010-11, M1 growth has generally been higher than in 2009-10, though there was significant deceleration during the latest fortnight for which data are available (i.e., 3 December 2010). On a financial-year basis, M1 increased by 3.1 per cent during the current year (up to 3 December 2010) compared to increase of 5.1 per cent during the corresponding period of the previous year. On a year-on-year basis, as on 3 December 2010, M1 growth was 16.5 per cent as compared to 18.3 per cent a year earlier (Figure 4.8). During the current financial year (up to 3 December 2010), currency with the public expanded by 12.9 per cent (` 99,324 crore), compared to an increase of 9.8 per cent (` 64,962 crore) during the corresponding period of the previous year. 4.41 The other important component of M 1 , namely demand deposits with banks decreased by 7.3 per cent during the period up to 3 December 2010 as against a marginal increase of 0.1 per
Figure 4.8
24 22 20 18
Narrow money (M1) - annual growth rate

2008-09 2009-10 2010-11
Per cent
16 14 12 10 8 6 4
09 May 23 May 04 Jul 18 Jul 10 Oct 06 Jun 20 Jun 24 Oct 07 Nov 21 Nov 05 Dec 19 Dec 02 Jan 16 Jan 30 Jan 13 Mar 27 Mar 13 Feb 01 Aug 15 Aug 29 Aug 12 Sep 26 Sep 27 Feb 11 Apr 25 Apr
86
Table 4.12 : Sources of Change in Money Stock (M3)

Growth Rate 31 March 31 March 31 March 5 December 4 December 2009 2009 2010 2008 2009 to to to to to 31 March 4 December 3 December 4 December 3 December 2010 2009 2010 2009 2010 (per cent) I. M1 (Narrow Money) II. M3 (Broad Money) (1+2+3+4) 1. Currency with the Public 2. Demand Deposits with Banks 3. Time Deposits with Banks 4 Other Deposits with RBI III. Sources of Change in Money Stock (M3) 1. Net Bank Credit to Government of which: Other Banks credit to Government 2. Bank Credit to Commercial Sector of which: Other Banks credit to Commercial Sector 3. Net Foreign Exchange Assets of the Banking Sector 4. Governments Currency Liabilities to the Public 5. Banking Sectors Net Nonmonetary Liabilities Other than Time Deposits Memo Items: 1. Money Multiplier (M3\M0) 2. Velocity of Money 3. Net Domestic Assets 4. Net Domestic Credit
Source : RBI.
18.6 16.8 15.4 22.8 16.1 -31.1 30.5
5.1 9.6 9.8 0.1 11.2 -33.7 19.4
3.1 8.2 12.9 -7.3 10.1 9.1 8.7
18.3 18.6 17.2 19.9 18.7 -23.1 38.2
16.5 15.3 18.7 13.7 14.9 13.4 18.8
19.7 15.9
19.5 4.8
6.9 10.3
26.7 10.5
7.1 21.9
16.3 -5.2 12.1
5.1 -0.3 7.7
10.3 5.3 4.4
10.4 9.0 10.6
22.0 0.1 8.6
16.0 4.85 1.20 25.4 20.2
15.1
9.9
23.4
10.8
13.5 9.2
9.1 9.8
22.2 18.2
20.6 20.9
Figure 4.9
24
Broad money (M3) - annual growth rate

2008-09
22 2009-10
Per cent
20 2010-11 18 16 14
10 Oct
09 May
23 May
24 Oct
07 Nov
21 Nov
04 Jul
18 Jul
05 Dec
19 Dec
06 Jun
20 Jun
02 Jan
16 Jan
30 Jan
12 Mar
27 Mar
13 Feb
12 Sep
26 Sep
01 Aug
15 Aug
29 Aug
27 Feb
11 Apr
25 Apr
87
Figure 4.10
30
Bank credit to commercial sector - annual growth rate

2008-09
25 2009-10
Per cent
20 2010-11 15 10 5
11 May 25 May 09 Nov 23 Nov 07 Dec 21 Dec 14 Mar 26 Mar 28 Mar
2008-09 5.6 2009-10 2010-11 4.8 4.4 4.0
12 Oct
26 Oct
04 Jan
08 Jun
22 Jun
18 Jan
06 Jul
20 Jul
01 Feb
15 Feb
14 Sep
4.46 Among the sources of M3, however, bank credit to the commercial sector has been accelerating since November 2009 (Figure 4.10).
28 Sep
03 Aug
17 Aug
31 Aug
Money Multiplier
4.47 During 2009-10, the expansion in M0 was higher than that in M3. Accordingly, the ratio of M3 to M0 (money multiplier) showed a decrease. At the end of March 2010, this ratio was 4.8, marginally lower than the end-March 2009 figure of 4.11. During the current financial year 2010-11, the money multiplier has generally shown a decreasing trend on account of reserve money registering a higher growth than broad money supply. As on 3 December 2010, the money multiplier was 4.9 compared to 5.2 on the corresponding date of the previous year (Figure 4.11).
close to the indicative projection of 17 per cent, non-food credit growth at 24.4 per cent was much above the indicative projection of 20 per cent. Credit expansion in the recent period has been rather sharp, far outpacing the expansion in deposits. Rapid credit growth without commensurate increase in deposits is not sustainable, with banks having to rely on borrowing from the Central bank. As a result of injection of primary liquidity of over ` 67,000 crore through OMO auctions since early November 2010, the structural liquidity deficit in the system has declined significantly. 4.49 Monetary deepening, as measured by the ratio of average M3 to the GDP, increased from 43.8 per cent in 1990-91 to 83.1per cent in 200910. This could be attributed to the spread of banking services in the country and development of the financial sector. The monetization of the economy as measured by the ratio of average M1 to the GDP
Movement in other monetary indicators

4.48 While the year-on-year money supply (M3) growth at 16.5 per cent in December 2010 was
Figure 4.11
6.0
Movements in money multiplier
Per cent
5.2
10 Oct
24 Oct
07 Nov
21 Nov
05 Dec
19 Dec
02 Jan
16 Jan
12 Mar
29 Feb
13 Apr
27 Apr
09 May
23 May
31 Mar
04 Jul
18 Jul
30 Feb
13 Feb
06 Jun
20 Jun
12 Sep
26 Sep
01 Aug
15 Aug
29 Aug
27 Feb
11 Apr
25 Apr
88
Table 4.13 : Select monetary aggregates (ratios to GDP)

As per cent of GDP at Market Prices (1999-2000 base) Currency Demand deposits with public with banks 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05* 2005-06* 2006-07* 2007-08* 2008-09* 2009-10* 8.7 8.8 8.6 8.8 9.1 9.4 9.2 9.3 9.1 9.5 9.6 10 10.5 10.7 10.4 10.3 10.5 10.5 11 11.4 6.4 6.9 6.9 6.6 7.2 6.7 6.5 6.7 6.7 6.8 7.2 7.4 7.5 7.8 8 8.8 9.4 9.5 9.3 9.7 Time deposits with banks 28.5 28.8 29.8 30.3 30.4 29.8 30.5 33 35.5 37.7 41.3 44.9 49 48.9 47 46.8 48.8 52.7 57.5 61.9 Aggregate deposits 34.9 35.7 36.6 36.9 37.6 36.5 37 39.7 42.2 44.5 48.5 52.2 56.5 56.7 55 55.6 58.2 62.2 66.8 71.5 M1 15.3 15.9 16 15.7 16.7 16.6 16.1 16.3 16 16.4 17 17.5 18.2 18.7 18.5 19.3 20 20.1 20.4 21.2 M3 43.8 44.7 45.7 46.1 47.1 46.4 46.6 49.2 51.5 54.1 58.2 62.3 67.1 67.6 65.5 66.1 68.9 72.8 77.9 83.1
Source : RBI. Note:* Based on GDP data with 2004-05 as base.
Figure 4.12
Ratios to GDP (per cent)
90 80 70 60 50 40 30 20 10
Select monetary aggregates as per cent of GDP

Aggregate deposits M1 M3
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
Year
has also shown an upward trend, albeit at a slower rate, during this period. In 1990-91, this ratio was
15.3 per cent and it increased to 21.2 per cent in 2009-10 (Table 4.13 and Figure 4.12).
2009-10
89
LIQUIDITY MANAGEMENT
4.50 The Reserve Bank continued its active policy of liquidity management through the LAF, CRR, and OMOs. During 2010-11 so far, the centres surplus balance with the RBI has been a key driver of autonomous liquidity. Currency in circulation has been another key determinant of autonomous liquidity. The LAF window of the Reserve Bank, which remained in surplus mode for nearly 18 months, switched into deficit mode towards endMay 2010 and largely maintained the trend subsequently. 4.51 The liquidity conditions changed significantly during the first quarter of 2010-11. The gradual moderation in volume of surplus liquidity in the system since February 2010 reflected the calibrated normalization of the monetary policy by the RBI. Accordingly, the LAF remained in the absorption mode, though the absorption volume declined gradually. To anchor inflation and prevent Table 4.14 : Liquidity management
further build-up of inflationary pressure, the RBI increased the repo and reverse repo rates as well as CRR by 25 bps each in April 2010 in the Annual Monetary Policy for 2010-11.The surplus liquidity in the domestic market gradually declined thereafter. A significant development was that the LAF window of the RBI, after remaining in surplus mode for nearly 18 months, switched into deficit mode towards the end of May 2010 mainly on account of 3G (3rd generation spectrum) and BWA (broadband wireless access) auctions and the consequent migration of liquidity to the Central Governments cash balance account with the RBI. In anticipation of temporary tightening of liquidity conditions, the RBI introduced measures allowing SCBs to avail of additional liquidity support under the LAF to the extent of up to 0.5 per cent of their NDTL and also access to the SLAF on a daily basis for the period 28 May - 2 July 2010. The average daily liquidity injection under the LAF during June 2010 was around ` 47,000 crore in contrast to the
(` crore) Outstanding as on last Friday of the month 2009 January February March** April May June July August September October November December 2010 January February March* April May June July August September October November LAF MSS Centres surplus* Total
54,605 59,820 1485 1,08,430 1,10,685 1,31,505 1,39,690 1,53,795 1,06,115 84,450 94,070 19,785 88,290 47,430 990 35,720 6215 -74,795 1775 11,815 -30,250 -1,17,660 -1,03,090
1,08,764 1,01,991 88,077 70,216 39,890 22,890 21,063 18,773 18,773 18,773 18,773 18,773 7737 7737 2737 2737 317 317 0 0 0 0 0
-9166 -9603 16,219 -40412 -6114 12,837 26,440 45,127 80,775 69,391 58,460 1,03,438 54,111 33,834 18,182 -28,868 -7531 76,431 16,688 20,054 65,477 86,459 93,425
1,54,203 1,52,208 1,05,781 1,38,234 1,44,461 1,67,232 1,87,193 2,17,695 2,05,663 1,72,614 1,71,303 1,41,996 1,50,138 89,001 21,909 9589 -999 1953 18,463 31,869 35,227 -31,201 -9665
Note : * Excludes minimum cash balances with the RBI in case of surplus. ** Data pertain to 31March. -ve sign under LAF indicates injection of liquidity through the LAF. -ve sign under Centres surplus indicates WMA /OD (ways and means advances/overdraft).
90
Figure 4.13
200 150 100
LAF reverse - repo and repo volume
FLAF
R thousand crores
SLAF 50 0 -50 -100 -150
01 May
01 Oct
01 May
01 Dec
01 Oct
01 Jul
01 Jul
01 Dec
01 Jan
01 Nov
01 Jan
01 Nov
01 Jun
01 Sep
01 Jun
01 Mar
01 Mar
2008-09
2009-10
2010-11
Year
Note: 1) Reverse repo is positive and repo is negative. 2) The second LAF (SLAF) is usually being conducted on Reporting Fridays with effect from May 8, 2009. As a part of liquidity easing measures, SLAF on a daily basis is temporarily being conducted till January 28, 2011.
average daily absorption of around ` 33,000 crore in May 2010 ( Table 4.14 and Figure 4.13). 4.52 During the second quarter, July-September, of 2010-11, the liquidity conditions generally remained in deficit mode. On 2 July 2010, the RBI hiked the repo and reverse repo rates by 25 bps each to 5.50 per cent and 4.0 per cent respectively. With the persistence of deficit liquidity conditions, the Bank extended the liquidity-easing measures introduced earlier. The SCBs were permitted to avail of additional liquidity support under the LAF to the extent of up to 0.5 per cent of their NDTL2. The SLAF on a daily basis was also extended till 16 July 2010. On an assessment of the prevailing overall liquidity conditions and with a view to providing flexibility to SCBs in liquidity management, the RBI further extended the SLAF on a daily basis till 30 July 2010. The average daily liquidity injection under the LAF remained at around ` 47,000 crore during July 2010. In view of the evolving inflationary scenario, the RBI raised the repo rate and reverse repo rate further by 25 bps and 50 bps, to 5.75 per cent and 4.50 per cent respectively in the First Quarter Review of Monetary Policy 2010-11
2
(announced on 27 July). The liquidity conditions improved in August 2010 (mainly on account of large pre-scheduled public debt redemptions on 28 July 2010), and the average daily net injection of liquidity declined to around ` 1000 crore during the month. After a brief period of surplus liquidity (from endAugust to early September 2010), the liquidity conditions again switched to injection mode as liquidity migrated to Government account with the RBI on account of quarterly advance tax outflows. On the basis of assessment of the macroeconomic situation, the RBI increased the repo rate and reverse repo rate by 25 bps and 50 bps respectively in the mid-quarter monetary policy review (announced on 16 September 2010). The liquidity conditions remained tight in the second half of September 2010 as the surplus cash balances of the Centre started building up, and the average daily net outstanding liquidity injection was around ` 24,000 crore during the month. 4.53 The liquidity conditions tightened further in October 2010 on account of increase in Government surplus balances and currency in circulation due to festive season demand. The average daily net outstanding liquidity injection was around ` 62,000
For any shortfall in maintenance of the SLR arising out of availment of this facility, banks were allowed se ek waiver of penal interest.
01 Sep
01 Aug
01 Aug
01 Jan
01 Feb
01 Feb
01 Apr
01 Apr

Figure 4.14
300 250
91
Market stabilisation scheme
Actuals Limits
R thousand crores
200 150 100 50 0
crore for the entire October 2010. However, the net liquidity injection crossed ` 1,00,000 crore on 29 October 2010. In order to ease the frictional liquidity pressure, the RBI announced certain temporary measures, namely conduct of special SLAF on 29 October and 1 November 2010, conduct of a special two-day repo auction under the LAF on 30 October 2010, and waiver of penal interest on shortfall in maintenance of SLR (on 30-31October) to the extent of 1 per cent of NDTL for availing of additional liquidity support under the LAF. The RBI extended these liquidity-easing measures further and conducted SLAF on all days during 1-4 November 2010 and extended the waiver of penal interest on shortfall in maintenance of SLR ( to the extent of 1 per cent of NDTL) for availing of additional liquidity support under the LAF till 7 November 2010. To contain inflation and anchor inflationary expectations, the RBI increased the repo and reverse repo rates by 25 bps each in the Second Quarter Review of Monetary Policy on 2 November 2010. Consistent with the stance of monetary policy and based on the assessment of prevailing and evolving liquidity conditions, the RBI conducted purchase of government securities under its OMOs for an aggregate amount of ` 12,000 crore on 4 November 2010 and accepted an aggregate amount of ` 8352 crore in that auction. The high deficit liquidity conditions continued in November 2010 with the persistence of high Government balances and rise in currency in circulation. On 9 November 2010, the RBI has re-introduced liquidity-easing measures (SLAF on a daily basis, the waiver of penal interest
Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2007-08 2008-09 2009-10 2010-11
Year
on shortfall in maintenance of the SLR to the extent of 1 per cent of NDTL for availing of additional liquidity support under the LAF), to remain in force till 16 December 2010. The average daily net liquidity injection during the month was around ` 99,300 crore. The liquidity conditions have remained in high deficit so far in December 2010 (till 20 December) as huge quarterly advance tax payments have increased the liquidity stress in the system. The RBI conducted purchase of Government securities through auction as part of its OMOs for an aggregate amount of `12,000 crore each on 9 December 2010 and 15 December 2010; and accepted an aggregate amount of ` 10,120 crore and `11,706 crore respectively in the auctions. The average daily net outstanding liquidity injection was around ` 1,10,000 crore during 1-20 December 2010. 4.54 While the overall liquidity in the system has remained in deficit consistent with the policy stance, the extent of tightness has been beyond the comfort level of the RBI. The RBI decided to (i) reduce the SLR of SCBs from 25 per cent of their NDTL to 24 per cent with effect from 18 December 2010;(ii) conduct OMO auctions for purchase of Government securities for an aggregate amount of `48,000 crore in the next one month. These two measures are expected to inject liquidity of the order of ` 48,000 crore on an enduring basis. The reduction of the SLR will free securities and once banks can borrow at the LAF window with these excess SLR securities, borrowers can shift from costlier sources to the LAF window ( Figure 4.14 and Table 4.15).
92
Table 4.15 : Call money market

Call Turnover (` crore) 2009-10 Mar.2009 Apr.2009 May2009 Jun.2009 Jul.2009 Aug.2009 Sep.2009 Oct.2009 Nov-09 Dec.2009 Jan.2010 Feb.2010 2010-11 Mar.2010 Apr.2010 May2010 Jun.2010 Jul.2010 Aug.2010 Sep.2010 Oct.2010 Nov.2010 17,624 16,374 16,786 14,258 18,954 15,916 17,212 17,840 17,730 3.51 3.49 3.83 5.16 5.54 5.17 5.50 6.39 6.81 37,640 57,150 32,798 -47,347 -46,653 -1048 -24,155 -61,658 -99,311 3987 2737 922 317 254 0 0 0 0 23,818 21,820 19,037 17,921 14,394 15,137 16,118 15,776 13,516 13,302 12,822 13,618 4.17 3.28 3.17 3.21 3.21 3.22 3.31 3.17 3.19 3.24 3.23 3.17 33,360 1,01,561 1,25,728 1,23,400 1,30,891 1,28,275 1,21,083 1,01,675 1,01,719 68,522 81,027 78,661 88,077 75,146 45,955 27,140 22,159 19,804 18,773 18,773 18,773 18,773 9944 7737 Call Rate (per cent)^ LAF (` crore)# MSS (` crore)*
Source : RBI. Notes : ^ : Average of daily weighted call rate. * : Average of weekly outstanding MSS. # : Average daily absorption under LAF.
MONEY MARKET
4.55 The money market generally remained orderly during 2010-11. At the commencement of the financial year 2010-11, the call rate mostly remained around the lower bound of the informal LAF corridor up to May 2010. With the tightening of liquidity conditions since end-May 2010, reflecting migration of liquidity to the Central Government account with the RBI on account of 3G auction/ advance tax payments, the call rate firmed up. The average daily call rate for the first quarter was at 4.16 per cent. It hovered around the upper bound of the LAF corridor till July 2010 as deficit liquidity conditions persisted due to the high Central Government cash balances. The call rate declined towards the end of August and early September with the change in liquidity conditions. However, it again firmed up from the middle of September 2010 and breached the upper bound of the informal LAF corridor in the second
half of the month reflecting the onset of high deficit liquidity conditions. The average call rate increased to 5.40 per cent in the second quarter (Table 4.15). The call rate has mostly remained above the upper bound of the corridor in the third quarter of 2010-11 so far, reflecting the increased liquidity stress in the system. The average call rate was 6.59 per cent in the third quarter of 2010-11 (till 20 December 2010) (Figure 4.15). 4.56 The rates in the collateralized segments have continued to move in tandem with the call rate, albeit below it, so far during 2010-11. The weighted average interest rate in the collateralized segment of the money market increased to 5.20 per cent during the second quarter from 3.97 per cent in the first quarter of 2010-11. Transaction volumes in the collateralized borrowing and lending obligation (CBLO) and market repo segments remained high during this period, reflecting active market

Figure 4.15
8 7 6
93
Movement of money market rates

Market repo (Non-RBI) Call money CBLO Reverse repo rate Repo rate
Per cent
5 4 3 2 1 0
May
Mar
Jul
Dec
Oct
Nov
May
Feb
Jun
Mar
Jan
Apr
Jul
Oct
Aug
Sep
Aug
2008-09
2009-10
2010-11
Year
conditions. Banks continued to remain the major group of borrowers in the collateralized segments whereas mutual funds (MFs) remained the major group of lenders of funds in these segments. The collateralized segment of the money market continued to remain the dominant segment, accounting for more than 80 per cent of the total volume so far during the year.
Certificates of Deposit (CDs)

4.57 Though the average gross issuance of CDs was high during 2010-11 so far, the amount of CDs outstanding declined, indicating decline in net issuances. The amount of outstanding CDs issued by SCBs declined marginally from ` 3,41,054 crore at the end of March 2010 to ` 3,32,982 crore at the end of November 2010. The outstanding amount constituted 7.45 per cent (as on 19 November 2010) of aggregate deposits of CD-issuing banks with significant inter-bank variation. During AprilNovember 2010, the average issuance was of the order of around ` 22,000 crore as compared to around `11,000 crore during the same period of the last financial year. The effective interest rate in respect of aggregate CD issuances increased from 6.07 per cent at the end of March 2010 to 8.16 per cent as on 19 November 2010.
discount rate (WADR) of aggregate CP issuances increased from 6.29 per cent at the end of March 2010 to 7.82 per cent at the end of September 2010, and reached 12.22 per cent at the end of November 2010.The shares of leasing and finance companies, manufacturing companies, and other financial institutions in total outstanding CPs were at around 50 per cent, 39 per cent, and 11 per cent respectively at the end of November 2010 (Table 4.16).
Treasury Bills (T-Bills)

4.59 T-Bills issuances during the year 2010-11 were modulated according to the cash management requirements of the Government as well as evolving market conditions. The notified amounts for competitive auctions of T-Bills were reduced during the first two quarters of the fiscal year. The outstanding stock of T- Bills went down from ` 1,34,500 crore on 31 March 2010 to ` 1,26,269 crore on 31 December 2010, after taking into account a rise in non-competitive allotment. The primary market yields for T-Bills of different tenors (91 days, 182 days, and 364 days) moved up during the year largely influenced by the liquidity conditions and monetary policy action by the RBI. The yield behaviour during 2010-11 vis--vis 200910 is shown in Figures 4.16, 4.17, and 4.18.
Commercial Paper (CP)

4.58 During 2010-11 so far, the commercial paper (CP) market has also picked up and the size of fortnightly issuance increased significantly. The outstanding amount of CP issued by corporates has shown an increasing trend from ` 75,506 crore at the end of March 2010 to `1,12,003 crore at the end of September 2010 and ` 1,17,793 crore at the end of November 2010. The weighted average
Cash Management
4.60 During the year, a new short-term instrument, named cash management bill (CMB), was introduced in May 2010. CMBs are non-standard, discounted instruments issued for maturities of less than 91 days, to meet the temporary cash-flow
Sep
Nov
Feb
Jun
Apr
94
Table 4.16 : Activity in money market segments

(` crore) Average daily volume (one leg) Year/ month Call Market repo CBLO Total Money market rate^ (per cent) 2.41 2.34 2.69 2.83 2.62 2.73 2.70 2.87 2.91 2.97 2.95 3.22 3.03 3.72 5.22 5.33 5.05 5.29 5.96 6.31 Term money Commercial paper Outstanding WADR (percent) Certificates of deposit Outstanding EIR (percent)
Apr.2009 May2009 Jun.2009 Jul.2009 Aug.2009 Sep.2009 Oct.2009 Nov.2009 Dec.2009 Jan.2010 Feb.2010 Mar.2010 Apr.2010 May2010 Jun.2010 Jul.2010 Aug.2010 Sep.2010 Oct.2010 Nov.2010
10910 9518 8960 7197 7569 8059 7888 6758 6651 6411 6809 8812 8187 8393 7129 9477 7958 8606 8920 8865
20545 22449 21694 20254 23305 27978 23444 22529 20500 14565 19821 19150 20319 17610 9481 12011 15553 15927 14401 9967
43958 48505 53553 46501 57099 62388 58313 54875 55338 50571 63645 60006 50891 42274 31113 29102 45181 53223 43831 32961
75413 80472 84207 73952 87973 98425 89645 84162 82489 71547 90275 87968 79397 68277 47723 50590 68692 77756 67152 51793
332 338 335 389 461 381 225 191 289 404 151 393 345 338 447 385 281 617 712 415
52881 60740 68721 79582 83026 79228 98835 103915 90305 91564 97000 75506 98769 109039 99792 112704 126549 112003 149620 117793
6.29 5.75 5 4.71 5.05 5.04 5.06 5.17 5.40 4.80 4.99 6.29 5.37 6.85 6.82 6.93 7.32 7.82 12.15 12.22
210954 218437 221491 240395 232522 216691 227227 245101 248440 282284 309390 341054 336807 340343 321589 324810 341616 337322 343353 332982
6.48 6.2 4.9 4.96 4.91 5.3 4.70 4.86 4.92 5.65 6.15 6.07 5.56 5.17 6.37 6.69 7.17 7.34 7.67 8.16
Source: RBI. Notes: ^ Average of daily weighted call rate.
Figure 4.16
8
Cut-off yields in the auctions of 91-day T-bills

2010-11 2009-10
Cut-off yields (per cent)
7 6 5 4 3 2
May
Jul
Oct
Nov
Dec
Jan
Figure 4.17
8

2010-11 2009-10
7 6 5 4 3 2
May
Oct
Jul
Nov
Dec
Jan
Mar
Jun
Aug
Sep
Feb
Apr
Mar
Jun
Aug
Sep
Feb
Apr

Figure 4.18
8
95

2010-11 2009-10
7 6 5 4 3 2
May
Jul
Oct
Nov
Jan
mismatches of the Government. During 2010-11, CMBs were issued twice in May 2010 for an aggregate amount of `12,000 crore, with a maturity of five and four weeks, respectively.
smooth and non-disruptive manner. During the year, the Government undertook buy-back operations whereby securities worth `11,767 crore were bought back. 4.63 During 2010-11 (up to 31 December 2010), gross market borrowings raised through dated securities by the Central Government wereRs 3,84,000 crore (net `2,98,342 crore) as against `3,83,000 crore (excluding issuances under the MSS) (net ` 3,46,911 crore) raised during the corresponding period of the previous year. The weighted average maturity of dated securities issued during the year (up to 31 December 2010) was moderately higher at 11.54 years as compared to 11.15 years for issues during the corresponding period of the previous year. The weighted average yield of dated securities during 2010-11(up to 31 December 2010) increased to 7.87 per cent from 7.21 per cent during the corresponding period of the previous year (Figure 4.19).
Central Government Borrowing

4.61 The Union Budget 2010-11 placed the net market borrowings (through dated securities) requirement of the Central Government at ` 3,45,010 crore as against ` 3,97,957 crore raised during the previous year. Including repayments of ` 1,12,133 crore, gross market borrowings were estimated at ` 4,57,143 crore (as compared to ` 4,51,000 crore raised in the previous year, including MSS de-sequestering of ` 33,000 crore). The actual issuances during the first half of the current year amounted to ` 2,84,000 crore (as against issuances of ` 2,95,000 crore, excluding MSS de-sequestering of `28,000 crore, during the corresponding period of the previous year).The issuance calendar for dated securities released on 23 September 2010 proposed to raise ` 1,63,000 crore during the second half of the year, indicating a reduction of `10,000 crore from the budget estimate. 4.62 The gross borrowings requirement in 201011 remained high as in the previous year. The market borrowings programme is, however,carried out in a
Yields on 10-year Government Securities

4.64 Secondary market yields on Government securities remained in a broad range during the year. Monetary policy, inflation concerns, and supply issues were the major factors influencing yields on government securities.
Figure 4.19
8.0
Weighted average yield of primary issues of dated securities (cumulative)

2010-11
7.5
Per cent
Mar
Dec
Jun
Aug
Sep
Feb
Apr
2009-10 7.0 6.5 6.0

May Jul Jun Oct Nov Dec Jan Mar Aug Sep Feb Apr
96
Economic Survey 2010-11 ahead of most other economies. However, in view of the rising food inflation and the risk of it impinging on inflationary expectations, the Reserve Bank embarked on the first phase of exit from the expansionary monetary policy in October 2009 itself. By April 2010, available data suggested that the recovery was firmly in place, though inflationary pressures accentuated. Accordingly, both repo and reverse repo rates as well as the CRR were increased by 25 bps each. The monetary policy stance in April 2010 was guided by the following three considerations. First, the need to move in a calibrated manner in the direction of normalizing the policy instruments in a scenario where real policy rates were still negative. Second, the need to ensure that demand-side inflation did not become entrenched. Third, the need to balance the monetary policy imperative of absorbing liquidity while ensuring that credit was available to both the Government and private sector. Significant developments took place subsequent to the announcement of the monetary policy in April 2010. Though recovery was consolidating, developments on the inflation front raised several concerns. The upward revision in administered fuel prices on 25 June 2010 was also expected to influence inflation in the months ahead. Accordingly, the repo and reverse repo rates under the LAF were increased by 25 bps each on 2 July 2010. In the interests of consolidating and of more broad-based domestic recovery and with the Table 4.17 : Revision in Policy Rates
(per cent) Effective Date 2009 05.01.2009 17.01.2009 05.03.2009 21.04.2009 2010 13.02.2010 27.02.2010 19.03.2010 5.00 5.25 5.50 5.75 6.00 6.25 6.50 3.50 3.75 6.00 4.00 4.50 5.00 5.25 5.50 20.04.2010 24.04.2010 02.07.2010 27.07.2010 16.09.2010 02.11.2010 25.01.2011 5.50 5.75 5.00 4.75 3.50 3.25 5.50 4.00 5.00 Repo rate Reverse Repo rate CRR
4.65 Intra-year movements in yields on Government securities could be attributed to various factors. The upward movement in the month of April 2010 was mainly on account of supply pressure in the wake of front-loading of the market borrowings programme. 4.66 In the month of May, concerns regarding high fiscal deficit receded due to higher-than-budgeted collections from auction of 3G and BWA licences. The improved sentiments drove down yields in the month of May. The impact of the improved sentiments, however, was offset by concerns of high inflation and policy tightening by the Reserve Bank. In the third quarter of the current financial year, tight liquidity conditions remained a major factor putting upward pressure on yields. The 10-year yield, which was at 7.87 per cent on 31 March 2010, went up to 7.94 per cent on 31 December 2010.
State Government Borrowings

4.67 Twenty-two State Governments have raised an aggregate amount of ` 74,104 crore on a gross basis up to end-December 2010 as compared to ` 1,00,085 crore raised by 25 State Governments during the corresponding period of the previous year. The cut-off yields have ranged between 8.05 and 8.58 per cent as compared to 7.04 and 8.49 per cent during the corresponding period of the previous year. The weighted average yield worked out to 8.36 per cent up to end-December 2010 as compared to 8.02 per cent during the corresponding period of 2009-10 and 8.11 per cent for the year as a whole. The spread between the yield on State Development Loans (SDLs) and the 10-year benchmark Government of India securities stood lower at 32-69 bps up to December 2010 as compared to 45-129 bps during the corresponding period of the previous year. It is expected that the calibrated strategies adopted for the market borrowings programme of the Government of India and the State Governments would ensure its completion in a non-disruptive manner.
MONETARY POLICY STANCE 2010-11
DURING
4.68 The accommodative monetary policy which was pursued beginning mid-September 2008 instilled confidence in market participants, mitigated the adverse impact of the global financial crisis on the economy, and ensured that it started recovering
Prices and Monetary Management then level of consumer price inflation in double digits, the First Quarter Review of the RBI (July 2010) upwardly revised the baseline projection of real GDP growth for the year to 8.5 per cent and raised the projection for WPI inflation for March 2011 to 6.0 per cent (Table 4.18). Consistent with this assessment, the repo rate was increased by 25 bps and reverse repo by 50 bps. The monetary policy actions were intended to moderate inflation by reining in demand pressures and inflationary expectations, maintain financial conditions conducive to sustaining growth, generate liquidity conditions consistent with more effective transmission of policy actions, and reduce the volatility of short-term rates in a narrower corridor. Given the context of the changing liquidity dynamics, particularly between surplus and deficit modes, it was proposed to set up a working group to review the operating procedure of the RBIs monetary policy, including the LAF. It was also announced that mid-quarter reviews of monetary policy would be made in June, September, December, and March. The changes in policy rates since 2009 are brought out in Table 4.17.
97
economies raised concerns about the sustainability of the global turnaround whereas the Indian economy was operating close to the trend growth rate, driven mainly by domestic factors. However, notwith-standing some moderation in recent months, headline inflation in India remained significantly above its medium-term trend and well above the comfort zone of the RBI (Table 4.18). Accordingly, the RBI further increased the repo rate by 25 bps to 6.25 per cent and the reverse repo rate also by 25 bps to 5.25 per cent on (2 November 2010). The CRR has been retained unchanged at 6 per cent of the NDTL of banks. 4.71 The RBI in its Third Quarter Review of the Monetary Policy (25 January 2011) indicated that its stance is shaped by four important considerations: Inflation is clearly the dominant concern. Even as the rate itself remains high, the reversal in the direction of inflation is striking. Primary food articles inflation has risen again sharply. Non-food articles inflation and fuel inflation are already at elevated levels. Non-food manufacturing inflation has remained sticky. There are signs of food and fuel price increases spilling over into generalised inflation. Second, there has been a sharp rise in global commodity prices which has heightened upside risks to domestic inflation. Third, growth has moved close to its pre-crisis trajectory even in the face of an uncertain global recovery. Fourth, the uncertainty with regard to global recovery has reduced.
Quarterly Reviews
4.69 As decided in the First Quarter Review, on the basis of assessment of the macroeconomic situation, the RBI in its Mid-Quarter Review on 16 September 2010 decided to increase the repo rate under the LAF by 25 bps from 5.75 per cent to 6.0 per cent and the reverse repo rate by 50 bps from 4.5 per cent to 5.0 per cent. 4.70 The Second Quarter Review of Monetary Policy for 2010-11 (released on 2 November 2010) noted that the fragile and uneven nature of the recovery and large unemployment in advanced
Table 4.18: Indicative Projections of Macro Parameters for 2010-11 by the RBI
Indicative projections for growth rates (per cent) Annual Policy 2010-11 (April 20,2010) GDP growth WPI inflation Money supply growth (M3) *Adjusted non-food credit 8.0 5.5** 17.0 20.0 First Quarter Review (July 27, 2010) 8.5 6.0** 17.0 20.0 Second Quarter Review (November 2, 2010) 8.5 5.5 17.0 20.0 Third Quarter Review (Jan. 25, 2011) 8.5 7.0 17.0 20.0
Notes : * Includes investment by SCBs in bonds/debenture/shares of public-sector undertakings, private corporate sector, and CP.
** Old series.
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Economic Survey 2010-11 has not only persisted for quite some time, but has also been rather sharp. High inflation in food articles is not unique to India, it has spiked in many other countries as well. The domestic food price situation could be exacerbated by the increase in global food prices because of dependency on import of some food items like edible oils. Current growth and inflation trends warrant persistence with an antiinflationary monetary stance. 4.75 The issue of maintaining an environment where the cost and availability of credit is supportive of growth momentum, while ensuring that inflation falls back to more comfortable target levels, will be at the centre stage of policy consideration in the near term. This has to be seen in the context of more than expected inflation in the recent past, relative stickiness of prices, especially of food, and building of wider inflationary expectations in the economy, even as monetary policy tools are being used proactively to manage demand and dampen inflationary pressures in the economy. The concurrent consolidation of fiscal deficits will, however, be essential as it is expected to ease the conduct of effective monetary policy in the near future. The reduced fiscal deficits will permit greater availability of credit to sustain growth, while tighter monetary policy starts to transmit its impact in reducing inflationary pressures. The transmission of monetary policy, however, comes with a lag. Inflationary pressures in the economy are also emanating in part from supply-side constraints, especially in food and other primary articles, as well as the transmission of higher global food, oil, and other commodity prices. These considerations therefore are complicating the issue in the near term. If external commodity negative price shocks build further, the dilemmas will become greater. Therefore, the policy challenge of maintaining the growth momentum in the economy with price stability is going to remain a key focus area for monetary policy and macroeconomic management.
4.72 On the basis of the assessment of the existing macroeconomic scenario, the RBI retained the bank rate at 6.0 per cent and the CRR of scheduled banks at 6.0 per cent of their NDTL; increased the repo rate under the LAF by 25 bps from 6.25 per cent to 6.5 per cent; and the reverse repo rate under the LAF by 25 bps from 5.25 per cent to 5.50 per cent. On the basis of an assessment of the liquidity situation, the RBI extended additional liquidity support to the SCBs under the LAF to the extent of up to 1 per cent of their NDTL, till 8 April 2011. For any shortfall in maintenance of the SLR arising out of availment of this facility, banks were allowed to seek waiver of penal interest purely as an ad hoc measure.
CHALLENGES
AND
OUTLOOK
4.73 Inflation is clearly the dominant concern. Average headline inflation in April-December 201011 at 9.4 per cent is the highest ever in the decadal average. This is also true of annual average inflation based on the WPI, for primary food articles, fuel and power, and manufacturing products. During the current financial year, even as the rate itself remains uncomfortably high, the reversal in the direction of inflation in December is also striking. After some moderation between August and November 2010, inflation rose again in December 2010 on account of sharp increase in the prices of primary food articles and the recent spurt in global oil prices. Non-food manufacturing inflation has also remained sticky, reflecting buoyant demand conditions. However, in January 2011, headline inflation has come down to 8.23 per cent and it is expected that this trend may continue in the next two months. 4.74 Going forward, the inflation outlook will be shaped by the food price situation and the demandside pressures in the economy. Rise in food inflation
Financial Intermediation and Markets
CHAPTER
Broader and deeper financial markets will be crucial for mobilizing higher savings
and intermediating them efficiently to finance higher investment and growth. Indias financial markets continued to gain strength in recent years, in the wake of steady reforms since 1991. Prudent regulations and institutions protected the economy from the recent global financial shocks. And its dynamism is a leading factor in the current recovery. Year-on-year non--food credit growth was up 24 per cent at the end of December 2010, and financed many sectors more broadly (from the agriculture rebound to third generation [3G] spectrum sales and private infrastructure projects), while the overall credit to gross domestic product (GDP) ratio rose to about 55 per cent, continuing its progress (but still structurally well below potential). Domestic capital markets performed well in 2010, primary markets financing record levels, including the largest-ever initial public offering (IPO) (for Coal India), while secondary markets reached new highs. Record foreign inflows helped support the market. Pensions and insurance gained, with life insurance premium growing nearly 26 per cent and penetration doubling to 5.4 per cent of GDP in 2009, from 2.3 per cent in 2000 when insurance reforms started. Looking to the future, the twin challenges are to continue this progress on gradual financial reform and to modernize regulations and institutions to ensure its continued safety and stability. The past year saw banking deposit growth slow-down, as real interest rates were depressed, especially compared to returns in other fast-recovering asset markets (real estate, gold, and stock markets). The priority is to considerably extend the reach of banking to help mobilize more savings, add more depth, and more efficiently intermediate opportunities, including those in the traditional priority sectors. To move ahead (1) financial inclusion needs to be accelerated as a next crucial step; innovative solutions will be needed in this regard; (2) similar efforts are needed to deepen domestic capital markets and the role of non-bank institutions, especially in corporate bond and debt markets; (3) the rapid lowering of fiscal deficits is needed to help crowd-in such developments; and (4) the Government and Reserve Bank of India (RBI) have already begun a series of essential regulatory overhaul, aimed at updating the modern legislation underlying financial markets, and improving macro-prudential safeguards and institutions. We need to continue along this path. The rest of the chapter describes this series of developments in the financial sector.
BANK CREDIT
5.2 Bank credit that started picking up from the last quarter of 2009-10 continued its momentum during 2010-11 as well. The pickup in credit reflected the improved demand conditions associated with
stronger industrial recovery and growth. Telecom operators raised credit to pay for 3G/broadband wireless access (BWA) spectrums, which partly contributed to stronger credit growth in the first quarter of 2010-11.
Table 5.1 : Flow of bank credit

As on 17 December, 2010 Outstanding as in end-March ` crore 2008 2009 2010 17-Dec. 10 1. Bank Credit (a) Food Credit (b) Non-food Credit 2. Aggregate Deposit (a) Demand Deposits (b) Time Deposits 3. Investment (a) Govt Securities (b) Other Approved Source : RBI. 23,61,914 44,399 23,17,515 31,96,940 5,24,310 26,72,630 9,71,715 9,58,662 13,053 27,75,549 46,211 27,29,338 38,34,110 5,23,085 33,11,025 11,66,410 11,55,785 10,625 32,44,788 48,489 31,96,299 44,92,826 6,45,610 38,47,216 13,84,752 13,78,395 6,358 36,39,866 62,521 35,77,345 47,99,789 5,84,713 42,15,076 14,43,303 14,38,268 5,035 18-Dec. 09 29,42,279 45,037 28,97,242 41,84,358 5,25,516 36,58,842 13,49,540 13,42,383 7,156 Outstanding as on Financial Year Year-on-Year so far (Percentage variation) 200910 6.0 -2.5 6.2 9.1 0.5 10.5 15.7 16.1 -32.6 201011 12.2 28.9 11.9 6.8 -9.4 9.6 4.2 4.3 -20.8 200910 11.3 -13.6 11.8 17.9 19.9 17.6 24.6 25.2 -34.5 201011 23.7 38.8 23.5 14.7 11.3 15.2 6.9 7.1 -29.6
5.3 As against an increase of 17.5 per cent in 2008-09, growth in bank credit moderated to 16.9 per cent in 2009-10. Non-food credit during the same period was 17.8 per cent and 17.1 per cent respectively. During 2010-11 credit started picking up in a strong way from early June 2010 and since then the growth in bank credit has shown a continuous increasing trend. During the financial year 2010-11, growth in bank credit extended by scheduled commercial banks (SCBs) stood at 12.2 per cent as on 17 December 2010 as compared to 6.0 per cent for the corresponding period in 2009-10. The year-on-year growth in bank credit as on 17 December 2010 was high at 23.7 per cent as compared to 11.3 per cent for the corresponding period of the previous year. It was
in fact above the Reserve Banks indicative projected trajectory of 20 per cent for the full year as set out in the Second Quarter Review for 2010-11 (2 November). Growth in non-food credit so far in 2010-11 on financial-year basis was much higher at 11.9 per cent as compared to 6.2 per cent in the previous year and 23.5 per cent yearon-year basis as compared to 11.8 per cent for the corresponding period of the previous year. Growth in aggregate deposits so far in 2010-11 have been lower than for the corresponding period of the previous year (Table 5.1). The high expansion in credit relative to lower growth in deposits during 2010-11 has caused increase in the credit- deposit ratio from 72.2 per cent in end-March 2010 to 75.8 per cent on 17 December 2010 (Figure 5.1).
Figure 5.1
76 75 74
Credit deposit ratio

2007-08 2008-09 2009-10 2010-11
Per cent
73 72 71 70 69 68
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
Fortnights
25
Financial Intermediation and Markets Figure 5.2

35 34 33
101
Investment deposit ratio

2007-08 2008-09 2009-10 2010-11
Per cent
32 31 30 29 28 27
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
Fortnights
5.4 During the financial year so far, private-sector banks have been faring better in terms of growth in credit extended as compared to public-sector banks (PSBs) and foreign banks. Due to higher credit growth and tight liquidity condition, commercial banks investment in Government and other approved securities remained low at 27.3 per cent as compared to 29.2 per cent in the previous year. Consequently, the investment-deposit ratio declined from 30.8 per cent in end-March 2010 to 30.1 per cent on 17 December 2010 (Figure 5.2) as the investment and deposit growth of SCBs is lower.
reviewed and increased their base rates. The base rate of PSBs and private-sector banks changed to the range of 7.60-9.00 per cent and 7.00-9.00 per cent respectively in December 2010 (Table 5.2). Subsequent to the migration to the base rate system, effective 1 July 2010, we find a large degree of convergence of base rates as announced by banks. Almost 60 banks with a of 97 per cent share in total bank credit have fixed the base rate in the close range of 7.00-8.50 per cent in November 2010.
iii. Interest Rates on Non-resident Indian (NRI)Deposits

5.7 The interest rates on non-resident external term deposits (NRE) and foreign currency non-resident bank account (FCNR[B]) deposits are regulated by RBI. At present, NRE ceiling deposit interest rate stands at LIBOR plus 175 basis points and FCNR(B) ceiling deposit interest rate is at London Interbank offered rate (LIBOR) plus 100 bps.
INTEREST
RATES
i. Deposit Rates
5.5 Domestic deposit rates of SCBs have moved up so far during 2010-11. Following the RBIs raising of the repo and reverse repo rates by 125 basis points (bps) and 175 bps respectively during MarchNovember 2010, the SCBs increased their deposit rates by 50 bps to 200 bps. Interest rates offered by the PSBs, private-sector banks and foreign banks on deposits of maturity of one to three years changed from the range of 6.00-7.25 per cent, 5.257.75 per cent, and 2.25-8.00 per cent respectively in March 2010 to the range of 7.00-8.50 per cent, 7.25-9.00 per cent, and 3.00-8.00 per cent respectively in December 2010 (Table 5.2).
iv. Interest Rate on Rupee Export Credit

5.8 The validity of the reduction in interest rate ceiling to 250 bps below the BPLR on pre-shipment rupee export credit up to 270 days and post-shipment rupee export credit up to 180 days was extended to 30 June 2010 from 30 April 2010. However, the RBI meanwhile advised the SCBs on 9 April 2010 to replace the BPLR system with a base rate system from 1July 2010. This necessitated changes in the formula in respect of interest rate on export credit. Accordingly, it was decided to deregulate the interest rates on pre-shipment rupee export credit up to 270 days and post-shipment rupee export credit up to 180 days. Banks are, therefore, free to decide the lending rate on export credit at or above the base rate with effect from 1 July 2010.
ii.
Lending Rates
5.6 The BPL` of SCBs remained unchanged from July 2009 till end-June 2010. The base rate system replaced the BPLR system with effect from 1 July 2010. The base rates of PSBs, private-sector banks, and foreign banks were fixed in the range of 7.508.25 per cent, 7.00-8.75 per cent, and 5.50-9.00 per cent respectively. Subsequently, several banks
25
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Table 5.2 : Movements in deposit and lending rates

(per cent) Interest Rates Term Deposit Rates PSBs a) Up to 1 Year b) 1 Year up to 3 Years c) Over 3 Years Private-sector Banks a) Up to 1 Year b) 1 Year up to 3 Years c) Over 3 Years Foreign Banks a) Up to 1 year b) 1 year up to 3 years c) Over 3 years 2.50-8.50 2.50-9.50 2.50-10.00 1.25-7.00 2.25-8.00 2.25-8.75 1.25-7.00 3.00-8.00 3.00-8.50 1.25-7.00 3.00-8.00 3.00-8.50 1.25-7.30 3.00-8.00 3.00-8.25 1.25-7.00 3.00-8.00 3.00-8.25 3.00-8.75 7.50-10.25 7.50-9.75 2.00-6.50 5.25-7.75 5.75-8.00 2.00-6.50 6.25-7.50 6.50-8.00 2.00-6.50 6.25-7.75 6.50-8.00 2.50-7.25 6.50-8.25 6.50-9.00 2.50-7.60 7.25-9.00 7.00-9.00 2.75-8.25 8.00-9.25 7.50-9.00 1.00-6.50 6.00-7.25 6.50-7.75 1.00-6.25 6.00-7.25 6.50-7.75 1.00-6.25 6.00-7.25 6.50-7.75 1.00-7.00 6.75-7.75 7.00-7.75 1.00-8.00 7.00-8.50 7.00-8.75 Mar.-2009 Mar.-2010 Jun.-2010 Jul.-2010 Sep.-2010 Dec.-2010*
Source: RBI. Notes: * As on 10 December 2010. 2. Benchmark prime lending rate (BPLR).
5.9 The Government of India decided to extend interest subvention of 2 percentage points with effect from 1 April 2010 to 31 March 2011 on pre- and postshipment rupee export credit for four export sectors, namely handicrafts, carpets, handlooms, and small and medium enterprises (SMEs) subject to the condition that the interest rate after subvention will not fall below 7 per cent, which is the rate applicable to a short-term crop loan under priority-sector lending. With the changeover to the base rate system, the interest rates applicable to all tenors of rupee export credit advances with effect from 1 July 2010 will be at or above base rate in respect of all fresh/ renewed advances. Accordingly, banks may reduce the interest rate chargeable to exporters as per the base rate system in the four sectors by the amount of subvention available. If, as a consequence, the interest rate charged to exporters goes below the base rate, such lending will not be construed to be violative of the base rate guidelines.
per cent in March 2010), while that to industry (medium and large) recorded a growth of 28.9 per cent (as against 24.8 per cent in March 2010). Credit to wholesale trade recorded a growth of 17.0 per cent (as against 28.1 per cent in March 2010). 5.11 Credit to the priority sector grew by 21.0 per cent (year-on-year) in November 2010 as compared to 17.1 per cent in March 2010. Among the priority sub-sectors, credit to micro and small enterprises (MSEs) (including service-sector enterprises) recorded a growth of 21.5 per cent (year-on-year) in November 2010 as compared to 20.8 per cent in March 2010. (Table 5.3).
Priority-sector Lending
5.12 A target of 40 per cent of adjusted net bank credit (ANBC) or credit equivalent amount of offbalance sheet exposures (OBE), whichever is higher, as on 31 March of the previous year, has been stipulated for lending to the priority sector by domestic SCBs, both in the public and private sectors Within this, sub-targets of 18 per cent and 10 per cent of ANBC or credit equivalent amount of OBE, whichever is higher, have been stipulated for lending to agriculture and the weaker sections respectively. However, to ensure that the focus of the banks on the direct category of agricultural advances does not get diluted, the indirect lending
SECTORAL DEPLOYMENT
OF
CREDIT
5.10 Disaggregated data on sectoral deployment of gross bank credit from 47 banks accounting for about 95 per cent of bank credit and non-food credit available up to 19 November 2010 showed that among the major sectors, credit (year-on-year) to agriculture recorded a growth of 20.0 per cent (22.9
Financial Intermediation and Markets Table 5.3 : Sectoral deployment of gross bank credit
Sl . No. Sector 27 Mar. 2009 Outstanding as on (` crore) ` 20 Nov. 2009 26 Mar. 2010 19 Nov. 2010 % Variation
103
26 Mar./ 27 Mar. 19 Nov. 2010 2009 2010 / Absolute 20 Nov. amount 2009 4,41,201 3018 4,38,182 159,720 77,477 64,335 17,908 2,19,658 18,932 39,872 16.7 6.6 16.8 17.1 22.9 20.8 6.3 24.8 28.1 5.6 22.3 38.4 22.1 21.0 20.0 21.5 21.6 28.9 Trade 17.0 14.7
Gross Bank Credit (1 + 2) 26,47,368 1 Food Credit 45,544 2 Non-food Gross Bank Credit (a+b+c+d) 26,01,825 a. Priority Sector 932,459 i. Agriculture & Allied Activities 338,656 ii. Micro & Small Enterprises 309,195 iii. Other Priority Sectors 2,84,608 b. Industry (micro & small, medium and large ) 8,85,393 c. Wholesale (other than food procurement) 67,425 d. Other Sectors 7,16,548 Of Non-food Gross Bank Credit 1 Housing (including prioritysector housing) 2,79,365 2 Consumer Durables 8187 3 Commercial Real Estate 92,421 4 Tourism, Hotels, & Restaurants 13,625 5 Advances to Individuals against Shares, Bonds, etc. 2287
27,56,861 40,645 27,16,216 949,287 343,070 335,655 2,70,562 9,69,261 80,922 7,16,746
30,88,569 48,562 30,40,007 1,092,179 416,133 373,530 3,02,516 11,05,051 86,357 7,56,420
33,71,551 56,248 33,15,303 1,148,808 411,816 407,872 3,29,120 12,49,843 94,702 8,21,950
2,91,760 8028 88,581 15,667 2347
3,00,929 8294 92,128 19,410 2863
3,27,391 8928 1,05,479 26,470 2935
21,564 107 (293) 5785 576
7.7 1.3 -0.3 42.5 25.2
12.2 11.2 19.1 69.0 25.1
Source : RBI. Note : Date the provisional & relate to select scheduled commercial banks (SCBs) which account for 95 per cent of total bank credit extended by all SCBs.
to agriculture in excess of 4.5 per cent of ANBC or credit equivalent amount of OBE, whichever is higher, are not reckoned for computing performance under 18 per cent target. However, all agricultural advances under the categories direct and indirect are reckoned in computing performance under the overall priority-sector target of 40 per cent of ANBC or credit equivalent amount of OBE, whichever is higher. 5.13 A target of 32 per cent of ANBC or credit equivalent amount of OBE, whichever is higher, has been stipulated for lending to the priority sector by foreign banks having offices in India. Within the overall target of 32 per cent to be achieved by foreign banks, the advances to MSEs and export sectors should not be less than 10 per cent and 12 per cent of the ANBC or credit equivalent amount of OBE, whichever is higher, respectively. 5.14 The outstanding advances granted by PSBs, private-sector banks, and foreign banks to the priority sector as on the last reporting Friday of March 2008, 2009, and 2010 are furnished in Table 5.4. There were shortfalls in the case of a few individual banks in the public and private sectors and foreign banks.
5.15 The outstanding priority-sector advances of PSBs increased from ` 7,24,150 crore as on the last reporting Friday of March 2009 to ` 8,64,564 crore as on the last reporting Friday of March 2010, showing a growth of 19.39 per cent. Although, PSBs as a group had achieved the overall priority-sector lending target of 40 per cent of ANBC or credit equivalent amount of OBE, whichever is higher, and formed 41.68 per cent of ANBC as on the last reporting Friday of March 2010, three banks, namely State Bank of Mysore, Indian Overseas Bank, and Industrial Development Bank of India (IDBI) Ltd, out of 27 public sector banks did not individually achieve the target. 5.16 The outstanding priority-sector advances of private-sector banks increased from ` 1,87,849 crore as on the last reporting Friday of March 2009 to ` 2,15,552 crore as on the last reporting Friday of March 2010, showing a growth of 14.74 per cent. Although, private-sector banks as a group had achieved the overall priority-sector lending target of 40 per cent of ANBC or credit equivalent amount of OBE, whichever is higher, and formed 45.99 per cent of ANBC as on the last reporting Friday of
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Table 5.4 : Particulars of Priority-sector Advances

A. PUBLIC SECTOR BANKS As on the last reporting Friday of Total Priority-sector Advances Total Advances to Agriculture* Total Advances to MSEs Advances to Weaker Sections 2. PRIVATE-SECTOR BANKS As on the Last Reporting Friday of Total Priority-sector Advances Total Advances to Agriculture* Total Advances to MSEs Advances to Weaker Sections 3. FOREIGN BANKS As on the Last Reporting Friday of Total Priority-sector Advances Total advances to MSEs Total Export Credit (includes SSI export)
Source: RBI Note: 1. *Indirect agriculture is reckoned only up to 4.5 per cent of the ANBC or credit equivalent of OBE, whichever is higher. 2. The figures in parentheses show percentage of advances to ANBC or credit equivalent amount of OBE, whichever is higher.
(` crore) March 2008 6,10,450(44.7) 2,49,397(18.3) 1,51,137(11.1) 1,21,740(8.9) March 2009 7,24,150(42.8) 2,99,415(17.7) 1,91,408(11.3) 1,65,829(9.8) March 2010 (provisional) 8,64,564(41.7) 3,70,730(17.3) 2,78,398(13.2) 2,12,214(10.2)
March 2008 1,64,068(47.8) 58,567(17.0) 46,912(13.7) 7152(2.0)
March 2009 1,87,849(46.2) 76,103(18.7) 46,656(11.5) 14,262(3.5)
March 2010(provisional) 2,15,552(46.0) 89,769(15.6) 64,534(13.7) 25,690(5.5)
March 2008 50,254(39.5) 15,489(12.2) 28,954(22.7)
March 2009 55,483(34.3) 18,138(11.2) 31,511(19.4)
March 2010(provisional) 60,290(35.0) 21,080(12.3) 35,466(20.7)
March 2010, two banks, namely Bank of Rajasthan Ltd., and State Bank of India (SBI) Commercial Bank, out of 22 private sector banks did not individually achieve the target individually. 5.17 The outstanding priority-sector advances of foreign banks increased from ` 55,415 crore as on the last reporting Friday of March 2009 to ` 60,290 crore as on the last reporting Friday of March 2010, showing a growth of 8.79 per cent. Foreign banks as a group had also achieved the overall prioritysector lending target of 32 per cent of ANBC or credit equivalent amount of OBE, whichever is higher, and formed 35.09 per cent of ANBC as on the last reporting Friday of March 2010. However, two of the 28 foreign banks, namely Krung Thai Bank and Oman International Bank, did not individually achieve the target. Table 5.4 gives figures of priority-sector advances. 5.18 In order to improve and enhance the flow of credit to the priority sector, the following policy initiatives were taken during 2010-11: (i) All SCBs were advised to ensure that: (a) of the total advances to the MSE sector, 40
per cent should go to micro (manufacturing) enterprises having investment in plant and machinery up to ` 5 lakh and micro (service) enterprises with investment in equipment up to ` 2 lakh; (b) of the total advances to the MSE sector, 20 per cent should go to micro (manufacturing) enterprises with investment in plant and machinery above ` 5 lakh and up to ` 25 lakh, and micro (service) enterprises with investment in equipment above ` 2 lakh and up to ` 10 lakh. (Thus 60 per cent of MSE advances should go to micro enterprises). (ii) In terms of the recommendations of the Prime Ministers Task Force on Micro, Small and Medium Enterprises (MSMEs) (Chairman: Shri T. K. A. Nair) constituted by the Government of India, banks were advised as follows : (a) to achieve a 20 per cent year-on-year growth in credit to MSEs to ensure enhanced credit flow; (b) to achieve the allocation of 60 per cent of the MSE advances to micro enterprises in
Financial Intermediation and Markets stages, namely 50 per cent in the year 201011, 55 per cent in the year 2011-12, and 60 per cent in the year 2012-13, and; (c) to achieve a 10 per cent annual growth in number of micro-enterprise accounts. (iii) In terms of recommendations of the Working Group constituted by the RBI to review the Credit Guarantee Scheme of the Credit Guarantee Fund Trust for Micro and Small Enterprises (Chairman: Shri V. K. Sharma, Executive Director, RBI) banks were advised not to accept collateral security in the case of loans up to ` 10 lakh extended to units in the MSE sector. (iv) The limit for waiver of margin/ security requirements for agricultural loans was enhanced from ` 50,000 to ` 1 lakh. Thus, at present, all agricultural loans up to ` 1 lakh do not require any collateral.
105
18,20,870 SHGs (26.2 per cent) and savings amount of ` 1299 crore (21 per cent) and cooperative banks with saving bank accounts of 10,79,465 SHGs (15.5 per cent) and savings amount of ` 1225 crore (19.8 per cent). The share under the Swarnajayanti Gram Swarozgar Yojana (SGSY) in total savings accounts was 16,93,910 SHGs forming 24.3 per cent of the total SHGs having savings accounts in the banks. During the year under review, the average savings per SHG with all banks marginally decreased from ` 9060 as on 31 March 2009 to ` 8915 as on 31 March 2010. They ranged from a high of ` 11,352 per SHG with cooperative banks to a low of ` 7136 per SHG with RRBs. As on 31 March 2010, the share of women SHGs in total SHGs with savings bank accounts was 53.10 lakh, i.e.76.4 per cent as compared to last years share of 79.5 per cent. 5.22 As on 31 March 2010, 48.51 lakh SHGs had outstanding bank loans of ` 28,038 crore as against 42.24 lakh SHGs with bank loans of ` 22,680 crore as on 31 March 2009 registering a growth of 14.8 per cent in the number of SHGs and 23.6 per cent in bank loans outstanding to SHGs. These figures included 12.45 lakh SHGs (25.7 per cent) with outstanding bank loans of ` 6251 crore (22.3 per cent) under the SGSY as against 9.77 lakh SHGs with outstanding bank loan of ` 5862 crore as on 31 March 2009. Commercial banks had the maximum share of outstanding bank loans to SHGs with a share of 66.7 per cent followed by RRBs with a share of 22.8 per cent and cooperative banks with a share of 10.5 per cent. As on 31 March 2010, average bank loan outstanding per SHG was ` 57,795 as against ` 53,689 as on 31 March 2009. It varied from a high of ` 62,289 per SHG in the case of commercial banks to a low of ` 33,894 in the case of cooperative banks. 5.23 On the basis of the data received from banks by the National Bank for Agriculture and Rural Development (NABARD), the gross non-performing assets (NPAs) in respect of bank loans to SHGs were 2.94 per cent of the bank loans outstanding to SHGs, as on 31March 2010. Table 5.5 provides some figures for the Programme. 5.24 The gathering momentum in the micro-finance sector has brought into focus the issue of regulating the sector. A draft Micro-Financial Sector (Development and Regulation) Bill 2010 is under consideration of the Government.
MICRO FINANCE
5.19 RBI guidelines to banks for mainstreaming micro-credit and enhancing the outreach of microcredit providers, inter alia, stipulated that microcredit extended by banks to individual borrowers directly or through any intermediary would henceforth be reckoned as part of their prioritysector lending. However, no particular model was prescribed for micro-finance and banks have been extended freedom to formulate their own model[s] or choose any conduit/intermediary for extending micro-credit. 5.20 Though there are different models for purveying micro-finance, the self-help group (SHG)Bank Linkage Programme has emerged as the major micro-finance programme in the country. It is being implemented by commercial banks, regional rural banks (RRBs) and cooperative banks. 5.21 Under the SHG-Bank Linkage Programme, as on 31 March 2010, 69.53 lakh SHGs held saving bank accounts with total savings of ` 6199 crore as against 61.21 lakh SHGs with savings of ` 5546 crore as on 31 March 2009. Thus, about 97 million families were associated with banking agencies under the Programme. As on 31 March 2010, commercial banks had the maximum share of SHG savings with 40,52,915 SHGs (58 per cent) and savings amount of ` 3674 crore (59 per cent) followed by RRBs with saving bank accounts of
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Year
Table 5.5 : Progress of Micro-finance Programme

New SHGs Financed by Banks During the Year No.(lakh) 2006-07 2007-08 2008-09 2009-10
Source: NABARD. Note:* Includes repeat loans to existing SHGs.
Bank Loan* (` crore) ` Growth (%) Cumulative 12,366.49 35.00 38.50 17.90 16,999.90 22,679.85 28,038.28
Cumulative during the Year No.(lakh) 28.94 Amount (` crore) ` 6570.39 8849.26 12,256.51 14,453.30
Growth (%)
11.06 12.28 16.09 15.87 11.00 31.10 (-)1.40
36.26 42.24 48.52
RURAL INFRASTRUCTURE DEVELOPMENT FUND (RIDF)

5.25 The Government of India set up the RIDF in 1995 through contribution from commercial banks to the extent of their shortfall in agricultural lending. The Fund has continued, with its corpus being announced every year in the Budget. Over the years, coverage under the RIDF has been made more broad based in each tranche and, at present, a wide range of 31 activities under various sectors is being financed. The annual allocation of funds for the RIDF announced in the Union Budget has gradually increased from ` 2000 crore in 199596 (RIDF I) to ` 16,000 crore in 2010-11 (RIDF XVI).
The aggregate allocations have reached ` 1,16,000crore. Further, a separate window was introduced in 2006-07 for funding the rural roads component of the Bharat Nirman Programme, with a cumulative allocation of ` 18,500 crore till 2009-10. 5.26 As against the total allocation of ` 1,16,000crore, encompassing RIDF I to XVI, sanctions aggregating ` 1,13,437 crore have been awarded to various State Governments and disbursements under the Fund amounted to ` 73,687 crore up to end November 2010. The National Rural Roads Development Agency (NRRDA) was sanctioned the entire amount of ` 18,500 crore (RIDF XII to RIDF XV) and it had fully availed of it by March 2010 (Table 5.6). 5.27 During 2010-11, the disbursement to the States amounted to ` 9649 crore till end-November 2010 (Table 5.7). Table 5.7 : Disbursements during 2010-11
(As on 30 November 2010) (` crore) Region Disbursement Target South West North Central East NER & Sikkim Total 3510 1960 4550 1440 3250 790 15,500 Achievement 1401 573 1478 360 1257 179 5248 39.91 29.23 32.48 25.00 38.68 22.66 33.86 Achieve ment (%)
Table 5.6 : Sanctions and Disbursements under the RIDF and Bharat Nirman
(As on 30 November 2010) (` crore) ` Region Sanction Disbursement Disbursement as per cent of Sanction 68.54 75.14 65.40 63.25 54.41 54.79 64.96 100.00 69.87
South West North Central East NER & Sikkim Sub Total BHARAT NIRMAN Total
Source: NABARD.
29,912 15,567 32,880 9944 19,788 5346 1,13,437 18,500 1,31,937
20502 11,697 21,502 6290 10,767 2929 73,687 18,500 92,187
Source : NABARD. Note: NERnorth-east region.
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AGRICULTURAL CREDIT
Flow of Agricultural Credit
5.28 As against the target of ` 3,25,000 crore for agricultural credit in 2009-10, the banking system disbursed ` 3,84,514 crore to the agricultural sector, thereby exceeding the target by around 18 per cent. Commercial banks and RRBs together extended credit to 77.49 lakh new farmers during 2009-10 and cooperative banks to13.43 lakh, thus taking the total number of farmers brought newly under the banking system to 90.92 lakh. The total number of agricultural loans financed as of March 2010 was 4.82 crore. The total credit flow to agriculture during 2010-11 by commercial banks, cooperative banks, and RRBs up to September 2010 was of the order of ` 1,94,392.63 crore, amounting to 52 per cent of the annual target of ` 3,75,000 crore (Table 5.8).
Box 5.1 : Recommendations of Task Force to look into the issue of a large number of farmers, who had taken loans from private moneylenders, not being covered under the loan waiver scheme
i. Financial literacy and counselling campaigns be undertaken to increase awareness among farmers on the KCC. ii. Banks be encouraged to educate their rural branch staff about the KCC. iii. Banks use farmers cooperatives and SHG federations as banking correspondents to increase outreach. iv. The coverage of new farmers in the command areas of bank branches and new areas be ensured through meaningful and purposeful conduct of gram sabhas and kisan credit camps at regular intervals. v. Bankers who have already been advised by the RBI to lend without any collateral, up to Rs1 lakh per farmer, put such advice into more widespread practice through joint liability groups (JLGs) of tenant farmers, sharecroppers, and oral lessees. vi. State governments exempt agricultural loan agreements from stamp duty. vii. The KCC be technology enabled, including the conversion to a smart card with withdrawals and remittances enabled at automated teller machines (ATMs), points of sale(PoS), and through hand-held machines; banks need to have core banking solutions (CBS) in place at the earliest, to enable technology to benefit the farmer. viii. The KCC limit be fixed for five years, based on the bankers assessment of total credit needs of the farmer for a full year, and that the limit be operated by the borrower as and when needed, with no sublimits for kharif and rabi, or for stages of cultivation. ix. Each withdrawal under the KCC be allowed to be liquidated in twelve months without the need to bring the debit balances in the account to zero at any point of time. x. There be automatic renewal and annual increase on credit limit linked to inflation rate.
Kisan Credit Card (KCC) Scheme

5.29 The KCC Scheme has become a widely accepted mechanism for delivery of credit to farmers. The scheme now also covers borrowers of the long-term cooperative credit structure. In order to safeguard the interests of KCC holders, NABARD has allowed banks the discretion to opt for any insurance company of their choice. The banks have to keep in mind the guiding principles of the Personal Accident Insurance Scheme (PAIS), especially the premium-sharing formula and coverage, while negotiating with insurance companies. 5.30 With a view to making the KCC more userfriendly, NABARD has enlarged its scope to cover term loans for agriculture and allied activities, including a reasonable component for consumption needs, besides the existing facility of providing crop
Table 5.8 : Flow of Institutional Credit to Agriculture and Allied Activities

(` crore) Sl. No. Agency 1. 2. 3. Co-operative Banks** Share (%) RRB Share (%) Commerc-ial Banks Share (%) Total
Source: NABARD. Notes* Up to 30 September 2010. **Including Others.
2005-06 39,786 22 15,223 8 1,25,477 70 1,80,486
2006-07 42,480 18 20,435 9 1,66,486 73 2,29,401
2007-08 48,258 19 25,312 10 1,81,088 71 2,54,658
2008-09 36,762 13 26,724 9 2,28,951 78 2,92,437
2009-10 63,492 17 35218 9 2,85,799 74 3,84,514
2010-11* 29,450 15 19141 10 14,5801 75 1,94,392
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Economic Survey 2010-11 Table 5.10 : Release under ADWDR

(` crore) ` Agency State Cooperative Banks SCARDB RRBs Total Debt Waiver Debt Relief Total
loan limit. Crop loans disbursed under the KCC Scheme for notified crops are covered under Rashtriya Krishi BimaYojana (National Crop Insurance Scheme), a crop insurance scheme introduced to protect the interests of the farmer against loss of crop yield caused by natural A calamities, pest attacks, etc. The KCC has thus Source: RBI become a single window for a comprehensive credit product. The major policy recommendations of the Task Force to look into the issue of a large number of farmers, who had taken loans from private moneylenders, not being covered under the loan waiver scheme under the chairmanship of Shri Umesh Chandra Sarangi, constituted by the Ministry of Agriculture, Government of India, are given in Box 1.1. 5.31 The banking system has issued 955.77 lakh KCCs involving a total sanctioned credit limit of ` 4,37,241 crore as on 31 August 2010. The share of commercial banks stood at 44.4 per cent of the total number of cards issued by the banking sector followed by cooperative banks (40.9 per cent) and RRBs (14.7 per cent). The year-wise and agencywise break-up of the KCCs issued is given in Table 5.9.
15,540.63 2062.02 17,602.65 3409.06 6045.19 248.41 694.68 3657.47 6739.87
24,994.89 3005.11 28,000.00
Note: SCARDBState Cooperative Agriculture and Rural Development Bank.
FINANCIAL PERFORMANCE OF BANKS

5.33 The consolidated balance sheet of the SCBs in India during 2009-10 showed relatively sluggish growth performance, marked mainly by slow deposit growth. The growth in profits of SCBs too was lower in 2009-10 than in the previous year. Further, there was a rise in the NPA ratio of SCBs in 2009-10. Though asset quality emerged as a concern for the banking sector, its capital adequacy remained fairly robust during the year, providing cushion for any future losses. 5.34 The overall growth in the consolidated balance sheet of SCBs in 2009-10 was 15.0 per cent, which was lower than the 21.1 per cent during the previous year. Moreover, the decline in growth could be seen across all bank groups with the notable exception of new private-sector banks. The working results of SCBs under different bank groups are given in Table 5.11. 5.35 The major factor contributing to the slowdown in growth of banks balance sheets was deposits. The growth in deposits of SCBs decelerated to
Agriculture Debt Waiver and Debt Relief (ADWDR) Scheme 2008

5.32 NABARD is the nodal agency for implementing the Scheme in respect of cooperative credit institutions and RRBs. The Bank has released of ` 24,994.89 crore towards debt waiver and ` 3005.11 crore towards debt relief claims. The agency-wise break-up of the releases under the ADWDR is given in Table 5.10.
Table 5.9 : Agency-wise KCCs Issued and Amount Sanctioned

(As on 31 August 2010) Agency 200708 Co-operative Banks RRBs Commer-cial Banks Total
Source: NABARD Note:*Since inception of the scheme (1998). : Not available.
Cards Issued (lakh) 200809 13.44 14.15 58.34 85.93 200910 17.43 19.49 53.13 90.05 201011 12.31 6.73 19.04 Total* 391.19 140.94 423.64 955.77
Amount Sanctioned (` crore) ` 200708 19,991 8783 59,530 88,264 200809 8428 5648 39,009 53,085 200910 7606 10,132 39,940 57,678 201011 Total*
20.91 17.73 46.06 84.70
5164 1,45,758 4329 58,293 2,33,190 9493 4,37,241
Financial Intermediation and Markets Table 5.11 : Working Results of SCBs

Items PSBs 2008-09 A Income (i) Interest Income (ii) Other Income Foreign banks Old pvt. sector banks New pvt. sector banks All SCB 2008-09
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2009-10 2008-09 2009-10 2008-09 2009-10 2008-09 2009-10 ` (` Crore) 36,341 21,572 26,390 18,790 9951 2782 31,600 8938 11,102 11,560 16,301 4741 17,452 19,163 12,834 3939 2390 4799 2409 5956
2009-10
3,15,554 3,54,876 2,73,088 3,06,488 42,466 48,388
45,216 30,322 14,894 37,706 12,819 12,298 12,589 20,098 7510 17,503
23,649 20,565 3084 21,337 14,076 4715 2545 4858 2312 6489
81,360 66,282 15,078 72,901 44,123 17,840 10,937 19,396 8459 22,158
79,405 4,63,702 4,94,271 62,310 3,88,482 4,15,752 17,095 75,220 78,519 68,606 4,10,952 4,37,162 37,130 2,63,223 2,72,084 17,960 13,516 24,315 10,799 25,180 89,581 58,147 1,10,897 52,750 1,25,258 99,769 65,310 1,22,419 57,109 1,43,669
B Expenditure 2,81,182 3,15,619 (i) Interest Expended 1,93,447 2,11,940 (ii) Intermediation Cost (operating expenses) 55,504 65,991 (iii) Provisions and Contingencies 32,231 37,688 C Operating Profit (A - Bi - Bii) D Net Profit (A-B) E Net Interest Income (spread) (Ai - Bi) F Total Assets G Net Income(Aii + E) As per cent of Total Asset A Income (i) Interest Income (ii) Other Income B Expenditure (i) Interest Expended (ii) Intermediation Cost (operating expenses) (iii) Provisions and Contingencies C Operating Profit (A - Bi - Biii) D Net Profit (A-B) E Net Interest Income (spread) (Ai - Bi) Source: RBI. 2.11 2.13 66,604 34,373 79,642 76,945 39,257 94,548
37,65,757 44,41,114 4,45,129 4,33,219 2,32,292 2,68,977 7,95,464 8,81,831 52,38,642 60,25,141 1,22,108 1,42,936 32,397 27,403 8738 9573 37,236 42,275 2,00,479 2,22,188
8.38 7.25 1.13 7.47 5.14 1.47 0.86 1.77 0.91
7.99 6.90 1.09 7.11 4.77 1.49 0.85 1.73 0.88
10.16 6.81 3.35 8.47 2.88 2.76 2.83 4.52 1.69 3.93
8.39 6.09 2.30 7.29 2.06 2.56 2.67 3.76 1.09 4.03
9.29 8.09 1.20 8.25 5.52 1.70 1.03 2.07 1.04 2.56
8.79 7.65 1.15 7.93 5.23 1.75 0.95 1.81 0.86 2.41
10.23 8.33 1.90 9.16 5.55 2.24 1.37 2.44 1.06 2.79
9.00 7.07 1.94 7.78 4.21 2.04 1.53 2.76 1.22 2.86
8.85 7.42 1.44 7.84 5.02 1.71 1.11 2.12 1.01 2.39
8.20 6.90 1.30 7.26 4.52 1.66 1.08 2.03 0.95 2.38
17.0 per cent in 2009-10 from 22.4 per cent in 200809. Further, credit growth constrained by a slowdown in deposits growth was placed at 16.6 per cent in 2009-10 as compared to 21.1 per cent in 2008-09. The deceleration in credit growth was accentuated on account of an overall slowdown of the economy in the aftermath of the global financial turmoil. However, while bank credit growth witnessed a slowdown on a year-on-year basis, bank credit in general and credit to industry in particular, showed distinct signs of recovery from October 2009 onwards as economic recovery became more broad-based. The credit-deposit ratio at the end of March 2010 was 73.6 per cent, marginally lower
than that at the end of March 2009. There was an increase in the proportion of current and savings accounts (CASA) in 2009-10 in contrast to a declining trend noted in the recent past. 5.36 On a year-on-year basis, the major drivers of non-food bank credit in 2009-10 were industry and agriculture. There was considerable slowdown in the growth in personal loans and also credit to the services sector during the year. 5.37 The growth in investments of banks decelerated to 18.6 per cent in 2009-10 from 23.1 per cent in 2008-09. Also, there were notable changes in the investment portfolio of banks. The
110
Economic Survey 2010-11 during 2008-09, when the global financial crisis intensified. However, in 2009-10, the gross NPA ratio increased to 2.39 per cent from 2.25 per cent in 2008-09. The total amount recovered and written off in 2009-10 was ` 49,210 crore. This was lower than the fresh NPAs added during 2009-10, which were to the tune of ` 65,674 crore. The sectoral distribution showed a growing proportion of priority-sector NPAs in 2009-10. Among the various channels of recovery available to banks for dealing with non-performing loans, the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act has been by far the most important channel. However, in 2009-10, there was a decline in the amount of NPAs recovered under the SARFAESI Act as a per cent of total amount of NPAs involved under this channel. 5.42 Among bank groups, the gross NPA ratio of PSBs increased to 2.19 per cent in 2009-10 from 1.97 per cent in the previous year. The most notable increase in NPA ratio in 2009-10 could be seen in the case of foreign banks. The NPA ratio of foreign banks increased to 4.29 per cent in 2009-10 from 3.80 per cent in 2008-09.
percentage contribution of investments in approved securities declined in 2009-10 in contrast to an increase in 2008-09, which was mainly due to banks preference to park their funds in low-risk instruments against the backdrop of prevailing global uncertainties. Consequently, the percentage contribution of investments in non-SLR(statutory liquidity ratio) securities by banks showed an increase in 2009-10 driven mainly by an increase in investments in mutual funds. 5.38 Similar to the slowdown in growth in balance sheets, there was a moderation in the financial performance of SCBs in 2009-10. The growth in both income and expenditure of the SCBs slowed down leading to a deceleration in the growth of operating and net profits of SCBs. Every indicator of profitability also showed a decline in 2009-10. The most salient indicator of profitability, return on assets (RoA), declined to 1.05 per cent in 2009-10 from 1.13 per cent in 2008-09. Further, return on equity (RoE) too declined to 14.3 per cent in 200910 from 15.4 per cent in 2008-09. 5.39 After abstaining during 2008-09, banks started resorting to the capital market for raising resources in 2009-10. The resources raised from the capital market by banks were in the form of both public issues and private placement in 2009-10.
Technological Developments in Banks

5.43 Banks in India are using information technology (IT) not only to improve their own internal processes but also to increase facilities and services to their customers. Efficient use of technology has facilitated accurate and timely management of the increased volumes of transactions of banks, consistent with a larger customer base. Of the total number of PSB branches, 97.8 per cent were fully computerized at the end of March 2010. 5.44 ATMs, particularly off-site ATMs, act as substitutes for bank branches in offering a means of anytime cash withdrawal to customers. Growth of ATMs, which had generally been steadily rising in recent years, was observed to be 37.8 per cent in 2009-10. More importantly, the growth in off-site ATMs too was comparably high at 44.6 per cent during the year. At the end of March 2010, the percentage of off-site ATMs to total ATMs stood at 45.7 per cent for all SCBs. 5.45 Another important technological development in 2009-10 was a significant increase in the percentage of PSB branches implementing CBS from 79.4 per cent at the end of March 2009 to 90 per cent at the end of March 2010. The percentage of branches under CBS was much larger for the SBI group as compared to nationalized banks.
Capital Adequacy Ratio

5.40 One of the major indicators of growing financial soundness of the Indian banking system was the improvement in the capital to risk-weighted assets ratio (CRAR). The CRAR of all SCBs under Basel I framework improved to 13.6 per cent by end-March 2010 from 13.2 per cent a year earlier, thus remaining significantly above the stipulated minimum of 9.0 per cent. As all commercial banks in India excluding RRBs and local area banks became Basel II compliant as on 31 March 2009, it is essential to also look at the capital adequacy position under this framework. Under the Basel II framework too, the CRAR of SCBs showed an increase in 2009-10; the CRAR improved to 14.5 per cent at the end of March 2010 from 14.0 per cent at the end of March 2009. At the bank group level, every bank group reported CRAR, on an average, of over 13 per cent under the Basel II framework.
NPAs of the Banking Sector

5.41 The NPAs of SCBs emerged as a major area of concern in 2009-10. Gross NPAs as percentage of gross advances of SCBs had remained unchanged
Financial Intermediation and Markets 5.46 With computerization in general, and CBS in particular, having reached near completion, it is important to leverage this technological advancement to look at areas beyond CBS that can help in not just delivering quality and efficient services to customers but also generating and managing information effectively. With regard to the second aspect of information management, a system of receiving data from banks by the RBI in an automated manner without any manual intervention is under examination. 5.47 Going forward, there are a number of issues with regard to development of banking technology that need to be addressed. These relate to further improvement in back office management in the form of streamlining the management information system (MIS), strengthening centralized processing, customer relationship management (CRM), and IT Governance. Back office technological advancement would help divert banks resources more towards front office management, thereby increasing the customer focus of their services and supporting greater financial penetration and inclusion.
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Bank was raised subject to conditions, with effect from December 8, 2008, for a period of one year. On a review, the relaxation allowed in December 2008 to select FIs (SIDBI, NHB and EXIM Bank) in resource raising norms for FIs has been co-terminated with refinance facility. Accordingly, outstanding borrowings of FIs should be within the normal prudential limit i.e. ceiling on aggregate resources at 10 times of net owned fund (NOF) and umbrella limit at one time of NOF with effect from 31st March, 2010. 5.49 The guidelines regarding lending under consortium arrangements/ multiple banking arrangements, provisioning coverage for advances, prudential norms on creation and utilization of floating provisions, additional disclosures in notes to accounts, and prudential norms on income recognition, asset classification and provisioning pertaining to advancescomputation of NPA levels and projects under implementationissued to banks have been mutatis mutandis applied to select FIs. Further, the guidelines regarding know your customer (KYC) norms/ anti-money laundering (ALM) standards/ combating of financing of terrorism (CFT) and sale of investments held under Held to Maturity category issued to banks are also applicable to select FIs. 5.50 Resources raised by FIs during 2009-10 were considerably higher than those during the previous year. While the long-term resources raised witnessed a sharp climb during 2009-10 as compared to the previous year, the short-term and foreign currency resources raised increased marginally. SIDBI mobilized the largest amount of resources, followed by Exim Bank and NHB (Table 5.12). 5.51 Total sources/deployment of funds of FIs increased modestly by 1.8 per cent to ` 3,02,610 crore during 2009-10. A major part of the funds of FIs was raised internally (51.8 per cent), followed by external sources (41.9 per cent); other sources formed only a small part. The funds raised from internal sources declined by 18.9 per cent, while those from external sources rose by 38.8 per cent over the year 2009-10 mainly due to recovery in the global financial markets during 2009-10. A large part of the funds raised was used for fresh deployments (56.8 per cent), followed by repayment of past borrowings (38.0 per cent). Other deployments
NON-BANKING FINANCIAL INSTITUTIONS (NBFIS)

Financial Institutions (FIs)
5.48 As at the end of March 2010, four institutions, namely Export Import Bank of India (Exim Bank), NABARD, the National Housing Bank (NHB), and the Small Industries Development Bank of India (SIDBI) were regulated by the RBI as all-India FIs. In the wake of recovery in the global as well as Indian economy during 2009-10, the RBI issued the following instructions to roll back the liquidity support measures initiated for FIs during 2008-09 for on-lending to housing finance companies (HFCs)/NBFCs/micro-finance institutions (MFIs) and exporters: (i) The refinance facility of ` 7,000 crore, ` 5,000 and ` 4,000 crore for SIDBI, Exim Bank and NHB, respectively, under the relevant provisions of the Reserve Bank of India Act, 1934 sanctioned in December 2008 have been withdrawn with effect from the close of business on 31st March, 2010. (ii) The ceiling on aggregate resources raised including the funds mobilised under umbrella limit by SIDBI, NHB and EXIM
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Table 5.12 : Resources Mobilized by FIs

(` Crore) ` Financial Institutions Long-term Total Resources Raised Short-term Foreign Currency Total Total Outstanding (as at the end of March) 2009 2010 40,509 24,922 10,598 30,186
2008-09 2009-10 2008-09 2009-10 2008-09 2009-10 2008-09 2009-10 Exim Bank NABARD NHB SIDBI Total 3197 4252 3124 5625 16,198 8150 16 7518 13,253 28,937 8905 3494 16,881 8811 38,091 5052 12,330 10,306 11,500 39,188 3800 1361 5161 5193 987 6,180 15,902 7746 20,005 15,797 59,450
18,395 37,202 12,346 26,867 17,824 16,503 25,740 24,487
74,3051,05,059 1,06,215
Source: Respective FIs. Notes:-: (i) Nil/Negligible. (ii) Long-term rupee resources comprise borrowings by way of bonds/ debentures; and short-term resources comprise commercial papers (CPs), term deposits, certificate of deposits (CDs),
including interest payments formed only a small part of the funds of FIs. The repayment of past borrowings recorded a sharp increase of 103.2 per cent, while fresh deployment registered a decline of 11.7 per cent over the year (Table 5.13).
Table 5.13 : Pattern of Sources and Deployment of Funds of FIs*

(Amount in ` crore)
Item 2008-09 2009-10 Percentage Variation in 2009-10
Non-Bank Finance Companies (NBFCs)

5.52 NBFCs as a whole account for 11.2 per cent of assets of the total financial system. With the growing importance assigned to financial inclusion, NBFCs have come to be regarded as important financial intermediaries particularly for the smallscale and retail sectors. There are two broad categories of NBFCs based on whether they accept public deposits, namely deposit-taking NBFCs (NBFCs-D) and non-deposit-taking NBFCs (NBFCsND). 5.53 The total number of NBFCs registered with the RBI, consisting of NBFCs-D and NBFCs-ND, declined from 12,740 in end-June 2009 to 12,630 in end-June 2010. The number of NBFCs-D declined from 336 to 308 during the same period, mainly due to the exit of many NBFCs-D from deposit- taking activity, while non-deposit-taking systemically important NBFCs (NBFCs-ND-SI with asset size ` 100 crore and above) increased from 234 to 260 during the same period. Under the NBFCs-D category there are two residuary non-banking companies (RNBCs) (Table 5.14)
Sources of Funds (i+ii+iii) (i) Internal (ii) External (iii) Others** Deployment of Funds (i+ii+iii) (i) Fresh Deployment (ii) Repayment of Past Borrowings (iii) Other Deployment of which: Interest Payments
2,97,296 (100.0) 1,93,294 (65.0) 91,314 (30.7) 12,688 (4.3) 2,97,296 (100.0) 1,94,711 (65.5) 56,592 (19.0) 45,993 (15.5) 8809 (3.0)
3,02,610 (100.0) 1,56,733 (51.8) 1,26,813 (41.9) 19,065 (6.3) 3,02,610 (100.0) 1,71,922 (56.8) 1,15,015 (38.0) 15,673 (5.2) 16,561 (5.5)
1.8 -18.9 38.8 50.3
1.8 -11.7
103.2 -65.9
88.0
Source: Respective FIs Notes:* Exim Bank, NABARD, NHB, and SIDBI. **Includes cash and balances with banks and balances with the RBI and other banks. Figures in parentheses are percentages to the totals.
Financial Intermediation and Markets Table 5.14 : Number of NBFCs Registered with the RBI
End June Number of Registered NBFCs 13,261 13,014 12,968 12,809 12,740 12,630 Number of NBFCs-D Number of NBFCsND-SI 149 173 189 234 260
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share of 83.2 per cent, followed distantly by loan companies with a 16.8 per cent share. 5.58 The asset size of NBFCs-D varies significantly between less than ` 25 lakh to above ` 500 crore. The asset-holding pattern remained skewed, with 15 NBFCs-D with asset size of above ` 500 crore holding 97.5 per cent of total assets of all NBFCsD, while the remaining 213 held about 2.5 per cent in end-March 2010. 5.59 The financial performance of NBFCs-D witnessed moderate deterioration as reflected in the decline in their operating profits during 2009-10. This decline was mainly on account of higher growth in expenditure than income of these institutions. The decline in operating profits along with marginal increase in tax provision resulted in a decline in net profits in 2009-10. The cost to income ratio deteriorated from 74 per cent in 2008-09 to 81.8 per cent in 2009-10. Non-interest cost at 97.4 per cent continued to constitute the dominant share in total cost of the NBFCs-D during 2009-10 while interest cost accounted for a smaller share. 5.60 There was a decline in the gross NPAs to gross advances ratio of NBFCs-D in 2009-10 in continuation of the trend observed in the recent past. Classification-wise, Gross NPA and net NPA ratios of AFCs and loan companies declined during 200910 as compared to the previous year. Asset quality of AFCs as reflected in various categories of NPAs (substandard, doubtful, and loss) shows sharp improvement. 5.61 Capital to risk-weighted assets ratio (CRAR) norms were made applicable to NBFCs-D in 1998, whereby every NBFC-D is required to maintain a minimum capital, consisting of Tier I and Tier II capital, not less than 12 per cent (15 per cent in the case of unrated deposit-taking NBFCs) of its aggregate risk-weighted assets. As at the end of March 2010, 212 out of 216 reporting NBFCs-D had CRAR of more than 12 per cent as against 221 out of 225 in end-March 2009. It may be pointed out that the NBFC sector has been witnessing a consolidation process in the last few years, wherein the weaker NBFCs are gradually exiting, paving the way for a stronger sector.
2005 2006 2007 2008 2009 2010

Source: RBI.
507 428 401 364 336 308
5.54 The ratio of deposits of reporting NBFCs to aggregate deposits of SCBs dropped to 0.36 per cent in end-March 2010 from 0.53 per cent in endMarch 2009, mainly due to the decline in deposits of reporting NBFCs. 5.55 Total assets of NBFCs-D (including RNBCs) increased to ` 1,09,324 crore during 2009-10 from ` 97,408 crore in the preceding year. Public deposits held by NBFCs-D and RNBCs together recorded a decline to ` 17,247 crore in end-March 2010 from ` 21,566 crore in end-March 2009. Netowned funds (NOFs) witnessed a growth of 18.8 per cent during 2009-10 and stood at ` 16,178 crore. 5.56 Total assets/liabilities of NBFCs-D (excluding RNBCs) expanded at the rate of 21.5 per cent during 2009-10 as compared to 3.4 per cent during 200809. Borrowings, which are the major source of funds for NBFCs-D, increased by 23.6 per cent during the year, while public deposits increased by 38.4 per cent largely due to the increase in public deposits of three NBFCs-D. On the assets side, the major componentshire purchase assets and loans and advanceswitnessed growth of 7.6 per cent and 42.7 per cent respectively during 2009-10 as compared to 6.8 per cent and 14.7 per cent during the previous year. Total investments of NBFCs-D increased by 23.3 per cent during 2009-10 primarily on account of rise in non-SLR investments. 5.57 Among NBFCs-D, asset finance companies (AFCs) held the largest share in total assets/liabilities (74.5 per cent) while loan companies accounted for 25.5 per cent in end-March 2010. The increase in assets/liabilities of AFCs was mainly on account of reclassification of NBFCs, which was initiated in December 2006. Of the total deposits held by all NBFCs-D, asset finance companies held the largest
Profile of NBFCs-ND-SI
5.62 The balance sheet of NBFCs-ND-SI stood at ` 5,63,476 crore in end-March 2010 as compared to ` 4,82,907 crore in end-March 2009 thereby registering a growth of 16.7 per cent during 2009-
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Economic Survey 2010-11 certificates (NoCs) from the Department of Non-Banking Supervision of RBI before making such investment. (ii) NBFCs-ND-SI engaged predominantly in infrastructure financing had represented to the RBI that there should be a separate category of infrastructure financing NBFCs in view of the critical role played by them in providing credit to the infrastructure sector. As advised in the Second Quarter Review of Monetary Policy 2009-10, it was decided to introduce a fourth category of NBFCs as infrastructure finance companies(IFCs) satisfying certain criteria like a minimum of 75 per cent of their total assets in infrastructure loans, net owned funds of ` 300 crore or above, minimum credit rating A or equivalent of CRISIL, FITCH, CARE, ICRA or equivalent rating by any other accrediting rating agency, and CRAR of 15 per cent (with a minimum Tier I capital of 10 per cent). Such NBFCs would be allowed to exceed credit concentration norms of lending to single/group borrowers by 5 per cent above that of other infrastructure loans. (iii) NBFCs-ND-SI were advised to submit Statement of Interest Rate Sensitivity [NBSALM3] within 20 days of the close of the half year to which it related. They were also advised that eligible companies could file the ALM returns on-line. (iv) While granting finance to housing/ development projects, NBFCs were advised to stipulate as a part of the terms and conditions that: (a) the builder / developer / owner / company disclose in the pamphlets / brochures / advertisements the name(s) of the entity to which the property is mortgaged. (b) the builder / developer / owner / company indicate in the pamphlets / brochures, that they would provide NOC / permission of the mortgagee entity for sale of flats / property, if required. Funds were would not be released unless the above requirements were fulfilled. (v) NBFCs having foreign direct investment (FDI) are required to submit certificates from their statutory auditors on half-yearly basis certifying compliance with existing terms
10. This significant increase in balance sheet size of NBFCs-ND-SI is mainly attributed to sharp increase in owned funds, debentures, bank borrowings, commercial paper, and other liabilities. Owned funds (which accounted for 25.8 per cent of total liabilities) increased by 11.3 per cent during 2009-10. Total borrowings (secured and unsecured) by NBFCs-ND-SI increased by 19.6 per cent to ` 3,81,850 crore and formed 67.7 per cent of total liabilities. During the period ended June 2010, total borrowings further increased by 8.3 per cent to ` 4,13,476 crore. 5.63 The pattern of deployment of funds by NBFCsND-SI in the year ended March 2010 remained broadly in line with that witnessed during the previous year. Secured loans continued to constitute the largest share (44.3 per cent of total assets), followed by unsecured loans (17.8 per cent), hire purchase assets (7.4 per cent), investments (17.4 per cent), cash and bank balances (4.5 per cent),and other assets (8.4 per cent) during the year ended March 2010. 5.64 The financial performance of the NBFCs-NDSI sector improved marginally as reflected in the increase in net profit of ` 10,897 crore during 200910 over the previous year. However, their net profit to total assets declined during the same period. 5.65 Gross and net NPAs ratios of the NBFCsND-SI sector deteriorated marginally during the year ended March 2010. However, these ratios showed some improvement in the quarter ended June 2010. Similarly, there was further diminution in value of investments between March 2009 and March 2010.
Policy Initiatives
5.66 The regulatory and supervisory framework of NBFCs continued to focus on prudential regulations with specific attention to the systemically important non-deposit-taking companies (NBFC-ND-SI). Some of the important developments in chronological order are as follows: (i) Instances of NBFCs having made overseas investments without regulatory clearance of the Department of Non-Banking Supervision, RBI,which is a violation of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations 2004 and attracts penalty, were observed. Accordingly, it was reiterated that all NBFCs desirous of making any overseas investment must obtain No Objection
Financial Intermediation and Markets and conditions of FDI. NBFCs were advised that such certificates may be submitted not later than one month from the close of the half year to which the certificate pertained. (vi) In terms of the third proviso of para 18 of the Non-Banking Financial (Non- Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions 2007, NBFCs were advised that any NBFC-ND-SI not accessing public funds, either directly or indirectly, may make an application to the Bank for modifications in the prescribed ceilings with regard to concentration of credit / investment norms. NBFCs-ND-SI may also be issuing guarantees and devolvement of these guarantees might require access to public funds. Accordingly it was advised that any NBFC-ND-SI not accessing public funds either directly or indirectly or not issuing guarantees may approach the Regional Office of the Department of NonBanking Supervision, RBI in whose jurisdiction the registered office of the company is located, for appropriate dispensation. (vii) NBFCs were advised that there should be no discrimination in extending products and facilities including loan facilities to physically/ visually challenged applicants on grounds of disability. (viii) All NBFCs excluding RNBCs may participate in the designated currency futures and options exchanges recognized by the Securities and Exchange Board of India (SEBI) as clients, subject to RBI (Foreign Exchange Department) guidelines in the matter, only for the purpose of hedging their underlying forex exposures. With appropriate disclosures in their balance sheets. (ix) According to the Repo in Corporate Debt Securities (Reserve Bank) Directions 2010, dated 8 January 2010 issued by the RBI, NBFCs registered with the RBI (other than Government companies as defined in Section 617 of the Companies Act 1956) are eligible for participation in repo transactions in corporate debt securities. NBFCs participating in such repo transactions were advised to comply with
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the Directions and accounting guidelines issued by RBI. (x) As announced in the Annual Policy 20102011, draft guidelines on core investment companies (CIC) were placed on the RBI website on 21 April 2010. Based on feedback received from the market participants, the regulatory framework for CICs was announced. In order to bring more clarity in the interest of the system it was decided that investing in shares of other companies, even for the purpose of holding stake should also be regarded as carrying on the business of acquisition of shares in terms of Section 45I(c) (ii) of the RBI Act. CICs with an asset size of ` 100 crore or more would be considered systemically important core investment companies (CICs-ND-SI) and would be required to obtain Certificate of Registration (CORs) from the RBI under Section 45-IA of the RBI Act even if they had in the past been advised that registration was not required. Capital requirements, leverage ratio to be maintained, etc. have been prescribed for CICs-ND-SI. Certain exemptions from maintenance of statutory minimum NOF, prudential norms including requirements of capital adequacy, and exposure norms have been prescribed for those CICs-ND-SI. CICs-ND-SI were advised to submit annual certificates from their statutory auditors regarding compliance with these guidelines within one month from the date of finalization of their balance sheet. (xi) In view of sub section (2) of Section 17 of the Credit Information Companies (Regulation) Act 2005, and Regulation 10 (a) (ii) of the Credit Information Companies Regulations 2006, NBFCs were advised that those NBFCs which had become member/ members of any new credit information company / companies may provide them the current data in the existing format. Such NBFCs may also provide historical data in order to enable the new credit information companies to validate their software and develop a robust database. However, care should be taken to ensure that no wrong data / history regarding borrowers is given to credit information companies.
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BOX 5.2 : CORPORATE BOND MARKETS

Economic vibrancy coupled with sophisticated state-of the- art financial infrastructure has contributed to rapid growth in the equity markets in India. In terms of market features and depth the Indian equity market ranks among the best in the world. In parallel, the Government securities market has also evolved over the years and expanded given the increasing borrowing requirements of the Government. In contrast, the corporate bond market has languished both in terms of market participation and structure. Non-bank finance companies are the main issuers and very small amounts of finance are raised by companies directly. There are several reasons for this: (i) Pre dominance of banks loans; (ii) FIIs participation is limited; (iii) Pensions and insurance companies and household are limited participants because of lack of investor confidence; and (iv) Crowding out by Government bonds. The corporate bond market as a result is only about 14 per cent of the total band market; and market liquidity and infrastructure remain constrained. With the intervention of the Patil Committee recommendations, the corporate bond market is slowly evolving. With bank finance drying up for long- term infrastructure projects in view of asset liability problems faced by banking system, the need for further development of a deep and vibrant corporate bond market can hardly be overemphasised. The following table shows the status of corporate bond market in India: Private placement of corporate bonds listed on NSE and BSE Year 2007-08 2008-09 2009-10 2010-11(till Nov-10) Source: SEBI ( includes NBFCs) The following table gives details of bond issuance in some of the emerging markets including India: Region/Countries Latin America Argentina Brazil Chile Mexico Hungary Poland Russia China India Indonesia Malaysia Philippines Thailand 2007 3.4 9.9 0.3 6.3 4.1 4.1 30.2 2.1 7.5 1.8 0.9 1.0 0.8 2008 0.1 6.7 0.1 4.5 5.3 3.8 22.1 2.1 1.4 4.2 0.4 0.4 0.5 (in US$ billion) 2009 0.5 10.1 3.0 15.5 3.0 10.2 10.8 3.3 2.2 5.5 0.1 5.4. No. of Issues 744 1041 1278 929 Amount (` Crore) ` 118,485 173,281 212,635 147,400
Emerging Europe
Asia
Source: IMF, GFSR, April 2010 Earlier initiatives taken for development of corporate bond market in India Regulatory jurisdiction over corporate bond market has been clearly defined and placed under SEBI. SEBI (Issue and Listing of Debt Securities) Regulations, 2008 simplified disclosures and listing requirements. A minimum market lot criterion has been reduced from ` 10 lakhs to ` 1 lakh to encourage retail investors. The limit of FIIs investment in corporate bonds has been increased to USD 20 billion from the existing limit of USD 15 billion and the incremental limit of USD 5 billion has to be invested in corporate bonds with residual maturity of over five years. BSE, NSE and FIMMDA have set up reporting platforms. Aggregate data reported on these platforms is disseminated to the public. Summary data is available on SEBI website. Repos in corporate bonds have been permitted, following RBI guidelines, since March 2010. Exchange traded interest rates futures were introduced in August 2009.

Draft Credit Default Swap, (CDS) guidelines have been released by RBI in July, 2010.
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The Finance Act, 2008 (with effect from 01/06/2008) mandated that no TDS (tax deduction at source) would be deducted from any interest payable on any security issued by a company, where such security is issued in dematerialised form and is listed on a recognised stock exchange in India. The stamp duty on items in central list (debentures and bonds in the nature of promissory note) have been brought down and made uniform. Clearing and settlement through clearing corporations have been mandated for trades between specified entities namely mutual funds, foresight institutional investors, venture capital funds etc. Clearing and settlement is on DvP I basis.
Suggested initiatives to be taken for further development of corporate bond market1 Clearing and settlement on DvP (Delivery versus Payment) III basis. Market making with primary dealers. Enabling Credit Default Swap. Allowing banks to do credit enhancement -Guaranteeing of corporate bonds by banks. Relaxing norms on short selling of Government bonds .(RBI). Relaxing norms for use of shelf prospectus -requires amendment to Section 60 of Companies Act (MCA). Empowering bond holder under SARFAESI (Department of Financial Services, RBI). Creating of a comprehensive bond data base (RBI, SEBI, FIMMDA). Amendment to Section 9 of the Stamp Act to lower stamp duties across states and make them uniform (Department of Revenue).
Agency responsible is indicated in bracket
Major Policy ChangesSecuritization Companies/ Reconstruction Companies (SCs/RCs)

5.67 On 21 April 2010, the RBI modified the guidelines issued to SCs/RCs on various aspects to bring in more transparency and market discipline.
CAPITAL MARKETS
Primary Market
5.68 The year 2010-11 has seen the Indian capital market put the worst behind and move towards strong growth. The cumulative amount mobilized as on 30 November 2010-11 through initial public offers (IPOs), follow on public offers (FPOs) and rights
issues stood at ` 46,701 crore as compared to ` 46,737 crore in 2009-10. During 2010-11, so far, 40 new companies (IPOs) were listed both at the NSE and BSE amounting to ` 33,068 crore as against 39 companies amounting to ` 24,696 crore in 2009. The mean IPO size for the current financial year is ` 827 crore as compared to ` 633 crore in the previous financial year, showing an increase of 30.6 per cent. Further, ` 2197 crore was mobilized through debt issue as compared to ` 2500 crore in 2009-10. The amount of capital mobilized through private placement in 2010-11 (as on 30 November 2010) is ` 1,47,400 crore as compared to ` 2,12,635 crore in 2009-10. Table 5.15 sums up these figures.
Table 5.15 : Resource Mobilization through the Primary Market

(` crore) ` Mode 1. Debt 2. Equity of which IPOs Number of IPOs Mean IPO Size 3. Private Placement 4. Euro Issues (ADR/GDR) Total (1+2+3+4)
Notes: NA indicates Not Available. Source: SEBI and RBI (for Euro Issues). * As on 30 November 2010
2007-08 0 54,511 42,595 85 501 1,18,485 NA 2,16,176
2008-09 1500 2082 2082 21 99 1,73,281 NA 1,79,066
2009-10 2500 46,737 24,696 39 633 2,12,635 NA 2,87,240
2010-11* 2197 46,701 33,068 40 827 1,47,400 NA 2,30,233
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Table 5.16 : Trends in Resource Mobilization (net) by Mutual Funds

(` crore) Sector 1. UTI 2. Public 3. Private Total (1+2+3)
Source: SEBI. Note: *As on 30 November, 2010
2006-07 7326 7621 79,038 93,985
2007-08 10,677 9820 1,33,304 1,53,802
2008-09 -3659 9380 -34,018 -28,296
2009-10 15,653 12,499 54,928 83,080
2010-11* -5237 -2956 20,378 12,185
Resource Mobilization by Mutual Funds

5.69 During 2010-11 (as in November 2010), mutual funds mobilized ` 12,185 crore from the market as compared to ` 83,080 crore in 2009-10. The market value of assets under management stood at ` 6,65,282 crore as on 30 November 2010 compared to ` 6,13,979 crore as on 31March 2010, showing an increase of 8.4 per cent. Table 5.16 puts gives details in this regard:
Secondary Market
5.70 As on 31 December 2010, Indian benchmark indices, the BSE Sensex and Nifty, increased by 17.0 per cent and 17.9 per cent respectively over the closing value of 2009-10. Nifty Junior and BSE 500 also increased by 17.8 per cent and 15.1 per cent respectively over their values in the previous financial year. (Figure 5.3) 5.71 The free float market capitalization of Nifty, the Sensex, Nifty Junior, and BSE 500 stood at
Table 5.17 : Index Returns, Volatility, Market Capitalization, and P/E ratio
Index Nifty Return (per cent) Market Capitalization ( Rscrore) Daily Volatility P/E Ratio Nifty Junior Return (per cent) Market Capitalization ( ` crore) Daily Volatility P/E Ratio BSE Sensex Return (per cent) Market Capitalization ( Rscrore) Daily Volatility P/E Ratio BSE 500 Return (percent) Market Capitalization ( crore) Daily Volatility P/E ratio
Sources: BSE and NSE. Note: $ As on 31 December 2010
2006-07
2007-08
2008-09
2009-10
2010-2010-$
12.3 9,27,089 1.8 18.4 7.3 13,76,826 2.0 18.5 15.9 8,31,033 1.8 20.3 9.7 14,56,632 1.7 17.7
23.9 12,40,071 2.0 20.6 16.0 2,02,809 2.4 16.7 19.7 10,71,940 1.9 20.1 24.3 19,96,839 2.0 20.0
-36.2 7,71,483 2.6 14.3 -45.6 1,13,523 2.8 8.7 -37.9 6,95,152 2.8 13.7 -42.8 11,68,850 2.6 13.7
73.8 15,25,162 1.9 22.2 148.4 2,92,316 2.0 15.8 80.5 13,28,862 1.9 21.3 96.4 24,44,151 1.8 20.4
17.9 18,27,097 1.0 24.5 17.8 3,37,573 1.1 17.6 17.0 16,32,236 1.0 23.6 15.1 29,52,135 1.0 21.4
Financial Intermediation and Markets Figure 5.3

14000 12000
119
Movement of indices of NSE and BSE

25000 22500 NIFTY index NIFTY jr index SENSEX index
NSE Indices
BSE Indices
10000 8000 6000 4000
20000 17500 15000 12500
Jan
May
Feb
Mar
Jun
Jul
Oct
2010
` 18,27,097 crore, ` 16,32,236 crore, ` 3,37,573 crore, and ` 29,52,135 crore respectively, showing an increase of 19.8 per cent, 22.8 per cent, 15.5 per cent and 20.8 per cent respectively over their values in financial year 2009-10. 5.72 The price to earnings (P/E) ratios of Nifty, the Sensex, Nifty Junior, and BSE 500 as on 31 December 2010 were 24.5, 23.6, 17.6 and 21.4 respectively, indicating an increase of 10.1 per cent, 10.5 per cent, 11.6 per cent and 4.5 per cent respectively over their 2009-10 values. 5.73 The details in respect of index return, volatility Market Capitalisation and P/E ratio are given in table 5.17. 5.74 In the capital market segment, the total turnover of the BSE stood at ` 8,93,839 crore and of the NSE at ` 27,87,862 crore as on 31 December 2010 as compared to ` 13,78,809 crore and ` 41,38,024 crore respectively in 2009-10. Table 5.18 displays these trends in the secondary market. ` Table 5.18 : Market Turnover (` crore)
Market BSE Cash Equity Derivatives NSE Cash Equity Derivatives 19,45,285 73,56,242 35,51,038 1,30,90,478 9,56,185 59,007 15,78,670 2,42,308 2006-07 2007-08
Equity Derivative
5.75 In the equity derivative segment, the NSE witnessed a total turnover of ` 2,05,99,192 crore as on 31 December 2010 as compared to ` 1,76,63,665 crore during 2009-10. Similarly, the total turnover in the equity derivative segment of BSE stood at ` 35 crore in 2010-11 (so far) as compared to ` 234 crore during 2009-10. Table 5.18. shows these trends while Table 5.19 shows the volatility of weekly returns on Indian equity markets. Table 5.19 : Volatility of weekly returns on Indian equity markets (standard deviation)
Index Nifty Nifty Junior Sensex BSE 500 2008-09 5.5 6.6 5.8 5.7 2009-10 3.8 4.5 3.6 3.9 2010-11* 2.2 2.5 2.2 2.2
Source: BSE and NSE. Note: *As on 31December 2010.
Aug
2008-09
2009-10
Dec
Sep
Nov
Apr
2010-11*
11,00,074 12,268 27,52,023 1,10,10,482
13,78,809 234 41,38,024 1,76,63,665
8,93,839 35 27,87,862 2,05,99,192
Sources: BSE and NSE. Note: *As on 31 December 2010.
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Year
Table 5.20 : Currency Futures

NSE 2009-10 No. of Contracts Trading Value (` crore) Average Daily Trading Value (` crore)
Source: NSE, MCX-SX, and USE. Note: * As on 30 November 2010.
MCX- SX 2009-10
USE 2010-11*
2010-11$
2010-11* 2009-10
37,86,06,983 50,02,21,743 40,81,66,278 61,93,53,844 17,82,608 23,04,219 19,44,654 28,89,445
NA 11,87,44,133 NA 5,37,836
7428
14,045
8103
17,636
NA
7504
Currency Derivative
5.76 The turnover at the MCX Stock Exchange (MCX-SX) in the currency derivatives segment stood at ` 28,89,445 crore in 2010-11 (as on 30 November,2010) as against ` 19,44,654 crore in 2009-10. The NSE, witnessed a turnover of ` 23,04,219 crore in 2010 (as on 30 November 2010) as compared to ` 17,82,608 crore in 2009-10. Further, the USE, which began operations in the currency derivatives segment on 20 September 2010, witnessed a turnover of ` 5,37,836 crore as on 30 November 2010. (Table 5.20)
Further, in the debt segment, FIIs invested ` 24,839 crore in 2010-11 (as on 31 December 2010) as compared to ` 32,438 crore in 2009-10. So far during 2010-11, total investment in equity and debt by FIIs stood at ` 1,37,461 crore as compared to ` 1,42,658 crore in 2009-10.(Table 5.22)
International Comparison
5.80 The trend in major emerging markets alongwith P/E ratios are given in table 5.23 and 5.24 respectively. Table 5.23 displays gains/losses posted by global indices over their 2003 levels from 2004 to 2010.
Interest Rate Derivative

5.77 Trading in interest rate futures started at the NSE on 31 August 2009. During 2010-11 (as on 30 November 2010), the NSE witnessed a total turnover of ` 53 crore in this segment as compared to ` 2975 crore in 2009-10. (Table 5.21)
Market Movements
5.81 The year 2010 has been one of strong growth for the Indian capital markets . Bulls tossed off the markets in the year 2010 to a net gain of 18per cent, following global recovery and with FIIs pumping money in to the market on account of solid domestic growth coupled with a resurging corporate sector. Indices achieved record highs during the special one-hour muhurut trading on 5 November 2010 with the Sensex touching 21004.96 and Nifty 6312.45. As on 31 December 2010, the markets stand just 3 per cent away from this alltime peak and closed at 20509.09 (+ 17.43 per cent from 31 December 2009 for the Sensex-) and 6134.5 (+ 17.95 per cent for Nifty). 5.82 Indian markets have been making gains for eight quarters in a row, their longest winning run in at least 20 years. While 2009 was basically a year of recovery from the crisis year of 2008, 2010 was one of consolidation of gains. From 9647 on 31st Dec 2008, the Sensex climbed to 17464.81 on 31 December 2009 and further consolidated its rally at 20509.09 on 31 December 2010. The total market capitalization as on 31 December 2010 stands at ` 72,96,725 crore compared to ` 60,81,308 crore as on 31 December, 2009.
FIIs
5.78 The number of registered FIIs increased to 1718 as on 31 December 2010 from 1713 on 31 March 2010. The number of registered subaccounts also increased to 5503 from 5378 during the same period. 5.79 In the Indian equity market, FIIs invested ` 1,12,622 crore during 2010-11 (as on 31 December 2010) as compared to ` 1,10,221 crore in 2009-10. Table 5.21 : Interest Rate future at NSE
Year No. of Contracts Trading Value ( ` crore) Average Daily Trading Value (Rscrore)
Source: NSE. Note:* As on 30 November 2010.
2009-10 1,60,894 2975 21
2010-11$ 2,864 53 0.3
Financial Intermediation and Markets Table 5.22 : Transactions of FIIs

Transactions 2008-09 Number of FIIs (actual) Number of Sub-accounts (actual) 1. Equity Market Activity ( Rscrore) Gross Buy Gross Sell Net 2. Debt Market Activity ( Rscrore) Gross Buy Gross Sell Net 3. Total Activity (Rscrore) Gross Buy Gross Sell Net
Source: SEBI. Note: *As on 31 December 2010.
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Calendar year 2009-10 1713 5378 7,05,523 5,95,302 1,10,221 1,40,914 1,08,477 32,438 8,46,437 7,03,779 1,42,658 2010-11* 1718 5503 6,03,406 4,90,785 1,12,622 1,54,081 1,29,241 24,839 7,57,487 6,20,026 1,37,461 1635 5015 5,54,585 6,02,292 -47,706 59,993 58,098 1,895 6,14,579 6,60,389 -45,811
Table 5.23 : Cumulative Change in Movement of Global Indices* Index 2004 BSE Sensex, India Hang Seng Index, Hong Kong Jakarta Composite Index, Indonesia Nikkei 225, Japan Kospi Index, South Korea TSEC weighted Index, Taiwan SSE Composite Index, China 13.1 13.2 44.5 7.6 10.5 4.2 -15.4 Cumulative Change over end-2003 Level (%) 2005 61 18.3 68.1 50.9 69.7 13.4 11.2 -22.4 2006 136.1 58.8 161 61.3 76.8 38 32.8 78.7 2007 247.4 121.2 296.8 43.4 133.9 82 44.4 251.5 2008 65.2 1.1 35.5 -22.9 25.6 -3.3 -25.2 43.7 2009 199.1 74.2 264.1 -5.3 104.4 58.7 32.3 116.9 2010 251.2 83.2 435.3 -4.2 153.0 35.3 87.6
Kuala Lumpur Comp. Index, Malaysia 14.2
Source: Derived from various country sources. Note: * End-year closing.
Table 5.24 : P/E Ratios in Select Emerging Markets Country Korea Thailand Indonesia Malaysia Taiwan India India Index Kospi SET Jakarta Composite Kuala Lumpur Comp. TSEC weighted BSE Sensex S&P CNX Nifty 2008-09 25.7 15.7 20.1 15.0 65.7 13.7 14.3 2009-10 11.1 12.3 16.6 18.9 19.1 21.3 22.3 2010-11* 14.8 15.0 20.9 17.4 15.7 23.6 24.5
Source: BSE, NSE, and Bloomberg. Note:* As on 31 December 2010.
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Economic Survey 2010-11 rate in the third quarter, marking a pickup in growth that may extend into 2011 as consumers and companies gain confidence to spend. Chinese manufacturing growth remains at relatively high levels amidst inflation. Global attention is on Chinese growth as it is considered the driver of global growth in 2011. Chinas manufacturing sector grew at the weakest pace in three months in December after the Government tightened monetary policy to restrain inflation and closed factories to meet energyefficiency targets. It is widely believed that following China, the rest of the central banks in emerging markets are also tightening their economies to safeguard them from inflation, making less cash available for equities. 5.86 Globally, leaders are striving to keep the pace of growth intact. Most European and Asian share indices rose as investors concerns over the Eurozones debt crisis were allayed by an 85 billion euro ($113bn; 72bn) bailout package for Ireland by the European Union and the International Monetary Fund on 28 November). Greece, which was the first to be hit, had received a 110 billion euro rescue package in May, which saved it from bankruptcy. The Monetary Policy Committee of the Bank of England voted to carry forward its 200 billion quantitative easing programme. The withdrawal of the programme set up by the US Federal Reserve to ease the strain from Europes debt crisis, was extended from January to August. Amid signs of recovery, the US Federal Reserve introduced the policy of buying $ 600 billion in US Treasury bonds and keeping short-term interest rates near zero. The US Govt. also extended all Bush-era tax cuts. All these developments have created positive vibes in the market. While the measures to rescue the Irish banking system are in place, there is now growing concern about the other two countries in the euro group called PIGS (Portugal, Ireland, Greece, and Spain) dampening sentiments across the globe.
5.83 In terms of month-onmonth movement, indices witnessed a consolidation phase till September 2010. While individual stocks saw many ups and downs, the indices were mostly range bound. The maximum monthly gains were recorded in September when the Sensex and Nifty made 11.67 per cent and 11.62 per cent respectively against the closing price in August. Compared globally, while the Jakarta Composite in Indonesia gained the most among indices with about 45 per cent rise, US Dow Jones and UKs FTSE 100 have each risen by around 11 per cent and 9 per cent respectively. NASDAQ composite Index was up 16.91 per centwhile S&P rose by 13 per cent. However, Japans Nikkei 225 and Chinas Shanghai Composite dipped 3 per cent and 14 per cent respectively during the year, reflecting the rising yen and monetary tightening in the respective countries.
Reasons For Market Movements

5.84 Markets are riding on the strong health of the Indian corporate sector; Also advance tax payments by Indias top 100 corporate taxpayers rose by 18.7 per cent in December from a year ago, indicating better corporate performance in the third quarter, reinforcing the belief in fundamentals in the market sphere. Indias April-November tax mop-up was estimated to be ` 4.18 trillion compared to ` 3.296 trillion a year ago, indicating the healthy fundamentals of the economy. Indias economy is likely to surpass the Governments 8.5 percent growth target for the fiscal year, giving further fillip to bourses on the domestic front. FII Flows at Historical levels: Historically low yields in developed markets due to accommodative monetary policies and weak economic prospects have pushed FII inflows to emerging markets to record highs. The primary market got a new lease of life this calendar year with Indian companies raising ` 69,192 crore through IPOs and FPOs. This was 3.5 times higher than the previous year (` 19,567 crore) and 53 per cent higher than the earlier record of ` 45,142 crore in 2007. Over 72 per cent of the years total mobilization was accounted for by publicsector units (PSUs). The year also witnessed the largest ever IPO in Indiaof ` 15,199 crorefrom Coal India, which single-handedly accounted for 22 per cent of the years total mobilization. 5.85 Global recovery also resulted in an upsurge in the markets. Boosting sentiments across the globe, the US economy expanded at a 2.6 per cent annual
MAJOR POLICY DEVELOPMENTS

Equity Finance For Small And Medium Enterprises (SMEs)
5.87 In recognition of the need for making finance available to needy SMEs, the SEBI Board in its meeting held on 25 October 2007 had agreed upon the creation of a separate exchange for SMEs. Accordingly, in May 2008 a discussion paper was brought out on the issue. Based on the feedback received, the SEBI Board in its meeting held on 6
Financial Intermediation and Markets October 2008 decided to encourage promotion of either dedicated exchanges and/or dedicated platforms of the existing exchanges for listing and trading of securities issued by SMEs. On 9 November 2009, the SEBI Board took a decision on the operational aspects of the exchanges/ platforms of stock exchanges for SMEs. Accordingly, SEBI has permitted setting up of a stock exchange/ trading platform for SMEs by a recognized stock exchange with nationwide trading terminals and has also issued guidelines for market making for the specified securities listed on the SME exchange. Further, necessary amendments to the SEBI regulations have been carried out. Based on the finalized regulations, applications have been received by SEBI for setting up SME platforms.
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External Commercial Borrowing (ECB) Policy

5.91 A prospective borrower can access ECBs under two routes, automatic and approval routes. A corporate, other than a financial intermediary, registered under the Companies Act,1956, can access ECBs under the automatic route up to US $ 500 million in a financial year both for rupee expenditure and / or foreign currency expenditure for permissible end uses. Borrowers in the services sector, namely hotels, hospitals, and software companies can access ECBs under the automatic route up to US$ 100 million in a financial year for import of capital goods and for rupee and / or foreign currency capital expenditure and NGOs engaged in micro finance activities up to US$ 5 million in a financial year. ECBs which are not covered by the automatic route are considered under the approval route on a case-by-case basis by the RBI. The ECB policy is operationalized through notifications issued by the RBI under the Foreign Exchange Management Act 1999. These can be accessed on RBIs website. The norms applicable to ECBs are also applicable to FCCBs in all respects, except in the case of HFCs for which criteria will be notified by the RBI. 5.92 Some aspects of the ECB policy modified recently in 2010-11 are summarized as follows: (a) As per extant norms, infrastructure finance companies (IFCs), i.e. NBFCs categorized as IFCs by the RBI were permitted to avail of ECBs for on-lending to the infrastructure sector, as defined in the extant ECB policy, under the approval route. After a review undertaken in April-May 2010, as a measure of liberalization of the existing procedures, it has been decided to permit the IFCs to avail of ECBs, including outstanding ECBs, up to 50 per cent of their owned funds under the automatic route, subject to their compliance with the prudential guidelines already in place. ECBs by IFCs above 50 per cent of their owned funds would require the approval of the RBI and, therefore, be considered under the approval route. (b) As per the extant policy, using ECBs to refinance domestic rupee loans was not permitted. However, keeping in view the special funding needs of the infrastructure sector, it has been decided to put in place a scheme of take-out finance arrangement
Financial Sector Legislative Reforms Commission (FSLRC)

5.88 The Government in its Budget 2010-11 announced the setting up of the FSLRC with a view to rewriting and cleaning up financial-sector laws to bring them in tune with current requirements. 5.89 The remit of the Commission will be to review, simplify, and rewrite legislation focusing on broad principles. It will evolve a common set of principles for governance of financial-sector regulatory institutions. The Commission will also examine the case for greater convergence of regulation and will streamline the regulatory architecture of financial markets.
Financial Stability And Development Council (FSDC)

5.90 With a view to strengthening and institutionalizing the mechanism for maintaining financial stability and development, the Government set up an apex-level bodythe FSDC. The Chairman of the Council is the Finance Minister of India and its members include heads of the financial-sector regulatory institutions. Without prejudicing the autonomy of regulators, this Council will monitor macro prudential supervision of the economy, including the functioning of large financial conglomerates, and address inter-regulatory coordination issues. It will also focus on financial literacy and financial inclusion. The Council will have one Sub-Committee headed by the Governor, RBI. The Secretariat of the said Council will be in the Department of Economic Affairs, Ministry of Finance. The notification constituting the FSDC was issued on 30 December 2010 and its first meeting was held on 31December 2010.
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Economic Survey 2010-11 increasing attractiveness as an investment destination, and need for additional financial resources for Indias infrastructure sector while balancing its monetary policy, it was decided to increase the limit of FII investment both in Government securities and corporate bonds by US $ 5 billion each, raising the cap to US$ 10 billion and US$ 20 billion respectively. The incremental limit of US$ 5 billion has, however, to be invested in securities with residual maturity of over five years and corporate bonds with residual maturity of over five years issued by companies in the infrastructure sector.
Table 5.25 : ECBs Registered with the RBI

(US$ million) Details ECB FCCB Total Automatic Route Approval Route 2009-10 (April-March) 17,602 4076 21,678 13,924 7754 2009-10 (Apr-Nov.) 8632 3633 12,265 7445 4820 2010 -11 (Apr-Nov.) 11,617 960 12,577 7683 4894
through ECBs, under the approval route, for refinancing of rupee loans availed of from domestic banks by eligible borrowers in the sea port and airport, roads including bridges, and power sectors for the development of new projects, subject to conditions stipulated by the RBI. Indian companies were allowed to buy back their FCCBs under the approval route, up to 30June 2010. Based on a review of policy and in view of the representations received from the issuers of FCCBs, it has been decided to consider applications, under the approval route, for buyback of FCCBs until 30 June 2011, subject to the issuers complying with all the terms and conditions of buyback / prepayment of FCCBs. (c) At present, entities in the services sectors, namely hotels, hospitals, and software are allowed to avail of ECBs up to US$ 100 million per financial year under the automatic route, for foreign currency and/or rupee capital expenditure for permissible end-uses. After a review it has been decided to consider applications from corporates in the hotel, hospital, and software sectors to avail of ECBs beyond US$ 100 million under the approval route. ECBs Registered with the RBI is given in Table 5.25.
Report of the Working Group on Foreign Investment In India

5.94 With a view to rationalizing the present arrangements relating to foreign portfolio investments by FIIs/ non- resident Indians (NRIs) and other foreign investments like foreign venture capital investor (FVCI) and private equity entities, the Government set up a working group to look at various types of foreign flows, which are taking advantage of arbitrage across the respective stand-alone regulations, and generate recommendations to the Government. The group submitted its report to the Finance Secretary on 30 July 2010. 5.95 The group examined the structure of regulation and the ways in which practices, institutions, and procedures inflect and shape these policy decisions. It looked at foreign exchange law with regard to listed and unlisted equity, corporate and government securities, and derivatives as well as tax policy related to these matters. It did not look at FDI policy except in areas where FDI policy and portfolio investment were intertwined. The groups report also offers, alongside economic policy contextualizing capital flows in relation to the Indian and global economies, close scrutiny of the structures and incentives created by the law in the main areas of the reports mandate: foreign exchange controls with regard to listed and unlisted equity, corporate and government securities regulation, and derivatives trading. The focus of the group has been to identify procedures and practices which can help avoid uncertainty, delay, or unequal treatment and to recommend measures which could simplify the portfolio investment environment, at the same time laying a strong emphasis on KYC norms. A copy of the report is available on the Finance Ministry website at the following link: http:// finmin.nic.in/reports/WGFI.pdf
FII Investments In Government Securities and Corporate Bonds

5.93 At present, FIIs registered with SEBI are permitted to invest in Government securities and corporate bonds up to US$ 5 billion and US$ 15 billion respectively. After a review in the context of Indias evolving macroeconomic situation, its
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Financial Action Task Force (FATF)

5.96 The FATF is an inter-Governmental body, responsible for setting global standards on antimoney laundering (AML) and combating the financing of terrorism (CFT). India became Observer at the FATF in the year 2006. Since then, India has been working towards full-fledged membership of the FATF. As part of its membership, a joint FATF / Asia Pacific Group Mutual Evaluation Team visited India in November-December 2009 for on-site assessment of Indias compliance with the 40+9 Recommendations of the FATF. 5.97 The Mutual Evaluation Report on India and Indias membership issues were discussed in the third meeting of the FATF Plenary-XXI held in Amsterdam the Netherlands from 23to 25 June 2010. The FATF Plenary adopted the Mutual Evaluation Report on India on 24 June 2010 and on 25 June 2010 admitted India as 34th Country Member of the FATF. 5.98 FATF membership is very important for India in its quest to become a major player in international finance. It will help India build the capacity to fight terrorism and trace terrorist money and to successfully investigate and prosecute offences related to money laundering and terrorist financing. The FATF process will also help us in coordination of AML/CFT efforts at international level.
5.101 In the calendar year 2010, S&P upgraded Indias foreign currency outlook from negative to stable, FITCH upgraded its local currency outlook from negative to stable, and Moodys upgraded its local currency outlook from Ba2 to Ba1. Credit ratings issued by other agencies maintained status quo.
FINANCIAL STABILITY BOARD (FSB)

5.102 The Financial Stability Forum (FSF) was established by the G7 finance ministers and central bank governors in 1999 to promote international financial stability through enhanced information exchange and international cooperation in financial market supervision and surveillance. It decided at its plenary meeting in London on 11-12 March 2009 to broaden its membership and invite as new members the G20 countries that were not initially in the FSF. These included Argentina, Brazil, China, India, Indonesia, Korea, Mexico, Russia, Saudi Arabia, South Africa, and Turkey. In order to mark a change and convey that the FSF would play a more prominent role in this direction in the future, the FSF was relaunched as the Financial Stability Board (FSB) on 2 April 2009, with an expanded membership and broadened mandate to promote financial stability. 5.103 The current FSB comprises national financial authorities (central banks, supervisory authorities, and finance ministries) from the G20 countries, as well as international financial institutions, international regulatory and supervisory groupings, committees of central bank experts, and the European Central Bank.
Indias Membership of the Eurasian Group On Anti-money Laundering And Combating The Financing Of Terrorism (EAG)
5.99 On 15 December 2010 India gained membership of the EAG which is an FATF-style regional body, responsible for enforcing global AML and CFT standards. The support for Indias membership was unanimous. India is the ninth member of the group. The other members are Russia, China, Turkmenistan, Serbia, Tajikistan, Uzbekistan, Belarus, and Kazakhstan. The group also has 16 nations and 15 organizations as observers.
FINANCIAL STABILITY ASSESSMENT PROGRAMME

5.104 Indias Financial Sector Assessment Programme (FSAP) was made by the IMF/World Bank in 2000-2001 but it was not made public as it was part of a pilot FSAP assessment of 12 countries. The Committee on Financial Sector Assessment (CFSA) chaired by the Deputy Governor, RBI and Finance Secretary had done a self-assessment in 2009. The results are in the public domain (RBI website). FSB Members have committed to undergoing periodic peer reviews. As a member, India has requested IMF/World Bank to conduct such a review by way of a full-fledged FSAP. Indias FSAP is scheduled for the calendar year 2011.
INDIAS SOVEREIGN RATING

5.100 Presently, India is rated by six international credit rating agencies, namely Standard and Poors (S&P), Moodys Investor Services, FITCH, Dominion Bond Rating Service (DBRS), the Japanese Credit Rating Agency(JCRA), and the Rating and Investment Information Inc., Tokyo(R&I). Information flow to these credit rating agencies has been streamlined.
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AND
INSURANCE
PENSION FUNDS
Insurance Sector
5.105 The insurance sector was opened for private participation with the enactment of the Insurance
Regulatory and Development Authority Act 1999. While permitting foreign participation in ventures set up by the private sector, the Government restricted participation of the foreign joint venture partner through the FDI route to 26 per cent of the paid-up equity of the insurance company.
Box 5.3 : Financial Inclusion and Literacy

Financial inclusion plays a crucial role in inclusive development and sustainable prosperity as is being increasingly recognised and acknowledged globally. Large segments of population need to be part of formal payment system and financial markets. Financial inclusion would also broaden and deepen financial savings and lead to higher economic development. Previous initiatives: While financial sector policies in India have long been driven by the objective of increasing penetration and outreach, the goal of inclusion has eluded us. About 41 per cent of adult population remains unbanked and the number of loan accounts covers only 14 per cent of adult population. The previous initiatives included (i) the expansion of network of co-operative banks to provide credit to agriculture and saving facilities in rural areas, (ii) nationalization of banks in 1969 and expansion of branches and (iii) creation of an elaborate framework of priority sector lending with mandated targets as part of a strategy to meet the savings and credit needs of large sections of the Indian population who had no access to institutional finance. Given the sheer enormity of the challenge, however, the outcomes of these efforts have so far been mixed. Recent initiatives/out of box approaches: Recent initiatives include (i) no frill account for retail purpose; (ii) simplified KYC (Know Your Customer) (iii) Credit counselling centre (GCC) facilities; (iv) use of NGOs and formation of SHGs; (v) Kisan credit cards services and (vi) extension of Smart cards. The Finance Minister in his Budget Speech of 2007-08 also laid down provisions for funding of financial inclusion goals. The Rangarajan Committee also spelt out priorities for meeting financial inclusion objectives. Two of the more important approaches in the recent times included the use of technology such as smart cards and mobile telephone banking. The potential for their spread can be vast especially in combination with banking correspondence approach launched recently. New entry and Competition: In addition, new competition and entry also play crucial roles as evident from the global experience. Two particular initiatives have included the role of Micro Financial Institutions (MFIs) and Non- Bank Finance Companies (NBFCs). MFI activities have surged in recent years, but has come under scrutiny and regulation (see Chapter 2). Services expanded at a fast rate, providing access on better terms than the alternatives of traditional money lenders. However, better regulation is also needed. On NBFCs, gold pawn establishments have also provided alternate access and are fast expanding in urban and semi-urban settings. As far as caps on interest rates are concerned, as in case of other products, subsidies in the form of low interest rates are often an inhibitor of access to services because of rationing and misuse. What we need today, therefore, are new approaches to financial inclusion that build on the lessons of the past but also involve trying out newer approaches and instruments. Importantly, this also requires a change in the mindset on the part of policymakers, practitioners and other stakeholders alike to figure out and put in place effective ways of reaching out to the hitherto un-reached and under-reached segments of our population. Financial Literacy: Any policy initiative seeking to afford greater access to financial services to a large segment of the population must necessarily address bridging the existing knowledge gap in financial education and literacy. Over the last decade or so, researchers all over the world, especially in the developed countries, have, therefore, started to study and explore whether individuals are well-equipped to make financial decisions. Financial education and literacy assumes urgency in any given scenario. No wonder policymakers all over are increasingly taking note of this and directing their efforts to address it. In the UK, the Financial Services Authority has launched a big campaign to improve the financial skills of the population and enable a better appreciation of risks and rewards inherent in financial instruments and transactions. The US Treasury, which established its Office of Financial Education in 2002, is working to promote access to the financial education tools. The Financial Literacy and Education Commission, established by Congress in 2003 was created to improve financial literacy and education. In Australia, the Government established a National Consumer and Financial Literacy Taskforce in 2002. In Malaysia, the Financial Sector Master Plan, launched in 2001, includes a 10-year consumer education programme. The Monetary Authority of Singapore has launched a national financial education programme (Money SENSE). A nationwide, coordinated effort was also required in India and the Financial Stability and Development Council (FSDC) is a step forward in this direction. It is expected that this new initiative will help adequately address the challenge of financial inclusion and literacy. Idioms and metaphors of development economics keep on changing from time to time. Today, new financial sector initiatives in a country like ours - be it in the form of prompt and innovative policy responses from the Government, central bank, other authorities or be it in the form of implementation efficiency and inventiveness from the varied players - need to explicitly prioritize both financial inclusion and financial education and literacy.
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New entrants in the insurance sector

5.106 Since the opening up of the sector, the number of participants has gone up from six insurers (including LIC of India, four public-sector general insurers, and the General Insurance Corporation as national reinsurer) in the year 2000 to 48 insurers operating in the life, non-life, and reinsurance segments (including specialized insurers, namely the Export Credit Guarantee Corporation [ECGC] and Agricultural Insurance Company [AIC]). Three of the general insurance companies, namely Star Health and Alliance Insurance Company, Apollo DKV, and Max Bupa Health Insurance Company Ltd., function as standalone health insurance companies. 5.107 Of the 22 insurance companies that have set up operations in the life segment post opening up of the sector, 20 are in joint ventures with foreign partners. Of the 18 (including stand alone health insurance companies) insurers who have commenced operations in the non-life segment, 16 are in collaboration with foreign partners. The three standalone health insurance companies have been set up in collaboration with foreign joint venture partners. Thus, as on date, 36 insurance companies in the private sector are operating in the country in collaboration with established foreign insurance companies from across the globe.
companies) underwrote premiums of ` 34,620 crore in 2009-10, as against ` 30,352 crore in 2008-09.
Insurance Penetration
5.110 Insurance penetration is defined as the ratio of premium underwritten in a given year to the GDP. Insurance penetration in the year 2000 when the sector was opened up to the private sector was 2.32 (life 1.77 and non-life 0.55) and it has increased to 5.39 in 2009 (life 4.73 and non-life 0.66). The increase in levels of insurance penetration has to be assessed against the average growth of over 8 per cent in the GDP in the last five years.
Initiatives taken by the Authority in the Insurance Sector

5.111 The initiatives taken by the authority in the insurance sector include the following: 1) Amendment to Insurance Legislation: The Insurance Laws (Amendment) Bill 2008 introduced in Parliament recently proposes to amend the Insurance Act 1938, the Insurance Regulatory and Development Authority (IRDA) Act 1999, and the General Insurance Business (Nationalization) Act 1972. The amendments to the Insurance Act and the IRDA Act focus on the current regulatory requirements; the proposed changes provide for greater flexibility in operations and are aimed at deletion of clauses that are no longer relevant in the present context. The amendments also provide for enhancement of enforcement powers and levy of stringent penalties. 2) Micro Insurance: The IRDA has formulated the Micro Insurance Regulations to distribute insurance products that are affordable to the rural and urban poor and to enable micro insurance to become an integral part of the countrys wider insurance system. The main thrust of these regulations is to provide low income people with affordable insurance products as a hedge against unforeseen risks. Total premium income in the micro insurance portfolio of life insurers for the year 200910 is ` 402 crore. Fourteen life insurers have so far launched 28 micro insurance products and by the end of March 2010 there were 8676 individual micro insurance agents in India. 3) Guidelines on the AML Programme: The IRDA issued guidelines on the AML Programme to the insurance industry on 31 March 2006, whereby insurers were advised to put a proper AML policy framework in place in case of life insurance
Life insurance
5.108 The post-liberalization period has been witness to tremendous growth in the insurance industry, more so in the life segment. In 2009-10, even after the outcome on account of the financial meltdown, the life insurance segment saw an upward trend. The first-year premium, which is a measure of new business secured, underwritten by the life insurers during 2009-10 was ` 1,09,894.02 crore as compared to ` 87,331.09 crore in 2008-09, registering a growth of 25.84 per cent. In terms of linked and non-linked business during the year 200910, 54.53 per cent of the first-year premium was underwritten in the linked segment while the remaining 45.47 per cent was in the non-linked segment as against 51.13 and 48.87 respectively in the previous year.
Non-life insurance
5.109 Non-life insurers in India (excluding specialized institutions like the Export Credit Guarantee Corporation and Agriculture Insurance Corporation and the standalone health insurance
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Economic Survey 2010-11 8) Corporate Governance guidelines: Corporate governance guidelines have been rolled out for insurance companies, effective from 1 April 2010. The objective of the guidelines is to ensure that the structure, responsibilities, and functions of the Boards of Directors and senior management of companies fully recognize the expectations of all stakeholders as well as those of the regulator. The guidelines broadly cover major structural elements of corporate governance. 9) Initiatives in the area of Policyholders Grievances Redressal a) Grievance redressal guidelines effective from 1 August 2010 specific to both life and general insurance companies have been issued by the IRDA fixing the turnaround time for various grievances. b) The IRDA has during July 2010 inaugurated the nationwide toll-free grievance call centre no.155255 for policyholders to lodge complaints against insurance companies. The Grievance Redressal Cell of the IRDA looks into complaints from policyholders. This Cell plays a facilitative role by taking up complaints with the respective insurers for speedy disposal. c) Guidelines have been issued by the IRDA effective from 1 June 2009 on renewability of health insurance policies clearly defining the procedure while declining a renewal or imposing a loading and also regarding upfront disclosures in Prospectuses. Insurers were also guided tocondone delay in renewal up to 15 days. d) The IRDA has also instructed insurers on the terms and conditions of health insurance to senior citizens and made it mandatory for products filed after the circular date to allow entry at least till 65 years of age. The IRDA vide its circular dated 2 September 2009 has also advised insurers to provide a free look period for health insurance policies with term three or more years. e) The IRDA is in the process of developing the new Integrated Grievance Management system (IGMS) which will not only facilitate policyholders to register/track their complaints online with insurance companies but also facilitate the IRDA to monitor the grievance redressal procedure of insurance companies
companies and non-life insurance companies effective from 1 August 2006 and 1 January 2007 respectively. An updated master circular on AntiMoney laundering/Counter-financing of terrorism has been issued by the Authority on 24 September 2010. The AML/CFT guidelines were reviewed by the Authority to align certain stipulations with those of the 40 +9 recommendations of the FATF and additional stipulations/clarifications were issued to insurers vide circular dated 12 November 2010 to be complied with by 31 December 2010. 4) Data Warehouse: The IRDA has initiated steps to design, build, and manage a data warehouse for the insurance industry recognizing that data will help the insurers design new products and allow scientific underwriting, further calculations of actuarial risks, price setting, and various aspects relating to claims settlement, management of hazards, etc. As a first step, the IRDA has designed a data set relating to health and motor vehicle insurance. The IRDA also proposes to put in place a formal data warehouse to enable access by various stakeholders across the industry. 5) Consumer Grievance Redressal Cell: The Grievance Redressal Cell of the IRDA looks into complaints from policyholders. Complaints against life and non-life insurers are handled separately. This Cell plays a facilitative role by taking up complaints with the respective insurers. 6) Public Awareness Campaigns/Programmes: The IRDAs strategy for consumer awareness/ education includes campaigns through external media, i.e. mass media, mainly print, television and the Internet, and internal initiatives such as an exclusive consumer education web page and sample booklets on various insurance-related topics, containing generic information, which insurers would also be advised to publish and distribute. 7) Cap on Unit-linked Insurance plans (ULIP) Charges: The insurance industry has introduced ULIPs which have found favour with customers in India. These products prescribe certain charges which are deducted either from contributions or from the fund. In order to simplify and to ensure that the charges are reasonable, relevant to the services being provided, and clear to customers, the IRDA has mandated an overall cap on all charges put together. Care has been taken to ensure that the insurers have freedom to distribute charges across the term of the policy. This also imparts flexibility and facilitates product innovation.
Financial Intermediation and Markets f) The IRDA being in receipt of several complaints from policyholders relating to agency identification and servicing, keeping the interests of policyholders in view, has directed all insurers to display the agency code, agency name, and nobile number (landline if mobile number not available) and other contact details prominently on the first page of the policy document to be implemented on or before 1 November 2010.
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(v) Authority revamped its present agency licensing portal with a new Agency portal in order to widen the scope of the portal and to integrate the various stakeholders with the agency licensing system. The portal commenced its operations on 5/1/2010. 11) Credit Insurnace : New guidelines on trade credit insurance policies have been issued by the IRDA effective from 13 December 2010, with a view to standardizing the features of these products. All insurers have to revise their products in line with file & use guidelines and trade credit insurance guidelines. These guidelines specify that a policyholder should necessarily be a supplier of goods and services and his loss should be by nonreceipt of trade receivables and can only be issued on whole turnover basis covering all buyers. 12) Variable Insurance products: Guidelines have been issued by the IRDA on variable insurance products (VIP) on 23 November 2010. As per these guidelines, all VIP products shall only be offered under non-unit-linked platform either as participating or non-participating and shall not be permitted under unit-linked platform. Benefit is payable on these policies either on death or maturity and only regular premiums with minimum policy and payment terms of five years are allowed. Single premium, limited premium, and group insurance contracts are not allowed under these products. 13) Consumer Education: Consumer education and policyholder protection being two sides of the same coin, the Regulator encourages and supports consumer bodies to conduct seminars on insurance, thereby not only educating the consumer but also providing a platform for the consumer to interact with representative(s). The IRDA itself conducts/ participates in and supports national-level seminars on different topics and is also proposing to launch a consumer portal shortly. 14) Persistency of Life Insurance Policies: In order to increase persistency in the interests of the insurance industry and to create professionalism amongst agents and encourage them to build a longterm career, the IRDA has issued an exposure draft to set certain minimum standards and requirements for agents and mandate insurers to review the performance of agents periodically. These proposals would be a step forward in protecting the interests of policyholders, who in the ultimate analysis stand to gain if persistency is high,
g) In respect of medical insurance policies, if there is a change in Preferred Provider of Network (PPN) of Hospitals, the insurers have been directed on 24 August 2010 to inform the policyholders at all times of the nearest possible alternative hospitals where the cashless facility is available and the conditions thereof. h) Guidance notes have been issued by the IRDA on 28 June 2010 on recent regulatory changes on ULIPs. 10) For the Orderly Growth of Insurance and Reinsurance industry: (i) As the inter-company balances in reinsurance and coinsurance are growing, the IRDA, noting that these balances can have serious implications for the liquidity of several entities in the insurance sector, has decided to induce insurers and brokers to move over to a computer system of administration and settlement of accounts in respect of all inter-company transactions. (ii) The IRDA (Sharing of Database for Distribution of Insurance Products) Regulations 2010 have been issued and all insurers advised to terminate all the referral arrangements entered into prior to the coming into effect of these regulations that are not in conformity with the provisions of these regulations. (iii) The IRDA (Insurance Advertisements and Disclosures) (Amendment) Regulations 2010 have been issued to ensure the orderly growth of the insurance industry. (iv) The IRDA ( Treatment of Discontinued Linked Insurance Policies) Regulations 2010 have been issued detailing the procedure on policy discontinuance and imposing a cap on charges on policy discontinuation.
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Economic Survey 2010-11 from 1 May 2009, on voluntary basis, the challenge is to spread the message of the NPS and old age income security to people in the unorganized sector across the country. This involves spreading the NPS distribution network such that NPS is easily accessible to all, and there is adequate awareness about it for people to decide voluntarily to open pension accounts.
both in terms of protection of life and profitability of the life insurance business which would benefit them in the long run. 15) IPO Guidelines: Several insurance companies will be completing 10 years of their operations shortly, after which they may be allowed by the Regulator to go in for an IPO. It is essential that the investors be made fully aware of the financial performance, company profile, financial position, risk exposure, elements of corporate governance in place, and the management of such insurance companies. The IRDA is participating in the meetings of the Standing Committee on Disclosures and Accounting Issues (SCODA) set up by SEBI to finalize the disclosure requirements for insurance companies in their prospectus documents. While laying down the stipulations on disclosure requirements, the IRDA has drawn on international best practices. It is proposed that the disclosure requirements for life and non-life companies would be separately mandated given the nature of their respective businesses. 16) Other activities: The IRDA along with National Disaster Management Authority (NDMA) has conducted a seminar on Disaster Management in New Delhi on 11 August 2010 to lay down a plan for devising products for catastrophe perils and also to discuss the collective role of the Government, NDMA, and IRDA representing insurance companies, on disaster management.
NPS Design
5.113 The NPS architecture essentially involves a set of financial institutions, called points of presence (PoP), which are authorized to open NPS accounts and receive contributions; the Pension Fund Managers (PFMs), or the PFMs, which are appointed by the Pension Funds Regulatory and Development Authority (PFRDA) and are authorized to manage the pension corpus of the subscribers; and the Central Recordkeeping Agency (CRA), which does the record keeping. A centralized record keeping for the NPS ensures that the individual pension account is completely portable across the country, professions, and employment. The management of the NPS is highly technology driven; the transmission of information and funds is done in an electronic environment ensuring speed, accuracy, and efficiency. The investment of the pension funds is done in accordance with prescribed norms which specify different categories of investment instruments along with prudential limits on the quality and quantity of investments. The pension fund managers manage three separate scheme, consisting of three asset classes, namely (i) equity, (ii) Government securities, and (iii) credit risk- bearing fixed income instruments, with the investment in equity subject to a cap of 50 per cent. In the equity scheme, the fund managers will invest only in index funds that replicate either the BSE Sensex or NSE Nifty 50 index. The subscriber will have the option to decide the investment mix of his pension wealth. In case the subscriber is unable or unwilling to exercise any choice regarding asset allocation, his contribution will be invested in accordance with the auto choice option with a predefined portfolio.
Pension Sector
Highlights
5.112 Pension reforms in India have evolved primarily in response to the need of reform in the Government pension system. This had been designed to make a shift from defined-benefit to defined-contribution by putting a cap on Governments liability towards civil servants pension. As a result of implementation of the New Pension System (NPS), all employees of the Central Government and Central autonomous bodies, with the exception of the armed forces, are now covered by this defined-contribution scheme with effect from 1 January 2004. Subsequently, 27 State Governments have notified and joined the NPS for their employees. As of now, the subscriber base for the mandatory Government sector has crossed 1.1 million with a corpus approaching to ` 70 billion. With opening up of the NPS to all citizens of India
Recent Initiatives
5.114 Although the NPS is perhaps one of the cheapest financial products available in the country, in order to make it affordable for economically disadvantaged people, the PFRDA has recently
Financial Intermediation and Markets introduced a lower cost version of the NPS, known as NPS-Lite, which enables groups of people to join the NPS at substantially reduced cost. The PFRDA has so far authorized nine aggregators to implement NPS-Lite. One of the distinguishing features of NPS has been unstinted Government support in popularizing the concept of old age income security. In this regard, the announcement of the Swavalamban scheme in budget 2010 by the Finance Minister was significant. Swavalamban is an incentive scheme for the NPS. Under this any citizen in the unorganized sector, who joins NPS in 2010-11, with a minimum annual contribution of ` 1000 and maximum of ` 12,000 will receive a Government contribution of ` 1000 in his NPS account. With this announcement, the Government of India has become a direct stakeholder in the old age income security of every citizen. The scheme is presently available for another three years beyond 2010-11 and will go a long way in promoting pension culture in the country. Efforts are under way to expand the reach of the NPS to new segments like Central and State autonomous bodies and the organized sector. The PFRDA is in dialogue with several State Government autonomous bodies and undertakings for extending the NPS to their employees.
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investment decisions based on their risk and return profiles, and contribute to improving financial literacy levels. The PFRDA is doing every bit to ensure that the complete distribution network of the NPS is fully galvanized so that access to the NPS is improved It is expected that the success of pension reforms will not only help in facilitating the flow of long-term savings for development, but also help establish a credible and sustainable social security system in the country.
CHALLENGES
AND
OUTLOOK
Licensing for new banks, recapitalization of banks

5.117 Providing access to banking facility to all citizens is one of the main objectives of the inclusive development agenda in India. While providing banking access, the issue of regulatory robustness for the banking sector should not be compromised. Therefore, the issue of providing eligibility norms for new entities to operate as banks is of paramount importance. 5.118 Minimum capital requirement for banks should be graded. Having two types of licences, namely one for providing basic banking to fulfil the obligation of financial inclusion and the other for full banking encompassing all activities of a commercial bank could be considered. 5.119 As regards allowing industrial houses, business houses, and NBFCs to promote banks, they may be allowed full banking licence with provision for avoiding conflict of interest issues. MFIs and NBFCs should be considered for being given licences for basic banking. It is very essential that the basic banking functions are clearly and objectively defined. 5.120 The issue of the requirement for foreign promoters in banking needs to be addressed and foreign promoters with credible banking experience, may be considered provided they meet the fitness criteria. Also the principle of reciprocity could be applied to countries that have allowed Indian banks to expand in their jurisdictions. 5.121 There is another important issue relating to minimum and maximum caps on promoter shareholding and other shareholders. One view is that as the bank grows in business, the promoters control should decline and the bank managed more professionally and independently.
Performance of the NPS

5.115 In the unorganized sector, nearly 34,000 subscribers had jointed the NPS as of December 2010 on voluntary basis. The subscriber base in the newly launched NPS-Lite is around 5000. For all citizens including workers of the unorganized sector, the NPS is currently available through nearly 5000 service provider branches of 35 PoPs. 5.116 Despite all its good features, popularization of the NPS remains a challenge. To address this challenge, the PFRDA has appointed an expert committee, called the Committee to Review implementation of Informal Sector Pension (CRIISP), to look into a range of issues connected with the NPS, such as reasons of sluggish public response, viability of the NPS as a financial product, ways and means of marketing/proper popularizing of the NPS and the agency best suited to perform this role, a sustainable and viable economic incentive model for the NPS, and the role of NPS fund managers in the entire NPS architecture, and suggest remedial measures. Important challenges before the PFRDA are to expand the distribution network of the NPS so that it is available within easy reach of all citizens, educate the citizens to take appropriate
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Economic Survey 2010-11 market, Government intervention is required in creating awareness amongst potential investors in the pension product. There is also need to consider passage of the long pending Pension Fund Regulatory and Development Authority Bill in order to give a fillip to regulatory robustness in the pension sector.
Human Resource Issues in PSBs

5.122 One of the most daunting tasks for banks in the near future is going to be HR management. The market in the financial sector and especially in banking is seeing growth driven by new products and services that include opportunities in credit cards, consumer finance, and wealth management on the retail side and in fee-based income and investment banking on the wholesale side. These require new skills in sales and marketing, credit, and operations. Furthermore, given the demographic shifts resulting from changes in age profile and household income, consumers will increasingly demand enhanced institutional capabilities and service levels from banks. PSBs need to fundamentally strengthen institutional skill levels especially in sales and marketing, service operations, risk management, and overall organizational performance. 5.123 Banks may aggressively use technology/ business process re-engineering to reduce the gap created by shortage of staff and improve overall manpower efficiency. In addition, a pool of talent for occupying leadership positions could be built up by banks by training and preparing promising officers to assume future leadership roles.
Financial Inclusion and Literacy

5.125 With proliferation in the number and complexity of financial products, risk is being transferred to the household. Investors and market players are being exposed to formal banking and financial products, as well as new sales practices, for the first time. All these require a base level of understanding of money, its management and use. The lack of this understanding has the potential of frittering away economic gains made at aggregate level by nations, resulting in wealth transfer from the financially illiterate to a small segment of the financially literate. Many researches have shown that a financially literate population promotes economic growth and well-being by expanding the quality of available financial services and by enhancing the ability of individuals to more effectively use the services in their best interests. Work on the topic by financial literacy scholar Annamaria Lusardi, Professor of Economics at Dartmouth College and Research Associate at the National Bureau of Economic Research (NBER), shows that individuals with low levels of financial literacy tend not to plan for retirement and borrow at high rates of interest. No wonder, there is a rush to make citizens financially literate. 5.126 With a household saving rate of 34 per cent, the merits of saving over current consumption are well understood in India. Unlike many developed countries, where getting people to save is an issue, the need in India is for the efficient conversion of this saving into investment. A large part of this money is in low-yielding assets like bank deposits and traditional insurance but there is a clear trend of individuals preferring security-based investments as they move upwards in income level. Therefore it is a big challenge for Indian policymakers to prepare an effective strategy to for financial literacy of these new savers, investors, and consumers to holistically plan for their financial well-being. 5.127 Simultaneously, as one segment of the population, due to advantages of birth, location, and education has benefited from the growth spurt in the Indian economy the other has been unable to
Pension Reforms
5.124 In a paradigm shift wherein a definedbenefit pension system was replaced by definedcontribution basedone, the NPS has been introduced by the Government of India and made mandatory for all new recruits to the Government (except armed forces) with effect from 1 January 2004. The NPS was opened to all citizens of India from 1 May 2009 on voluntary basis. Twenty-seven State Governments have notified and joined the NPS for their employees. As of now, the subscriber base for the mandatory Government sector has crossed 1.1 million with a corpus approaching ` 70 billion. However, covering the majority of the population from the unorganized sector for whom the system was designed remains a challenge. Many new initiatives have been taken by the pension regulator PFRDA to address the issue of distribution. There is no doubt that the NPS is designed very attractively with many consumer friendly features and a low cost structure. Therefore, the basic structure of the pension scheme need not be altered. Government has also provided a direct co-contribution of ` 1000 per account from last year under the Swavlamban scheme.But in a distributor- and supply-driven
Financial Intermediation and Markets reap the benefits due to exclusion from the financial system. It is another policy challenge to reach out to this financially uncovered segment. Government has already made its commitment clear by announcing its intention of providing banking facility to all areas including rural by 2012. Widespread use of new and cost-effective technology could be made to achieve this goal.
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Macro Prudential Regulations and Financial Stability : Real Estate Sector

5.128 In recent times and especially after the global financial crisis, the issue of financial stability has drawn great attention mainly due to transmission of its impact on the real sector of the economy. The slowdown in the real sector has compounded the need for policymakers to consider steps for maintaining financial stability. One of the steps
considered and taken worldwide has been to firstly consider and re look at existing macro prudential regulations in the financial sector and then to introduce such regulations if they donot exist. As the financial crisis had its origin in the housing and real sector in the US, a very close look is required at the need for robust macro prudential regulations in this sector. In India also the RBI has recognized this and initiated steps in this direction in its quarterly monetary policy review of 2 November 2010. The steps include increasing the risk weights for housing loans and also increasing the loan to value ratios for such loans. Such macro prudential regulations are required in every segment of financial markets in India. The advantage of such regulations is that they are concentrated in the targeted segment and are not embedded in monetary policy so as to spread any negative impact over the entire economy.
Balance of Payments
CHAPTER
The world economy, led by the buoyant economic activity in emerging economies,
is gradually recovering from the crisis. The risks however remain, as advanced economies face large fiscal deficit, high public debt and unemployment levels and tepid aggregate demand, leading to subdued growth. The sovereign debt crisis in the peripheral euro-zone countries is contributing to the uncertainty. At the same time, large capital flows to emerging economies, rising oil and agricultural prices are fueling inflationary pressures that may affect the nascent global recovery. In the backdrop of these developments, the Indian economy continues to exhibit resilience, moving steadily towards the pre-crisis growth path. The current account deficit however, has widened due to robust import demand and lower invisibles surplus. These are being largely financed by the relatively higher capital flows, leading to moderate accretion in reserves. There are however challenges that include volatile nature of foreign institutional investment that is characterized by surge and reversal of capital flows, deceleration in foreign direct investment and the risk of further slowdown in advanced economies that may affect exports and strain balance of payments.
GLOBAL ECONOMY
6.2 The world economy is exhibiting signs of recovery, driven largely by the robust growth in emerging economies. Advanced countries however, continue to face uncertainty with large fiscal deficit, high public debt and unemployment levels that together with the deleveraging of banks, corporate entities and individuals, is affecting aggregate demand and impeding the recovery process. 6.3 The risk of sovereign debt crisis in peripheral euro zone economies and the fear that it could spread to the banking and insurance sectors with large sovereign debt exposure, have made the markets nervous. The likely impact on the euro and the risk that the financial sector may take a hit is also responsible for the efforts to avoid haircut on sovereign debt of affected countries through restructuring. 6.4 With investors dithering, Irelands rescue package under the aegis of the European Financial Stability Facility (EFSF) and the International
Monetary Fund (IMF) has not had the desired stabilization effect on the markets. Many also believe that the size of EFSF is not large enough to bail out bigger economies like Spain and the high debt countries such as Italy and Belgium in the event of the crisis spreading to other euro zone countries. The risk is that the crisis could further impair the confidence of investors through contagion channels and delay the incipient recovery of the global economy. 6.5 Investor nervousness is compounded by the high refinancing requirement of sovereign, bank and corporate debts and the fear that there may not be sufficient liquidity in the market to rollover the maturing obligations. There is also the apprehension that the stimulus effort by governments is simply substituting the high private debt before the crisis with public debt, without benefitting the global economy in a major way. 6.6 The investor uncertainty is reflected in high volatility of the currency markets. Moreover, as none of the currencies offers a safe haven, many
Balance of Payments investors are taking refuge in commodities, facilitated by investor-friendly instruments like Exchange Traded Funds (ETF), commodity indices and the ease of taking positions in the futures market. Together with rising demand from the emerging economies, the trend is reflected in increasing and volatile prices of gold, oil, metals and soft products like foodgrains. The surge in prices of commodities like oil and foodgrains, however is straining the balance of payments of emerging economies and contributing to price rise, affecting their growth prospects. 6.7 The surge in capital flows to emerging economies to take advantage of interest differential (carry trade), higher stock market returns and better growth prospects is another fallout of uncertain growth prospects and low interest environ in advanced countries. The deluge of capital, however, is leading to stock market/ real estate bubbles and appreciation of local currency, with excess liquidity contributing to inflationary pressures. 6.8 Economic theory, at the same time, is at a cross roads. With free market economics discredited and prices no longer regarded an effective signalling mechanism, the confidence in the selfcorrecting attribute of the market mechanism is abating. The Keynesian approach of deficit financing and high public expenditure is also being doubted,
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as it has led to the build up of public debt, without successfully addressing unemployment and aggregate demand problems in advanced countries. 6.9 Some of the mainstream financial market theories like the efficient market hypothesis that have been the mainstay of finance are similarly being questioned. The theories based on the risk free nature of sovereign debt that have been the cornerstone of financial market modelling, too have come in for criticism due to the risk of default/ restructuring in peripheral euro zone countries and the build up of public debt to unsustainable levels in many advanced countries. As a result, the bonds of many top notch corporate entities and emerging economies are being priced more competitively visa-vis some of the euro zone countries. 6.10 In the ensuing melee, there is an attempt to revisit both economics and finance. In the first place, it is being recognized that the markets are subject to boom and bust cycles, which could assume serious proportions due to credit induced asset price bubbles that are characterized by a positive feedback loop. Countercyclical measures and leaning against the wind may, therefore be necessary. Second, there is renewed emphasis on integrating behavioural factors with mainstream economics and finance to make theory correspond more closely with the real world situation.
Box 6.1 : BRIC Study Report

The term BRIC stands for Brazil, Russia, India and China. It was coined by Goldman Sachs in 2001 in a paper titled Building Better Global Economic BRICs that looked at the future growth prospects of the four largest emerging economies. BRIC countries have since come to play a major role on the global stage. The BRIC Heads of State and Finance Ministers also periodically meet for increasing cooperation among the BRIC countries. During the meeting of the BRIC Finance Ministers and Central Bank Governors in London on 4 September, 2009, a decision was taken to commission a study examining the prospects of the world economy and the role of the BRIC countries in the post-crisis world. The communiqu of the meeting also noted that the emerging economies had helped the world economy counter the fallouts of the global crisis by absorbing the impact of the widespread deterioration in trade, credit flows and demand. Given the increasing importance of the BRIC economies on the global stage and the recognition that they would play a dominant role in the world economy in the coming years, the purpose of the collaborative study is to identify possible areas of co-operation and synergies among the BRIC countries for promoting mutual growth and for collectively harnessing global economic recovery. It was also decided that India would anchor the study project. A working group, drawing upon government/central bank experts from each of the four countries, was constituted for successfully conducting the study. Members of this group have been collaborating among themselves by identifying best practices and lessons in the individual BRIC countries in wide variety of sectors. The first meeting of the working group was held in New Delhi in September 2010 and was attended by participants from all the four BRIC countries. The meeting finalized the phases of report preparation covering issues relating to mutual sharing of information, identification of crucial challenges and opportunities facing the BRIC economies, and a time frame for preparation of the draft study report. The first draft of the report has been prepared by the Indian team and is under circulation among the BRIC countries for appraisal and inputs.
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Economic Survey 2010-11 elsewhere (GNIE) and miscellaneous (such as, communication, construction, financial, software, news agency, royalties, management and business services), (b) Income, and (c) Transfers (grants, gifts, remittances, etc.) which do not have any quid pro quo. 6.15 Under capital account, capital inflows can be classified by instrument (debt or equity) and maturity (short or long-term). The main components of capital account include foreign investment, loans and banking capital. Foreign investment comprising foreign direct investment (FDI) and portfolio investment consisting of foreign institutional investors (FIIs) investment, American Depository Receipts / Global Depository Receipts (ADRs/GDRs) represents non-debt liabilities, while loans (external assistance, external commercial borrowings and trade credit) and banking capital including nonresident Indian (NRI) deposits are debt liabilities. 6.16 BoP developments during 2009-10 indicate that despite lower trade deficit, current account deficit widened on account of slowdown in invisible receipts. There was also sharp increase in capital flows, which led to accretion in foreign exchange reserves. The current account deficit of 2.8 per cent of the gross domestic product (GDP) in 2009-10 vis-a-vis 2.3 per cent in 2008-09, however remained well within manageable limits. The net capital flows increased substantially to 3.8 per cent of GDP in 2009-10 as compared to 0.5 per cent in 2008-09. This led to net accretion of US$ 13.4 billion in foreign exchange reserves on BoP basis, as against the net outflow of US$ 20.1 billion in 2008-09. 6.17 BoP in 2009-10 had contrasting ramifications for economic recovery. The decline in exports of goods and services in response to weak global demand had a dampening impact on overall GDP growth. However, a higher current account deficit led to stronger absorption of foreign capital. This implied higher investment activity financed by foreign capital, which partly contributed to the stronger recovery in growth. Major determinants of BoP transactionssuch as external demand, international oil and commodity prices, pattern of capital flows and the exchange rate changed significantly during the course of the year. With the turnaround in exports and revival in capital flows, external sector concerns receded gradually in the second half of 2009-10. 6.18 As per the latest data available, the highlights of BoP developments during the first half (H1 AprilSeptember 2010) of 2010-11 were higher trade and
6.11 Third, there is increasing recognition that a prudent regulatory and supervisory framework is necessary for smooth functioning of the markets. At the same time, coordination among regulatory agencies of different countries is necessary to minimize the risk of regulatory arbitrage. Fourth, macro prudential regulation that takes a top down approach to regulation is the new policy buzzword, as is evident from the recently announced Basel III rules that include countercyclical buffer and leverage restrictions on bank capital to ensure macroeconomic stability. 6.12 In the back drop of such uncertainty and efforts at stabilization, most emerging economies continue to perform well with high growth rates that signify a measure of decoupling with the advanced economies. This is mainly because (i) many emerging economies went through an introspection and correction phase after the series of crises in 1980s and 1990s, leading to lowering of external and public debt levels, streamlining of public expenditure and institution building; (ii) emerging economies had minimal exposure to toxic assets that were responsible for the origin and spread of the crisis; and (iii) financial innovations like Collateralized Debt Obligations (CDOs) and credit default swaps that contributed significantly to the crisis, had made limited inroads in emerging economies. 6.13 India has been more fortunate in that (a) its growth was largely domestic economy driven; (b) the calibrated approach to capital account liberalization prevented interest arbitrage seeking surge and reversal of capital flows; (c) strict supervision of banks prevented exposure to toxic assets abroad and excessive lending to the real estate sector that insulated banks from the fallout of pricking of the real estate bubble; (d) credit derivative instruments like credit default swaps that played the key role in precipitating the crisis, are yet to be introduced in the market.
BALANCE OF PAYMENTS
6.14 Balance of payment (BoP) comprises current account, capital account, errors and omissions and changes in foreign exchange reserves. Under current account of the BoP, transactions are classified into merchandise (exports and imports) and invisibles. Invisible transactions are further classified into three categories, namely (a) Servicestravel, transportation, insurance, Government not included
Balance of Payments Table 6.1: Balance of Payments : Summary

Sl. No. Item 2005-06 2006-07 2007-08 2008-09 2009-10PR
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(US$ million)
2009-10 H1 (AprilSept. 2009)PR 8 2010-11 H1 (AprilSept. 2010)P 9
1 I 1 2 3 4
2 Current Account Exports Imports Trade Balance Invisibles (net) A Non-factor Services B Income C Transfers
1,05,152 1,57,056 -51,904 42,002 23,170 -5,855 24,687 -28,734 -9,902 25,470 1,702 2,508 3,699 1,373 2,789 15,528 3,034 12,494 660 -516 15,052
1,28,888 1,90,670 -61,782 52,217 29,469 -7,331 30,079 -32,313 -9,565 45,203 1,775 16,103 6,612 1,913 4,321 14,753 7,693 7,060 4,047 968 36,606
1,66,162 2,57,629 75,731 38,853 -5,068 41,945 -52,614 -15,737 1,06,585 2,114 22,609 15,930 11,759 179 43,326 15,893 27,433 10,847 1,316 92,164
1,89,001 3,08,521 91,605 53,916 -7,110 44,798 -65,604 -27,915 6,768 2,441 7,862 -1,985 -3,246 4,290 5,785 19,816 -14,031 -4,090 1,067 -20,080
1,82,235 3,00,609 79,991 35,726 -8,040 52,305 -82,648 -38,383 53,397 2,893 2,808 7,558 2,084 2,924 51,167 18,771 32,396 -13,113 -1,573 13,441
82,569 1,38,419 - 55,850 42,511 19,098 -3,279 26,692 -36,752 -13,339 22,964 1,023 728 -49 1,045 2,865 30,275 12,330 17,945 -10,058 -92 9,533 (-) 9,533
1,10,518 1,77,457 - 66,939 39,058 19,510 -6,509 26,057 -47,429 -27,881 36,661 2,993 5,974 6,749 834 2,163 29,137 5,340 23,797 -9,026 -1,750 7,030 (-) 7,030
-91,467 -1,19,520 - 1,18,374
5 6 II 1
Goods and Services Balance Current Account Balance Capital Account Capital Account Balance i ii External Assistance (net) External Commercial Borrowings (net)
iii Short-term debt iv Banking Capital (net) of which: Non-Resident Deposits (net) v Foreign Investment (net) of which: A FDI (net) B Portfolio (net) vi Other Flows (net) a III Errors and omission IV Overall Balance b V Reserves [increase (-) / decrease (+)]
(-) 15,052 (-) 36,606 (-) 92,164
20,080 (-) 13,441
PR: Partially Revised. P: Preliminary Source: Reserve Bank of India (RBI). a includes among others delayed export receipts and rupee debt service. b Overall balance includes total current account balance, capital account balance and errors and omissions.
current account deficits as well as capital flows visa-vis the first half of 2009-10 (Table 6.1).
CURRENT ACCOUNT
Merchandise trade
6.19 Indias current account position during 200910 continued to reflect the impact of the global economic downturn and deceleration in world trade witnessed since the second half of 2008-09. On a BoP basis, Indias merchandise exports of US$ 182.2 billion during 2009-10 posted a decline of 3.6 per
cent, as against US$ 189.0 billion in 2008-09, which recorded a positive growth of 13.7 per cent over the exports of US$ 166.2 billion in 2007-08. Similarly, import payments of US$ 300.6 billion also recorded a decline of 2.6 per cent in 2009-10, as compared to US$ 308.5 billion in 2008-09, which was 19.8 per cent higher than the imports of US$ 257.6 billion in 2007-08. Though the decline in exports was relatively higher than that in imports, the merchandise trade deficit in absolute terms decreased marginally to US$ 118.4 billion (8.6 per cent of GDP) during 2009-10 from US$ 119.5 billion (9.8 per cent of GDP) in 2008-09.
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Economic Survey 2010-11 higher oil import bill during the first half of 2010-11. Despite the higher export growth compared to imports during April-September 2010-11, the trade deficit widened in absolute terms by 19.7 per cent to US$ 66.9 billion in the first half of 2010-11, as compared to US$ 55.9 billion during the same period last year.
6.20 Commodity-wise analysis of Indias exports indicated that the share of primary products in total exports increased by 100 basis points from 13.9 per cent in 2008-09 to 14.9 per cent in 2009-10. Similarly, the share of petroleum, crude and products (including coal) increased from 14.9 per cent to 15.8 per cent during the same period. The higher growth rate of 3.8 per cent in primary products in 2009-10 (as against 1.7 per cent in 2008-09) and 2.3 per cent in petroleum (as against negative growth of 3.0 per cent in 2008-09) were responsible for increase in the share of these in 2009-10. The share of manufactured goods, however, decreased from 68.9 per cent in 2008-09 to 67.2 per cent in 2009-10 due to negative growth of 5.9 per cent in 2009-10, as against 23.1 per cent growth in 2008-09. Among import items, the share of petroleum, oil and lubricants (POL) declined to 30.2 per cent in 2009-10, as against 31.3 per cent in 2008-09 on account of negative growth of 7.0 per cent in 2009-10. The other major component of imports was gold and silver, whose share increased by 100 basis points from 9.3 per cent in 2008-09 to 10.3 per cent in 2009-10, because of a higher growth rate of 35.5 per cent in 2009-10 as against 22.3 per cent in 2008-09. The detailed analysis of the trade performance of India is dealt with in the next chapter. 6.21 The widening of Indias current account deficit during the first half of 2010-11(April-September 2010) reflects the impact of the growth asymmetry between India and the rest of the world. Indias exports and imports growth momentum, which started during the second half of 2009-10, continued during the first half of 2010-11 also. On BoP basis, Indias merchandise exports during the first quarter (Q1April-June 2010) and Q2 (July-September 2010) of 2010-11 recorded a growth of 43.6 per cent and 25.0 per cent respectively, as against a decline of 31.8 per cent and 19.1 per cent in the corresponding quarters of 2009-10. During H1 of 2010-11, exports recorded a growth of 33.8 per cent as against negative growth of 25.7 per cent during the corresponding period of the previous year. Similarly, imports witnessed a growth of 34.2 per cent and 22.8 per cent during the first two quarters of 201011, as against a decline of 20.8 per cent and 21.3 per cent recorded during the corresponding quarters of 2009-10. Imports posted a growth of 28.2 per cent during the first half of 2010-11, as compared to negative growth of 21.1 per cent during H1 of 200910. The rising imports of oil, pearls, and semiprecious stones have contributed significantly to a burgeoning import bill. Rising crude oil prices, along with growth in quantity of oil imports, has led to a
Invisibles
6.22 The invisibles account of BoP reflects the combined effect of transactions relating to international trade in services, income associated with non-resident assets and liabilities, labour, property and cross-border transfers, mainly workers remittances. Two components of the current receipts namely software services and workers remittances, continued to remain relatively resilient in 2009-10, as was the case in 2008-09, despite the global economic meltdown and were mainly responsible for the net invisible surplus. 6.23 Invisibles receipts of US$ 163.4 billion in 2009-10 recorded a decline of 2.6 per cent over US$ 167.8 billion in 2008-09 (as against an increase of 12.7 per cent in 2008-09 over US$ 148.9 billion in 2007-08), mainly due to lower receipts under miscellaneous services such as business, financial, and communication services, together with lower investment income. Receipts under all the components of business services (such as traderelated services, business and management consultancy services, architectural, engineering and other technical services, and services relating to maintenance of offices abroad) showed a decline during 2009-10 reflecting lagged impact of the global crisis. Receipts under investment income declined to US$ 12.1 billion in 2009-10 from US$ 13.5 billion in the previous year on account of significant decline in interest rates abroad. 6.24 Software receipts at US$ 49.7 billion however, showed an increase of 7.4 per cent in 2009-10 (14.9 per cent a year earlier). Private transfer receipts, comprising mainly remittances from Indians working overseas also increased to US$ 53.9 billion in 2009-10 (3.9 per cent of GDP) from US$ 46.9 billion (3.8 per cent of GDP) in the previous year. Private transfer receipts constituted 15.6 per cent of current receipts in 2009-10 (13.1 per cent in 2008-09). 6.25 Invisible payments increased by 9.4 per cent from US$ 76.2 billion in 2008-09 to US$ 83.4 billion in 2009-10 due to increase in payments under all the components except software services, transfers and investment income. As a result, the net invisible
Balance of Payments balance (receipts minus payments) of US$ 80.0 billion (5.8 per cent of GDP) in 2009-10 posted a negative growth of 12.7 per cent over US$ 91.6 billion (7.5 per cent of GDP) in 2008-09. The net receipts under the services component (travel, transportation, insurance, G.N.I.E. miscellaneous) went down by 33.8 per cent from US$ 53.9 billion in 2008-09 to US$ 35.7 billion in 2009-10. However, software services registered a positive growth of 10.3 per cent during the same period from US$ 43.7 billion to US$ 48.2 billion. The other component of invisibles which posted a positive growth was transfers (private as well as official). The net private transfers of US$ 52.1 billion in 2009-10 were higher by16.8 per cent from US$ 44.6 billion in 2008-09. 6.26 The impact of growth asymmetry between India and the rest of the world was observed in Indias invisibles account in the current fiscal 2010-11, leading to moderation in net invisibles balance in H1 of 2010-11(April-September 2010). This moderation was primarily due to the decline in investment income and private transfer receipts and increase in services payments. 6.27 The net invisibles surplus was lower by 8.0 per cent at US$ 39.1 billion during H1 of 2010-11 as against US$ 42.5 billion during the corresponding period of 2009-10, essentially due to higher invisible payments (which recorded a growth of 33.4 per cent as against a decline of 4.1 per cent a year earlier) driven by all major categories of services and decline in gross investment income receipts. Services payments increased by 46.9 per cent (against a decline of 4.7 per cent a year ago) mainly due to higher payments under travel transportation, business and financial services. 6.28 On the other hand, a significant decline in receipts under investment income and private transfers offset, to a large extent, the increase in services exports. Investment income receipts declined sharply by 40.1 per cent (as compared to a marginal decline a year before) mainly due to the persistence of lower interest rates abroad. Private transfer receipts at US$ 27.2 billion also recorded a decline of 1.1 per cent (as against an increase of 4.3 per cent a year earlier). However, services exports witnessed a major turnaround during the period, recording a growth of 27.4 per cent (as against a decline of 16.8 per cent a year earlier) led by all the major components of services such as business, financial, software, travel and transportation services. Reflecting this, invisible receipts recorded a growth
139
of 11.1 per cent as against a decline of 8.9 per cent a year earlier. However, as the growth in invisibles payments was higher than the invisibles receipts, net invisibles surplus stood lower during AprilSeptember 2010, as compared with the corresponding period of the previous year. Net invisibles surplus financed about 58.3 per cent of the trade deficit during April-September 2010, as against 76.1 per cent during the same period last year. 6.29 The goods and services balance i.e. trade balance plus services, increased by 25.9 per cent from US$ 65.6 billion (5.4 per cent of GDP) in 200809 to US$ 82.6 billion (6.0 per cent of GDP) in 200910, on account of the decrease in net services receipts by 33.8 per cent to US$ 35.7 billion in 200910 from US$ 53.9 billion in 2008-09. During the first half of 2010-11, the goods and services deficit widened by 28.8 per cent to US$ 47.4 billion from US$ 36.8 billion during the first half of 2009-10, on account of widening of the trade deficit while the net services receipts remained at more or less the same level (Tables 6.1 and 6.2).
Current account balance

6.30 As a consequence of the decline in invisible surplus, despite the lower trade deficit, the current account deficit increased by 37.5 per cent in 200910 to US$ 38.4 billion (2.8 per cent of GDP) from US$ 27.9 billion (2.3 per cent of GDP) in 2008-09. Similarly, the lower invisible surplus combined with higher trade deficit during the first half of 2010-11 led to more than doubling of the current account deficit to US$ 27.9 billion from US$ 13.3 billion during April-September 2009-10 (Figures 6.1 and 6.2).
CAPITAL
ACCOUNT
6.31 Stronger recovery in India, ahead of the global recovery along with positive sentiments of global investors about Indias growth prospects, encouraged a revival in capital flows during 2009-10. The turnaround was mainly driven by large inflows under FIIs and short-term trade credits. The gross capital inflows at US$ 345.7 billion during 2009-10 were 10.2 per cent higher than the US$ 313.6 billion in 200809, while gross capital outflows at US$ 292.3 billion were lower by 4.8 per cent from US$ 306.9 billion in 2008-09. As a result, net capital flows at US$ 53.4 billion (3.8 per cent of GDP) were much higher during 2009-10 as compared to US$ 6.8 billion (0.5 per cent of GDP) in 2008-09.
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Sl. No.
1 1 2 3 4 5 6 7 8 9
Table 6.2 : Selected Indicators of the External Sector

Item 2005-06 2006-07 2007-08 2008-09 2009-10PR 2009-10 2010-11 H1 (AprilH1 (AprilSept. 2009)PR Sept. 2010)P
8 -25.7 -21.1 -14.2 -4.7 59.7 77.5 4.5 3.2 12.5 13.9 23.4 -9.4 7.2 -6.2 -2.2 1.0 0.9 3.8 3.9 9 33.8 28.2 27.4 46.9 62.3 77.8 8.2 16.3 5.9 14.5 23.2 -8.8 5.1 -6.2 -3.7 0.1 1.7 2.5 4.8
2 Growth of Exports BoP (%) Growth of Imports BoP (%) Growth of Non-factor Services (Credit) (%) Growth of Non-factor Services (Debit) (%) Exports/ImportsBoP (%) Exports/Imports of Goods and Services (%) Import Cover of FER (No. of months) External Assistance (net)/ TC (%) ECB (net)/TC (%)
3 23.4 32.1 33.3 24.0 67.0 85.0 11.6 6.7 9.8 11.0 12.6 18.8 -6.2 5.0 -3.4 -1.2 0.3 0.4 1.5 3.0
PR:
4 22.6 21.4 28.0 28.5 67.6 86.2 12.5 3.9 35.6 9.6 13.6 20.1 -6.5 5.5 -3.4 -1.0 1.7 0.8 0.7 4.7
5 28.9 35.1 22.4 16.2 64.5 83.0 14.4 2.0 21.2 0.2 13.4 20.8 -7.4 6.1 -4.2 -1.3 1.8 1.3 2.2 8.6
6 13.7 19.8 17.3 1.1 61.3 92.7 9.8 36.1 116.2 63.4 15.4 25.2 -9.8 7.5 -5.4 -2.3 0.7 1.6 -1.2 0.5
P:
7 -3.6 -2.6 -9.6 15.3 60.6 90.0 11.1 5.4 5.3 5.5 13.2 21.7 -8.6 5.8 -6.0 -2.8 0.2 1.4 2.4 3.8
10 NRI Deposits/ TC (%) 11 Exports 12 Imports 13 Trade Balance 14 Invisible Balance 15 Goods and Services Balance 16 Current Account Balance 17 ECBs 18 FDI (net) 19 Portfolio Investment (net) 20 Total Capital Account (net) Source: RBI TC: Total Capital Flows (net); FER: Foreign Exchange Reserves;
As per cent of GDPmp
Partially Revised. Preliminary ECBs: External Commercial Borrowings; GDPmp: Gross Domestic Product at current market prices.
Figure 6.1
Current account balance, goods and services balance, trade balance, invisibles balance and net capital inflows as a per cent of GDP during 2005-06 to 2009-10
8.6 5.0 3.0 0.5 -1.2 -3.4 -6.2 -1.0 -3.4 -6.5 -1.3 -2.3 -4.2 -5.4 -7.4 -8.6 -9.8 2005-06 2006-07 2007-08 2008-09 2009-10 Invisibles balance Net capital inflows -6.0 -2.8 Trade balance 5.5 6.1 4.7 7.5 5.8 3.8 Current account balance Goods & services balance
10 8 6
As per cent of GDP
4 2 0 -2 -4 -6 -8 -10 -12
Year
Balance of Payments
Figure 6.2
141
Current account balance, goods and services balance, trade balance, invisibles balance and net capital inflows as a per cent of GDP during H1 of 2009-10 and 2010-11
7.2 3.9 5.1 4.8 Current account balance Goods & services balance -2.2 -3.7 -6.2 -9.4 2009-10 H1 (Apr - Sep 2009) -6.2 -8.8 Invisibles balance Net capital inflows Trade balance
10 8 6
As per cent of GDP
4 2 0 -2 -4 -6 -8 -10 -12
2010-11 H1 (Apr - Sep 2010)
Year
6.32 Both inward as well as outward FDI showed declining trend in 2009-10 vis-a-vis 2008-09. The inward FDI declined by 12.4 per cent to US$ 33.1 billion in 2009-10 from US$ 37.8 billion in 2008-09. Similarly, outward FDI declined by 19.6 per cent from US$ 17.9 billion in 2008-09 to US$ 14.4 billion in 2009-10. Consequently, the net FDI (inward FDI minus outward FDI) was marginally lower at US$ 18.8 billion in 2009-10, as compared with US$ 19.8 billion in 2008-09. The FDI was channelled mainly into manufacturing followed by construction, financial services and the real estate sector. 6.33 Portfolio investment witnessed net inflow of US$ 32.4 billion in 2009-10 as against a net outflow of US$ 14.0 billion in 2008-09. The attractive domestic market conditions facilitated net FII inflows of US$ 29.0 billion in 2009-10 (as against net outflow of US$ 15.0 billion in 2008-09). At US$ 3.3 billion, the ADRs / GDRs remained at the same level in 2009-10 as in 2008-09. Net ECBs slowed down to US$ 2.8 billion (US$ 7.9 billion in 2008-09) mainly due to increased repayments. 6.34 The net short-term trade credits to India increased significantly to US$ 7.6 billion in 2009-10 from net outflows of US$ 2.0 billion a year earlier, reflecting international confidence in domestic importers. After recording net inflows under nonresident deposits during the first three quarters, there were outflows during the last quarter of the 2009-10. Overall net non-resident deposits inflows stood lower at US$ 2.9 billion during 2009-10 as compared to US$ 4.3 billion during 2008-09.
6.35 Net capital inflows increased significantly during H1 of 2010-11, mainly due to FII inflows, shortterm trade credits and ECBs. Net FII inflows were higher at US$ 22.3 billion during April-September 2010 as compared to US$ 15.3 billion a year earlier reflecting attractive returns in Indian stock markets. Inflows under short-term trade credits and ECBs increased significantly on the back of strong domestic demand and persistence of higher interest rate differentials between India and abroad. Accordingly, short-term trade credits increased to US$ 6.7 billion during April-September 2010 as against a marginal outflow witnessed during the corresponding period of 2009-10. Net inflows under ECBs to India increased to US$ 6.3 billion as compared to US$ 0.8 billion a year earlier. The large increase in these inflows was considerably offset by the moderation in net FDI to US$ 5.3 billion during H1 of 2010-11 as against US$ 12.3 billion during the corresponding period of 2009-10 due to decline in inward FDI. The inward FDI declined by 36.4 per cent from US$ 19.8 billion during H1 of 2009-10 to US$ 12.6 billion during H1 of 2010-11. However, outward FDI remained at more or less the same level at US$ 7.2 billion during H1 of 2010-11, as compared to US$ 7.4 billion in H1 of the previous year. The share of net FDI in net capital flows also declined from 53.7 per cent in H1 of 2009-10 to 14.6 per cent in the first half of the current fiscal. With capital account surplus being higher than the current account deficit, the overall balance was in surplus at US$ 7.0 billion, which resulted in a net accretion to foreign exchange reserves of an equivalent amount during
142
Economic Survey 2010-11 embedded strategy within this framework. The aftermath of the global financial crisis has, however, triggered a debate on the costs of building up foreign exchange reserves as a self-insurance mechanism. It needs to be acknowledged that foreign exchange reserves have helped insulate India from the worst impact of the crisis. There is an argument that a multilateral option of a pre-arranged line of credit that can be easily and quickly accessed can be a substitute for costly self-insurance. Such a multilateral option, however is necessary but not sufficient, as foreign investors often view the size of foreign exchange reserves as a key input in taking investment decisions. 6.40 In evaluating the level of reserves and the quantum of self insurance of a country, it is also important to distinguish between countries where reserves are a consequence of current account surpluses and economies with current account deficits where reserves are a result of capital inflows in excess of their economys absorptive capacity. India falls in the latter category, wherein reserves comprise mainly portfolio (FIIs) investment, which are more vulnerable to sudden stops and reversals and borrowings from abroad.
H1 of 2010-11 as compared to US$ 9.5 billion during H1 of 2009-10. 6.36 As per the latest available information on capital inflows, FDI inflows at US$ 19.0 billion were almost at the same level during April-November 2010 as it was during the corresponding period of the previous year. Portfolio investment including FII inflows, however, increased sharply to US$ 32.8 billion during April-November 2010 from US$ 22.2 billion a year earlier. The surge in FIIs could be attributed to relatively sound economic fundamentals and increased international liquidity due to easy monetary policies followed by many advanced countries. 6.37 The salient features of the BoP during 2009-10 and in the first half of the current fiscal have been higher current account deficit due to lower net invisibles surplus and large net capital inflows mainly on account of higher inflows under portfolio investments and short-term trade credits, leading to net accretion of foreign exchange reserves on BoP basis.
FOREIGN EXCHANGE RESERVES

6.38 Foreign exchange reserves are an important component of the BoP and an essential element in the analysis of an economys external position. Indias foreign exchange reserves comprise foreign currency assets (FCAs), gold, special drawing rights (SDRs) and reserve tranche position (RTP) in the International Monetary Fund (IMF). The level of foreign exchange reserves is largely the outcome of the RBIs intervention in the foreign exchange market to smoothen exchange rate volatility and valuation changes due to movement of the US dollar against other major currencies of the world. Foreign exchange reserves are accumulated when there is absorption of the excess foreign exchange flows by the RBI through intervention in the foreign exchange market, aid receipts, interest receipts, and funding from institutions such as the International Bank for Reconstruction and Development (IBRD), Asian Development Bank (ADB) and International Development Association (IDA). Both the US dollar and the euro are intervention currencies. Foreign currency assets are maintained in major currencies like the US dollar, euro, pound sterling, Australian dollar and Japanese yen. Reserves are denominated and expressed in the US dollar, which is the international numeraire for the purpose. 6.39 The twin objectives of safety and liquidity are the guiding principles of foreign exchange reserves management in India, with return optimization being
Indias foreign exchange reserves

6.41 Beginning from a low level of US$ 5.8 billion at the end of March 1991, Indias foreign exchange reserves gradually increased to US$ 25.2 billion by end-March 1995, US$ 38.0 billion by end-March 2000, US$ 113.0 billion by end-March 2004 and US$ 199.2 billion by end-March 2007. The reserves reached their peak at US$ 314.6 billion at end-May 2008, before declining to US$ 252.0 billion at the end of March 2009. The decline in reserves in 200809 was inter alia a fallout of the global crisis and strengthening of the US dollar vis--vis other international currencies. During 2009-10, the level of foreign exchange reserves again increased to US$ 279.1 billion at the end of March 2010, mainly on account of valuation gain as the US dollar depreciated against most of the major international currencies. The component-wise details of foreign exchange reserves from 1950-51 to 2010-11 (up to December 2010) in rupee and US dollar are given in Appendices 6.1(A) and 6.1(B). 6.42 During 2009-10, of the total US$ 27.0 billion increase in foreign exchange reserves, US$ 13.6 billion was on account of valuation gain and balance US$ 13.4 billion was on BoP basis (Table 6.3). The increase in foreign exchange reserves during this period also includes SDR allocations made by the
Balance of Payments
143
Table 6.3 : Sources of Variation in Foreign Exchange Reserves on BoP Basis and Valuation Effect (US$ billion)
Sl. No. Items 2008-09 2009-10
PR
April-September 2009-10
PR
2010-11P
1 I II
2 Current Account Balance Capital Account (net) (a to g) a Foreign Investment (i+ii) (i) FDI (ii) Portfolio Investment of which: FIIs ADRs/GDRs b External Commercial Borrowings c Banking Capital of which: NRI Deposits d Short-term Trade Credit e External Assistance F Other Items in Capital Account* g Errors and Omissions h Overall balance (I+II) Reserve Change on BoP Basis [Increase (-) / Decrease (+) ]
3 (-) 27.9 7.9 5.8 19.8 (-) 14.0 (-) 15.0 1.2 7.9 (-) 3.2 4.3 (-) 2.0 2.4 (-) 4.1 1.1 (-) 20.1 (+) 20.1 (-) 37.6 (-) 57.7
4 (-) 38.4 51.8 51.2 18.8 32.4 29.0 3.3 2.8 2.1 2.9 7.6 2.9 (-) 13.1 (-) 1.6 13.4 (-) 13.4 13.6 27.0
5 (-) 13.3 22.7 30.3 12.3 17.9 15.3 2.7 0.7 1.0 2.9 -0.1 1.0 (-)10.2 (-) 0.1 9.5 (-) 9.5 19.8 29.3
6 (-) 27.9 33.1 29.1 5.3 23.8 22.3 1.6 6.0 0.8 2.2 6.7 3.0 (-)10.7 (-)1.8 7.0 (-)7.0 6.8 13.8
III
IV Valuation Change Total Reserve Change (III+IV) (Increase in reserves (+) / Decrease in reserves (-))
PR: Partially Revised. P: Preliminary Source: RBI Note: *: Other items in capital account include SDR allocations, leads and lags in exports, funds held abroad, advances received pending issue of shares under FDI and transactions of capital receipts not included elsewhere and rupee debt service. As per the BoP compilation practice, an increase in reserves is indicated by (-) sign and a decrease by (+) sign. For other items (+) sign indicates increase and (-) sign means decrease. Difference, if any, is due to rounding off.
IMF to India in two consecutive tranches of SDR 3,082.5 million (equivalent to US$ 4,821 million) under the general allocation on 28 August, 2009 and SDR 214.6 million (equivalent to US$ 340 million) under special allocations on 9 September, 2009 and Figure 6.3
300 295
purchase of 200 metric tonnes of gold from the IMF by the RBI, under the IMFs limited gold sales programme at the cost of US$ 6.7 billion in November 2009, as part of its foreign exchange reserves management operation.
Foreign exchange reserves

Foreign exchange reserves
US$ billion
290 285 280 275 270
May 2010
Jul 2010
Oct 2010
Nov 2010
Mar 2010
Aug 2010
Year
Dec 2010
Jun 2010
Apr 2010
Sep 2010
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Sl. No.
Table 6.4 : Summary of changes in foreign exchange reserves (US$ billion)

Year Foreign exchange reserves at the end of financial year (end March) 3 151.6 199.1 309.7 252.0 279.1 292.9 Total Increase / decrease in reserves over previous period 4 + 10.1 + 47.5 + 110.6 - 57.7 + 27.0 + 13.8 Increase/decrease in reserves on a BoP basis 5 + 15.0 (148.5) + 36.5 (76.8) + 92.2 (83.4) -20.1 (34.8) + 13.4 (49.6) + 7.0 (50.7) Increase/decrease in reserves due to valuation effect 6 - 4.9 (- 48.5) + 11.0 (23.2) + 18.4 (16.6) - 37.6 (65.2) + 13.6 (50.4) + 6.8 (49.3)
1 1 2 3 4 5 6
2 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 (upto Sept. 2010)
Source: RBI. Note: Figures in parentheses indicate percentage share in total change.
6.43 In the current fiscal 2010-11, on month-onmonth basis, foreign exchange reserves have shown an increasing trend. The reserves increased by US$ 18.2 billion from US$ 279.1 billion at the end of March, 2010 to US$ 297.3 at the end of December, 2010 (Figure 6.3). This level of reserves provides about 10 months of import cover. 6.44 A summary of changes in the foreign exchange reserves since 2005-06, with a breakdown into increase/decrease on BoP basis and valuation effect is presented in Table 6.4. 6.45 Foreign Currency Assets (FCAs) are the major constituent of foreign exchange reserves in India. FCAs increased by US$ 13.1 billion (5.1 per cent) from US$ 254.7 billion at end-March 2010 to US$ 267.8 billion at end-December 2010. The increase was largely attributed to valuation gain, aid receipts and purchase of US dollar by the Reserve Bank of India. 6.46 In line with the principles of preserving the long-term value of the reserves in terms of purchasing power, minimizing risk and volatility in returns and maintaining liquidity, the RBI holds FCAs in major convertible currency instruments. These include deposits of other countries central banks, the Bank for International Settlements (BIS) and top-rated foreign commercial banks, and securities representing debt of sovereigns and supranational institutions with residual maturity not exceeding 10 years, to provide a strong bias towards capital
preservation and liquidity. The annualized rate of return, net of depreciation, on the multi-currency multi-asset portfolio of the RBI declined from 4.2 per cent in 2008-09 to 2.1 per cent in 2009-10. 6.47 Country-wise details of foreign exchange reserves show that India is the fourth largest foreign exchange reserve holder in the world, after China, Japan and Russia (Table 6.5). Table 6.5 : Foreign exchange reserves of some major countries
Sl. No. 1 1 2 3 4 5 6 7 8 9 10 11 Country Foreign exchange reserves (US$ billion) 3 2,454.3 1,118.8 479.4 297.3 293.5 285.5 268.8 225.8 216.6 188.3 157.4
2 China (June 2010) Japan (December 2010) Russia (December 2010) India (December 2010) Korea (October 2010) Brazil (November 2010) China P R Hong Kong (December 2010) Singapore (December 2010) Germany (December 2010) France (December 2010) Italy (October 2010)
Source: IMF except for China; For China: www.safe.gov.cn.
Balance of Payments
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Table 6.6 : International Comparison of Foreign Exchange Reserves (US$ billion) and Ratio of Reserves to Imports of Goods and Services
Sl. No. 1 I 1 2 3 4 5 Country / Country Group 2 Country Russia China India Brazil Mexico 176.5 (107.4) 822.5 (115.5) 132.5 (72.8) 53.3 (54.4) 74.1 (30.5) 296.2 (141.7) 1069.5 (125.4) 171.3 (75.5) 85.2 (70.7) 76.3 (27.4) 467.6 (165.5) 1531.3 (148.0) 267.6 (95.1) 179.5 (113.8) 87.1 (28.5) 412.7 (112.3) 1950.3 (158.2) 248.0 (71.5) 192.9 (87.6) 95.1 (28.5) 417.8 (164.8) 2348.8 (211.0) 266.2 (81.6) 237.4 (135.9) 99.6 (38.7) 468.7 (152.8) 2693.4 (169.6) 281.6 (76.2) 274.9 (117.9) 119.6 (35.9) 508.1 (143.8) 3025.6 (157.8) 295.9 (69.7) 292.7 (110.0) 129.6 (36.5) 2005 3 2006 4 2007 5 2008 6 2009 7 2010 (Projection) 8 2011 (Projection) 9
II 1
Country Group Developing Asia (excluding China & India) 201.1 (38.6) 248.5 (42.5) 330.0 (49.1) 335.5 (41.8) 393.0 (60.2) 459.4 (58.2) 508.2 (58.4)
Source: World Economic Outlook Database, October 2010. Note: Reserves are based on official holding of gold valued at SDR 35 an ounce. This convention results in a marked underestimation of reserves for countries that have substantial gold holdings. Figures in parentheses indicate ratio of reserves to imports of goods and services.
6.48 A comparative picture of foreign exchange reserves and import cover, as measured by the ratio of foreign exchange reserves to import of goods and services for select country groups and countries including India is presented in Table 6.6. Among the country groups, Developing Asia and the Middle East accumulated reserves during the period 200509, leading to steady improvement in the ratio of reserves to import of goods and services.
6.50 During 2009-10, on the back of capital inflows and positive growth outlook, the Indian rupee generally appreciated against the US dollar, though marked by intermittent depreciation pressures. An easy supply situation in the market also led to moderation in forward premia. 6.51 On a point-to-point basis, the rupee that stood at 50.95 per US dollar on 31 March 2009, displayed a two-way movement with generally appreciating trend in the second half of 2009-10. The appreciation of the rupee in 2009-10 was generally led by FII inflows, driven by strong macroeconomic performance and better return. The growth in exports, continued capital inflows and weakening of the US dollar against some of the major currencies contributed to appreciating pressure on the rupee, taking the rupee-US dollar exchange rate to ` 45.14 per US dollar by end-March 2010. 6.52 The Rupee/US dollar exchange rate marginally appreciated by 0.7 per cent to ` 44.81 per dollar between 31 March 2010 and 31 December 2010. Over the same period, the rupee has experienced depreciation of 2.5 per cent against
EXCHANGE RATES
6.49 The exchange rate policy is guided by the broad principles of careful monitoring and management of exchange rates with flexibility, while allowing the underlying demand and supply conditions to determine its movements over a period in an orderly manner. Subject to this predominant objective, RBI intervention in the foreign exchange market is guided by the goals of reducing excess volatility, preventing the emergence of destabilizing speculative activities, maintaining adequate levels of reserves, and developing an orderly foreign exchange market.
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Table 6.7 : Exchange Rates of Rupee per Foreign Currency and RBIs Sale/Purchase of US Dollar in the Exchange Market During 2010-11
Annual/Monthly average exchange rates ( ` per foreign currency)*, Month US$ Pound Sterling 3 75.89 (3.2) 68.44 Euro Japanese Yen** 5 51.10 (- 9.6) 50.18 RBI Net sale (-) / purchase (+) (US$ million) 6 (-) 2,505
1 2009-10 March 2010 2010-11 April 2010 May 2010 June 2010 July 2010 August 2010 September 2010 October 2010 November 2010 December 2010
2 47.42 (-3.0) 45.50
4 67.08 (-3.0) 61.77
44.50 (2.2) 45.81 (-2.9) 46.57 (-1.6) 46.84 (-0.6) 46.57 (0.6) 46.06 (1.1) 44.41 (3.7) 45.02 (-1.4) 45.16 (- 0.3)
68.24 (0.3) 67.23 (1.5) 68.70 (-2.1) 71.52 (-3.9) 72.97 (-2.0) 71.68 (1.8) 70.39 (1.8) 71.85 (-2.0) 70.46 (2.0)
59.66 (3.5) 57.67 (3.5) 56.90 (1.4) 59.76 (-4.8) 60.14 (-0.6) 60.08 ( 0.1) 61.72 (-2.7) 61.50 (0.4) 59.69 (3.0)
47.63 (5.4) 49.69 (-4.1) 51.22 (-3.0) 53.43 (-4.1) 54.53 (-2.0) 54.50 (0.1) 54.28 (0.4) 54.57 (-0.5) 54.24 (0.6)
110.0 260.0 450.0 870.0 -
Source : RBI * FEDAI indicative rate; ** Per 100 Yen. Figures in parentheses indicate appreciation (+) and depreciation (-) over the previous month/year.
the Pound Sterling and 12.1 per cent against the Japanese yen, while it appreciated by 1.2 per cent against the euro. 6.53 On annual average basis, rupee depreciated against all major international currencies except the pound sterling in fiscal 2009-10. The annual average exchange rate of the rupee was ` 45.99 per US dollar in 2008-09 and it depreciated by 3.0 per cent to ` 47.42 in 2009-10. Similarly, the annual average exchange rate of the rupee in 2008-09 was ` 65.06 per euro and ` 46.20 per 100 Japanese yen, and it depreciated by 3.0 per cent and 9.6 per cent, respectively to ` 67.08 and ` 51.10 during 2009-10. The annual average exchange rate of the rupee per pound sterling however, showed appreciation of 3.2 per cent from ` 78.32 per pound sterling in 2008-09 to ` 75.89 in 2009-10. 6.54 The monthly average exchange rate of the rupee has generally been range-bound, moving in
the range of ` 44-47 per US dollar between AprilDecember 2010. The exchange rate of the rupee (monthly average of buying and selling by the Foreign Exchange Dealer Association of India [FEDAI], depreciated by 1.5 per cent against US dollar from ` 44.50 per US dollar in April 2010 to ` 45.16 per US dollar in December 2010. Similarly, the rupee depreciated by 3.2 per cent against the pound sterling, and 12.2 per cent against the Japanese yen during the same period. 6.55 The month-wise exchange rate of the rupee against major international currencies and the RBIs sale/purchase of foreign currency in the foreign exchange market during 2010-11 are indicated in Table 6.7. 6.56 Appendix 6.5 presents the exchange rate of the rupee vis--vis select international currencies year-wise since 1980-81, and month-wise during 2010-11.
Balance of Payments Table 6.8 : Movement of Rupee and NEER and REER Indices during 2010-11
Month/year Rupee per US Dollar Appreciation (+)/ depreciation (-) in Rupee per US Dollar over previous month NEER* REER* Appreciation (+)/ depreciation (-) in NEER over previous month
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Appreciation (+)/ depreciation (-) in REER over previous month
1 March 2008 March 2009 March 2010 2010-11 April 2010 (P) May 2010 (P) June 2010 (P) July 2010 (P) August 2010 (P) September 2010 (P) October 2010 (P) November 2010 (P) December 2010 (P)
2 40.36 51.23 45.50
4 70.94
5 110.98 95.44 114.49
-21.2 12.6
60.45 66.59
- 14.8 10.2
- 14.0 20.0
44.50 45.81 46.57 46.84 46.57 46.06 44.41 45.02 45.16
2.2 - 2.9 - 1.6 - 0.6 0.6 1.1 3.7 - 1.4 - 0.3
68.40 68.07 67.55 65.70 65.66 66.00 66.68 66.10 66.80
118.92 120.00 118.78 116.18 116.53 117.54 118.25 117.48 118.71
2.7 - 0.5 - 0.8 - 2.7 - 0.1 0.5 1.0 - 0.9 1.1

P: Provisional.
3.9 0.9 - 1.0 - 2.2 0.3 -0.9 0.6 - 0.7 1.0
Source: RBI. * Six-currency Trade-based Weights,
Base: 1993-94 (April-March) =100,
NEER and REER

6.57 The nominal effective exchange rate (NEER) and real effective exchange rate (REER) indices are used as indicators of external competitiveness of the country over a period of time. NEER is the weighted average of bilateral nominal exchange rates of the home currency in terms of foreign currencies, while REER is defined as a weighted average of nominal exchange rates adjusted for home and foreign country relative price differentials. REER captures movements in cross-currency exchange rates as well as inflation differentials between India and its major trading partners. The RBI has been constructing six currency (US dollar, euro, pound sterling, Japanese yen, Chinese renminbi and Hong Kong dollar) and 36 currency indices of NEER and REER. 6.58 On a point-to-point basis, the six-currency trade-based REER (base: 1993-94=100) appreciated by 20.0 per cent between March 2009 and March 2010. In the current fiscal it appreciated by 3.7 per cent between March 2010 and December 2010. This indicates loss of competitiveness against major trading partners, when inflation differentials
are taken into account. However, a significant share of Indias foreign trade is invoiced and settled in US dollar. REER is less effective indicator of rupee competitiveness to that extent. 6.59 The six-currency trade-based NEER (base: 1993-94=100) appreciated by 10.2 per cent between March 2009 and March 2010 and by 0.3 per cent between March 2010 and December 2010. As compared to this, the monthly average exchange rate of the rupee against the US dollar appreciated by 12.6 per cent between March 2009 and March 2010 and in the current fiscal by 0.8 per cent between March 2010 and December 2010 (Table 6.8 and Appendix 6.6).
US dollar exchange rate in international market

6.60 During 2009-10 (March 2009 March 2010), the US dollar depreciated against major currencies. It fell by 4.9 per cent against the pound sterling, 1.7 per cent against the euro, 7.4 per cent against the Japanese yen and 23.9 per cent against the Australian dollar. The dollar however, gained some strength against major currencies, especially in
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Table 6.9 : Exchange Rate of US dollar against International Currencies

Month/Year 1 March 2009 March 2010 US$ Appreciation (+) / Depreciation (-) (end-March 2009 end-March 2010) 2010-11 April 2010 May 2010 June 2010 July 2010 August 2010 September 2010 October 2010 November 2010 December 2010 US$ Appreciation (+) / Depreciation (-) (end-March 2010 end-December 2010) Source: RBI. 1.5324 1.4757 1.4738 1.5298 1.5732 1.5718 1.6026 1.5558 1.5602 (-) 3.3 1.3404 1.2693 1.2183 1.2650 1.2960 1.3642 1.3921 1.2986 1.3381 1.2 93.20 91.51 90.60 87.56 85.25 83.48 80.49 83.66 81.19 (-) 10.7 0.9263 0.8672 0.8671 0.8694 0.8998 0.9669 0.9805 0.9590 1.0235 (-) 11.1 GBP/USD 2 1.4340 1.5082 (-) 4.9 Euro/USD 3 1.3308 1.3543 (-) 1.7 USD/JPY 4 98.100 90.885 (-) 7.4 AUD/USD 5 0.6921 0.9095 (-) 23.9
December 2009, on the back of a pickup in economic activity and market conditions turning more conducive to economic growth in the USA. However, between end-March 2010 and end-December 2010, the US dollar depreciated by 3.3 per cent against the pound sterling, 10.7 per cent against the Japanese yen, and 11.1 per cent against the Australian dollar, while appreciating by 1.2 per cent against the euro. The appreciation against the euro could be attributed to the sovereign debt problems in some of the member countries of euro zone (Table 6.9).
on account of higher commercial borrowings and short-term debt. Taken together, these two components contributed over 70 per cent of total increase in Indias external debt. The valuation effect arising from depreciation of the US dollar against major international currencies contributed to an increase of US$ 6.3 billion to the total increase. Excluding the valuation effect, the increase in external debt would have been US$ 27.2 billion. 6.63 The maturity profile of Indias external debt indicates the dominance of long-term borrowings. At the end of September 2010, the short-term debt at US$ 66.0 billion accounted for 22.3 per cent of total external debt, while the remaining 77.7 per cent was long-term debt (Table 6.10). 6.64 The long-term components, such as commercial borrowings, NRI deposits and multilateral borrowings constitute a significant share of external debt. Taken together, these components accounted for 60.5 per cent of total external debt at the end of September 2010, while the remaining 17.2 per cent was accounted by other components (i.e., bilateral borrowings, export credit, IMF and rupee debt). The share of commercial borrowings continued to be the highest at 27.8 per cent in total external debt followed by NRI deposits (16.9 per cent) and multilateral debt (15.8 per cent) (Table 6.11).
EXTERNAL DEBT
6.61 Indias external debt stock stood at US$ 262.3 billion ( ` 1,184,998 crore) at end-March 2010 recording an increase of US$ 37.8 billion over endMarch 2009 level of US$ 224.5 billion ( ` 1,143,951 crore). Of the total increase, long-term debt accounted for 28.7 billion, while short-term debt was higher by US$ 9.1 billion. Appendices 8.4(A) and 8.4(B) present the disaggregated data on Indias external debt outstanding for the period from March 1991 to September 2010 in Indian rupee and US dollar terms, respectively. 6.62 At end-September 2010, total external debt increased by US$ 33.5 billion (12.8 per cent) to US$ 295.8 billion ( ` 1,332,195 crore) over end-March 2010. The increase in Indias external debt was mainly
Balance of Payments Table 6.10 : Indias External Debt Stock

At end-March Long-term 1 2005 2006 2007 2008 2009PR 2010PR 2010 (end-June)PR 2010 (end-Sept.)QE
PR: QE:
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In US$ million Short-term 3 17,723 19,539 28,130 45,738 43,362 52,471 57,841 66,010 Total 4 134,002 139,114 172,360 224,407 224,547 262,344 272,910 295,847 Long-term 5 508,777 533,367 628,771 714,409 923,044 948,168 1,001,809 1,035,647
In ` crore Short-term 6 77,528 87,155 122,631 182,881 220,907 236,830 269,483 296,548 Total 7 586,305 620,522 751,402 897,290 1,143,951 1,184,998 1,271,292 1,332,195
2 116,279 119,575 144,230 178,669 181,185 209,873 215,069 229,837
Source: Ministry of Finance and RBI. Partially Revised; Quick Estimates.
Table 6.11 : Composition of External Debt

Sl. No. 1 1 2 3 4 5 6 7 8 9 10 Component 2 Multilateral Bilateral IMF Export credit Commercial Borrowings NRI Deposits Rupee Debt Long-term debt (1 to 7) Short-term debt Total External Debt (8+9) March 2009 PR 3 17.6 9.2 0.5 6.4 27.8 18.5 0.7 80.7 19.3 100.0 March 2010 PR 4 16.3 8.6 2.3 6.4 27.4 18.3 0.6 80.0 20.0 100.0
(Per cent to total external debt) June 2010 PR 5 16.4 8.4 2.2 6.4 27.3 17.6 0.6 78.8 21.2 100.0 September 2010 QE 6 15.8 8.3 2.1 6.2 27.8 16.9 0.6 77.7 22.3 100.0
Source: Ministry of Finance and RBI. PR: Partially Revised; QE: Quick Estimates.
6.65 The currency composition of Indias total external debt shows that US dollar denominated debt accounted for 53.9 per cent of total external debt at end-September 2010, followed by the Indian Rupee (18.8 per cent), Japanese Yen (11.8 per cent), SDR (9.8 per cent) and Euro (3.6 per cent). The currency composition of Government debt indicates predominance of SDR denominated debt (39.9 per cent), which is attributable to borrowing from International Development Association (IDA) i.e., the soft loan window of the World Bank under the multilateral
agencies and SDR allocations by the International Monetary Fund (IMF). The share of US dollar denominated debt was 28.1 per cent at the end of September 2010 followed by Japanese yen denominated (19.4 per cent) (Table 6.12). 6.66 The composition of Indias external debt has undergone change over the years with shares of both multilateral and bilateral components showing a declining trend in long-term debt. There is increasing share of private players in Indias total external debt. Government (sovereign) external debt
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Table 6.12 : Currency Composition of Indias External Debt and Sovereign External Debt
Total external debt Sl. Currency No. 1 1 2 3 4 5 6 7 2 US Dollar SDR Indian Rupees Japanese Yen Euro Pound Sterling Others Total March 2009PR 3 54.1 9.8 15.4 14.3 4.1 2.0 0.3 100.0 March 2010PR 4 53.4 10.7 18.6 11.4 3.6 1.8 0.5 100.0 June 2010PR 5 54.9 10.1 18.1 11.5 3.3 1.7 0.4 100.0 Sept. 2010QE 6 53.9 9.8 18.8 11.8 3.6 1.7 0.4 100.0 March 2009PR 7 29.6 39.5 5.7 19.9 5.2 0.1 0.0 100.0 Sovereign external debt March 2010PR 8 26.5 41.7 8.9 18.6 4.3 0.0 0.0 100.0 June 2010PR 9 28.8 39.8 8.9 18.7 3.8 0.0 0.0 100.0 Sept. 2010QE 10 28.1 39.9 8.6 19.4 4.0 0.0 0.0 100.0
Source : Ministry of Finance and RBI. PR : Partially Revised. QE : Quick Estimates
stood at US$ 72.3 billion, while non-Government debt amounted to US$ 223.6 billion at end-September 2010. The share of Government debt in total external debt declined from 25.6 per cent at end-March 2010 to 24.4 per cent at end-September 2010. The ratio of Government external debt to GDP has remained around 5.0 per cent in the last four years. 6.67 Sovereign external debt is a small proportion of the overall public debt of the Government of India.
The bulk of sovereign debt is from domestic sources. In the domestic debt category also, a significant share of dated securities is owned by commercial and co-operative banks and insurance companies. Given the composition of public debt and the fact that a sizeable share of banking and insurance is in the public sector, the refinancing risk that has been at the root of the euro zone crisis, is at best minimal (Box 6.2).
Box 6.2 : Indias Sovereign Debt: Specific Attributes

There have been concerns about the level of public debt, with consolidated debt (Centre and State) at 78.8 per cent of GDP as at end March 2010 (13th Finance Commission). For determining the vulnerability level of public debt, it is important however to look at the composition, refinancing requirements and the investor base. Following issues highlight the specific attributes of Central Government public debt, which place it in a distinct class, making it less vulnerable to market risks, as experienced in many advanced countries: a) The share of sovereign external debt in total public debt was 10.8 per cent at end-September 2010. The bulk of the debt was from multilateral and bilateral creditors with FIIs investment in Government securities accounting for less than 1 per cent of total public debt. As India does not access international capital markets as a sovereign entity, the refinancing risk due to foreign commercial investors, which significantly contributed to the euro area sovereign debt crisis, is therefore largely absent; b) Domestic debt accounts for 89.2 per cent of the total Central Government sovereign debt. Out of this, 11.5 per cent is in non-marketable categories like securities issued to the National Small Savings Fund. The remaining 77.7 per cent is marketable securities with 73.4 per cent in dated securities (long term) and 4.3 per cent in Treasury Bills (short term); c) In the dated securities category, banks (including co-operative banks) accounted for 51.9 per cent and insurance companies (mainly Life Insurance Corporation) 22 per cent of the total debt. Given the Statutory Liquidity Ratio (SLR) requirement for banks and the fact that a significant share of banking and insurance sector remains in the public sector, the refinancing risk, is at best minimal; d) The average maturity of Central Government securities is nearly 10 years, making it less vulnerable to refinancing risk. Despite the fact that the sovereign debt carries minimal refinancing and speculative risk, concerted efforts are underway to lower the public debt levels to sustainable benchmarks through setting fiscal targets and the Medium Term Fiscal Policy Statement that are part of the Annual Budget of the Government of India.
Balance of Payments Table 6.13 : Indias key External Debt Indicators (per cent)
Year External Debt (US$ billion) Total External Debt to GDP DebtService Ratio Foreign Exchange Reserves to total External debt 5 Concessional Debt to Total External Debt Short-term External Debt* to Foreign Exchnage Reserves 7
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Short-term Debt* to total Debt
1990-91 1995-96 2000-01 2005-06 2006-07 2007-08 2008-09 2009-10PR End-June 2010 PR End-Sept.2010 QE
83.8 93.7 101.3 139.1 172.4 224.4 224.5 262.3 272.9 295.8
28.7 26.9 22.5 16.8 17.5 18.0 20.5 18.1 -
35.3 26.2 16.6 10.1# 4.7 4.8 4.4 5.5 3.9 3.8
7.0 23.1 41.7 109.0 115.6 138.0 112.1 106.4 101.0 99.0
45.9 44.7 35.4 28.4 23.0 19.7 18.7 16.7 15.9 15.6
146.5 23.2 8.6 12.9 14.1 14.8 17.2 18.8 21.0 22.5
10.2 5.4 3.6 14.0 16.3 20.4 19.3 20.0 21.2 22.3
Source: Ministry of Finance and RBI. PR: Partially Revised. QE: Quick Estimates. - : Not worked out for the broken period. * : Short-term debt is based on original maturity. #: Works out to 6.3 %, with the exclusion of India Millennium Deposits (IMDs) repayments of US$ 7.1 billion and pre-payment of US$ 23.5 million. Note: Debt-service ratio is the proportion of gross debt service payments to External Current Receipts (net of official transfers).
6.68 The key debt indicators show that Indias external debt to GDP ratio was 18.1 per cent (20.5 per cent in 2008-09) and debt service ratio 5.5 per cent during 2009-10 (4.4 per cent in 2008-09). Indias foreign exchange reserves provided a cover of 99 per cent to the external debt stock at end-September 2010 (106.4 per cent at end-March 2010). The ratio of short-term external debt to foreign exchange reserves was 22.5 per cent at end-September 2010 as compared to 18.8 per cent at end-March 2010. The ratio of concessional debt to total external debt declined steadily and worked out to 15.6 per cent at end-September 2010 as against 16.7 per cent at end-March 2010. The key external debt indicators are presented in Table 6.13. 6.69 The external debt management policy of the Government of India continues to focus on raising sovereign loans on concessional terms with longer maturities, regulating ECBs through end-use and all-in-cost restrictions, rationalizing interest rates on NRI deposits and monitoring long as well as shortterm debt.
International comparison
6.70 A cross country comparison of external debt of twenty most indebted developing countries, based on the data given in the World Banks Global Development Finance, 2010, showed that India was the fifth most indebted country, after the Russian Federation, China, Turkey, and Brazil, in 2008 in terms of stock of external debt. The ratio of Indias external debt stock to gross national income (GNI) as of 2008 at 19.0 per cent was the fourth lowest with China having the lowest ratio at 8.7 per cent. The element of concessionality in Indias external debt portfolio was fourth highest after Pakistan, Indonesia and the Philippines (Table 6.14). 6.71 In terms of the cover of external debt provided by foreign exchange reserves, Indias position was fourth highest at 111.6 per cent after China, Thailand and Malaysia. A comparison of the share of shortterm debt in total external debt across countries reveals that Indias position was tenth lowest with Pakistan having the lowest ratio.
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Table 6.14 : International Comparison of Top Twenty Developing Debtor Countries, 2008
Sl No. Countries Total External debt stock (US $ million) 3 402,453 378,245 277,277 255,614 230,611 218,022 203,984 150,851 128,285 107,595 104,943 92,479 66,182 64,856 64,798 64,277 50,229 49,337 46,887 42,108 Total debt to Gross National Income (per cent) 4 25.8 8.7 35.3 16.2 19.0 42.1 19.1 30.4 39.9 95.0 54.7 51.7 35.1 35.0 32.0 41.3 16.0 28.7 20.2 127.3 Short-term to total external debt (per cent) 5 13.6 49.5 18.3 14.3 19.6 29.8 12.0 17.6 29.2 9.9 29.7 22.1 34.5 10.8 37.4 23.2 33.8 2.8 12.1 33.5 Foreign Exchange Reserves to Total Debt (per cent) 6 106.1 514.5* 26.6 75.8 111.6 28.5 46.7 34.2 36.2 18.5 37.9 34.1 139.3 57.8 171.3 35.9 85.7 18.3 50.5 12.5 Concessional to total external debt (per cent) 7 0.5 10.8 2.7 1.4 20.5 0.2 0.5 27.9 1.6 1.1 1.5 1.6 6.5 23.1 11.1 0.3 1.0 60.6 2.1 0.3
1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
2 Russian Federation China Turkey Brazil India Poland Mexico Indonesia Argentina Kazakhstan Romania Ukraine Malaysia Philippines Thailand Chile Venezuela Pakistan Colombia Latvia
Source: World Banks Global Development Finance, 2010. *: Foreign exchange reserves data are sourced from State Administration of Foreign Exchange, Government of China. Note: Countries are arranged based on the magnitude of debt presented in column no.3 in the Table.
THE G20
6.72 The Group of Twenty (G20) was established in 1999 to bring together Finance Ministers and Central Bank Governors of systemically important industrialized and developing economies to discuss key issues relating to the global economy and financial stability. By contributing to the strengthening of the international financial architecture and providing opportunities for dialogue on national policies, international co-operation, and international financial institutions, the G-20 helps to support growth, financial stability and development across the globe. 6.73 Since its inception, the G20 has held annual Finance Ministers and Central Bank Governors
meetings and discussed measures to promote financial stability in the world and achieve sustainable economic growth and development. 6.74 In the wake of the global financial and economic crisis in 2008, the G20 was elevated to a Leaders Summit. It was designated as a premier forum for international economic cooperation in 2009, effectively replacing the G8 as a forum for steering the global issues. The move was considered a milestone in reforming global governance, making it more inclusive since this forum comprises both emerging as well as industrialized economies (Box 6.3). 6.75 Several landmark reforms of international financial institutions were initiated at the behest of
Balance of Payments
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Box 6.3 : G 20: Basic facts

The G20 comprises 19 countries - namely - Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, the Republic of Korea, Turkey, the United Kingdom, the United States of America and the European Union which is represented by the rotating Council presidency and the European Central Bank as the 20th member. It represents 90 per cent of the global gross national product, 80 per cent of the worlds trade and twothird of the worlds population. Five Summits at the level of G20 leaders or Head of State have been held since breakout of the global economic crisis in 2008. Sl. No. 1 2 3 4 5 Summits Venue London, UK Pittsburgh, USA Toronto, Canada Seoul, South Korea Month / Year 2 April, 2009 24-25 September, 2009 26-27 June, 2010 11-12 November, 2010
the G20 which heightened the expectation for bringing about fundamental changes in the functioning of the global institutions and in the global governance structure. India as a member of the G20 has been actively engaged in global economic governance and in shaping the world order (Box 6.4).
Main Issues/Outcomes of G20 Summits

6.76 The most concerted response to the global economic crisis came from the platform of the G20 countries. G20 Leaders Summits have set the agenda rolling for both short and medium-term actions to meet the crisis. 6.77 The first G20 Summit was held in November 2008 in Washington DC under the shadow of the greatest financial crisis in the post-war era. Its significant achievements were in the form of high level commitments to: reform international financial regulation; to expand the Financial Stability Forum and other major standard setting bodies; and to give greater voice and representation to emerging and developing countries in International Financial Institutions. 6.78 Four months later, G20 Leaders met again in London in April 2009, wherein they pledged to do whatever was necessary to restore confidence, growth and jobs, promote global trade and investment and reject protectionism. They also agreed to undertake unprecedented and concerted fiscal expansion and monetary easing, and reached an agreement to provide over a trillion US dollar of additional resources to the global economy through the International Financial Institutions, of which 750 billion US dollar was for the IMF. 6.79 The Third G20 Leaders Summit was held in Pittsburgh, USA, on 24-25 September, 2009. The major outcomes related to (a) timelines for voice and quota reforms in the World Bank and the IMF, (b) timelines for regulatory reform in the Financial Sector (c) launching of a Framework for Strong Sustainable and Balanced Growth, (d) resolve to phase out and rationalize inefficient fossil fuel subsidies, while protecting the interests of the poorest, and (e) designating the G20 as the premier multilateral forum for cooperation on economic issues. 6.80 The fourth G 20 Leaders Summit was held at Toronto, Canada, on 26-27 June, 2010. Building on G20 achievements in addressing the global economic crisis, leaders agreed on the next steps that the G20 countries should take to ensure a full
Washington DC, USA 15 November, 2008
The next G 20 Summit will be held in Cannes, France on 3-4 November, 2011.
Box 6.4 : India and G 20

India is a member of the G20 since it was established as Finance Ministers Forum in 1999. India is the only G20 member country from South Asia and one of the important emerging market member countries in the G20. Some important landmarks in Indias involvement in the G20 are: G20 chair in 2002 and hosted G20 Finance Ministers and Central Bank Governors meeting in that year. Co-chaired (represented by Deputy Governor, RBI) the G20 Working Group on Enhancing Sound Regulation and Strengthening Transparency (after the November 2008 Washington Summit). Currently co-chair of the Working Group on G20 Framework for Strong, Sustainable and Balanced Growth along with Canada. India is contributing to various thematic issues being deliberated in G20 such as: Financial sector regulatory reforms Climate change IFIs reform Growth and Fiscal Consolidation Enhancing shareholding in forums such as FSB, IASB Issues pertaining to Non-Cooperative Jurisdiction (Global Forum, FATF etc.)
154
Economic Survey 2010-11 services, imposing new export curbs or implementing WTO inconsistent measures to stimulate exports. Besides, the leaders agreed to support bringing the Doha Development Round to a balanced and ambitious conclusion as soon as possible. 6.81 The fifth G 20 Summit was held in Seoul, South Korea, on 11 and 12 November, 2010. The summit was notable for the increasing economic and political influence of the emerging economies and may well be indicative of the rebalancing of the global economy. The earlier G-20 finance ministers meeting played an important role in mollifying the concern of a possible currency war by pledging to move towards more market determined exchange rate systems that reflect underlying economic fundamentals and refrain from competitive devaluation of currencies (Box 6.5).
return to growth with quality jobs, carry out growth friendly fiscal consolidation, reform and strengthen financial systems, and create strong, sustainable and balanced global growth. Advanced economies committed to fiscal plans that will, at least halve deficits by 2013 and stabilize or reduce government debt-to-GDP ratios by 2016. In addition, there was agreement on (i) strengthening social safety nets, enhancing corporate governance reform, financial market development, infrastructure spending, and greater exchange rate flexibility in some emerging markets; (ii) pursuing structural reforms across the entire G-20 membership to increase and sustain growth prospects; and (iii) making more progress on rebalancing global demand. The leaders also agreed to renew for three years (until end 2013) the G20 commitment to refrain from raising barriers or imposing new restrictions on trade in goods and
Box 6.5 : Highlights of the Leaders Declaration of G 20 Summit held in Seoul, South Korea in November, 2010
Adoption of the Seoul Action Plan included country specific actions, to move closer to the shared objectives of stronger, sustainable and balanced growth. The Plan includes commitment to: a) Undertake macroeconomic policies, including fiscal consolidation to ensure ongoing recovery and sustainable growth and enhance the stability of financial markets, in particular moving towards more market determined exchange rate systems, and refraining from competitive devaluation of currencies. Advanced economies, including those with reserve currencies, will be vigilant against excess volatility and disorderly movements in exchange rates; b) Implement a range of structural reforms that boost and sustain global demand, foster job creation, and increase the potential for growth; and c) Enhance the Mutual Assessment Process (MAP) to promote external sustainability. To strengthen multilateral cooperation to promote external sustainability and pursue the full range of policies conducive to reducing excessive imbalances and maintaining current account imbalances at sustainable levels. The leaders have tasked the G 20 Framework Working Group (of which India is a co-chair along with Canada) with technical support of the IMF and other international organizations to develop indicative guidelines composed of a range of indicators that would serve as a mechanism to facilitate timely identification of large imbalances that require preventive and corrective actions to be taken. Indicative Guidelines will then be put up for consideration of the G20 Finance Ministers and Central Bank Governors in their April 2011 Ministerial.
Adoption of the Seoul Consensus for Development based on six principles (Focus on Economic Growth, Global Development Partnership, Global or Regional Systemic Issues, Private Sector Participation, Complementarity and Outcome Orientation) and nine pillars (Infrastructure, HRD, Trade, Private Investment in job creation, Financial Inclusion, Growth with Resilience, Food Security, Governance and Knowledge sharing), including a multi-year action plan, and setting up of a High Level Panel (HLP) on Infrastructure. Endorsement of the new instruments of the IMF for Global Financial Safety Nets, and the recent IMF work on improving global capacity to cope with shocks of a systemic nature, including working with regional financing arrangements (RFAs). It also endorsed, amongst others, the use of macro prudential measures as a response to volatile capital flows. Endorsement of the Gyeongju G20 Finance Ministers and Central Bank Governors agreement on IMF reforms of a 6 per cent shift in quota in favour of under-represented and emerging market and developing countries (EMDCs), and a comprehensive review of quota formula by 2013 to better reflect the economic weights of EMDCs and completion of the next general review of quotas by January 2014. Endorsement of the core elements of the new financial regulatory capital and liquidity framework (Basel III), and measures to better regulate the SIFIs on which work will continue. It was also agreed to work further on macro prudential policy frameworks, strengthen regulation and oversight of shadow banking, and regulate commodity derivates markets. Recommit to resist all forms of protectionism, while recognizing that 2011 was a critical window of opportunity to intensify engagement to conclude the Doha Development Round. Adopt the G20 Anti Corruption Action Plan.
Balance of Payments
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CHALLENGES
6.82 The continuing sovereign debt risk in peripheral euro-zone countries and fear that it could spread to the financial sector, together with the high fiscal and public debt in several advanced countries, poses a risk to global recovery. In the event of the crisis spreading, it could have fallout for the Indian economy through reversal of capital flows and slowdown in exports. 6.83 Second, the fragile global recovery and the robust domestic growth have led to higher current account deficit in 2009-10 and 2010-11 (April September), which is a matter of some concern.
The problem may be further aggravated by the rising international oil prices. 6.84 Third, the periodic surge in capital flows could lead to problem of absorptive capacity in the economy, fuelling asset price bubbles, currency appreciation and stoking inflation. The challenge is in managing such surge in capital flows. 6.85 Fourth, the FDI inflows that are stable and productive in nature, have declined from US$ 37.7 billion in 2008-09 to US$ 33.1 billion in 2009-10 and US$ 19.0 billion in the current fiscal (up to November 2010). Moreover, the majority of the capital inflow is in the form of FIIs, which are volatile in nature. Steps have to be taken to encourage FDI inflows vis--vis other forms of capital.
International Trade
CHAPTER
External trade growth collapsed in different countries in the tumultuous recession-
ridden years of 2008 and 2009. The fall in trade, which was steeper than the decline in real GDP, was arrested in 2010, with trade growth recovering faster than real GDP growth. The recovery in trade growth has been made possible, in part, by the fiscal stimulus imparted by the governments and the low base of the preceding years. However, the extent of recovery differs substantially across countries and world trade remains below its pre-crisis level. India, which weathered the global crisis well, seems poised to be among the few countries to surpass the earlier peak and even reach or surpass the pre crisis trends in trade.
WORLD TRADE
7.2 The sudden and sharp decline in world trade from US $ 16 trillion in 2008 to US$ 12.4 trillion in 2009 was followed by an impressive recovery in 2010. World trade reached US$ 7.03 trillion in the first half of 2010, with a value growth of 24 per cent. World trade volumes which fell by an unprecedented 10.7 per cent in 2009 have quickly recovered with a growth of 12 per cent in 2010 as per the International Monetary Funds (IMF), World Economic Outlook (WEO), January 2011 (Table 7.1).
While this recovery is partially due to the base effect, the pickup in world output from the negative territory of (-) 0.6 per cent in 2009 to a positive 5.0 per cent in 2010 backed by the fiscal stimulus of different countries helped. As stated by the IMF, world trade remains below its pre-crisis trend and for some economies, particularly those hit by a banking crisis, it remains below pre-crisis levels. Growth in trade volumes of emerging and developing economies in 2010 was more robust than that of advanced economies, just as the fall in 2009 had been less severe.
Table 7.1 : Trends in growth in trade volumes

(per cent change) Projections
2009
World Trade Volume (goods and services) Imports Advanced Economies Emerging and Developing Economies Exports Advanced Economies Emerging and Developing Economies
Source : IMF, World Economic Outlook, January 2011
2010
12.0
2011
7.1
2012
6.8
10.7
12.4 8.0
11.1 13.8
5.5 9.3
5.2 9.2
11.9 7.5
11.4 12.8
6.2 9.2
5.8 8.8
Website : http://indiabudget.nic.in
International Trade 7.3 Growth in world trade volume is expected to moderate in 2011 and 2012 to 7.1 per cent and 6.8 per cent respectively, as per IMF projections. However, the trade growth in emerging and developing economies is expected to be more robust than that in the advanced economies in 2011 and 2012.
157
trade financing. An International Chamber of Commerce (ICC) survey of mid-2010 covering 161 banks located in 75 countries indicates that the costs of trade finance remain substantially higher than they were in the pre-crisis period, raising questions concerning affordability for exporters. 7.7 According to an April 2010 report by the Group of 20 (G-20) Trade Finance Experts Group, through the second half of 2009 and the first quarter of 2010, there is evidence that short-term trade finance markets have generally improved. Average prices for letters of credit in large emerging economies have fallen from 150-250 basis points (bps) a year ago to 70-150 bps, and the markets in many advanced economies are quickly returning to normalcy. However, this recovery has not been universal and several regions have markets that remain stressed, especially in Africa. Market sources cite that international or large pan-African banks continue to charge 200 to 320 bps to endorse a letter of credit in countries regarded as having a lower risk in Africa. Low-income countries in Asia and Central America seem to be in a better situation. In these areas, liquidity has returned to near normal, but there is still a market gap resulting from the general deterioration in the credit-worthiness of traders, coupled with greater risk aversion of commercial banks. An interesting development is a potentially long-lasting shift towards structured trade finance. The financial crisis brought a heightened sensitivity to risk, which has led to an increase in the relative demand for intermediated trade finance over traditional open account financing. In fact, recent estimates indicate that the level of intermediated (bank-supported) trade finance in 2009 surpassed that of open account transactions, reversing a longterm trend towards open account financing. 7.8 The G-20, in its Communiqu issued during the Seoul Summit (November 2010) has reiterated the need for enhancing the availability of trade finance in developing countries, particularly the lowincome countries. In this regard, the G-20 Ministers have agreed to monitor and assess trade finance programmes in support of developing countries and to evaluate the impact of regulatory regimes on trade finance. The G-20 Trade Finance Expert Group, together with the WTO Experts Group on Trade Finance and OECD Export Credit Group, are mandated with assessing the current need for trade finance in low-income countries, and, if a gap is identified, will develop and support measures to increase its availability in low-income countries.
Trade Credit: International Scenario

7.4 While the global economic crisis adversely affected international trade, on the supply side there is enough evidence to suggest that the financial crisis might have reduced the availability of trade credit. This could have resulted in a decline in the volume of trade that would otherwise have taken place even with the demand shock. Thus the shortage in trade credit might have deepened and prolonged the recession. Nearly 90 per cent of world trade reportedly depends on some form of trade finance or insurance, with the total size of this market estimated at between US$ 10 to 12 trillion in 2008. The World Trade Organization (WTO) has estimated a shortage in trade finance liquidity to the tune of US$ 25 billion as a fallout of the economic recession, whereas the World Bank estimated that the shortage in trade finance accounted for 10 to 15 per cent of the decline in trade. 7.5 A recent National Bureau of Economic Research (NBER) study provides new evidence that adverse credit conditions were an important channel through which the global economic and financial crisis affected trade volumes. Taking the case of the US market, the study states that countries with higher inter-bank rates and thus tighter credit availability exported less to the USA. Thus not only the fall in US demand, but even the credit tightening in the US, resulting in higher cost of trade financing for firms exporting to the US, could have posed a bigger challenge in countries with high cost of credit. 7.6 A study undertaken by the Organization for Economic Cooperation and Development (OECD) in June 2010 shows a differentiated picture in terms of the impact of trade finance on pre- and post-crisis trade, pointing to a threshold effect. The study highlights that availability of trade finance seems to have a limited impact on exports under normal circumstances, i.e. outside crisis periods. However, an IMF-BAFT (Bankers Association for Finance and Trade) survey in March 2010 is of the view that the drop in global demand was the most important reason for the decline in trade, followed by reduced
158
Economic Survey 2010-11 7.11 Pre-export financing and loans backed by export credit agencies have played a major role in 2010 trade finance markets. National governments across the globe devised strategies on war footing to support trade finance activities, some of them through the respective export credit agencies or developmental institutions (see Box 7.1).
7.9 BAFT-IFSA (the merged entity of BAFT and International Financial Services Association) announced the Master Partnership Agreement (MPA) in June 2008 for mitigating the trade finance risk. The MPA is an industry standard for use by banks and their counter parties around the globe to facilitate the buying and selling of country and bank trade finance related risk. It is designed to simplify the exchange of documentation, reduce legal costs, increase efficiency, and promote trade. 7.10 Multilateral organizations have introduced several supportive measures to stimulate availability of trade finance. More than 850 foreign trade transactions for the total amount of 550 million were supported by the European Bank for Reconstruction and Developments (EBRD) Trade Facilitation Programme (TFP) in 2009, providing additional benefits to the trade finance market. The Asian Development Banks (ADB) Trade Finance Facilitation Programme (TFFP) exposure limit was increased to US$ 1 billion. In 2009, the TFFP supported US$2 billion in trade, an increase of over 300 per cent compared to 2008. Under its Global Trade Finance Programme, the International finance Corporation (IFC) issued US$3.46 billion in guarantees in financial year 2010, a 44 per cent increase over the previous year.
Trade Credit: Indian scenario

7.12 In the wake of the global crisis and the problems being faced by exporters, the Reserve Bank of India (RBI) had reduced the interest rate ceiling to 250 bps below the benchmark prime lending rate (BPLR) on pre-shipment rupee export credit up to 270 days and post-shipment rupee export credit up to 180 days. This facility was available up to 30 June, 2010. In addition, the Government of India in its Union Budget for 2010-11 extended interest rate subvention of 2 per cent on pre and post shipment rupee export credit for certain employment-oriented export sectors such as handicrafts, carpets, handlooms, and small and medium enterprises up to 31 March 2011. On 9 August 2010, the interest rate subvention scheme was further extended to leather and leather manufacturers, jute manufacturing including floor covering, engineering goods, and textiles for the
Box 7.1 : Response to Trade Credit Crunch in Select Countries

The policy responses of some select countries related to trade credit were as follows:
The US-Exim (Export-Import) Bank announced a programme for providing US$ 4 billion in new short-term trade finance facilities and US$ 8 billion in medium- and long-term trade finance facilities to support export of US goods to emerging markets. Similarly, China, through the China-Exim Bank, provided short- , medium- , and long-term trade finance facilities for export of Chinese goods and services to emerging markets. The Federal Reserve, USA announced currency swap facilities with the European Central Bank and central banks in various countries to keep the foreign currency liquidity in the international financial system. The UK Government announced plans to guarantee as much as 20 billion of bank loans to small and medium companies ensuring flow of credit. Germany announced a financial-sector rescue package of 480 billion (US $ 672 billion), to secure confidence in and liquidity into the banking system. The Central Bank of Russia announced schemes to lend to commercial banks without requisite collateral for up to six months. In addition, the Central Bank granted a credit line of US$ 50 billion to Vnesheconomobank until the end of 2009. The Government of Hong Kong SAR has proposed extending the maximum guarantee period for working capital loan for small and medium enterprises (SMEs) from two years to five years. The Japanese Government announced US $1.0 billion trade finance facilitation initiative, to be developed in close cooperation with the IFC and ADB. Banco Nacional de Desenvolvimento Economico e Social (BNDES), the export credit agency of Brazil announced R$ 6 billion working capital credit facilities for Brazilian companies. The Brazilian Central Bank auctioned US$ 1 billion to banks (who will use it for trade credit lines) with repurchase clauses. Colombia and Venezuela jointly pledged US$ 100 million each for creation of a special fund in order to boost crossborder trade between the two countries.
International Trade period from 1 April 2010 to March 31, 2011. With the introduction of a base rate, the lending rates charged on rupee export credit were deregulated with effect from 1 July 2010. However, the RBI has stipulated that banks may reduce the interest rate chargeable as per the base rate in the sectors specified above by the subvention available, even if the interest rate charged to exporters goes below the base rate, subject to a ceiling of 7 per cent. 7.13 As a result of difficult financing conditions prevailing in the international credit markets and increased risk aversion of the lending counterparties, the gross inflow of short-term trade credit to India during 2008-09 was lower than in 2007-08. The gross inflows of short-term trade credit reached US$ 41.8 billion during 2008-09, while repayments (outflows of short-term trade credit) stood at US$ 43.8 billion, resulting in a net outflow of US$ 2.0 billion during 2008-09. Thus financing of short-term trade credit did not pose much of a problem in India. However, the situation changed in 2009-10 with short-term trade credit inflows increasing by 27.5 per cent to US$ 53.3 billion, while short-term trade credit outflows increased only marginally by 4.5 per cent to US$ 45.7 billion, thereby resulting in a net inflow of US$ 7.6 billion. This trend became further pronounced in financial year 2010-11. Short-term trade credit to India recorded a large net inflow of US$ 6.7 billion in H1 of 2010-11 (as against a marginal net outflow of US$ 0.05 billion during H1 of 2009-10) in line with the increase in imports associated with strong domestic economic activity and improved conditions in the global financial markets. After the negative growth, as on 27 March 2009, export credit grew moderately as on 26 March 2010. This trend continued with export credit growth at 11.3 per cent as on 31 December 2010. However export credit as a percentage of net banking credit fell by 0.9 percentage points from 5.5 per cent as on 28 March 2008 to 4.6 per cent on 27 March 2009 and 4.1 per cent as on 31 December 2010 (see Table 7.2). 7.14 The various policy initiatives taken by the RBI through a hike in the all-in-cost ceiling for improving the trade credit mechanism, enhancement of the limit on overseas borrowings by banks, extending the line of credit as well as swap facility to Exim Bank, have helped in easing the pressure on trade financing. This is further corroborated by the increase in share of short-term trade credit (both inflows and outflows) in overall gross capital flows- while share of inflows increased from 10.9 per cent in 2007-08 to Table 7.2 : Export Credit
Outstanding as on
159
Export Variations Export Credit (Per credit as ` (` Crore) Cent) per cent of NBC 39,118 43,321 42,978 49,202 57,687 69,059 86,207 104,926 129,983 128,940 138,143 153,794 9.0 10.7 -0.8 14.5 17.2 19.7 24.8 21.7 23.9 -0.8 7.1 11.3 9.8 9.3 8.0 7.4 7.6 6.3 5.7 5.4 5.5 4.6 4.3 4.1
24 March 2000 23 March 2001 22 March 2002 21 March 2003 19 March 2004 18 March 2005 31 March 2006 30 March 2007 28 March 2008 27 March 2009 26 March 2010 31 December 2010*
Source: Reserve Bank of India (RBI). Notes: * Variation over the figure as on 26 March 2010. NBCnet banking credit. Data up to March 2004 relate to select banks accounting for 90 per cent of bank credit. Data 18 March 2005 onwards, pertain to all scheduled banks excluding regional rural banks (RRBs) availing of export credit refinance from the RBI.
15.6 per cent in 2009-10, share in outflows increased from 9.6 per cent to 15.8 per cent during the same period.
INDIAS MERCHANDISE TRADE

7.15 Indias trade growth (in US dollar terms) has been robust at 20 per cent plus since 2002-03. While Indias trade growth has a strong correlation with world trade growth, it has been significantly higher than world trade growth particularly in two time periods, first just following the 1990 reforms and second after 2003 (see Figure 7.1). 7.16 Unlike many other countries, the global recession only slightly jolted the continued upward growth in Indias export sector with exports rising at a reasonable rate of 13.6 per cent in 2008-09. The compound annual growth rate (CAGR) for Indias merchandise exports for the five-year period 200405 to 2008-09 increased to 22 per cent from the 14 per cent of the preceding five-year period. However, in 2009-10 export growth was negative at (-)3.5 per cent, partly reflecting the effect of global recession and partly the higher base effect due to lagged export data of 2008-09. Despite this negative growth, Indias ranking in the leading exporters in merchandise trade
160
Figure 7.1
40 30
Export growth of World and India

India World
Per cent
20 10 0 -10 -20 -30

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Year
Source: IMF & WTO Note: Data for 2010 is only for three quarters
which slipped marginally from 26th in 2007 to 27th in 2008 improved to 21st in 2009. 7.17 However, this reasonably good overall picture for the whole year hides some of the difficulties through which the export sector went in the 12 crisis ridden months. In the case of India, the rebound in export growth from the second half of 2009-10 early 2010-11 was as sharp as the earlier fall, partly reflecting the low base and partly global trends (see Figure 7.2). Some deft handling by the Government on the export front also lessened the pain for the exporters in these trying months. 7.18 Though export growth decelerated from July to November 2010 after high spurts from February 2010 to June 2010, cumulative export growth in AprilDecember 2010-11 was good at 29.5 per cent with
cumulative exports reaching US $ 164.7 billion during this period. Current indications are that India will not only achieve the target of US$ 200 billion but surpass it in 2010-11. 7.19 Export growth in dollar terms decelerated in 2008-09 while in rupee terms it exhibited an opposite movement reflecting the direct effect of the high depreciation of the rupee by 12.5 per cent. In 200910, while export growth in dollar terms was negative, in rupee terms it showed a very marginal increase due to the marginal depreciation of the rupee by 3.1 per cent. In 2010-11 (April-December), export growth was robust both in dollar and rupee terms, the latter being slightly less due to the appreciation of the rupee by 5.0 per cent (Figure 7.3). Import growth movements in dollar and rupee terms exhibited similar movements during the same period (Figure 7.4).
Figure 7.2
80 60 40
Monthly trends in India's trade: values and growth

Export Growth (%) Import Growth (%)
Per cent
20 0 -20 -40
May Jul Oct Nov May Dec Mar Aug May Mar Dec Aug Aug Dec Jul Nov Jun Jun Oct Jan Jul Feb Sep Sep Sep Oct Nov Jun Jan Feb Apr Apr Apr
Export US$ billion
Import US$ billion
2008-09
2009-10
2010-11
Year
Source: Based on Directorate General of Commercial Intelligence and Statistics (DGCI&S) data.
International Trade Table 7.3 : Trade Performance : Volume and Unit Values
161
(Annual per cent change)
Exports Value Rupee US$ Volume terms terms 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11* 2.7 22.1 15.0 27.9 21.6 25.3 14.7 28.2 0.6 23.4 -1.6 20.3 21.1 30.8 23.4 22.6 29.0 13.6 -3.5 29.5 0.8 19.0 7.3 11.2 15.1 10.2 7.9 9.0 -1.1 -
Unit Value 1.0 2.9 7.5 14.9 6.1 13.7 5.1 16.9 1.0 -
Imports Value Rupee US$ Volume terms terms 6.2 21.2 20.8 39.5 31.8 27.3 20.4 35.8 -0.8 13.6 1.7 19.4 27.3 42.7 33.8 24.5 35.5 20.7 -5.0 19.0 4.0 5.8 17.4 17.2 16.0 9.8 14.1 20.2 9.9 -
Terms of Trade Unit Value 2.8 14.3 3.1 18.9 14.0 15.1 1.9 13.8 -10.0 Net Income -2.1 -9.8 3.6 -3.5 -6.0 -1.3 2.6 2.5 12.3 -1.3 7.4 11.2 7.3 8.2 8.8 10.7 11.7 11.0 -
Source: Computed from DGCI&S data. Note: * April-December 2010. Volume and unit value index of exports and imports are with new base (1999-2000=100)
7.20 The deceleration in export growth in rupee terms in 2009-10 was not only due to the large deceleration of growth in unit values to 1.0 per cent compared to 16.9 per cent in 2008-09 but also due to actual decline in quantum by 1.1 per cent Figure 7.3
50
compared to the 9 per cent growth in 2008-09. This was mainly due to the negative growth in both volume and unit values of manufactured goods. Export volume of food and food articles like rice, coffee, spices, and oilseed cake also fell (though their unit values
Export growth and exchange rate changes

Export growth in US$ terms Export growth in R terms Exchange rate changes
Percentage change
40 30 20 10 0 -10 -20
1999-2000 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2009-10
Year
Figure 7.4
50
Import growth and exchange rate changes

Import growth in US$ terms Import growth in R terms Exchange rate changes
Percentage change
40 30 20 10 0 -10 -20
1999-2000 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
Year
Source: Based on DGCI&S and RBI data.
162
Economic Survey 2010-11 negative unit value growth of machinery and transport equipment coupled with the low quantum growth; negative unit value growth in miscellaneous manufactured articles and mineral fuels and nonfuel crude materials, despite their positive quantum growths. 7.23 The net terms of trade, which measures the unit value index of exports as a proportion of unit value index of imports, improved by 12.3 per cent. This was despite the very marginal positive growth in unit value index of exports as the growth of unit value index of imports was negative for the first time in this decade at 10 per cent. Income terms of trade, reflecting the capacity to import, grew at 11 per cent like in the two previous years. But unlike the earlier two years this was due to the high favourable growth in net barter terms of trade while export volume growth was negative for the first time in this decade. 7.24 Indias share in world merchandise exports has started rising since 2007 albeit by a very slow 0.1 percentage point so as to reach 1.3 per cent in 2009 and 1.4 per cent in 2010 (January-June). This was mainly due to the relatively slow rise or greater fall in world export growth than Indias (Table 7.4). The increase in Chinas share of world exports between 2000 and 2009 at 5.8 percentage points is 50 per cent of the total increase in the share of
increased) mainly due to supply constraints and policy interventions like ban on exports in the case of non-basmati rice. 7.21 A dissection of the export quantum indices region-wise, shows that the negative quantum growth for the first time in the decade was due to the negative quantum growth for almost all the regions, except the South African Development Community, Asia-Pacific Economic Cooperation, and the European Union. In particular, the (-) 8.0 per cent growth for the Association of South East Asian Nations (ASEAN) and the (-) 5.8 per cent growth for North America which are among our major trading partners and the high negative growth of 22 per cent for the Commonwealth of Independent States (CIS) contributed to this fall in quantum of exports. Similarly a dissection of the import unit value indices, region-wise, shows that the negative growth for the first time in the decade was due to the negative growth of unit values in imports from all the regions, with the South African Development Community being the exception. 7.22 The deceleration of imports in rupee terms in 2009-10 was mainly due to the high negative growth of unit value indices even while volume growth was moderately high. This, in turn, was due to the high negative unit value growth in chemicals and related products despite the moderate quantum growth;
Table 7.4 : Export growth and share in world exports : India and other select countries
Value (US$ CAGR billion) 2009 200007 China Korea Hong Kong Russia Singapore Mexico Taiwan India Malaysia Brazil Thailand Indonesia South Africa EDEs World 1202 362 319 303 270 230 204 165 157 153 152 119 63 4572 12,358 25.4 11.6 7.9 18.9 11.7 7.3 7.6 19.8 8.7 16.5 12.1 8.8 12.8 16.9 11.7 Growth rate % Annual 2008 2009 2010 (JanJune) 35.1 34.3 24.8 51.4 37.4 35.4 49.3 35.3 36.9 27.5 36.8 38.1 31.2 26.7 24.0 Share in world exports (%) change in shares 2009/ 2000 5.8 0.2 -0.6 0.8 0.0 -0.8 -0.7 0.7 -0.3 0.4 0.1 -0.1 0.0 11.6 -
2000
2008
2009
2010 (JanJune) 10.0 3.1 2.6 2.7 2.3 2.0 1.9 1.4 1.4 1.3 1.3 1.0 0.5 37.4 100.0
17.3 13.6 5.3 33.1 13.0 7.3 3.5 29.7 19.1 23.2 12.9 18.3 21.3 25.3 15.9
-15.9 -14.3 -12.2 -35.7 -20.2 -21.3 -20.1 -15.2 -24.9 -22.7 -12.0 -14.4 -26.0 -24.4 -22.7
3.9 2.7 3.2 1.7 2.2 2.6 2.3 0.7 1.5 0.9 1.1 1.0 0.5 25.4 100.0
8.9 2.6 2.3 3.0 2.1 1.8 1.6 1.2 1.3 1.2 1.1 0.9 0.5 37.9 100.0
9.7 2.9 2.6 2.5 2.2 1.9 1.6 1.3 1.3 1.2 1.2 1.0 0.5 37.0 100.0
Source : Computed from IMF, International Financial Statistics, November 2010. Note: EDEs stand for emerging and developing economies.
International Trade emerging and developing countries over this period, while Indias rise in share of 0.7 percentage points forms only 6 per cent of the total increase. However, Chinas export growth rate which was above 25 per cent in this decade till 2007, moderated to 17.3 per cent in 2008 and became a negative (-) 15.9 per cent in 2009 due to global recession. It improved to 35.1 per cent in the first half of 2010, following the general trend, as a result of recovery and low base effect. Indias export growth was also negative at (-) 15.2 per cent in 2009 but recovered to 35.3 per cent in 2010 (January-June). While Russias export growth in the first half of 2010 at 51.4 per cent is very high, standing at (-) 35.7 per cent in 2009, its fall had been equally great with Russias share in world exports falling from 3.0 to 2.5 per cent. 7.25 International trade activity in Asia, which rebounded appreciably in the first two quarters of 2010, has tapered in the third quarter. This is partially due to the base effect and partially a reflection of the global trend in trade in Q3 of 2010. Both exports and imports have exhibited almost similar growth patterns with a deceleration in Q3 for most emerging Asian countries, except Hong Kong and Philippines, where growth in exports have improved marginally compared to the earlier quarter or earlier two quarters. 7.26 Indias merchandise imports, also affected by global recession, fell to US$288.4 billion with a
Figure 7.5
450 400 350 300 250 200 150 100 50 0 2006-07 2007-08 2008-09 2009-10 2009-10 (Apr-Dec) 2010-11 (Apr-Dec)
163
Table 7.5 : Quarterly Trade Growth of Major Asian Economies in 2010

Country Y-o-Y Growth (%) Q1
China Hong Kong India Indonesia South Korea Malaysia Philippines Singapore Thailand Exports Imports Total Trade Exports Imports Total Trade Exports Imports Total Trade Exports Imports Total Trade Exports Imports Total Trade Exports Imports Total Trade Exports Imports Total Trade Exports Imports Total Trade Exports Imports Total Trade 28.7 64.8 44.1 25.8 34.2 30.1 36.4 61.6 50.8 44.7 49.9 47.0 35.8 37.4 36.6 40.8 45.4 42.7 42.9 33.3 37.5 38.3 35.3 36.9 31.6 58.1 43.4
Q2
40.9 43.6 42.2 23.9 29.4 26.7 30.1 32.3 31.5 32.5 44.7 37.8 33.1 43.0 37.5 33.2 42.7 37.4 33.3 25.4 28.9 36.6 33.8 35.3 41.5 46.0 43.6
Q3
32.3 27.1 29.8 27.4 23.8 25.5 19.6 31.0 26.5 24.2 29.6 26.6 23.7 24.5 24.1 23.1 29.9 26.1 39.9 21.3 29.9 27.5 22.6 25.2 21.9 30.5 25.9
Source: Computed from WTO data. Note: Y-o-Yyear on year.
negative growth of -5.0 per cent in 2009-10. This was due to the fall in growth of petroleum, oil, and
POL Imports
Value of imports of POL
Value (R thousand crore) & Quantity (MMT)
Quantity of POL
Source : Ministry of Petroleum and Natural Gas (MOPNG).
164
Figure 7.6
140 120
Crude oil price (US$/bbl)

Indian Basket Brent
Crude oil price
100 80 60 40 20 0
Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2006-07
2007-08
2008-09
2009-10
Years
Source : Based on MOPNG data.
lubricant (POL) imports by 7.0 per cent and nonPOL imports by 4.2 per cent. POL import growth was low mainly due to decline in import price of the Indian crude oil import basket by 16.5 per cent despite the increase in quantity by 7.7 per cent (Figure 7.5). 7.27 International oil prices recorded an unprecedented rise during 2008 and remained considerably volatile during the entire ensuing period. The price of the Indian basket of crude oil which moved in tune with international oil prices was also volatile, averaging at US $83.57 per barrel during 2008-09 after reaching an unprecedented US $ 142 per barrel on 3 July 2008 before declining sharply following global recession. The monthly movements in oil prices from 2006-07 to 2010-11 (April-December) clearly reflect this volatility (Figure 7.6). Current oil prices are around US $ 95-100 per barrel with Brent crude price even crossing the US$100 mark in February 2011 and Indian crude oil baset reaching US$ 98.4 per barrel on 11 February 2011.
7.28 Non-POL non-bullion imports declined by 8.6 per cent in 2009-10 reflecting relatively low demand for imports for industrial activity, partly due to low industrial growth and fall in exports resulting in lower demand for imports of inputs needed for exports. Imports also started picking up in the second half of 2009-10, though with a months lag ending the ninemonth continuous negative growth in December 2009. The rebound in imports was much sharper with import growth as high as 73.5 and 78.3 per cent in February and March 2010. This was partly due to base effect and partly due to the pickup in exports and industrial activity. During 2010-11 (AprilDecember) import growth was at 19 per cent accompanied by an increase in both POL and nonPOL imports at 17.7 per cent and 19.6 per cent respectively. Gold and silver imports registered a growth of 8.7 per cent. Non-POL non-bullion imports increased by 21.2 per cent due to recovery in industrial activity and exports. 7.29 Trade deficit (on customs basis) increased by 2.4 per cent to US$ 82 billion in 2010-11 (April
Table 7.6 : Growth in POL trade and non-POL imports (US$ terms)
Total imports 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11(Apr.-Sept.) 1.7 19.4 27.3 42.7 33.8 24.5 35.5 20.7 -5.0 26.0 POL imports -10.5 26.0 16.6 45.1 47.3 29.8 39.8 17.4 -7.0 29.7 POL exports 13.3 21.6 38.5 95.9 66.5 60.1 52.5 -3.0 2.3 66.0 Net POL imports -13.8 26.8 12.9 34.4 41.4 18.9 33.7 28.7 -10.9 15.1 Non- POL imports 7.2 17.0 31.5 41.8 28.8 22.3 33.6 22.2 -4.2 24.5 Gold & silver imports -1.2 -6.4 59.9 62.6 1.5 29.5 21.0 26.4 32.8 12.1 Non-POL, nongold & silver imports 8.5 20.3 28.5 39.0 33.1 21.4 35.2 21.7 -8.6 26.3
Source : Computed from DGCI&S data.
International Trade December) from US$ 80.1 billion in the corresponding period of the previous year. Trade deficit reached a peak of US $ 118.4 billion in 2008-09 and moderated to US $ 109.6 billion in 2009-10. The relatively higher import growth compared to export growth in the first half of 2010-11, raised the alarm of a possible unmanageable current account deficit. With import growth slowing down from October 2010 and exports picking up in November 2010, the fear that the high current account deficit may be due to high merchandise trade deficit is disappearing. Net POL import growth, which has been positive since 200203, became negative at -10.9 per cent in 2009-10 after a gap of seven years. However, during 2010-11 (April-September), it turned positive again with a growth of 15.1 per cent (Table 7.6).
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exports to EU and US markets in 2009-10 and the first half of 2010-11. In the case of primary products, the only major change was the fall in share of Others (see Table 7.7). 7.32 While Indias manufactures exports to the EU suffered a high negative growth in 2009-10, the recovery in the first half of 2010-11 was moderate compared to the robust recovery of manufactures exports to the other two destinations. Among manufactures, the performance of different product groups was varied. In the case of textiles exports to the US and EU, there was a fall in shares with a greater fall in the case of the latter. Negative export growth to the EU continued even in the first half of 2010-11, while there was moderate export growth to the US after three successive years of negative growth. In gems and jewellery also, in the first half of 2010-11, the share of exports to both the US and the EU fell with a higher fall in case of the former. In the case of exports of engineering goods to the US and EU there was a fall in shares with a relatively higher fall in the case of the latter in 2009-10 and a rise in shares in the first half of 2010-11. There was a rise in share of exports to Others with a high growth of 50 per cent in the first half of 2010-11 (see Box 7.2). In the case of chemicals and related products, the share of exports to the US increased by nearly 3 percentage points, while it was stagnant in the case of the EU and fell slightly in the case of Others in the first half of 2010-11 compared to 2008-09. The slowdown in Indias exports to the EU where the recovery from global recession is weak is a cause for concern.
TRADE COMPOSITION
Export composition
7.30 The export basket has seen major compositional changes in this decade with a 10 percentage point fall in shares of manufactures, a 12.6 percentage point gain in shares of petroleum crude and products, and a 3.3 percentage point fall in shares of primary products. This trend continued during the last two years, i.e. from 2008-09 to the first half of 2010-11, with the share of the major category, i.e manufactures, stagnating at 68.9 per cent and even falling in 2009-10; share of primary products falling to 12.7 per cent in the first half of 2010-11 after increasing in 2009-10; and share of petroleum crude and products increasing continuously both in 2009-10 and the first half of 2010-11 to reach 16.9 per cent. Within manufactures, there has been no major compositional change in the last two years. However, compared to 2000-01 the share of engineering goods has increased substantially while that of textiles including readymade garments (RMG) has fallen heavily from 23.6 per cent in 2000-01 to 9.5 per cent in the first half of 2010-11. The chemicals and related products category has made some gains in share, while leather and leather manufactures and handicrafts have lost shares. 7.31 A comparison of the commodity-wise growth of major exports of India to the major destinations in the first half of 2010-11 over 2008-09 shows a fall in the shares of manufactures exports to the USA and EU, while there is a rise in the case of Others. In the case of petroleum, crude, and products, there is a gain in export shares to all the three destinations with a major gain to EU market, with high growth of
Import composition
7.33 The composition of imports also underwent changes in this decade. The share of food and allied products imports which fell to 2.1 per cent in 200809 from 3.3 per cent in 2000-01, increased to 3.7 per cent in 2009-10 and fell to 3.2 per cent in the first half of 2010-11 with slight fall in import shares of edible oils and pulses (Table 7.8). The share of fuel imports, however, remained at around 33 per cent. The most notable change is the sudden rise in share of capital goods imports from 10.5 per cent in 200001 to 15.0 per cent in 2009-10 and again a fall to 13.1 per cent in the first half of 2010-11 due to the see-saw movement in shares of imports of transport equipment. The share of gold and silver and electronic goods in the import basket decreased in the first half of 2010-11 compared to 2008-09 and 2009-10. The share of pearls, precious, and semi-precious stones saw a see-saw movement with negative
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Box 7.2 : Indian Engineering Sector : Need for More Focus

The engineering industry is the largest segment of the Indian industrial sector. It accounts for 3 per cent of Indias GDP with a 30.5 per cent weight in the index of industrial production (IIP); 29.9 per cent share of total investment; and 62.8 per cent share in foreign collaborations. Engineering exports are one of the largest foreign exchange earners for the country and account for over 20 per cent of Indias total exports with around 35 per cent of the engineering exports contributed by the micro, small, and medium enterprises (MSME) sector. Indias export of engineering goods grew at 25.2 per cent (CAGR) during 2000-01 to 2007-08. In 2008-09, the growth moderated to 18.7 per cent and in 2009-10 it declined by 19.6 per cent because of global recession, with its share in total exports falling to 18.2 per cent. In the first half of 2010-11, there was a robust growth of 46.0 per cent partially due to base effect and partially due to global recovery following stimulus measures. The performance of principal categories of engineering items export shows that in 2009-10, all the major categories of engineering goods had negative growth. In the first half of 2010-11, all the major categories like machinery, iron and steel, and other engineering goods registered high growth with the major sub-categories like transport equipment, primary and semi-finished iron and steel, non-ferrous metals and manufactures of metals registering whopping growths of 61.8 per cent, 65.0 per cent, 61.5 per cent, and 40.3 per cent respectively. Only one major sub-category, i.e. machinery and instruments registered moderate growth of 10.5 per cent (see Table 1) Table 1 : Export Performance of Different Engineering Goods Share in Indias Total Exports(%) Engineering Categories 2008-09 2009-10 2009-10 (Apr.Sept.) 12.5 0.2 5.7 6.7 1.9 0.4 1.5 5.1 0.4 0.3 1.0 3.3 0.1 19.5 2010-11 (Apr. Sept.) 13.3 0.1 4.8 8.3 2.3 0.4 1.9 6.2 1.0 0.3 1.3 3.6 0.1 21.8 Growth Rate (%) 2009-10 2010-11 (Apr. Sept.) -13.3 -26.4 -13.3 -12.9 -39.2 -34.2 -40.4 -21.7 -43.1 11.3 5.4 -27.2 -5.9 -19.6 37.7 -1.2 10.5 61.8 63.9 59.1 65.0 59.8 229.4 63.5 61.5 40.3 37.6 46.0
1) Machinery a) Machine Tools b) Machinery & Instruments c) Transport Equipment 2) Iron & Steel a) Iron & Steel Bar Rods, etc b) Primary & Semi-finished Iron & Steel 3) Other Engineering Items a) Ferro Alloys b) Aluminium other than Products c) Non-ferrous Metals d) Manufacture of metals e) Residual Engineering Items Total Engineering Exports Source: DGCI&S
12.2 0.2 5.9 6.1 3.2 0.6 2.6 6.4 0.8 0.3 1.1 4.1 0.1 21.8
11.0 0.2 5.3 5.5 2.0 0.4 1.6 5.2 0.5 0.3 1.2 3.1 0.1 18.2
The major markets for Indian engineering exports are the USA, Singapore, UAE, UK, China, Germany, and Italy. Notably, while there was a fall in growth of Indias engineering exports to most of the markets in 2009-10, its engineering exports to China grew by over 62 per cent. With a 0.8 per cent share of world engineering exports in 2008, India ranks 30thbelow all comparable countries in the global engineering exports market. This low position is primarily attributable to three factors: 1) Low exportsto-GDP ratio: exports-to-GDP ratio of 15 per cent for India vis--vis 27 per cent for comparable countries 2) Low engineering-to-total exports ratio: engineering exports to total exports ratio of 24 per cent for India vis--vis 30 per cent for comparable countries 3) Low technology-intensity of engineering exports: share of high and medium technology products in engineering exports is 62 per cent for India vis--vis 71 per cent for comparable countries. Given Indias current low share of world engineering exports and the significant scope for improvement in competitiveness, there is potential for achieving higher growth in this major sector of world trade.
International Trade Table 7.7 : Composition of exports by major markets
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Percentage share CAGR Growth ratea 2000-01 2008-09 2009-10 2009-10 2010-11 2000-01 2008-09 2009-10 2009-10 2010-11 (Apr.(Apr.to (Apr.(Apr.Sept.) Sept.) 2007-08 Sept.) Sept.) I Primary Products World 16.0 13.9 USA 9.4 7.2 EU 13.1 8.4 Others 19.8 16.7 Agri & Allied Products World 14.0 9.6 USA 9.0 6.0 EU 11.9 6.9 Others 16.8 11.0 Ores and Minerals (excl. coal, incl. mica) World 2.0 4.3 USA 0.4 1.2 EU 1.3 1.4 Others 3.0 5.7 Manufactured Goods World 78.8 68.9 USA 90.6 90.2 EU 86.8 79.3 Others 70.9 62.0 Textiles incl. RMG World 23.6 10.2 USA 27.2 18.4 EU 29.2 18.2 Others 19.8 6.4 Gems & Jewellery World 16.6 15.1 USA 29.3 21.7 EU 11.5 8.3 Others 13.9 16.1 Engineering Goods World 15.7 21.8 USA 13.4 23.9 EU 14.0 25.4 Others 17.2 20.0 Chemical & Related Products World 10.4 12.3 USA 5.7 14.8 EU 9.7 13.0 Others 12.5 11.6 Leather & leather mnfrs World 4.4 1.9 USA 3.7 1.7 EU 11.4 5.9 Others 1.6 0.7 Handicrafts including Handmade Carpets World 2.8 0.6 USA 6.0 1.6 EU 4.4 1.1 Others 0.8 0.2 Petroleum, Crude & Products (incl. coal) World 4.3 14.9 USA 0.0 0.8 EU 0.0 10.6 Others 7.9 18.6 Total Exports World 100.0 100.0 USA 100.0 100.0 EU 100.0 100.0 Others 100.0 100.0 14.9 6.8 8.6 18.0 10.0 5.8 7.1 11.6 4.9 1.0 1.5 6.5 67.2 89.1 73.2 62.0 10.5 18.4 18.5 6.9 16.2 24.2 6.7 17.8 18.2 17.1 20.8 17.6 12.8 17.2 12.5 12.2 1.9 1.5 6.3 0.6 0.5 1.5 1.1 0.2 15.8 2.3 16.9 18.1 100.0 100.0 100.0 100.0 13.4 7.0 9.0 15.7 9.3 5.9 7.4 10.4 4.1 1.1 1.6 5.3 71.1 88.5 77.3 66.5 11.3 19.1 19.9 7.5 17.0 24.2 6.9 18.7 19.5 16.4 22.2 19.2 12.7 15.8 12.4 12.3 2.0 1.6 6.7 0.7 0.5 1.5 1.1 0.2 13.3 2.2 12.6 15.8 100.0 100.0 100.0 100.0 12.7 7.7 8.5 14.5 8.5 6.6 7.1 9.1 4.2 1.1 1.4 5.4 68.9 88.7 73.5 64.5 9.5 16.9 15.7 6.7 14.9 20.3 6.4 16.3 21.8 22.2 22.1 21.7 12.1 17.6 13.0 11.0 1.7 1.4 6.0 0.7 0.5 1.4 0.9 0.2 16.9 2.7 17.4 19.5 100.0 100.0 100.0 100.0 19.7 7.9 12.7 22.8 14.6 4.4 10.6 17.1 38.9 37.9 26.0 40.7 16.7 11.3 15.8 19.3 8.1 7.1 11.4 6.3 15.0 8.9 11.3 19.8 25.2 19.5 27.1 26.0 24.3 26.8 24.4 23.7 8.7 -1.5 9.5 12.6 2.3 -1.7 1.9 10.6 46.8 214.9 683.2 43.7 20.4 12.1 18.3 23.5 1.7 2.9 1.7 1.6 9.7 13.1 6.6 10.0 -12.5 -29.6 -16.7 -11.4 23.1 7.1 20.6 28.9 4.4 -4.8 7.9 6.2 42.1 -7.7 24.8 66.2 18.7 16.1 25.7 16.6 7.2 12.8 7.4 6.0 1.5 16.1 1.0 -2.1 -25.8 -30.6 -18.0 -30.2 -3.0 -76.2 5.7 -5.0 13.6 2.0 13.9 15.7 3.8 -13.5 -5.7 6.6 1.1 -12.1 -6.4 3.8 9.9 -21.1 -2.5 11.9 -5.9 -8.7 -15.4 -1.3 -1.2 -7.6 -6.7 6.9 3.7 2.8 -26.2 8.8 -19.6 -33.9 -25.1 -13.1 0.9 7.4 -11.8 4.0 -5.5 -17.8 -2.1 -9.4 -10.6 -14.7 -7.5 -10.6 2.3 180.3 45.4 -3.9 -3.5 -7.6 -8.4 -1.3 -27.8 -27.4 -23.5 -28.5 -28.4 -25.9 -23.5 -29.5 -26.5 -34.5 -23.3 -26.5 -21.4 -24.9 -29.5 -17.3 -8.4 -14.1 -10.5 -3.9 -20.9 -23.3 -48.5 -15.5 -32.1 -48.7 -41.0 -24.7 -18.1 -9.9 -26.4 -16.9 -20.2 -24.4 -16.9 -26.8 -30.4 -32.2 -29.4 -29.4 -42.5 21.5 -10.9 -47.8 -25.7 -23.5 -26.8 -25.7 23.2 42.6 15.8 23.0 18.7 45.1 17.1 16.6 33.5 29.8 9.5 35.7 26.1 30.4 15.7 28.7 9.7 15.1 -4.1 18.1 14.2 8.9 12.8 15.4 46.0 75.8 21.1 50.2 23.8 45.5 27.5 18.2 14.1 14.5 8.2 31.1 22.6 21.6 3.2 56.4 66.0 61.4 67.9 64.5 30.1 30.1 21.7 32.6
(a)
(b)
II
(a)
(b)
(c)
(d)
(e)
(f)
III
Source : Computed from DGCI&S data
Note : Totals of I, II, and III may not add up to total exports due to some unclassified items. a Growth rate in US dollar terms
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Table 7.8 : Commodity composition of imports

Percentage share Commodity Group 2000-01 2009-10 2009-10 2010-11 (Apr.(Apr.Sept.) Sept.) CAGR Growth rate (per cent) a 2009-10 2009-10 (Apr.Sept.) 2010-11 (Apr.Sept.) 2000-01 2008-09 to 2007-08
Food and Allied Products, of which 1 Cereals 2 Pulses 3 Edible Oils Fuel, of which 4 POL
3.3 0.0 0.2 2.6 33.5 31.3 1.3 10.5 5.9 1.0 1.4 46.3 5.9 9.6 9.3 7.0 100.0
3.7 0.0 0.7 1.9 33.2 30.2 2.3 15.0 7.4 1.1 4.1 42.6 5.2 5.6 10.3 7.3 100.0
3.5 0.0 0.6 1.9 32.5 29.2 2.6 15.9 8.0 1.2 4.2 42.5 5.6 4.3 9.1 8.3 100.0
3.2 0.0 0.5 1.8 33.2 30.1 2.4 13.1 7.3 1.0 2.1 43.2 5.7 7.7 8.1 6.3 100.0
19.3 73.8 42.6 9.7 26.0 25.8 33.3 37.2 33.1 28.7 61.1 22.6 22.1 7.2 20.8 28.1 25.6
9.1 -93.3 -2.4 34.4 17.7 17.4 156.8 -3.9 7.7 27.7 -34.3 23.8 23.0 107.7 26.4 15.3 20.7
69.0 123.1 58.8 62.3 -5.5 -7.0 -48.3 -8.2 -10.2 -15.1 -11.6 1.3 0.0 -2.4 32.8 -10.0 -5.0
59.8 -2.7 47.1 69.7 -39.7 -40.8 -55.4 -20.0 -24.3 -28.9 -18.1 -27.8 -22.9 -47.8 -23.9 -17.7 -30.7
13.7 237.5 4.2 17.6 28.9 29.7 14.4 4.2 15.7 7.4 -36.1 28.0 26.7 128.9 12.1 -5.3 26.0
II
III Fertilizers IV Capital Goods, of which 5. Machinery except electrical & machine tools 6 Electrical machinery 7 Transport equipment V. Others, of which 8 Chemicals 9 Pearls, Precious, Semi-precious Stones 10 Gold & Silver 11 Electronic Goods Total Imports
Source : Calculated from DGCI&S data Note : * Growth rate in US dollar terms. Totals of I, II, III, IV, and V may not add up to total imports due to some unclassified items.
growth in 2009-10 and very high growth (129 per cent) in the first half of 2010-11.
Export diversification
7.34 In 2009, India had a global export share of 1 per cent or more in 48 out of a total of 99 commodities at the two-digit Harmonised System (HS) level, but
a significant share of 5 per cent or more in 12 items (Table 7.9). Among these, three items, pearls, precious stones, metals, coins, etc.; manmade filaments; and ores, slag, and ash had an increase in global share by 0.5 per cent point or more in 2009 over 2008. Six items, which include silk; carpets and other textile floor coverings; lac, gum, resins,
Table 7.9 : Indias Share in World Exports: Commodity-wise (share of more than 5 per cent)
Sl. No. 1 2 3 4 5 6 7 8 9 10 11 12 Product Code Product Label 71 50 57 13 52 53 63 54 67 14 09 26 Pearls, Precious Stones, Metals, Coins, etc. Silk Carpets and Other Textile Floor Coverings Lac, Gums, Resins, Vegetable Saps and Extracts nes Cotton Vegetable Textile Fibres nes, Paper Yarn, Woven Fabric Other made Textile Articles, Sets, Worn Clothing, etc. Manmade Filaments Bird Skin, Feathers, Artificial Flowers, Human Hair Vegetable Plaiting Materials, Vegetable Products nes Coffee, Tea, Mate, and Spices Ores, Slag, and Ash Change in Share 2009/2008 4.4 -0.5 0.0 -1.8 -0.9 0.2 0.1 1.4 0.1 -0.4 -0.3 0.5
2005 8.2 12.5 9.0 11.4 5.5 4.8 7.0 2.5 3.4 5.1 4.7 6.8
2006 6.5 11.4 9.6 10.6 6.8 4.2 6.4 2.6 4.4 4.5 5.0 4.8
2007 6.6 10.5 8.7 9.5 8.5 4.6 5.7 2.9 5.0 4.8 5.2 4.8
2008 5.7 10.2 8.4 9.7 8.6 6.1 5.4 3.7 5.0 5.4 5.3 4.5
2009 10.1 9.7 8.4 7.9 7.7 6.3 5.5 5.1 5.1 5.1 5.1 5.0
Source : Calculated from National Centre for Trade Information (NCTI) data based on UN-ITC Trade Map Data 2009.
International Trade vegetable saps and extracts; cotton; vegetable plaiting materials, vegetable products; and coffee, tea, mate, and spices, lost global shares in 2009 over 2008. Noticeable is the near doubling in share of pearls, precious stones, metals, coins, etc., with growth in trading activity, and the fall of nearly 2 percentage points in lac, gums, resins, vegetable saps, and extracts, due to crop failures coupled with competition from substitute products and competing countries. Of the remaining 38 items, 11 lost their shares in 2009 over 2008.
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in 2009-10 and the first half of 2010-11. This is mainly due to Indias exports and imports of gems and jewellery items followed by POL to the UAE. In both 2009-10 and 2010-11(April-September), Indias exports to the UAE were higher than imports, while Indias exports to China are lower than imports. The high and rising trade with the UAE may also be due to circular trading to some extent. 7.36 Export-import ratios in Table 7.10 show that among its top 15 trading partners, India had bilateral trade surplus with five countries, namely the UAE, USA, Singapore, the UK, and Hong Kong in 2009-10 and the first half of 2010-11. Indias trade deficit with the USA and Singapore in 2007-08, turned into trade surplus thereafter. The export-import ratio fell in 200809 in the case of Hong Kong, though it recovered in 2009-10. Indias export-import ratio in the case of China is not only low but has been stagnating at around 0.3 though it increased to 0.4 in 2009-10, to again fall to 0.3 in the first half of 2010-11. 7.37 The UAE has displaced the USA as the topmost destination of Indias exports in 2008-09 and 2009-10 with an export share of 13.2 per cent and 13.4 per cent respectively. In 2009-10, Indias exports to the top two destinations, i.e. the UAE followed by the USA, registered growth of (-)2.1, and (-)7.6, per cent respectively.
DIRECTION
OF
TRADE
7.35 The directional pattern of Indias trade after changing in the first half of this decade with the share of the top 15 trading partners increasing by 5.5 percentage points to 60.3 per cent in 2007-08 compared to 2000-01, has not changed much after that with the top 15 countries continuing to hold the share of around 60 per cent even in 2009-10 and 2010-11 (April-September) (Table 7.10). In the first half of 2010-11, their share was 59.8 per cent. An interesting development in the direction of Indias trade is that the USA which was in first position in 2007-08 has been relegated to third position in 200809, with the UAE becoming Indias largest trading partner, followed by China. This position continued
Table 7.10 : India's trade and export-import ratio with major trading partners
Share in total trade
2007-08 2008-09 2009-10 2009-10 (AprSept) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 UAE China USA Saudi Arabia Germany Switzerland Singapore Australia Iran Hong Kong Korea RP Indonesia UK Japan Belgium Total (1 to 15) Total Trade 7.0 9.2 10.1 5.6 3.6 2.5 3.7 2.2 3.1 2.2 2.1 1.7 2.8 2.5 2.1 60.3 100.0 9.9 8.6 8.1 5.1 3.8 2.6 3.3 2.6 3.0 2.7 2.6 1.9 2.6 2.2 2.1 61.0 100.0 9.3 9.1 7.8 4.5 3.4 3.3 3.0 3.0 2.9 2.7 2.6 2.5 2.3 2.2 2.1 60.5 100.0 8.8 9.1 8.6 4.4 3.6 2.7 3.2 2.9 3.2 2.6 2.4 2.7 2.4 2.2 2.0 60.9 100.0
Export/Import ratioa
2010-11 2007-08 2008-09 2009-10 2009-10 (Apr(AprSept) Sept) 9.9 9.3 7.6 4.5 3.0 3.2 3.0 2.4 2.2 3.0 2.4 2.5 2.1 2.4 2.4 59.8 100.0 1.2 0.4 1.0 0.2 0.5 0.1 0.9 0.1 0.2 2.3 0.5 0.4 1.4 0.6 1.0 0.6 0.6 1.0 0.3 1.1 0.3 0.5 0.1 1.1 0.1 0.2 1.0 0.5 0.4 1.1 0.4 0.8 0.6 0.6 1.2 0.4 1.2 0.2 0.5 0.0 1.2 0.1 0.2 1.7 0.4 0.4 1.4 0.5 0.6 0.6 0.6 1.5 0.3 1.0 0.3 0.5 0.0 1.2 0.1 0.2 2.3 0.4 0.4 1.4 0.5 0.6 0.6 0.6 2010-11 (AprSept) 1.2 0.3 1.4 0.2 0.5 0.0 1.3 0.1 0.2 1.4 0.3 0.5 1.5 0.7 0.6 0.6 0.7
Source: Computed from DGCI&S data. Note: *A coefficient of export and import ratio between 0 and 1 implies that Indias imports are greater than exports and if the coefficient is greater than one, India exports more than what it imports.
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Economic Survey 2010-11 brought out by the WTO in 2009, world export and import growth in services fell to (-)12 per cent in 2009. The decline was more or less similar in most of the major regions like North America, Europe, and Asia. Import growth in commercial services fell in the US, EU, and Japan and was at (-)9 per cent,(-)13 per cent, and (-)10 per cent, respectively. While Indias import growth and export growth of commercial services were at (-)9 per cent and (-)15 per cent respectively, those of China were at 0 per cent and (-)12 per cent respectively. While India ranks 21st in world merchandise exports in 2009 compared to China which is in first position, in commercial services exports it ranks 12th compared to China at fifth rank. 7.42 The three broad categories of commercial services, namely transport, travel, and other commercial services witnessed a decline in export growth in 2009 (Table 7.11). Among top exporters/ importers of services (with EU-27 taken as a single unit) India ranked among the first five countries in the export of other commercial services, computer and information services, communication services, and personal, cultural and recreational services in 2009/2008 (Table 7.12). 7.43 As per the WTOs International Trade Statistics 2010, in 2009, all commercial services sectors were affected by the global crisis but not to the same extent. Transport services growth fell mirroring the fall in world trade. Financial services were severely hit due to the turmoil in the financial markets resulting in world exports of financial services declining by 15 per cent in 2009 though they began slowly to recover in the last few months of the year. Europes financial sector was the most affected by the economic crisis. The EUs exports of financial services plummeted by 19 per cent, to US$ 133 billion in 2009. In the United States, the second largest world exporter of financial services, as well as in Hong Kong, the decline was by 7 per cent. At the start of 2010, there was an upward trend
7.38 Region-wise, over half of Indias exports (53.5 per cent) in the first half of 2010-11 were to Asia (including ASEAN), up from around 40 per cent in 2001-02. During 2010-11 (April-September), exports to Asia (including ASEAN) increased by 29.2 per cent and to Europe by 23.3 per cent. Indias merchandise exports to South Asian countries increased by 29.2 per cent. 7.39 In 2010-11 (April-September), Asia and ASEAN continued to be the major source of Indias imports accounting for 61.5 per cent of the total. Country-wise, China remained the largest source with a 12 per cent share in Indias total imports followed by the UAE (7.5 per cent), Saudi Arabia (6 per cent), and USA (5.9 per cent). Indias import growth from 13 of its top 15 trading partners was positive, the USA and Iran being the exceptions.
SERVICES TRADE
7.40 In recent years, the focus of services trade has shifted away from just facilitating trade in goods as the sector has emerged as an independent entity in itself with services trade in the four supply modes opening up new opportunities. The integration of telecommunication and computer technology has made virtually all services tradable across borders. Virtually all commercial services are now tradable across borders. The trend towards globalization, reinforced by liberalization policies and the removal of regulatory obstacles, has fuelled steady growth of international investment and trade in services.
World Trade in Services

7.41 The US$ 3.35 trillion world export of commercial services was dominated by the developed countries in 2009, with the exception of India and China which were also among the top 12 exporters. As in the case of merchandise trade, India has improved its rank in commercial services trade. As per the latest International Trade Statistics 2010
Table 7.11 : World exports of commercial services trade by major category, 2008
Value (US$ billion) 2009 Commercial services Transport Travel Other commercial services
Source : WTO
Annual percentage change 2000-09 9 8 7 12 2007 20 20 15 23 2008 13 17 10 12 2009 -12 -23 -9 -9
3350 700 870 1780
International Trade Table 7.12 : Indias sector-wise Rank and Share in World Exports / Imports of Services
Rank 2009 Transportation Services Travel Services Other Commercial Services Communication Services* Construction Services* Insurance Services* Financial Services* Computer and Information Services* Other Business Services* Personal, Cultural and Recreational Services* Export Import Export Import Export Import Export Import Export** Import** Export Import Export Import Export** Import** Export** Import** Export** Import 13 13 14 4 8 4 11 12 13 7 7 7 5 2 4 6 6 5 12 Share 2000 0.6 2.1 0.7 2009 1.5 4.2 1.2 3.7 2.4 0.6 1.5 1 1.5 5.4 2.1 1.8 1.3 0.6 1.4 7.7 9.4
171
Per cent Change 2009 -5 -17 -10 -17 0 43 -11 -5 178 17 -1 163 19 -42 40 -6
Source: Compiled from WTO, International Trade Statistics 2010. Note : * data relate to 2008; ** WTO Secretariat estimates.
in exports of financial services. Estimates for the first quarter of 2010 indicate recovery across all countries. Construction, the most dynamic sector in 2008, also saw its growth fall sharply. Computer and information services as well as royalties and licence fees were more resilient. World exports of computer and information services decreased by 6 per cent in 2009, after record growth of 23 per cent in 2008. While exports of computer and information services fell by 9 per cent in Europe and by 14 per cent in the CIS, in North America, they stagnated and in Asia, fell by 2 per cent. In 2009, world travel exports fell by 9 per cent, reflecting the worldwide drop in international tourism with tourist arrivals down by 4 per cent. The decline was most pronounced in Europe (-13 per cent), North America (-11 per cent), and the CIS (-22 per cent). Asian economies were less affected with a 3 per cent decline. World tourism is recovering rapidly with forecasts from the World Tourism Organization indicating that the number of international tourists will increase by 3-4 per cent in 2010. 7.44 In commercial services imports, India moved from 13th position in 2005 and 2008, to 12th position in 2009, with a 2.5 per cent share. The United States, the European Union, China, and Japan are the major importers of services in the world.
Indias Services Trade

7.45 India and China are the two important developing countries which are making rapid strides in the services trade sector. However, the pattern of growth of the different services in India differs from that of other countries. While other commercial services is the major category for most of the top service exporters, in the Indian case its share is proportionately higher than in that of others at 77.4 per cent in 2008 compared to 56.5 per cent for the USA, 54.8 per cent for the EU, 45.9 per cent for China, and 60.6 per cent for Japan. Thus this category containing many dynamic services is important for India. The share of travel at 11.5 per cent is relatively lower than in most other countries. The shares of the US and China are more than double that of India. Even in transportation, Indias share is less than half that of many leading exporters of services, partly reflecting Indias lower volume of merchandise trade and partly the relatively lower participation of Indias shipping sector in Indias export trade. Thus the composition of services exports highlights the need to pay special attention to developing shipping and travel services in India. The composition of Indias imports compared to other service trading countries also shows the relatively higher importance of other commercial services particularly in 2009-10.
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Economic Survey 2010-11 The revival of this sector which had a CAGR of 33.9 per cent during 2000-01 to 2007-08 is a good sign, though it is partially due to the base effect. The increasing share of business services in nonsoftware services exports is noteworthy. Both business services and financial services exports registered very high growth of 111.4 per cent and 64.9 per cent. More than the base effect, this was due to the revival of these exports, following global recovery (Table 7.13). The fall in share of travel services from 21.5 per cent in 2000-01 to 11.4 per cent in the first half of 2010-11 is a cause of concern. This reflects the fact that we have not yet tapped the vast tourism potential of India.
Indias Services Exports

7.46 India, is moving towards a services-dominated GDP growth with a 10 per cent CAGR for services which is higher than the 6.7 per cent for non-services during 2004-05 to 2009-10. It is also moving towards a services-dominated export growth with a CAGR of 16.7 per cent for services during 2004-05 to 200910 (the CAGR was 28.7 per cent during 2000-01 to 2006-07) which is slightly higher than the 16.4 per cent for merchandise exports during the corresponding period. Services exports reached US$ 106 billion in 2008-09 with a moderate growth of 17.3 per cent over the previous year. As a result of global recession, they declined to US $ 95.8 billion in 2009-10 with a negative growth of (-)9.6 per cent. The miscellaneous item of services exports with a nearly three-fourths share of total services exports, slightly improved its share in the first half of 201011 with a growth of 28.2 per cent. The share of software services declined to 45.7 per cent in the first half of 2010-11 from 50.8 per cent in the corresponding period of 2009-10. This was a result of moderate growth of 14.7 per cent in the first half of 2010-11 and the revival of non-software services exports. Non-software services exports which had registered a high negative growth of (-)41.2 per cent in 2008-09 increased their share to 29.5 per cent with the high growth of 56.9 per cent.
Indias Services Imports

7.47 Imports of commercial services have become important in recent years reaching US$ 52 billion in 2008-09 and US $ 60 billion in 2009-10. But it had low growth of 1.1 per cent in 2008-09 and moderate growth of 15.3 per cent in 2009-10 (Table 7.14). Business services are the most important category of services imports, followed by transportation and travel. Import growth of business services declined by (-)7.5 per cent in 2008-09 picked up by 17.8 per cent in 2009-10. It grew robustly at 62.9 per cent in the first half of 2010-11. Import growth of transportation and travel which fell in 2009-10 turned positive in the
Table 7.13 : India's Exports of Services

Sl. No. Commodity Groups Percentage share CAGR Growth rate* April2000-01 AprilSeptember to September 2000- 2009- 2009- 20102007- 2008- 2009- 2009- 201001 10 10 11 08 09 10 10 11 21.5 12.6 1.7 4.0 60.3 39.0 21.3 2.1 2.1 7.0 100.0 12.4 11.7 1.7 0.5 73.8 51.9 21.9 11.9 3.9 1.3 100.0 11.5 11.6 1.8 0.5 74.7 50.8 24.0 11.6 4.2 1.7 100.0 11.4 11.5 1.5 0.4 75.2 45.7 29.5 19.3 5.5 1.3 100.0 18.3 25.5 29.4 -9.2 31.6 30.2 33.9 75.0 37.5 11.3 27.8 -4.0 12.9 -13.2 17.6 22.3 14.9 33.5 10.9 37.7 -4.6 17.3 8.9 -1.2 12.7 13.2 -13.8 7.4 -41.2 -38.9 -15.6 -46.5 -9.6 -5.2 -10.3 6.2 -5.2 -16.4 -8.2 -36.6 -46.4 -19.2 -42.0 -16.8 26.2 26.6 10.4 9.5 28.2 14.7 56.9 111.4 64.9 2.3 27.4
1 2 3 4 5
Travel Transportation Insurance GNIE Miscellaneous a) Software Services b) Non-software Services of which: i) Business Services ii) Financial Services iii) Communication Services Total Services Exports
Source : Calculations based on RBI data. Note : * Growth rate in US dollar terms. GNIE= Government not included elsewhere.
International Trade Table 7.14 : India's Imports of Services

Sl. No. Commodity Groups
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Percentage share CAGR Growth rate* April2000-01 AprilSeptember to September 2000- 2009- 2009- 2010- 2007- 2008- 2009- 2009- 201001 10 10 11 08 09 10 10 11 19.2 24.4 1.5 2.2 52.6 4.1 48.6 7.0 13.5 0.9 100.0 15.6 19.9 2.1 0.9 61.5 2.4 59.1 30.1 7.7 2.3 100.0 17.8 20.3 2.7 0.9 58.3 3.4 55.0 32.1 8.0 2.4 100.0 14.0 18.4 1.9 1.0 64.7 3.2 61.5 35.5 9.1 1.4 100.0 18.6 18.3 24.7 2.4 21.1 28.2 20.4 48.9 6.8 31.4 19.8 1.8 11.3 8.3 111.2 -4.8 -23.6 -2.4 -7.5 -5.6 26.5 1.1 -0.9 -6.9 13.8 -33.7 32.5 -42.7 40.1 17.8 56.9 24.6 15.3 -9.9 -29.4 22.9 13.2 9.2 -53.4 18.9 10.9 24.2 13.0 -4.7 15.6 33.2 6.3 49.4 63.1 39.9 64.5 62.9 68.0 -14.2 46.9
1 2 3 4 5
Travel Transportation Insurance GNIE Miscellaneous a) Software Services b) Non Software Services of which: i) Business Services ii) Financial Services iii) Communication Services Total Services Imports
Source : Calculations based on RBI data. Note : *Growth rate in US dollar terms. GNIE= Government not included elsewhere.
first half of 2010-11. Financial services imports grew by 68 per cent.
Table 7.15 : Indias Exports, Imports and Balance of Trade in Services (US $ billion) Exports 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2009-10 (April-September) 2010-11 (April-September) 16.3 17.1 20.8 26.9 43.2 57.7 73.8 90.3 106.0 95.8 43.8 55.7 Imports 14.6 13.8 17.1 16.7 27.8 34.5 44.3 51.5 52.0 60.0 24.7 36.2 Balance 1.7 3.3 3.6 10.1 15.4 23.2 29.5 38.9 53.9 35.7 19.1 19.5
Balance of Trade in Services

7.48 There is growing concern about a high merchandise trade deficit coupled with inflation derailing the growth momentum. However the less known fact is that the falling services trade surplus is adding to the woes on the current account deficit front, instead of acting as a cushion as was the case earlier. Services trade surplus which increased steadily in this decade to reach US$53.9 billion in 2008-09, fell drastically in the global crisis year of 2009-10 to US$ 35.7 billion. This was caused by the collapse in exports of non-software services, particularly business services, the slow growth of software services, and the rise in import of nonsoftware services, particularly business and financial services. The low service trade surplus situation continued in the first half of 2010-11. This was due to the sudden rise in imports of non-software services, particularly business and financial services which overshadowed the rise in exports of business and financial services. If this situation continues in the second half of this year and coming years, then we have to reconcile to the fact that the hitherto extra cushion provided by the services sector for trade balance will not be available. The impact on growth of the rising import of business and financial services also needs to be evaluated (see Table 7.15).
Source : Computed from RBI data.
Policies and Barriers to Trade in Services

7.49 In the light of the global recession, some measures were taken to help the services sector. These include extension of sunset clauses for Software Technology Parks of India (STPIs) and
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Economic Survey 2010-11 Levy obligation in respect of all imported raw sugar and white/refined sugar removed. Export of non-basmati rice, edible oils (except coconut oil and forest based oil), and pulses (except Kabuli chana) banned. Minimum export price (MEP) used to regulate exports of onion (at $1200 per tonne for December 2010) and basmati rice ($900 PMT). Export of onion (all varieties) including Bangalore rose onions and Krishnapuram onions fresh or chilled, frozen, provisionally prepared, or dried but excluding onion cut, sliced, or broken in powder form not permitted with effect from 22 December 2010 and until further orders. Full exemption from basic custom duty provided to onions and shallots with effect from 21 December 2010. Consequently, these items also exempt from special additional duty of 4 per cent, education cess, and secondary and higher education cess. The exemption is open ended and does not carry a validity clause prescribing a terminal date.
export-oriented units (EOUs) up to 2010-11 and doubling of duty free entitlement to hotels under the served from India scheme. A coordinated and synchronized effort is needed towards the services sector as at present services activities are dispersed and fall within the purview of different departments of the Government (also see Box 7.6). There are also many barriers to trade in services. These include the State-level licensing and the Buy American provisions in the case of business services and IT services in the US; the requirement of the Office of the Comptroller of Currency (OCC) in the US and some State banking supervisors to maintain asset pledges in addition to the paid up capital they maintain in their home country in the case of financial services; the fragmentation of the US insurance market into 56 different jurisdictions and direct discrimination on a number of fronts; restrictions in the case of transport and related services and the recent protectionist policies in the US and other economies that deny market access to other countries. There is need to negotiate at bilateral and multilateral levels for the removal of the market access barriers to trade in services.
TRADE POLICY
Recent Trade Policy measures
7.50 Trade policy measures taken by the Government and the RBI in 2009-10 and 2010-11 focused on reviving exports and export-related employment. The Government followed a mix of policy measures including fiscal incentives, institutional changes, procedural rationalization, and enhanced market access across the world and diversification of export markets. Improvement in infrastructure related to exports; bringing down transactions costs, and providing full refund of all indirect taxes and levies, were the three major areas of focus (see Box 7.3). 7.51 Some of the trade policy measures to check inflation in the country are the following: Import duties reduced to zero for rice, wheat, pulses, edible oils (crude), butter and ghee and to 7.5 per cent for refined and hydrogenated oils and vegetable oils; Import of raw sugar allowed at zero duty under open general licence (O G L). Import of white/refined sugar allowed. The facility has been extended up to 31 December 2010 without any quantitative cap.
Policy for Promoting State-wise Exports

7.52 State-wise exports as reflected in the data on state of origin of exports of goods show clear domination of Maharashtra and Gujarat. Tamil Nadu, Karnataka, and Andhra Pradesh fall in the second rung of exporting States. In 2009-10, the growth of exports from all the States was negative, except Haryana, Kerala, Goa, and Rajasthan. High negative export growth was registered by Delhi, followed by Uttar Pradesh, West Bengal, and Karnataka. In the first half of 2010-11 export growth to all destinations was positive except for Kerala (Table 7.16) To encourage exports outlay under the Assistance to States for Developing Export Infrastructure and Allied Activities (ASIDE) scheme for the Eleventh Five year plan was increased to ` 3793 crore.
Market Access Initiative (MAI) and Market Development Assistance (MDA) Schemes
7.53 The MAI scheme was launched in 2003 to act as a catalyst for Indias exports on a sustained basis. The scheme is formulated on a focus product focus country approach to evolve specific strategy for specific market and specific product. To further enable better coordination, synergising, and facilitating of Indias export promotion activities by the Indian Missions abroad, a Challenge Fund has
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Box 7.3 : Trade Policy Measures

Market and Product Diversification and Expansion of Markets: 27 new markets added under the Focus Market Scheme (FMS) with incentive of duty credit scrip at 3 per cent of exports. Market Linked Focus Product Scheme (MLFPS) with incentive of duty credit scrip at 2 per cent, has been significantly broadened by inclusion of a large number of products linked to their markets. All of Africa, Latin America, and a large part of Oceania covered under the FMS and MLFPS (13 countries added under the MLFPS at the time of release of the FTP 2009-14 in August 2009 and two countries added in January 2010). The incentive available under the FMS has been raised from 2.5 per cent to 3 per cent; and for the Focus Product scheme (FPS) and MLFPS from 1.25 per cent to 2 per cent; and Special Focus Products at 5 per cent. Additional benefit of 2 per cent bonus, over and above the existing benefits of 5 per cent / 2 per cent under the FPS allowed for about 135 existing products, which have suffered due to recession in exports. Major sectors include all handicrafts items, silk carpets, toys and sports goods (all of which were earlier eligible for 5 per cent benefits); leather products and leather footwear, handloom products, and some of engineering items including bicycle parts and grinding media balls (all of which were earlier eligible for 2 per cent benefit). 256 new products added under the FPS (at eight-digit level), which became entitled for benefits at 2 per cent of FOB value of exports to all markets. Major sectors / product groups are engineering, electronics, rubber and rubber products, other oil meals, finished leather, packaged coconut water, and coconut shell worked items. Instant tea and CSNL cardinol included for benefits under the Vishesh Krishi Gram Upaj Yojana (VKGUY) at 5 per cent of FOB (free on board) value of exports. Nearly 300 products (at eight-digit level) from the readymade garment sector incentivized under the MLFPS for a further six months from October 2010 to March 2011 for exports to 27 EU countries. The zero-duty Export Promotion Capital Goods (EPCG) Scheme and Status Holder Incentive Scrip (SHIS) scheme introduced in 2009 for limited sectors and valid only for two years initially, extended by one more year till 31 March 2012 and the benefit of the scheme expanded to additional sectors. Three additional Towns of Export Excellence (TEEs) announced, taking the list to 24. Interest subvention of 2 per cent extended up to March 2011 for certain labour-intensive sectors of exports. Interest rates on export credit in foreign currency reduced to LIBOR + 200 bps in February 2010 from the earlier LIBOR+350bps. Sections 10A and 10B (sunset clauses for STPI and EOUs schemes respectively) extended for the financial year 2010-11. Anomaly in Section 10AA relating to taxation benefit of unit vis--vis assessee removed; FTP also provided fillip to the services sector (hotels) by doubling duty-free entitlement under the Served From India Scheme (SFIS) from 5 per cent to 10 per cent of foreign exchange earnings. Duty Entitlement Passbook (DEPB) Scheme extended beyond 31 December 2010 till 30 June 2011. Time period of export realization for non-status holder exporters increased to 12 months, on par with the status holders. This facility has been extended up to 31 March 2011. Advance Authorization for Annual Requirement now exempted from payment of Anti-dumping and Safeguard duty. Value limit on duty-free import of commercial samples enhanced from Rs 1 lakh to Rs 3 lakh per annum. DEPB and Freely Transferable Incentive Schemes provisionally allowed without awaiting receipt of bank realization certificate (BRC). Export obligation period under Advance Authorization Scheme enhanced from 24 months to 36 months without payment of composition fee. Facilitation of Trade through various Electronic Data Interchange (EDI) initiatives, namely online filing and processing of various authorizations to reduce transaction cost and time.
Support for Technological Upgradation
Availability of Concessional Export Credit:
EOUs/STPIs
Services
Others
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Table 7.16 : State-wise Exports of Top 15 States

(US$ million) (April-September) Sl. No. State 1 2 3 4 5 6 7 8 9 11 13 14 15 Maharashtra Gujarat Tamil Nadu Karnataka Andhra Pradesh Kerala Haryana Uttar Pradesh Delhi Rajasthan Punjab Goa Madhya Pradesh Total exports 2008-09 44,661 40,268 18,538 12,295 9896 4752 4791 7570 8466 5582 3313 3351 3015 1781 2945 1,85,295 2009-10 43,351 38,771 16,083 9092 8558 5842 5678 5523 5187 4197 3338 3230 2732 2481 2357 1,78,751 2009-10 20,275 16,341 7899 4206 4594 2783 2653 2762 2575 1826 1434 1233 1260 557 916 80,950 2010-11 23,405 24,593 8404 5011 6620 2647 3575 3848 2933 2821 1853 2736 1904 1074 1147 1,05,352 Share(%) 2009-10 24.3 21.7 9.0 5.1 4.8 3.3 3.2 3.1 2.9 2.3 1.9 1.8 1.5 1.4 1.3 100.0 Growth rate* (%) 2009-10 -2.9 -3.7 -13.2 -26.0 -13.5 22.9 18.5 -27.0 -38.7 -24.8 0.8 -3.6 -9.4 39.3 -20.0 -3.5 2010-11 (Apr-Sept.) 15.4 50.5 6.4 19.1 44.1 -4.9 34.8 39.3 13.9 54.5 29.2 121.9 51.1 92.7 25.2 30.1
10 West Bengal 12 Orissa
Source : DGCI&S. * Growth rate in US $ terms
recently been set up. Individual Missions would bid for support from the Fund by submitting innovative export promotion project proposals. Priority would be given to focused, specific projects with quantifiable/tangible results. During 2010-11 (up to 31 December 2010), a total of 205 projects/export promotion events and eight market studies/export promotion surveys were approved for assistance under this scheme. 7.54 To stimulate and diversify the countrys export trade, the Marketing Development Assistance (MDA) Scheme is under operation. During the year 201011 up to 31 December 2010, a total of 411 projects/ export promotion events have been approved for assistance.
April 2000. SEZs in India functioned from 1 November 2000 to 9 February 2006 under the provisions of the Foreign Trade Policy and fiscal incentives were made effective through the provisions of relevant statutes. The SEZ Act 2005, supported by SEZ Rules, came into effect on 10 February 2006, providing for drastic simplification of procedures and for single window clearance on matters relating to Central as well as State Governments. The SEZ Rules provide for different minimum land requirements for different classes of SEZs. 7.56 In addition to seven Central Government SEZs and 12 State/private-sector SEZs set up prior to the enactment of the SEZ Act 2005, formal approval has been accorded to 580 proposals out of which 374 SEZs have been notified. The performance of SEZs has been reasonably good despite some criticism (see Box 7.4)
Special Economic Zones (SEZs)

7.55 India recognized early the effectiveness of the export processing zone (EPZ) model in promoting exports, with Asias first EPZ set up in Kandla in 1965. With a view to overcome the multiplicity of controls and clearances; absence of world-class infrastructure; and an unstable fiscal regime to attract larger foreign investments in India, the Special Economic Zones (SEZs) Policy was announced in
Tariff Reforms
7.57 The global recession forced a review of the tariff reform process. The pause button was pressed on peak duties in the last two years with the highest rate on manufactures continuing at 10 per cent. The only movement in tariffs was in the area of free trade
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Box 7.4 : Performance of SEZs in India

SEZs are becoming increasingly important in Indias exports. The performance of SEZs is mainly examined in three areas, exports, employment, and investment. Exports: A total of 130 SEZs are already exporting. Out of this 75 are information technology (IT)/ IT enabled services (ITES), 16 multi-product and 39 other sector specific SEZs. The total number of units in these SEZs is 3139. The physical exports from the SEZs have increased by 121 per cent to ` 2,20,711 crore in 2009- 10 with a CAGR of 58.6 per cent during 2003-04 to 2009-10 compared to the CAGR of 19.3 per cent for total merchandise exports of the country for the same period. When the whole world including India was reeling under the effects of the global recession, growth in exports from SEZs was 121 per cent in 2009-10 compared to a paltry 0.6 per cent growth in total exports from India. Exports during the first three quarters of the current year have been to the tune of ` 2,23,132 crore. The share of SEZs in Indias total exports has increased consistently from 4.7 per cent in 2003-04 to 26.1 per cent in 2009-10 and 29.7 per cent in the first three quarters of 2010-11 (see Table 1). Table 1 : SEZs Exports and Indias Total Exports: A Comparison Year Exports from SEZs Value (` crore) 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 (Apr.-Dec.) 13,854 18,314 22,840 34,615 66,638 99,689 2,20,711 2,23,132 Growth (%) 39.0 32.2 24.7 51.6 92.5 49.6 121.4 Exports from India Value (` crore) 2,93,367 3,75,340 4,56,418 5,71,779 6,55,863 8,40,755 8,45,534 7,51,633 27.9 21.6 25.3 14.7 28.2 0.6 23.4 Growth (%) Share of SEZs Exports in Total Exports 4.7 4.9 5.0 6.1 10.2 11.9 26.1 29.7
One of the criticisms SEZs face is that exports are mainly from the old SEZs which were formerly free trade zones (FTZs) and not from greenfield SEZs. It is interesting to know that not only have many greenfield SEZs started exporting but also the exports of new SEZs, i.e. SEZs notified under the SEZ Act 2005, have grown rapidly over the years resulting in the highest share of 53.4 per cent for this category in 2009-10 compared to Central Government SEZs and State Government /private SEZs established prior to the SEZ Act 2005 (see Table 2). Table 2 : Exports from New and Old SEZs 2005-06 Central Govt SEZs Value (in ` crore) Growth (%) Share (%) State Govt/Pvt SEZs Established prior to SEZ Act, 2005 Value (in ` crore) Growth (%) Share (%) SEZs notified under SEZ Act, 2005 Value (in ` crore) Growth (%) Share (%) 0.4 19,657 86.1 3183 13.9 25,358 29 73.3 9134 187 26.4 122 39,275 54.9 58.9 22,167 142.7 33.3 5195 4158.2 7.8 46,985 19.6 47.1 31,640 42.7 31.7 21,064 305.5 21.1 58,037 23.5 26.3 44,729 41.4 20.3 1,17,946 459.9 53.4 2006-07 2007-08 2008-09 2009-10
Employment: Out of the total employment of 6,44,073 persons in SEZs, an incremental employment of 5,09,369 persons was generated after February 2006 when the SEZ Act came into force. At least double this number obtains indirect employment outside the SEZs as a result of the operations of SEZ units. This is in addition to the employment created by the developer for infrastructure activities. (Contd.....)
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Box 7.4 : Performance of SEZs in India (Contd....)

Investment: The total investment in SEZs till 31 December 2010 is approximately ` 1,95,348 crore including ` 1,91,313 crore in the newly notified zones. In SEZs 100 per cent FDI is allowed through automatic route.The Governments role has been more as a facilitator by fast tracking the approvals rather than providing any direct monetary support. SEZs being set up under the SEZ Act 2005 are primarily private investment driven. Issues: Some important issues relating to SEZs are the following: Direct Tax Code (DTC) Impact: The issue is related to deadlines for profit-linked deductions: As per the DTC, SEZ developers will be allowed profit-linked deductions for all SEZs notified on or before 31 March 2012. Units in SEZs that will commence commercial operations by 31 March 2014 too will be allowed profit-linked exemptions. Developers and units notified after these dates will only have investment-linked exemptions and not profit-linked exemptions. There is concern about these dates among developers and units particularly in the big SEZs with long gestation time. Goods and Services Tax (GST): As per the GST model being considered, GST will be levied on imports with necessary constitutional amendments. Though full and complete set off would be available on the GST paid on import of goods and services, after the introduction of the GST, tax exemptions, remissions, etc. related to industrial incentives should be converted, if at all needed, into cash refund schemes after collection of tax, so that the GST scheme on the basis of a continuous chain of set-offs is not disturbed. Regarding special Industrial Area Schemes, such exemptions, remissions would continue up to legitimate expiry time both for the Centre and the States. However, any new exemption, remission, or continuation of an earlier one would not be allowed. In such cases, the Central and State Government could provide reimbursement after collecting the GST. Issue of Power generation and distribution: Another area of concerns is the generation and distribution of power by the SEZ developers/units. While one opinion is that it should be left to the entrepreneur to decide whether he would like to provide power as an infrastructure, as defined in the SEZ Act, or set up a unit to sell power as a good, another view is that power cannot be an infrastructure and can be only a good to be generated and distributed by the unit. It may be worth considering appropriate policy to encourage power generation and distribution. Coordination issues: The Directors, STPI, have been declared Development Commissioners (DCs) for the IT SEZs under their respective jurisdiction. An STPI is under administrative control of the Department of Information Technology. Other multi-product and sector-specific SEZs are under the charge of DCs appointed by the Department of Commerce. However a number of issues, for example processing of notification of IT SEZs, coordination with state governments etc, relating to IT SEZs are also looked after by the DCs appointed by the Department of Commerce. This leads to a situation of dual control adversely impacting effective coordination and needs to be resolved. Disinvestment: The new SEZs have come up mainly in the private sector with no funding from the Government. Now the time has possibly come to see whether some of the established SEZs which are state owned could also be privatized. Disinvestment in these SEZs could not only add to the kitty of the Government and release more money for social-sector development but could also make these SEZs more efficient.
agreements (FTAs) like the one with ASEAN. The tariff policy in 2009-10 focused on tackling inflation by lowering import duties of specific items. While the current concerns on current account deficit may lead to the pause button remaining pressed, a step forward in tariff reforms could be taken even in these trying times (see Box 7.5) 7.58 The other tariff reforms could include measures like reducing end-use exemptions as the revenue foregone on account of export promotion concessions in 2009-10 was ` 43,622 crore, rectifying the inverted duty structure, removing Quantitative Restrictions (QRs) from petroleum products as the Administrative Price Mechanism (APM) has been dismantled, and introducing sunset clauses for export promotion schemes having tariff concessions.
Contingency Trade Policy and Non-tariff Measures

7.59 Anti-dumping investigations initiated by all countries started falling after reaching a peak in 2001, numbering 165 in 2007. However, in 2008, they again rose to 213. While they fell marginally to 209 in 2009, there seems to be a downward movement in 2010, with only 69 investigations initiated in the first half of the year (Table 7.17). Indias anti-dumping initiations fell from 55 in 2008 to 31 in 2009. In the first half of 2010, there were 17 anti-dumping initiations by India. During 2010-11 (up to 31 December 2010), the Directorate General of Antidumping and Allied Duties has initiated 13 fresh anti-dumping investigations. The products involved are certain hot rolled flat stainless steel products, azodicarbonamide, sewing machine needles,
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Box 7.5 : Lowering Peak Duties with Least Revenue Loss

Peak duties for manufactures could be reduced from 10 per cent by tinkering intelligently with the tariffs without any fall in collection rates given the fact that total collection rates (an indicator of overall incidence of tariffs including countervailing and special additional duties) have fallen to a low of 5.9 per cent in 2009-10 (see Table 1). The falling collection rate is a function of both rising import volumes as well as leakages due to exemptions on account of end use and the countervailing excise duty applicable on import goods. Table 1: Tariff collection Rates for selected import groups* Sl No. Commodity Group 1 2 3 4 5 6 7 8 9 10 Food Products POL Chemicals Man-made Fibre Paper and Newsprint Natural Fibre Metals Capital Goods Others Non POL Total 2003-04 19.3 11.2 24.1 45.9 7.2 13 32 19 7.6 14.4 13.5 2004-05 22 9.9 21.6 38.7 7.4 10.6 25.8 15.8 5.5 12.1 11.5 2005-06 32.2 5.9 20.1 33.6 9.2 12.5 25 12.5 5.2 11.5 9.8 2006-07 23.2 5.4 22.1 28.3 9.5 12.1 24.1 14.3 5.7 12.3 10.2 2007-08 19.3 5.7 21.6 30.1 10.3 12.6 24.3 15.7 6.1 12.8 10.4 2008-09 4.2 2.7 16.4 17 8.4 5.6 16.8 12.5 4 8.7 6.9 2009-10 2.5 1.9 13.9 22 7.7 4.3 17.4 11.3 3.8 7.6 5.9
Source: Department of Revenue, Ministry of Finance. * Collection rate is defined as the ratio of revenue collection (basic customs duty+ countervailing duty) to value of imports unadjusted for exemptions, expressed in percentage. Sl No.1 includes cereals, pulses, tea, milk and cream, fruits, vegetables, animal fats, and sugar. Sl No.3 includes chemical elements, compounds, pharmaceuticals, dyeing and coloring materials, plastic, and rubber. Sl No.5 includes pulp and waste paper newsprint paperboards and manufactures and printed books. Sl No.6 includes raw wool and silk. Sl No.7 includes iron and steel and non ferrous metals. Sl No.8 includes non-electronic machinery and project imports, electrical machinery.
In 2009-10, there are 340 tariff lines under capital goods and 4135 lines under intermediates consisting mainly of goods going into manufacture of finished products with tariffs of 10 per cent and above. The two groups in the high duty category account for as much as 39 per cent in the total number tariff lines. The share of the two categories in the duty slab of 10 per cent and above in notional duty (that is the revenue which should have come to the exchequer from the import volumes and duty rates but for the end use exemption or special category like export promotion) is 2.5 per cent (in the case of capital goods) and 33.5 per cent (in the case of intermediate goods) of the total notional revenue estimated at ` 2,02,705 crore. If both capital and intermediate goods are brought under the 7.5 per cent duty slab and if collection rates are assumed to be the same, then there is a revenue loss of around ` 11,747 crore. However, in the case of intermediate and capital goods the collection rates are higher in the 7.5 per cent duty slab compared to the 10 per cent and above slab. If these collection rates were factored into the calculations, there could be an actual gain in revenue due to better compliance and fall in undervaluation associated with improved collection rate in the low duty 7.5 per cent slab as compared to the 10 per cent plus slab. One of the reasons for this is that countervailing duty exemptions, for example in textiles, are high in the 10 per cent slab compared to the 7.5 per cent slab. Moving capital and intermediate goods to the 7.5 per cent slab would result in the number of tariff lines with duty of 7.5 per cent accounting for 79.6 per cent (or nearly 80 per cent) of the total. They will cover 97.45 per cent of imports. Even if some intermediate goods and all capital goods are moved to the 7.5 per cent and below category, then a major part of manufactures will have peak duty of 7.5 per cent or less. This will give a big push to industrial growth and exports, besides giving leverage power in WTO negotiations as well as FTAs. Table 1 also shows that the collection rates for capital goods are still relatively high at 11.3 per cent in 2009-10 after all the exemptions including concessions under the Export Promotion Capital Goods (EPCG) scheme. This also needs attention.
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Table 7.17 : Investigations initiated by top ten users of anti-dumping measures 1995-2010
Country India United States European Community Argentina South Africa Australia Brazil Canada China PR Turkey All Countries
Source: WTO
1995 6 14 33 27 16 5 5 11 0 0 157
2000 41 47 32 43 21 15 11 21 11 7 298
2001 79 77 28 28 6 23 17 25 14 15 371
2004 21 26 30 12 6 9 8 11 27 25 220
2005 28 12 25 12 23 7 6 1 24 12 202
2006 35 8 35 11 3 10 12 7 10 8 203
2007 47 28 9 8 5 2 13 1 4 6 165
2008 55 16 19 19 3 6 23 3 14 23 213
2009 2010* 31 20 15 28 3 9 9 6 17 6 209 17 2 8 7 0 4 5 1 4 1 69
19952010* 613 442 414 277 212 212 184 152 182 145 3752
*Upto June 2010.
caustic soda, paranitroaniline , stainless steel cold rolled flat products of 200 series having width below 600 mm, stainless steel cold rolled flat products of 400 series having width below 600 mm, soda ash, opal glassware, melamine, morpholine, geogrids and aniline-III. The countries involved in these investigations are the European Union, Korea, South Africa, Taiwan, the USA, China PR, Thailand, Norway, UAE, Kenya, Iran, Pakistan, Turkey, Ukraine, Indonesia, Japan, Malaysia. 7.60 Over the last two decades the world has witnessed rapid expansion of global trade and reduction in tariff rates both through the multilateral arrangement under the WTO as well as various types of trade cooperation agreements including FTAs. However, at the same time developed countries are increasingly resorting to the use of non-tariff measures (NTMs) to protect their domestic industries. 7.61 The WTO-UNCTAD (United Nations Conference on Trade and Development)-OECD Reports on G-20 trade and investment measures (the fourth one being the latest) states that the number of new measures imposed by G-20 countries is still increasing, but more slowly than in the past and with a welcome decline in the initiation of new
trade remedy actions (anti-dumping duties, countervailing measures, and safeguards). The new restrictive measures introduced during different periods following the global recession show a fall, covering only 0.3 per cent of total G-20 imports and 0.2 per cent of world imports in May 2010-October 2010 (see Table 7.18). 7.62 However, there is an accumulation of the trade restrictive measures with limited progress in unwinding them. Since October 2008, on aggregate, new G-20 trade restrictions have grown to cover 1.8 per cent of G-20 imports and 1.4 per cent of total world imports. Only around 15 per cent of the trade restrictive measures introduced since the outbreak of the crisis have so far been removed, which indicates that the bulk of them still remain in force. 7.63 In terms of number of trade measures, the most affected sectors include electrical machinery and equipment; chemical products; mineral fuel; machinery and mechanical appliances; iron and steel; cereals; plastic products; and dairy products. The sectors most heavily affected in terms of coverage of restrictive trade measures were electrical apparatus for line telephony, bio diesel, and automatic data processing machines. The large majority of G-20 actions since mid-May 2010 have been trade
Table 7.18 : Share of New Trade Restrictive Measures

Oct. 2008Oct. 2009 In total world imports In total G20 imports 0.8 1.0 Nov.2009May 2010 0.4 0.5 May 2010Oct. 2010 0.2 0.3
International Trade remedies, in particular the initiation of new antidumping investigations, followed by increases in tariffs and other import-related taxes. Among nonverified measures, the most frequent actions were related to export taxes or restrictions, non-tariff measures (import bans, licences, or other border controls), and government measures aimed at favouring domestic industries or products. The most frequently reported export measures concern restrictions on some agricultural products (export bans and quotas affecting grains) and some minerals (export quota reductions and reported informal bans on rare earth minerals) 7.64 Some G-20 members have raised tariffs and introduced new non-tariff measures to protect domestic production in certain sectors, notably steel and motor vehicles. G-20 members have continued to use trade defence mechanisms in these as well as other sectors like non-automatic import licenses. The US and EU have re-introduced agricultural export subsidies for the dairy sector, measures that are generally acknowledged to be among the most highly trade-distorting. Some of the fiscal and financial packages that have been introduced to tackle the crisis contain elements such as state aids, other subsidies, and buy/lend/invest/hire local conditions that favour domestic goods and services at the expense of imports. Stricter application of Sanitary and Phytosanitary measures (SPS) and TBT (technical barriers to trade) regulations and slower procedures and additional procedural requirements are the other measures imposed by countries. Thus, in the area of trade, there has been policy slippage since the crisis began and this has continued after the G-20 London Summit in April 2009. 7.65 India has adopted a multi-pronged strategy to deal with the issues relating to non-tariff measures (NTMs). On the export side, an online database has been set up, on the SPS and TBT notification (which may result in NTMs) notified to the WTO by members. This is to provide information to exporters about the regulatory regime of other countries. Besides, steps are being taken to upgrade the infrastructure and surveillance system at the major ports and airports to ensure due compliance with our standards and regulations. Moreover, wherever Indias export interest is affected, issues are raised by the Government in suitable redressal forums available under the WTO such as in the SPS and TBT Committee. These issues are also taken up in bilateral forums.
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WTO NEGOTIATIONS AND INDIA

Trade Negotiations
7.66 The Doha Round of trade negotiations at the WTO has been under way since 2001. Discussions were slow to resume after they paused in December 2008 and there has not been much progress since. A stock taking exercise at the level of senior officials took place in the WTO in March 2010, where members agreed to take the discussions ahead based on the work already done while maintaining the focus on the development dimension of the Round. The positive signals given by world leaders at the G-20 Leaders Summit held in Seoul in November 2010, have imparted a sense of urgency amongst members regarding the Geneva process that is supposed to resume in January 2011. The Director General, WTO, has suggested a cocktail approach of discussions combining the Chair-led processes within the negotiating groups and bilateral contacts, both in specific areas and at horizontal level. India is willing to work with the coalition groups in the WTO towards an early conclusion of the Doha Round. Its stand, however, is unequivocal: the protection of poor, subsistence farmers of developing countries and vulnerable industries is a priority. 7.67 In the area of agriculture, discussions are still taking place on the basis of the revised draft agriculture modalities text of 6 December 2008. As per this draft, developed countries would have to reduce their bound tariffs in equal annual installments over five years with an overall minimum average cut of 54 per cent. Developing countries would have to reduce their bound tariffs with a maximum overall average cut of 36 per cent, over a larger implementation period of ten years. Both developed and developing country members would have the flexibility to designate an appropriate number of tariff lines as sensitive products, on which they would undertake lower tariff cuts. Developing countries would have a special products (SP) entitlement of 12 per cent of agricultural tariff lines. An average tariff cut of 11 per cent is proposed on SPs, including 5 per cent of total tariff lines at zero cuts. There are also reductions/disciplines proposed for various categories of domestic and export subsidies. 7.68 In the case of Non-Agricultural Market Access (NAMA) negotiations, the tariff reductions are proposed through a non-linear Swiss formula with a three-tiered coefficient of 20, 22 and 25 for formula reductions linked to specific flexibilities for protecting sensitive NAMA tariff lines of developing countries
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Economic Survey 2010-11 7.71 India has shown considerable movement from Uruguay Round commitments to revised offers; however its primary requests in Modes 1 and 4 have not been addressed by key developed countries. Some of the major developed country members have shown little or no movement in their Mode 4 offers which is a major cause of concern to India. The US and other developed countries such as Australia are trying to introduce a new approach to services negotiations by way of the clustering initiative. India has opposed this cluster approach on procedural as well as substantive grounds. The lack of progress in services under the Doha Round is not due to problems with the approach of negotiations but because of lack of political will, inadequate response from developed countries in sectors and areas of export interest to developing countries, and little movement in agriculture and NAMA. 7.72 One of the areas of crucial interest to India is development of disciplines in domestic regulations (DR) involving qualifications and licensing requirements and procedures without which Mode 4 access gets severely impeded. Negotiations on this subject are proceeding on the basis of the Chairmans text of March 2009. In order to take the negotiations forward, a fresh round of offers would need to be tabled at the WTO by member countries. A timeline for the submission of the second revised offers in services would be decided after a breakthrough is achieved in agriculture and NAMA. An ambitious outcome in services has to be an essential part of any breakthrough package. India has repeatedly stated that any future work in services must be anchored in Annex C of the Hong Kong Ministerial Declaration. Members need to spell out clearly how they intend to meet the modal objectives outlined in Annex C. In particular, developed countries need to provide clear signals of market openings in sectors and modes of interest to developing countries, particularly in Modes 1 and 4.
and a coefficient of 8 for tariff reduction of developed countries. With regard to the Sectoral proposal of some countries, by which the tariffs in certain identified sectors are proposed to be brought to zero or near zero levels, Indias negotiating position has been that participation in sectoral initiatives must be non-mandatory and on a good faith basis without pre-judging the outcome. Another important aspect of NAMA negotiations pertain to Non-Tariff Barriers (NTBs). With regard to this, India is one of the initial proponents of the Horizontal Mechanism (HM) proposal. It aims to bring in a ministerial decision on Procedures for the facilitation of NTBs. This proposal has received the support of more than 100 WTO Member countries. Though the Doha mandate refer to NTBs in the context of products of export interest to developing countries, there have been some moves to utilize this increasing market access of remanufactured goods by some countries, led by United States of America. Indias negotiating position on this is that since there is no agreed definition on remanufactured goods, a work programme is required in the first place for defining and distinguishing remanufactured goods in contrast to other second hand goods which might have grave implications on the environment and livelihood aspects of the developing countries. The work programme has now got support from around 17 countries. 7.69 In services, India has been a demandeur. It has also offered substantial sectoral and modal coverage in its initial offer (January 2004) and the first revised offer (August 2005) of the ongoing services negotiation. At the Signaling Conference (July 2008) which was held on the sidelines of the Mini-Ministerial meeting, some further improvements were also conveyed. However, Indias offers / signals are conditional on receiving satisfaction in respect of its Modes 1 / 2 and Mode 4 requests. 7.70 The services negotiations at the WTO have been rejuvenated after the G-20 Meeting. Substantive interest has been evinced by all members to intensify the negotiations to make use of the limited window of opportunity (2011) to conclude the negotiations. As a part of the plurilateral process (where more than two countries are involved), 22 plurilateral groups have been formed at the WTO in service sectors/ modes. India is the coordinator of the plurilateral requests in Mode 1 (cross-border supply) and Mode 4 (Movement of Natural Persons) - the core areas of its interest in the services negotiations. India is also co-sponsor of plurilateral requests in computer and related services (CRS) and architectural, engineering and integrated engineering services.
Rules Negotiations
7.73 Negotiations are taking place in the Negotiating Group on Rules (NGR) aimed at clarifying and improving disciplines under the Anti Dumping Agreement and the Agreement on Subsidies and Countervailing Measures (ASCM), while preserving the basic concepts, principles, and effectiveness of these agreements and their instruments and objectives. Members are also discussing new disciplines for fisheries subsidies.
International Trade 7.74 The discussions on Chairs draft text of 18 December 2008 continued during 2010. Consensus eludes on the bigger issues in anti-dumping such as zeroing, sunset reviews, lesser duty rule, public interest, causation, and anti-circumvention. In Subsidies Agreement, considerable divergence remains in the proposals on specificity, subsidies in the case of inputs provided at regulated prices, and benchmarks for export finance. India has been seeking strengthened anti-dumping rules so as to prohibit the use of zeroing in dumping margin calculation, strengthening of the rules for conduct of sunset reviews, and mandatory application of lesser duty. In the Subsidies Agreement, India is opposed to the enlargement of the scope of prohibited subsidies in the ASCM and /or limiting of the existing flexibilities for the developing countries. In the negotiations on the new disciplines on fisheries subsidies, India is seeking effective special and differential (S&D) treatment for the developing countries, particularly in the light of employment and livelihood concerns for small, artisanal fishing communities and for retaining sufficient policy space so as to enable it to develop its infrastructure.
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commitments to support and assistance for infrastructure development. It is important that this linkage is respected by the entire WTO membership, particularly the developed countries and that adequate assistance is provided for implementation of commitments so that a high standards agreement on trade facilitation can be reached.
BILATERAL AND REGIONAL COOPERATION

7.76 In the past, India had adopted a very cautious and guarded approach to regionalism. However, recognizing that Regional and Preferential Trading Agreements (RTAs) would continue to feature prominently in world trade and given the slow nature of multilateral negotiations, India began moving in most cases towards Comprehensive Economic Cooperation Agreements (CECAs). Some of the recent developments related to major FTAs/RTAs/ CECAs are the following: India-EU Trade and Investment Agreement Negotiations: Negotiations for a Broad-based Bilateral Trade and Investment Agreement (BTIA) between India and the EU started in June 2007. So far eleven rounds have been held. The last round was held in India in January 2011. India-Japan Economic Partnership Agreement (EPA) Comprehensive Economic Cooperation Partnership Agreement (CEPA)Negotiations: The negotiations for a CEPA started in January 2007 and an in principle Agreement was signed during the 14th Round on 9 September 2010 in Tokyo. IndiaMalaysia Comprehensive Economic Cooperation Agreement (CECA): IndiaMalaysia CECA negotiations were launched in February 2008. The negotiations have been concluded in September 2010. The CECA including trade in goods, services, investment, and other areas of economic cooperation, would be signed as a Single Undertaking. Taking into account the India-ASEAN Trade in Goods Agreement that was implemented in January 2010 between India and Malaysia, both sides have offered ASEAN plus market access in goods. On 27 October 2010, the Prime Ministers of India and Malaysia have announced conclusion of the negotiations with the Agreement scheduled to be signed by early 2011 and implemented by 1 July 2011.
Trade Facilitation
7.75 Another important area of the Doha round is the negotiations on trade facilitation. Simplification of trade procedures by reducing trading costs is in the interest of all WTO members. A Draft Consolidated Negotiating Text on Trade Facilitation was worked out by the WTO members on 14 December 2009. The draft text has since been revised six times in 2010 through discussions in the meetings of the Negotiating Group on Trade Facilitation. India has been actively participating in these meetings and has also tabled a few proposals on Customs Cooperation, Rapid Alerts System of Customs Union, and Appeal Mechanism. Developed countries do not want to change their trade procedures but expect others to do so. Developing countries have, by and large, adopted an extra defensive approach to negotiations. Least developed countries, in general, do not want to undertake any binding commitment. Capacity constraints and lack of resources are two major factors that prevent developing countries (and least developed countries) from taking on binding commitments in trade facilitation. The current scenario indicates that developed countries and other donors may not invest in building physical infrastructure in these countries, although the July 2004 Framework Agreement clearly links
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Economic Survey 2010-11 India-Korea CEPA: An IndiaKorea CEPA was signed on 6 August 2009 and implemented with effect from1 January 2010 covering trade in goods, investment, services and bilateral cooperation in areas of common interest. Under the CEPA, tariffs will be reduced or eliminated on 93 per cent of Koreas tariff lines and 85 per cent of Indias tariff lines. It will facilitate trade in services through additional commitments made by both countries to ease movement of independent professional and contractual service suppliers. India-ASEAN Trade In Goods Agreement: On 13 August 2009, India and ASEAN comprising Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam signed the Trade in Goods Agreement under the broader framework of a Comprehensive Economic Cooperation Agreement (CECA) between India and ASEAN. The Trade in Goods Agreement provides for elimination of basic customs duty on 80 per cent of the tariff lines accounting for 75 per cent of the trade in a gradual manner starting from 1 January 2010. India has excluded 489 HS 6 digit lines from the list of tariff concessions and 590 HS 6 digit lines from the list of tariff eliminations to address sensitivities in agriculture, textiles, auto, chemicals, crude and refined palm oil, coffee, tea, pepper, etc. Asia Pacific Trade Agreement (APTA): APTA includes Bangladesh, the Republic of Korea, Sri Lanka, China, Lao PDR and India. The fourth round of negotiations was launched in Goa in October 2007 in the Second Session of the Ministerial Conference. To move forward the fourth round of negotiations, the third meeting of the Ministerial Council and the 35th Session of the Standing Committee were held on 15 December 2009 and 13 14 December 2010 respectively in Seoul, South Korea. in world trade, though transient in nature at present. While world merchandise trade picked up in the first half of 2010, there was a slowdown in the third quarter of 2010 due to the base effect and drying up of fiscal stimulus. The growth of exports and imports has also moderated in Indias major trading partners in the last few months of 2010. In particular, the import growth of the EU has been decelerating even before it could fully pick up, falling to as low as 7.8 per cent and 6.1 per cent in July and September 2010 respectively and picking up in October and November 2010 to 9.3 per cent and 12.6 per cent respectively. This situation in the EU may continue for some time with fresh bouts of financial turbulence flaring up in the periphery of the Euro area in the fourth quarter of 2010. Deceleration was also registered in other markets like Hong Kong, USA, Japan, and Singapore. 7.78 On the import side there is new trouble brewing up in the Middle East resulting in oil prices (Brent) which were hovering at around US$ 95 per barrel crossing the US $ 100 mark in February 2011 and gold prices steadying at around US$1341 per troy ounce (as on 28 January 2011) after reaching a peak of US$1423 on 7 December 2010. Although the concerns on the trade deficit front have subsided with pickup in exports in the last five months and slowdown in imports in the last three months of 2010-11 (April-December), the situation needs to be watched. However, the deceleration in net surplus of services trade is a cause for worry on the current account deficit front.
Challenges
7.79 After withstanding the crisis successfully, the short-term challenges on the trade front for India are related to speeding up and maintaining the tempo of export growth and ensuring that the slightly dimmed prospects on the trade growth front do not come in the way of the reforms agenda. The gradual withdrawal of stimulus measures by India and other countries is not likely to adversely affect Indias rising exports. However, there is need to be vigilant about any fallout of the financial turbulence in the periphery of the Euro zone and the new disturbances in the Middle East. Equally important is the need to guard against new protectionist measures. Though many of these are on the decline, those already in place need early winding up. India may have to raise its pitch in bilateral and international forums on early withdrawal of these trade distorting measures and also insist on sunset clauses for the remaining measures. The continuation of inflation concerns on
CHALLENGES AND OUTLOOK

Outlook
7.77 The outlook for Indias trade sector has brightened with a good growth of 29.5 per cent in 2010-11 (April-December), a robust growth of 36.4 per cent in December 2010 and similar signs for January 2011. However, this bright picture needs to be moderated on account of the recent developments
International Trade
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Box 7.6 : Trade Policy Reforms : Some Challenges for the Medium and Long Term
Some important challenges for Indias trade sector in the medium and long term are the following: Challenge of becoming a major player in world trade: The challenge for India is to achieve a share in world trade commensurate with its size. Despite making great strides in its export growth with 20 per cent plus growth continuously from 2002-03 to 2007-08, India has not made much progress in terms of the share in world trade. While Indias exports were higher than those of China till 1954, they started lagging thereafter. In 1990, shares in world exports of China and India were 1.8 per cent and 0.5 per cent respectively and in 2009, their respective shares stood at 9.7 per cent and 1.3 per cent. If India can attain at least half of Chinas share in world exports, the impact on its employment and manufacturing activity will be enormous. While trade policy measures, shift in focus to some markets and some products, trade facilitation, tariff reforms, etc. have helped in some measure, if India has to achieve a substantial share in world exports, a big push will be needed. Challenge of real diversification of Indias exports: While India has diversified its export basket as well as export markets over the years, substantial diversification in tune with world demand has not taken place. This can be seen by matching Indias exports with the top 100 imports of the world at the six-digit HS level. The exercise based on PCTAS data 2010(data for 2008) shows that Indias presence in these top items of world demand is negligible except for a few items such as diamonds and jewellery, oil cakes, t-shirts, mens/boys trousers, flat rolled iron products, and maize (corn). There are many electronic, electrical, and engineering items (the three Es) in the top 100 imports of the world where Indias presence is negligible. Challenge of increasing export competitiveness: Indias export competitiveness is being challenged not only from China and the South East Asian countries but also from the newly emerging Asian countries, less developed countries like Bangladesh, and small countries like Vietnam in items like textiles. At macro level, the two major determinants of export competitiveness are the exchange rate and inflation reflected in the real effective exchange rate (REER). As per the RBI, there has been a distinct divergence between the movements of six-currency and 36-currency REER indices so far during 2010-11. While the six-currency REER remained above base level by 16 to 20 per cent, signifying higher inflation differentials with these economies, the 36-currencyREER largely remained below or around base level, implying that inflation in India has been comparable to or below the levels prevailing in its trading partners in the developing world. The magnitude of nominal exchange rate appreciation/depreciation of the currencies of these countries also differed, as reflected in the 30-currency REER derived after the exclusion of the 6-currency index from the 36-currency index. If the positive inflation differentials persist and the tendency among some countries to use undervalued exchange rates to boost their export further amplifies, then the competitiveness of Indian exports may come under pressure. At the micro level there are issues like the high transaction cost in exports. The recent Department of Commerce report of the Task Force on Transaction Cost in Exports also highlights this issue. Quoting the World Bank Doing Business Report it states that it takes 17 days to export a container from India and costs US$945 per container, compared to US$450 and US$ 500 in Malaysia and China respectively. Denmark, Brazil, Mexico and China take 5 days, 12 days, 14 days and 21 days respectively to export a container from their countries. The report estimates the magnitude of transaction cost at approximately US$ 13 billion. It has identified 44 issues for action, of which 21 issues have been implemented and 11 issues are under the process of implementation. Implementation of the 21 issues and another 2 issues is likely to mitigate the transaction cost by ` 2100 crore (i.e. around US$467 million). Further efforts to reduce transaction cost could increase Indias export competitiveness. Challenges related to tariff reforms: India has been progressively lowering peak customs duty. The fall in peak duty has not led to the feared collapse in revenue collections. The duty cuts have neither wiped out the domestic manufacturing sector nor resulted in large-scale unemployment as forecasted by many. The data show that progressive peak duty cuts have been accompanied by rise in customs duty collections. However, further bold tariff reforms with minimum revenue loss are needed to reach levels comparable to those in ASEAN both for peak rate as well as total duty (also see Box 7.5). One area of tariff reforms is related to customs duty exemptions and export promotion schemes. As a percentage of aggregate tax collection, revenue foregone remains high with more than half of all notional revenues flowing into the foregone account. What is worse, an increasing trend is visible over the last three years. In financial year 2009-10, only 41.7 per cent of notional duty was collected compared to 44.6 per cent and 51.1 per cent in 2008-09 and 2007-08 respectively. Substantial revenue is foregone on account of the different export promotion schemes. In 2010-11, revenue foregone will continue to be significant at more than ` 50,000 crore due to enlargement of the scope of schemes under the Foreign Trade Policy 2009-14 (FPS/FMS/VKGUY) and improvement in export promotion rates in the Duty Entitlement Passbook (DEPB) Scheme coupled with pickup in exports. The revenue loss from end-use exemptions will also go up with rising imports. There is also the question of accountability in the case of different schemes, which involve substantial exemptions. While some exemptions are needed particularly at this juncture to promote exports, there is scope for reducing the duty foregone by rationalization and convergence of these schemes. One such example is related to the Export Promotion Capital Goods (EPCG) scheme. With import duties of general capital goods being reduced consistently, the differential with total EPCG has come down from 35.4 per cent to 21.5 per cent during the last five years. Another reduction in import duties for all capital goods preferably to the 3 per cent duty level stipulated for the general EPCG and simultaneous withdrawal of the EPCG scheme could help in avoiding revenue leakages and serve as a major step (Contd.....)
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Box 7.6 : Trade Policy Reforms: Some Challenges for the Medium and Long Term (Contd...)
in rationalizing export promotion schemes. It will also serve as an upfront push to the import of capital goods for modernization of the manufacturing and services sector in general and export manufacturing in particular. Challenges related to FTAs/Comprehensive Economic Cooperation Agreements (CECAs) in the absence of successful WTO negotiations. The proliferation of FTAs in the world is characterized as the spaghetti bowl in which trade crisscrosses in a complex fashion between countries based on tariff differentials and complicated rules of origin. In recent years, India too is a part of many regional and bilateral groupings. While there are benefits from these FTAs for Indian exports, in some cases the benefits to the partner countries are much more, with net gains of incremental exports from India being small or negative. FTAs also lead to a new type of inverted duty structure with duties for final products being lower from FTA partners compared to duties for the previous-stage raw materials imported from non-FTA countries. This acts as a disincentive to local manufacturing which is not competitive against FTA imports because of the inverted duty structure phenomenon. For example, the normal customs duty on Indian TV sets is 10 per cent, but in the case of imports from Thailand and Singapore there is zero duty subject to the rules of origin requirement. There are similar issues even in agricultural items. For example, arecanuts or betel nuts have a basic customs duty of 100 per cent. But this duty is nil or at concessional low rate at different levels for imports from Sri Lanka under the Indo-Sri Lanka FTA and the South Asian Free Trade Area (SAFTA) agreement and from FTA partners like Myanmar, Bhutan, and Nepal. This could affect some regions which depend mainly on cultivation of arecanuts for livelihood. Following the ban of some States on arecanut products, demand crashed. Allowing imports at concessional duties under FTAs for items that are banned by some States needs reconsideration. The policy challenge related to FTAs/CECAs should take note of specific concerns of the domestic sector and ensure FTAs do not mushroom. Instead they should lead to higher trade particularly higher net exports from India. Challenges related to services trade: Services trade is uncharted territory with plenty of opportunities and challenges. A more conducive environment for trade in services can be created by liberalizing FDI in services as FDI inflows and trade in services have a close relationship given the nature of intra-firm trade of multinational parent firms with affiliates; rationalizing taxes in services like shipping and telecom; going forward with totalization agreements; streamlining domestic regulations like licensing requirements and procedures, technical standards, and regulatory transparency which can help in the growth and export of services; and continuing with the focus on services in multilateral and bilateral negotiations. These, along with systematic marketing of services, collection and dissemination of market information by setting up a portal for services, streamlining the services data system, and a more focused, coordinated, and synchronized policy by the different agencies involved, could help the services sector make further strides. (Also see Chapter 10)
the domestic front would also mean that trade policy measures could be put to further test in the coming fiscal year to tackle inflation. This could further erode the exports of the already battered agricultural export sector. This has necessitated the formation of a systematic inflation-tackling mechanism with early warning systems, rather than resorting to ad hoc policy measures. 7.80 The challenges in the medium to long term have to be seen in the light of the many paradoxes in the Indian trade sector (Also see Box 7.6). While India is becoming an active player in world trade
negotiations and shaper of world trade policy, it is still a small player in world trade. While it is trying to gain markets and increase competitiveness in new areas, it is losing markets and competitiveness in some of the traditional areas. While it has made some forays into exports of some dynamic commodities having high shares and high growth, it has not been able to make a real dent in the trade of these big ticket items which are top of the list of world demand. Thus the potential for India in trade is great, but the challenges are also aplenty.
Agriculture and Food Management

P
CHAPTER
ioneering work by agriculture scientists and the efforts of farmers had helped achieve a breakthrough in the agriculture sector in the 1960s, popularly known as the Green Revolution. High agricultural production and productivity achieved in subsequent years has been the main reason for attaining food security to a large extent. The country has not witnessed any big technological breakthrough in agriculture since then. The food safety net for each and every of the over a billion citizensa number that is growing requires enhanced agricultural production and productivity in the form of a Second Green Revolution. Further, special attention is required for achieving higher production and productivity levels in pulses, oilseeds, fruits, and vegetables, which had remained untouched in the First Green Revolution but are essential for nutritional security. In this regard, achieving high production of poultry, meat and fisheries is also essential. The relatively weak supply responses to price hikes in agricultural commodities, especially food articles, in the recent past brings back into focus the central question of efficient supply chain management and need for sustained levels of growth in agriculture and allied sectors. The choice before the nation is clearto invest more in agriculture and allied sectors with the right strategies, policies, and interventions. This is also a necessary condition for inclusive growth and for ensuring that the benefits of growth reach a larger number of people.
8.2 The growth of agriculture and allied sectors is still a critical factor in the overall performance of the Indian economy. As per the 2010-11 advance estimates released by the Central Statistics Office (CSO) on 07.02.2011, the agriculture and allied sector accounted for 14.2 per cent of the gross domestic product (GDP), at constant 2004-05 prices. During Figure 8.1
700
the period 2004-05 to 2007-08, the GDP for agriculture and allied sectors had increased from ` 5, 65,426 crore to ` 6,55,080 crore, at constant 2004-05 prices; thereafter it stagnated at this level for two years (2008-09 to 2009-10) (Figure 8.1). In 2009-10, it accounted for 14.6 per cent of the GDP compared to 15.7 per cent in 2008-09 and 19.0 per cent in
GDP for agriculture and allied sectors

GDP
R thousand crore
650 600 550
Year
2010-11 (AE)
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10 (QE)
188
Table 8.1 : Agriculture Sector: Key Indicators

(per cent)
Sl. No. Item 2008-09 2009-10 2010-11 (Advance Estimates)
GDPShare and Growth (at 2004-05 prices) Growth in GDP in agriculture & allied sectors Share in GDPAgriculture and allied sectors Agriculture Forestry and logging Fishing Share in Total Gross Capital Formation in the Country (at 2004-05 prices) Share of Agriculture & Allied Sectors in total Gross Capital Formation Agriculture Forestry and logging Fisheries Agricultural Imports & Exports (at current prices) Agricultural imports to national imports Agricultural exports to national exports Employment in the agriculture sector as share of total workers as per census 2001
-0.1 15.7 13.3 1.6 0.8 8.3 7.7 0.07 0.56 2.71 10.22 58.2
0.4 14.6 12.3 1.5 0.8 7.7 7.1 0.06 0.54 4.38 10.59
5.4 14.2
Source : Central Statistics Office and
Department of Agriculture and Cooperation.
2004-05. Its share in GDP has thus declined rapidly in the recent past. This is explained by the fact that whereas overall GDP has grown by an average of 8.62 per cent during 2004-05 to 2010-11, agricultural sector GDP has increased by only 3.46 per cent during the same period. The role of the agriculture sector, however, remains critical as it accounts for about 58 per cent of employment in the country (as per 2001 census). Moreover, this sector is a supplier of food, fodder, and raw materials for a vast segment of industry. Hence the growth of Indian agriculture can be considered a necessary condition for inclusive growth. More recently, the rural sector (including agriculture) is being seen as a potential source of domestic demand, a recognition that is even shaping the marketing strategies of entrepreneurs wishing to widen the demand for goods and services. In terms of composition, out of a total share of 14.6 per cent of the GDP in 2009-10 for agriculture and allied sectors, agriculture alone accounted for 12.3 per cent followed by forestry and logging at 1.5 per cent and fisheries at 0.8 per cent (Table 8.1).
PERFORMANCE OF THE AGRICULTURE SECTOR DURING THE CURRENT FIVE YEAR PLAN (2007-2012)
8.3 During the first three years of the current Five Year Plan, the agriculture sector (including allied
activities) recorded an average growth of 2.03 per cent against the Plan target of 4 per cent per annum. In the first year, 2007-08, of the current Plan the agriculture sector had achieved an impressive growth of 5.8 per cent. However, this high growth could not be maintained in the following two years and agriculture-sector growth fell into the negative zone of - 0.1 per cent in 2008-09, although this was a year of a record 234.47 million tonnes food production. The decline in growth of agricultural GDP was primarily due to the fall in the production of agricultural crops such as oilseeds, cotton, jute and mesta, and sugarcane. In 2009-10, despite experiencing the worst south-west monsoon since 1972 and subsequent significant fall in kharif foodgrain production, the growth marginally recovered to 0.4 per cent primarily due to a good rabi crop. Several advance measures taken by the government to salvage the rabi crop had the desired effect of checking the impact of the drought situation on the rabi crop. Things are looking bright in the current year with a relatively good monsoon and the agriculture-sector is expected to grow at 5.4 per cent as per the 2010-11 advance estimates. The agriculture sector growth in the first four years of the Plan is estimated at 2.87 per cent. In order to achieve the Plan target of average 4 per cent per year, the agriculture sector needs to grow at 8.5 per cent during 2011-12.
Agriculture and Food Management Table 8.2 : GCF in Agriculture and Allied Activities (` crore at 2004-05 prices) `
Year GDP Agriculture & allied activities GCF 2004-05 2005-06 2006-07 2007-08 2008-09P 2009-10QE 29,71,464 32,54,216 35,66,011 38,98,958 41,62,509 44,93,743 76,096 86,611 90,710 1,05,034 1,28,659 1,33,377 GDP 5,65,426 5,94,487 6,19,190 6,55,080 6,54,118 6,56,975 GCF/GDP in agriculture & allied activities 13.46 14.57 14.65 16.03 19.67 20.3
189
GCF in agriculture as per cent of total 2.56 2.66 2.54 2.69 3.09 2.97
Source : Central Statistics Office. Notes: P- provisional.
Q-quick estimates.
GROSS CAPITAL FORMATION (GCF) IN AGRICULTURE AND THE ALLIED SECTOR

8.4. The GCF in agriculture and allied sectors as a proportion to the GDP in the sector stagnated around 14 per cent during 2004-05 to 2006-07. However, there is a marked improvement in this figure during the current Five Year Plan. It increased to 16.03 per cent in 2007-08 and further to 19.67 per cent in 200809 (provisional) and to 20.30 per cent in 2009-10 (quick estimates [QE]). However, the GCF in agriculture and allied sectors relative to overall GDP has remained stagnant at around 2.5 to 3.0 per cent (Table 8.2). As a result the share of GCF in agriculture and allied sector in total GCF has remained in the range of 6.6 to 8.2 per cent during 2004-05 to 200910 (Table 8.3). There is need to significantly step up investment in agriculture, both by the private and public sectors to ensure sustained target growth of 4 per cent per annum.
tonnes in 2008-09. The production of foodgrains declined to 218.11 million tonnes during 2009-10 (final estimates) due to the long spells of drought in various parts of the country in 2009. The productivity of almost all the crops suffered considerably, which led to decline in their production in 2009. As per the second advance estimates released by Ministry of Agriculture on 9.2.2011, production of foodgrains during 201011 is estimated at 232.07 million tonnes compared to 218.11 million tonnes last year (Table 8.4). This is only marginally below the record production of 234.47 million tonnes of foodgrains in 2008-09. The country is likely to achieve record production of wheat (81.47 million tonnes), pulses (16.51 million tonnes) and cotton (33.93 million bales of 170 kg. each) this year. This high level of production has been achieved despite crop damage due to drought in Bihar, Jharkhand, Orissa and West Bengal and the effects of cyclones, unseasonal and heavy rains, and cold wave and frost conditions in several parts of the country.
CROP PRODUCTION
8.5 For four consecutive years from 2005-06 to 2008-09, foodgrains production registered a rising trend and touched a record level of 234.47 million Table 8.3 : Share of Agriculture & Allied Sectors GCF in total GCF (per cent) (at 2004-05 prices)
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 7.5 7.3 6.6 6.5 8.3 7.7
GROWTH RATES OF AREA, PRODUCTION AND YIELD OF

AGRICULTURAL CROPS
8.6 Growth in the production of agricultural crops depends upon acreage and yield. Given the limitations in the expansion of acreage, the main source of long-term output growth is improvement in yields. Trends in indices of area, production, and yield of different crops for two periods 1980-81 to 1989-90 and 2000-01 to 2009-10 (base triennium ending[TE] 1981-82=100) are given in Table 8.5. An analysis of growth rates of area, production, and yield of various crops based on their respective indices has been made in the following paragraphs.
190
Table 8.4 : Agricultural Production 2010-11

(million tonnes)
Crops 2nd Advance Estimates 2010-11 94.01 81.47 40.08 16.51 232.07 27.85 336.70 33.93 10.08 Target 2010-11 Percentage of 2010-11 production to target set for 2010-11 92.17 99.35 91.09 100.06 94.92 83.89 106.89 130.50 87.65 2009-10 (final estimates) Percentage change in 2010-11 compared to 2009-10 5.52 0.83 19.46 12.62 6.40 11.94 15.19 40.09 -14.72
Rice Wheat Coarse Cereals Pulses Total Foodgrains Oilseeds Sugarcane Cotton* Jute and Mesta**
102.00 82.00 44.00 16.50 244.50 33.20 315.00 26.00 11.50
89.09 80.80 33.55 14.66 218.11 24.88 292.30 24.22 11.82
Notes : *million bales of 170 kg each
**million bales of 180 kg each
Table 8.5 : Compound Growth Rates of Area, Production and Yield

(as per cent per annum with base TE 1981-82=100) Crop Area Rice Wheat Jowar Bajra Maize Ragi Small millets Barley Total Coarse Cereals Total Cereals Gram Tur Other Pulses Total Pulses Total Foodgrains Sugarcane Oilseeds Cotton 0.41 0.46 -0.99 -1.05 -0.20 -1.23 -4.32 -6.03 -1.34 -0.26 -1.41 2.30 0.02 -0.09 -0.23 1.44 1.51 -1.25 1980-81 to 1989-90 Production 3.62 3.57 0.28 0.03 1.89 -0.10 -3.23 -3.48 0.40 3.03 -0.81 2.87 3.05 1.52 2.85 2.70 5.20 2.80 Yield 3.19 3.10 1.29 1.09 2.09 1.14 1.14 2.72 1.62 2.90 0.61 0.56 3.03 1.61 2.74 1.24 2.43 4.10 Area -0.03 1.21 -3.19 -0.42 2.98 -3.03 -5.28 -1.41 -0.76 0.09 4.34 0.26 -0.34 1.17 0.29 0.77 2.26 2.13 2000-01 to 2009-10 Production Yield 1.59 1.89 -0.07 1.68 5.27 -1.52 -3.58 -0.25 2.46 1.88 5.89 1.82 -0.32 2.61 1.96 0.93 4.82 13.58 1.61 0.68 3.23 2.11 2.23 1.57 1.78 1.17 3.97 3.19 1.48 1.56 0.02 1.64 2.94 0.16 3.79 11.22
8.7 Rice and wheat: During the 1980s the growth in area in rice was marginal at 0.41 per cent but growth in production and yield was above 3 per cent. From 2000-01 to 2009-10 the situation changed with growth in area turning negative and in production and yield standing at 1.59 per cent and 1.61 per cent respectively. In wheat too, during the 1980s the growth in area was marginal at 0.46 per cent but in production and yield was above 3 per cent. During 2000-01 to 2009-10 the growth in area in wheat was 1.21 per cent and in production and yield was 1.89 per cent and 0.68 per cent respectively. This
suggests that in these two crops the yield levels have plateaued and there is need for renewed research to boost production and productivity (Figures 8.2 and 8.3). Given the constraints in area expansion, there is no other alternative. Both public and private-sector investment in research and development (R&D) needs to be encouraged. Figure 8.4 shows changes in the index of area, production, and yields of rice during 2003-04 to 2009-10, Figure 8.5 shows changes in the index of area, production, and yield of wheat during 2003-04 to 2009-10.

Figure 8.2
Compound growth rate (per cent)
4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0 -0.5 Area Production Yield
191
Compound growth rate of area, production and yield of rice
1980-81 to 1989-90
2000-01 to 2009-10
Figure 8.3
4.0
Compound growth rate of area, production and yield of wheat
3.5 3.0 2.5 2.0 1.5 1.0 0.5 0 Area Production Yield 2000-01 to 2009-10 1980-81 to 1989-90
Figure 8.4
250 200
Index of area, production and yield of rice

Area Production Yield
Index
150 100 50 0
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Year
Figure 8.5
250 200
Index of area, production and yield of wheat
Index
150 100 50 0
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
Year
2009-10
192
8.8 Coarse Cereals: In coarse cereals the situation is totally different. Since there was no technological breakthrough in these crops, the growth rate in area of total coarse cereals, in both the periods (1980-81 to 1989-90 and 2000-01 to 200910) was negative reflecting either shift to other crops or relatively dry area remaining fallow. In all the major coarse cereals there was negative growth in area during both the periods except for maize, which recorded a growth rate of 2.98 per cent in the 200001 to 2009-10 period. However, growth in production and yield for coarse grains which was 0.40 per cent and 1.62 per cent respectively in the 1980s improved significantly to 2.46 per cent and 3.97 per cent respectively in the 2000-01 to 2009-10 period (Figure 8.6). This increase is primarily driven by maize and bajra. Figure 8.7 illustrates changes in the index of area production and yield of total coarse cereals during 2003-04 to 2009-10. Special effort is required to promote production and productivity of all coarse cereals to ensure food security (Box 8.1) 8.9 Pulses: Pulses are the main source of protein for a large section of population in India. Gram and Tur are the major contributors to the total production
Figure 8.6
4.0
Box 8.1 : Coarse cereals

The food and nutritional security of India currently depends to a great extent on the production of wheat and rice. These two crops together constituted 78 per cent of total foodgrains production in 2009-10, whereas coarse cereals constitute only 15 per cent in the same year. The area under coarse cereals has shown a decline over the years whereas their yield has shown significant improvement despite decrease in area in all the major coarse cereals except maize. The nutritional value of coarse cereals is also gradually being realized. There is every reason to promote the production of these crops and help them realize their full potential with increased investment in research and schemes to promote their cultivation particularly in rain-fed areas.
of pulses in the country. During the 1980s there was negative growth in total area under pulses and growth in production and yield was 1.52 per cent and 1.61 per cent respectively. During 2000-01 to 2009-10, whereas area and production have grown by 1.17 per cent and 2.61 per cent respectively, growth in yield at 1.64 per cent has remained at about the
Compound growth rate of area, production and yield of coarse cereals
3.5 3.0 2.5 2.0 1.5 1.0 0.5 0 -0.5 -1.0 -1.5 Area Production Yield 2000-01 to 2009-10 1980-81 to 1989-90
Figure 8.7
250 200
Index of area, production and yield of coarse cereals

Index
150 100 50 0
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Year
Agriculture and Food Management same level reflecting that the growth in production is primarily because of increase in area (Figure 8.8). A technological breakthrough in pulse production is necessary to keep pace with rising demand for this commodity. Figure 8.9 illustrates changes in the index of area, production, and yield of total pulses during 2003-04 to 2009-10. 8.10 Sugarcane: The compound growth rate of area, production, and yield of sugarcane during 2000-01 to 2009-10 has declined compared to the 1980s. The decline in growth rate of yield during this period is because of relatively higher decline in growth rate of production compared to decline in growth rate of area (Figure 8.10). Concerted effort is required to increase yield rate of this crop to avoid fluctuations in production and spikes in price of sugar. Figure 8.11 displays changes in the index
Figure 8.8
3.0 2.5 2.0 1.5 1.0 0.5 0 -0.5 Area Production Yield
193
of area, production, and yield of sugarcane during 2003-04 to 2009-10. 8.11 Oilseeds: The significant improvement in annual growth in indices of yield and area under oilseeds during 2000-01 to 2009-10 as compared to the 1980s has resulted in increase in the annual growth rate of production of oilseeds. India, however, still imports a significant proportion of its requirement of edible oil (Figure 8.12). The current growth rate needs to be maintained to ensure a reasonable level of self-sufficiency in this crop. Figure 8.13 shows changes in the index of area, production, and yield of oilseeds during 2003-04 to 2009-10. 8.12 Cotton: A significant improvement in yield has resulted in an increase in growth rate of cotton production from 2.80 per cent during the 1980s to 13.58 per cent per annum during 2000-10 (Figure
Compound growth rate of area, production and yield of total pulses
1980-81 to 1989-90
2000-01 to 2009-10
Figure 8.9
250 200
Index of area, production and yield of total pulses

Index
150 100 50 0
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
Year
Figure 8.10
3.0 2.5 2.0 1.5 1.0 0.5 0
Compound growth rate of area, production and yield of sugarcane
2009-10
1980-81 to 1989-90 2000-01 to 2009-10
Area
Production
Yield
194
Figure 8.11
250 200
Index of area, production and yield of sugarcane

Index
150 100 50 0
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
1980-81 to 1989-90 2000-01 to 2009-10
Year
Figure 8.12
5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0
Compound growth rate of area, production and yield of oilseeds
Area
Production
Yield
Figure 8.13
300 250
Index of area, production and yield of oilseeds

Index
200 150 100 50

2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
1980-81 to 1989-90 2000-01 to 2009-10
Year
Figure 8.14
14
Compound growth rate of area, production and yield of cotton
12 10 8 6 4 2 0 -2 Area Production Yield
195
Figure 8.15
500 400
Index of area, production and yield of cotton

Index
300 200 100 0

2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Year
8.14). Figure 8.15 shows changes in the index of area, production, and yield of cotton during 2003-04 to 2009-10.
AREA COVERAGE
IN
2010-11
8.13 The total cropped area under foodgrains, oilseeds, sugarcane, and cotton during kharif 2010 is higher by 2.33 lakh ha as compared to that in kharif 2009. Owing to drought in major rice-producing areas, i.e. Bihar, Jharkhand, West Bengal, and eastern Uttar Pradesh, the area under rice during kharif 2010 is lower by about 5.40 lakh ha. While the area under coarse cereals has gone down by 3.42 lakh ha, there has been significant increase of 6.11 lakh ha in the area under pulses with the result that total area under foodgrains in kharif 2010 is only marginally lower by 2.71 lakh ha than that in kharif 2009. In oilseeds, while area under groundnut has gone up by 4 lakh ha, seasmum, soyabean, and sunflower have recorded lower acreage; consequently the overall area under oilseeds during kharif 2010 is lower by 8.27 lakh ha as compared to kharif 2009. However, there is significant increase in the area under sugarcane (6.53 lakh ha) and cotton (6.90 lakh ha). Thus there appears to be some shift in the cropping pattern in kharif 2010.
Further, export of non-basmati rice is permitted on diplomatic/humanitarian considerations. Export of basmati rice is permitted with a minimum export price (MEP) of US $ 900 per ton or ` 41, 400 per ton. Government has reduced the import duty on pulses to nil from 8 June 2006 to augment their supply. Export of pulses except kabuli chana (chickpeas) has been prohibited with effect from 1 April 2008.
AGRICULTURAL INPUTS
8.15 Agricultural inputs play a crucial role in determining yield levels and in turn augmentation of level of production in the long run. Improvement in yield depends on application of technology, use of quality seeds, fertilizers, pesticides, micronutrients and irrigation.
Seeds
8.16 Seeds are a critical input for long-term sustained growth of agriculture. In India, more than four-fifths of farmers rely on farm-saved seeds leading to a low seed replacement rate. Hence the Central Government has been addressing this issue through various programmes/schemes. This includes the Indian Seed Programme involving the participation of Central and State Governments, the Indian Council of Agricultural Research (ICAR), State agricultural universities, cooperatives and the private sector, and farmers and plant breeders. Year-wise details of production of breeder and foundation seeds and distribution of certified seeds are given in Table 8.6. 8.17 The Ministry of Agriculture has been implementing the Central- sector Development and Strengthening of Infrastructure Facilities for Production and Distribution of Quality Seeds scheme since 2005-06 with the aim of ensuring timely availability of quality seeds of various crops at affordable prices. The major thrusts of the scheme
Exports and Imports

8.14 Depending on domestic availability, Government allows exports and imports of food items especially wheat, rice, and pulses. Government has reduced the import duty on wheat to nil from 9 September 2006 to augment its supply. Export of wheat has been prohibited since 8 October 2007. The import duty on semi-milled or wholly milled rice has been reduced to nil from 20 March 2008 to augment its supply. Export of non-basmati rice has been prohibited since 15 October 2007 except for a quantity of 10,000 tonnes per annum of organic non-basmati rice permitted since 7 December 2009.
196
Economic Survey 2010-11 The new Act is expected to (i) create a facilitative climate for growth of the seed industry, (ii) enhance seed replacement rates for various crops, (iii) boost the export of seeds and encourage import of useful germ plasm, and (iv) create a conducive atmosphere for application of frontier sciences in variety development and for enhanced investment in R&D. The Seeds Bill was introduced in the Rajya Sabha in 2004. It was referred to the Parliamentary Standing Committee on Agriculture which recommended several modifications in 2008. These will be taken up for further consideration.
Table 8.6 : Production of Breeder and Foundation Seeds and Distribution of Certified Seeds
Year Production of Production of breeder foundation seeds seeds (quintals) (lakh quintals) 66,460 68,654 73,829 91,960 74,361 94,410 6.9 7.4 7.96 8.22 9.69 11.46 Distribution of certified/ quality seeds (lakh quintals) 113.10 126.74 155.01 179.05 215.81 257.11
(Anticipated) Source : Department of Agriculture and Cooperation.
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Fertilizers
8.20 India is meeting 85 per cent its urea requirement through indigenous production but depends heavily on imports for its phosphatic and potash (P & K) fertilizer requirements. Urea, 21 grades of P & K fertilizers, and 15 grades of NPK (nitrogen, phosphorus, and potash) complex fertilizers are provided to farmers at subsidized prices. Farmers pay only 25 to 40 per cent of the actual cost and the rest of the cost is borne by the Government in the form of a subsidy, which is reimbursed to the manufactures/importers.
are improving quality of farm-saved seeds through seed village programmes to enhance seed replacement rates, boosting seed production in the private sector, and helping public-sector seed companies contribute to enhanced seed production. Since the inception of the scheme in 2005-06, 1,31,023 seed villages have been covered across the country and 183.10 lakh quintals of certified/ quality seeds produced till 2009-10, which is a significant achievement. This effort needs to be further promoted. 8.18 Under the component of assistance for boosting seed production in the private sector, credit-linked back-ended capital subsidy of 25 per cent of project cost subject to a maximum limit of ` 25 lakh per unit is provided on seed infrastructure development. In order to establish/strengthen infrastructure facilities for production and distribution of quality seeds, States/UTs and State Seeds Corporations are provided financial assistance for creating facilities for seed-processing plants and machinery for seed cleaning, grading, treating, and packing. Assistance is also provided for creation/strengthening of seed-processing plants. The Protection of Plant Varieties and Farmers Rights (PPV&FR) Authority established in November 2005 at New Delhi has been mandated to implement provisions of the PPV&FR Act, 2001. 8.19 Considering the vital importance of the seed industry in promoting agricultural growth, the Ministry of Agriculture has been proposing replacement of the existing Seeds Act 1966 by suitable legislation.
Production
8.21 The domestic production of urea, Diammonium phosphate (DAP), and complex fertilizers in the year 2009-10 has increased compared to 200809. The production of urea is estimated at 215.37 lakh tonnes in 2010-11 and that of DAP and complexes at 39.58 lakh tonnes and 91.66 lakh tonnes, respectively (Table 8.7). Availability of raw material/intermediates has been a major bottleneck in the increase in production of fertilizers. 8.22 Timely import of urea and other fertilizers was arranged to ensure timely availability of fertilizers in required quantity (Table 8.8).
Table 8.7 : Production of Urea, DAP and Complex Fertilizers

(in lakh tonnes)
Year Urea DAP Complex fertilizers
200607 48.52 74.64
200708 42.12 58.50
200809 29.93 68.48
2009- 201010 11* 42.46 80.38 39.58 91.66
203.10 198.60 199.20 211.12 215.37
Note: *Estimated
Agriculture and Food Management Table 8.8 : Import of Urea, DAP and MOP
(in lakh tonnes)
197
(iv)
Urea 2006-07 2007-08 2008-09 2009-10 2010-2011* 47.18 69.28 56.67 52.09 45.83
DAP 28.76 29.90 61.91 58.89 68.12
MOP 34.48 44.20 56.72 52.86 47.84
Distribution and movement of fertilizers are monitored through the online web-based fertilizer monitoring system (FMS), which tracks the import, production, movement, availability, distribution, and sale of fertilizers in all States. Government has placed 20 per cent of the produced/imported decontrolled P & K fertilizer under the Movement Control Order of the Department of Fertilizers as per the Essential Commodities Act 1955 with the objective of making fertilizers available in the difficult areas. The manufacturers of customized and mixture fertilizer are allowed by the Government to source the subsidized fertilizers from the manufacturers/importers after their receipt in the districts.
(v)
Note : *(April-November 2010). DAP : di-ammonium phosphate MOP : muriate of potash.
8.23 Chemical fertilizers play a significant role in the development of the agricultural sector. In India, the per hectare consumption of fertilizers in nutrient terms has been increasing (Table 8.9). 8.24 There have been major policy initiatives in the fertilizer sector. A few recent ones are as follows: (i) Introduction of nutrient-based subsidy scheme with effect from 1 April 2010. Under the nutrientbased subsidy scheme (NBS), Government has amended subsidy per kg of nutrients N, P, K and S contained in P & K fertilizers as well as per MT of fertilizers. Maximum retail prices (MRPs) of the decontrolled P&K fertilizers have been kept open and companies are free to announce their MRPs. However, manufacturers/ importers of fertilizers are required to print MRPs along with applicable NBS on each bag of fertilizer clearly. The failure to do so invites action under the Essential Commodities Act 1955. A uniform freight subsidy policy has been announced under which rail freight is paid on actual and road freight on a normative average district lead for urea. Government has included three new grades of complex fertilizers under the NBS.
(vi)
(vii) Government has put the export of (DAP) and MOP in the restrictive category to discourage export and illegal diversion.
Irrigation
8.25 Irrigation is one of the most important inputs for enhancing productivity and is required at different critical stages of plant growth of various crops. The Government of India has taken up irrigation potential creation through public funding and is assisting farmers to create potential on their own farms. Substantial irrigation potential has been created through major and medium irrigation schemes. The total irrigation potential in the country has increased from 81.1 million hectares in 1991-92 to 108.2 million hectares in March 2010. 8.26 The Central Government initiated the Accelerated Irrigation Benefit Programme (AIBP) from 1996-97 to extend assistance for the completion of incomplete irrigation schemes. Under this programme, projects approved by the Planning Commission are eligible for assistance. Further, the assistance, which was entirely a loan from the Centre in the beginning, was modified by inclusion of a grant component with effect from 2004-05. AIBP guidelines were further modified in December 2006 to provide enhanced assistance at 90 per cent of the project cost as grant to special category States, Drought Prone Area Programme (DPAP) States/tribal areas/flood-prone areas, and Koraput-BalangirKalahandi (KBK) districts of Orissa. Under the AIBP, ` 41,729.37 crore of Central loan assistance (CLA)/ grant has been released up to 31 March 2010. As on 31 March 2010, 281 projects have been covered
(ii)
(iii)
Table 8.9 : Per Hectare Consumption of Fertilizers in Nutrient Terms

(in lakh tonnes) Product Nitrogenous(N) Phosphatic (P) Potash (K) Total (N+P+K) 2006 -07 55.43 23.35 2007 -08 55.15 26.36 2008 -09 65.06 33.13 127.2 2009 -10 72.74. 36.32 135.3 201011* 80.56 41.72 17.13
137.73 144.19 150.90 155.80
216.51 225.70 249.09 264.86 139.41
Per Hectare 111.8 116.50 Consumption (kg)
Note : *Relates to estimated kharif 2010.
198
under the AIBP and 120 completed. Irrigation potential of 9.82 lakh ha is estimated to have been created from major/medium /minor irrigation projects during 2009-10.
Reservoir storage status

8.28 The total designed storage capacity at full reservoir level (FRL) of 81 major reservoirs in the country monitored by the Central Water Commission (CWC) is 151.77 billion cubic metres (BCM). At the end of monsoon 2010, the total live storage in these reservoirs was 115.23 BCM which is more than the live storage of 89.84 BCM at the end of the monsoon in 2009 and also more than 100.25 BCM which is the average of the last 10 years.
RAINFALL
AND
RESERVOIR LEVELS
8.27 Rainfall influences crop production and productivity in a big way in India, with agriculture still being largely rainfed. More than 75 per cent of annual rainfall is received during the southwest monsoon season (June-September). During the south-west monsoon season of 2010, the country as a whole received 2 per cent more rainfall than the long period average (LPA). Central India, north-west India, and the southern peninsula experienced 4 per cent, 12 per cent, and 17 per cent more rainfall respectively. Northeast India received 18 per cent less rainfall than the LPA. At district level, 28 per cent of districts received excess rainfall, 41 per cent normal, 29 per cent deficient, and 2 per cent scanty rainfall. During south-west monsoon 2010, out of 36 subdivisions, 5 recorded deficient rainfall and the remaining 31 excess/normal rainfall. Out of 597 meteorological districts for which data are available, 413 (69 per cent) received excess/ normal rainfall and the remaining 184 (31per cent) deficient/scanty rainfall during the season. The performance of the south-west Monsoon during 2001-10 (June-September) is given in Table 8.10.
PRICE POLICY PRODUCE
FOR
AGRICULTURAL
8.29 The price policy for agricultural commodities seeks to ensure remunerative prices to growers for their produce with a view to encouraging higher investment and production and safeguarding the interest of consumers by making sure that adequate supplies are available. The price policy also seeks to evolve a balanced and integrated price structure in the perspective of the overall needs of the economy. With this aim, the Government announces minimum support prices (MSPs) for major agricultural commodities each season and organizes purchase operations. The designated Central nodal agencies intervene in the market for undertaking procurement operations with the objective of ensuring that the market prices do not fall below the MSPs fixed by the Government. Over the years, the MSPs have been raised reasonably to ensure that farmers are incentivized to enhance production of their crops.
Table 8.10 : Monsoon performance : 2001 to 2010 (June September)

Year Number of meteorological subdivisions Normal Excess Deficient/ scanty 5 21 3 13 4 10 6 4 23 5 Percentage of districts with normal/ excess rainfall 67 39 77 56 72 60 72 76 41 69 Percentage of long period average rainfall for the country as a whole 92 81 102 86 99 99 105 98 77 102
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
29 14 26 23 23 20 17 30 10 17
1 1 7 0 9 6 13 2 3 14
Source : India Meteorological Department. Note: Excess: +20 per cent or more of LPA; Normal: +19 per cent to -19 per cent of LPA; Deficient: -20 per cent to -59 per cent of LPA; Scanty: -60 per cent to -99 per cent of LPA.
Agriculture and Food Management These operations involving high costs have put considerable fiscal strain on the economy. The MSPs of kharif and rabi crops of 2009-10 and 2010-11 are given in Table 8.11. 8.30 In addition, Government has also notified the MSPs of commercial crops like copra, raw jute, dehusked coconut, and toria. The MSPs for fair average quality (FAQ) variety of milling copra and FAQ variety of ball copra for 2010 season have been fixed at ` 4450 per quintal and ` 4700 per quintal respectively. The MSP for de-husked coconut for 2010 season has been fixed at ` 12 per kg, for TD-5 variety of ex-Assam raw jute for Table 8.11 : Minimum support prices
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2010 -11 season at `1575 per quintal , and for toria of FAQ variety for 2010-11 to be marketed in 201112 at ` 1780 per quintal. 8.31 The National Agricultural Cooperative Marketing Federation of India Ltd. (NAFED), the Central Nodal Agency for implementing price support operations for commercial crops, entered the markets with a view to safeguarding the interest of coconut growers and procured 44,418 quintals of milling copra and 480 quintals of ball copra up to 4 October 2010, as the wholesale prices ruled below their MSPs for 2010 season. During the marketing season 2010-11, month-end wholesale price of
(` per quintal) 2009-10 2010-11 Difference between 2010-11 and 2009-10 Prices (in `)
Kharif Crops Paddy (common) Paddy (Gr.A) Jowar (Hybrid) Jowar (Maldandi) Bajra Maize Ragi Arhar (Tur) Moong Urad Groundnut in shell Sunflower Soyabean (black) Soyabean (yellow) Seasmum Nigerseed Cotton (F-414/H-777/J34 Rabi crops Wheat Barley Gram Masur (lentil) Rapeseed/Mustard Safflower 1100 750 1760 1870 1830 1680 1120 780 2100 2250 1850 1800 20 30 340 380 20 120 950 980 840 860 840 840 915 2300 2760 2520 2100 2215 1350 1390 2850 2405 2500 1000 1030 880 900 880 880 965 3000* 3170* 2900* 2300 2350 1400 1440 2900 2450 2500 50 50 40 40 40 40 50 700 410 380 200 135 50 50 50 45 0
Note: * An additional incentive at the rate of ` 5 per kg is also available for tur, moong, and urad sold to procurement agencies during the harvest/arrival period of two months.
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Economic Survey 2010-11 (PoA). The Mission also emphasizes the need to harness traditional knowledge and agricultural heritage for in-situ conservation of genetic resources. 8.34 The PoA would be operationalized by mainstreaming adaptation and mitigation strategies in ongoing R&D programmes and in flagship schemes including the Rashtriya Krishi Vikas Yojana (RKVY), National Horticulture Mission (NHM), and National Food Security Mission (NFSM) through a process of selective upscaling and course correction measures. This would further be supplemented by introduction of new programmatic interventions and by seeking convergence with other National Missions and collaborations with key Ministries/ Departments for institutionalizing linkages in order to address cross-sectoral issues.
TD-5 grade raw jute ruled above the MSP and therefore no procurement was made under the Price Support Scheme.
SCHEMES/PROGRAMMES AGRICULTURE SECTOR
IN THE
8.32 Agriculture is a State subject. Hence the primary responsibility for increasing agricultural production, enhancing productivity, and exploring the vast untapped potential of the sector rests with the State Governments. Central Government supplements the efforts of the State Governments through a number of centrally sponsored and Centralsector schemes. The major schemes/programmes are as follows:
National Mission for Sustainable Agriculture

8.33 While agricultural productivity is adversely affected by climate change, agricultural activity itself contributes to global warming. The adoption of ecological agriculture, which integrates natural regenerative processes, minimizes non-renewable inputs, and fosters biological diversity, has tremendous scope for reducing emissions and enhancing soil carbon sequestration. At the same time, many ecological agricultural practices also constitute effective strategies for adapting to climate change, which is a priority for developing countries. This calls for more investment and policy support to be devoted to this productive and sustainable form of farming. Recognizing the challenge of climate change to Indian agriculture, the National Mission for Sustainable Agriculture (NMSA), which is one of the eight Missions under the National Action Plan on Climate Change (NAPCC) has been conceptualized. It seeks to address issues regarding sustainable agriculture in the context of risks associated with climate change by devising appropriate adaptation and mitigation strategies for ensuring food security, enhancing livelihood opportunities, and contributing to economic stability at national level. While promotion of dry-land agriculture would receive prime importance by way of developing suitable drought and pest resistant crop varieties and ensuring adequacy of institutional support, the Mission would also expand its coverage to rainfed areas for integrating farming systems with livestock and fisheries, so that agriculture continues to grow in a sustainable manner. The Mission identifies ten key dimensions for promoting sustainable agricultural practices, which will be realized by implementing a programme of action
Macro Management of Agriculture

8.35 The Macro Management of Agriculture (MMA) scheme was revised in 2008 to improve its efficacy in supplementing / complementing the efforts of the States towards enhancement of agricultural production and productivity and provide opportunity to draw upon their agricultural development programmes relating to crop production and natural resource management, with the flexibility to use 20 per cent of resources for innovative components. The revised MMA Scheme has formula-based allocation criteria and provides assistance in the form of grants to the States/UTs on 90:10 basis except in case of the north-eastern States and Union Territories where the Central share is 100 per cent. MMA assistance during 2010-11 has been used to treat 3.02 lakh ha of land under the National Watershed Development Project for Rainfed Areas (NWDPRA) and 1.94 lakh ha under River Valley Projects (RVP) sub-schemes and for financing acquisition of 10,208 tractors and 5766 power-tillers among other farm machinery.
The National Food Security Mission (NFSM)

8.36 The NFSM was launched in rabi 2007-08 with a view to enhancing the production of rice, wheat, and pulses by 10 million tonnes, 8 million tones, and 2 million tonnes respectively by the end of the Eleventh Plan. The Mission aims to increase production through area expansion and productivity; create employment opportunities; and enhance the farm-level economy to restore confidence of farmers. The NFSM is presently being implemented in 476 identified districts of 17 States of the country.
Agriculture and Food Management Besides, a series of activities for more vigorous promotion of pulse crops has been adopted under the NFSM to intensify the pulse production programme from 2010-11. These are: i) Merging of the pulse component of the Integrated Scheme of Oilseeds, Pulses, Oil Palm and Maize (ISOPOM) with the NFSM so as to increase the scope and area coverage of the pulses programme. Jharkhand and Assam have also been included under the programme since there is immense potential for pulse promotion in rice fallows. Through a new programme under the NFSM called the Accelerated Pulses Production Programme (A3P), 1000 block demonstrations of technology have been launched from 201011. This programme will essentially promote plant nutrients- and plant protection-centric technologies in compact blocks of 1000 ha each for five major pulse crops, namely, tur, moong, urad, gram, and lentil.
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pulses promotion strategies and other initiatives undertaken to boost agricultural productivity in these states. 8.41 The progress reports received from the States indicate significant achievements under the NFSM during the course of its implementation in the last four years, i.e. during 2007-08 to 2010-11(till date). New farm practices have been encouraged through 3.24 lakh demonstrations of improved package of practices. As many as 63,273 demonstrations of the system of rice intensification (SRI), and 32,344 demonstrations of hybrid rice have been conducted. Nearly, 96.84 lakh quintals of high yielding variety seeds of rice, wheat, and pulses and hybrid rice have been distributed. About 72.27 lakh ha of area has been treated with soil ameliorants, such as gypsum/lime/micro nutrients to restore soil fertility for higher productivity. An area of about 29.25 lakh ha has been treated under Integrated Pest Management (IPM). Further, nearly 21.27 lakh improved farm machineries, including water-saving devices have been distributed. As a capacity-building initiative, 33,205 farmers field school (FFS) - level trainings have so far been held. In addition, about 353 (3.53 lakh ha) block demonstrations have been conducted during the 2010 kharif under the A3P.
ii)
8.37 Focused and target-oriented technological intervention under the NFSM has made significant impact since its inception, reflected in the increase in production of rice and wheat in 2008-09 and 2009-10. 8.38 From 2010-11, as a new initiative, the A3P has been launched as a part of NFSM Pulses. Under the A3P, one million ha of potential pulses area, covering tur, urad, moong, gram, and lentil, has been taken up for large-scale demonstration of technology in compact blocks. A total of 600 A3P units of tur, urad, moong, gram, and lentil have been proposed for 2010-11. For organizing A3P units at the farmers fields, an amount of ` 54.66 lakh per unit has been proposed. 8.39 Further, an amount of ` 300 crore has been provided in the Union Budget 2010-11 for promoting dry-land farming in 60,000 pulses and oilseeds villages in rainfed areas. These funds have been provided as additional Central assistance under the ongoing RKVY to the States of Andhra Pradesh, Gujarat, Karnataka, Madhya Pradesh, Maharashtra, Rajasthan, and Uttar Pradesh. 8.40 Another programme, namely Bringing Green Revolution in the Eastern States is operational in seven statesUttar Pradesh, Jharkhand, Bihar, West Bengal, Assam, Orissa, and Chhattisgarh. The Rice Development and Organizing Pulses and Oilseeds Villages is another programme, beside the
The Rashtriya Krishi Vikas Yojana (RKVY)

8.42 The RKVY was launched in 2007-08 with an outlay of ` 25,000 crore for the Eleventh Plan to incentivize States to enhance public investment so as to achieve a 4 per cent growth rate in agriculture and allied sectors during the Plan. During the threeyear period 2007-10, an amount of ` 7895.12 crore was released under the RKVY. Out of the budget provision of ` 6722crore for implementation of the RKVY in the States, an amount of ` 3986.76 crore has been released as on 25 November 2010. Specific allocation has to be made for the following three new initiatives introduced under the RKVY in 2010-11: (i) Extending the Green Revolution to the eastern region of the country, covering the States of Assam, Bihar, Chhattisgarh, Jharkhand, Orissa, eastern UP, and West Bengal, with the objective of increasing the crop productivity of the region by intensive cultivation through recommended agricultural technologies and package of practices. Special initiatives for pulses and oilseeds in dry-land areas by organizing 60,000 pulses and oilseeds villages in identified watersheds
(ii)
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Economic Survey 2010-11 where pulse and oilseed farmers are provided farm machinery and equipment on customhiring basis. These initiatives dovetail with other schemes of the Government of India having components for promotion of oilseeds and pulses production. Development Programme is under implementation in 15 States, viz. Andhra Pradesh, Bihar, Chhattisgarh, Himachal Pradesh, Jammu and Kashmir, Gujarat, Karnataka, Madhya Pradesh, Maharashtra, Orissa, Punjab, Rajasthan, Tamil Nadu, Uttar Pradesh, and West Bengal.
(iii)
Implementation of the National Mission on Saffron Economic Revival of Jammu & Kashmir Saffron Sector during 2010-11.
Drought Management
8.45 Due to deficit rainfall during south-west monsoon 2010 in Bihar, Jharkhand, Orissa, and West Bengal, the Central share of the State Disaster Response Fund (SDRF) for 2010-11 has been released to enable these States to expeditiously take the necessary drought-mitigation measures. In view of drought/deficit rainfall in certain regions, it was decided to implement a Diesel Subsidy during kharif 2010 (14 July 2010 to 30 September2010) in drought/ deficit rainfall areas to save the standing crops in the field.
8.43 The RKVY has linked 50 per cent of Central assistance to the percentage of State Plan expenditure on agriculture and allied sectors. This has incentivized States to step up allocation to agriculture and allied sectors, which was 5.11per cent of total State Plan Expenditure in 2006-07, to 6.29 per cent in 2009-10. The RKVY has emerged as the principal instrument in financing development of agriculture and allied sectors in the country. Its convergence with other schemes like the Mahatma Gandhi National Rural Employment Scheme (MGNREGA) is expected to boost development of the agrarian economy. The States will take up projects under the RKVY primarily from amongst those that appear in their District and State Agriculture Plans. There will be increased synergy between agricultural planning and implementation of schemes in the coming years, which will play a crucial role in promoting holistic development of agriculture and allied sectors.
ALLIED SECTORS
The National Horticulture Mission (NHM)
8.46 The Ministry of Agriculture has been implementing the centrally sponsored NHM for the holistic development of the horticulture sector since 2005-06, duly ensuring forward and backward linkages, and with the active participation of all the stakeholders. All the States and the three Union Territories of Andaman and Nicobar Islands, Lakshadweep, and Puducherry are covered under the Mission except the eight north-eastern States including Sikkim and the States of Jammu and Kashmir, Himachal Pradesh, and Uttarakhand. The latter are covered under the Horticulture Mission for the North East and Himalayan States (HMNEH).The scheme is being implemented in 372 districts in the country. During 2005-06 to 200910, an additional 16.57 lakh ha of identified horticulture crops has been covered. Apart from establishment of 2192 nurseries for production of quality planting materials, 2.78 lakh ha has been covered under rejuvenation of old and senile orchards. Organic cultivation of horticultural crops has been adopted in an area of 1.37 lakh ha. 8.47 With the implementation of the NHM and other schemes, the production of horticulture crops has increased from 170.8 million tonnes in 200405 to 214.7 million tonnes in 2008-09. The per capita availability of fruits and vegetables has increased from 391 gram/day in 2004-05 to 466 gram/day in 2008-09.
The Integrated Scheme of Oilseeds, Pulses, Oil Palm and Maize (ISOPOM)
8.44 The ISOPM is being implemented in 14 major States for oilseeds and pulses, 15 for maize, and 10 for oil palm. The pulses component has been merged with the NFSM with effect from 1 April 2010. The Scheme provides flexibility to the States in implementation based on a regionally differentiated approach to promoting crop diversification. Under the Scheme, assistance is provided for purchase of breeder seed, production of foundation seed, production and distribution of certified seed, distribution of seed minikits, plant protection chemicals, plant protection equipment, weedicides, gypsum/ pyrite/ liming/ dolomite, sprinkler sets, and water carrying pipes, supply of rhizobium culture/ phosphate solubilizing bacteria and improved farm implements, publicity, etc. The Oil Palm Development Programme under the ISOPOM is being implemented in the States of Andhra Pradesh, Karnataka, Tamil Nadu, Gujarat, Goa, Orissa, Kerala, Tripura, Assam, and Mizoram. Its Maize
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Technology Mission for Integrated Development of Horticulture in North Eastern States, Sikkim, Jammu and Kashmir, Himachal Pradesh, and Uttarakhand
8.48 The Technology Mission for Integrated Development of Horticulture was launched in 200102 to address issues related to production and productivity, post harvest handling, marketing, and processing of horticultural crops in the north- eastern States. The Mission was extended to the three Himalayan States, namely Himachal Pradesh, Jammu and Kashmir, and Uttarakhand in 2003-04. It covers the entire spectrum of horticulture development right from production to consumption through backward and forward linkages. During the course of its implementation, it was realized that some additional components need to be introduced to achieve the objective of holistic growth of the horticulture sector. Accordingly, some new components such as high density planting, vegetable seed production, and horticulture mechanization have been included in the Mission. This has now been renamed the Horticulture Mission for North East and Himalayan States (HMNEH) along with revision of the cost norms so as to incentivize investment and supplement income generation for the beneficiaries. 8.49 The implementation of the Mission has helped bring an additional 5,12,614 ha under various horticulture crops (fruits, vegetables, spices, plantation crops, medicinal plants, aromatic plants, root, and tuber crops) in these States. In addition, 26,571 ha of senile and unproductive orchards have been rejuvenated to increase productivity. The Mission has succeeded in bringing 54,938 ha under organic farming. Major infrastructure which has come up under the Mission includes 974 nurseries, 10,979 community tanks, and 12,758 tube wells. Drip irrigation has been extended to 16,303 ha. Twentyfive model floriculture centres, fifty-nine herbal gardens, twenty-five tissue culture units, and twentytwo disease forecasting units have also been set up. The Mission gave special thrust to protected cultivation of high-value crops like tomato, coloured capsicum, strawberry, and flowers to ensure quality production. Special attention has been given to promoting and popularizing mechanization in horticulture. So far 5,785 power tillers, 4,64,595 manually operated machines, 12,542 power operated implements, and 12,887 diesel engines have been distributed among the farmers of the region. To strengthen the hands of women farmers, self-help groups (SHGs) have been promoted. Till now 8527
SHGs have been formed that are involved in the promotion of floriculture and in exports. For proper handling and marketing of horticultural produce, 47 wholesale markets, 344 rural primary/Apni Mandies, 35 cold storages, and 64 processing units have been set up. Under the Mission 2,65,435 persons, including 53,276 women, have so far been trained.
Micro Irrigation
8.50 The Centrally sponsored National Mission on Micro Irrigation (NMMI) was launched in June 2010 in addition to the earlier Micro Irrigation Scheme launched in January 2006. The Mission is being implemented during the Eleventh Plan period for enhancing water-use efficiency by adopting drip and sprinkler irrigation systems in all States and Union Territories for both horticulture and agricultural crops. The scheme provides assistance at 60 per cent of the system cost for small and marginal farmers and at 50 per cent for general farmers. Since 2005-06, a sum of ` 2739 crore has been released by the Government of India under the scheme and 2.27 lakh ha brought under microirrigation. The system is beneficial for farmers in increasing crop productivity and water-use efficiency; reducing fertilizer consumption (fertigation through drip system) and electricity and labour consumption; and enhancing income.
National Bamboo Mission (NBM)

8.51 With a view to harnessing the potential of the bamboo crop in the country, the Ministry of Agriculture has been implementing the centrally sponsored NBM in 27 States in the country with a total outlay of ` 568.23 crore. The Mission aims to promote holistic growth of the bamboo sector by adopting an area-based, regionally differentiated strategy and to increase the area under bamboo cultivation and marketing. Under the Mission, steps have been taken to increase the availability of quality planting material by supporting the setting up of new nurseries/tissue culture units and strengthening of existing ones. To address forward integration, the Mission is taking steps to strengthen the marketing of bamboo products, especially handicraft items. During the current year (2010-11), 7946 ha forest and 2079 ha non-forest area has been covered under bamboo plantation.
Rubber
8.52 India is the fourth largest producer of natural rubber (NR) with a share of 8.5 per cent in world production in 2009. Despite not having the best of
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Economic Survey 2010-11 Table 8.12 : Production and per capita availability of milk
Year Per capita availability (grams/day) 176 220 241 246 252 258 263 Production (million tonnes) 53.9 80.6 97.1 100.9 104.8 108.5 112.5
geographically favourable regions for growing NR, India continued to record the highest productivity among major NR-producing countries. The production of NR in 2010-11 is projected at 851,000 tonnes, which is an increase of 2.4 per cent over 2009-10. India has emerged as the second largest consumer of NR, overtaking the United States with a share of 9.6 per cent in world consumption in 2009. Consumption of NR in 2010-11 is projected at 948,000 tonnes, which is an increase of 1.9 per cent over the previous year. Given the relatively higher domestic prices prevailing in the last many months, exports of NR are expected to be lower and imports higher in 2010-11.
1990-91 2000-01 2005-06 2006-07 2007-08 2008-09 2009-10
Coffee
8.53 India ranks sixth in coffee production after Brazil, Vietnam, Columbia, Indonesia, and Ethiopia. It produces both Arabica and Robusta varieties of coffee in a proportion of 33:67. Coffee is cultivated in about 3.99 lakh ha mainly confined to the southern States of Karnataka, Kerala, and Tamil Nadu, which form the traditional coffee tracts. To a lesser extent, coffee is also grown in non-traditional areas like Andhra Pradesh, Orissa, and the north-eastern States, the main emphasis being tribal development and afforestation. Coffee is predominantly an exportoriented commodity in India with 65 to 70 per cent of the production being exported, thereby earning considerable foreign exchange. For the past five to six years, the productivity in India has been around 800 kg/ha. The production of coffee stood at 2,89,600 MT in 2009-10. For the year 2010-11, the post monsoon crop estimate is placed at 2,99,000 MT.
Source: Department of Animal Husbandry, Dairying and Fisheries.
Five Year Plan envisages an overall growth of 6-7 per cent per annum for the sector. In 2009-10, this sector produced 112.5 million tonnes of milk, 59.8 billion eggs, 43.2 million kg wool, and 4.0 million tonnes of meat. The result of the 18th Livestock Census (2007), derived from village-level count, has placed the total livestock population at 529.7 million and poultry birds at 648.8 million. 8.56 India ranks first in world milk production, increasing its production from 17 million tonnes in 1950-51 to about 112.5 million tonnes in 2009-10 (Table 8.12). The per capita availability of milk has also increased from 112 grams per day in 1968-69 to 263 gram per day in 2009-10. It is however still low compared to the world average of 279.4 grams/ day, as per FAOSTAT (Food and Agriculture Organization Statistical Database) 2009 data. Box 8.2 gives some details of the milk situation in India. 8.57 A major programme for genetic improvement called the National Project for Cattle and Buffalo Breeding (NPCBB) was launched in October 2000 to be implemented over a period of 10 years in two phases of five years each. The NPCBB envisages genetic upgradation and development of indigenous breeds on priority basis. At present, 28 States and one Union Territory are participating in the project.
Tea
8.54 India is the largest producer and consumer of black tea in the world. Tea is grown in 16 States in India. Assam, West Bengal, Tamil Nadu and Kerala account for about 96 per cent of the total production. The teas originating from Darjeeling, Assam, and the Nilgiris are well known for their distinctive flavours the world over. Tea production in India during the year 2009-10 has been estimated at 991.18 million kg against 972.77 million kg achieved in 2008-09.
Livestock insurance
8.58 A Centrally sponsored scheme of livestock insurance is being implemented in all the States with twin objectives: providing protection mechanism to the farmers and cattle rearers against any eventual loss of their animals due to death; and demonstrating the benefits of insuring livestock to the people. The scheme, which was introduced in 100 selected districts on pilot basis during 2005-06, has now been
ANIMAL HUSBANDRY, DAIRYING, AND FISHERIES

8.55 The livestock & fisheries sector contributed over 4.07 per cent to the total GDP during 2008-09 and about 29.7 per cent to the value of output from total agricultural and allied activities. The Eleventh
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Box 8.2 : Milk Scenario in India

Annual milk production in India has grown more than six times since independence. The average annual growth rate in the production of milk in recent years has been close to 4 per cent. Even though the level of per capita availability at 263 gram/ day for India in 2009-10 is much lower than that in developed countries, it is well above the developing country average. The Eleventh Five Year Plan envisages an overall growth of 6-7 per cent per annum for the sector. As per an assessment made by the Planning Commission, the domestic demand for milk by 2021-22 is expected to be 172.20 million tonnes. As projected under the proposed National Dairy Plan, the production of milk in the country is required to increase to 180 million tonnes by 2021-22 to meet the demand. However, the country has not been able to keep pace with the domestic demand for milk. The domestic demand for milk is growing at about six million tonnes per year whereas annual incremental production over the last ten years has been about 3.5 million tonnes per year. With higher growth of the economy, increase in population, and increased health consciousness among the populace, it is only natural that the demand for milk and milk products will increase leading the proportion of income spent on milk and milk products to increase. Further, urban centres will demand more and more processed and packaged dairy products but in the rural areas people may still prefer to purchase from the local milkmen. About 80 per cent of milk produced in the country is still handled in the unorganized sector and only the remaining 20 per cent is equally shared by cooperatives and private dairies. Despite the appreciable growth in the milk production in the last six decades, the productivity of our animals is still low. Our marketing systems are also not modernized or developed to a satisfactory level. Other issues in this sector are ineffective breeding programmes, limited availability and affordability of quality feed and fodder, improper veterinary infrastructure, lack of vaccinations, inadequate access to formal credit mechanisms, inadequate research capacity, limited processing capacity, and lack of transport. Considering that the requirement of milk in 2021-22 is expected to be 180 million tonnes and the current level of milk production is 112 million tonnes, the milk production must increase at around 5.5 per cent per annum in the next 12 years. If it fails to do so, India may need to resort to imports from the world market. A large consumer like India entering the international market would have the potential to cause international prices to spurt. Hence it is prudent that we depend on the domestic market and develop the milk sector with the right attention and focus and the required investment. Recent hikes in prices of milk and milk products have been a matter of concern. The gap between domestic demand for milk and production of milk has put upward pressure on milk prices in the country. A strong supply response with focus on production and productivity can only keep the prices stable.
extended to 300 selected districts covering all states. The scheme benefits farmers and cattle rearers having milch cattle and buffaloes. In 2010-11, `. 20.12 crore has been released up to December 2010 and 20.63 lakh animals were insured from 2006-07 to 2009-10.
Poultry
8.59 Poultry development is one of the most resilient sectors in the country, fast adapting itself to the changing biosecurity, health, and food safety needs. India produces more than 59.8 billion eggs per year, with per capita availability of 51 eggs per annum. The poultry meat production is estimated to be 1.85 million tonnes in 2008-09. To provide necessary services to the farmers, four regional Central Poultry Development Organizations (CPDOs) have been restructured on the principle of onewindow service. These are located at Chandigarh, Bhubaneswar, Mumbai, and Hessarghatta. They
impart training to farmers to upgrade their technical skills. The Central Poultry Performance Testing Center (CPPTC), located at Gurgaon is entrusted with responsibility of testing the performance of layer and broiler varieties. This Center gives valuable information relating to different genetic stocks available in the country. The Centrally sponsored Poultry Development scheme has three components, Assistance to State Poultry Farms, Rural Backyard Poultry Development, and Poultry Estates. Assistance to State Poultry Farms aims at strengthening existing State poultry farms to enable them to provide improved stocks suitable for rural backyard rearing. The main objective of the Rural Backyard Poultry Development component is to provide supplementary income and nutritional support to below poverty line (BPL) people. Poultry Estates are aimed primarily at educated, unemployed youth and small farmers with some margin money, to make profitable ventures out of
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Economic Survey 2010-11 and Feed Development Scheme with effect from 1 April 2010 to supplement the efforts of the States to improve fodder production. Financial assistance to the tune of ` 2903.04 lakh (up to December 2010), has been provided to the States in 2010-11. Under the Central Minikit Testing Programme, fodder seed minikits of latest high-yielding fodder varieties are distributed free of cost to farmers. During the current year (2010-11) 11.79 lakh fodder seed minikits have been allotted to the States for distribution to farmers.
various poultry- related activities. The Central-sector, Poultry Venture Capital Fund scheme encourages entrepreneurship skills of individuals, covering various poultry activities.
Livestock health
8.60 Animal wealth in India has increased manifold prompting the animal husbandry sector to adopt modern practices. With increased trade activity and extensive cross-breeding programmes, the chances of ingress of exotic diseases into the country have increased. To ensure disease-free status and be compatible with the standards laid down by the World Animal Health Organization, many animal health schemes have been initiated, which provide financial assistance to States/UTs to control major livestock and poultry diseases and strengthen veterinary services including reporting of animal diseases. All avian influenza outbreaks reported were effectively controlled and the country declared free from avian influenza in June 2010.
CREDIT
AND
INSURANCE
Agricultural Credit
8.63 From Kharif 2006-07 to 2008-09, farmers were receiving crop loans up to a principal amount of ` 3 lakh at 7 per cent interest. In the year 200910, Government provided an additional 1 per cent interest subvention to those farmers who repaid their short-term crop loans as per schedule. The Government has raised this subvention for timely repayment of crop loans from 1 per cent to 2 per cent from the year 2010-11. Thus the effective rate of interest for such farmers will be 5 per cent per annum.
Fisheries Fisheries
8.61 Fish production increased from 7.14 million tonnes in 2007-08 to 7.85 million tonnes in 2009-10. Fishing, aquaculture, and allied activities are reported to have provided livelihood to over 14 million persons in 2008-09, apart from being a major foreign exchange earner (Table 8.13).
Revamping of Cooperative Credit Structure

8.64 In January 2006, the Government announced a package for revival of the Short-term Rural Cooperative Credit Structure involving financial assistance of ` 13,596 crore. The National Bank for Agriculture and Rural Development (NABARD) has been designated the implementing agency for the purpose. States are required to sign memorandums of understanding (MoUs) with the Government of India and NABARD, committing to implementation of the legal, institutional and other reforms as envisaged in the revival package. So far
Feed and fodder

8.62 Adequate availability of feed and fodder for livestock is very vital for increasing milk production and sustaining the ongoing genetic improvement programme. The estimated green fodder shortage in the country is about 34 per cent. The Department of Animal Husbandry & Dairying has been implementing a modified centrally sponsored Fodder
Table 8.13 : Production and export of fish

Fish production (million tonnes) Year 1990-91 2000-01 2005-06 2006-07 2007-08 2008-09 2009-10 Marine 2.3 2.8 2.8 3.0 2.9 3.0 2.98 Inland 1.5 2.8 3.8 3.8 4.2 4.6 4.87 Total 3.8 5.6 6.6 6.8 7.1 7.6 7.85 Export of marine products Qty (000 tonnes) 140 503 551 612 541 602 664 Value (` crore) ` 893 6288 7019 8363 7620 8608 9921
Agriculture and Food Management twentyfive States have executed such MoUs.This covers 96 per cent of the primary agricultural cooperative societies (PACS) and 96 per cent of the Central cooperative banks (CCBs) in the country. As of November 2010, an amount of ` 8009.75 crore has been released by NABARD as Government of India share for recapitalization of 49,983 PACS.
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Rehabilitation Package for Distressed Farmers

8.65 The Government is implementing a rehabilitation package for 31 suicide- prone districts in the States of Andhra Pradesh, Karnataka, Kerala, and Maharashtra involving a financial outlay of ` 16,978.69 crore. Special packages are being implemented in Kerala for the development of Kuttanad wetland ecosystem and mitigation of agrarian distress in Idukki district with an outlay of ` 1840.75 crore and ` 764.45 crore, respectively.
Company of India Ltd. (AIC) is the implementing agency (IA) for the Scheme. The main objective of the scheme is to protect farmers against crop losses suffered on account of natural calamities. The scheme is available to all the farmersloanee and non-loaneeirrespective of their size of holding. It is operating on the basis of an area approach. It envisages coverage of all the food crops, oilseeds, and annual commercial/horticultural crops in respect of which past yield data are available for adequate number of years. Premium rates for food and oilseeds crops are ranging between 1.5 per cent and 3.5 per cent. In case of annual commercial/horticultural crops, actuarial premiums are being charged. A 10 per cent subsidy is available for small and marginal farmers. All financial liabilities under the scheme are shared by the Central and State Governments on 50: 50 basis. The scheme is at present being implemented by 25 States and two UTs.
ii) The Pilot Modified NAIS (MNAIS)

Keeping in view the limitations/shortcomings of the existing scheme, the Government has approved the Modified NAIS for implementation on pilot basis in 50 districts from rabi 2010-11 season. The major improvements made in the MNAIS are: actuarial premium with subsidy in premium at different rates, i.e. 40 per cent to 75 per cent depending upon the slab, provided to farmers, all claims liability on the insurer, unit area of insurance reduced to village panchayat level for major crops, indemnity for prevented/sowing/planting risk and for post harvest losses due to cyclone, payment up to 25 per cent advance of likely claims as immediate relief, more proficient basis for calculation of threshold yield, minimum indemnity level of 70 per cent instead of 60 per cent, and private-sector insurers with adequate infrastructure allowed (at present, ICICILombard, IFFCO-Tokio and Cholamandalam-MS). Only upfront premium subsidy is shared by the Central and State Governments on 50: 50 basis and claims are the liability of the insurance companies. Seven States have already notified the areas for implementation of the scheme during rabi 2010-11. It is expected that the scheme will be notified by 1415 States.
Kisan Credit Card (KCC) Scheme

8.66 The KCC scheme was introduced in August 1998. About 970.64 lakh KCCs have been issued up to September 2010. The scheme includes reasonable components of consumption credit and investment credit within the overall credit limit sanctioned to the borrowers to provide adequate and timely credit support to the farmers for their cultivation needs
Task Force on Private Moneylenders

8.67 A Task Force has been constituted under the chairmanship of Chairman, NABARD, to look into the issue of a large number of farmers who had taken loans from private moneylenders in the country. The Task Force has submitted its report in June 2010. This has been circulated to stakeholders for furnishing their comments/ views.
Agricultural Insurance
8.68 Four crop insurance schemes, namely the National Agricultural Insurance Scheme (NAIS), Pilot Modified NAIS (MNAIS), Pilot Weather Based Crop Insurance Scheme (WBCIS), and Pilot Coconut Palm Insurance Scheme (CPIS) are under implementation in the country.
iii) Weather Based Crop Insurance Scheme (WBCIS)

Efforts have been made to bring more farmers under the fold of crop insurance by introducing a Weather Based Crop Insurance Scheme (WBCIS) as announced in the Union Budget 2007 in selected
i) The National Agricultural Insurance Scheme (NAIS)

The NAIS is being implemented in the country from rabi 1999-2000 season. The Agriculture Insurance
208
Economic Survey 2010-11 States and Union Territories have enacted legislations (the Agriculture Produce Marketing Committee [APMC] Act) to provide for regulation of agricultural produce markets. Seventeen States/ UTs have amended their APMC Acts and the remaining are in the process of doing so (Table 8.14). There are 7157 regulated markets in the country as on 31March 2010. The country has 21,221 rural periodical markets, about 15 per cent of which function under the ambit of regulation. The advent of regulated markets has helped mitigate the market handicaps of producers/ sellers at wholesale assembling level. Internet connectivity is being provided to important agricultural markets in the country to establish a nationwide information network for speedy collection of prices and market-related information. Presently, wholesale prices of 300 commodities and about 2000 varieties are being reported on the Agricultural Marketing Information Network (AGMARKNET) portal from more than 1900 markets. But rural periodic markets in general and tribal markets in particular have remained outside the ambit of the APMC Act. 8.70 Other major initiatives include setting up of terminal market complexes (TMC) for fruits, vegetables, and other perishables in important urban centres in those States which provide for market reforms as per the Model Act. These markets will
areas on pilot basis. The WBCIS is intended to provide insurance protection to farmers against adverse weather incidences, which are deemed to unfavourably impact crop production. It has the advantage of settling claims within the shortest possible time. The WBCIS is based on actuarial rates of premium but to make the scheme attractive, premium actually charged from farmers have been restricted on a par with the NAIS. In addition to the Agriculture Insurance Company of India Ltd. (AIC), private insurers have also been included for implementing the scheme in selected areas. During kharif 2007 to kharif 2010, about 81 lakh farmers have been covered under the pilot scheme.
iv) Coconut Palm Insurance Scheme (CPIS)

The CPIS is being implemented on pilot basis since 2009-10 in selected areas of Andhra Pradesh, Goa, Karnataka, Kerala, Maharashtra, Orissa, Tamil Nadu, and West Bengal. The scheme is administered by the Coconut Development Board (CDB) through the AIC. As on 30 July 2010, 14.33 lakh palms of about 27,023 farmers have been covered under the scheme.
Agricultural Marketing
8.69 Organized marketing of agricultural commodities is being promoted in the country through a network of regulated markets. Most of the
Table 8.14 : Progress of Reforms in Agricultural Markets (APMC Act) (as on 31 October 2010)
Sl. No. 1. Stage of reforms Reforms to the APMC Act have been done for Direct Marketing; Contract Farming and Markets in Private/Coop. Sectors. Name of State/ Union territory Andhra Pradesh, Arunachal Pradesh, Assam, Chhattisgarh, Goa, Gujarat, Himachal Pradesh, Jharkhand, Karnataka, Madhya Pradesh, Maharashtra, Mizoram, Nagaland, Orissa, Rajasthan, Sikkim, and Tripura (a) (b) (c) 3. There is no APMC Act and hence not requiring reforms Direct Marketing:NCT of Delhi Contract Farming:Haryana, Punjab and Chandigarh Private Markets:Punjab and Chandigarh
2.
Reforms to APMC Act have been done partially
Bihar*, Kerala, Manipur, Andaman & Nicobar Islands, Dadra & Nagar Haveli, Daman & Diu ,and Lakshadweep Tamil Nadu Meghalaya, Haryana, J&K, Uttarakhand, West Bengal, Pondicherry, NCT of Delhi and Uttar Pradesh
4. 5.
The APMC Act already provides for reforms Administrative action has been initiated for the reforms
Note: * APMC Act has been repealed with effect from September 1, 2006.
Agriculture and Food Management provide state-of-the-art infrastructure facilities for electronic auction, cold chain and logistics, and operate through primary collection centres conveniently located in producing areas to allow easy access to farmers.
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Extension Services
8.71 A scheme called Support to State Extension Programmes for Extension Reforms was launched in 2005-06, with the aim of making the extension system farmer driven and farmer accountable. For this purpose new institutional arrangements are being made for technology dissemination in the form of an Agricultural Technology Management Agency (ATMA) at district level to operationalize the extension reforms with the active participation of farmers/ farmer groups, non-government organizations (NGOs), Krishi Vigyan Kendras, Panchayati Raj Institutions and other stakeholders operating at district level and below. Up to October 2010, 591 district-level ATMAs have been established. Gender concerns are being mainstreamed by mandating that 30 per cent of resources on programmes and activities are allocated for women farmers and extension functionaries. 8.72 The Mass Media Support to Agriculture Scheme focuses on use of Doordarshan infrastructure for providing agriculture-related information and knowledge to the farming community. Audio/ video spots on emerging issues/ schemes such as rabi/kharif campaign, Kisan Call Centre Scheme, and KCC are publicized using free commercial time. Live crop seminars on Doordarshan involving farmers and experts have also been organized. The mass media initiative also includes the use of 96 All India Radio FM transmitters to broadcast 30-minute area-specific agricultural programmes six days a week. With a view to creating awareness about assistance available under various schemes, a Focused Publicity Campaign has been launched during 2010-11. Under this campaign publicity through newspapers as well as electronic media was carried out. 8.73 The Kisan Call Centre scheme was launched in 2004 to provide agricultural information to the farming community through toll-free telephone lines. A country-wide common 11-digit number1800180-1551has been allocated for KCCs. Replies to the queries of the farming community are being provided in 22 local languages. Calls are attended to from 6.00 am to 10.00 pm on all seven days of the week.
8.74 The Agri-clinic and Agri-business Centres Scheme was launched in 2002 to provide extension services to farmers on payment basis through setting up of economically viable selfemployment ventures. Selected trainees are provided agri-preneurship training. NABARD monitors the credit support to AgriClinics through commercial banks. Provision of creditlinked back-ended subsidy at 33 per cent of the capital cost of the project funded through bank loan as well as full interest subsidy for the first two years on the bank credit has recently been approved under the scheme. From the inception of the scheme 22,158 unemployed agriculture graduates have been trained up to September 2010. 8.75 Information dissemination through agri fairs/ exhibitions is an excellent mechanism for showcasing latest technological advancements and dissemination of information to the farming community and also promoting business opportunities in agriculture and allied sectors. Agri fairs are promoted/ organized at national, State, district, and block levels.
FOOD MANAGEMENT
8.76 The main objectives of food management are procurement of foodgrains from farmers at remunerative prices, distribution of foodgrains to consumers, particularly the vulnerable sections of society at affordable prices and maintenance of food buffers for food security and price stability. The instruments used are MSP and Central issue price (CIP). The nodal agency which undertakes procurement, distribution, and storage of foodgrains is the Food Corporation of India (FCI). Procurement at MSP is open-ended, while distribution is governed by the scale of allocation and its offtake by the beneficiaries. The offtake of foodgrains is primarily under the targeted public distribution system (TPDS) and other welfare schemes of the Government of India.
Procurement and Offtake of Foodgrains

8.77 During rabi marketing season (RMS) 201011, 22.52 million tonnes of wheat was procured against 25.38 million tonnes in RMS 2009-10. In kharif marketing season (KMS) 2009-10, the total procurement of rice was 31.46 million tonnes against 33.69 million tonnes in KMS 2008-09. Procurement of coarse grains in 2009-10 stood at 4.07 thousand tonnes compared to 13.75 thousand tonnes in 200809. Procurement of foodgrains in States like Punjab, Haryana, Uttar Pradesh, Madhya Pradesh, Andhra
210
Economic Survey 2010-11 reducing transportation costs. As on 22 December 2010, a total of ` 9376 crore of food subsidy has been released to various States under DCP operations in 2010-11. States under DCP operations have shown a healthy trend of increase in procurement of rice (94.9 lakh tonnes in KMS 200607 to 119.5 lakh tonnes in 2009-10). In KMS 200809 and 2009-10, the rice procurement by DCP states was 135.4 and 119.5 lakh tonnes respectively. In the case of wheat, however, the procurement in DCP States, particularly Uttar Pradesh and Madhya Pradesh was rather low in RMS 2006-07 and 200708 primarily due to aggressive purchases by private companies on expectation of higher market prices, lower rates of taxes and levies than Punjab and Haryana and proximity to markets in southern and eastern States of the country. However, there was record procurement of wheat in RMS 2008-09 and 2009-10. Under the decentralized system of procurement, the procurement of wheat has increased from 0.5 lakh tonnes in 2006-07 to 60.7 lakh tonnes in 2009-10. In 2010-11, the wheat procurement in DCP states has gone down primarily due to Uttar Pradesh withdrawing from the DCP scheme.
Pradesh, and Chhattisgarh is higher than in other States. In fact, Punjab and Haryana make the maximum procurement. Increased MSP along with various other steps taken by the Government has resulted in higher levels of procurement of foodgrains. This has paved the way for comfortable levels of food stocks to meet the TPDS needs and buffer stocks norms. Offtake of wheat and rice from the Central pool for the TPDS and other welfare schemes) has gone up in the last many years (Table 8.15).
Decentralized Procurement Scheme

8.78 A number of States have opted for implementation of the Decentralized Procurement Scheme (DCP) introduced in 1997, under which foodgrains are procured and distributed by the State Governments themselves. Under this scheme, the designated States procure, store and issue foodgrains under the TPDS and welfare schemes of the Government of India. The difference between the economic cost fixed for the State and the CIP is passed on to the State Government as subsidy. The decentralized system of procurement has the objectives of covering more farmers under MSP operations, improving efficiency of the PDS, providing foodgrains varieties more suited to local tastes and
Table 8.15 : Procurement and offtake of wheat and rice (million tonnes)
2005-06 Procurement of Wheat and Rice Rice 27.66 Wheat 14.8 Total 42.5 2006-07 25.11 9.2 34.3 2007-08 28.74 11.1 39.8 2007-08 22.5 10.8 33.3 15.1 8.7 9.5 4.1 0.0 37.4 2008-09 33.69 22.7 56.38 2008-09 22.1 12.5 34.6 15.6 9.5 9.5 3.7 1.2 39.5 2009-10 31.46 25.4 56.9 2009-10 23.4 19.0 42.4 16.5 16.1 9.8 5.2 2.1 49.7 2009-10 2010-11 April-September 12.1 9.5 21.6 8.3 8.4 4.9 1.8 0.0 23.4 12.4 9.5 21.9 8.7 8.2 5.0 3.0 0.3 25.2
Offtake of Wheat and Rice for the TPDS* 2005-06 2006-07 Rice Wheat Total BPL (rice + wheat) APL (rice+ wheat) AAY (rice + wheat) Welfare Schemes Open/Tender Sales/Exports Total
Notes:* Revised. BPL : below poverty line; APL : above poverty line; AAY : antyodaya anna yojana
19.1 12.0 31.1 15.7 8.0 7.4 10.1 1.1 42.3
21.1 10.3 31.4 14.2 8.5 8.7 5.4 0.0 36.8
Offtake of Wheat and Rice for Other Schemes
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Buffer Stock
8.79 The stock position of foodgrains in the Central pool as on 1 October, 2010 is 46.2 million tonnes comprising 18.4 million tonnes of rice and 27.8 million tonnes of wheat. This is adequate for meeting the requirements under the TPDS and welfare schemes during the current financial year (Table 8.16).
applicable) as the price paid to the farmers, procurement incidentals, and the cost of distribution. The economic cost for both wheat and rice witnessed a significant increase during the last few years due to increase in MSPs and proportionate increase in the incidentals (Table 8.17 and Figure 8.16).
Food Subsidy
8.81 Provision of minimum nutritional support to the poor through subsidized foodgrains and ensuing price stability in different States are the twin objectives of the food security system. In fulfilling its obligation
Economic Cost of Foodgrains to the FCI

8.80 The economic cost of foodgrains consists of three components, namely MSP (and bonus if
Table 8.16 : Buffer Stock Norms and Actual Stocks

(lakh tonnes) As on WHEAT Minimum Buffer Norms January 2008 April July* October January 2009* April July October January 2010 April July October 82 40 201 140 112 70 201 140 112 70 201 140 Actual Stock 77.12 58.03 249.12 220.25 182.12 134.29 329.22 284.57 230.92 161.25 335.84 277.77 RICE Minimum Buffer Norms 118 122 98 52 138 142 118 72 138 142 118 72 Actual Stock 114.75 138.35 112.49 78.63 175.76 216.04 196.16 153.49 243.53 267.13 242.66 184.44 TOTAL Minimum BufferNorms 200 162 299 192 250 212 319 212 250 212 319 212 Actual Stock 191.87 196.38 361.61 298.88 357.88 350.33 525.38 438.06 474.45 428.38 578.50 462.21
Notes:* Buffer norms include Food Security Reserve of 30 lakh tonnes of wheat from 1 July 2008 and 20 lakh tonnes of rice from 1 January 2009 onwards.
Table 8.17 : Economic cost of Rice and Wheat

(`/quintal)
Year Rice Procurement Incidentals* Distribution Cost Economic Cost ** Wheat Procurement Incidentals Distribution Cost Economic Cost
2002-03
2004-05
2006-07
2007-08
2008-09
2009-10 (RE)
2010-11 (BE)
61.67 157.72 1165.03 137.63 145.51 884.00
58.48 256.51 1303.59 182.74 222.80 1019.01
193.66 289.58 1391.18 180.15 269.36 1177.78
214.91 297.82 1549.86 164.02 244.43 1311.75
252.58 263.81 1732.48 193.62 230.27 1384.42
295.03 208.40 1873.58 219.22 216.06 1457.30
316.81 254.51 2043.14 224.99 248.89 1543.93
Notes: * For rice, from 2006-07, weightage of levy rice incidentals is also being added in the procurement incidentals. ** Weighted average of common and grade A rice taken together. BE : budget estimates; RE : revised estimates.
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Figure 8.16
2500
Economic cost of rice and wheat

Rice Wheat
R/qunital
2000 1500 1000 500 0

2002-03 2004-05 2006-07 2007-08 2008-09 2009-10 2010-11
Year
Notes: Weighted average of common and grade A rice taken together. For rice, from 2006-07, in the procurement incidental weightage of levy rice incidentals is also being taken.
towards distributive justice, the Government incurs food subsidy. While the economic cost of wheat and rice has continuously gone up, the issue price has been kept unchanged since 1 July 2002. The Government, therefore, continues to provide large and growing amounts of subsidy on foodgrains for distribution under the TPDS, other nutrition-based welfare schemes, and open market operations. The food subsidy bill has increased substantially in the past few years (Table 8.18 and Figure 8.17).
Table 8.18 : Quantum of food subsidies released by Government

Year Food subsidy (` crore) ` 1999-2000 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11* 9200.00 12,010.00 17,494.00 24,176.45 25,160.00 25,746.45 23,071.00 23,827.59 31,259.68 43,668.08 58,242.45 51,196.97 Annual growth (per cent) 5.75 30.54 45.66 38.20 4.07 2.33 -10.39 3.28 31.19 39.69 33.37 -
TPDS Allocation and CIP

8.82 Allocations of foodgrains for the BPL and Antyodaya Anna Yojana (AAY) categories are made at 35 kg per family per month for all accepted 6.52 crore BPL (including 2.43 crore AAY) families in the country as per 1993-94 poverty estimates of the Planning Commission and March 2000 population estimates of the Registrar General of India (RGI). For the APL category, allocations to different States/ UTs are made depending upon the availability of stocks of foodgrains in the Central pool and past offtake by the States. The allocation for the APL category has been increased from 10 kg to 15 kg per family per month from August 2010 for six Figure 8.17
70
Note: *Figures up to 22 December 2010.
months. Accordingly, these allocations range between 15 kg and 35 kg per family per month. Wheat and rice are issued by the Central
Quantum of food subsidies released by government

Food subsidy
Rthousand crore
60 50 40 30 20 10 0
2000-01
2001-02
2002-03
2003-04
1999-2000
2004-05
2005-06
2006-07
2007-08
2008-09
Year
2009-10
Agriculture and Food Management Government at uniform CIPs to States and Union Territories for distribution under the TPDS. Details of CIPs of wheat and rice since 2002-03 are given in Table 8.19. 8.83 The difference between wholesale prices of wheat and rice in the open market and the CIPs at which foodgrains are issued to cardholders has widened in the last five years due to non-revision of the latter, as a result of which offtake under the TPDS, particularly by APL families has gone up substantially. During the current year, the Government has released a quantity of 470.80 lakh tonnes under the TPDS covering AAY, BPL and APL families. In addition, 5.90 lakh tonnes of foodgrains was released to States as calamity relief, etc. Further, special ad hoc allocation of 30.66 lakh tonnes of foodgrains was made to States/UTs in May 2010 for all accepted numbers of BPL/AAY/ APL families in the country. The issue price of this allocation was ` 8.45 per kg for wheat and ` 11.85 per kg for rice. A total quantity of 25.00 lakh tonnes has been allocated as special ad hoc/additional allocation for BPL families at BPL prices to all States/ UTs in September 2010 for distribution over next six months. Further, during the current year, an allocation of 47.55 lakh tonnes of foodgrains has been made till November 2010 for other welfare schemes such as the Midday Meal Scheme, Integrated Child Development Services (ICDS), welfare Institutions, and the Emergency Feeding Programme.
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Table 8.20 : Quantity of Wheat and Rice Disposed of under the OMSS (D)
Year Qty (lakh MT) Wheat 2009-10 2010-11* (as on 17.11.2010) 16.28 2.07 Rice 4.94 1 .67
Note: *Lifting after March 2010 against allocation made in 2009-10.
wheat and rice disposed of under the Open Market Sale Scheme (domestic) (OMSS [D]) during the last two years is given in Table 8.20.
Sugar
8.85 Sugar production in India is cyclic in nature. The 2006-07 and 2007-08 sugar seasons (OctoberSeptember) were years of high production whereas the 2008-09 and 2009-10 seasons were years of low production. The production of sugar in the 2008-09 and 2009-10 sugar seasons is estimated at about 146.7 lakh tonnes and 188 lakh tonnes compared to 282 lakh tonnes and 263 lakh tonnes in 2006-07 and 2007-08 respectively. The decline in sugar production in 2008-09 and 2009-10 put upward pressure on domestic sugar prices and the Central Government had to take a number of measures to augment domestic stocks of sugar and contain sugar prices during this period such as allowing import of duty-free sugar, imposing stock-holding and turnover limits on sugar, bringing khandsari sugar under the ambit of stockholding and turnover limits and suspension of futures trading in sugar. The sugar production in 2010-11 is expected to be better at about 245 lakh tonnes, as per estimates given by Cane Commissioners. 8.86 The concept of statuary minimum price has been replaced by that of fair and remunerative price (FRP) for sugarcane to provide reasonable margin to sugarcane farmers on account of risk and profit and is to be uniformly applicable to all States. The amendments to the Sugarcane (Control) Order 1966, have come into force from 22 October 2009. For the 2010-11 sugar season, the Central Government has fixed an FRP of ` 139.12 per quintal linked to a basic recovery rate of 9.5 per cent subject to a premium of ` 1.46 for every 0.1 percentage increase in recovery above that level.
Open Market Sale Scheme (Domestic) OMSS (D)

8.84 In addition to maintaining buffer stocks and providing foodgrain stocks to meet the requirement of the TPDS and other welfare schemes, the FCI on the behalf of the Government of India has been undertaking sale of wheat and rice at predetermined prices in the open market from time to time to enhance the supply so as to have a moderating influence on open market prices. The quantity of Table 8.19 : CIPs
(`/quintal) Year 2002-03 (w.e.f 1.7.2002 till date) Category APL BPL AAY * Wheat 610 415 200 Rice 830 565 300
Edible Oils
8.87 The production of oilseeds (kharif 2010-11) and net availability of edible oils from all domestic sources
* CIPs for AAY households are effective since the inception of the scheme in December 2000.
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Economic Survey 2010-11 Table 8.21 : Turnover on commodity futures markets

(` crore) Name of the exchange Calendar year 2008 2009 2010 (up to Nov. 2010) 78,95,404 9,73,217
(primary) are estimated at 172.74 lakh tonnes and 35.19 lakh tonnes respectively. In order to increase the availability and control price of edible oils, the Government has reduced custom duties on crude and refined edible oils to nil and 7.5 per cent respectively since April 2008. It has been decided that this duty structure will continue till September 2011. Export of all major edible oils from the country has been banned since March 2008 up to September, 2011 (except coconut oil through Cochin Port and certain oils from minor forest produce and edible oils in branded consumer packs of up to 5 kg, with a ceiling of 10,000 tonnes per year).The Government launched a scheme for Distribution of Subsidized Edible Oils in 2008-09 to provide relief to consumers from rising prices of edible oils. Under this Scheme, imported edible oil was distributed through State Governments/UTs at the rate of 1 litre per ration card per month. The Scheme continued in 2009-10 with a subsidy of ` 15 per kg on imported oil up to 10 lakh tonnes and has been extended till 31 March 31 2011.
Multi Commodity Exchange, Mumbai National Commodity and Derivatives Exchange, Mumbai National Multi Commodity Exchange, Ahmedabad Others Total
42,84,653 6,28,074
59,56,656 8,05,720
37,272
1,95,907
1,80,738
83,885 50,33,884
1,32,173 70,90,456
4,45,366 94,94,725
COMMODITY FUTURES MARKET

8.88 The commodity futures market facilitates the price discovery process and provides a platform for price risk management in commodities. The market comprises 21 commodity futures exchanges, which include five national and 16 (commodity-specific) regional commodity exchanges. During 2010, one commodity exchange, namely the Ahmadabad Commodity Exchange (ACE), was upgraded to a national exchange and rechristened ACE Derivatives and Commodity Exchange Limited, Ahmadabad. Agricultural commodities, bullion, energy, and base metal products account for a large share of the commodities traded in the commodities futures market. Futures trading in zinc and lead, mini contracts were introduced for trading during 2010. 8.89 The total value of trade in the commodity futures market has risen substantially in 2010 (Table 8.21). The growth could be attributed to larger participation in the market, increase in global commodity prices, the advent of new commodity exchanges and the restoration of trade in some of the suspended agriculture commodities. 8.90 During the year 2010-11 (up to November 2010), in value terms bullion accounted for the maximum share of traded value among the commodity groups (45.22 per cent) followed by metals (23.80 per cent), energy (19.45 per cent)
and agricultural commodities (11.53 per cent). However, in quantity terms trade in energy accounted for 56.77 per cent followed by agricultural commodities (31.67 per cent), metals (11.51 per cent), and bullion (0.05 per cent). 8.91 The Forward Markets Commission (FMC), the regulator for commodity futures trading under the provisions of the Forward Contracts (Regulation) Act 1952, continued its efforts to strengthen and broad base the market during 2010. The efforts were directed at enlarging the participation of physical market stakeholders, especially farmers, as hedgers in the commodity futures market by increasing the level of awareness of physical market participants and policymakers about the economic role of this market. The FMC also ensures the dissemination of spot and futures prices of agriculture commodities at Agricultural Produce Market Committees (APMCs) through the implementation of the Price Dissemination Project, in coordination with AGMARKNET and the national commodity exchanges. The project envisages placement of electronic price ticker boards at APMC markets displaying AGMARKNET spot prices and futures prices of agriculture commodities discovered on the National Exchanges, on a real-time basis. On the regulatory front, the FMC also took the following steps for the development of commodity futures market: i. The Commission amended the guidelines for grant of recognition to new commodity exchanges under the Forward Contracts
Agriculture and Food Management (Regulation) Act 1952 by specifying the equity that can be held by a single stock exchange or commodity exchange and the cumulative equity shareholding of all stocks and commodity exchanges. ii. The equity structure of the nationwide multicommodity exchanges was specified after five years of operation, in view of which, no individual or persons acting in concert can hold more than 15 per cent of the paid up equity capital of the exchange. The original promoter/ investors can also not hold more than 26 per cent of the paid up equity capital of the exchanges. The amended clause also restricts the shareholding of stock exchange(s) and commodity exchange (s) in the National Commodity Exchange. To protect the interests of customers, guidelines on market access through authorized persons for all national commodity exchanges were amended whereby the system of sub-brokers was discontinued and the members of the national commodity exchanges were required to provide access to their clients only through authorized person(s) appointed as per the Commissions guidelines. Guidelines were issued specifying the conditions which are required to be fulfilled by the members of the commodity exchanges willing to set up wholly owned subsidiaries and joint ventures in the overseas markets.
OF
215
provide the most efficient spot price inputs to futures exchanges. On the agricultural side, the exchanges will enable farmers to trade seamlessly on the platform by providing real-time access to price information and a simplified delivery process, thereby ensuring the best possible price. On the buy side, all users of the commodities in the commodity value chain would have simultaneous access to the exchanges and be able to procure at the best possible price. Therefore the efficiency levels attained as a result of such seamless spot transactions would result in major benefits for both producers and consumers.
OUTLOOK
AND
CHALLENGES
iii.
iv.
8.93 The country has made great strides towards increasing foodgrains production since the midsixties. Today, India ranks high in the production of various commodities such as milk, wheat, rice, fruits, and vegetables. However, the agriculture sector in India is at a crossroads with rising demand for food items and relatively slower supply response in many commodities resulting in frequent spikes in food inflation. The technological breakthrough achieved in the 1960s is gradually waning. The need for a second green revolution is being experienced more than ever before. 8.94 Increasing agriculture production and productivity is a necessary condition not only for ensuring national food security, livelihood security, and nutritional security but also for sustaining the high levels of growth envisaged in the current Plan. However, with very little growth in area and marginal growth in yields of many crops during the last decade, increasing agricultural production remains a challenge. Concerted and focused efforts are required for addressing the challenge of stagnating productivity levels in agriculture. A holistic approach, simultaneously working on agricultural research, development, dissemination of technology, and provision of agricultural inputs such as quality seed, fertilizers, pesticides, and irrigation, would help achieve the critical levels of productivity needed. Further, effective coordination and monitoring of the ongoing agriculture and allied sector programmes needs to be ensured for optimum results. 8.95 Capital investment in agriculture as a percentage of the GDP has been stagnating in recent years, although the capital expenditure in agriculture as a percentage of the GDP in agriculture has shown
DEVELOPMENT EXCHANGE
ELECTRONICS SPOT
8.92 Four National Commodity Spot Exchanges with electronic trading platforms were set up, namely the National Spot Exchange Limited (NSEL), NCDEX Spot Exchange (NSPOT), Reliance Spot Exchange, and National APMC. Of these, the NSEL, NCDEX Spot Exchange, and Reliance Spot Exchange are in operation. At present, the spot exchanges offer trading in more than 30 commodities having delivery locations spread over 15 states. Spot exchanges electronically connect large numbers of buyers and sellers geographically located at distant places to converge on a single platform to overcome problems of time, distance, and information flow and also provide guarantee for each trade market linkage among farmers, processors, exporters and users with a view to reducing the cost of intermediation and enhancing price realization by farmers. They also
216
Economic Survey 2010-11 requirements which are of vital importance for the growth of agriculture sector. 8.101 A higher growth rate of the economy and rising levels of income are putting pressure on products from the livestock sector. Many items such as meat, milk, and poultry are experiencing upward pressure in their prices adding to the wholesale food price inflation. A long-term strategy to increase the production of these items is the need of the hour. These steps would also help enhance rural income and supplement the livelihood options of the rural populace. 8.102 There has been substantial increase in the MSPs of various crops over the last few years. This is considered necessary for incentivizing farmers to increase production and productivity. At the same time, the MSP signals the floor price for the produce which, in turn, has the potential of increasing the prices. Addressing the welfare of the agricultural producers and of the consumers simultaneously poses a challenge. Further, inability of a large number of small and marginal farmers to directly access the agri-market puts a question mark on increases in MSP actually benefiting such farmers. Record procurement of rice and wheat in the last few years has helped build up the buffer stock and strategic reserve of wheat and rice. There is, however, a huge cost involved in the process, which is met through budgetary sources in the form of food subsidy. The procurement operations linked with MSPs cause fiscal stress by way of increasing food subsidies. The issue of efficient food stocks management and offloading of stocks in time needs urgent attention. 8.103 One of the most pressing of emerging challenges is that of conservation. Enactment of laws for ecological foundations for climate resilient agriculture, management of agricultural waste, building carbon sequestration of soil and overall natural resource management is urgently needed. 8.104 To conclude, raising farm productivity with adequate focus on rainfed areas, diversification of Indian agriculture from just crop farming to livestock, fisheries and poultry and horticulture while simultaneously addressing environmental concerns should be the focus for the agriculture sector. Higher levels of investments are required for not only increasing farm productivity but also creating adequate infrastructure for transport, storage and distribution of agricultural produce.
some improvement in the current Five Year Plan. It may, however, also be noted that the agriculture sector GDP has itself been stagnating during the last three years from 2007-08 to 2009-10. The real challenge in agriculture sector is to enhance capital investment in the sector both by public and private sector in a sustained way. 8.96 Sixty per cent of our net sown area is still rainfed. Various studies indicate that the potential of rainfed areas has not been fully utilized. A targeted development of rainfed areas should be prioritized. 8.97 Enhancing the returns farmers get on their production is essential for incentivizing the farmers to produce more. Farmers need to realize the market price for their produce. Setting up of efficient supply chains is not only essential for ensuring adequate supplies of essential items at reasonable prices but also to ensure that producers get adequately compensated. Linking farmers to the market is, therefore, very important. The successful experience of cooperatives in the milk sector in managing the supply chain and providing remunerative prices to the producers may be emulated in the case of agricultural products. 8.98 The level of secondary food processing in India is very low compared to many western countries. With increasing income and population, demand for processed food is likely to increase. It is necessary to cater to this changing demand and at the same time enhance the income of farmers. So far the focus in food management has been on cereals, mainly rice and wheat. However, the demand for processed food is expected to increase. Investment in food processing, cold chains, handling, and packaging of processed food needs encouragement. 8.99 Declining per capita availability of foodgrains has been a matter of major concern. For ensuring nutritional security, it is not only important to increase the per capita availability of foodgrains but also to ensure that right quantities of food items are there in the food basket of a common man. A thrust on horticulture products is required for enhancing per capita availability of food items as well as ensuring nutritional security. 8.100 Addressing infrastructure requirements in the agriculture sector, especially storage, communication, roads, and markets should be a priority. Public Private Partnership models can be of help in ensuring faster development of these
Industry
G
CHAPTER
rowth in the industrial sector was buoyant during the first two quarters (AprilJune, July-September) of the current financial year. The manufacturing sector, in particular, showed a remarkable robustness, growing at rates of 12.6 percent and 9.9 percent respectively, during these two quarters. Thereafter industrial output growth has begun to moderate. This compares with global trends as global manufacturing continued to rebound post crisis till the first half of 2010 and has thereafter moderated. Indias post recovery industrial output growth has been largely driven by a few sectors such as the automotive sector along with a revival in cotton textiles, leather, food products, and metal products. Some sectors have shown extreme month-on-month output volatility. The impact of favourable monsoon on the domestic-demand-driven industrial sector has not been widespread. On the consumer non-durable segment in particular it has not been discernible so far but is expected to be visible in the fourth quarter of this fiscal year. A higher base effect had adverse impact on the industrial growth rate in the Q3 (October-December 2010) and accordingly may moderate the industrial sectors contribution to the gross domestic product (GDP) in Q3 of the current financial year.
9.2 Industry-sector GDP, which includes gross value added (GVA) of the construction sector apart from mining, manufacturing, and electricity, has shown quarterly growth rates comparable to growth rates based on the index of industrial production (IIP). IIP data for Q2 and Q3 of the current financial year indicate that moderation has set in across all the broad sectors covered under it. Manufacturing growth rate declined to 5.1 per cent in Q3 of the current financial year. This is a moderate performance compared to the peak growth of 16.8 per cent achieved during Q4 (January-March) of the last financial year. Within the manufacturing sector, the capital goods segment has been the main driver of growth though it has shown extreme volatility as it registered a growth of 3.5 percent in Q1 of 2009-10 and surged up to 45.7 per cent during Q4 of the last financial year and continued to be in double digit till Q2 and moderated further to 3.8 per cent during Q3 of the current financial year. (Table 9.1).
9.3 The IIP-based cumulative industrial output growth rate during April-December 2010 was 8.6 per cent, at par with the growth rate in the corresponding months of the previous year (Figure 9.1). Componentwise cumulative growth figures, however, show wide variation. Growth rates in the mining and electricity sectors have been comparatively low. Likewise, on the basis of use-based classification, intermediate and consumer non-durable goods have also had comparatively lower growth. 9.4 Due to poor performance of the basic goods and consumer non-durables segments, which constitute about 59 per cent of the IIP, a sizeable chunk of the industrial sector has not contributed significantly towards overall IIP growth. The growth has mainly been driven by the capital goods and the consumer durables segments. Weighted contribution of capital goods and consumer durables during AprilDecember 2010 was about 29 per cent and 21 per cent as against their weights of 9.26 per cent and 5.37 per cent respectively in the IIP. The basic goods
218
Table 9.1 : Growth in the IIP and its major components

(per cent)
Period
Mining
Manufacturing 6.1 5.6 1.3 0.8 3.6 8.7 14.4 16.8 12.6 9.9 5.1
Electricity 2.0 3.2 2.9 3.0 5.8 7.4 3.8 7.1 5.6 2.1 6.5
Basic goods 3.3 4.9 2.5 0.4 6.3 5.9 6.1 10.3 6.8 4.7 6.8
Capital goods 9.2 15.2 5.7 4.0 3.5 6.7 22.7 45.7 31.9 18.4 3.8
Intermediate goods 3.0 -1.3 -5.9 -3.0 7.0 11.6 19.4 17.0 10.5 10.8 6.5
Consu- General mer goods 8.7 7.0 4.8 3.2 -0.3 9.7 10.6 5.2 9.2 7.0 3.7 5.6 5.2 1.5 1.0 4.0 8.6 13.3 15.8 11.9 9.1 5.3
Q1 2008-09 Q2 2008-09 Q3 2008-09 Q4 2008-09 Q1 2009-10 Q2 2009-10 Q3 2009-10 Q4 2009-10 Q1 2010-11 Q2 2010-11 Q3 2010-11
4.0 3.8 2.0 0.9 6.8 9.0 10.3 12.9 10.2 7.0 5.8
Source : Central Statistics Office (CSO).
Figure 9.1
25 20
Growth (per cent) in the IIP and its major components

22.7 21.4 April-Dec 2009-10 12.5 9.2 5.7 6.1 6.1 4.7 1.4 0.7 8.6 8.6 April-Dec 2010-11
16.7
Per cent
15 11.2 10 5 0 8.7 7.7 8.9 9.1
Manufacturing
Electricity
Capital goods
Intermediate
Basic goods
Non-durables
segment, which has a weight of 35.57 per cent in the IIP, contributed only 20 per cent during AprilDecember 2010 (Table 9.2). 9.5 The manufacturing sector, which has a weight of 79.36 per cent in the IIP, is its key driver. Manufacturing output growth has dipped from a peak of 18 per cent in April 2010 to 1.0 per cent in December 2010, as a result of which IIP growth has also come down from 16.6 per cent in April 2010 to 1.6 per cent in December 2010. However, this slowdown is in a large part driven by the base effect. Despite wide fluctuations, the AprilDecember 2010 cumulative growth rate has remained at a robust 9.1 per cent for the manufacturing sector and 8.6 per cent for the IIP. Month-wise annual growth rate for the remaining months of the financial
Table 9.2 : Sector-wise weighted contribution

Weight contribution
Weight Sector Mining 10.47 Manufacturing 79.36 Electricity 10.17 General IIP 100.00 Use-based Basic goods 35.57 Capital goods 9.26 Intermediate goods 26.51 Consumer goods (total) 28.67 Consumer Durables 5.37 Consumer Non-durables 23.3 AprilAprilDec 2009 Dec 2010 7 88 5 100 20 19 37 24 20 4 6 90 4 100 20 29 28 23 21 2 100
General IIP 100..00 100 Source : Central Statistics Office (CSO).
Durables
General
Mining
Industry Figure 9.2

20
219
Projection of IIP growth for Q4 2010-11

3-years average annual growth 2-years average annual growth Seasonally adjusted annual growth
May Jun Oct Jul Nov Dec Jan Feb Mar Aug Sep Apr
Annual growth (per cent)
15 10 5 0 -5
2010
2011
Year
year is likely to remain moderate but annual growth rate is expected to remain at par with the last years growth rate. (Figure 9.2). 9.6 During April-December 2010, out of the seventeen industrial groups covered under the manufacturing sector, nine have had higher than 10 per cent cumulative growth rates and three higher than 5 per cent. Only five groups have had less than 5 per cent or negative cumulative growth rates. The poor performance of basic chemicals and chemical products, with an IIP weight of 14 per
cent, has contributed significantly to pulling down the IIP (Table 9.3). 9.7 The IIP with 1993-94 as its base has become dated. It has, therefore, not been able to capture the structural shift in manufacturing, both in terms of the products to be included and the coverage of producing units. There has been a consistent downward bias in the IIP and this widens as the base becomes dated. A comparative study of IIP and Annual Survey of Industries (ASI) data clearly establishes that the downward bias of IIP has
Table 9.3 : Growth of Industry Product Groups (at two-digit level) Index of Industrial Production (base 1993-94=100)
Industry Group Manufacturing Transport Equipment Other Manufacturing Industries Metal Products Machinery & Equipment Food Products Leather Products Rubber, Plastic & Petroleum Jute Textiles Cotton Textiles Basic Metals Paper Products Non-metallic Mineral Products Textile Products Basic Chemicals & Chemical Products Wool, Silk & Man-made Textiles Beverages & Tobacco Products Wood Products
Source : Central Statistics Office (CSO).
Weight 793.6 39.8 25.6 28.1 95.7 90.8 11.4 57.3 5.9 55.2 74.5 26.5 44 25.4 140 22.6 23.8 27
2008-09 3.3 2.4 3.5 0.5 9 -9.7 -6.9 -1.5 -10 -1.9 4 1.9 1.3 5.8 5.5 0 16.2 -9.6
2009-10 11 26.9 9.2 11.5 20.6 -1.5 2.5 15.4 -24.4 5.5 6.5 3.9 9.5 8.4 8.8 8.1 -0.2 9.7
April- Dec. (2009-10) 8.9 18.5 6.4 0.2 15.7 -6.9 1.1 14.5 -14.1 4.1 4.6 2.1 8.1 10.6 11.3 11.8 -1 8.6
April- Dec. (2010-11) 9.1 24.5 22.1 21.9 12.7 12.4 11.4 11 10.8 10.2 8.4 8 6.5 3.7 2 -0.6 -3.1 -13.8
Industrial Groups with Growth Rates above 10 per cent during April-December 2010-11
Industrial Groups with Growth Rates below 10 per cent during April-December 2010-11
Industrial Groups with negative Growth Rates during April-December 2010-11
220
Table 9.4 : Rate of Growth of ASI Manufacturing (1999-2000 prices) and IIP Manufacturing
2004-05 ASI Output ASI Gross Value Added IIP Manufacturing Difference 22.01 17.36 9.2 8.2 2005-06 9.26 12.79 8.9 3.3 2006-07 19.72 19.69 12.9 6.8 2007-08 10.17 14.83 9.2 5.6 2008-09 8.90 2.80 3.3 -0.5
Source : Office of the Economic Adviser, Department of Industrial Policy and Promotion (DIPP).
considerably increased and this has implications for GDP growth and the share of manufacturing in this growth. Assessment of the growth of registered manufacturing based on the ASI and IIP for the last five years clearly indicates persistence of this continued bias (Table 9.4).
Structural shift in the organized manufacturing sector

9.10 There is a general perception that in the Indian organized manufacturing sector, there has not been much increase in the rate of growth of employment. Product market reforms which eliminated capacity regulations and rent seeking in Indian industry were expected to provide impetus for greater absorption of labour in line with resource availability. ASI data, which are the most comprehensive data set on the organized sector, did indicate that the number of persons engaged in the organized manufacturing sector, after continuous increase in the initial years, witnessed a deceleration from 1997-98 onwards. The decline continued until 2003-04. From 2004-05 onwards, there has been continuous increase in employment in the organized manufacturing sector. Further, even in 2008-09, the latest year for which ASI data are available, there appears to be a significant increase in the number of persons employed. This is contrary to the anecdotal evidence and various surveys undertaken during this period which indicated a decline in the employment in the organized manufacturing sector. While there has been an increase in the capital employed per unit of labour during the period and the output per unit of labour, a sharper increase has been observed in the rate of growth of labour absorption itself (Figure 9.3).
Volatility in the IIP at individual items level

9.8 Since the weight of an item (4-digit NIC) broadly indicates its relative importance in the IIP, it is generally expected that contribution of an item in any given monthly IIP would be close to its assigned weight in the basket. In other words, any excess contribution over and above the base years assigned weight in the IIP would affect overall IIP growth. The Office of the Economic Adviser, DIPP, has carried out an exercise to identify the highly volatile items with high standard deviation (SD) during the past five years. 9.9 The exercise has identified 26 highly volatile items with a weight of 8.2 per cent in the IIP. Within these 26 volatile items there are five with a weight of 1.8 per cent showing very high SD, namely ampicillin(200), alarm time pieces (875), agarbatti(409), well/offshore platforms(13,475) and insulated cables and wires (204). These items have created wide fluctuations in the IIP. There is need to shift to a new base and an IIP series based on an updated basket.
Figure 9.3
35
Structural shift in organised manufacturing

12 11 10 9 8 7 6 5 Output/ Labour (R Lakhs) Capital/ Labour (R lakhs) Persons engaged
Output/labour and capital/labour ratios
30 25 20 15 10 5 0
1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-20 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
Persons engaged in millions
Year
Industry
221
Corporate-sector performance
9.11 Based on analysis of abridged financial results of the listed manufacturing companies, it is observed that revenue growth in the second half (OctoberMarch) of 2009-10 rebounded to pre-crisis level amidst improving demand conditions and confidence. Consequently, consumption of raw material as well as power and fuel expenses followed an upward trend during the considered period. Accumulated stocksin-trade during the first half of 2008-09 were depleted during the later quarters indicating adjustments of inventory levels to changes in business demand which had picked up, during the latter half of 200910 and first quarter of 2010-11, indicating revival of the demand. The non-core other income which contributed significantly to net profits was seen to be at lower levels during Q2 and Q3 (July-September, October-December) of 2009-10 and contracted further in Q1 of 2010-11. However, in Q2 it has risen to a peak of 69.5 per cent. 9.12 The growth in net profits followed a downward trend and was very low in Q3 and Q4 of 2008-09. However, during the subsequent quarters, aided by low base and momentum in demand, corporate
profits have recovered. But first half results in 201011 reveal pressures on net profits on account of higher commodity prices and staff costs and higher interest outgo. With faster increase in total expenditure in relation to sales, the profitability margin has contracted in recent months (Table 9.5)
INDUSTRIAL GROWTH
Textiles
BY
SECTORS
9.13 The IIP covers four textile groups, namely cotton textiles; wool, silk & man-made fibre textiles; jute & other vegetable fibre textiles (except cotton); and textile products (including wearing apparel). Cotton textiles production grew by 10.1 per cent during April November 2010-11 as compared to 3.6 per cent during April-November 2009-10. Jute textiles production have also recovered and grew by 6.8 per cent as compared to a decline of 16.7 per cent during April-November 2009-10. Textile products grew by 5.7 per cent during April-November 2010-11 as compared to 3.9 per cent during the corresponding months of the previous year. In the wool, silk, and man-made fibres segment of textiles growth has,
Table 9.5 : Year-on-Year Growth in Sales and Expenditure of listed public limited manufacturing companies in the private sector
Items
Q1 No. of Companies 1926
2008-09
Q2 1837 Q3 1849 Q4 1901 Q1 1885
2009-10
Q2 1876 Q3 1901 Q4
2010-11
Q1 Q2 1933
1912 1900
Growth Rates in per cent Sales Change in Stock-in-trade Expenditure Consumption of Raw Materials Staff Cost Power & Fuel Other Income Interest Costs Profits after Tax (PAT) 30.1 131.9 34.3 38.1 19.3 28.8 -9.5 52 6.9 32.1 230.1 38.8 44 17 37.8 2.7 69.9 -4.2 6.3 a 9.3 4 12.4 21.7 14.9 60.5 -66.4 0.1 a -2.9 -9.6 7.9 3.1 26.8 43.3 -28.3 -2.7 -79.5 -6.6 -14.5 9.9 -1.4 62.7 8.3 3.2 -0.4 0.1 -3.4 -4.7 9.1 -5.7 10 -2.1 17.6 28.7 b 26.6 35.5 12 1.7 12.3 -5 178 34.9 b 37.5 46.6 18.1 10.6 28.8 354 34.5 40.6 16.9 13.1 21.2 -46.5 22.5 21.9 20.4 15.5 69.5 7.8 10.9
42.4 -28.5 1.1 69.4 10.9 8.2
Ratio in per cent PAT to Sales 8.7 7.6 3.6 6.7 9.2 9 8 8.6 8 8.1
Source : Reserve Bank of India Studies on Corporate Performance based on a abridged results of select companies in the private corporate sector. Note: a: Numerator is negative; b : Denominator is negative
222
Table 9.6 : Production of fabrics/cloth (million sq. m)

April- October Sector Mill Sector Handloom Powerloom Hosiery Others Total Cloth Production 2006-07 1746 -5.40% 6536 -7.00% 32,879 -7.40% 11,504 -10.40% 724 -0.059 53,389 -7.70% 2007-08 1781 -2.00% 6947 -6.30% 34,725 -5.60% 11,804 -2.60% 768 -6.10% 56,025 -4.90% 2008-09 1796 -0.80% 6677 -3.90% 33,648 -3.10% 12,077 -2.30% 768 0.00% 54,966 -0.019 2009-10 (P) 1961 -9.20% 6769 -1.40% 36,644 -8.90% 13,623 -12.80% 814 -5.70% 59,809 -8.80% 2009-10 1097 -3.00% 3956 -1.70% 21699 -1.70% 7941 -5.30% 448 -6.30% 35,141 -1.90% 35,805 476 8362 22067 3770 2010-11 (P) 1130
Source : Office of the Textile Commissioner, Mumbai. Notes : P is Provisional.
however, dipped to mere 0.1 per cent during AprilNovember 2010 as compared to 13 per cent during April-November 2009-10. 9.14 Overall, the production of textile fabrics increased by 1.9 per cent during April-October 201011. This is a moderate performance when compared with the robust increase of 8.8 per cent during 200910. The decline in textile fabrics/cloth during the current financial year has been on account of comparatively lower growth rates in the production of mill, power loom and hosiery segments. (Table 9.6). 9.15 Post slowdown/recession in the developed economies, the textile sector has gathered momentum yet the export performance of Indian textiles continues to lag substantially behind that of Chinas as regards rate of growth as well as share in world textile exports. During 2009, China had a 28.3 per cent share in world textile exports as against Indias share of only 4.3 per cent. In clothing exports, China had a share of 30.7 per cent as against Indias share of 3.6 per cent. Indias textile exports grew by 6.31 per cent during 2009-10 as against a decline of 5.0 per cent during 2008-09. As per the latest available data for April-September 2010, exports of textiles and clothing were of the order of US$ 11.27 billion, thus recording a growth of 11.47 per cent vis-vis exports worth US$ 10.11 billion in AprilSeptember 2009.
CHEMICALS,
FERTILIZERS
PETROCHEMICALS AND
Chemicals
9.16 Major chemicals undergo several stages of processing to be converted into downstream chemicals. These processed chemicals are used in agriculture and industry as auxiliary materials such as adhesives, unprocessed plastics, dyes, and fertilizers. Chemicals are also directly used by consumers in the form of pharmaceuticals, cosmetics, household products, paints, etc. The trend in production of chemicals in the current year vis--vis the preceding three is given in Table 9.7. During April-November 2010-11 dyes and dyestuffs registered impressive growth of 18.52 per cent.
Petrochemicals
9.17 Petrochemicals include synthetic fibres, polymers, elastomers, synthetic detergents, and performance plastics, apart from their intermediates such as synthetic fibre intermediates, synthetic detergent intermediates, olefins, and aromatics. The main sources of feedstock and fuel for petrochemicals are natural gas and naphtha. Petrochemical products cover the entire spectrum of daily use items ranging from clothing, housing, construction, furniture, automobiles, household items, toys, agriculture, horticulture, irrigation, and packaging to medical appliances.
Industry Table 9.7 : Production of major petrochemicals
223
(000 MT) Years Alkali Chemicals 5443 5442 5602 3659 3876 5.93 Other Inorganic Chemicals 609 513 518 341 365 7.04 Organic Chemicals 1552 1254 1280 846 867 2.48 Pesticides (Tech.) 83 85 82 60 56 -6.67
Note: MT- Metric Tonne
Dyes & Dyestuffs 44 32 42 27 32 18.52
Total Major Chemicals 7731 7326 7524 4933 5196 5.33
2007-08 2008-09 2009-10 April-Nov 2009 April-Nov.2010 Growth rate
Source : Department of Chemicals and Petrochemicals.
Table 9.8 : Production of major petrochemicals

(000 MT) Years Synthetic fibers Polymers Elastomers Synthetic detergent intermediates 585 552 618 406 422 3.94
Note: MT- Metric Tonne
Performance plastics 157 141 172 117 124 5.98
Total major petrochemicals 8675 8192 8287 5472 5915 8.17
2007-08 2008-09 2009-10 April-Nov 2009 April-Nov. 2010 Growth rate
2524 2343 2601 1727 1824 7.35
5304 5060 4791 3152 3450 9.45
105 96 106 70 65 -7.14
Source : Department of Chemicals and Petrochemicals.
9.18 The production of major petrochemicals in primary form and the growth rates from 2007-08 onwards are exhibited in the Table 9.8. It is worth noting that polymers account for the largest share by far of petrochemical production and in 2009-10 this share was 58 per cent. During April-November 2010-11 major petrochemicals have increased by 8.17 per cent.
requirement of potash, about 90 per cent of phosphatic, and about 20 per cent of urea is met through imports. 9.21 In addition to urea, 21 grades of P & K fertilizers, namely di-ammonium phosphate (DAP), muriate of potash (MOP), mono-ammonium phosphate (MAP), triple super phosphate (TSP), ammonium sulphate (AS), single super phosphate (SSP), and 15 grades of NPK complex fertilizers are provided to farmers at subsidized rates, which are much below the actual cost. Farmers pay only 25 to 40 per cent of the actual cost and the rest is borne by the Government in the form of a subsidy that is reimbursed to the manufacturers/importers. 9.22 The domestic production of urea in the year 2009-10 was 211.12 lakh MT, as compared to 199.20 lakh MT in 2008-09. The production of DAP increased sharply in 2009-10 and was at 42.46 lakh MT as compared to 29.93 lakh MT in 2008-09. The estimated production of urea in 2010-11 is projected at 215.37 lakh MT and that of DAP and complexes at 39.58 lakh MT and 91.66 lakh MT respectively (Table 9.9)
Foreign Trade in Chemicals and Petrochemicals

9.19 The share of chemicals and petrochemicals in total national exports declined from 11.6 per cent to 9.96 per cent during the period 2003-04 to 200910. Likewise, imports declined from 9.2 per cent to 7.2 per cent.
Fertilizers
9.20 India is meeting 85 per cent of its urea requirement through indigenous production but is largely import dependent for meeting the phosphorus and potassium (P&K) fertilizer requirements either as finished fertilizers or raw materials. The entire
224
Table 9.9 : Production and import of fertilizers

( lakh MT) Production Year Urea DAP Complex Fertilizers MOP 2008-09 199.2 29.93 68.48 Nil 2009-10 211.12 42.46 80.38 Nil 2010-11* 215.37 39.58 91.66 Nil 56.72 52.86 47.84 2008-09 56.67 61.91 Imports 2009-10 52.09 58.89 2010-11* 45.83 68.12
Source : Department of Chemicals and Petrochemicals Note : * estimated; MT- Metric Tonne.
Steel
9.23 India ranked as the fourth largest producer of crude steel in the world during JanuaryNovember 2010, after China, Japan, and the USA as per the World Steel Association. This was a slip in rank from its number three position in 2009. The country has also been the largest sponge iron producer in the world since 2002. Domestic crude steel production grew at a compounded annual growth rate of 8.4 per cent during 2005-06 to 2009-10 (Table 9.10).The increase in production rode on the back of capacity expansion, mainly in private-sector plants, as also higher utilization rates. 9.24 The Indian steel industry has diversified its product mix to include sophisticated value-added steel used in the automotive sector, heavy machinery, and physical infrastructure. It, however, suffers from the high ash content of locally available metallurgical coal and a marked dependence on imported coal. The issues regarding raw material security (e.g. getting iron ore mining lease),
infrastructure (affecting logistics and transport), and uncertainties in land acquisition have emerged as bottlenecks to greenfield expansion. During AprilNovember 2010-11, consumption, imports, and exports of finished steel recorded growth rates of 9.8 per cent,11.1 per cent, and 13.8 per cent respectively.
Information technology and electronics

9.25 The revenue aggregate of the information technology (IT)-business process outsourcing (BPO) industry has grown by 5.4 per cent to reach US $ 73.1 billion in 2009-10 as compared to US $ 69.4 billion in 2008-09. IT services exports were US $ 27.3 billion in 2009-10 as compared to US $ 25.8 billion in 2008-09, showing a growth of 5.8 per cent. Information Technology Enabled Services (ITeS)-BPO exports have increased from US $ 11.7 billion in 2008-09 to US $ 12.4 billion in 2009-10, registering a year-on-year (Y-o-Y) growth of 6 per cent. Revenue from the domestic market (IT services and ITeS-BPO) has grown to US $ 14 billion in the
Table 9.10 : Production, consumption, import and export of total finished steel and pig iron
(million tonnes)
Item Production for Sale Import Export Real Consumption** TFS PI TFS PI TFS PI TFS PI 2005-06 46.56 4.69 4.31 0.03 4.8 0.44 41.43 4.13 2006-07 52.53 4.93 4.93 0.03 5.24 0.71 46.78 4.33 2007-08 56.07 5.284 7.03 0.11 5.08 0.56 52.12 4.62 2008-09 57.16 6.21 5.84 0.08 4.44 0.35 52.35 5.87 2009-10 Change (per cent) over 2008-09 59.69 5.73 7.3 0.11 3.24 0.28 56.48 5.46 4.4 -7.6 25 38 -27 -21 7.9 -6.9
Source : JPC, Ministry of Steel. Notes : TFS= total finished steel, both alloy and carbon; PI=pig iron; *provisional.; ** adjusted for stock variation and double counting.
Industry year 2009-10 as compared to US $ 12.8 billion in 2008-09, a growth of about 9 per cent. Total IT software and services employment has reached 2.28 million in 2009-10 (excluding employment in the hardware sector) as against 2.20 million in 200809.The IT-ITeS industrys contribution to national GDP is estimated to increase from 6.0 per cent in 2008-09 to 6.1 per cent in 2009-10. NASSCOM expects IT-BPO exports to grow by at least 18 per cent in 2010-11 to reach US $58.7 billion as against US $ 49.7 billion in 2009-10.
225
by individual creativity and innovation, and make significant contributions to the countrys GDP, manufacturing output, exports, and employment generation. MSMEs contribute 8 per cent of the countrys GDP, 45 per cent of manufactured output, and 40 per cent of exports. The labour-capital ratio in MSMEs is much higher than in larger industries. Moreover, MSMEs are better dispersed. In view of these factors, MSMEs are important for achieving the national objective of growth with equity and inclusion.
Electronics hardware manufacturing

9.26 The production of electronics is estimated to grow by 13 per cent to reach Rs.109,940 crore in 2009-10 as compared to ` 97,260 crore in 200809. Electronics hardware exports are estimated to be ` 31,250 crore in 2009-10 as compared to ` 31,230 crore in 2008-09. The cumulative export figure in electronics during 2010-11 (April to July) is estimated at US $ 1.36 billion (` 6259 crore) whereas during the same period in the previous year, exports of electronics amounted to US $ 1.92 billion (` 9339 crore).
CENTRAL PUBLIC-SECTOR ENTERPRISES (CPSES)

9.28 There were altogether 249 CPSEs under the administrative control of various ministries/ departments as on 31March 2010. Of these, 217 were in operation and 32 under construction. The cumulative investment (paid-up capital plus longterm loans) in all the CPSEs stood at ` 579,920 crore as on 31 March 2010, an increase of 12.93 per cent over 2008-09. The capital employed in all the CPSEs went up by 14.73 per cent during the same period. A great deal of investment in CPSEs is accounted for by internal resources rather than through investment from outside. 9.29 The net profit of the profit-making CPSEs (158) stood at `108,434.68 crore in 2009-10. The net loss of the loss-making enterprises (59) on the other hand,
Micro, small, and medium enterprises (MSMEs)

9.27 The role of MSMEs in the economic and social development of the country is widely acknowledged. They are nurseries for entrepreneurship, often driven
Table 9.11 : Performance of CPSEs during 2009-10

(` crore) Sl. No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. Particulars 2009-10 2008-09 % change over previous year 12.93 14.73 -2.87 10.10 8.35 -0.82 30.28 -9.16 -9.11 -7.72 4.77 -2.98
Investment(long-term loan + equity) Capital employed (net fixed assets + working capital ) Total turnover Profit of Profit Making CPSEs Loss of Loss Making CPSEs Net worth Dividend declared Corporate tax Interest paid Contribution to Central Exchequer Foreign Exchange Earnings Foreign Exchange Outgo
579,920 910,120 1,235,060 108,435 15,842 660,245 33,223 119,529 35,720 139,828 77,745 420,415
513,532 793,240 1,271,529 98,488 14,621 665,686 25,501 131,583 39,300 151,529 74,206 433,332
Source: Department of Public Enterprises.
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Economic Survey 2010-11 with growth of about 6 per cent for the world. Foreign exchange earnings (FEEs) from tourism in 2010-11 (April-November) increased by 16.8 per cent in rupee terms, and by 22.7 per cent in US dollar terms, as compared to the corresponding period of 2009-10 (Table.9.12).
stood at `15,842 crore during the same period. The year also witnessed severe financial under-recoveries by public-sector oil marketing companies (OMCs) as they had to keep prices on sale of petroleum products low in the domestic market. The foreign exchange earnings of the CPSEs amounted to ` 77,745 crore during 2009-10 and were clearly overtaken by the foreign exchange outgo of ` 420,415 crore (Table 9.11).
FINANCING
AND INVESTMENT
Industrial Credit
9.31 On a year-on-year basis, credit growth to industry sharply accelerated to 27.0 per cent in November 2010 from 14.2 per cent in November 2009 (Table 9.13). The sectoral composition of the gross deployment of bank credit to industry,
Tourism Sector
9.30 Foreign Tourist Arrivals (FTAs) in the first eight months of 2010-11 have registered significant growth of 9.4 per cent after the negative growth in 2008-09 and low growth in 2009-10. This compares favourably
Table 9.12 : Number of FTAs, FEEs in Rupees and Us Dollars, and Per Cent Change
Year FTAs (lakh) 46.67 51.75 50.66* 52.86* 33.65* %Change over Previous Year 13.8 10.9 -2.1 4.3 9.4 FEEs (` crore) ` 41,127 45,526 48,657** 59,124** 40,104** % Change Over Previous Year 17.9 10.7 6.9 21.5 16.8 FEEs (million US$) 9123 11,349 10,543** 12,521** 8777** % Change over Previous Year 16.2 24.4 -7.1 18.8 22.7
2006-07 2007-08 2008-09 2009-10 2010-11

(April-Nov)
Note: *provisional;** advance estimates. Source: Department of Tourism.
Table 9.13 : Industry-wise deployment of gross bank credit

Sector % Growth (y-o-y) Nov. 2009 Mining & Quarrying (incl. Coal) Food Processing Beverage & Tobacco Textiles Leather & Leather Products Wood & Wood Products Paper & Paper Products Petroleum, Coal Products & Nuclear Fuels Chemicals & Chemical Products Rubber, Plastic & their Products Cement & Cement Products Basic Metal & Metal Product All Engineering Vehicles, Vehicle Parts & Transport Equipment Construction Infrastructure Industries Industry total minus Infrastructure 2.6 5.9 49.2 7.4 -0.5 4.1 11 -22 1 6.5 18.3 18.3 4.7 -2.9 8.9 47.2 14.2 4.6 Nov. 2010 27.0 30.3 -2.3 18.1 16.1 27.9 16.3 -14.6 19.9 37.8 40.9 25.7 31.9 16.5 16.4 44.2 27.0 20.0 Share in outstanding credit to industry(%) Nov. 2009 1.3 4.6 0.9 9.4 0.5 0.4 1.5 5.9 6.6 1.2 1.8 12.8 5.7 3.1 3.2 29.0 100.0 71.0 Nov. 2010 1.3 4.8 0.7 8.7 0.5 0.4 1.4 4.0 6.3 1.3 2.0 12.6 5.9 2.9 3.0 32.9 100.0 67.0
Source : RBI. Notes : Data are provisional and relate only to select banks.
Industry including infrastructure, shows widely varying patterns. It is the infrastructure sector that kept credit growth to industry at the level of 27.0 per cent during the year ended November 2010. Net of infrastructure, year-on-year credit growth to industry was 20.0 per cent in November 2010, compared to 4.6 per cent during the corresponding period of the previous year. 9.32 Industrial credit to micro and small enterprises (MSEs), including service-sector, grew at a higher rate of 21.5 per cent in November 2010 compared to 19.3 per cent during the corresponding period of the previous year. Further, industrial credit to MSEs in the manufacturing sector grew at 16.9 per cent during November 2010 as compared to 19 per cent during November 2009.
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decline in stock market indices also affected valuation gains and the combined effect of these factors led to a decline in industry GCF. But during 2009-10, industry GCF as a share of overall GCF has increased to 43.8 per cent due to revival of investment sentiments (Table 9.14). 9.34 While the GCF indicates actualization of investment, investment intentions indicated in the Industrial Entrepreneur Memorandums (IEMs) filed are lead indicators of likely investment flow to industry and of entrepreneurs perception. The investment intentions also provide the sectoral preferences of investors and shifts in these preferences over time. During 2001-09, overall investment indicated in the IEMs filed increased at an average annual rate of 35.5 per cent. There was, as expected, a decline in investment intentions in 2009, but investment intentions in 2010 (January-November) indicate revival of business sentiment and an improvement in entrepreneurs perception. Metals, machinery, cement, chemicals, and the auto sector continue to dominate as the preferred industries. This is consistent with the growth of these industries (Table 9.15).
Industrial Investment
9.33 The industry sector has been attracting a sizeable chunk of domestic capital formation resulting in an addition to productive capacities. As per the new series of National Accounts (2004-05), average annual growth of new investment in the industrial sector (excluding construction) was 11.3 per cent, as against average GDP growth of 8.6 per cent during 2004-05 to 2009-10. The rate of growth of gross capital formation (GCF) for mining, registered manufacturing, and the electricity sector was even higher. There was a decline in the share of industry GCF in the total GCF in 2008-9, which could be considered an abnormal year because the global economic meltdown had affected investor sentiment resulting in a dip in investment and deferment of investment decisions. The internal accruals of the corporate sector were also adversely affected. A
Foreign Direct Investment (FDI)

9.35 Domestic savings in India have not been large enough to wholly meet investment requirements. Capital inflows from other countries, particularly of an investment nature, have become important. The ratio of domestic savings to GDP has generally been lower than that of GCF to GDP. During 2004-08, this gap was 1.3 per cent of GDP. Equity inflows are more stable and bring in managerial skills and technological knowhow together with the investment.
Table 9.14 : Gross Capital Formation (GCF) in Industry

(` Crore at 2004-05 prices) 2004-05 1. Mining 2. Manufacturing 2.1 Registered 2.2 Unregistered 3. Electricity Total Industry GCF* Rate of growth (%) 37,322 344,517 245,984 98,533 53,300 435,139 2005-06 52,260 405,047 342,671 62,376 64,673 521,980 19.96 2006-07 60,412 472,223 380,294 91,929 76,366 609,001 16.67 2007-08 68,470 611,469 521,967 89,502 85,040 764,979 25.61 2008-09 59,266 417,971 381,056 36,915 95,533 572,770 -25.13 2009-10 96,079 563,633 477,202 86,431 98,908 758,620 32.45 11.35 CAGR 20.82 10.35 14.17 -2.59 13.16 11.76
Total GCF excluding valuables1,011,178 1,183,485 1,365,019 1,606,013 1,542,642 1,731,209 Share of industry in total GCF 43.0 44.1 44.6 47.6 37.1 43.8
Source: Office of the Economic Adviser, DIPP and CSO Notes: CAGR- compound annual growth rate; * Industry GCF excludes construction
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Table 9.15 : Investment Indicated in Industrial Entrepreneur Memorandums (IEMs) Filed

(` Crore) 2005 Food Fermentation Industries Textiles Wood & Wood Products Paper and Paper Products Leather and Leather Products Chemicals Rubber Cement Metals Machinery Transport Others Fuel Total 40,098 2888 21,605 163 5473 209 28,350 1102 11,800 101,730 87,340 2059 25,707 25,432 353,956 2006 62,845 8008 26,325 8199 148 45,722 2403 42,406 144,128 165,227 10,688 48,669 23,782 588,550 2007 10,520 5171 22,193 105 4649 266 34,352 1191 76,906 180,973 375,276 11,314 69,583 35,001 827,500 2008 15,924 8230 10,730 622 5841 106 155,756 2867 125,948 364,978 556,635 24,862 207,842 42,225 1,522,566 2009 15,637 4566 9200 96 6037 106 27,661 2118 53,742 254,285 503,651 5048 95,958 61,743 1,039,848 2010 (Jan. Nov.) 18,272 2998 25,747 122 5908 152 51,072 5330 94,732 380,691 884,582 10,437 64,398 72,956 1,617,397
Source: Office of the Economic Advisor, DIPP.
To encourage FDI inflows, FDI policy has continued to be fine tuned and progressively liberalized, allowing FDI in more and more industries under the automatic route. In the year 2000, Government allowed FDI up to 100 per cent on the automatic route for most activities; a small negative list was notified where either the automatic route was not available or there were limits on FDI. Since then, the policy has been gradually simplified and rationalized and more sectors have been opened up for foreign investment. 9.36 There has been tremendous growth in FDI inflows to India since 2003-04. Equity inflows have risen nearly thirteen-fold, from US$ 2.23 billion in 2003-04 to US$ 27.31 in 2008-09 and US$ 25.89 billion in 2009-10. Total FDI inflow into India since the onset of the liberalization process (August 1991May 2010) is nearly US$ 136.86 billion. This represents only the equity capital component. Under international practices of reporting, i.e. including equity capital, reinvested earnings, and intracompany loans, the figure comes to US $168.94 billion as against US$ 6.13 billion in 2001-02, US $ 35.18 billion in 2008-09, and US $ 37.19 billion in 2009-10. While the FDI inflows have somewhat flattened out over the course of the last three years, the pace of inflows has been stable, including during 2009-10. This is despite the fact that the United Nations Conference on Trade and Development
(UNCTAD) World Investment Report (WIR), 2009, had noted a fall in global FDI inflows from a historic high of US$1.979 trillion in 2007 to US$1.697 trillion in 2008, a decline of 14 per cent. UNCTAD had subsequently predicted a fall in global FDI investment flows by 30 per cent, from US $ 1.7 trillion in 2008 to US$ 1.2 trillion in 2009. The Organization for Economic Cooperation and Development (OECD), in its report on investment, released in March 2010, had also noted significant stagnation in global investment activity due to the global economic crisis. Table 9.16 : Growth in FDI inflows
(US$ billion)
Financial As per PerFDI PerYear International centage Equity centage Practices* Growth Inflows# Growth 2003-04 2004-05 2005-06 2006-07 2007-08 (P) 2008-09 (P) 2009-10 (P) 2010-11 (AprilOct 2010) 4.32 6.05 8.96 (-) 14% (+) 40% (+) 48% 2.23 3.78 5.97 (-) 18% (+) 69% (+) 58%
22.83 (+) 155% 34.84 35.18 37.18 14.9 (+) 53% (+)1% (+)6% -
16.48 (+) 176% 26.86 27.99 27.15 12.62 (+) 63% (+)4% (+)3 -
Source : Office of the Economic Adviser, DIPP. Note: * As per Reserve Bank of India (RBI) estimates. # As per DIPP estimates.
Industry Table 9.17 : Sector-wise FDI Inflows into industry and infrastructure
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(US $ million) 1991-2002 Food Products Fermentation Industries Textiles Wood Products Paper Leather Chemicals Rubber, Plastic, & Petroleum Products (including oil exploration) Non-metallic Minerals Metals and Metal Products Machinery and Equipments Transport Equipments Others Manufacturing Mining (including mining services) Power* Telecommunications Total 972.6 51.1 249.2 0.1 327.2 43.4 1810.4 2002-07 392.2 216.3 327.2 0.6 139.0 16.8 1934.1 2007-08 80.7 270.1 186.0 0.4 104.2 7.5 582.3 2008-09 150.5 144.7 157.4 11.3 310.1 3.3 992.5 2009-10 348.2 112.0 140.6 6.5 85.9 5.1 611.8 2010-11 (Apr.-Nov) 166.0 18.0 56.2 0.7 28.1 0.3 500.6
342.1 515.8 223.0 3092.4 431.1 2834.2 7.8 1885.8 2140.4 14,926.0
464.7 877.9 548.7 6854.4 1130.8 1184.7 55.8 398.5 1505.9 16,047.6
1441.9 143.0 1176.9 2645.7 674.8 704.3 458.3 1011.2 1261.5 10,748.5
497.2 944.2 960.9 2528.1 1151.7 1566.1 34.4 1070.1 2558.4 13,080.8
296.2 45.6 406.7 2515.3 1176.6 1079.4 174.0 1935.2 2554.0 11,493.0
542.2 279.1 960.3 1317.1 533.0 1232.6 75.1 1028..0 1029.8 7831.2
Source: DIPP. Note : Total excludes inflows to services sector and other NRI schemes; *=includes Non-conventional energy sector
9.37 FDI equity inflows, as a percentage of the GDP, grew from 0.37 per cent in 2003-04 to nearly 2.21 per cent in 2008-09. As a percentage of the GCF, they grew from 1.35 per cent to nearly 6.32 per cent during the same period. The 2009 survey of the Japan Bank for International Cooperation (JBIC), conducted among Japanese investors, continued to rank India as the second most promising country for overseas business operations, after China. The WIR, 2010, in its analysis of global trends and sustained growth of FDI inflows, has ranked India as the second most attractive location for FDI for 2010-12. According to it, the top five most attractive locations for FDI for 2009-11 are China, India, Brazil, the United States, and the Russian Federation. The WIR, 2009, had listed India as the third most attractive destination. For India to maintain its momentum of GDP growth, it is vital to ensure that the robustness of its FDI inflows is also maintained. 9.38 In FDI equity investments, Mauritius tops the list of first ten investing countries followed by the US, the UK, Singapore, Netherlands, Japan, Germany, France, Cyprus, and Switzerland. Among
the sectors attracting highest FDI are services, telecommunications, computer software and hardware, housing and real estate, and construction. Sectors like agricultural services, sea transport, and electrical equipment have shown a quantum jump in FDI inflows during 2009-10. Sectorwise FDI inflows into some of the key industrial and infrastructure sectors are given in Table 9.17.
POLICY DEVELOPMENTS PROGRAMMES

Textiles
AND
9.39 The two flagship schemes of the Ministry of Textiles, namely the Technology Upgradation Fund Scheme (TUFS) and Scheme for Integrated Textile Parks (SITP), have been approved for continuation in the Eleventh Five Year Plan. TUFS, which was commissioned on 1 April 1999 with a view to facilitating the modernization and upgradation of the textile industry by providing credit at reduced rates to entrepreneurs both in the organized and the unorganized sectors, has been fine tuned to induce
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Economic Survey 2010-11 ` 40,000 crore has been planned to be invested by the government to e-enable delivery of over 1100 services across the country in public private partnership (PPP) mode; to make available a converged backbone network for data, voice, and video communications throughout States/UTs, and to provide common secure IT infrastructure to host State-level e-Governance applications/data in order to enable seamless G2C, G2B, and G2C services. Significant progress has been made in creating these core e-infrastructures comprising State Wide Area Networks (SWAN), State Data Centres (SDC), State Service Delivery Gateways (SSDG), and onestop shop front-end service access pointsthe Common Services Centres (CSCs). 9.44 The Government had decided to establish a National Knowledge Network (NKN) with scalable multiples of 10 Gbps capacity high speed data communication network. It will connect about 1500 nodes covering Institutions of higher learning, research, and governance. A core backbone consisting of 17 Points of Presence (PoPs) have been established. The total number of operational NKN core links is 37. Around 88 institutions of higher learning and advanced research have already been connected to the network and 15 virtual classrooms set up. 9.45 To maintain an edge there is need to be attentive and continuously work towards generating quality manpower. The Government announced the National Skill Development Policy in 2010 which has set a target of equipping 500 million with skills by 2022. The policy also aims at taking the advantage of the demographic dividend, i.e. increasing population of the working age group of 15 to 59 years in India. The Department of Information Technology (DIT) has been listed under the skill development initiative and given the target of training 10 million persons by the year 2022. 9.46 Recognizing the importance of nanotechnology, the DIT initiated a Nanotechnology Development Programme in 2004 with the objective of creating infrastructure for research in nanoelectronics and nanometrology at national level and also funding small and medium-level research projects in specific areas such as nanomaterials, nanodevices, carbon nano tubes (CNT), and nanosystems. A nanometrology laboratory is being set up at the National Physical Laboratory, Delhi. The facilities created at the Indian Institute of Science, Bangalore (IISc), and Indian Institute of Technology, Powai (IITP), are made available to
rapid investments in the targeted segments of the textile industry. Under the scheme, an amount of ` 85,091 crore was sanctioned against project cost of ` 207,747 crore and loans worth ` 85,091 crore were disbursed to 28,302 applicants up to 30 June 2010(P). Under the SITP, 40 integrated textiles parks of international standards, covering the weaving, knitting, processing, and garmenting sectors with project proposals worth ` 4133.09 crore (of which assistance from the Government is `1419.69 crore) have been sanctioned. So far, eight textile parks have been inaugurated. 9.40 The Ministry of Textiles formulated a draft National Fibre Policy incorporating inputs from all the major stakeholders. The Policy has been designed with a decadal perspective (2010-20) and seeks to place India firmly on the world fibre map by strengthening the existing policy framework and providing institutional and technological support for rapid fibre growth in the country in the coming decade. 9.41 A new scheme, namely the Integrated Skill Development Scheme for the textiles and apparel sector including jute & handicrafts, was launched on 5 August 2010 with the objective of capacity building of institutions providing skill development and training for workers in the textiles sector. The Scheme envisages an investment of ` 272 crore, of which the Government contribution would be ` 229 crore during 2010-11 and 2011-12 with a target of 2.56 lakh persons to be trained. 9.42 The Government of India has decided to include sericulture activities up to the stage of cocoon production along with extension system for cocoon production in agri-enterprises up to the stage of yarn production and marketing to be eligible for funding under the Rashtriya Krishi Vikas Yojana (RKVY). The benefits of the RKVY can now be availed of for improvement of the sericulture extension system, enhancement of soil health, development of rain-fed sericulture, and integrated pest management.
Electronics and IT
9.43 Several Governments across the world, including in India, have devised e-Governance strategies and are employing technology applications in the delivery of public services. The National eGovernance Plan(NeGP) has been approved by the Cabinet in May 2006 with a vision to providing access to critical public services and promoting rural entrepreneurship. The NeGP consists of 27 Mission Mode Projects (MMPs) (9 Central, 11 State, and 7 Integrated) and 8 Support Components. Over
Industry researchers in the country through the Indian Nanoelectronics Users Programme (INUP) through which more than 40 organizations are already accessing these facilities from all over the country for R&D activities. 9.47 In order to promote indigenous production of medical electronic equipment in the country, the DIT has been supporting technology development activities for the development of diagnostic, therapeutic, and related medical electronic devices. Under the Jai Vigyan Mission (JVM), six JMV integrated medical linear accelerators (linac) for cancer treatment have been developed and deployed at the Mahatma Gandhi Institute of Medical Sciences (MGIMS), Wardha, and Regional Cancer Centre (RCC), Adyar, and are being used for treatment of cancer patients and four more machines are under development for deployment in other hospitals in the country. Telemedicine centres have been set up in the rural and remote areas of Tripura, Punjab, Himachal Pradesh, West Bengal, Kerala, and Tamil Nadu and tele-consultations been provided through these centres to patients in remote areas. 9.48 For alignment of IT process with business processes and for IT to deliver the correct and appropriate business solutions, there is a need for quality assurance in the field of electronics and IT in the country. This is being carried out by the Directorate of Standardization, Testing and Quality Certification (STQC) of the DIT. It provides testing, calibration, training, and certification services through its well-developed network of test laboratories spread across the country including the north-east region. These services have been primarily utilized by small and medium-scale industries and so far more than 10,000 organizations have availed of them. 9.49 For deriving economic benefits from an ITled society, a holistic approach was made towards e-commerce and information security with the passage of the Information Technology Act 2000 and its amendment in 2008. The Indian Computer Emergency Response Team (CERT-In) has been designated as nodal agency for coordinating all matters related to cyber security and emergency response.
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the development and promotion of MSMEs. The detailed recommendations cover six major thematic areas, namely credit, marketing, labour, rehabilitation and exit policy, infrastructure, technology and skill development, and taxation as also special measures for the north-eastern region and Jammu and Kashmir. The implementation of these recommendations is being monitored periodically by the Steering Group constituted under the chairmanship of Principal Secretary to the Prime Minister. Further, a Council on Micro, Small and Medium Enterprises under the chairmanship of the Prime Minister has been set up to lay down broad policy guidelines and review the development of the MSME sector. 9.51 The National Manufacturing Competitiveness Programme (NMCP) is the nodal programme of the Government of India for developing global competitiveness among Indian MSMEs through improvement in their processes, designs, and technology and market access. With the balance three schemes operationalized this year, all its ten components are now under implementation. These ten components include Building Awareness on Intellectual Property Rights for MSMEs, Scheme for providing Support for Entrepreneurial and Managerial Development of SMEs through Incubators, Enabling the Manufacturing Sector to be Competitive through Quality Management Standards and Quality Technology Tools (QMS/ QTT), Mini Tool Rooms under PPP mode, Marketing Assistance Support to MSEs (Bar Code), Lean Manufacturing Competitiveness Programme for MSMEs, Promotion of Information & Communication Tools (ICT) in the Indian MSME Sector; Design Clinics Scheme for MSMEs, Marketing Assistance and Technology Upgradation Scheme for MSMEs, and Technology Quality Upgradation Support to MSMEs. 9.52 In line with the overall target set by the Prime Ministers National Council on Skill Development, the Ministry of MSME has taken up skill development as a high priority area. The agencies under the Ministry will conduct skill development programmes for about 4.16 lakh trainees during 2010-11. Further, the Ministry aims to train 4.78 lakh trainees in the year 2011-12 through its various programmes for the development of self-employment opportunities as well as wage employment opportunities in the country. 9.53 The Government has adopted the cluster approach as a key strategy for enhancing the
MSMES
9.50 The report of the Task Force on Micro, Small and Medium Enterprises, presented to the Honble PM on 30th January, 2010, provides a roadmap for
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Economic Survey 2010-11 of khadi and polyvastra has been introduced from 2010-11. The scheme provides for assistance up to 20 per cent of the value of production to be shared among artisans, producing institutions, and selling institutions in the ratio 25:30:45. 9.58 The Government has tied up financial aid from the Asian Development Bank (ADB) amounting to US$150 million over a period of three years for implementing a comprehensive Khadi Reform Programme worked out in consultation with the ADB and Khadi and Village Industries Commission (KVIC). Under this reform package, it is proposed to revitalize the khadi sector with enhanced sustainability of khadi, increased incomes and employment for artisans, and artisans welfare and to enable the KVIC to stand on its own with gradually decreasing dependence on Government grants. Initially, the programme will be initiated in 300 khadi institutions keeping the needs of regional balance, geographical spread, and inclusion of backward areas in view. The first tranche fund of ` 96 crore has already been released to the KVIC for implementation of the programme.
productivity and competitiveness as well as capacity building of MSEs and their collectives in the country. The guidelines of the MSE Cluster Development Programme have been comprehensively modified to provide higher support to the MSEs. During 201011,12 new clusters were taken up for diagnostic study, 11 new clusters for soft interventions, and 6 clusters approved for setting up of common facility centres (CFCs). With this, a total of 471 clusters spread over 28 States and seven UTs have so far been taken up for diagnostic study, soft interventions, and setting up of CFCs and efforts are under way to cover more and more clusters from all the States/UTs. 9.54 Under the Credit Guarantee Fund Scheme for Micro and Small Enterprises, over 1.5 lakh MSE proposals for an amount of ` 7568 crore have been approved for extending loans without collateral/thirdparty guarantee during the year (up to November 2010)thereby registering a growth of over 150 per cent in terms of number of proposals and over 200 per cent in terms of credit amount over the corresponding period of last year. Cumulatively, about 4.50 lakh MSE proposals for loans of ` 18,946 crore have been approved under the scheme up to November 2010. 9.55 Under the Credit Linked Capital Subsidy Scheme,15 per cent capital subsidy is provided upfront on loans subject to a maximum of ` 15 lakh, for technology upgradation through adoption of wellestablished and improved technologies approved under the Scheme. The ambit of the Scheme was recently enlarged to include 201 new technologies, including 179 in the pharmaceutical sector. During the year (upto November 2010) 1963 MSEs have been assisted and subsidy amounting to ` 117.3 crore has been sanctioned. 9.56 Under the Prime Ministers Employment Generation Programme (PMEGP) launched in August 2008, over 2.65 lakh applications have been received up to November 2010, of which 1.13 lakh have been selected by the District Level Task Force concerned for assistance.Financial assistance for 30,881 projects has been sanctioned by banks and loans were disbursed in 23,059 cases which will give employment to about 2.31 lakh persons. It is expected that 6 lakh additional employment opportunities will be generated in 2010-11. 9.57 A flexible growth stimulating and artisancentric scheme named Market Development Assistance (MDA) to promote production and sales
CPSES
9.59 With a view to delegating enhanced financial and operational powers to the CPSEs, the Government had introduced the Navratna and Miniratna schemes. During 2010-11, the Government has introduced the Maharatna scheme to empower mega Navratna CPSEs to expand their operations both in domestic as well as foreign markets. During the year, four CPSEs, namely Indian Oil Corporation Ltd., National Thermal Power Corporation Ltd., Oil and Natural Gas Corporation Ltd., and Steel Authority of India Ltd., were granted Maharatna status. Two more CPSEs, i.e. Oil India and Rashtriya Ispat Nigam Ltd., were granted Navratna status in 2010-11 and there are now 16 Navratna CPSEs as a result. Three more CPSEs, namely the Bridge & Roof Company Ltd., Bharat Pumps & Compressors Ltd. and National Seeds Corporation Ltd., were granted Miniratna status during the year and presently there are 62 Miniratna CPSEs. 9.60 Besides endeavouring to professionalize the Boards of Directors of these enterprises, the Government has issued guidelines on corporate governance of CPSEs. The Government, furthermore, established the Board for Reconstruction of Public Sector Enterprises (BRPSE) in December
Industry 2004 to advise the Government, inter alia, on revival / restructuring of sick and loss-making CPSEs. The BRPSE has made recommendations in respect of 62 cases until 31 December 2010. The Government, in turn, has approved the proposals for revival of 40 CPSEs and closure of two. The total assistance approved by the Government in this regard up to 31 December 2010 has been ` 23,612 crore, of which ` 3,290 crore comprises cash assistance and ` 20,322 crore non-cash assistance. Out of 20 revived CPSEs (which posted profit in 2008-09), 11 have been posting profit consistently for three years.
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specifically of women and children, and make India a safe tourism destination. As a follow-up of the efforts of the Ministry of Tourism to develop Sustainable Tourism Criteria, a Pledge for Commitment towards Safe, Honourable, and Sustainable Tourism was taken by the stakeholders of the travel trade and hospitality industry on World Tourism Day, 27 September 2010. 9.65 The Ministry of Tourism continued promotional efforts under the Incredible India campaign in overseas and domestic markets. Emphasis was also laid on social awareness campaigns in the domestic market to sensitize the masses and various stakeholders to the importance of tourism.
Tourism
9.61 The Ministry of Tourism is making concerted efforts for development of nationally and internationally important destinations and circuits through Mega Tourism Projects. These projects are a judicious mix of cultural, heritage, spiritual, and eco tourism in order to give tourists a holistic experience. The Ministry is also combining with other Central Government ministries such as Railways, Civil Aviation, Road Transport & Highways, Food Processing and Urban Development as well as the concerned State Governments to achieve convergence and synergy with their programmes so that the impact of investment in these destinations is maximized. 9.62 The Visa-on-Arrival (VoA) scheme was started in the country from January 2010 on pilot basis for nationals of five countries, namely Finland, Japan, Luxembourg, New Zealand, and Singapore. A total of 5644 VoAs were issued during JanuaryNovember 2010. The scheme is being extended to nationals of five more countries, namely Cambodia, Laos, Phillipines, Myanmar, and Vietnam from January 2011. 9.63 The Reserve Bank of India has delinked credit for hotel projects from real estate, thereby enabling hotel projects to avail of credit at relaxed norms and reduced interest rates. 9.64 The Ministry of Tourism has adopted the Code of Conduct for Safe & Honourable Tourism in July 2010 essentially to strengthen the critical pillar of Suraksha (Safety) and ensure that Indian tourism follows international standards of safe tourism practices, applicable to both tourists and local residents, i.e. local people and communities who may be impacted by tourism in some way. The Code has been formed to sensitize travellers and the travel industry, close all possibilities of exploitation,
Fertilizers
9.66 The Government is examining the feasibility of revival of Hindustan Fertilizer Corporation Ltd. (HFCL) and Fertilizer Corporation of India Ltd. (FCIL), subject to confirmed availability of gas. An Empowered Committee of Secretaries, constituted to look into the various financial models for revival of the closed units, has submitted its recommendations. Various modules of revivals are under consideration. Proposals are under consideration for revamp of Madras Fertilizers Limited (MFL). 9.67 The concession scheme for decontrolled P & K fertilizers which was allowed to continue by the Government from 1992 to 31 March 2010 was changed to a Nutrient Based Subsidy scheme (NBS) with effect from 1 April 2010, whereby for P & K fertilizers, the Government has announced subsidy per kg of nutrients N, P, K, and S as well as per MT of fertilizers under the NBS during 2010-11 and 201112. The Government has also provided additional subsidy on fertilizers fortified with secondary and micronutrients, namely boron and zinc. An additional subsidy of ` 300 and ` 500 per tonne respectively has been sanctioned for boron- and zincfortified fertilizers. With the objective of providing a variety of subsidized fertilizers to farmers depending upon soil and crop requirements, the Government has included three new grades of complex fertilizers under the NBS, namely NP 24-24-0-0, NPK 16-1616-0, and NPKS 15-15-15-09, in 2010-11. 9.68 Under the NBS, freight subsidy on decontrolled P & K fertilizers (except SSP) for rail movement is being paid as per the actual claim. The secondary freight is also paid. Freight for direct road movement from plant or port is subject to lower
234
Economic Survey 2010-11 to the free list. However, most of the other policy measures adopted to safeguard the economy during the recessionary period like removal of export duty on steel remain in place. At the same time, the government has set up an Inter-Ministerial Group to facilitate interaction between investors and various agencies in matters of acquisition of land, mining rights, power, and transportation including rail, road, and port sectors.
of the actual claim or the equivalent rail freight up to a maximum distance of 700 km with effect from 1st January 2011. Manufacturers have been allowed to fix the maximum retail price (MRP) of boronated SSP higher than that of powered or granulated SSP. To ensure easy availability of fertilizers in all parts of the country, a uniform freight subsidy policy has been announced under which rail freight is paid on actual basis and road freight on a normative average district lead for urea. 9.69 The Government has placed 20 per cent of produced/imported decontrolled P & K fertilizers under the control of Department of Fertilizers under the Essential Commodities Act 1955 with the objective of making fertilizers available in the difficult areas. In order to improve availability of fertilizers in the country, import of all the subsidized fertilizers has been permitted. 9.70 The manufacturers of customized and mixture fertilizer are allowed by the Government to source the subsidized fertilizers from the manufacturers/ importers after their receipt in the districts. With a view to ensuring adequate availability in the country and the subsidy paid, the Government has put the export of DAP and MOP in the restricted category to discourage exports and illegal diversion. Steps are being taken to put all P & K fertilizers under the restricted category. Possibilities for setting up of joint venture ammonia/urea projects in countries abroad where adequate gas is available are being explored. Indian entities are in dialogue for joint ventures in the field of phosphatic and potassic fertilizers in resource-rich countries.
SOME CRITICAL DIMEMSIONS INDUSTRIAL DEVELOPMENT
OF
Recent trends in industrial pollution

9.73 Industrial effluents comprising organic pollutants, chemicals and heavy metals and run-off from land based activities such as mining are a major source of water pollution. The major waterpolluting industries include fertilizers, refineries, pulp and paper, leather, metal plating, and other chemical industries. Continued monitoring by the Central Pollution Control Board (CPCB) and State Pollution Control Boards of water quality of aquatic resources has revealed that organic pollution continues to be predominant pollutant of aquatic resources. Based on the primary water quality criteria evolved in terms of bio-chemical oxygen demand (BOD), 150 stretches on 105 rivers have been identified as polluted. 9.74 Rapid industrialization and urbanization have also resulted in increase in pollution load on rivers. According to CPCB estimates, against an estimated sewage generation of about 38,254 million litres per day (mld) from Class I cities and Class II towns of the country, the available treatment capacity is for 11,787 mld, indicating a wide gap between sewage generated and treatment capacity created. Discharge of untreated waste water constitutes a major source of pollution load for the rivers. 9.75 Existing pollution abatement infrastructure in the country provides adequate treatment facilities to various streams of pollution generated by industries. Fly-ash, phospho-gypsum, and iron and steel slags are the main forms of Industrial solid wastes generated in India. It is estimated that around 112.29 million tonnes of fly-ash is generated annually by thermal power plants, of which only 53.92 million tonnes is utilized by different sectors like cement, road embankments, fly ash bricks and products, and back filling of mines. Besides, there are 36,145 hazardous-waste- generating industries in the
Steel Sector
9.71 The World Steel Association forecast for steel consumption in India is optimistic, indicating that Indias steel demand is likely to grow by 8.2 per cent in 2010 and 13.6 per cent in 2011. For 201011, with Indian GDP likely to register steady growth and provided that the current performance trends of its major end-use segments (manufacturing, construction, consumer durables including automobiles, capital goods )are sustained, consumption of finished steel is likely to end the year with 9 per cent growth. 9.72 Responding to the improving economic outlook, the Government rolled back the earliereffected reduction in excise duty, leading to a hike in the duty rate from 8 per cent to 10 per cent. Import of hot rolled coils was also moved from the restricted
Industry country producing 6.2 MT hazardous waste every year, brought about by expansion of chemical-based industries. It is further estimated that 1.47 lakh MT of e-waste was generated in the country in 2005, which is expected to increase to about 8.0 lakh MT by 2012. Presently there exist 23 e-waste recycling units with 90,000 MTA capacity.
235
Current programmes and policy

9.76 The Government has notified emission and effluent standards for relevant pollutants for 74 categories of processes and industries, including 17 categories of highly polluting industries under the Environment (Protection) Act 1986. The concerned State Pollution Control Boards / Authorities along with the CPCB monitor the discharges from these units. A total number of 2504 units have been identified under these 17 categories, out of which 1810 have set up pollution control facilities to comply with standards, 265 are defaulting, and 429 have been closed. 9.77 There exists a charter on Corporate Responsibility for Environmental Protection (CREP) covering 17 categories of highly polluting industries. Industrial-sector-specific action points for each category were identified and listed for implementation after consulting various stakeholders. 9.78 Other measures taken by the Government towards effective control of industrial pollution include inspection and enforcement of emission and effluent standards through issue of directions and consent mechanism, mandatory prior environmental clearance for designated development projects, financial assistance for establishment of CETPs for small-scale industrial units located in industrial clusters, identification of critically polluted areas, and preparation of action plans for abatement of pollution.
9.79 Prior environmental clearance of development projects based on environmental impact assessment is mandatory for designated sectors/projects. Various steps, including involvement of stakeholders through public hearings, have been taken to bring greater transparency and professionalism in the granting of environmental clearances. Status of projects appraised in 2010 is displayed in Table 9.18.
Labour relations
9.80 Due to constant endeavour of the industrial relations machineries of both the Centre and States, the industrial relations climate has generally remained peaceful and cordial. The number of incidences of strikes and lockouts has exhibited a declining trend over the past few years. Strikes and lockouts have declined from 349 in 2009 (P) to 99 in 2010(P). Correspondingly, the total number of mandays lost has also declined from 9,169,037 in 2009 to 1,699,826 in 2010(P) (Table 9.19). 9.81 As regards spatial/industry-wise dispersions of incidences of strikes, lockouts, there exist Table 9.19 : Strikes and Lockouts (man-days lost )
Year Strikes Lockouts Total Mandays lost 2,96,64,999 2,03,24,378 2,71,66,752 1,74,32,965 91,69,037 16,99,826
2005 2006 2007 2008(P) 2009(P) 2010(P)
227 243 210 240 157 79
229 187 179 181 192 20
Source : Labour Bureau, Ministry of Labour
Table 9.18 : Projects appraised during April-November 2010

Nature of Project Cleared EC 1. Industry 2. Thermal power 3. River valley and Hydroelectric 4. Mining (Coal & Non Coal) 6. Nuclear Total 150 32 07 72 01 387 TOR 288 71 24 152 58 01 594 Pending EC 104 23 10 80 105 00 322 TOR 172 90 10 153 58 03 486 Rejected/ Returned/ withdrawn EC TOR 85 33 01 40 00 03 162
5. Infrastructure, construction & Industrial Estates 125
Source: Ministry of Environment and Forests. Notes: EC Environmental clearance; TOR - Terms of Reference
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Economic Survey 2010-11 less than 1.4 per cent. The growth of manufacturing is crucial for employment generation, augmentation of domestic supply, resource utilization and value addition, and for sustainable growth of exports. Neglect of research and development (R&D) in new technology and skill development continues to shackle growth in the manufacturing sector. High technology base and skilled manpower are crucial for enhancing manufacturing competitiveness in the globalized economy. For many of the economically successful emerging economies, promotion of manufacturing has been a key objective. Some of these countries like South Korea have become technological giants solely on the basis of indigenous learning, skill, and R&D effort. China has been the most successful in building the worlds largest manufacturing base by giving special attention to technology development and by gearing FDI policy to promote technology transfer. All of these countries have also laid emphasis on making their SME sector highly competitive and the driver of technology. There is a strong case for enhancing public investment and building PPP in the R&D in skill and technology development. 9.85 Manufacturing inflation so far has been benign compared to overall inflation. Point to point manufactured products inflation rate for the month of December 2010 was 4.46 per cent as compared to 3.61 per cent a year ago. But the domestic prices of minerals, mineral oil, electricity, and other inputs (except coal) are on the rise partly due to the hardening of international commodity prices. Persistent high inflation is also leading to rise in average wages and this may impact labour-intensive industries such as textiles and leather etc. In the short to medium term, rising input costs may undermine the competitiveness of some sectors and also dampen domestic and foreign demand. 9.86 Overall production of the six core industries, namely crude oil, petroleum refinery products, coal, electricity, cement, and finished steel, has marginally gone up so far during this financial year but there is a huge gap in terms of the required capacity addition needed to catch up with the projected demand in some sectors. There has not been significant capacity addition in some of the core industries. Likewise slow rate of capacity addition in physical infrastructure sectors is constricting industrial sector growth. Capacity addition in core sectors and removal of infrastructure bottlenecks would spur industrial sector output in the medium to long term.
widespread variations among different States/UTs. The maximum incidences were recorded in the State of Gujarat. Wage and allowance, bonus, personnel, indiscipline and violence, and financial stringency were the major reasons for these strikes and lockouts.

9.82 Looking at IIP data for the past few months, in the short-term the industrial sector is likely to grow at moderate but sustainable rates. Continued buoyancy in corporate sales, comparatively higher credit flow to industry, larger number of investment intentions across all major industries and States, accelerated growth in some sectors, and robust merchandise exports so far are likely to sustain industrial activities in the remaining months of the financial year. Over the medium to long term, to sustain double-digit output growth and reduce the vulnerabilities of the sector, there is need to put in place a policy framework for embarking on another round of multifaceted reforms. 9.83 The latest available data on bank credit and the financial resources from non-bank sources flowing to the industrial sector indicate increased investment activities in the sector. Gross banking credit to the industrial sector net of infrastructure has increased by 20.0 per cent in November 2010, compared to 4.6 per cent during the corresponding period of the previous year. At the same time increasing cost of financing and slowdown in the flow of FDI equity inflows during the current financial year are causes of concern. Long-term foreign investment supplements the domestic investable funds and eases the liquidity crunch that constricts the sector from time to time. Industrial credit to MSEs in the manufacturing sector grew at 16.9 per cent in November 2010, marginally lower compared to last year. For medium to long-term sustainable robust growth, availability and ease of credit flow to the industrial sector in general and MSE sector in particular is critical. The MSE sector seems to be relatively less favourably placed in terms of credit availability and credit cost of working capital as compared to the medium and large scale industrial and services sectors. This persistent bias needs to be corrected. 9.84 The manufacturing sector, despite being the driver of industry, has not grown significantly over time in terms of its share in the GDP. The share of Indian manufacturing in world manufacturing is also
Services Sector
I
10
CHAPTER
ndia stands out for the size and dynamism of its services sector. The contribution of the services sector to the Indian economy has been manifold: a 55.2 per cent share in gross domestic product (GDP), growing by 10 per cent annually, contributing to about a quarter of total employment, accounting for a high share in foreign direct investment (FDI) inflows and over one-third of total exports, and recording very fast (27.4 per cent) export growth through the first half of 2010-11.
10.2 The data on this sector is still sparse and has to be collected from multiple sources. While the latest available data has been taken from different national and international sources, care has been taken as far as possible to use data from only reliable sources. It is hoped that having a separate chapter on services will be a catalyst for better and more regular data on this sector in the future. Some services, such as infrastructure (roads, railways, civil aviation), financial services, and social services (health and education) are discussed in other chapters of the survey. The construction industry is briefly discussed in this chapter, because of similar related characteristics and RBI and international institutions like WTO including it under services, even though from a national accounts classification, it is part of the secondary rather than the tertiary sector. 10.3 This chapter examines the role of services in Indias economy in terms of contribution to GDP, employment, FDI, and States domestic product, and draws some international comparisons. The chapter goes on to examine the performance of different services sub-sectors which are not wellcovered in other chapters such as domestic trade; tourism including hotels and restaurants; shipping and port services; storage; telecommunications related services; real estate; information technology (IT) and IT enabled services (ITeS); accounting and auditing services; research and development (R&D)
services; legal services and consultancy; construction; and some specialized social services such as sports.
IMPORTANCE OF THE SERVICES SECTOR FOR INDIA

10.4 The importance of the services sector can be gauged by looking at its contributions to different aspects of the economy.
Services GDP
10.5 The share of services in Indias GDP at factor cost (at current prices) increased rapidly: from 30.5 per cent in 1950-51 to 55.2 per cent in 2009-10. If construction is also included, then the share increases to 63.4 per cent in 2009-10. 10.6 The ratcheting up of the overall growth rate (compound annual growth rate [CAGR]) of the Indian economy from 5.7 per cent in the 1990s to 8.6 per cent during the period 2004-05 to 2009-10 was to a large measure due to the acceleration of the growth rate (CAGR) in the services sector from 7.5 per cent in the 1990s to 10.3 per cent in 200405 to 2009-10. The services sector growth was significantly faster than the 6.6 per cent for the combined agriculture and industry sectors annual output growth during the same period. In 2009-10, services growth was 10.1 per cent and in 2010-11
238
Figure 10.1
12 11 10 9 8 7 6 5 4 3 2 1 0
Growth rate of GDP and services sector GDP

Services GDP Overall GDP
Annual growth (per cent)
2005-06
2006-07
2007-08
2008-09
2009-10
Year
Source : Central Statistics Office (CSO)
(advance estimatesAE) it was 9.6 per cent. Indias services GDP growth has been continuously above overall GDP growth, pulling up the latter since 199798. It has also been more stable (Figure 10.1).
the trend was similar, the fall in employment in primary sector was less (at -1.1 per cent) with a small commensurate rise in employment in the other two sectors, which was again almost equally divided between the other two sectors (Table 10.1)
Services Employment in India

10.7 Although the primary sector (agriculture mainly) is the dominant employer followed by the services sector, the share of services has been increasing over the years while that of primary sector has been decreasing. Between 1993-94 to 200405, there was a sharp fall in the share of the primary sector in employment. The consequent rise in share of employment of the other two sectors was almost equally divided between the secondary and tertiary sectors. In 2007-08 compared to 2004-05, though
FDI in Services in India

10.8 The measurement of the share of services in FDI inflows encounters problems as it is difficult to clearly differentiate activities between services and goods in sectors such as computer hardware and software, telecommunications, and construction. Nevertheless, the share of the four sectors combined (services [financial and nonfinancial], computer hardware and software, telecommunications, and housing and real estate), predominantly consisting of services, in FDI equity
Table 10.1 : Share of Broad Sectors in Employment (UPSS)

Shares Sectors Primary Secondary Tertiary 1993-94 64.5 14.3 21.2 2004-05 57.0 18.2 24.8 2007-08 55.9 18.7 25.4 Change in shares 2004-05 over 2007-08 over 1993-94 2004-05 -7.5 3.9 3.6 -1.1 0.5 0.6 2007-08 over 1993-94 -8.6 4.4 4.2
Note : For the years 2004-5 and 2007-8 projected population at mid-point of these two rounds was obtained by applying projected population figures from the Registrar General of Indias (RGI) office. For the year 1993-94, the population at mid-point of the survey period was obtained by interpolation of census population of 1991 and 2001. Work participation rates of rural males, rural females, urban males, and urban females were obtained separately from unit-level data of the National sample Survey (NSS) and by multiplying them with the respective population, the total numbers of Usual Principal and Subsidiary Status (UPSS) workers for these four categories were obtained. Then the distribution of employment from unit-level data for broad sectors (primary, secondary, and tertiary) was obtained. From the number of workers in the four categories and sectoral distribution of employment, total employment for three sectors for each of these four categories was obtained. From this, overall employment distribution at broad sectoral level was calculated.
Services Sector Table: 10.2 : Sectors Attracting Highest FDI Equity Inflows
239
(` crore) `
Ranks Sector 2008-09 (Apr.-Mar.) 2009-10 2010-11 (Apr.-Mar.) ( Apr.-Dec.) Cumulative Inflows (Apr. 2000Dec. 2010) 1,18,274 (26,454) 47,144 (10,601) 46,727 (10,258) 42,049 (9,380) 39,802 (8,964) % age to Total Inflows (In US$ter-ms) 21% 8% 8%
1 2 3
Services Sector (financial & non-financial) Computer Software & Hardware Telecommunications (radio paging, cellular mobile, basic telephone services) Housing & Real Estate Construction Activities (including roads & highways)
28,516 (6,138) 7,329 (1,677) 11,727 (2,558) 12,621 (2,801) 8,792 (2,028)
20,776 (4,353) 4,351 (919) 12,338 (2,554) 13,586 (2,844) 13,516 (2,862)
13,044 (2,853) 3,054 (670) 6,021 (1,327) 4,680 (1,024) 4,109 (911)
4 5
7% 7%
Source : Department of Industrial Policy and Promotion. Note : Figures in parantheses are US$ million.
inflows in April 2000December 2010 is around 44 per cent. If construction is included then the share rises to 51 per cent. The financial and non-financial services sector which falls purely in the services category is the largest recipient of FDI equity inflows with a 21 per cent share. This is followed by the other two sectors, namely computer software and hardware, and telecommunications each with 8 per cent share. Housing and real estate, and construction with 7 per cent share each were next in importance (Table 10.2). 10.9 The year 2009-10 has seen a drying up of FDI inflows to India due to the global crisis with a fall of 5.5 per cent. Mirroring this trend, FDI inflows
in the services sector also fell by 29.1 per cent (in US dollar terms). The first nine months of 2010-11 have also not shown any improvement on the FDI front, overall and in services sectors.
State-wise Comparison
10.10 A comparison of the share of services in the gross state domestic product (GSDP) of different States and Union Territories shows that the services sector is the dominant sector in most States of India (Figure 10.2). States such as Delhi, Chandigarh, Kerala, Maharashtra, Bihar, Tamil Nadu and West Bengal have shares equal to or above the all-India share.
Figure 10.2
90 80 70
Share and growth of services sector in 2008-09

Share of services Services growth Overall growth
Per cent
60 50 40 30 20 10 0
Jammu & Kashmir
Himachal Pradesh
Uttar Pradesh
Madhya Pradesh
West Bengal
Chattisgarh
Uttarakhand
Rajasthan
All india
Tamil Nadu
Maharashtra
Andhra Pradesh
Chandigarh
Gujarat
Jharkhand
Haryana
Karnataka
Bihar
Orissa
Punjab
Note: Data in the case of Goa and Jammu and Kashmir are for 2007-08. Shares in current prices, Growth rate constant prices.
Assam
Kerala
Delhi
Goa
240
Economic Survey 2010-11 less pronounced than the slowdown in merchandise export growth, and has recovered rapidly in the first half of 2010-11 with a growth of 27.4 per cent. The overall openness of the economy reflected by total trade including services as a percentage of GDP shows a remarkable increase from 29.2 per cent in 2000-01 to 53.9 per cent in 2008-09, though it dipped to 46.1 per cent in 2009-10 due to the global crisis. The dip was more due to fall in share of merchandise trade to GDP to 35 per cent in 2009-10 compared to 41 per cent in 2008-09. The fall in the share of services trade to GDP was less than 2 percentage points from 12.9 per cent to 11.2 per cent.
10.11 State-wise growth of GSDP is also closely associated with faster growth of the tertiary sector. Interestingly, Bihar which has the highest overall growth rate in 2008-09 also has the fastest growth among States in services, in part due to its rapid progress from a low base (only Goas growth rate in services is higher than that of Bihar, but this is for 2007-08). Even small States such as Chhattisgarh and relatively low-income States such as Orissa and Rajasthan which have relatively low overall growth rates have started piggy-backing on the good performance of their services sectors to climb up the ladder of progress. Thus, the services revolution in India seems to be becoming more broad based rather than being concentrated in only a few States.
Important Services for India

10.13 Some services have been particularly important for this improving performance in India. Software is one sector in which India has achieved a remarkable global brand identity. Tourism- and travel-related services and transport services are also major items in Indias services. Besides these, the potential and growing services include many professional services, infrastructure-related services, and financial services.
Services Exports
10.12 India is also moving towards a services-led export growth. During 2004-05 to 2008-09 as per the Balance of Payments data, merchandise and services exports grew by 22.2 and 25.3 per cent respectively. Services growth slowed in 2009-10 as a result of the global recession, but the decline was
Table 10.3 : Share of different services categories in GDP at factor cost (current prices)
2004-05 Trade, hotels & restaurants Trade Hotels & restaurants Transport, storage & communication Railways Transport by other means Storage Communication Financing, insurance, real estate & business services Banking & insurance Real estate, ownership of dwellings & business services Community, social & personal services Public administration & defence Other services Construction Total Services (excluding Construction) Total Services (including Construction) Total GDP
Source : CSO @ provisional estimates
2005-06 16.7 15.1 1.6 8.2 0.9 5.7 0.1 1.6 14.5 5.4 9.1 13.5 5.6 7.9 7.9 52.9 60.8 100
2006-07 17.1 15.4 1.7 8.2 0.9 5.7 0.1 1.5 14.8 5.5 9.3 12.8 5.2 7.6 8.2 52.9 61.1 100
2007-08 2008-09@ 2009-10* 17.1 15.4 1.7 8.0 1.0 5.5 0.1 1.4 15.1 5.5 9.6 12.5 5.1 7.4 8.5 52.7 61.2 100 16.9 15.4 1.5 7.8 0.9 5.5 0.1 1.4 16.1 5.7 10.4 13.3 5.8 7.5 8.5 54.1 62.6 100 16.3 14.9 1.4 7.8 1.0 5.2 0.1 1.5 16.7 5.4 11.4 14.4 6.3 8.1 8.2 55.2 63.4 100
16.1 14.6 1.5 8.4 1.0 5.7 0.1 1.7 14.7 5.8 9.0 13.8 5.9 8.0 7.7 53.0 60.7 100
* quick estimates
Services Sector 10.14 CSOs classification of the services sector falls under four broad categories, namely a) trade, hotels, and restaurants; b) transport, storage, and communication; c) financing, insurance, real estate, and business services; and d) community, social, and personal services. Among these, financing, insurance, real estate, and business services; and trade, hotels and restaurants are the largest groups accounting for 16.7 per cent and 16.3 per cent respectively of the national GDP in 2009-10. The community, social, and personal services category accounts for a 14.4 per cent share, while transport, storage, and communication accounts for a 7.8 per cent share. Construction, which is a borderline services inclusion, has a share of 8.2 per cent (Table 10.3).
241
SERVICES SECTOR : INTERNATIONAL COMPARISON

Services GDP
10.15 With an overall share of 64.2 per cent in world GDP in 2009 (Table 10.4), the services sector
across the globe has been playing a dominant role in the growth of economies, especially in highincome economies which have transited to services-led economies. India with a services sector share of 52 per cent in national GDP in 2009 and 55.2 per cent in 2009-10 compares well even with the developed countries in the top 12 countries with the highest overall GDP. Chinas share of services in its national GDP at 39.2 per cent is relatively low, though it is ahead of India in absolute terms (as its overall GDP is more than three times that of India). In terms of services growth rate, China (10.5 per cent) followed by India (8.9 per cent) are the two fastest growing economies in the top 12 countries. In the global crisis year of 2009, when most of the top 12 countries registered negative growth in services, only China(9.4 per cent), India (6.8 per cent), and Brazil (2.6 per cent) registered positive growth. Indias world ranking in overall GDP at current prices in 2009 was 11 and in services GDP it was 12. Except for the Russian Federation moving to 11th position and India moving to 12th in services, there is no major change in rank in terms of overall GDP and services GDP.
Table 10.4 : Performance in Services Growth of Top 12 Countries

Country Rank Overall GDP (US$ billion) Share of Services (% of GDP) Services Growth Rate (%)
Overall Services At At Current Constant Prices Prices GDP GDP 2009 2009 2000
2008
2009
2000
2008
2009
2000-09(b)
United States Japan China Germany France United Kingdom Italy Brazil Spain Canada India Russia World
1 2 3 4 5 6 7 8 9 10 11 12 -
1 2 4 3 5 6 7 9 8 10 12 11 -
14119 5069 4984 3330 2649 2170 2113 1572 1464 1336 1287 1231 58069
12,899 4451 3544 2847 2192 2285 1725 1021 1182 1168 1141 865 49,356
74.1 71.0 39.0 61.6 68.8 65.4 62.5 55.5 59.3 59.5 45.9 50.2 63.7
76.8 71.3 39.1 64.4 70.0 69.3 64.6 55.8 61.9 64.0 52.4 52.4 64.0
76.5 71.0 39.2 66.6 71.1 70.5 66.6 57.3 63.6 65.5 52.0 (55.2)(a) 54.0 64.2
3.4 1.9 9.7 3.4 3.7 4.7 3.9 4.0 5.2 4.6 4.9 6.0 3.9
0.9 0.1 9.5 3.1 0.9 0.5 -0.2 4.8 2.3 2.2 9.7 7.4 2.0
-3.1 -5.6 9.4 -1.4 -1.1 -3.3 -2.0 2.6 -1.0 -0.2 6.8 -5.1 -1.6
2.0 0.5 10.5 1.4 1.5 2.3 0.9 3.6 3.1 2.8 8.9 5.6 2.5
Source : UN National Accounts Statistics accessed on 4 February 2011. Note : Rank is based on current prices. Growth rates are based on constant prices (US$). (a) In 2009-10 as per CSO, India. (b) CAGR is estimated for 2000-09.
242
Sector
Table 10.5 : Number of Greenfield FDI Projects in Services Industries 20072009

2007 297 1024 448 1161 2922 2008 553 1269 594 1616 3647 2009 370 1133 544 1267 2927 Hotels & Tourism Transport, Storage, and Communications Communications Financial Services Business Services
Source: UNCTAD, World Investment Report 2010.
FDI in the Services Sector

10.16 The global economic and financial crisis had a dampening effect on cross-border FDI flows. Though the crisis took a heavy toll on flows to manufacturing activities, the services sector was also affected. As per the United Nations Conference on Trade and Development (UNCTAD), the impact of the crisis across sectors has resulted in a shift in their relative weights in FDI flows-it has fallen in manufacturing, relative to the primary and services sectors. The share of manufacturing in total cross-border mergers and acquisitions (M&As) was lower in developed countries--where it stood at 30 per cent of their value in 2009--than in developing and transition economies, where it accounted for 32 per cent of the transaction value. The shares of the primary sector and services in total cross-border M&As by value, on the other hand, were higher in developed countries than in developing and transition economies. Business services were among the sectors where investment expenditures were hard hit by the crisis, registering a reduction of greenfield investment projects in the world by 20 per cent in 2009 compared to the previous year. Greenfield investments in financial services also declined from 1616 in 2008 to 1267 in 2009 (Table 10.5). 10.17 On the positive side, at global level, mediumterm prospects for services are generally better than those for the manufacturing sector with international investment in the services sector expected to grow relatively faster. In addition, many services transnational companies, which some years ago were mainly focused on their home markets, are now pursuing internationalization strategies involving ambitious investments abroad. Developing and transition economies, particularly in Asia, are considered as most attractive destinations.
countries, and was among the top 12 service exporters of the world in 2009. However, China in fifth rank is ahead of India with 12th rank (see Chapter 7 for details).
INDIAS SERVICES DATA

10.19 One of the important challenges faced by the country is collection of data on the services sector. The challenge of data collection leads to difficulties in compilation of an index for services sector production, non-representation of many services sectors in the calculation of the wholesale price index, limited availability of published data on pricing of services, and limited data on trade in services. Even where data are available, they suffer from deficiencies related to definition, method of collection, suitability for pricing, and construction of indices. 10.20 Recently some efforts are being made to collect services data (see Box 10.1). While these initiatives have to be speeded up, a lot more effort in coordination may be needed.
PERFORMANCE
OF
SUB-SECTORS
Trade in Services
10.18 India has made much progress in Trade in services, which is dominated by developed
10.21 The two fast-growing broad services categories are: a) financing, insurance, real estate and business services; and b) transport, storage, and communication. The latter overtook the former in 2009-10 with a high growth of 15 per cent (Table 10.6). A third category, growth of trade, hotels, and restaurants, slowed in 2008-09 and has recovered moderately in 2009-10. The fourth category, community, social, and personal services, saw a sudden jump in 2008-09 to overtake the growth of all other categories, reflecting the high growth in public administration and defence. This category has continued to grow rapidly in 2009-10, despite a slowdown in growth in public administration and defence (with the commitments for pay arrears under the new revised scale for Government
Services Sector Box 10.1 : Some Recent Efforts to Collect Services Data
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1. Index of services production (ISP) : The contribution of the services sector to the national economy, both in terms of value addition and employment generation, is growing over the years. However, there is no short-term indicator to measure the dynamics of this vast and heterogeneous sector. To fill this gap, the ISP is being compiled by the CSO. The index for railways, air transport, and ports has been completed. 2. Services price index (SPI) : Dr Rangarajan Commission (2001), set up by the Ministry of Statistics and Programme Implementation, had recommended the compilation of a separate SPI, which should eventually be merged with the wholesale price index (WPI) once it has stabilized and established its robustness. Ten sectors, namely banking, trade, business services, postal services, telecommunication, air transport, port services, insurance, rail transport, and road transport have been identified in the initial phase for development of an experimental SPI. Methodologies for developing the SPI have been finalized for seven sectors, namely railways, trade services, business services, banking, telecommunications, postal services, and air transport. A common format is developed for the sector-specific methodologies approved by the Expert Committee covering the scope of the index, products to be covered, and weighting diagram. Construction of the SPI on experimental basis is to be undertaken sequentially beginning with the index of banking services and rail transport. 3. Trade in services data : There are some developments on the services trade front also. While the RBI has been providing data on services at a more disaggregate level in recent years, as per the recommendations of the Working Group on Balance of Payments (BOP) manual, the RBI will also provide aggregate data on trade in services with a lag of 45 days from April 2011, i.e. April 2011 data will be available on 15 June 2011. The working group had suggested that disaggregated data on services should be released on a quarterly basis. As a follow up, RBI has started releasing disaggregated quarterly data on trade in services beginning the first quarter of 2010-11, which has been published in the February 2011 issue of the RBI bulletin. A joint committee on International Trade in Services formed by the Department of Commerce had also submitted its report in 2001 and in 2010 an expert group on Strengthening of Institutional Mechanism for Regular Collection and Compilation of Data on International Trade in Services has been set up by the Ministry of Statistics and Programme Implementation.
Table 10.6 : Annual Growth in Indias Services GDP at Factor Cost (in constant prices)
(percentage) 2005-06 Trade, Hotels, & Restaurants Trade Hotels & Restaurants Transport, Storage, & Communications Railways Transport by Other Means Storage Communications Financing, Insurance, Real Estate, & Business Services Banking & Insurance Real Estate, Ownership of Dwellings, & Business Services Community, Social, & Personal Services Public Administration & Defence Other Services Construction Total Services (excluding Construction) Total Services (including Construction) Overall GDP
Source : CSO Notes : * provisional estimates. **quick estimates.
2006-07 11.0 10.7 14.4 12.7 11.1 9.0 10.9 24.9 14.0 20.6 9.5 2.9 2.0 3.5 10.3 10.1 10.1 9.6
2007-08 10.0 9.7 13.1 12.9 9.8 8.7 3.4 25.4 11.9 16.7 8.4 6.9 7.6 6.3 10.7 10.3 10.4 9.3
2008-09* 5.5 6.5 -3.1 11.1 7.6 5.2 10.5 25.8 12.5 14.0 11.2 12.7 20.2 7.4 5.4 10.1 9.5 6.8
2009-10** 6.7 7.2 2.2 15.0 9.4 7.0 10.7 32.1 9.2 11.3 7.5 11.8 13.0 10.9 7.0 10.1 9.7 8.0
12.2 11.7 17.5 12.2 7.5 9.3 4.7 25.5 12.7 15.9 10.6 7.0 4.2 9.1 12.8 11.0 11.2 9.5
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Economic Survey 2010-11 services excluding construction grew by 10.1 per cent in 2009-10. In 2010-11(AE), they grew by 9.4 per cent and 9.6 per cent respectively. 10.22 The two broad services categories, namely trade, hotels, transport and communication; and financing, insurance, real estate and business services, comprising many dynamic services have performed well with growth of 11 per cent and 10.6 per cent, respectively in 2010-11 (AE). Only community, social and personal services have registered a low growth of 5.7 per cent due to base effect of fiscal stimulus in the previous two years, thus contributing to the slight deceleration in the growth of the services sector. Construction sector grew at a moderate 8 per cent. 10.23 A comparison of the different indicators related to different services in India shows good performance in services like telecom, aviation, and railways. Storage services show a fall in the number of warehouses which is a just a reflection of demand and supply in different places (Table 10.7). The performance and outlook for the services sector based on the limited firm-level data, though sketchy and based on estimates and forecasts also indicates a robust performance in services activities in 201011 and 2011-12 (see Box 10.2).
employees coming down), due to the offsetting rise in growth of other services reflecting the fiscal stimulus to social sector activities. Among the subcategories, in 2008-09, double-digit growth was registered by communication (25.8 per cent), public administration, and defence (20.2 per cent), banking and insurance (14 per cent) and storage (10.5 per cent). Negative growth was registered only by hotels and restaurants (-3.1 per cent). Among business services, the two important categories are computer-related services and the category consisting of many services like R&D services, market research, business and management consultancy, architectural engineering, and advertising, with shares of 3.26 per cent and 0.88 per cent respectively in the GDP. While computerrelated services, which grew by 21.2 per cent in 2008-09, registered a moderate growth of 5.2 per cent in 2009-10 due to the global crisis, R&D services registered good growth of 19.6 per cent and 19.9 per cent in 2008-09 and 2009-10 respectively. Among other services, the two important ones in terms of share of GDP are education and medical health, with the former growing at 13.9 per cent and the latter at 5.3 per cent in 2009-10. All other services are of minor importance in Indias GDP. While total services including construction grew by 9.7 per cent, total
Table 10.7 : Performance of Indias Services Sector: Some Indicators

Sector Aviation Telecom Tourism Shipping Ports Railways Storage Indicators Airline Passengers (domestic and international) Telecom Connections (wireline and wirless) Foreign Tourist Arrivals Foreign exchange earnings from tourist arrivals Gross Tonnage of Indian Shipping No. of ships Port Traffic Freight Traffic by Railways Net Tonne Kilometers of Railways Storage Capacity No. of Warehouses Unit 2007-08 Million lakh Million US $ Million Million GT Numbers Million Tonnes Million Tonnes Million MT Numbers 53.49 3004.92 5.08(a) 10,729(a) 8.84(a) 867 521.47 804.11 523,000 98.78 490 Period 2008-09 2009-10 49.5 4297.25 5.28(a) 11,750(a) 9.31(a) 925 532.53 833.31 538,226 105.25 499 56.94 6212.8 5.11(a) 11,394(a) 9.39(a) 1003 562.74 7647.6(b) 5.58(a) 14,193(a) 10.1(c) 416.61(d) 2010-11
887.99 673.31(e) 584,760 444,515(e) 105.98 487
Sources: Directorate General of Civil Aviation, Telecom Regulatory Authority of India, Ministry of Tourism, Ministry of Shipping, Ministry of Railways and Central Warehousing Corporation. (Compiled by EXIM Bank of India) Notes : (a) calendar years, for example 2007-08 for 2007. (b) April-November. (c) As on 01 September 2010. (d) April October. (e) April December.
Services Sector
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Box 10.2: Performance of Services Firms: A Sectoral Analysis

The Centre for Monitoring Indian Economys (CMIE) analysis of the sector-wise performance of services activities based on firm-level data is given here. The data for 2010-11 and 2011-12 are based on estimates and forecasts. Transport logistics: The sales of the transport logistics services industry are estimated to have grown by a healthy 7.2 per cent during 2009-10. This growth is likely to have been achieved by a combination of higher cargo volumes and better realizations. In 2010-11 as a whole, the sales of this sector is expected to grow by 13 per cent and Profit After Tax (PAT) is expected to grow by 11 per cent. Shipping: The shipping sectors sales are expected to fall by 3 per cent in 2010-11. Freight rates are likely to remain weak during the second half of the year. After two consecutive years of decline, the sales growth is likely to pick up in 2011-12 at 3.2 per cent with a slow recovery in cargo volumes and an improvement in freight rates. However, the industrys PAT is expected to decline by 3.3 per cent in 2011-12 with a sharp growth in depreciation charges and interest expenses, by 12.6 per cent and 13.7 per cent , respectively, which is likely to eat into a major part of the industrys operating profits. A substantial tonnage addition to its fleet during the two years is also likely to affect the rise in these expenses. Aviation: Oil marketing companies hiked aviation turbine fuel (ATF) prices for the fortnight beginning 1 January 2011. The ATF price ex-Mumbai rose by 5.9 per cent as compared to the corresponding fortnight a month ago, to Rs.48,059 per kilolitre. This was 16.6 per cent higher than the average ATF price in January 2010. In 2010-11 as a whole, sales are expected to grow by 25.9 per cent. This will be due to an expected rise in passenger volumes and the passing on of higher ATF prices. In 2011-12, sales are likely to grow by a healthy 14 per cent. Retail sector: Retail sector is expected to record healthy sales in 2010-11 and grow by 10.2 per cent in 2011-12. The sectors PAT margin is expected to expand over the next three years on account of a faster rise in income vis-a-vis expense. For the year ending March 2011, projects worth Rs.8,281 crore are expected to be completed adding retail space of 115.1 lakh square feet. During 2011-12, projects worth Rs.24,143 crore are expected to be completed adding a capacity of 168.6 lakh square feet. Health Services: The health services sectors sales is expected to grow by a healthy 25.6 per cent in 2010-11 and 19.8 per cent in 2011-12 driven by a healthy rise in sales. The sectors PAT increased by a whopping 107.1 per cent in the quarter ending September 2010-11 on account of a faster rise in income vis-a-vis expenses and is expected to grow by 45 per cent in 2010-11. Hotel: After falling in 2009-10, the hotel sectors sales are likely to grow in 2010-11 by 18.1 per cent due to both, higher occupancies and Average Room Rate (ARRs). However, fresh room additions in 2011-13 will keep the ARRs under check. Sales are expected to grow by 15.1 per cent in 2011-12. Telecom: After rising by just 2.2 per cent during 2009-10, sales growth of the telecom industry witnessed a recovery and improved during the first half of 2010-11. This recovery in sales growth is expected to continue. During 2010-11 and 2011-12, sales are expected to rise by 11.4 per cent and 14.6 per cent respectively driven by an increase in the subscriber base and a deceleration in the fall of both, average revenue per user (ARPU) and the minutes of usage per user (MOU). Software: The Indian software industry is mainly export-oriented. The industry garners around 60-70 per cent of the total revenue from its two largest markets, namely the US and Europe. The economic slowdown in these major export destinations led to a deceleration in growth of sales of the Indian software industry to 5.9 per cent. However, sales are expected to grow at 16.9 per cent and 17.8 per cent, respectively during 2010-11 and 2011-12 due to higher client additions and an uptick in billing rates. Construction and allied activities: Sales growth of the construction industry is expected to pick up in the second half of 2010-11. With increased activity in the industrial and infrastructure construction segments, due to Governments thrust on infrastructure creation, sales growth of this sector is expected to rise by 20.2 per cent and 21.7 per cent in 201011 and 2011-12 respectively.
Source: Compiled by EXIM Bank of India based on CMIE Industry Analysis.
P ERFORMANCE SERVICES
Trade
OF
S OME M AJOR
10.24 Trade is an important segment in Indias GDP. The GDP from trade (inclusive of wholesale and retail in the organized and unorganized sectors) at constant prices increased from ` 4,33,967 crore
in 2004-05 to ` 6,71,396 crore in 2009-10, at a CAGR of 9.1 per cent. The share of trade in the GDP, however, remained fairly stable at around 15 per cent in the last four years. 10.25 The last decade has witnessed acceleration in the growth rate of real GDP. It has been in the range of 8-9 per cent during the last five years.
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Economic Survey 2010-11 India. Since tourism does not fall under a single heading in the National Accounts Statistics, its contribution has to be estimated. In 2007-08, the contribution of tourism to the countrys GDP, and to total jobs (direct and indirect) in the country was estimated at 5.92 per cent, and 9.24 per cent respectively. In absolute numbers, the total number of tourism jobs in the country increased from 38.6 million in 2002-03 to 49.8 million in 2007-08. According to the UN World Tourism Organization, tourism provides 6 per cent to 7 per cent of the worlds total jobs directly and millions more indirectly through the multiplier effect in this sector. Tourism also plays an important role in the countrys foreign exchange earnings, as its share in Indias export of services accounted for 13 per cent of the total export of services in 2009-10. 10.27 In India, the tourism sector witnessed significant growth in recent years. During the period 2004 to 2009, the CAGRs of foreign tourist arrivals and foreign exchange earnings from tourism in rupee terms were 8.1 per cent, and 14.5 per cent respectively. Foreign tourist arrivals in India, which were at 5.28 million in 2008, fell to 5.11 million in 2009 due to the global crisis. These arrivals, which registered negative or low growth rates in the first eleven months of 2009, started recovering from December 2009 with a good growth of 21 per cent. In the year 2010, the recovery continued with foreign tourist arrivals at 5.58 million registering a growth of 9.3 per cent. The foreign exchange earnings from tourism in the year 2010 witnessed a growth of 18.1 per cent over the previous year in rupee terms compared to the decline of 3.3 per cent in 2009. Domestic tourism also plays an important role in overall tourism development in the country. The number of domestic tourist visits increased to 650 million in 2009 as compared to 562.98 million in 2008, witnessing a growth of 15.5 per cent in spite of various adverse factors during this period. 10.28 The hotels and restaurants sector is an important sub-component of the tourism sector. Availability of good quality and affordable hotel rooms plays an important role in boosting the growth of tourism in the country. Presently there are 1593 classified hotels with a capacity of 95,087 rooms in the country. The hotels sector comprises various forms of accommodation, namely star category hotels, heritage category hotels, timeshare resorts, apartment hotels, guest houses, and bed and breakfast establishments. The share of the hotels and restaurant sector in the overall economy
This fast growth means rising disposable income of the population, in particular that of the middle class. With the growth in consuming population, the retail business also got a boost. There are no official estimates of the size of retail trade in the country, though such estimates have been made by some institutions. Quoting a NSSO Survey, the International Council for Research on International Economic Relations (ICRIER) study of 2008 places employment in the retail trade at 35.06 million, which constitutes 7.3 per cent of the workforce in the country. On the basis of employment intensity in retail trading, the contribution of the retail sector in the GDP is estimated in the range of 10 to12 per cent. A large number of small and decentralized traders dominate the Indian retail scene. One estimate puts their number at 1.3 crore. The organized corporate sector has started showing interest in the retail business. With fast growth in the GDP and rising disposable income of the consuming classes, the modern format of retailing (i.e. organized retailing) is attracting domestic and foreign investment (Box 10.3).
Tourism, including Hotels and Restaurants

10.26 Tourism is one of the major engines of economic growth in most parts of the world including Box 10.3 : FDI in Retail Trading in India and Other Countries
In India, retail trade is a state subject. There is no national framework for its regulation and development and states have their own regulations. At central level, only the flow of FDI into the sector is regulated. While FDI in cash and carry wholesale trading is permitted in India, FDI in multi-brand retailing is prohibited. FDI in singlebrand retailing up to 51per cent has been allowed since 2006. A total of 94 proposals have been received till May 2010, of which 57 were approved. During the period April 2006 to March 2010, FDI inflows valued at US $ 194.69 million have come into this sector, accounting for 0.21 per cent of total FDI inflows during this period. FDI in retail trading is permitted in Brazil, Argentina, Singapore, Indonesia, China, and Thailand without limits on equity participation, while Malaysia has equity caps on FDI in the retail sector. Permitting FDI in retail in a phased manner beginning with metros and incentivizing the existing retail shops to modernize could help address the concerns of farmers and consumers. FDI in retail may also help bring in technical know-how to set up efficient supply chains which could act as models of development.
Source: Based on the Department of Industrial Policy and Promotions Discussion paper, FDI in Multi brand Retail Trading, Department of Consumer Affairs inputs, and working paper No.1. 2010, Department of Economic Affairs.
Services Sector increased from 1.46 per cent in 2004-05 to 1.69 per cent in 2007-08, and then decreased to 1.53 per cent and 1.45 per cent in 200809 and 2009-10 respectively. The CAGR in the GDP contributed by the hotels and restaurants sector was 8.5 per cent in 200405 to 200910. There was, however, negative growth (-3.41 per cent) in 200809 over the year 2007 08, which was due to the adverse global economic conditions in this year, while in 2009-10, the sector registered a growth of 2.2 per cent. Several studies have identified the demand-supply gap in hotel rooms in India; some of them have estimated a gap of 150,000 hotel rooms, of which 100,000 rooms are in the budget segment. Since the construction of hotels is primarily a private-sector activity and is capital intensive with a long gestation period, the Government is making efforts to stimulate investments in this sector and speed up the approval process. 10.29 Various financial and fiscal incentives have been announced by the Government for the hospitality sector including a five-year tax holiday under the Income Tax Act for two, three, and four star category hotels located in all United Nations Educational, Scientific and Cultural Organization (UNESCO) World Heritage sites (except Mumbai and Delhi) for hotels starting operations from 1 April 2008 to 31 March 2013; a five-year tax holiday announced in 2007-08 for two, three, and four star category new hotels and convention centres coming up between 1 April 2007 and 31 July 2010 in the National Capital Territory of Delhi and some neighbouring districts of the National Capital Region. Other incentives include: relaxation of external commercial borrowings (ECB) to reduce the liquidity crunch being faced by the hotel industry for setting up new hotel projects; allowing FDI up to 100 per cent under the automatic route for the hotel and tourism-related industry; delinking of credit to hotel projects from commercial real estate by the RBI, thereby enabling hotel projects to avail of credit at relaxed norms and reduced interest rates; and an investment-linked deduction under Section 35 AD of the Income Tax Act announced in the Union Budget 2010-2011 for establishing new hotels of 2star category and above, all over India, thus allowing 100 per cent deduction in respect of the whole or any expenditure of capital nature. Government also has a voluntary scheme of granting approval to bonafide tour operators, travel agents, tourist transport operators, and adventure tour operators
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who satisfy certain criteria specified in terms of turnover, infrastructure, and manpower. 10.30 Since infrastructure development holds the key to Indias sustained growth in the tourism sector, the Government has been making efforts to develop quality tourism infrastructure at tourist destinations and circuits. A scheme has been launched for development of nationally and internationally important destinations and circuits through mega projects. So far, 38 projects have been identified out of which 23 have been sanctioned. The mega projects are a judicious mix of heritage and cultural, spiritual, and ecotourism in order to give tourists a holistic experience. In order to meet the huge skill gap in the hospitality industry, the Government has put in place a multipronged strategy which includes strengthening and expanding the institutional infrastructure for training and education. Besides, steps are being taken for skill training of youth in the hospitality sector and providing skill certification. Special efforts were also made for the Commonwealth games including creation of additional hotel accommodation and assistance for training of service providers like tourist taxi drivers, auto drivers and immigration personnel in Delhi, the NCR region, and Agra for making them tourist friendly and hospitable. While the general security situation has improved, to strengthen the National Tourism Policy 2002s critical pillar of Suraksha (Safety), the Government has adopted the Code of Conduct for Safe and Honourable Tourism on 1 July 2010. 10.31 Along with the continuation of promotional efforts under the Incredible India campaign, the Government has introduced the Visa-on-Arrival (VoA) scheme for tourists from five countries, namely Singapore, Finland, New Zealand, Luxembourg, and Japan on a pilot basis with effect from 1 January 2010. During JanuaryDecember 2010, a total of 6549 VoAs were issued under this scheme. The VoA scheme has been extended to the nationals of Cambodia, Vietnam, Laos, and Philippines with effect from 1 January 2011 and Myanmar and Indonesia from 25 January 2011. 10.32 Despite these efforts, there is a lot more to be done given the potential of this sector. In fact at 11.5 per cent, the share of travel in Indias exports of commercial services in 2008 is relatively lower than that of many other exporters of services and half the shares of the USA, EU, and China (Table 10.8).
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Table 10.8 : Composition of Commercial Services Exports of India and Other Major Services Exporters
India 1 2 3 Transportation Travel 11.0 11.6 USA 17.5 26.0 56.5 EU 23.0 22.2 54.8 Japan 31.9 7.5 60.6 (shares in 2008) China Singapore Hong Kong 26.2 27.9 45.9 34.8 12.7 52.5 31.4 16.6 52.0
Other Commercial Services 77.4
Source: calculated from World Trade organization (WTO) data.
10.33 Indias share in international tourist arrivals is a paltry 0.58 per cent in 2009. In fact, at 11.07 million, outbound Indians in 2009 were more than double the inbound tourists, though foreign exchange outgo due to outbound Indians is much less than the foreign exchange inflow from inbound tourists. These facts show that this high potential sector with multiplier effects on income and employment generation is still relatively untapped.
Table 10.9 : Share of Merchant Fleets by Flags of Registration as on 1 January 2010

Rank Flag of Registration 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Panama Liberia Marshall Islands Hong Kong Greece Bahamas Singapore Malta China Cyprus South Korea Norway UK and Northern Ireland Japan Germany Italy Isle of Man India World Total DWT (In 000) 2,88,758 1,42,121 77,827 74,513 67,629 64,109 61,660 56,156 45,157 31,305 20,819 20,811 20,176 17,707 17,570 17,276 16,711 14,970 12,76,137 Share (%) 22.63 11.14 6.09 5.83 5.30 5.02 4.83 4.40 3.54 2.45 1.63 1.63 1.58 1.39 1.38 1.35 1.30 1.17 100
Some Transport Related Services

Shipping
10.34 Shipping plays an important role in the economic development of the country, especially in Indias international trade. The Indian shipping industry also plays an important role in the energy security of the country, as energy resources, such as coal, crude oil, and natural gas are mainly transported by ship. Further, during crisis situations, Indian shipping contributes to the uninterrupted supply of essentials, and can serve as second line of defence. Approximately, 95 per cent of the countrys trade by volume, and 68 per cent in terms of value, is being transported by sea. Though India has one of the largest merchant shipping fleets among the developing countries, it was ranked eighteenth in the world in terms of dead weight tonnage (DWT) as on 01 January 2010. Leaving the flags of convenience countries, Indias share is low at 1.17 per cent, while Chinas is around three times higher than Indias (see Table 10.9). Indian shipping tonnage (capacity) was practically stagnant at around 7 million gross tonnage (GT) till the beginning of 2004-05. However, the tonnage tax regime introduced by the Government of India in that year boosted the growth of the Indian fleet as well as its tonnage. The Indian fleet presently stands at 10.16 million GT and 1040 ships (as on 01 January 2011), with the Shipping Corporation of India, a public-sector undertaking, having a major share of 35.3 per cent in Indias shipping tonnage. Of this 9.1 million GT with 340 ships caters to Indias
Source : UNCTAD, Review of Maritime Transport 2010.
overseas trade and the rest to coastal trade. The gross foreign exchange earnings/ savings of Indian ships during 2007-08 were at a record level of ` 14,589 crore. Net foreign exchange earnings/ savings of Indian shipping companies, after accounting for financial costs at ` 8952 crore were around 61 per cent of gross earnings/ savings. 10.35 In order to facilitate growth of the Indian shipping industry and make it competitive at international level, the government has initiated several measures like bringing acquisition of all types of ships under open general licence; allowing 100 per cent FDI in the shipping and port sectors; cargo support to Indian shipping lines by providing
Services Sector for centralized shipping arrangements through the Chartering Wing (Transchart) of the Ministry of Shipping; introducing tonnage tax system during 2004-05; formulating a Cruise Shipping Policy of India in June 2008; and establishing the Indian Maritime University in November 2008. 10.36 According to the National Council of Applied Economic Research (NCAER), a 5 per cent increase in the national shipping tonnage saves or earns an additional 17 per cent of the freight bill and according to a report by The Energy and Resources Institute (TERI), a 1 per cent change in gross registered tonnage (GRT) is likely to bring about a 0.0068 per cent change in the GDP. While Indias overseas seaborne trade has been growing substantially over the years from 224.62 million tonnes in 1999-2000 to 598.70 million tonnes in 2008-09 with a CAGR of 10.57 per cent during 200405 to 2008-09, there is a sharp decline in the share of Indian ships in the carriage of Indias overseas trade from about 40 per cent in the late 1980s to 9.5 per cent in 2008-09 with a 5.7 per cent share in Indias export trade and 12 per cent share in Indias import trade. Given the relatively low participation of Indian ships in Indias export trade and given the fact that Indian ships are ageing, with the average age of the Indian fleet increasing from 15 years in 1999 to 18.3 years in 2009, there is urgent need to increase the shipping fleet for a country of Indias size. This can lead not only to higher growth of the economy but also higher foreign exchange earnings/ savings and higher employment.
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of ports in the world in 2008 places Singapore, followed by Shanghai and Rotterdam at the top, with Madras and the Jawaharlal Nehru Port Trust (JNPT) in the 70th and 71st positions in terms of total cargo volume. In terms of container traffic also, Singapore followed by Shangai are at the top, while the JNPT ranks 25th. 10.38 The average turnaround time in major Indian ports was 4.38 days in the year 2009-10 and was relatively higher in some ports like Paradip, Kolkata,Vizag, and Kandla, while average output per ship-berth-day was 10,168 tonnes with more than double the average in the JNPT and around onefifth the average in Kolkata port. With the average turnaround time in India already relatively high by international standards, the turnaround time of Singapore being less than a day, what is cause for further worry is the rise in average turnaround time and average pre-berthing time and fall in average output per ship-berth-day in 2009-10. (See Table 10.10) 10.39 A lot of attention needs to be paid to our port sector. There is need to follow a holistic approach for improving the existing infrastructure and services at ports through modernization of the systems using latest technology. The infrastructure facilities at major ports for handling crude oil particularly need to be strengthened through a facilitative policy on single-point moorings. The facilities at existing ports with regard to cargo handling, stevedoring, pilotage services, bunker services, and warehousing facilities need to be upgraded. The trans-shipment of Indian cargo taking place outside the country at present needs to be handled at Indian ports through concerted measures. This would include increasing the drafts Table10.10 : Some Performance Indicators for Major Ports in India
Year Average Average Turnaround pre-Berthing Time Time (in days) (in hours) Average Output per Ship Berth day (in tonnes)
Port Services
10.37 Being the gateways of international trade, ports play a vital role in the overall economic development of the country. India is blessed with a long coastline with 13 major ports and around 200 non-major ports. While around 72 per cent of the total cargo handled by volume was through Indias major ports and the rest through non-major ports till 2008-09, with the development of private ports the share of major ports fell to 67 per cent during 200910. Despite the recessionary trend and decline in exports, during the years 2008-09 and 2009-10, traffic at major ports attained a growth of 2.2 per cent and 5.74 per cent respectively over the previous year. Some recent developments in the port services sector include the finalization of a model concession agreement for awarding projects on public private partnership (PPP) basis in 2008 and introduction of web-based port community systems. The ranking
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10(P)
3.41 3.50 3.62 3.93 3.87 4.38
6.03 8.77 10.05 11.40 9.55 11.67
9298 9267 9745 10071 10473 10168
Source : Ministry of Shipping website.
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Economic Survey 2010-11 goods. The CWC has also diversified its business into CFSs/ICDs and also started Container Rail Transportation from Loni (UP) to Jawaharlal Nehru Port. The expansion of the overall capacity of the CWC has been slow as it is cost intensive. The profits generated are being ploughed back to construct additional warehouses thereby strengthening the warehousing infrastructure throughout the country. At State level, the 17 SWCs meet the storage requirements and complement the work of the CWC. As on 31 October 2010, these SWCs were operating a network of 1585 warehouses with an aggregate storage capacity of 214.41 lakh MT. 10.42 Major policy initiatives taken recently by the Government include construction of godowns under the seven-years guarantee scheme of the Government of India, most of them being managed by the CWC or SWCs; permission of up to 100 per cent FDI in the construction of warehousing infrastructure; and construction of warehouses under the Grameen Bhandaran Yojana of NABARD and the Rastriya Krishi Vikas Yojana. In the year 2007-08, the Government enacted the Warehousing (Development & Regulation) Act 2007 to make the warehouse receipt fully negotiable. Recently the Government took another major initiative for construction of godowns under its Private Enterpreneurs Godown (PEG) scheme. The CWC has constructed 0.9 lakh MT godowns during the year 2009-10 and has planned to construct additional capacity to the tune of 1.77 lakh MT during the year 2010-11. 10.43 Some issues related to the warehousing sector include increasing high quality storage capacity as well as the numbers of trained samplers/ graders; addressing issues like storage loss due to deterioration of the produce during storage, lack of provision for dealing with cases where stocks are pledged with banks and the depositor either absconds or refuses to take delivery; delay in delivery and deposit of stocks due to extension of no-entry zones in cities, levy of property tax on warehouses and high fees by ports.
available at Indian ports, rationalization of port dues and providing differential levels of tariff for different sizes of vessels or for different cargoes so as to attract mother ships to berth at Indian ports. The many port charges in India need to be reduced as they are higher than in many other countries due to inefficiency of ports and inclusion of unrelated costs like pension and other contributions to labour in port services.
Storage Services
10.40 The warehousing services sector plays an important role in the economy of the country. Warehousing services are an important cog both in inbound logistics, as raw materials, parts, and stores have to be stocked, inventory control maintained, and materials which do not meet specifications returned to suppliers, as well as outbound logistics as the goods produced have to be stored in different geographical locations before shipping/ dispatch as per demand/ order inflows. In India, the most important component of warehousing is agricultural storage for agri-produce, foodgrains, fertilizers, manure, etc. Other components include industrial warehousing for industrial goods, import cargo, and excisable cargo; inland container depots (ICDs)/ container freight stations (CFSs) for facilitating import/export trade; and special warehouses for cold and temperature controlled storage. The warehousing sector also provides ancillary services like handling, transportation, pest control, farmer extension schemes, dedicated warehousing at doorsteps, consultancy, and project execution. 10.41 The Government has established the Central Warehousing Corporation (CWC) with the objective of providing scientific storage facilities for agricultural implements and produce and other notified commodities. Besides, with the same objective, 17 State Warehousing Corporations (SWCs) were also set up under the Warehousing Corporations Act 1962. The CWC and the respective State Governments are equal shareholders of these SWCs. The commercial outreach with social objectives has resulted in the CWC operating a large warehousing network across the country. As on 31 December 2010, the CWC was operating 476 warehouses, with a total storage capacity of 102.24 lakh MTs and an average utilization of 85 per cent. It made an entry into operation of public bonded warehouses in the late 1970s, when the Central Board of Excise and Customs, acknowledging the expertise of the CWC in the field of storage and warehousing, identified it as a custodian for dutiable
Telecom and Related Services

10.44 The opening of the telecom sector in India has not only led to rapid growth but also helped a great deal towards maximization of consumer benefits as tariffs have been falling across the board as a result of increasing competition, with the telecom service price index falling from 100 in 2004-05 to
Services Sector 85.08 in 2007-08. The telecom sector has grown from a level of 22.8 million telephone subscribers in 1999 to 54.6 million in 2003, and further to 764.77 million at the end of November 2010. Wireless telephone connections have contributed to this growth as the number of wireless connections rose from 3.57 million in March 2001 to 729.58 million by the end of November 2010. Tele-density, which was 2.32 per cent, increased to 64.34 per cent in November 2010. However, there is a wide gap between rural tele-density (30.18 per cent in November 2010) and urban tele-density (143.95 per cent in November 2010). This shows that the market still has large untapped potential. 10.45 The Internet, which is another growing mode of communication, is a worldwide system of computer networks. Broadband is often called highspeed Internet, because it usually has a high rate of data transmission. Broadband subscribers grew from 0.18 million in 2005 to 10.71 million as at the end of November 2010. The number of Internet and broadband subscribers is expected to increase to 40 million and 20 million, respectively by 2010. Introduction of BWA (Broadband Wireless Access) services will enhance the penetration as well as growth of broadband subscribers. Wi-Max has also been making headway in penetration of wireless broadband connectivity across all sectors. (For further details, see Chapter 11.)
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the objective of promoting housing finance institutions both at local and regional levels has conceptualized the reverse mortgage loan product exclusively for covering house-owning senior citizens. It has introduced the residential real estate price index (RESIDEX), which is an initiative towards providing the housing finance sector with an index which reflects the trends in the prices of residential properties across the country. 10.47 The global economic crisis impacted the Indian real estate industry significantly. However, various measures taken by the Government to boost the demand for residential properties, as also the relaxation in provisioning requirements by the RBI for banks and NHB for Housing Finance Companies (HFCs), has minimized the impact of economic crisis on this sector. The sector has started recovering following the increasing activity in the Indian economy, however with a fundamental difference. Customers are now going for needbased purchases rather than investment based on the euphoria and hype witnessed in 2007 and 2008. 10.48 A joint study by Price Waterhouse Coopers (PWC) and Urban Land Institute of India (ULI) has cited India as one of the emerging markets for real estate sector in the Asia Pacific region. The study classifies India as semi-transparent market in the Asia Pacific region, and ranks it 41st on a global transparency scoring scale. It places Mumbai (ranked 3rd), New Delhi (5th), and Bangalore (10th) among the top 10 prospective cities for real estate investment for the year 2011. Mumbai and New Delhi in that order capture the top two places in terms of city development prospects for the year 2011. 10.49 In this emerging services sector, while short term worries like hardening interest rates need to be addressed, there is also need for some fundamental reforms like tackling the high stamp duty issue which makes even honest citizens deal in black money and problems related to foreclosure of loans and the Urban Land Ceiling Regulations Act (ULCRA).
Real Estate Services

10.46 The real estate sector includes development of commercial and residential real estates, with participation and involvement of both Government agencies and private developers. The GDP from the real estate sector (including ownership of dwellings) along with business services witnessed a growth of 7.5 per cent (at constant prices) in the year 2009-10. In terms of share, it accounted for 9.3 per cent of the GDP in the year 2009-10. Fiscal incentives for the housing sector provided in successive budgets together with liberal investment and credit policies and reforms brought the housing and real estate sector to the centre stage of the Indian economy. The policy measures include permission for FDI in townships, housing, built-up infrastructure, and construction development projects, including SEZs, under the automatic route, which has attracted foreign investors into this sector. However, FDI is not allowed in real estate business. The National Housing Bank (NHB) established with
Some Business Services

IT and ITeS
10.50 India has gained a brand identity as a knowledge economy due to its IT and ITeS sector. The IT-ITeS industry has four major components: IT services, business process outsourcing (BPO), engineering services and R&D, and software
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Economic Survey 2010-11 10.53 This sector has also led to employment generation. Direct employment in the IT services and BPO/ITeS segment was 2.3 million in 2009-10 and is estimated to reach nearly 2.5 million by the end of financial year 2010-11. Indirect employment of over 8.3 million job opportunities is also expected to be generated due to the growth of this sector in 201011. These jobs have been generated in diverse fields such as commercial and residential real estate, retail, hospitality, transportation, and security. 10.54 India continues to be the dominant player in the global outsourcing sector. However, its future will depend on how the challenges related to its continued competitiveness are tackled. These include increasing competition, rising costs, talent shortfall, infrastructure constraints, increasing risk perception, protectionism in key markets, and deteriorating business environment. 10.55 The Government has been supporting the IT and ITeS sector in many ways. This was continued in the 2010-11 Budget with policies like Government expenditure for improving IT infrastructure and delivery mechanism, reduction in surcharge from 10 per cent to 7.5 per cent for IT companies and Governments E-Governance plan. There are some issues in the IT-ITeS sector which need attention. These include shifting from low-end services to highend services like programming in the light of competition in BPO from other countries and policies in some developed countries like UK to employ locals; addressing data protection issues as half of offshore work does not come to India; concluding totalization agreements with target countries to resolve the social security benefits issue as is being done now; and increasing the coverage and depth of IT and ITeS services in the domestic sector.
products. The growth in the services sector in India has been led by the IT-ITeS sector which has become a growth engine for the economy, contributing substantially to increases in the GDP, employment, and exports. This sector has improved its contribution to Indias GDP from 4.1 per cent in 2004-05 to 6.1 per cent in 2009-10 and an estimated 6.4 per cent in 2010-11. The industry has also helped expand tertiary education significantly. The top seven States that account for about 90 per cent of this sectors exports have started six to seven times more colleges than other States. 10.51 The Indian IT-ITeS industry has registered robust growth since 2004-05. According to NASSCOM, the year 2010-11 is characterized by broad-based growth across mature and emerging verticals. The overall Indian IT-ITeS revenue has grown to US $ 63.7 billion in 2009-10 and an estimated US $ 76.1 billion in 2010-11, translating into a CAGR of 22.5 per cent from 2004-05 to 2010-11. The industry grew by an estimated 19.5 percent in 2010-11 compared to the moderate growth of 6.2 per cent in 2009-10 (see Table 10.11). Exports dominate the ITITeS industry, and constitute about 77 per cent of total industry revenue. Total IT-ITeS exports have grown from US$ 17.7 billion in 2004-05 to US $ 49.7 billion in 2009-10 and an estimated US $ 58.9 billion in 2010-11 registering a CAGR of 22.2 per cent from 2004-05 to 2010-11. 10.52 Though the IT-ITeS sector is export driven, the domestic market is also significant with a revenue growth of US $ 14 billion in 2009-10 and an estimated revenue of US $ 17.2 billion in 2010-11. The IT and BPO industry (excluding hardware) witnessed a quick rebound in growth and has been estimated to have grown by 19.5 per cent, aggregating revenues of US$ 76.1 billion in 2010-11 with exports at US$ 58.9 billion accounting for a major portion.
Table 10.11: IT-ITeS Revenue and Exports (US $ billion)

Year Total IT-BPO Services Revenue Exports Domestic, of which (i) IT Services (ii) ITeS-BPO (iii) Software Products
Source : Nasscom.
2009-10 63.7 49.7 14.0 8.9 2.2 2.9
2010-11 (Estimated) 76.1 58.9 17.2 10.9 2.8 3.5
Growth Rate CAGR (2005-06 to in 2010-11 (%) 2010-11) (%) 19.5 18.5 22.8 22.5 27.3 20.7 22.5 22.2 23.7 20.8 29.3 30.7
Services Sector
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Accounting and Auditing Services

10.56 Accounting, auditing, and book-keeping services are part of business services. The accounting profession in India is highly developed with the potential to become internationally more competitive. As per the WTO data, in the $33.76 billion other business services exports by India in 2008, the share of legal, accounting, management, and public relations services was 17.4 per cent and in the $21.06 billion imports of other business services by India, their share was 17.9 per cent. Indian accounting firms are increasingly getting integrated, and are providing associated services such as management consultancy, corporate finance, and advisory services, in addition to their core business of accounting, auditing, and tax services. The accounting profession is structured in India as partnership with few partners or proprietorship concerns. The Indian accounting sector mainly comprises small and medium enterprises (SMEs), matching the existing economic structure of India. The number of chartered accountancy firms with five or more partners is about 2000 out of more than 13000 firms. The remaining are practicing as proprietary firms or in their individual names. The Chartered Accountancy Profession in India has globally benchmarked its qualification, training and standards (including convergence to global standards on IFRS) for increased mobility and has entered into qualification recognition arrangements with accounting bodies in UK, Australia, Canada and Ireland. 10.57 The cost and management accounting profession in India has attained great maturity with the quality of professional cost and management accounting services being on par with the best in
the world. However, there is limited use of cost audit and cost management techniques in India. Scientific use of management accounting tools on a wider scale can bring about higher cost efficiency in operations and take the Indian accounting industry to greater heights. 10.58 There is need to tap outsourcing in niche areas like actuarial and accountancy services as there is good scope for outsourcing actuarial services and accountancy services to India including setting up back offices. But Indian service providers need high-quality training in tax laws of US and other countries besides laws related to insurance, pension, etc. Tie-ups to overcome the weakness of small size of domestic accountancy firms can also help Indias accounting sector grow manifold.
R&D
10.59 As per the Department of Science and Technology estimates, the national investment on R&D activities was ` 37,777.9 crore in 2007-08. Though India, with a R&D share of 0.8 per cent in the GDP in 2007-08, is ahead of other developing countries like Mexico, Malaysia, and Chile, it lags behind countries like South Korea (3.5 per cent), Russia (1.1 per cent ), China (1.5 per cent), and Brazil (1per cent) 10.60 A cross-country comparison of expenditure on R&D by sectors shows the dominance of the business enterprises sector in other countries. In the US and China, the business enterprises sector accounted for as much as 72 per cent of total R&D expenditure in 2007 and in the UK, this figure was 64 per cent. In India, while the Government sector continues to account for a leading share, an
Table 10.12 : R&D Expenditure by Sectors : A Cross-country Comparison

(per cent) Country US UK China S. Korea Russia Brazil India S. Africa Business Enterprises 70.0 64.8 61.2 74.9 69.9 40.4 19.3 55.5 2002 Govt Higher Edn 12.1 9.2 28.7 13.4 24.5 20.6 76.5 21.9 13.4 24.0 10.1 10.4 5.4 38.9 4.1 20.5 Pvt. Non-profit 4.5 1.9 1.3 0.2 0.1 2.1 Business Enterprises 72.6 64.2 72.3 58.6 62.9 40.2 29.6 57.7 2007 Govt. Higher Edn 10.6 8.3 19.2 18.6 30.1 21.3 66.0 21.7 12.9 25.2 8.5 21.3 6.7 38.4 4.4 19.4 Pvt. Non-profit 3.9 2.3 neg 1.5 0.3 0.1 neg 1.2
Source: UNESCO Science Report 2010. Note: negnegligible.
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Economic Survey 2010-11 established referral relationships with Indian firms. 10.64 India has over 750 law colleges and about 30,000 lawyers graduating every year. The Bar Council of India, which lays down the standards of professional conduct and etiquette, as also standards for legal education, has been constituted under the Advocates Act 1961. In addition, there are also State Bar Councils that enrol advocates and enforce discipline. Government has constituted the National Legal Services Authority, under the Legal Services Authorities Act 1987 to monitor and evaluate implementation of legal aid programmes and lay down policies and principles for making legal services available under the Act. The National Litigation Policy has also been launched with the objective of reducing Government litigation in courts so that court time can be used for resolving other pending cases and average pendency time reduced from 15 years to three years, a goal set by the National Legal Mission. 10.65 India is ranked 41st, with a score of 4.8, in terms of judicial independence, according to the Global Competitiveness Report (2010-11) of the World Economic Forum. As regards efficiency of the legal framework in settling disputes, India is ranked 47th, with a score of 4.1. India rises to 37th position when it comes to the efficiency of the legal framework in challenging regulations, with a score of 4.2. 10.66 Over the years, the legal system in India has undergone changes with the increasing globalization of the Indian economy. This has enabled transformation of Indian lawyers into global service providers. Trans-border mergers, corporate restructuring, acquisitions, IPRs are some of the areas in which Indian lawyers have acquired expertise. Since liberalization, Indian lawyers have been gaining dynamic experience in handling cases spanning fields such as banking, telecom, insurance, power, civil aviation, and transportation, which were earlier largely under the purview of the public sector. In addition, they have acquired experience in areas related to taxation, mergers and acquisitions, joint ventures, IPRs, FDI, and special economic zones. The conclusion of The Trade Related Intellectual Property Rights (TRIPS) Agreement and Information Technology Agreement has brought the necessary experience in newer dimensions of patent services, analysis and prosecution support and internet-based disputes and cyber crimes.
important development has been the rising share of the business enterprises sector from 19 per cent in 2002 to almost 30 per cent in 2007 (Table 10.12) 10.61 As per estimates in 2009-10, the sectors which attracted largest R&D expenditures include pharmaceuticals, electrical and non electrical machinery, transport equipment, electronics, and plastics. R&D intensity (R&D as per cent of sales) for the pharmaceuticals sector was much higher than that for other sectors. 10.62 There is huge potential for R & D services, particularly in healthcare, biotech and electronics. However, there are issues related to intellectual property rights (IPRs) in the sector. India has amended the IPR laws in the past two decades and its laws are fully compliant with WTO regulations. There is an impartial judicial process in India which implements the laws. The Government has taken many measures to encourage R&D like enhancing the weighted deduction on expenditure incurred on in-house R&D from 150 per cent to 200 per cent for the manufacturing business and from 125 per cent to 175 per cent for payments made to national laboratories, research associations, colleges, universities, and other institutions for scientific research, and allowing a 125 per cent weighted deduction for approved associations engaged in research in social sciences or statistical research, besides exemptions in the income from approved research associations in the Budget 2010-11. Equipped with these incentives, the private sector should take a cue from other countries and step up its R&D investments.
Legal Services
10.63 The legal systems in India, the USA, and in the UK are rooted in British common law, thus making Indian lawyers competent, without much additional training, to undertake standard legal work such as vetting of contracts, patent registrations, or reviewing of documents. India has an estimated 600,000 legal practitioners and is next only to USA in terms of numbers. According to industry sources, Indian commercial law practice is approximately of the order of ` 600 crore to ` 650 crore per annum in revenues. The service providers are individual lawyers and small or family-based firms. In India, the practice of law is governed by the Advocates Act of 1961. Under this Act, foreign law firms are not allowed to engage in practice of law in India. Many foreign legal firms have set up liaison offices (currently permitted under the law), while a few have
Services Sector 10.67 Indias prominence in the legal process offshoring (LPO) segment is being widely acknowledged in the global market. Potential exists for India to tap a significant share of world LPO business. India holds significant advantage in various parameters that work in favour of driving the LPO industry towards India. Off-shoring legal work to India saves about 80 per cent of the cost that may be incurred in a developed country like USA. It is estimated that the cost of employing a fresh law graduate in the USA would be US $ 150,000 per annum as compared to US $ 15,000 per annum in India. On per hour basis, this works out to US $ 600 in the USA as compared to US $ 70 in India. Establishment cost to set up a legal firm in India is also low as compared to the USA or Europe. According to estimates, India is 40 times more costeffective than in the USA in this regard.
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organizations, academic institutes, and professional bodies. Consulting firms are the dominant players (64 per cent) followed by individual consultants (22 per cent), R & D organizations (10 per cent), academic institutes (3 per cent), and professional bodies (1 per cent). The client sectors to which consulting services are provided include agriculture, banking and financial services, chemicals, education, energy, entertainment, environment, governance, public administration and policy, hospitality, infrastructure, manufacturing, real estate, retail, information technology, telecommunications, transport, and utilities. 10.70 The Indian management consultancy market is one which is still in its nascent stage, with high growth and large entry of players being the key characteristics. Although it is still relatively small in revenue size as compared to the global management consultancy market, standing at US$ 1.5 billion in the year 2006-07, the Indian management consultancy industry has shown high growth partly due to the low base from which it picked up. Growth in management consultancy exports was also high with exports amounting to US$7.3 billion in the year 2006-07. 10.71 The Indian engineering consultancy market is experiencing a boom, with many large-scale development projects driving its growth. It is a more developed market as compared to the management consultancy market. Although it is still relatively small in revenue size as compared to the global engineering consultancy market standing at US$ 2.91 billion in the year 2006-07, the Indian engineering consultancy industry has shown a steady growth over the last few years. 10.72 Over the past decade, India has emerged as one of the fastest growing consultancy markets worldwide. This is largely attributable to increased investment activities due to liberalization of FDI restrictions, entry of many new players into the Indian market, high growth in most key sectors, and India being an emerging economy and a lowcost sourcing destination.
Consultancy
10.68 Consultancy is essentially a knowledgebased profession with an underlying developmental role spanning a wide range of sectors. Not only do consultancy services play an important role in the development of the economy, but such consultancy exports enhance the visibility of Indian technical expertise abroad and boost the external sector in multiple ways, including foreign exchange revenues, promotion of export of technology and merchandise (especially capital goods and raw materials), and training of personnel, while contributing significantly to national development in the host country. Revenues of Indian consulting industry are estimated at US$ 4.41 billion in 2007. Though the consulting profession contributed only 0.44 per cent to the GDP in 2007, growth rates of the industry have been extremely promising over the last few years with a CAGR of about 73.68 per cent between 2002 and 2007. The Asia Pacific (APAC) consulting industry generated revenues worth US$33.5 billion in the year 2008 with Indias contribution at US$1.81 billion, i.e. a share of 5.4 per cent of the total APAC market. 10.69 The consultancy services market can be broadly categorized into management consultancy and engineering consultancy. Some of the commonly provided services across both fields of consultancy include detailed project reports, impact studies, evaluation/ assessment studies, advisory services, design and detailed engineering. Consulting services in India are being provided by a host of entities, the major categories being individual consultants, consulting firms, R&D
Construction
10.73 The construction industry in India is an important indicator of development as it creates investment opportunities across various related sectors. The construction industry has contributed an estimated ` 3,84,282 crore (at constant prices) to national GDP in 2010-11 (a share of around 8 per cent). The industry is fragmented, with a handful
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Economic Survey 2010-11 10.77 Some initiatives that could be taken in the construction sector include using the standard contract document for all domestic civil engineering projects, setting up consortiums to bid effectively for international projects, and resolving the issue of precondition in most of the overseas tenders floated by clients wherein equipment to be supplied by the contracting company has necessarily to be sourced from an approved list of suppliers from developed countries. Another area that needs consideration is the possibility of a double guarantee avoidance treaty on the lines of the double taxation avoidance treaty as overseas clients insist on bank guarantees to be issued under the contract being routed through a local bank operating in the country of project execution which results in Indian contracting companies being called upon to pay the bank guarantee charges to Indian banks as also to the local overseas banks which issue the final end guarantees to the client, based on the counter guarantees from the Indian banks.
of major companies involved in construction activities across all segments; medium sized companies specializing in niche activities; and small and medium contractors who actually work on subcontract basis and carry out the work in the field. The sector is labour intensive and, including indirect jobs, provides employment to more than 35 million people. 10.74 Creation of physical assets is an important outcome of construction activity. Prior to liberalization, the sector was dependent on Government spending on infrastructure as also construction activity undertaken by the private sector for housing complexes. The sector was given industry status in the year 2000. Since then, there are more initiatives by the Government to undertake projects on PPP basis. These initiatives have resulted in more private ownership of build-operatetransfer (BOT), build-operate-own-transfer (BOOT), and build-operate-lease-transfer (BOLT) projects. FDI is allowed upto 100 per cent under the automatic route in townships, housing, built-up infrastructure, and construction of development projects (which include housing, commercial premises, educational institutions, and recreational facilities). 10.75 The construction sector has major linkages with the building materials industry since they account for sizeable share of the construction costs (approximately 40 per cent to 50 per cent). The construction component, on an average, accounts for more than half of the investment required for setting up critical infrastructure like power projects, ports, railways, roads, and bridges. The sector therefore is critical for enhancing the productive capacity of the overall economy. With plans to enhance infrastructure investment to US $ 1 trillion, the construction sector is all set to become one of the growth engines of the Indian economy in the foreseeable future. 10.76 Construction services have been brought under the ambit of services tax since the year 2004. However, certain infrastructure projects like dams, roads, bridges, railways, and airports and projects awarded by Government/ local bodies are exempt from services tax. Construction service providers have been allowed to avail of Central value added tax (CENVAT) credit on capital goods, inputs, and input services since 2004. Moreover, excise duty on supply of goods to deemed export projects is refunded. The existing VAT Act provides for deduction of subcontractor turnover based on documentary evidence.
Some Social Services

10.78 Healthcare and education are the two major social services (see chapter 12). Besides these two, some other social services like sports are gaining importance in India.
Sports
10.79 Sports have always been seen as an integral part of all round development of the human personality. Apart from being a means of entertainment and physical fitness, sports have also played a great role in national identity and bonding with the international community. Organizing sports events is emerging as an important activity for inflow of tourists and generation of employment and is thereby contributing to national income. 10.80 Physical education, games, and sports have been receiving attention over successive Plans. However, it was only after India hosted the Ninth Asian Games in 1982 that sports became a subject of policy. The National Sports Policy 1984 was the first move towards developing an organized and systematic framework for the development and promotion of sports in the country and it was succeeded by the National Sports Policy 2001. The policy envisages broad-basing of sports, upgradation and development of infrastructure, strengthening of scientific and coaching support, among others. The Sports Authority of India (SAI) was established in 1984 with the objective of spotting and nurturing talent at all levels, by providing the
Services Sector requisite infrastructure and equipment, coaching facilities, scientific back-up, nutritious diet, and exposure to competition. 10.81 The 19th Commonwealth Games (CWG), a mega sporting event held every four years, in which 71 countries and territories participate, were organized successfully by India. The event has significantly contributed to employment generation, infrastructure development, tourism inflow, and growth in national income. The Sports Ministry had undertaken a massive and unprecedented training programme for the top sportspersons of India, to prepare the Indian contingent for CWG 2010. A Scheme for Preparation of Indian Athletes for CWG 2010 was put in place for providing comprehensive and intensive training and exposure to Indian sportspersons, both domestically and abroad. In this effort, 170 Indian and 30 foreign coaches and 78 supporting technical personnel were involved. This has resulted in the best-ever performance by India in any major, multi-disciplinary sports event with a haul of 101 medals (38 gold, 27 silver, and 36 bronze), which is more than double the medals India won at CWG, Melbourne, 2006. This achievement placed India second in medals tally after Australia and ahead of major sporting countries such as England, Canada, and South Africa.
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Challenges
10.83 Given the myriad activities in services, supporting its growth will require careful and differentiated strategies. The opportunities in this fast-growing, employment-oriented, FDI attracting sector, with vast export-potential are striking. However, the challenges are also many. One of the challenges in this area is to retain Indias competitiveness in those sectors where it has already made a mark such as IT & ITeS and Telecommunications. Their deeper and broader use in the domestic sectors would also have a dramatic potential to increase the efficiency and productivity of other goods and services. The second challenge lies in making inroads into some traditional areas such as tourism and shipping where other countries have already established themselves, but where the potential for India is nevertheless very high. The third challenge is in making forays into globally traded services in still niche areas for India, such as financial services, health care, education, accountancy, and other business services where India has a large domestic market and has also shown recent signs of making a dent in the international market, but only a very small part of the full potential has been tapped. There are also challenges related to collecting better data and developing a better coordinated strategy to pull together all the dispersed information. Regulatory improvements will also be important as many domestic regulations and market access barriers could come in the way of fully tapping this growthaccelerating sector. Since there are diverse sectors within services, the issues and policies cannot be separated into watertight compartments. Addressing these challenges and issues could further strengthen the services sector which is the driving force for India to realize double-digit growth potential, both overall and at state level, while providing more and better jobs. to help achieve more inclusive and balanced growth.

Outlook
10.82 The outlook for the services sector which had slightly dimmed due to the fallout of the subprime crisis in the US and the global financial crisis has once again brightened. Recent business performance indicators of different service firms in different sub-sectors also support this healthy prognosis. Even during the crisis year, annual services growth was around the 10 per cent mark, which it has maintained since 2005-06. This is in contrast to the overall GDP growth which fell to 6.8 per cent in 2008-09 from 9.3 per cent in 2007-08. Thus the resilience of the services sector has greatly contributed to the resilience of the economy.
Energy, Infrastructure and Communications

O
11
CHAPTER
ne of the major requirements for sustainable and inclusive economic growth is an extensive and efficient infrastructure network. It is critical for the effective functioning of the economy and industry. The key to global competitiveness of the Indian economy lies in building a high class infrastructure. To accelerate the pace of infrastructure development and reduce the infrastructure deficit, the Government has initiated a host of projects and schemes to upgrade physical infrastructure in all crucial sectors. Despite several challenges, the positive results of the Governments initiatives are showing in some sectors. However, required capacity addition in a time-bound manner needs focused attention in other sectors.
11.2 The Planning Commission in its Mid-Term Appraisal of the Eleventh Five Year Plan has taken stock of total investment in infrastructure (electricity, roads and bridges, ports, airports, telecommunications, railways, irrigation, water supply and sanitation, storage, and oil and gas pipelines) during the first two years (2007-08 and 2008-09) of the Plan. It has revised the estimates of total investment in infrastructure during the Eleventh Plan period based on the revised data available during the first two years of the Eleventh Plan and it is now estimated that it would be ` 20,54,205 crore, which is comparable with the initial investment planned. The contribution of the private sector during the first two years was 34.32 per cent and 33.74 per cent respectively, higher than the targeted 30 per cent. The investment in infrastructure has reached 7.18 per cent of the gross domestic product (GDP) in 2008-09 and this is expected to increase to 8.37 per cent in the terminal year of the Plan. Total investment in infrastructure during the Eleventh Plan is, therefore, likely to increase by 2.47 percentage points of the GDP as compared to the Tenth Plan. During the first three years (2007-08 to 2009-10) actual expenditure in the ten infrastructure sectors (including investment in gas pipelines along with oil) is about ` 10,65,828 crore as against the target of ` 9,81,119 crore.
OVERVIEW OF PERFORMANCE
11.3 While the overall investment in infrastructure seems on target, the targets in some sectors have not been achieved. During 2007-08 to 2009-10, capacity addition has been lower than the target in power, roads (National Highways Development Project [NHDP]), new railway lines, and doubling of railway lines. The sub-sectors where achievements have been above or close to target are telecommunications, villages electrified under the Rajiv Gandhi Grameen Vidyutikaran Yojana(RGGVY), railway lines electrification, railway gauge conversion, and new and renewal of roads construction under the Pradhan Mantri Gram Sadak Yojana(PMGSY). 11.4 The Department of Programme Implementation monitors the progress in Centralsector projects costing ` 150 crore and above on a monthly basis. The progress report of October 2010 indicates that projects such as roads, power, railways, petroleum, telecom, coal, and steel constitute about 92 per cent of the total 559 monitored projects and overtime project delays have been creeping up. As on October 2010, out of the 559 projects, 14 are ahead of schedule, 117 are on
Energy, Infrastructure and Communications schedule, and 293 are delayed. Of the balance projects, no dates have been fixed for commissioning. In the road transport and highways sector, 51 projects have reported delay in the range of 1 to 36 months. In the power sector, 20 projects have reported delays in the range of 1to18 months over the completion schedule earlier targeted. In the petroleum sector, 16 projects have reported delays in the range of 1 to16 months. 11.5 There has been a steady decline in the time and cost overruns of Central-sector projects costing ` 150 crore and above and this can be attributed to closer monitoring and system improvements by the Ministries concerned. An examination of cost overruns in the last twenty years as against originally
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approved costs shows that the former declined from 61.6 per cent in March 1991 to 12.06 per cent in March 2008. There is, however, an upward trend from March 2008 as cost overruns reached 14.72 per cent in March 2010 and further climbed to 20.7 per cent in October 2010. The rise is partly due to exclusion of projects costing less than ` 150 crore from the monitoring system as these had lower cost overruns compared to the bigger projects. The increase is also partly dueto steep rise in prices of steel and cement in 2006-07. 11.6 During April-November 2010, the performance of core industries and infrastructure services has been mixed. The switching capacity addition and cellphone connections in the telecommunications
Table 11.1 : Growth in core industries and infrastructure services (in per cent)
Sl. No. 1 2 3 4 5 6 Sector 2006-07 2007-08 2008-09 2009-10 2010-11 (April-Nov.) 4.6 0.6 6.7 3.3 0.8 39.7 27.1 0.0 4.1 11.5 0.8 19.8 17.7 26.1 12.7 15.9
Power Coal Finished Steel Railway Revenue Earning Freight Traffic Cargo Handled at Major Ports Telecommunications: a) Addition in Switching Capacity b) Telephone Connections c) Cellphone Connections
7.3 5.9 12.2 9.2 9.5 -23.0 -19.6 85.4 3.3 9.4 5.6 12.6 -1.4 3.6 19.4 12.1 34.0
6.3 6.0 6.8 9.0 12.0 -25.4 83.7 38.3 -8.6 7.8 0.4 6.5 2.1 7.5 19.7 11.9 20.6
2.5 8.2 13.2 4.9 2.2 101.0 80.9 -2.6 7.6 -1.8 3.0 1.4 3.4 -5.7 3.8 -12.1
6.8 8.0 3.2 6.6 5.7 -3.6 47.3 13.2 10.1 0.5 -0.4 44.8 10.4 7.9 5.7 14.5
7 8 9
Fertilizers Cement Petroleum: a) Crude Oil b) Refinery c) Natural Gas
10
Civil Aviation: a) b) c) Export Cargo Handled Import Cargo Handled Passengers Handled at International Terminals
d) Passengers Handled at DomesticTerminals 11 Roads:* Upgradation of Highways i) NHAI
-12.5 -10.5
164.6 12.5
30.9 17.3
21.4 4.0
-32.2 -0.2
ii) NH(O) & BRDB
Notes: * Includes widening to four lanes and two lanes and strengthening of existing weak pavement only. NHAINational Highways Authority of India. BRDB- Border Road Development Board. Source: Ministry of Statistics and Programme Implementation (MOSPI).
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Economic Survey 2010-11 of domestic /imported coal also affected the thermal generation. 11.8 In the thermal category, growth in generation from coal, lignite and gas-based stations was of the order of 2.77 per cent, 4.75 per cent and 6.71 per cent respectively. The overall plant load factor (PLF), a measure of efficency, of thermal power stations during April-December 2010, though less than that achieved during April-December 2009, exceeded the target of 71.35 per cent for the first three quarters of the current financial year (Table 11.3).
sector have increased by 39.7 per cent and 27 per cent respectively. Crude oil production has increased by 11.5 per cent and natural gas production by 19.8 per cent. The civil aviation sector has also performed comparatively better than the previous year both in terms of cargo and passengers handled. The power and cement sectors have grown at comparatively lower rates. Coal-sector growth has been very low at 0.6 per cent as compared to the previous year's 8 per cent. Lower coal-sector output has impacted thermal power generation this year. Fertilizer production has also not seen any rise as against the previous year's 13.2 per cent growth (Table 11.1).
Table 11.3 : Thermal power generation during April-December 2010

Components Generation (Billion KWh) 387.912 18.808 75.139 0 2.072 483.932 Growth (%) PLF (in per cent) Apr.Apr.Dec. Dec. 2009 2010 76.46 74.40 66.03 76.17 73.23 70.68 66.03 0 72.86
POWER
Generation
11.7 Electricity generation by power utilities during 2010-11 has been targeted to go up by 7.7 per cent to 830.757 billion KWh. The growth in power generation during April-December 2010 was about 4.5 per cent as compared to about 6.17 per cent during April-December 2009, with nuclear, hydro, and thermal power generation registering growth of 33 per cent, 8 per cent and 3 per cent respectively (Table 11.2). Good monsoon and improved availability of water moderated demand as well as supply of power. On the one hand the agricultural requirement of power reduced; on the other hand, there were some developments adversely affecting growth in thermal generation. Some thermal units had to be put under reserve shut down. Scheduling of generation from costlier liquid fuel and gas based plants was also affected. Commissioning of stabilization of some of the new thermal power stations, unscheduled/ extended planned maintenance of some of the thermal units, shortage
Coal Lignite Gas Turbine Multi-fuel Diesel Thermal Total
2.77 4.75 6.71 0 (-)30.62 3.03
Source: Ministry of Power.
11.9 The sector-wise and region-wise break-up of the PLF from 2007-08 to 2010-11 (April-December) shows the continuity and change over time as well as regional variation (Table.11.4). Out of the total installed generation capacity in the country, about 11 per cent is based on gas or liquid fuel (excluding diesel). The commencement of production of gas from D-6 fields of the KG (Krishna-Godavari) basin since April 2009 has improved gas availability for electricity generation.
Table 11.2 : Power Generation by Utilities (Billion KWh)

Category Power Generation Hydroelectric* Thermal Nuclear Bhutan Import 2008-09 723.8 113.0 590.0 14.8 5.9 2009-10 771.551 106.680 640.876 18.636 5.358 April-December 2009-10 2010-11 571.573 83.360 469.694 13.408 5.111 597.290 90.145 483.932 17.849 5.364 Growth (per cent) 4.50 8.14 3.03 33.12 4.96
Note: *Excludes generation from hydro stations up to 25 MW. Source: Ministry of Power;
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Box 11.1 : Power Sector Reforms

Taking Stock : Electricity reform in India started in the early 1990s, prompted by the rising losses of State Electricity Boards (SEBs) and their inability to meet demand. It followed worldwide reforms that began in the United Kingdom, Norway, Canada, and the USA and were later adopted in Latin America as well. In developed countries, sweeping reforms focused on restructuring vertically integrated cost-of-service monopolies and introducing wholesale competition, while developing countries focused on their need to accelerate power generation investment. In India, reforms have made major progress in the following areas:
entry by private independent power producers (IPP); corporatization of state-owned enterprises; unbundling of generation,
transmission, and distribution (T&D)

a national enabling legislation (Electricity Act 2003); independent power regulation at national level (CERC) and in
States
bulk transmission improvements (for example Powergrid), with wholesale electricity markets emerging in inter-State
trading and merchant power sales (as an alternative to long-term power purchase agreements in cost-of-supply memorandums of understanding [MOUs]with States) and spot and futures markets
Some, limited, private entry into distribution (for example Orissa, Delhi,), and splitting up of some State electricity
distribution companies into discoms (distribution companies); and

Central incentives (APDRP, accelerated power development, and reform programme) to support the implementation of
electricity reform in States including accelerated metering and reducing high unaccounted-for T&D losses. A composite reform index (although it does not assess quality), ranks India among the top reformers worldwide--comparable to Latin America (for example Chile, Brazil), better than East Asia (for example China, Indonesia, Thailand) and a step behind the most advanced (for example France, the UK, some US states). Among States in India itself, there remain significant variations. The highest ranked include most of the larger states, i.e. Andhra Pradesh, Gujarat, Haryana, Madhya Pradesh, Maharashtra, and West Bengal (as evident in their utilization of APDRP incentives), apart from Orissa and Delhi, two States with private distribution (with mixed impacts). With expected lags and some temporary reversals, outcomes are now beginning to emerge : accelerated power generation investments and competition; switch to tariff-based awards for new power projects; more efficient fuel sourcing (offshore natural gas, imported coal); rapid development of a national grid (with four out of five regions synchronized and the fifth--southern--interconnected), with greater reliability; and increased wheeling of electricity generated with emergence of a national bulk market with open access to States and wholesale trading. Future Directions : Nevertheless, reform remains incomplete. And performance lags behind accelerating demand, especially given the massive future investment requirements and the critical role of the power sector in sustaining growth:
economic growth and higher incomes are fuelling rapid demand growth (6 per cent a year) and rising unmet demand
(peak deficits of 12-13 per cent);

unreliable services are hampering agriculture and industry and penalizing households with large welfare losses; progress
on connecting rural households and habitations as yet unconnected to grid-based electricity supply is also slow;
very high unmetered and unaccounted-for sales (35 per cent), among the highest in the world, is draining public
revenues, forcing larger price increase requirements, and causing massive losses (combined annual losses of the SEBs are about 1 per cent of the GDP);
electricity tariffs don't match economic values (extensive subsidies, cross-subsidies) because of political economy
reasons, hampering efficient use of scarce public resource (for example excessive mining of ground-water) and deterring efficient supply;
competition in many critical segments of the industry, especially distribution, is inadequate or incomplete and remains
under threat (including peak price escalation), while existing monopolies of State-owned distribution continue to underperform (unmetered sales, leakages, outages, lack of transparency in financial accounts and performance management). Reforms are now essential in three directions: (1) Strengthening Regulation : Worldwide, and in India, electricity reform is technically challenging and politically constrained. The States have a crucial role in implementing further reform and the Centre in setting out a broader framework. Political economy conflicts are often complicated, with multiple actors and interests:SEBs, generation, transmission and distribution companies, wholesale and retail actors, and a variety of consumers--the farm sector, urban households, and industry. In this setting, and given substantial 'natural' monopolies in parts of the chain, the strong role of independent regulators is crucial: to balance these interests, promote competition, and enhance the working of the market. Worldwide evidence suggests that electricity reform works only in the presence of strong, independent regulators, insulated from political and commercial pressures. For example, regulators will need to ensure adequate competition and act on uncompetitive behaviour in wholesale trade, including capping wholesale tariffs and investigating competition.
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(2) Improving Distribution and Opening Bulk Supply to Competition : The next step is to introduce competition and open access at bulk level. Most power distribution is still the monopoly of SEBs, with mounting losses and poor services. Three different models of restructuring are possible, with States adopting whichever model works best and setting-up surrogate competition amongst these modes: (a) public private partnership (PPP) mode with open access. Long-term concessions granted to private distribution companies, incorporating high investment requirements, performance standards, tariffs subject to regulation, and permitting bulk consumers open access to networks (similar to telecom). (b) Distribution franchisee mode. Competitive bidding to select franchisee operators, where ownership of assets remains with state discoms and licencee supplies bulk electricity to franchisee at predetermined prices, franchisee retains predefined portion of revenues and pays discoms annual rate bids, T&D losses are monetized and borne by discoms with incentives to lower them and tariffs remain the same as in larger licensing area. (c) Performance-based State electricity discoms. With management independence and overhaul, and strict commercial performance standards, some stronger state discoms could potentially provide competitive services, with bulk consumers again permitted open access to networks. (3) Revising Tariffs to More Economic Levels : The previous two steps will not be enough without a strong political economy decision by all States to revise electricity tariffs to economic levels and reduce subsidies and cross-subsidies. India currently has some of the lowest and most uneconomic average electricity tariffs in the world--8 cents/kwh at retail level, compared to about 12-15 cents/kwh in countries much better-endowed with coal or gas energy (Canada, South Africa, the USA), and 19-20 cents/kwh elsewhere (much of Europe, developing countries). The current tariffs levels are unsustainable, cannot elicit needed investments, drain resources, and are not targeted at the poor. Instead, lifeline metering and supply measures with explicit subsidies that are more carefully targeted are possible. Consumers prefer reliable supplies over subsidized and unreliable supplies. The evidence in India itself clearly suggests that better performing States have more economic pricing (till they reach a threshold level) and lower cross-price subsidies and distortions in tariffs (with industrial supply price ratio to domestic tariffs rationalized). Better tariff setting thus goes hand-in-hand with better performance.
State level electricity reform and domestic tariffs, 2008

700
State level electricity reform and ratio of industrial to domestic tariffs, 2008
Ratio of industrial to domestic tariff
3.5 3.0 2.5 2.0 1.5 1.0 0.5 0
Domestic electricity tariff (paisa/kwh)
600 500 400 300 200 100 0
State Electricity Reform Index
State Level Reform Index
Source: Economic Division, Department of Economic Affairs (DEA), estimates. Bibliography: (1) Gajendra Haldea, 2010. Infrastructure at Cross-roads; (2) Rahul Tongia, 2003. The Political Economy of Indian Power Sector Reforms, Working Paper No. 4, Stanford. (3) Himachal Power Engineers' Association, 2008. Power Sector Reforms: Reorganisation & Restructuring of SEBs, Issues, Concerns and Some Suggestions. (4) Keya Ghosh, 2009. Electricity Reforms in West Bengal, CUTs Calcutta Resource Centre.
Power deficit
11.10 The deficit in power supply in terms of peak availability and total energy availability rose steadily from 2003-04 to 2007-08, a period of high growth in peak demand and total energy requirement. Despite modest growth in electricity generation, the peak deficit came down significantly in 2008-09 on account of a slowdown in growth of peak demand. During April-December 2010, the peak and total energy deficits came down to 10.2 per cent and 8.8 per cent respectively from 12.6 per cent and 9.8 per
cent during the corresponding period in the previous year, mainly due to growth of availability of power exceeding the growth in its requirement.
Capacity addition
11.11 The Eleventh Plan envisaged capacity addition of 78,700 MW in the power sector, of which 19.9 per cent was hydro, 75.8 per cent thermal, and the rest nuclear power. This has been revised to 62,374 MW now comprising 8237MW hydro, 50,757 MW thermal, and 3380 MW nuclear power.

Table 11.4 : PLF of Thermal Power Stations (per cent)
Category 2007-08 2008-09 2009-10 (Apr.Dec.) 71.20 84.30 91.04 81.79 79.45 83.30 64.66 47.62 77.27 69.80 83.63 84.43 81.88 77.77 82.64 62.94 0 76.17 2010-11 (Apr.Dec.) 63.91 83.14 79.68 76.73 72.72 76.98 65.70 0 72.86
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between project authorities, contractors and their sub-vendors, delay in readiness of balance of plants by the executing agencies, design problems in CFBC boilers, and shortage of fuel.
i) State Sector ii) Central Sector iii) Private Sector REGIONS Northern Western Southern Eastern North-Eastern All India
71.9 86.7 90.8 81.4 80.3 84.9 69.6 20.4 78.6
Ultra Mega Power Projects (UMPPs) Initiative

11.14 The Ministry of Power had launched an initiative for development of coal-based super critical UMPPs each of about 4000 MW capacity under Case II bidding route. Four UMPPs, i.e Sasan in Madhya Pradesh, Mundra in Gujarat, Krishnapatnam in Andhra Pradesh, and Tilaiya in Jharkhand have already been transferred to the identified developers and are at different stages of implementation. Two units of 800 MW each of the Mundra UMPP are expected to be commissioned in the Eleventh Five Year Plan.
Capacity addition of 32,032 MW has been achieved till 31 December 2010 and projects with a capacity of 30,725 MW are under construction for commissioning during the remaining period of Eleventh Plan. 11.12 Against the revised target of 12,039 MW, capacity addition of 9,263 MW was achieved during 2007-08. On account of revision in the definition of commissioning of thermal projects, the capacity addition target for the year 2008-09 was revised to 7,530 MW, against which a capacity of 3,454 MW was added. The capacity addition target for the year 2009-10 was 14,507 MW, against which a capacity of 9585 MW was added up to 31 March 2010. In the current fiscal, 9730.5 MW has been added till 31 December 2010 which is higher than the highest ever capacity addition of 9585 MW in a single year, i.e 2009-10 (Table11.5). 11.13 The main reasons for underachievement of capacity addition targets were delayed and nonsequential supply of material by suppliers, shortage of skilled manpower for construction and commissioning of projects, contractual disputes
Development of hydropower
11.15 As per the reassessment study carried out by the Central Electricity Authority(CEA), the identified hydroelectric potential of the country (having installed capacity above 25 MW) is 1,45,320 MW. As of now, 172 schemes with installed capacity of 37,367 MW are under operation, 46 (installed capacity 13,785 MW) are under construction, 31 (installed capacity 16,087 MW) have been approved by the CEA, detailed project reports (DPRs) of 44 (installed capacity 15,441 MW) have been prepared and are under various stages of examination, and 108 schemes (installed capacity 41,945 MW) are under survey and investigation. The hydro capacity addition of 15,627 MW planned for the Eleventh Five Year Plan has been revised to 8237 MW in the MidTerm Appraisal (MTA) of the Eleventh Plan. Of this, 3,921 MW has been added till 31December 2010. 11.16 The main reasons for slow development of hydro-power include difficult and inaccessible potential sites, difficulties in land acquisition, rehabilitation, environmental and forest-related
Table 11.5 : Capacity Addition Target (original) and Achievement during April December 2010 (MW)
Sector Thermal Target Central State Private Total 5,890 6,012 5,891 17,793 Actual 2,115 2,331 4,794.50 9,240.50 Hydro Target 529 5,97.5 2,19.5 1,346 Actual 120 178 192 490 Nuclear Target 1220 0 0 1,220 Actual 0 0 0 0 Total Target 7,639 6,609.5 Actual 2,235 2,509
6,110.50 4,986.50 20,359 9,730.50
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Economic Survey 2010-11 total number of transactions under open access at inter-State level was 18,128. The Central Transmission Unit (CTU) has received 225 applications from private developers for long- term open access amounting to 1,62,898 MW. At State level, as per information available with the Forum of Regulators Secretariat, 24 SERCs have notified terms and conditions of open access regulations, 20 have determined cross-subsidy surcharge, 25 have allowed open access up to 1 MW, 22 have determined transmission charges, and 18 have determined wheeling charges. In addition, the Power System Operation Corporation Limited (POSOCO), has been operationalized by the Government of India with effect from 1 October 2010 to manage load dispatch functions earlier being managed by the CTU, i.e. the power grid.
issues, inter-State issues, geological surprises, and contractual issues. A multi-pronged strategy has been adopted to harness the hydro potential resources in the country. Some of the policy measures and initiatives taken by the Government are finalization of an investor-friendly New Hydro Policy 2008 and the liberal National Rehabilitation and Resettlement Policy, 50,000 MW Hydroelectric Initiative, and Mega Power Project Policy. The salient features of the New Hydro Policy 2008 are a level playing field for private hydro projects; exemption from tariff-based competitive bidding up to January 2011 to private hydro projects; private developers to have the facility of merchant sale of up to 40 per cent of saleable energy; an additional 1 per cent free power over and above 12 per cent to be earmarked for a Local Area Development Fund; each project-affected family (PAF) to get free 100 units of electricity every month for a period of 10 years after commissioning of the project; and project authorities to bear the 10 per cent of the State contribution under the Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY) for electrification of the affected area.
Trading of Electricity
11.20 Power trading helps in resource optimization by facilitating the disposal of surplus power with distribution utilities and in meeting the short-term demand. The Central and State Electricity Regulatory Commissions have powers to grant interState and intra-State trading licences respectively. The CERC has so far granted 47 inter-State trading licences, of which 38 were in existence as on 31 December 2010. Details of electricity trading by licensed inter-State traders, in terms of volume, price, and margin are given in Table 11.6.
TRANSMISSION, TRADING, ACCESS, AND EXCHANGE

National Grid
11.17 An integrated power transmission grid helps even out supply-demand mismatches. The existing inter-regional transmission capacity of about 22,400 MW connects the northern, western, eastern, and north-eastern regions in synchronous mode operating at the same frequency and the southern region in asynchronous mode. This has enabled inter-regional energy exchanges of about 38,000 million units in financial year 2010-11 (till November 2010), thus contributing to greater utilization of generation capacity and an improved power supply position. Proposals are under way to have synchronous integration of the southern region with the rest.
Power Exchange
11.21 The CERC has issued power market regulations that focus on the creation of an overall power market structure, the role of power exchange traders, and also provide for market oversight and surveillance. The two power exchanges, namely the Indian Energy Exchange Ltd. (IEX), New Delhi, and Power Exchange India Ltd. (PXIL), Mumbai, already in operation from 27June 2008 and 22 October 2008 respectively have been deemed to be registered under these regulations. The price of electricity traded through the exchanges was high during the initial months of the current financial year but it showed a declining trend over the year. The weighted average price of power traded through the IEX in the months of November and December 2010 was ` 1.99 per kWh and ` 2.36 per kWh respectively. In addition to transactions in the day ahead market (collective transactions), power exchanges have been undertaking transactions in the term ahead market (i.e. transactions through intra-day contracts,
Open access
11.18 The regulations on open access in inter-State transmission and on inter-State trading are issued by the Central Electricity Regulatory Commission (CERC). The responsibility for introduction of open access at distribution level rests with the State Electricity Regulatory Commissions (SERCs). 11.19 Open access in inter-State transmission is fully operational. During financial year 2009-10, the
Energy, Infrastructure and Communications Table 11.6 : Electricity trading

Period Volume of electricity traded (MUs) 14,188.8 15,022.74 20,964.77 21,916.92 26,819.15 18,150.04 Weighted average purchase price (`/kWh) ` 3.14 4.47 4.48 7.25 5.22 5.12 * Weighted average sale price (`/kWh) ` 3.23 4.51 4.52 7.29 5.26 5.17 *
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Trading margin (`/kWh) ` 0.09 0.04 0.04 0.04 0.04 0.05
2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 (upto 31st Oct, 2010)
Source : Ministry of Power.
Note:* The prices have come down during the months of November and December 2010.
day ahead contingency contracts, and weekly contracts) since September 2009. The volume of electricity transacted in the term ahead market of the two power exchanges, i.e. IEX and PXIL, during April-October 2010 has been 486.47 MUs and 656.71 MUs respectively.
Promotion of Green Power

11.22 The CERC has amended the Terms and Conditions for Tariff Determination from Renewable Energy Sources Regulations 2010 for increasing the visibility of the generic tariff determined for solar photo voltaic (PV) and solar thermal projects. The capital cost and other norms applicable for the year 201011 shall also apply for solar PV projects during the year 2011-12; for solar thermal projects during the years 2011-12 and 2012-13, if the power purchase agreements in respect of the solar PV and solar thermal projects are signed on or before 31 March 2011; and the entire capacity covered by the power purchase agreements is commissioned on or before 31 March 2012 in respect of solar PV projects and on or before 31 March 2013 in respect of solar thermal projects. 11.23 The CERC has also notified Terms and Conditions for the recognition and issuance of Renewable Energy Certificate for Renewable Energy Generation Regulations 2010 on 18 January 2010 as well as their first amendment on 1 October 2010. These Regulations assume special importance in fulfillment of the mandate to promote renewable sources of energy and development of a market in electricity. The Renewable Energy Certificate (REC) framework is expected to give a push to renewable energy capacity addition in the country. 11.24 The REC is a market-based instrument to promote renewable energy and facilitate renewable
purchase obligations (RPOs). It can make the renewable electricity market stable and predictable by maximizing the benefits of renewable generation while reducing costs. It could also be used by those States that do not have substantial renewable energy resources to meet their RPOs. The CERC and SERCs created the necessary regulatory and institutional framework and rolled out the scheme from November 2010. The REC mechanism sets the way forward for encouraging competition and eventually mainstreaming renewable energy.
Aggregate Technical and Commercial (AT&C) losses and Restructured APDRP

11.25 The focus of the Re-structured Accelerated Power Development Reforms Programme (R-APDRP) is on actual, demonstrable performance in terms of reduction in AT&C losses. Projects under the scheme will be taken up in two parts in urban areas--towns and cities with population of more than 30,000(10,000 in case of special category States). 11.26 Part-A of the Scheme shall include projects for the establishment of baseline data and Information Technology (IT) applications for energy accounting/ auditing and IT-based consumer service centres. Preparation of baseline data for the project area covering consumer indexing, GIS (geographic information system) mapping, metering of distribution transformers and feeders, and automatic data logging for all distribution transformers and feeders and SCADA(supervisory control and data acquisition) / DMS (distribution management system) system is only for big cities. It would include asset mapping of the entire distribution network at and below 11 kV transformers and adoption of IT applications for meter reading, billing
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Economic Survey 2010-11 The objective of the Mission is to achieve growth with ecological sustainability by devising costeffective strategies for end-use demand-side management. The Ministry of Power and BEE have been entrusted with the tasks of preparing the implementation plan for the NMEEE and upscaling the efforts to create and sustain a market for energy efficiency and unlock investment of around ` 74,000 crore. The Mission, by 2014-15, is likely to achieve about 23 million tonnes oil-equivalent of fuel savings in coal, gas, and petroleum products, along with an expected avoided capacity addition of over 19,000 MW. The carbon dioxide emission reduction is estimated to be 98.55 million tonnes annually.
and collection, energy accounting and auditing, redressal of consumer grievances, and establishment of IT-enabled consumer service centres. The baseline data will be verified by an independent agency appointed by the Ministry of Power. 11.27 Part B of the scheme will include regular distribution strengthening projects. These include renovation, modernization and strengthening of 11 kV-level substations, transformers/transformer centres, re-conductoring of lines at 11kv and below level, load bifurcation, load balancing, high voltage distribution system (HVDS), and installation of capacitor banks and mobile service centres. In exceptional cases, where the sub-transmission system is weak, strengthening at 33 kV- or 66 kVlevel may also be considered.
PETROLEUM
Oil and gas production
11.31 Efficient and reliable energy supplies are a precondition for accelerated growth of the Indian economy. While the energy needs of the country, especially oil and gas, are going to increase at a rapid rate in the coming decades, the indigenous energy resources are limited. Oil and gas constitute around 45 per cent of total energy consumption. At the same time, the dependence on imports of petroleum and petroleum products continues to be around 80 per cent of total oil consumption in the country. 11.32 During the current financial year (2010-11), production of crude oil is estimated at 37.96 million metric tonne (MMT), which is about 12.67 per cent higher than the crude oil production of 33.69 MMT during 2009-10. The projected production for natural gas, including coal bed methane (CBM), for 201011 is 53.59 billion cubic metres (BCM) which is 12.80 per cent higher than the production of 47.51 BCM in 2009-10. The increase in natural gas production is primarily from the KG deepwater block.
Rural Electrification
11.28 Under the RGGVY, 87,791 villages have been electrified and connections released to 135.31 lakh below poverty line(BPL) households up to 30 November 2010. Under the Tenth Five Year Plan, 235 projects covering 68,763 villages and 83.10 lakh BPL connections were sanctioned at a cost of ` 9,732.90 crore. In Phase I of the Eleventh Plan period, 338 projects have been sanctioned for implementation at a cost of ` 16,620.61 crore for electrification of 49,736 villages and release of connections to 163.34 lakh BPL households. Till 30 November 2010, 333 projects have been awarded and franchisees are in place in 1,10,567 villages in 16 States.
Energy Conservation and efficiency

11.29 Several measures have been taken by the Ministry of Power and Bureau of Energy Efficiency (BEE) to promote energy conservation and its efficient use targeting 5 per cent reduction in demand during Eleventh Plan through schemes being implemented by BEE. The Ministry of Power has also launched an awareness programme which includes giving incentives for efficiency and conservation efforts by way of National Energy Conservation Awards, painting, debate and essay competitions for schoolchildren, and creating general awareness through the media on the need for energy conservation. 11.30 The National Mission for Enhanced Energy Efficiency (NMEEE) is one of the eight missions under the National Action Plan on Climate Change. It has been approved and will soon be implemented.
Exploration of Domestic Oil and Gas

11.33 India has an estimated sedimentary area of 3.14 million sq. km, comprising 26 sedimentary basins. Prior to the adoption of the New Exploration Licensing Policy (NELP), only 11 per cent of India's sedimentary basin was under exploration. Since operationalization of the NELP in 1999, the Government of India has awarded 47.3 per cent of it for exploration. So far 87 oil and gas discoveries have been made by private/joint venture (JV) companies in 26 blocks and more than 640 MMT of oil-equivalent hydrocarbon reserves have been
Energy, Infrastructure and Communications added. As on 1 October 2010, investment made by Indian and foreign companies was of the order of US $ 14.8 billion, of which, US $ 7.5 billion was in hydrocarbon exploration and US$ 7.3 billion in development of discoveries.
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Offering of NELP Blocks under NELP IX

11.34 The ninth round of NELP (NELPIX) was launched on 15 October 2010 and 34 exploration blocks including 8 deepwater, 7 shallow water, 11 on-land, and 8 Type-S on-land were offered. On-land blocks are spread over six States, namely Assam(2), Gujarat(11), Madhya Pradesh(2), Rajasthan(2), Tripura(1), and Uttar Pradesh(1).
between the Directorate General of Hydrocarbons (DGH) and U S Geological Survey (USGS), USA for exchange of scientific knowledge and technical personnel in the field of gas hydrate and research energy is in progress. An MOU was recently signed in the area of marine gas hydrate research and technology development between the Leibniz Institute of Marine Sciences, Germany, and DGH for research on methane production from gas hydrate by carbon dioxide sequestration.
Shale Gas
11.38 Shale gas is being explored as an important new source of energy in the country. India has several shale formations which seem to hold shale gas. The shale gas formations are spread over several sedimentary basins such as Cambay, Gondwana, and KG on land and Cauvery river. The DGH has initiated steps to identify prospective areas for shale gas exploration and acquisition of additional geoscientific data. An MOU has been signed with the USA during the visit of President Obama to India in November 2010 for cooperation in the field of shale gas assessment and development.
Domestic Exploration of Other Gaseous Fuel

Coal Bed Methane (CBM)
11.35 CBM is found embedded in coal seams. The CBM policy has provided a level playing field for exploration and commercial exploitation of CBM by national and international companies since the 2000. Total CBM resources in 26 blocks awarded so far are estimated at 1374 BCM. In the fourth round, the Government of India has awarded 7 CBM blocks in the States of Assam, Chhattisgarh, Jharkhand, Madhya Pradesh, Orissa, and Tamil Nadu and signed 33 contracts. Commercial production of CBM in India has now become a reality with current CBM gas production at about one lakh cu. mper day. The CBM gas produced in the country is being utilized by nearby industries in and around Raniganj block in West Bengal.
Gas production from KG-D6 Basin

11.39 Gas production from KG-D6 began on 1 April 2009. The current gas production from the KG-D6 field is about 53 MMSCMD, of which about 45 MMSCMD is being produced from D1 and D3 fields and about 8 MMSCMD from MA field. The approved Field Development Plan of D1 and D3 envisages gas production to the tune of 80 MMSCMD from the third year of commercial production, i.e. with effect from 2012-13.
Underground Coal Gasification (UCG)

11.36 The Oil and Natural Gas Commission (ONGC) has entered into an Agreement of Collaboration (AOC-MOU) with the National Mining Research Centre-Skochinsky Institute of Mining (NMRC-SIM) in Russia. In the selected Vastan mine block, seismic survey was carried out and 18 boreholes drilled for detailed UCG site characterization. Based on geological, hydrological, and geo-mechanical data analysis, Vastan in Gujarat and Hodu Sindri in Rajasthan have been found suitable for UCG stations. Pilot production of UCG at Vastan by the ONGC is expected to commence by the end of the Eleventh Five Year Plan period.
Crude Oil Production from Rajasthan

11.40 Crude oil production by the Rajasthan Cairn Energy India Pvt. Ltd has started in block RJ-ON90/1 with effect from 29 August 2009 at the initial production rate of 3500 barrels per day. Current crude oil production from this block is about 1,25,000 bopd. The Government has designated Indian Oil Corporation Limited (IOC), Mangalore Refinery and Petrochemicals Ltd (MRPL), and Hindustan Petroleum Corporation Ltd (HPCL) for lifting part of the crude oil production from this block after ascertaining the capacity of receiving refineries of the nominees. The oil production from this block during 2009-10 was about 0.447 MMT and during 2010-11, up to 30 November 2010 about 3.12 MMT.
Gas Hydrate
11.37 Gas hydrate is at research and development (R&D) stage world over. A cooperation programme
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Economic Survey 2010-11 and Hazira LNG Private Ltd. (HLPL). During 200910, about 8.91 mmtpa LNG was imported. This is equivalent to about 31 million standard cubic metre per day (mmscmd) of regasified LNG (RLNG). During April-November 2010, 4.91 mmtpa of LNG has been imported. 11.44 As part of the concerted efforts to augment the country's supply of LNG, PLL has tied up 1.44 mmtpa for its Kochi LNG terminal from Exxon Mobil from its share in the Gorgon project, Australia, for 20 years . The sale and purchase agreement (SPA) for it was executed in August 2009. In addition, GAIL and PLL are exploring the possibility of import of LNG from various potential suppliers. 11.45 In order to handle increased LNG imports, additional infrastructure is being created in the country. Capacity at PLL's Dahej LNG terminal has been expanded to 10 mmtpa in July 2009. Dabhol LNG terminal is expected to be commissioned this year. The terminal will, however, become fully operational only after completion of breakwater facilities in 2012. PLL is setting up an LNG terminal at Kochi which is planned to be commissioned in 2011-12.
Development of Marginal Fields

11.41 Concerted efforts have been made to put new and marginal fields in production through inhouse resources as well as through service contracts. The ONGC has an inventory of 165 marginal fields and 131 have either been monetized or are under various stages of development through in-house efforts. So far, 10 fields have been awarded on service contract.
Equity Oil and Gas from Abroad

11.42 In view of unfavourable demand-supply balance of hydrocarbons in India, acquiring equity oil and gas assets overseas is one of the important components of enhancing energy security. The Government is encouraging national oil companies to aggressively pursue equity oil and gas opportunities overseas. Apart from ONGC Videsh Limited (OVL) (40 projects in 15 countries), the other oil public-sector undertakings (PSUs), namely Indian Oil Corporation Limited (IOCL) (9 projects in 6 countries), Oil India Limited (IOL) (12 projects in 8 countries), Bharat Petroleum Corporation Limited (BPCL) (12 projects in 7 countries), GAIL (India) Limited (4 projects in 2 countries), and Hindustan Petroleum Corporation Limited (HPCL) (2 projects in 2 countries), have acquired overseas exploration acreages. The total investment by oil PSUs (OVL, OIL, GAIL, IOCL, BPCL, and HPCL) overseas is more than US$ 13 billion (` 59,000 crore). OVL produced about 8.87 MMTOE oil and oil-equivalent gas in 2009-10 from its overseas assets in Sudan, Vietnam, Venezuela, Russia, Syria, Colombia, and Brazil. The latest acquisition in May 2010 by OVL (along with OIL and IOCL) is 11 per cent participating interest of Carabobo-1 project in the hydrocarbonrich Orinoco belt of Venezuela, with proposed investment of US$ 1.3 billion. The projected production is 400,000 bopd and the first oil is expected in 2013.
Refining Capacity
11.46 There had been increase in domestic refinery capacity by 19.46 per cent in 2009-10 to reach 177.97 MMT from 148.97 MMT in 2008-09 and it is further expected to reach 185.40 MMT by 1 April 2011 and 238.96 MMT by the end of 2011-12. Refinery production (crude throughput) during 200910 was160.03 MMT (excluding Jamnagar Refinery under special economic zone [SEZ ]by Reliance Industry Ltd) showing an increase of 16 per cent over 2008-09. During April-November 2010 it was 106.53 MMT.
Pipeline Network and City Gas Distribution Network

11.47 There has been substantial increase in the pipeline network in the country with current figures of 28 product pipelines of 11,037 km length and 67.2 MMT capacity. There are also 17 crude pipelines of 7,425 km and additional LPG pipelines of over 2,000 km. With increased availability of gas in the country the city gas distribution network has been enlarged to cover compressed natural gas (CNG) in 19 cities supplying gas for domestic consumers, public transport, and commercial/industrial entities. In Vision-2015, provision of pressurized natural gas
Import of Liquefied Natural Gas(LNG)

11.43 Petronet LNG Limited (PLL), promoted by ONGC, GAIL, IOCL, and BPCL, was formed to import LNG and set up an LNG regasification plant at Dahej. PLL signed a contract with RasGas, Qatar, in July 1999 for import of 7.5 million metric tonnes per annum (mmtpa) LNG for a period of 25 years. As per the contract, supply of 5 mmtpa commenced in 2004 and of the balance 2.5 mmtpa in January 2010. In addition to these term contracts, LNG is also being sourced from the spot market by PLL
Energy, Infrastructure and Communications (PNG) to more than 200 cities across the country is envisaged.
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Rajiv Gandhi Gramin LPG Vitaran Yojana (RGGLVY)

11.48 The 'Vision-2015' adopted for the liquefied petroleum gas (LPG) sector, inter-alia, focuses on raising the population coverage of LPG in rural areas and areas where coverage is low. The RGGLVY for small-size LPG distribution agencies was launched on 16 October 2009. This scheme targets coverage of 75 per cent of the population by 2015 by release of 5.5 crore new LPG connections. Oil marketing companies (OMCs) have issued advertisements to set up 2329 LPG distributors in 22 States, namely Andhra Pradesh, Arunachal Pradesh, Assam, Bihar, Chattisgarh, Gujarat, Himachal Pradesh, Jharkhand, Karnataka, Madhya Pradesh, Maharashtra, Manipur, Mizoram, Meghalaya, Nagaland, Orissa, Rajasthan, Tamil Nadu, Tripura, Uttar Pradesh, West Bengal, and Pondicherry. Out of this, 75 LPG distributors have already been commissioned. Selection for the rest of the locations is in progress as per policy. The price of administered pricing mechanism (APM) gas produced by ONGC and OIL has been increased from June 2010 to the level of US$ 4.2/mmbtu, less royalty, which is equal to the price of gas produced by NELP operators.
of LPG connections released to BPL households by each company. It is expected that the OMCs will incur ` 6.00 crore during the current financial year.
Special Efforts for Energy Conservation

11.51 The Petroleum Conservation Research Association (PCRA) is a national government agency engaged in promoting energy efficiency in various sectors of the economy. It has been providing services leading to improvement in energy utilization in the industrial, transport, agriculture and domestic sectors of the economy. The PCRA conducts a number of activities leading to energy conservation through a mix of direct and indirect services to various sectors of the economy. During 2010-11, a total of 3420 field activities were carried out up to November 2010 against 5122 activities during 2009-10.
Coal
11.52 More than 90 per cent of the coal production in India is of non-coking coal. The production of raw coal during April to November 2010 was 319.80 million tonne (MT), against 317.79 MT in the same period of the previous year. Coking coal production during this period was 28.72 MT against 25.64 MT during the same period last year, registering a growth of 12.01 per cent. The growth rate in the production of raw coal increased from 5.85 per cent during 200607 to 7.98 per cent in 2009-10, due to enhanced production by all the stakeholders, especially captive blocks and large PSUs like Coal India Ltd. (CIL) and Singareni Collieries Company Ltd. (SCCL). The lower growth in production during the current year is primarily due to environmental restrictions, particularly application of the comprehensive environmental pollution index (CEPI), non-availability of forestry clearance against some of the projects, poor law and order situation in the States of Jharkhand and Orissa, and excessive rainfall in the western parts of the Country. During 2009-10 the import and export of coal was about 67.744 MT and 2.171 MT respectively. 11.53 Under the scheme of e-auction, CIL and SCCL have been carrying out e-auction of coal. During 2009-10, CIL sold 56.28 MT and SCCL 1.29 MT of coal through e-auction. During AprilDecember 2010 CIL has offered 37.73MT and sold 32.36MT of coal through e-auction, with an increase of 81 per cent in the notified price. Similarly SCCL has also offered 1.95MT and sold 1.66MT of coal
Free LPG Connections to BPL Rural Households

11.49 A proposal for providing one-time financial assistance to BPL households for acquiring new LPG connections is under consideration of the Government. Under the proposed scheme, the Government and Oil Marketing Companies would provide one-time assistance of ` 1400 for acquiring a new LPG connection to a BPL family. The scheme would cover all eligible households in the BPL list of the State Government/Union Territory. About 32-40 lakh new LPG connections are to be released annually under this scheme. 11.50 The annual financial implication of the scheme is estimated to be ` 490 crore. The proposed budgetary support has been restricted to the extent of 50 per cent of the total funds required. The remaining 50 per cent would be partly drawn from the Corporate Social Responsibility Funds (CSRFs) of the six major oil companies, namely ONGC, IOCL, BPCL, HPCL, OIL, and GAIL and partly borne by the three oil marketing companies (OMCs) namely IOCL, HPCL, and BPCL in the ratio
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through e-auction, with a 48 per cent increase on notified price up to December 2010. 11.54 The Government has formed a special purpose vehicle (SPV), namely International Coal Venture Limited (ICVL), comprising leading PSUs including CIL for securing metallurgical coal and thermal coal assets overseas. Aspects like the functioning of ICVL and strength of personnel are being finalized. The Empowered Committee of Secretaries constituted for considering ICVL's proposals for acquiring coal properties abroad will also consider CIL's proposals for investing in coal assets abroad which are worth more than ` 1,000 crore. 11.55 For increasing the output of washed coking and non-coking coal, CIL has envisaged setting up of 20 new coal washeries for an ultimate raw coal throughput capacity of 111.10 MT per annum with an estimated capital investment of about ` 2,500 crore. These include seven coking coal washeries and 13 non-coking coal washeries. 11.56 For increasing production from underground mines, initiatives like identification of high-capacity underground mines for development with latest technology, restarting mining in abandoned mines forming JVs with reputed mining companies, introduction of continuous miners and power supported long wall (PSLW) as a mass production technology in more mines, introduction of high wall mining, and upgradation of equipment size are being taken. 11.57 As of now, 216 coal blocks with geological reserves of about 50 billion tonnes have been allocated to public/private companies. Out of these, 10 blocks have been de-allocated and out of the de-allocated blocks, 2 reallocated to eligible companies. At present, there are thus 208 coal blocks allocated to various public/private companies, of which, (a) 96 with geological reserves of about 27,941.94 MT have been allotted to the government companies, (b) 100 with geological reserves of about 17,269.01 MT to private companies, and (c) 12 with geological reserve of about 4,846.26 MT allotted for ultra mega power projects (UMPPs)/ tariff power projects based on bidding. Out of the total allocated blocks, 26 (14 private and 12 public) have commenced production. The production from these coal blocks for the year 2009-10 was 35.31 MT and was 23.90MT (provisional) during April-November 2010-11.
RAILWAYS
Rationalization of railway freight rates and passenger fares
11.58 Freight structure has been rationalized by the Indian railways. There has been continuous thrust on bringing in transparency and simplification while introducing measures to make rail tariff more competitive so as to attract additional traffic. A dynamic pricing policy has been introduced in recent years, wherein tariff measures are modulated in response to the market scenario for better management of regional and seasonal skew in demand with the objective of maximizing revenues through optimal utilization of transport capacities. Iron ore for export has also been brought under the ambit of the dynamic pricing policy. An inflation concession of ` 100 per wagon is being granted on foodgrains for domestic use and kerosene oil. 11.59 To increase revenue from the freight business, a slew of freight incentive schemes have been launched. Based on the feedback of the Railways and customers, these schemes are made more attractive for better utilization of railway assets in traditional empty flow directions, encouraging freight forwarders, incremental traffic in lean season, loading of bagged consignment in open wagons, etc.
Freight performance of the Indian railways

11.60 Freight loading on Indian Railways in the period April-November, 2010 was 593.43 MT as compared to 574.40 MT in April-November 2009 an increase of 3.31 per cent. (Table 11.7) This was short of the proportionate target of 605.11 MT by 11.68 MT. The low growth was primarily on account of negative growth in iron ore. Iron ore loading has been primarily affected in the current year due to the restrictions imposed by the State Governments of Orissa and Karnataka. Frequent bandhs by Naxalites adversely affected loading, particularly in the Bailadila sector on East Coast Railway.
Upgradation of passenger amenities

11.61 Indian Railways has decided to add 206 more railway stations to the existing list of 378 Adarsh Stations. Railways will develop Adarsh Stations with basic facilities such as drinking water, adequate
Energy, Infrastructure and Communications Table 11.7 : Performance of Indian Railways.

(April November)
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Change (per cent) Particulars 1. Total Revenue-earning Freight Traffic (MT) i) Coal ii) Raw Materials for Steel Plants(except iron ore) iii) Pig Iron & Finished Steeli) from Steel Plants ii) from Other Points iii) Total iv) Iron Ore i) for Export ii) for Steel Plants iii) for Other Domestic Users iv) Total v) Cement vi) Foodgrains vii) Fertilizers viii) POL ix) Container Servicei) ii) iii) Domestic Containers EXIM Containers Total 7.05 23.29 30.34 62.23 551.45 8687 838 9.63 25.32 34.95 66.1 600.55 9270 7245.8 903.5 5.5 17.06 22.56 43.91 378.38 8929 4939.7 616 6.66 17.68 24.34 44.36 393.11 9086 5235.84 653 36.6 8.72 15.19 6.22 8.9 6.71 4.7 7.82 21.09 3.63 7.89 1.02 3.89 1.76 6 6.01 45.75 42.9 41.93 130.58 86.24 35.51 41.35 38.08 43.64 44.33 44.77 132.74 93.15 38.69 43.68 38.88 30.07 29.74 28.74 88.55 59.62 22.74 30.2 26.19 17.22 28.73 30.58 76.53 63.11 26.2 33.17 26.43 -4.61 3.33 6.77 1.65 8.01 8.96 5.63 2.1 -42.73 -3.4 6.4 -13.57 5.85 15.22 9.83 0.92 21.96 6.62 28.58 24.17 7.68 31.85 15.56 4.53 20.09 16.01 4.57 20.58 10.06 16.01 11.44 2.89 0.88 2.44 2008-09* 833.39 369.63 10.85 2009-10*(P) 2009-10 (P) 887.79 396.15 11.6 574.4 252.77 7.77 2010-11(P) 2009-10 593.43 270.38 8.33 6.53 7.17 6.91 2010-11 3.31 6.97 7.21
x) Balance (other goods) 2. Net tonne kilometres (billion) 3. Net tonne km/Wagon/Day (BG) ** 5. Passenger kilometres (billion)
4. Passenger Traffic Org. (million) E 6920.4
Notes: * Excluding Konkan Railway loading, ** calculated in terms of 8 wheelers, Source: Ministry of Railways.
E Excluding Metro Kolkata, P= provisional
toilets, catering services, waiting rooms, and dormitories especially for lady passengers. Work has started at various stations. 11.62 The computerized passenger reservation system (PRS) of Indian Railways is the largest passenger reservation network in the world, available at 2,222 locations with more than 8,074 terminals. On an average 4.28 crore passengers per month are booked through the PRS with an average earning of ` 1,722.01 crore per month. Indian Railways has tied up with India Post for providing the PRS facility through post offices and is functional at 112 such post offices.
11.63 The computerized unreserved ticketing system(UTS), initiated to provide a fast, flexible, and secure method of issuing unreserved tickets, enables passengers to get unreserved tickets up to three days in advance from any counter and any station to any station in a defined cluster. Computerized UTS is available at 4,468 locations with approximately 8,080 counters provided till end of November 2010. Automatic ticket vending machines have been installed at 375 locations. 11.64 The freight operations information system (FOIS) gives an account of all demands, number of loads/rakes/trains and their pipeline, freight locos,
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Economic Survey 2010-11 provided with data loggers. Automatic block signalling to improve line capacity has been provided on 77 RKM.
stock at aggregate level, etc. FOIS phase I (rake management system--RMS) module, implemented at 243 locations, covers all major yards/ lobbies and control offices in divisions and zones. FOIS phase II (terminal management system TMS) has been commissioned at 678 locations. 11.65 RailTel was set up for creating optical fibre cable (OFC)-based communication infrastructure for modernizing the communications system for train control, operation, and safety and to generate revenue through commercial exploitation of surplus capacity. RailTel has set up an OFC network of 39,000 route km (RKM) of which 27,982 is of high bandwidth capacity. Till date 234 important stations and about 3,575 other stations have been connected to the OFC network. RailTel has also set up a countrywide Next Generation Network and it has been put to use to carry railway voice traffic.
Investment in capacity
11.68 During the Eleventh Five Year Plan period, electrification of 3,500 RKM was planned with an outlay of ` 3,000 crore. In the Mid-Term review of the Eleventh Plan, a revised target of 4,500 RKM has been approved. In all 2,416 RKM has been electrified in the first three years of the Eleventh Plan and 1,000 RKM and 1,084 RKM targeted for electrification during 2010-11 and 2011-12 respectively. During AprilNovember 2010, 216 RKM has been electrified. An additional requirement of ` 1,000 crore was projected in the Mid-Term Review while increasing the target from 3,500 to 4,500 RKM.
Rail safety
11.66 Safety is the prime concern of Indian Railways and all possible steps are undertaken on a continuing basis to prevent accidents. As a result, the number of consequential train accidents including cases of trespassing at unmanned level crossings came down from 415 in 2001-02 to 165 in 2009-10. During 2010-11 (April to November) also, a similar declining trend has been observed as the number of consequential train accidents including cases of trespassing at unmanned level crossings came down from 106 to 93 in comparison to the corresponding period of the preceding year. Accidents per million train kilometres, an important index of rail safety, also came down from 0.55 in 2001-02 to 0.17 in 2009-10. This is expected to fall further during 2010-11.
Infrastructure improvement
11.69 To optimize the operational expenditure by obtaining electricity at economical tariffs, Indian Railways has planned to set up its own captive thermal power plants. To avail of electric power supply at economical rates, Railways, in partnership with the National Thermal Power Corporation (NTPC), is setting up a 1000 MW Thermal Power Plant at Nabi Nagar. The power supply from this plant is likely to be available during 2012. Railways is planning to set up a coal-based thermal power plant at Adra in Purulia district of West Bengal. An MoU has been signed between the NTPC and Railways to set up the proposed plant by a JV between the NTPC and Railways. 11.70 A greenfield electric loco manufacturing unit is being set up at Madhepura, Bihar, to manufacture 12,000 hp locomotives on the basis of a long-term procurement-cum-maintenance contract through PPP on build, own, and operate (BOO) basis, by selecting a JV partner through international competitive bidding (ICB). The cost of the project is ` 1,293 crore and equity contribution of Indian Railways and its JV partner will be in the ratio of 26:74. The Cabinet has approved setting up of a greenfield rail coach factory at Kanchrapara, West Bengal to manufacture and supply 500 railcars per annum over a period of 10 years.
Initiatives taken during April-November 2010 to modernize and improve signalling system
11.67 In order to increase efficiency and enhance safety in train operations, electrical/electronic interlocking along with multi-aspect colour light signalling system replaced the outdated mechanical/ multi cabin system at 227 stations. To improve reliability and visibility of signals, outdated filamenttype signals have been replaced with long life, highly durable light emitting diode (LED) signals at 506 stations. A centralized online monitoring/diagnostic system with the provision of data loggers has been introduced in Indian Railways for predictive maintenance and intensive supervision of the signalling system and 337 stations have been
Dedicated Freight Corridor project (DFC)

11.71 The DFC project envisaging a Western DFC (1534 km) from Mumbai to Rewari/TKD to cater largely to the container transport requirement and
Energy, Infrastructure and Communications an Eastern DFC (1839 km) from Ludhiana to Dankuni largely to serve coal and steel traffic is being implemented by the Dedicated Freight Corridor Corporation of India Ltd. (DFCCIL). The base project cost is estimated at about ` 50,761 crore (excluding escalation, contingencies, taxes/duties, and interest during construction). The project is being funded through a debt to equity ratio of 2:1 with major debt expected from bilateral/multilateral funding agencies like the Japan International Cooperative Agency and World Bank. Along the Western DFC alignment, the Delhi-Mumbai industrial corridor is also coming up. Considering the need for DFCs on other important routes, a preliminary engineering cum traffic survey (PETS) is being undertaken on the following routes--north-south (Delhi to Chennai), east-west (Kolkata to Mumbai), east-south (Kharagpur to Vijayawada), and south (Goa to Chennai)
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NHDP as in November 2010 is shown in Table 11.8. 11.73 Steps taken to expedite the progress of the NHDP include regular monitoring of contracts and progress reviews, appointment of senior officials by State Governments as nodal officers for resolving problems associated with implementation of the NHDP, setting up of a Committee of Secretaries under the Cabinet Secretary to address interministerial and Centre-State issues such as land acquisition, utility shifting, environment approvals and clearances of railway over-bridges (ROBs), simplification of the procedure of issue of land acquisition (LA) notifications, and posting of a Railways officer to the (NHAI) to coordinate with the Ministry of Railways in expediting the construction of ROBs. The NHAI has also set up Regional Offices headed by Chief General Managers for close monitoring of projects. So far 14 Regional Offices have been set up.
ROADS
National Highways Development Project (NHDP)
11.72 About 25 per cent of the total length of National Highways (NHs) is single lane / intermediate lane, about 52 per cent is two lane standard, and the balance 23 per cent is four lane standard or more. In 2010-11, the achievement under various phases of the NHDP up to November 2010 has been about 1,007 km and projects have been awarded for a total length of about 3,780 km. The status of the
Revised strategy for implementation of NHDP

11.74 The NHAI formulated Work Plans (Work Plans I and II) for awarding of about 12,000 km each during the years 2009-10 and 2010-11. These plans lay down a specific time frame for various activities and are being monitored very closely at various levels. Under Work Plan I so far 73 projects of 6,426 km length have been awarded and bids for a further nine are at various stages. Under Work Plan II, one
Table 11.8 : NHDP Projects as on November 2010

Sl. NHDP No. components Total Length km) Completed 4/6 Lane (km) Under implementation Length (km) 1 2 3 4 5 6 7 8 9 10 GQ NS-EW Port Connectivity Other NHs SARDP-NE NHDP Phase III NHDP Phase IV NHDP Phase V NHDP Phase VI NHDP Phase VII Total 5,846 7,142 380 1,383 388 12,109 20,000 6,500 1,000 700 55,448 5,809 5385 291 926 1922 407 14,740 37 1,332 83 437 112 5,207 486 1,893 41 9,628 No. of Contracts 10 106 6 7 2 73 4 16 2 226 425 6 20 276 4,980 19,514 4,200 1,000 659 31,080 Balance for Award of Civil Work (km)
Notes: GQGolden Quadrilateral connecting Delhi, Mumbai, Chennai, and Kolkata; NS-EWnorth-south and east-west corridor; SARDP-NESpecial Accelerated Road Development Programme in the North-eastern Region. Source : Ministry of Road Transport and Highways (MoRT&H).
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project of 170 km length was awarded and bids for five more projects are under various stages of process. 11.75 A committee under the Chairmanship of Shri B. K. Chaturvedi, Member Planning Commission, submitted a report containing the recommendations on the urgent issues for key changes in the implementation framework and modified financing plan of the NHDP. The Government considered and accepted the recommendations contained in the report of the Committee in November 2009 with the proviso that the financing plan from 2010-11onwards would be considered by the Empowered Group of Ministers (EGoM) for further action. 11.76 The EGoM has since given the in-principle approval for Work Plan II for 2010-11 for award of projects covering a length of about 12,000 km and also has approved additional budgetary support for the SARDP-NE and J&K projects. The EGoM has also approved the Work Plan for 2010-11 onwards with the stipulation that of the total NH length to be developed, broadly 60 per cent would be taken up on build, operate, and transfer (BOT) (Toll) basis, 25 per cent on BOT (Annuity) basis, and the remaining 15 per cent on engineering procurement contract (EPC) basis. 11.77 The NHAI is setting up 192 special land acquisition units (SLAUs) in various States for expediting the LA process, which is identified as a major bottleneck in the implementation of the projects, and 122 such units have already been set up. Besides, Chief Ministers have been requested to set up High Level Coordination Committees under Chief Secretaries to sort out issues involving coordination between departments. Most States have constituted these High Level Coordination Committees. 11.78 To expedite the progress of the NHDP, the MoRT&H has taken up implementation of about 4700 km under NHDP IV through State Public Works Departments (PWDs)/Corporations. It consists of implementation of about 1800 km under NHDP IVA (approved by the Government in July 2008) and about 2900 km under NHDPIVB (yet to be approved by the Government). Of the 1800 km under NHDPIVA taken up through State PWDs / Corporation, one project of 108 km has been awarded up to November 2010 and another of 670 km is at an advanced stage of award. Advance action has also been taken for project preparation work for about 2900 km under NHDP IVB.
Financing of the NHDP

11.79 A part of the fuel cess imposed on petrol and diesel is allocated to the NHAI to fund the implementation of the NHDP. The NHAI, whenever required, leverages the said cess flow to borrow additional funds from the debt market. Till date such borrowings have been limited to funds raised through 54 EC (capital gains exemption) bonds and the short-term overdraft facility. 11.80 The Government of India has also taken loans for financing various projects under the NHDP from the World Bank (US$ 1965 million), Asian Development Bank(ADB) (US$ 1605 million), and Japan Bank for International Cooperation (32,060 million yen) which are passed on to the NHAI partly in the form of grants and partly as loan. The NHAI had also availed a direct loan of US $ 149.78 million from the ADB for the Surat Manor Expressway Project (Table 11.9) Table 11.9 : Financial Structure of NHAI
` (` crore)
Year Cess Fund External Borrow- Budge Assistance ings 54-EC tary Bonds Support Grant 2005-06 2006-07 2007-08 2008-09 2009-10 3269.70 2350.00 6407.45 1582.50 6541.06 1776.00 6972.47 1515.00 7404.70 272.00 Loan 600.00 1289.00 395.50 1500.00 444.00 305.18 378.80 1630.74 68.00 1153.63 802.00 570.67 559.00 159.00 200.00
Source: Department of Road Transport & Highways.
SARDP-NE
11.81 The SARDP-NE aims at improving road connectivity to State capitals, district headquarters, and remote places of the north-east region. It envisages two / four laning of about 4798 km of NHs and two laning / improvement of about 5343 km of State roads. This will ensure connectivity of 88 district headquarters in the north-eastern States to two- lane NHs / two-lane State roads. The programme has been divided into Phases 'A' and 'B' and the Arunachal Pradesh Package of Roads & Highways. 11.82 With the approval of the Cabinet Committee on infrastructure (CCI) on 8 April 2010 for transfer/ addition of 1503 km roads to Phase 'A' of the SARDP-
Energy, Infrastructure and Communications NE, Phase 'A' now consists of improvement of 4099 km of roads consisting of 2041 km of NHs and 2058 km of State roads at an estimated cost of ` 21,769 crore. Out of the 4099 km, the Border Roads Organization (BRO) and State PWDs have been assigned the development of 3213 km. The remaining length of 886 km will be built by the NHAI, Ministry / Arunachal Pradesh PWD, and BRO after investment approval is received from the CCI. Out of the 3213 km, projects covering a length of 2219 km have been approved till December 2010 and work is in different stages of progress. Phase 'B' has now been modified to cover two laning of 1285 km of NHs. Further approval for preparation of DPRs for two laning / improvement of 2438 km of State roads has also been given. Till December 2010, a DPR was prepared for 450 km. 11.83 The Arunachal Package covering a 2319 km stretch of road was approved by the Government as part of the SARDP-NE on 9 January 2009. Of this, 776 km has been approved for execution on BOT (annuity) basis and the remaining for tendering on EPC basis. Two projects under BOT (annuity) for 58 km length have been awarded and the award for the remaining two covering 718 km is under process. For other stretches to be taken up on EPC basis, estimates have been sanctioned/ DPR is under process.
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standards in order to have better facility in long continuous stretches. 11.85 In general, the larger stretches costing more than ` 150 crore have been taken up with loan assistance from the World Bank under the National Highways Interconnectivity Improvement Programme (NHIIP). DPR consultants have been engaged for preparation of a DPR for about 3800 km. The smaller stretches costing less than ` 150 crore have been taken up through budgetary support. In this category, a 2200 km length (51 projects) with an estimated cost of ` 5800 crore has been taken up. Provision of these projects has been made in the Annual Plan 2010-11 and Demands for Grants 2010-11. DPRs are prepared by State PWDs and the estimates are directly submitted by them to the Ministry for sanction.
Development of Roads in Left Wing Extremism (LWE)-affected areas

11.86 The project covering 1126 km of NHs and 4351 km of State roads in LWE-affected areas is spread over 34 district in eight States, namely Andhra Pradesh, Bihar, Chhattisgarh, Jharkhand, Madhya Pradesh, Maharashtra, Orissa, and Uttar Pradesh. An allocation of ` 1000 crore has been made for the project from the gross budgetary support (GBS) under the Annual Plan for 2010-11. As against the total target till December 2010, projects for a total length of 4897 km at an estimated cost of ` 5998 crore have been sanctioned / processed till November 2010. Of these, projects for a length of 3012 km at an estimated cost of ` 3537 crore have been awarded till November 2010 and an expenditure of ` 256 crore incurred.
Initiatives for development of the entire NH network to minimum acceptable two-lane standard
11.84 Keeping in view the targets stipulated in the Eleventh Plan for accelerated efforts to bring the NH network up to a minimum two-lane standard within the next 10 years (i.e. by the end of the Twelfth Plan) and also for removing existing deficiencies, the Ministry has proposed a World Bank loan as well as budgetary allocations to reach this goal by December 2014. DPR consultants have been engaged for preparation of a DPR for about 3800 km proposed to be developed under World Bank Assistance. The MoRT&H has also initiated action for improvement of the remaining 2500 km of single / intermediate lane NHs through budgetary resources. In order to make a visible impact, the work would be taken up for upgradation on corridor concept. Therefore, corridors would include strengthening (in adjoining reaches) in addition to widening to two lane/ two lane with paved shoulder
Construction of rural roads under the Pradhan Mantri Gram Sadak Yojna (PMGSY)
11.87 The PMGSY was launched to provide single all-weather connectivity to eligible unconnected habitations having population of 500 persons and above in plain areas and 250 persons and above in hill States, the tribal (Schedule-V) areas, desert (as identified in the Desert Development Programme) areas, and LWE-affected districts as identified by the Ministry of Home Affairs. 11.88 Under the programme, up to November 2010 about 4.19 lakh km roads to benefit 1,07,974
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Box 11.2 : Auction for an efficient, cost effective and transparent system of award of PPP projects for National Highways Development
Highways are a critically important infrastructure for an emerging nation. And the design of appropriate contracts is the critical instrument for meeting the challenge of highways. What are these challenges? To put it in one sentence, the objective or the challenge is to maximize the difference between: (a) the additional welfare that our citizens get from having more and better roads and, (b) the present value of the cost of building (henceforth, building should be taken to mean building or renovating) those roads. The broad principles above translate into these following general rules. (1) We have to have a cut off rule to decide which projects are worthwhile and which not. (2) Between two identical roads if one can be done at a lower cost, we should choose the one with the lower cost, subject to that being viable in the sense of (1), above. (3) All costs do not take the form of brick and mortar. A build up of fiscal deficit is also a form of cost. This may be difficult to reduce to the equivalent of brick and mortar cost but must not be omitted for that reason. Some of the problems can be overcome if projects are awarded on the basis of a transparent and hands-off auction system. The heart of an efficient, cost effective and transparent system of PPP partnership whereby the Government gives out the task of developing new highways to the private sector is the system of auction. Auctions work best when the product is being sold lock, stock and barrel to a bidder. Hence, systems such as BOT (toll) and annuitized BOT (toll) are better suited to being given out through competitive auction than the BOT (annuity). In the case of BOT (toll) and annuitized BOT (toll) the developer basically gets to own the road for the next 20 years. Hence, this comes close to a lock, stock and barrel sale. Auctions are, however, highly specialized objects and their detailed good design require specialist input. The details of the auction should therefore be worked out with inputs from specialists. No attempt should be made to apportion in advance different groups of bidders to different projects. All private bidders willing to bid, subject to their meeting the qualification requirement, should have the right to bid. The current practice in the case of BOT (toll), is to allow for a viability gap funding (VGF) of up to 40% of the project cost. However, it has been seen that some developers make so much profit at the start of the project because of the 40% VGF that they do not, after that, take adequate interest in maintaining the highways. And, knowing this, they will not even have the incentive to build the road properly in the first place. To make good-quality road building incentive compatible with the developer's interest and at the same time serve the national interest it is recommended that we allow for up to 10% VGF upfront. Then for any VGF over and above 10% and limited to a maximum of 40%, the balance should be converted into an annuity to be paid in equal installments each year for the next 20 years. Unlike under the BOT (annuity) system, the toll will still be managed and collected by the private developer who wins the bid and therefore the incentives are aligned. Given that the developer would continue to receive "annuitized" payments from the Government it will be in the interest of the developer to maintain the road as he is obligated to do to the Government. Further, since the developer will be collecting toll, he or she will have a direct interest in maintaining the road. And since he himself will be maintaining the road, by the argument of backward induction it follows that the developer will have an interest in building good-quality roads, for which the maintenance cost is not excessive. Source: Report on Methodology for PPP (Public Private Partnership) project for National Highways Development under the chairmanship of Dr. Kaushik Basu, Chief Economic Adviser.
habitations have been cleared with an estimated cost of ` 1,18,298 crore. A sum of ` 75,404 crore has been released to the States/UTs and about ` 74,345 crore has been spent. So far, 2,98,809.72 km road length has been completed and new connectivity has been provided to over 73,651 habitations. Work on a road length of about 1,20,181 km is in full swing. 11.89 Rural roads has been identified as one of the six components of Bharat Nirman and has the goal to provide all-weather road connectivity to all villages with a population of 1000 (500 in the case
of hilly or tribal areas). In effect, Bharat Nirman proposes to provide new connectivity to a total of 54,648 habitations. This would involve construction of 1,46,184 km of rural roads. In addition to new connectivity, Bharat Nirman envisages upgradation/ renewal of 1,94,130 km of existing rural roads. Under the rural roads component of Bharat Nirman, 38,144 habitations have been provided all-weather road connectivity up to November 2010 and projects for connecting 15,426 habitations are at different stages. During 2010-11, up to November 2010 over 24,411 km all-weather road has been completed under the
Energy, Infrastructure and Communications programme. New connectivity has been provided to nearly 3271 habitations with an expenditure of ` 8705 crore.
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CIVIL AVIATION
11. 90 The Civil Aviation Sector witnessed a strong recovery during 2010 from the adverse impact of the recent global financial crisis. The scheduled domestic passenger traffic at 51.53 million clocked a growth rate of 19 per cent during January-December 2010 as compared to 43.3 million during the corresponding period in 2009. Domestic cargo transported by air increased from 3.4 million tonnes in 2009 to 4.7 million tonnes in 2010 registering a growth rate of 30 per cent. At present 12 scheduled airlines are operational (10 passenger and 2 cargo). The total number of aircraft in their fleet has risen by one to 419 at the end of December 2010. The non-scheduled operators as on December 2010 have 360 air-craft in their fleet. 11.91 The civil aviation sector in India has resumed a higher trajectory of growth after emerging from adverse impact of global financial crisis. India's air traffic has grown by about 18 per cent per year since 2004. The potential for higher levels of growth in the future is also very high. Industry forecasts suggest that India will be the fastest growing civil aviation market in the world by 2020 with about 420 million passengers being handled by the Indian airport system as against 140 million in 2010. Such growth prospects pose a number of challenges on many fronts. 11.92 Keeping in view the pace of developments in this area and to draw upon expertise available outside the system to address issues that are predominantly economic in content, the Civil Aviation Economic Advisory Council (CAEAC) has been set up under the Chairmanship of the Secretary, Civil Aviation, with experts drawn from different sub-segments of the industry and from other related fields. The CAEAC met once in December 2010 and once in January 2011 and is scheduled to meet periodically at regular intervals and advise the Ministry in charting out a framework of analysis for addressing issues facing the sector that are predominantly economic in content. 11.93 In pursuance of the decision taken in the first meeting of the CAEAC, a Working Group on Regulatory Framework to protect consumer interests including disclosure of passenger tariffs and conditions of service by domestic airlines has been set up on 20 December 2010 with the mandate to recommend measures to enhance transparency and
disclosure and to suggest improvements in the system of monitoring. Another Working Group on Air Cargo/Express Service Industry has been set up on 17 January 2011 to look into issues of long-term significance for the industry and advise the Ministry on policy initiatives required in this regard.
Protection of interest of Air Travellers

11.94 In order to ensure appropriate protection for air travellers in the event of flight disruptions, i.e. cancellations and delays without due notice to passengers, airlines have been directed to provide compensation in addition to the refunding of ticket prices for the inconvenience caused. Additionally, airlines have been mandated to compensate passengers with confirmed bookings who are denied boarding against their will in addition to refund of air ticket in accordance with the Civil Aviation Requirements dated 6 August 2010. The Tariff Monitoring Unit set up in the DGCA continues to monitor the passenger fares offered by scheduled domestic Airlines to ensure that the competition in the market is fair.
Air India Ltd

11.95 With effect from November 2010, the name of the Company has been changed from National Aviation Company of India Ltd to Air India Ltd. In view of its critical financial position, it was decided that Air India would come up with a revised business plan along with a financial restructuring plan, after consultation with professional financial/management consultants, indicating the operational measures as also financial restructuring measures required to improve the financials of the company. Air India has reported that a number of measures were taken for cost reduction and improved revenue generation as a result of which it is confident of turning around its performance during the next 18 to 24 months subject to other factors remaining favourable. With a view to addressing the debt-equity ratio, ` 800 crore was infused as equity into the company in 2009-10 and ` 1200 crore in 2010-11. This would give the company flexibility in its financial restructuring.
Airport development
11.96 As part of the restructuring and modernization of metro airports, Delhi and Mumbai airports are being restructured and modernized PPPs. Phase-1 of the development work of the Indira Gandhi International Airport (IGIA), Delhi, has already been completed with the operationalization of Termial-3 at an
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Economic Survey 2010-11 constituted. The process of corporatization of ATC services has already been set in motion. This is one of the major developments in the area of infrastructure for the aviation sector in the country.
estimated cost of ` 12,857 crore. Development work at Chhatrapati Shivaji International Airport (CSIA), Mumbai, will be completed by 31 December 2012 with an estimated cost of ` 9802 crore. Similarly, the Airport Authority of India (AAI) has undertaken development work at Kolkata and Chennai airports with an estimated cost of ` 1942 crore and ` 1808 crore respectively, subsequently revised to ` 2325 crore and ` 2015 crore respectively. The revision in cost is under consideration. As per the revised schedule, the Kolkata project is to be completed by October 2011 and the Chennai project by May 2011 (domestic terminal ) and July 2011 (international terminal).
Outstanding Issues
11.100 Indian carriers operate in an exceptionally high-cost environment. The single largest element contributing to airline costs is aviation turbine fuel (ATF) which accounts for 40 per cent of the operating cost of Indian carriers, as against a figure of only 20 per cent for international carriers. ATF in India is priced, on an average, almost 60 per cent higher than internationally. The widening differential in ATF prices and its huge negative impact on airline balance sheets are eroding its competitiveness. In the backdrop of higher oil-crude prices, there is severe risk of dampening of passenger market growth by quickly making air travel out of reach for a significant portion of the market, which was fuelling its growth. The losses being registered by Indian carriers may result in reduced connectivity thereby affecting growth in this sector.
Modernization of non-metro airports

11.97 The Committee on Infrastructure(COI) in its 12th meeting held on 8 June 2006 had approved the modernization of 35 non-metro airports.Of these 35, the cost of development work on 30 is less than ` 150 crore. The development work on 11 such projects has already been completed and on 19 is either at planning stage or in progress. The cost of development work on the remaining five projects, is more than ` 150 crore. The work on one such project, namely Thiruvananthapuram, has been completed and work is in progress on the remaining four.
TELECOMMUNICATIONS
Growth
11.101 The opening of the sector has not only led to rapid growth but also helped a great deal towards maximization of consumer benefits as tariff have been falling across the board. From only 76.54 million telephone subscribers in 2004, the number increased to 764.77 million at the end of November 2010. Wireless telephone connections have contributed to this growth as their number rose from 35.62 million in March 2004 to 729.58 million at the end of November 2010. The wire-line has shown a decline from 40.92 million in 2004 to 35.19 million in November 2010(Table 11.10).
GAGAN Project:
11.98 Implementation of the GPS-aided GEOaugmented Navigation (GAGAN) project over Indian Airspace for seamless navigation of civil aircraft is in progress.. The total cost of the project is ` 774 crore, out of which ` 148 crore has been spent on the GAGAN-Technology Demonstration System (TDS) Phase with the AAI's contributing ` 108 crore and the Indian Space Research Organization (ISRO) ` 40 crore. An amount of ` 626 crore has been earmarked for GAGAN-Final Operational Phase (FOP) out of which the AAI is required to contribute ` 496 crore and ISRO the balance.
Corporatization of Air Traffic Control (ATC)services

11.99 The Government had constituted a committee headed by Shri Naresh Chandra, former Cabinet Secretary, to suggest a road map for the civil aviation sector in India. The committee had recommended that keeping in view the efficiency required in many functional areas and international trends, ATC services should be hived off from the current jurisdiction of the AAI and a separate corporate entity
Table 11. 10 : Growth of telephone connections (in millions)

March 2008 Wireline Wireless Gross Total Annual Growth (%) 39.41 261.08 300.49 46 March 2009 37.96 391.76 429.73 43 March 2010 36.96 Nov. 2010 35.19
584.32 729.58 621.28 764.77 45 19
Source: Department of Telecommunications.
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Teledensity
11.102 With increasing private-sector participation, the share of the private sector in total telephone connections has increased to 84.5 per cent in November 2010 from a meager 5 per cent in 1999. Teledensity, an important indicator or telecom penetration, rose from 7.02 per cent in March 2004 to 64.34 per cent in November 2010. Thus there has been continuous improvement in the overall teledensity of the country. Rural teledensity which was above 1.57 per cent in March 2004 has increased to 30.18 per cent at the end of November 2010. Urban teledensity has increased from 20.74 per cent in March 2004 to 143.95 per cent at the end of November 2010. 11.103 With the penetration of mobile services and flourishing of private service providers, rural telephone connections have gone up from 12.3 million in March 2004 to 250.94 million in November 2010. The share of rural telephones in total telephones has steadily increased from around 16 per cent in 2004 to 32.81 per cent as on 30 November 2010. During 2009-10, the growth rate of rural telephones was 62.6 per cent as against 37.32 per cent for urban telephones. The private sector has contributed crucially to the growth of rural telephones by providing about 84.5 per cent of telephones as in November 2010.
has been successfully conducted. This will encourage further expansion of wireless services 11.106 Mobile number portability (MNP): MNP allows any subscriber to change his service provider without changing his mobile phone number. The much-awaited MNP was launched on 25 November 2010 in Haryana and is now available to more than 700 million subscribers across the country from 20January, 2011. 11.107 Manufacturing: Indian telecom industry manufactures a complete range of wireline telecom equipment using state-of-the-art technology. Considering the growth of wireless, there are excellent opportunities for domestic and foreign investors in manufacturing sector. Presently most of the wireless core equipment is being imported and there is great potential to manufacture these items in the country. The last five years saw many renowned telecom companies setting up their manufacturing bases in India. The production of telecom equipments in value terms increased from ` 48,800 crore during 2008-09 to ` 51,000 crore during 2009-10. The worth of telecom equipment including customer premises equipment (CPE) produced during 2010-11 is expected to be about ` 53,500 crore . There are favourable factors such as policy moves taken by the Government, incentives offered, large talent pool in R&D, and low labour cost which can provide an impetus to the industry. Exports of telecom equipment have also increased from ` 11,000 crore in 2008-09 to ` 13,500 crore during 2009-10 and are expected to increase to ` 14,000 crore in 2010-11.
Internet / Broadband
11.104 With supportive policies, broadband subscribers grew from 8.77 million as in March 2010 to about 10.71 million up to November 2010. A target of 20 million by 2010 has been set. in broadband policy. The auction of BWA spectrum has been successfully conducted. Newer Access technologies like Broad Band Wireless Access (BWA) can significantly transform the character of internet/broadband scenario in India. This will encourage further expansion of wireless service with a vision of providing 'Broadband for all'.
Activities under Universal Service Obligation Fund (USOF)

11.108 The USOF continues to be used to subsidize the development of the telecom sector in rural areas. Support is provided from the USOF for operation and maintenance of village public telephones (VPT) in revenue villages identified as per Census 2001. There are still about 62,443 uncovered villages which would also be provided with VPT facility with subsidy support from the USOF. Agreements were signed with Bharati Sanchar Nigam Limited (BSNL) whereby 40,101 villages have been covered under VPTs. As on 31December 2010, 61,985 VPTs have been provided by BSNL. In order to provide broadband connectivity to rural areas under the purview of the USOF, out of a total of 8,88,832 wireline broadband connections, 2,32,852 have been provided till 30 November 2010.
New horizons for further growth

11.105 Third-generation (3G ) telecom services: The explosive growth of the telecom industry in India is being followed by the urge to move towards better technology and the next level of service delivery. While the last five years have been transformational for Indian telecom industry, the next few years look even more exciting. One of the key new frontiers is 3G technology. The auction of 3G/WBA spectrum
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Economic Survey 2010-11 associated with mail transmission to and from this region.
POST
11.109 India Post has the largest postal network in the world with 1,54,979 post offices across the length and breadth of the country. As on 31 March 2010, out of this total, 1, 39,182 were in rural areas and 15,797 in urban areas. On an average each post office serves 7176 people and covers an area of approximately 21.21 sq. km. India Post has so far introduced 1082 franchisee outlets to cater to the demand for postal services where it is not possible to open departmental post offices.
Computerization and Networking of Post Offices

11.113 Under the Plan project of computerization and networking of post offices, the Department of Posts has supplied computer hardware, peripherals, and power back-up equipment to 14,324 post offices till date in the Eleventh Plan period Upgraded computer hardware, namely servers, desktops and peripherals, and power back-up equipment like UPSs and gensets have been supplied to 1939 post offices computerized during earlier five year plans. Wide Area Network (WAN) connects1308 sites/ locations including all head post offices, administrative offices, major speed post centres and accounts offices. Broadband facilities have been provided to 10,530 offices. The IT Modernization Project Phase II of India Post under the Eleventh Plan envisages computerization of all the noncomputerized post offices in the country (Departmental single-handed post offices) and all extra-departmental post offices phased over the financial years 2010-11 and 2011-12.
Project Arrow
11.110 The Department has launched Project Arrow, to lay the foundation for a comprehensive, long-term transformation of India Post. Project Arrow aims at comprehensive improvement of the core post office operations as well as the ambience in which postal transactions are undertaken. The response of the general public and the staff of the Department to the initiative have been overwhelmingly positive and Project Arrow offices have shown significant increase in revenue earnings. The initiative 'Project Arrow--Transforming India Post' has also won the Prime Minister's award for Excellence in Public Administration for the year 2008-09. So far 1530 post offices have been covered under this project.
Banking and insurance services

11.114 India Post is pursuing the objective of financial inclusion through its 1,39,182 post offices in rural areas and 15,797 post offices in urban areas. The total number of post office savings bank accounts has increased from 14.23 crore in 200304 to 24.10 crore in 2009-10 The outstanding balance in them in 2009-10 was ` 5,83,789 crore. India Post has already computerized its savings bank operations in 11,000 post offices. The post offices also provide insurance services to the Government and semi-Government employees and the rural populace under the banner of Postal Life Insurance (PLI) and Rural Postal Life Insurance (RPLI). The number of RPLIs has increased from 26.66 lakh in 2003-04 to 70 lakh in 2008-09 and more than 99 lakh in 2009-10. There were more than 44 lakh PLI policies as on 31March 2010.
Mail Operations
11.111 The Mail Network Optimization Project has been launched to optimize the existing mail network of Department of Posts and streamline core mail operations. It also seeks to bring in greater standardization and improvement in the operational processes relating to mail processing, transmission, and delivery. The Department has undertaken a project to set up Automated Mail Processing Centres (AMPCs) in Delhi, Mumbai, Kolkata, Chennai, Bangalore, and Hyderabad with a view to automating mail sorting. This automated sorting of mail, which would help the Department increase productivity at post offices in these cities. 11.112 The Department of Posts has inducted a dedicated cargo aircraft for carriage of mail, parcels, and logistics in the north-east region in order to bring in consistency in mail transmission. The India Post aircraft operates on the Kolkata-Guwahati-ImphalAgartala-Kolkata route on a regular basis. This initiative has provided a vital communication link for the north-east region with the rest of the country and helped the Department resolve the problems
Leveraging of the postal network

11.115 The Department of Posts has been given the responsibility of disbursing wages to Mahatma Gandhi National Employment Guarantee Scheme (MGNREGS) beneficiaries through post office savings bank accounts. Starting with Andhra Pradesh postal circle in 2006, the payment of wages
Energy, Infrastructure and Communications under the MGNREGS is currently operational in 19 postal circles comprising 26 States and 5 UTs. The scheme is operational through 96,895 post offices. Nearly 4.67 crore NREGS accounts have been opened up to October 2010 and the amount disbursed in this financial year (April-October 2010) amounts to more than ` 7113 crore. 11 .116 The Department of Posts in collaboration with the National Bank for Agriculture and rural Development (NABARD) provides micro-credit facility to self-help groups (SHGs) through identified post offices on agency basis. The corpus fund for implementation of this project is given by NABARD. The pilot is in operation in five districts involving seven divisions of Tamil Nadu circle. So for, 1207 SHGs have been provided more than ` 3.29 crore in loan. 11.117 The Department has designated 4707 Central Assistant Public Information Officers (CAPIOs) at least one in each tehsil across the country. Officers in charge of the computerized customer care centres have been identified to act as CAPIOs for the Department and to receive Right to Information (RTI) requests and appeals on behalf of other Central public authorities who have agreed to avail of this facility in post offices in pursuance of Section 5 (2) and 19 of the RTI Act 2005. The designated CAPIO at a post office receives RTI requests and appeals for forwarding to the Central Public Information Officer or senior officer specified under sub-section (1) of section 19 of the RTI Act 2005 or the Central Information Commission (CIC), as the case may be.
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will rise to constitute 38 per cent of total population by 2026. 11.120 Urbanization has increased the demand for urban services. In this context, improving the urban infrastructure covering basic civic services like drinking water supply, sewerage, solid waste management, and urban transport assumes great significance. Municipal institutions responsible for providing these civic services are facing acute shortage of capacity and resources. 11.121 The Eleventh Five Year Plan had estimated the total fund requirement for implementation of the target for urban water supply, sewerage and sanitation , drainage, and solid waste management to be ` 129,237 crore and that for urban transport to be ` 132,590 crore. According to estimates based on the City Development Plans(CDPs) prepared by the States under the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) launched in 2005-06, the requirements for both urban infrastructure services and urban transport were estimated to be as high as ` 8,00,000 crore.
JNNURM
11.122 The JNNURM was launched in 2005-06 to encourage cities to initiate steps to bring about improvement in existing civic service levels in a sustainable manner in Mission mode over a sevenyear Mission period. The components under the Sub-Mission Urban Infrastructure and Governance (UIG) include urban renewal, water supply (including desalination plants), sanitation and sewerage, solid waste management, urban transport, development of heritage areas, and preservation of water bodies. The allocation for the JNNURM (UIG) was increased from ` 25,500 crore to ` 31,500 crore in February 2009. On 3 December 2010, the Mission has completed five years. 11.123 All the selected 65 cities under the UIG component of the JNNURM have prepared comprehensive CDPs, charting out their long-term vision and goals in urban governance and development. These plans also include investment plans, with a focus on provision of city-wide urban infrastructure services such as water supply, sanitation, drainage, and provision of basic services to the urban poor. 11.124 With the launching of the JNNURM, the reform of urban local bodies (ULBs) has begun.
International Operations of India Post

11.118 India Post has also launched a premium express service called WorldNet Express in a unique collaboration with Duetsche Post, the national postal carrier of Germany. This service enables customers to despatch express parcels to over 200 countries and has advanced features like tracking of parcels through internet, telephone, and SMS. This service is also supported by a 24-hour telephone help line.
URBAN INFRASTRUCTURE
11.119 In 2001, just 27.8 per cent of India's total population lived in urban areas. Yet, in absolute terms, with about 285 million persons living in urban areas, India has the second largest urban population in the world. It is expected that the urban population
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Memorandums of Agreement (MoAs) in respect of the reforms agenda to be undertaken by States and cities has been negotiated and signed with 65 Mission cities and six ULBs falling under urban agglomeration of cities. There is now better appreciation at State level of the importance of developing and sustaining infrastructure through appropriate user charges. Further, States and ULBs have started meeting timelines committed for implementation of the reforms under the MoAs. 11.125 The JNNURM is a reforms-driven programme. As against commitments to achieve reforms by the fifth year in accordance with their respective MoAs, 29 out of 29 States/UTs have repealed the Urban Land Ceilings Act, 21 out of 29 have constituted District Planning Committees, 15 out of 15 have rationalized stamp duties to 5 per cent, and 17 out of 26 States have transferred / integrated water supply and sanitation functions. Also 42 out of 62 ULBs have shifted to double-entrybased accounting system. 11.126 A Community Participation Fund (CPF) was established on 4 June 2007 with an initial corpus of ` 100 crore with the provision of an additional ` 90 crore for the remaining years of the Mission period. So far 45 proposals have been approved under the CPF. 11.127 For 2010-11 ` 6556.12 crore has been provided for the UIG. A total number of 526 projects, as on 31December 2010, have been sanctioned at an approved cost totalling ` 60,215.44 crore for 62 cities out of the listed 65 Mission cities across 31 States/UTs. Additional Central Assistance (ACA) admissible for these projects is ` 27,878.44 crore. As on 31December 2010, ` 12,978.93 crore has been released as ACA to various States and UTs for the projects, financing of buses, CPF and eGovernance projects approved under the JNNURM and also for reimbursement cost of CDPs and DPRs. 11.128 While sanctioning projects under the JNNURM, highest priority has been accorded to sectors that directly benefit the common man and the urban poor, namely water supply, sanitation, and storm water drainage. Cumulatively, more than 95 per cent of the seven-year ACA allocation of ` 31,500 crore under the UIG Sub-Mission has already been committed. During 2010-11, up to 31 December 2010, 10 projects have been approved with project cost of ` 2706.99 crore. The ACA admissible for these projects is ` 996.52 crore of which ` 557.46 crore has been released.
E-Governance
11.129 A Mission mode project on e-Governance in municipalities was conceptualized as part of the Eleventh Five Year Plan for making urban Governance more efficient and effective. It was decided subsequently that initially the e-Governance project would be a part of the JNNURM for 35 cities with population of over 10 lakh and a new Centrally sponsored scheme (CSS) for other cities and towns would be taken up after watching the implementation under the JNNURM. Accordingly, the guidelines for the National Mission Mode Project (NMMP) on eGovernance in municipalities was prepared and circulated to the States/ULBs for submission of DPRs The DPRs with State-level solutions from Jharkhand and Uttar Pradesh have already been approved. This is in addition to seven DPRs already approved for Nagpur, Vijayawada, Cochin, PimpriChinchwad, Navi Mumbai, Ulhasnagar, and Chennai. The DPR for Jharkhand covers e-Governance in Dhanbad ULB and the Uttar Pradesh DPR covers e-Governance in Kanpur ULB.
Urban Infrastructure Development Scheme for Small and Medium Towns (UIDSSMT)
11.130 The UIDSSMT is a sub-component of the JNNURM for development of infrastructure facilities in all towns and cities other than the 65 Mission cities. For obtaining assistance under the UIDSSMT, States and ULBsneed to sign MoAs committing to implement reforms. From its inception in December 2005 till December 2010 as many as 764 projects across 641 towns and cities at a cost of ` 12,928.93 crore were sanctioned under the UIDSSMT, comprising inter alia 418 water supply projects, 96 sewerage projects, 65 storm water drainage projects, 56 solid waste management projects, and 108 road projects. So far, the committed ACA under the UIDSSMT for approved projects is ` 10,435.93 crore, against which ` 7110.29 crore has been released till 31 December 2010.
Other Urban Infrastructure Schemes and initiatives in Urban Governance

11.131 Under the pilot scheme for Urban Infrastructure Development in Satellite Towns around Seven Mega-Cities (UIDSST), i.e. Mumbai, Kolkata, Delhi, Chennai, Hyderabad, Bangalore, and Ahmedabad, a total of six projects worth ` 234.08 crore were sanctioned for Pilkhuwa, Vasai-
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Box 11.3 : Cities and Growth, Land Markets and Urban Development
Cities may hold the key to our future. India is entering what we term as "Three Great Transformations": (1) growth of cities; (2) jobs to meet rising aspirations of a young adult population; and (3) doubling household incomes. Some 200 million new entrants to the labour force will migrate from rural to urban areas, and lift India's economy-wide (including rural) productivity, growth and average incomes. Urbanisation is pulling people out of rural poverty. But the process is knife-edge: failure will lead to chaotic cities, unfulfilled aspirations, and slower growth. ...As a Demographic Bulge Looms (millions in age-group)
Urban population (per cent total)

55 50 45 40 35 30 25 20 15
1960 1963 1969 1975 1981 1984 1990 1993 1999 2002 2005 2008
1970
India Indonesia China Nigeria Thailand
Per cent population
Year
Patterns : India's urban population is underestimated, partly because of definitional reasons, and will approach some 45% of the population (495 million), compared to 30% (295 million) in 2009. This is equivalent to building 1 additional Greater Mumbai or Greater Delhi every year. Growth is taking place in peripheries of major agglomerations: Greater Mumbai, Delhi, Kolkata, Chennai, Bangalore, Hyderabad, Ahmedabad. The number of 1 million plus cities grew from 9 in 1971 to 35 in 2001, and may rise shortly to 47 such cities (including our second-tier faster growing cities, such as Kanpur, Surat, Jaipur, and Lucknow). Below them are still smaller but bourgeoning towns. Satellite imagery of night-time lights shows the growing urban "hotspots". Urbanisation Lags....
China falling
1.2 1.0
India rising
1.2 1.0
Population (millions)
0.8 0.6 0.4 0.2 0

1950 1970 1990 2010 2030 2050
Population (millions)
0.8 0.6 0.4 0.2 0

1950 1990 2010 2030 2050
Year
<15 15-64 64+ <15
Year
15-64 64+
Managing Land Markets : Land prices are climbing across India. Once conversion from agricultural to urban use is permitted---a difficult regulatory process---land prices can jump twenty-fold. The reason: land values reflect the capitalisation of future expected income stream in urban settings (than in farming). As land prices rise, they drive cost-push inflation. The answer does not lie in tightening land conversion regulations, but to
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act counter-intuitively to: (1) improve land conversion processes; (2) sell publicly acquired lands in auctions; and (3) lean with markets and improve the supply of accessible land through better transport. Land is abundant (urban land area is only some 2% of total arable land); it is accessible land that is scarce. Cities On the Brink : A recent rating on sanitation (19 indicators) by the Ministry of Urban Development reveals that 190 out of 423 municipalities in India are on the brink of environmental disaster (coded red)--many in the poorest states of UP and Bihar, but also Andhra Pradesh. Another 229 are judged in need of major improvement, many in the richest states. The sanitation standards in Gaya and Aligarh make up the median of India's 423 cities. Only 4 make it to safe levels, and none to the highest standard. Institutions : Institutional reforms are urgent. Absent reform, it can undermine public trust: from master planning, to regulatory improvements, basic local services (water, sanitation, roads, public transport, safety, low-cost housing), and greater independence and accountability of locally elected city managers, as intended under the 74th Constitutional Amendment Act for urban local bodies. While the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) launched in 2005 is funding infrastructure projects in 65 cities (requirements include an urban plan, project report, and an MOU which commits to a set of reforms, including implementation of the 74th Amendment, community involvement, municipal reforms, and earmarking funds and lands for the poor), the project remains limited. Local capacity is also severely limited. Financial management and procurement systems are weak and PPPs to fund investments limited. Financing Urban Investments : The scale of funding needs is enormous. A recent study estimated that some US$1.2 trillion would be required over two decades, and annually an average of about US$95 per capita, versus one-fifth that currently. An alternative estimate: some 7-8 percent of GDP annually, versus the 0.6 percent currently. Lessons from elsewhere, especially in East Asia, adapted to India's setting, could be useful. Possible elements: Urban Land Value Capture. Public land sales by transparent auctions are essential, instead of being captured by others. In China, while originally unregulated and non-transparent, a constitutional change in 1988 required all public land transactions (land use rights) to be auctioned under open, competitive bidding, similar to Singapore and Hong Kong, with proceeds flowing to the municipalities. Between 1990-2002, the speed and extent of such transactions is what permitted much of new urban landscape in China to emerge (from Guangdong to Shanghai). Mumbai auction of public lands (Bandra-Kurla) have raised large sums. Enforcement and Dispute Settlement: Improving Land Administration and Courts. Land administration needs to be improved. Specialized courts to handle contract disputes are needed to restrain opportunistic behavior by developers or local authorities. Public Redistributive Uses. Some part of land value has to be transparently provided to the community, especially low-cost public housing, which has long dominated successful East Asian urbanization; and improved connectivity in rural areas and communities, including rehabilitation and resettlement. Public Land, Densification, Land taxes, and user charges. Publicly owned land has to be fully listed, encroachments removed, and managed transparently---including regular sales to manage land markets. Similarly, eased floor-area-ratios can expand the supply of buildable space (density). Land taxes and user charges need to brought to economic levels. State governments to improve area planning and wider connectivity. Local municipalities should handle local needs. But larger urbanization strategy will need state government master plans for overlapping jurisdictions and area-wide planning, including new cities and transport corridors. Tamil Nadu, Andhra Pradesh and Gujarat are testing new ways. Increased Central government funding. JNNURM will need redesign, expansion and deepening, addressing much larger funding needs---for critical public needs, such as low-cost housing, urban transport, slum redevelopment, and water and sanitation. A programmatic transfer, rather than project-by-project sanctions, may be needed, benchmarked against front-loaded reforms and results. Sources: (1) Isher Judge Ahluwalia and others, 2011. Urbanisation and Economic Growth in India, mimeo. (2) McKinsey Global Institute, April, 2010. India's Urban Awakening: Building Inclusive Cities, Sustaining Economic Growth. (3) IDFC, 2009. India Infrastructure Report-Land A Critical Resource for Infrastructure (4) Dowall David, and Paavo Monkkonen, 2008. Urban Development and Land Markets in Chennai, India. International Real Estate Review, Vol. 11 No. 2, pp 142-165
Energy, Infrastructure and Communications Vihar, and Vikarabad during 2010-11. These projects will contribute towards amelioration of basic services in these towns. Approved in 2009, the scheme is perceived as co-terminus with the Eleventh Five Year Plan, i.e. operational till 2012. 11.132 The North Eastern Region Urban Development Programme (NERUDP) was launched in November 2009 with ADB assistance. The project aims to assist the States of Tripura, Mizoram, Sikkim, Meghalaya, and Nagaland to address challenges of urban development in their capital cities. During 2010-11, the States worked on preparing projects related to water supply and solid waste management.
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Metro Rail Projects

11.137 In order to give proper legal cover to metro projects, the Metro Railways Amendment Act 2009 was brought into effect in September 2009, providing an umbrella 'statutory' safety cover for metro rail work in all the metro cities of India. The Act was extended to the National Capital Region, Bangalore, Mumbai, and Chennai metropolitan areas with effect from 16October 2009. 11.138 The Government of India had approved the implementation of the Bangalore Metro Rail Project of 42.3 km length by Bangalore Metro Rail Corporation Ltd. (BMRCL). The project commenced on 20 January 2007 and is targeted for completion by 31March 2013.The Government of India had approved implementation of the east-west metro corridor of 14.67 km length in Kolkata by Kolkata Metro Rail Corporation Ltd (KMRCL). The project is targeted for completion by 31January 2015.The Government of India had also approved the implementation of the Chennai Metro Rail Project of 46.5 km length by Chennai Metro Rail Ltd. (CMRL). The project is targeted for completion by 31March 2015. 11.139 In addition, metro rail projects have been taken up on PPP basis in Mumbai for VersovaAndheri-Ghatkopar (11.07 km), Charkop to Mankhurd via Bandra (31.87 KM) and Hyderabad Metro (71.16 KM) with viability gap funding (VGF) support from the Government of India.
Urban transport
11.133 Urban transport is one of the key elements of urban infrastructure. As compared to private modes of transport, public transport is energy efficient and less polluting. The public transport system also helps improve urban-rural linkage and improves access of the rural/semi-urban population in the periphery to city centres for the purpose of labour supply without proliferation of slums within and around cities. 11.134 In this background, the major objective of urban transport initiatives is to provide efficient and affordable public transport. A National Urban Transport Policy (NUTP) was laid down in 2006, with the objectives of ensuring easily accessible, safe, affordable, quick, comfortable, reliable, and sustainable mobility for all. 11.135 In order to provide better transport, proposals for bus rapid transit system (BRTS) were approved for Ahmedabad, Bhopal, Indore, Jaipur, Pune, Rajkot, Surat, Vijayawada, and Vishakhapatnam cities under the JNNURM. During the current financial year, one more proposal for a BRTS in Kolkata has been approved under the JNNURM taking the number of cities supported for BRTS to 10, covering a total length of 452.20 km at a total estimated cost of ` 5203.79 crore. Admissible Central financial assistance out of this amount is about ` 2374.45 crore. 11.136 Purchase of 15,260 buses at a total cost of ` 4723.97 crore has been approved under the scheme, out of which ACA admissible is ` 2088.84 crore. Till December 2010, more than 10,000 modern intelligent transport system(ITS)-enabled, low floor and semi-low floor buses have been delivered to States/Cities.
FINANCING INFRASTRUCTURE
Debt financing
11.140 Net bank credit to infrastructure in 200910 defined as the difference between outstanding gross deployment of bank credit to infrastructure in March 2009 and March 2010, increased substantially in the current fiscal (Table 11.11). As compared to net bank credit increase of ` 64,322 crore during April-November 2009-10 there has been an increase of ` 1,02,301 crore during AprilNovember 2010, showing 59 per cent rise. 11.141 The total FDI inflows during April-November 2010 have been low compared to the inflows during the same period in the previous year. FDI inflows into the petroleum and natural gas and air transport
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Economic Survey 2010-11 11.143 With the objective of stimulating and mobilizing increased private-sector investments, either from domestic sources or foreign avenues, the Government has offered various incentives for the infrastructure sector for sustained economic growth. These include: allowing 100 per cent FDI(under the automatic route) in all infrastructure sectors including the roads, power, ports, and airport sectors; 74 per cent in telecom services and 100 per cent in telephone equipment; 49 per cent to100 per cent for various services in the aviation sector; extended tax holiday periods up to ten-year tax holidays (under section 80-IA of the Income Tax Act 1961) to enterprises engaged in the business of development, operation, and maintenance of infrastructure facilities; and emphasis on PPP as one of the preferred modes for project implementation. 11.144 The Government of India is actively encouraging PPPs through several initiatives. The appraisal mechanism for PPP projects has been streamlined to ensure speed, eliminate delays, adopt international best practices, and have uniformity in appraisal mechanism and guidelines. The appraisal mechanism notified includes setting up of the Public Private Partnership Appraisal Committee (PPPAC) responsible for the appraisal of PPP projects in the Central sector. The Committee has mandated detailed guidelines for submitting proposals and follows a predetermined time frame for according approval to proposals submitted in a time-bound manner. Standardized bidding and contractual
Table 11.11 : Increment Flow of Bank Credit to Infrastructure

(` crore) Period Infrastructure (Total) 30,286 62,220 64,636 Power Telecom Roads & Ports 5,352 9,429 Other Infrastructure 10,776 12,179 10,658 10,956 7,326 2,643
2006-07 2007-08 2008-09 2009-10 2009 (April-Nov.)
12,994
1,164
21,947 18,663
29,372 12,044 12,584 9,036 761 26,509 18,408 8,790
1,09,916 63,394 64,322 37,806
2010 1,02,301 52,502 38,367 (April-Nov.)

Source: RBI.
sectors have been comparatively higher during the current financial year. FDI inflows into the power, telecommunications, and information and broadcasting sectors have been comparatively lower during 2010-11 (Table 11.12)
Infrastructure development and PPPs

11.142 Given the enormity of the investment requirements and limited availability of public resources for investment in physical infrastructure, it is imperative to explore avenues for increasing investment in infrastructure through a combination of public investment, PPPs and, occasionally, exclusive private investment wherever feasible.
Table 11.12 : FDI flows to infrastructure (US$ million)

Sector Power Non-conventional Energy Petroleum & Natural gas Telecommunications Information & Broadcasting * Air Transport ** Sea Transport Ports Railway-related Components Total (of above) 2007-08 968 43.2 1426.8 1261.5 299.2 99.1 128.4 918.2 12.4 5156.8 2008-09 984.8 85.3 412.3 2558.4 748.7 35.2 50.2 493.2 18 5386.1 2009-10 1,437.3 497.9 272.1 2554.0 491.2 22.6 284.9 65.4 34.2 5659.6 April-Nov.2009 1237.8 67.0 218.7 2223.3 419.9 15.7 279.8 65.4 25.1 4552.7 April-Nov.2010 984.0 44.1 529.4 1092.8 272.4 115.6 288.6 10.9 0.4 3338.2
Source: Department of Industrial Policy & Promotion. Notes: * Information & broadcasting including print media; ** Air transport including air freight.Variation in data is due to reclassification of some sectors.
Energy, Infrastructure and Communications documents have been notified. Further, project sponsors are encouraged to award projects through a transparent open competitive bidding process, which leads to greater transparency and consistency. 11.145 PPP projects that are economically essential but commercially unviable are provided financial assistance in the form of Viability Gap Funding(VGF) and long tenor loans through the India Infrastructure Finance Company (IIFC) Limited. IIFC (UK) Ltd., a subsidiary of the IIFCL at London, has been established with the objective of borrowing funds from the RBI and lending to Indian companies implementing infrastructure projects in India solely for meeting capital expenditure outside India. In order to ensure quality project development activities by the States and Central Ministries, the India Infrastructure Project Development Fund (IIPDF) supports up to 75 per cent of the project development expenses in the form of interest-free loans. The projects, sponsored by State Governments and municipalities represent various sectors where PPPs are increasingly being adopted, namely urban sector, health and education, civil aviation, and roads. 11.146 PPP cells have been established in twentyfour State Governments/UT Administrations and thirteen Central Infrastructure Ministries, which have become the central core to catalyse PPPs in an efficient and effective manner in their respective sectors/States. The Government is providing assistance in the form of professional assistance (PPP and MIS Experts) to the PPP cells of the selected States and Central Ministries. An online database on PPP projects in the country www.pppindiadatabase.com and the website www.pppinindia.com have been developed. The purpose of the website is to provide comprehensive and current information on the status and extent of PPP initiatives in India at the Central, State, and sectoral levels. A panel of transaction advisers for PPPs has been notified for use by the States and other entities who are undertaking PPP transactions. 11.147 The Department of Economic Affairs (DEA), in collaboration with the ADB initiated the PPP Pilot Projects Initiatives where the process of structuring of PPP projects is closely watched over by the Central Government to develop demonstrable PPP projects in challenging sectors. Sixty PPP projects in various States, municipalities, and Central
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Ministries have been identified and are being thus developed, encompassing sectors such as rural secondary education, elementary education, greenfield hospitals and diagnostic centres, water supply and sanitation, affordable housing, training centres, and rural infrastructure. 11.148 As part of a wide-ranging effort to create an enabling environment for PPPs, the DEA has developed the National PPP Capacity Building Programme, in collaboration with the World Bank and the German KfW. The strategy is essentially aimed at enhancing the capacities of public functionaries engaged in identification, conceptualizing, structuring, and management of the PPP project development cycle. It also enhances awareness of key decision makers regarding the critical issues and choices in a PPP context. The nation-wide programme comprises four building blocks, namely training needs assessment, curriculum development, training of trainers, and rollout. The training needs assessment and curriculum development have been completed and the National PPP Capacity Building Programme has been launched by the Finance Minister on 22 December 2010. The Programme will be implemented through State Administrative Training Institutes (ATIs) and Central Training Institutes (CTIs). Two level of training would be imparted through the training institutes, namely PPP sensitization courses and specialized modules on managing PPPs. Sector-specific PPP toolkits covering four sectors (highways, ports, solid waste management, and urban transport) have been launched by the Finance Minister on 22 December 2010. Risk and contingent liability frameworks and communication strategy for greater advocacy of PPPs is being developed. 11.149 Many State Governments have institutionalized measures to encourage privatesector engagement in creation of infrastructure and delivery of services. Infrastructure Development and Enabling Acts have been developed by Andhra Pradesh, Bihar, Gujarat, and Punjab. PPP policies and guidelines to facilitate PPP projects have been notified by Karnataka, Haryana, Orissa, Assam, Goa, Madhya Pradesh, and West Bengal. Other measures include development of sectoral policies for promoting PPPs, establishing nodal departments/ PPP cells, establishing VGFs (to supplement the VGF provided by the Central Government), establishing Project Development Fund (to
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State
Table 11.13 : State-wise and Sector-wise PPP Projects

Total Number of Projects 71 6 1 4 9 2 31 4 3 8 102 16 36 30 2 20 2 21 52 24 43 8 1 8 14 518 Total Number of Projects Airports Education Energy Health Care Ports Railways Roads Tourism Urban Development Total 5 1 24 2 47 4 324 30 81 518 Up to ` 100 crore 2691.2 77.55 15 374 95 250 407.28 0 0 681 2672.94 226 2026.6 887.85 226.12 235.1 0 1174.98 1307.71 733.59 623.48 0 0 200 355.45 15,260.85 Up to ` 100 crore 0 93.32 733.59 217 866 102.22 8760.51 1492.08 2996.13 15,260.85 Between ` 251 and 500 crore 5147.4 769.58 0 464 408.2 0 3360.9 270 0 398 13,136.31 615.5 2694.95 1099.84 0 500 419 572 1100.81 2669 8902.16 1458.57 478 1214.4 2474.37 48,152.99 Between ` 251 and 500 crore 303 0 2669 0 4070.29 905 36,721.42 0 3484.28 48,152.99 More than ` 500 crore 36,748.7 1246.7 0 0 10,374 0 18496.98 2043.05 6319.76 625.07 28,499.6 16351.5 2949 31,213.59 536 9930.63 2947.8 705 4497.76 13,708 9100 4103.21 0 3299.06 6738 21,0433.41 More than ` 500 crore 18808 0 13,708 0 64,777.09 594.34 1,01,363.98 1050 10132 2,10,433.41 Value of Contracts (` crore) ` 44,587.3 2093.83 15 838 10,877.2 250 22265.16 2313.05 6319.76 1704.07 44,308.85 17193 7670.55 33,201.28 762.12 10665.73 3366.8 2451.98 6906.28 17,110.59 18,625.64 5561.78 478 4713.46 9567.82 27,3847.25 Value of Contracts (` crore) ` 19111 93.32 17,110.59 217 69,713.38 1601.56 1,46,845.91 2542.08 16612.41 2,73,847.25
Andhra Pradesh Bihar Chandigarh Chhattisgarh Delhi Goa Gujarat Haryana Jammu and Kashmir Jharkhand Karnataka Kerala Madhya Pradesh Maharashtra Meghalaya Orissa Puducherry Punjab Rajasthan Sikkim Tamil Nadu Uttar Pradesh Uttarakhand West Bengal Inter-State Total Sector
Source: I&I Division, DEA, Ministry of Finance.
Energy, Infrastructure and Communications supplement GOI grant under IIPDF), establishing panels of transaction advisers, and developing standardized bid documents, sectoral templates, and handbooks on PPPs. Awareness of schemes, guidelines, initiatives, and resource materials prepared is being created through PPP websites of Central and State Governments. These measures have resulted in a robust pipeline of over 518 projects (at different stages, i.e. bidding, construction, and operational ) in diverse sectors with an estimated project cost of over ` 2,73,847.25 crore. (Table 11.13).
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11.150 The level of investment and capacity addition made in the key infrastructure sectors during the first three years of the Eleventh Plan vis a vis the financial and physical performance achieved in the Tenth Plan indicates an optimistic outlook for infrastructure sector as a whole. Yet, to accelerate the pace of infrastructure development further, certain challenges need to be overcome. The foremost is to make huge capacity addition in a time-bound manner while ensuring that projects embody value for money and investment results in world class infrastructure. Infrastructure should at the same time be affordable and sustainable. 11.151 The Planning Commission has carried out a preliminary assessment of the investment in infrastructure during the Twelfth Plan(2012-17). The projected investment requirement would be of the order of ` 40,99,240 crore(about US$1025 billion). It is projected that at least 50 per cent of this investment would have to come from the private sector against about the 36 per cent anticipated in the Eleventh Plan. The public-sector investment would have to increase from ` 13,11,293 crore in the Eleventh Plan to about ` 20,49,620 crore. Thus financing infrastructure would be a big challenge in the coming years and to meet the challenge some innovative ideas and new models of financing would be required. Channelling domestic and foreign financial savings of this scale into infrastructure requires a judicious mix of policy interventions which balances the growth and stability objectives. The Deepak Parikh Committee has recommended developing the domestic debt capital market, tapping the potential of the insurance sector, and enhancing the participation of banks, financial institutions, and large non-banking financial companies (NBFCs) specializing in infrastructure financing.
11.152 Apart from the need for substantial financial outlays for infrastructure, there are several nonfinancing constraints that need to be addressed to avoid time and cost overruns. Urgent action is called for in addressing the problems of (i) tendering of unviable projects; (ii) bad quality of engineering and planning at DPR stage; (iii) lack of standardized and sub-optimal contracts; (iii) land acquisition delays and slow approval processes, especially environmental and forest clearances; (iv) insufficient optimization of procurement costs (of PSUs); (v) weak performance management in nodal agencies and PSUs and; (vi) inadequate availability of skilled and semi-skilled manpower. 11.153 It is important that priority should also be accorded to the physical outcomes from infrastructure development in India. There is urgent need to streamline land acquisition and environment clearance for infrastructure projects. There is a strong case for bringing in parity between the compensation package admissible under the Land Acquisition Act 1894 and that applicable to land acquisition under the National Highways Act 1956 to enable faster acquisition. The price discovery issues could perhaps be circumvented by allowing private parties to bid for supply of the land involved. It is also important that the 80 per cent minimum norm for physical acquisition of land before tendering should be strictly enforced through suitable disincentives. In case of road expansion projects, there may also be a case for excluding the land which is part of the original lanes from being counted as part of the acquired land. A national forest land bank, with clear paperwork and titles, could significantly reduce the approval time for forest clearances. 11.154 To overcome execution issues during the construction/building stage, the best available talent/skilled manpower, for the planning process and at project document preparation stage, needs to be hired. Significant upfront investment in engineering and planning (for example project creation, contracting, tendering, project scheduling) is required. Cost overruns may also be mitigated by moving away from item rates to lump sum EPC contracts for large projects and creation of greater capacity for project management and monitoring through a multidisciplinary agency. Investment in building managerial and technical capabilities of executing agencies on a par with the private sector (for example procurement, DPR, and monitoring)
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Economic Survey 2010-11 account the growing need for peaking power rather than the base load capacity in the power sector, greater focus on rail and water transport, more demand-side measures in water rather than making huge investments in water supply augmentation. All this will require a macro-level approach and greater inter-Ministerial coordination.
is crucial. A way forward would be to kick-start a construction-focused vocational training programme through a commercially viable PPP. 11.155 There is also need to reassess the existing criteria and priorities used for allocation of funds to different sectors, for example, taking into
Human Development, Equity and Environment
12
CHAPTER
The ultimate objective of development planning is human development or increased

social welfare and well-being of the people. Increased social welfare of the people requires a more equitable distribution of development benefits along with better living environment. Development process therefore needs to continuously strive for broad-based improvement in the standard of living and quality of life of the people through an inclusive development strategy that focuses on both income and nonincome dimensions. The challenge is to formulate inclusive plans to bridge regional, social and economic disparities. The Eleventh Five Year Plan sought to address this challenge by providing a comprehensive strategy for inclusive development, building on the growing strength of the economy.
12.2 This chapter focuses on issues related to 'inclusive development' in India and uses both international as well as inter-State comparisons to shed light on the subject. Apart from highlighting the international position of India vis--vis other emerging market economies and similarly placed countries in terms of the human development index (HDI), an attempt has been made to examine the interrelations between different parameters of the HDI. From the domestic angle, the chapter focuses on trends in social-sector spending both at the centre and the state levels. It looks at social-sector policies implemented by the Government, particularly poverty alleviation and employment generation, health, education, rural infrastructure, development of the weaker sections of society, women and child development, and social security. It also discusses climate change and its impact on development in the context of intergenerational equity.
a long and healthy life, to be educated and knowledgeable, and to enjoy a decent economic standard of life. According to HDR 2010, the HDI for India was 0.519 in 2010 with an overall global ranking of 119 (out of the 169 countries) compared to 134 (out of 182 countries) in 2007 (HDR, 2009). However, a comparable analysis of the trends during 1980-2010 (Table12.1) shows that although lower in HDI ranking, India has performed better than most (including very high and high human development) countries in terms of average annual HDI growth rate. India with an HDI improvement rank of 6 (19802010) has performed much better than most comparable countries except China (Table12.1). 12.4 However, there should be no room for complacency as India is still in the medium human development category with countries like China, Sri Lanka, Thailand, Philippines, Egypt, Indonesia, and South Africa having better overall HDI ranking within the same category. The existing gap in health and education indicators as compared to developed countries and also many of the developing countries indicates a need for much faster and wider spread of basic health and education. Life expectancy at birth in India was 64.4 years in 2010 as against 81 years in Norway, 81.9 years in Australia, 74.4 years in Sri Lanka, and 73.5 years in China (Table 12.2).
HUMAN DEVELOPMENT AND GENDER

12.3 The HDI reported in the Human Development Report (HDR) published by the United Nations Development Programme (UNDP) is an alternative to the more standard method of measuring growth using gross domestic product (GDP). It captures progress in terms of three basic capabilities: to live
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Table 12.1 : Trends in the HDI 1980-2010

Avg. Annual HDI Growth Rate (percent) HDI 1 2. 41 57 65 73 83 89 91 92 97 101 108 110 113 119 125 128 129 Country Norway Australia Poland Malaysia Russia Brazil Turkey China Sri Lanka Thailand Philippines Egypt Indonesia South Africa Vietnam India Pakistan Kenya Bangladesh World 1980 0.788 0.791 0.541 0.467 0.368 0.513 0.483 0.523 0.393 0.390 0.320 0.311 0.404 0.259 0.455 1990 0.838 0.819 0.683 0.616 0.692 0.552 0.460 0.558 0.546 0.552 0.484 0.458 0.601 0.407 0.389 0.359 0.437 0.313 0.526 1995 0.869 0.887 0.710 0.659 0.644 0.583 0.518 0.584 0.581 0.569 0.523 0.508 0.634 0.457 0.415 0.389 0.435 0.350 0.554 2000 0.906 0.914 0.753 0.691 0.662 0.649 0.629 0.567 0.600 0.597 0.566 0.500 0.505 0.440 0.416 0.424 0.390 0.570 2005 0.932 0.925 0.775 0.726 0.693 0.678 0.656 0.616 0.635 0.631 0.619 0.587 0.561 0.587 0.540 0.482 0.468 0.443 0.432 0.598 2009 0.937 0.935 0.791 0.739 0.714 0.693 0.674 0.655 0.653 0.648 0.635 0.614 0.593 0.594 0.566 0.512 0.487 0.464 0.463 0.619 2010 0.938 0.937 0.795 0.744 0.719 0.699 0.679 0.663 0.658 0.654 0.638 0.620 0.600 0.597 0.572 0.519 0.490 0.470 0.469 0.624 19802010 0.58 0.57 1.06 1.24 1.96 0.83 1.01 0.66 1.52 1.43 1.61 1.52 0.50 1.99 1.05 19902010 0.56 0.67 0.76 0.94 0.19 1.03 1.83 0.82 0.90 0.72 1.23 1.35 -0.03 1.70 1.44 1.55 0.37 2.03 0.85 HDI Improvment Rank 200019802010 2010* 0.34 0.25 0.54 0.73 0.82 0.73 0.76 1.57 0.86 0.67 0.90 1.82 1.24 1.66 1.64 1.03 1.86 0.89 34 35 19 14 2 51 29 78 8 12 6 10 87 3
Source : HDR 2010. * Measured using deviation from fit. Lower the number, faster the improvement.
Table 12.2 : Indias Global Position in Human Development 2010

Country Norway Australia Poland Malaysia Russia Brazil Turkey China Sri Lanka Thailand Philippines Egypt Indonesia South Africa Vietnam India Pakistan Kenya Bangladesh World HDI 2010 0.938(1) 0.937(2) 0.795 (41) 0.744 (57) 0.719 (65) 0.699 (73) 0.679 (83) 0.663 (89) 0.658 (91) 0.654 (92) 0.638 (97) 0.620 (101) 0.600 (108) 0.597 (110) 0.572 (113) 0.519 (119) 0.490(125) 0.470(128) 0.469(129) 0.624 GNI per capita (PPP2008 US $) 2010 58,810 38,692 17,803 13,927 15,258 10,607 13,359 7258 4486 8001 4002 5889 3957 9812 2995 3337 2678 1,628 1587 10,631 Life Expectancy Mean Yrs of at birth(yrs) 2010 Schooling 2010 81.0 81.9 76 74.7 67.2 72.9 72.2 73.5 74.4 69.3 72.3 70.5 71.5 52.0 74.9 64.4 67.2 55.6 66.9 69.3 12.6 12.0 10.0 9.5 8.8 7.2 6.5 7.5 8.2 6.6 8.7 6.5 5.7 8.2 5.5 4.4 4.9 7.0 4.8 7.4 Expected Yrs of Schooling 2010* 17.3 20.5 15.2 12.5 14.1 13.8 11.8 11.4 12.0 13.5 11.5 11.0 12.7 13.4 10.4 10.3 6.8 9.6 8.1 12.3
Source: HDR 2010 Note: * Refers to an earlier year than specified. Figures in parentheses in Column 2 give ranking among 169 countries.
Human Development, Equity and Environemnt It is less than the global average of 69.3 years. Similarly, the performance of India in terms of mean years of schooling is not only much below that of countries like Sri Lanka, China, Egypt, and Vietnam, but also lower than the global average. 12.5 In terms of gender equality index (GEI), India with an index value of 0.748 ranks 122 out of a total of 168 countries in 2008. The GEI captures the loss in achievement due to gender disparities in the areas of reproductive health, empowerment, and labour force participation with values ranging from 0 (perfect equality) to 1 (total inequality). The GEI index value of 0.748 indicates a higher degree of gender discrimination in India compared to countries like China (0.405) and Sri Lanka (0.599).
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the purview of the States. Major programme-specific funding is available to the States through Centrally Sponsored Schemes. 12.7 Expenditure on social services (which include education, medical and public health, family welfare, water supply and sanitation, welfare of Scheduled Castes (SCs), Scheduled Tribes (STs) and Other Backward Classes (OBCs), labour and labour welfare, social security, nutrition, and relief for natural calamities, etc.) by the General Government (Centre and States combined) has also shown increase in recent years (Table 12.4) reflecting the higher priority given to this sector. Expenditure on social services as a proportion of total expenditure increased from 21.1 per cent in 2005-06 to 23.8 per cent in 2008-09 and further to 25.2 per cent in 2010-11 (BE). As a proportion of GDP, its share increased from 5.49 per cent in 2005-06 to 6.63 per cent in 2010-11 (BE). Expenditure on education as a proportion of total expenditure has increased marginally from 10 per cent in 2005-06 to 11.3 per cent in 2010-11 (BE). While the expenditure on health as a proportion of the GDP has increased from 1.23 per cent in 200506 to 1.27 per cent in 2010-11 (BE), its share in total expenditure has increased marginally from 4.7 per cent in 2005-06 to 4.8 per cent in 2010-11 (BE).
Trends in India's social-sector expenditures

12.6 The Central Government expenditure on social services and rural development (Plan and non-Plan) which contributes to human development has gone up consistently over the years (Table 12.3). It has increased from 13.75 per cent in 2005-06 to 19.27 per cent in 2010-11. The Central support for social programmes has continued to expand in various forms although most social-sector subjects fall within
Table 12.3 : Central Government Expenditure (Plan and non-Plan) on Social Services and Development
ITEM (as Per Cent of total expenditure) 2005-06 2006-07 2007-08 2008-09* 2009-10 2010-11 Actual Actual Actual Actual RE BE
1. Social Service a. Education, Sports, Youth Affairs b. Health & Family Welfare c. Water Supply, Housing, etc. d. Information & Broadcasting e. Welfare of SC/STand OBC f. Labour & Employment g. Social Welfare & Nutrition h. North-eastern Areas i. Other Social Services Total 2. Rural Development 3. Pradhan Mantri Gram Sadak Yojana (PMGSY) 4. Social Services, Rural Development, and PMGSY 5. Total Central Government Expenditure 3.71 1.89 2.08 0.30 0.33 0.25 0.84 0.00 0.40 9.79 3.12 0.83 13.75 100.00 4.28 1.87 1.72 0.25 0.34 0.32 0.85 0.00 -0.17 9.47 2.84 1.08 13.38 100.00 4.02 2.05 2.02 0.22 0.36 0.27 0.82 0.00 1.29 11.06 2.80 0.91 14.77 100.00 4.04 1.91 2.31 0.22 0.35 0.27 0.72 1.56 1.55 12.94 4.50 0.88 18.32 100.00 3.96 1.90 2.20 0.20 0.41 0.22 0.79 1.50 1.87 13.06 4.27 1.11 18.44 100.00 4.46 2.03 2.27 0.22 0.63 0.25 1.06 1.75 1.34 14.02 4.17 1.08 19.27 100.00
Source : Budget Documents and Ministry of Rural Development Note: SC-Scheduled Caste; ST-Scheduled Tribe; OBC-Other Backward Class; PMGSY-Pradhan Mantri Gram Sadak Yojana; RE-revised estimate. * Provisional.
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Table 12.4 : Trends in Social Services Expenditure by General Government (Central and State Governments combined)
(` crore) Items Total Expenditure Expenditure on Social Services of which: i) Education ii) Health iii) Others Total Expenditure Expenditure on Social Services of which: i) Education ii) Health iii) Others Expenditure on Social Services of which: i) Education ii) Health iii) Others i) Education ii) Health iii) Others 2005-06 Actual 9,59,855 2,02,672 2006-07 Actual 11,09,174 2,39,340 2007-08 Actual 13,16,246 2,94,584 2008-09 Actual 15,95,110 3,80,269 2009-10 (RE) 2010-11 (BE)
19,09,380 20,71,147 4,76,351 5,22,492
96,365 45,428 60,879 25.99 5.49 2.61 1.23 1.65 21.1 10.0 4.7 6.3 47.5 22.4 30.0
1,14,744 52,126 72,470 25.83 5.57 2.67 1.21 1.69 21.6 10.3 4.7 6.5 47.9 21.8 30.3
1,29,366 63,226 1,01,992 26.40 5.91 2.59 1.27 2.05 22.4 9.8 4.8 7.7 43.9 21.5 34.6
1,61,360 73,898 1,45,011 28.57 6.81 2.89 1.32 2.60 23.8 10.1 4.6 9.1 42.4 19.4 38.1
2,04,986 90,700 1,80,665 29.15 7.27 3.13 1.38 2.76 24.9 10.7 4.8 9.5 43.0 19.0 37.9
2,35,035 99,738 1,87,719 26.29 6.63 2.98 1.27 2.38 25.2 11.3 4.8 9.1 45.0 19.1 35.9
As Per Cent of GDP
As Per Cent of Total Expenditure
As Per Cent of Social Services Expenditure
Source : RBI as obtained from Budget Documents of Union and State Governments. BE: budget estimates; RE: revised estimates.
Inclusive Development
12.8 This section and the one that follows on social sector initiatives, examines the major dimensions of inclusive development like poverty alleviation, employment generation, health, education, and social welfare besides giving the progress of important Government programmes in those sectors. 12.9 Inclusive development can be seen in terms of progress in social inclusion and financial inclusion. Despite more than six decades of planned economic development, a large part of the population, particularly segments like landless agricultural labourers, marginal farmers, SCs, STs, and OBCs, suffers social and financial exclusion. Accordingly, the Government's policies are directed towards economic and social upliftment of these segments so as to enable everyone to reap the benefits of growth.
12.10 There is a close connection between social inclusion and financial inclusion. Accordingly, the Government has devised many schemes for financial inclusion of the socially excluded like SCs, STs, OBCs, and the disabled. The details of some of these are given in Table 12.5. A major financial inclusion intiative was formally launched as Swabhimaan on 10 February, 2011 which aims at providing branchless banking through the use of technology. Banks will provide basic services like deposits, withdrawal and remittances using the services of Business Correspondents (Banks Saathi). The initiative enables Government subsidies and social security benefits to be directly credited to the accounts of the beneficiaries, enabling them to draw the money from the Business correspondents in their village itself.
Human Development, Equity and Environemnt
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Table 12.5 : Details of the Loan Disbursed/Beneficiaries covered under the NSCFDC, NSKFDC, NBCFDC, and NHFDC
Sl. Corporation No. 1 2 3 4 NSFDC NSKFDC NBCFDC NHFDC Total Amount of Loan Disbursed (` crore) ` Te r m MicroOthers Total Loan finance 79.94 36.67 62.27 17.63 196.51 41.12 10.53 44.50 2.15 98.3 17.79 0.08 17.87 121.06 64.99 106.77 19.86 312.68 No. of Beneficiaries Te r m MicroOthers Loan finance 9,597 3,525 31,489 3,438 48,049 21,897 4,525 49,171 1,070 76,663 2,165 7,371 3 9,539 Total 33,659 15,421 80,660 4,511* 1,34,251
Source: Ministry of Social Justice & Empowerment. Notes: * including estimated number of beneficiaries on average loan basis against released advance funds to State Channalising Agencies (SCAs). NSCFDCNational Scheduled Caste Finance and Development Corporation; NSKFDC-National Safai Karamcharis Finance Development Corporation; NBCFDCNational Backward Classes Finance Development Corporation; NHFDCNational Handicapped Finance and Development Corporation.
12.11 Special efforts are being made by the Government of India for the social and economic upliftment of the north-east region. While in terms of some parameters like gross state domestic product (GSDP) growth and literacy rate the north-eastern
states are doing comparatively better, they are still lagging behind in terms of financial inclusion. The tribal population which constitutes a major chunk of the population is very much distanced from the socio-economic development visible in the rest of
Box 12.1 : North-Eastern States and Financial Inclusion

In terms of financial inclusion the north-east region lags behind the rest of the nation. Banks have entered the north-eastern states very late. Among north eastern states, only Assam, Meghalaya, Tripura and Sikkim have had local banks operating for the last few decades. Private-sector banks are conspicuous by their low presence in these states. If the gross inadequacy of the branch network is one of the factors hindering financial inclusion, political disturbances resulting in the nonfunctioning of some of the existing branches is another. For extending credit, some banks have liberally issued Kisan Credit Cards to farmers. Self-help groups are also being promoted in large numbers for providing micro-finance to the poor. Yet, the number of those who remain beyond the reach of banks is more than those who have been covered by bank branches. The banking penetration ratio (defined as the proportion of the households availing banking facilities) is very low in the north-east region. According to the Analytical Report on Household Assets, Census of India 2001, the banking penetration ratio in almost all states except Arunachal Pradesh is lower than the national average, with Manipur having the lowest ratio (see Table). Table (in per cent) State Manipur Assam Tripura Mizoram National Average Banking Penetration Ratio 8.7 20.5 26.5 31.8 35.8 State Nagaland Meghalaya Sikkim Arunachal Pradesh Banking Penetration Ratio 15.9 20.8 29.7 37.5
The National Sample Survey (NSS) data of 59th Round (2003), reveal that the proportion of farm households excluded from accessing credit from institutional sources to total farm households is as high as 96 in the north eastern States. Thus banking development indicators show the poor state of banking and resultant low level of financial outreach in these states. The Central Government's "New Initiatives for North Eastern Regions" announced in 1996 proposed a number of measures including setting up of the North Eastern Development Finance Corporation Ltd. for integrated development of the region. The RBI has also set up a committee for a financial-sector plan for the north-east region in 2006. To improve banking penetration in the north-east, the RBI has asked the state governments in the region as well as banks to identify centres where there is a need for setting up branches or banking facilities. RBI would bear the one time capital cost and recurring cost per annum for a limited period of 5 years under the Viability Gap Funding scheme for the north-east region. RBI has also permitted banks to open branches in rural, semi urban and urban centers in north-eastern states without its permission subject to reporting. Awareness programme for educating the uninitiated rural population are being organized by all banks with the active support of the RBI. However, a lot more needs to be done for financial inclusion of the north-east region.
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Economic Survey 2010-11 (HPI) used since 1997. The MPI indicates the share of the population that is multidimensionally poor adjusted by the intensity of deprivation in terms of living standards, health, and education. According to this parameter, India with a poverty index of 0.296 and poverty ratios of 41.6 per cent (in terms of PPP $ 1.25 a day ) and 28.6 per cent (national poverty line) is not favourably placed when compared with countries like China and Sri Lanka. In fact, the difference in population below the poverty line (BPL) widens substantially in case of India when this indicator is used instead of the national poverty line indicator, while for other countries, there is less of a difference and in some cases even a fall (Table 12.6). 12.13 The Planning Commission which is the nodal agency for estimating the number and proportion of people living below the poverty line at national and State levels, separately for rural and urban areas, makes poverty estimates based on a large sample survey of household consumption expenditure carried out by the National Sample Survey Organization (NSSO) after an interval of
the country. Moreover, each of the eight northeastern states has its own ethnic and socioeconomic problems for which there is no uniform solution, making the implementation of policy measures difficult. Added to this are inherent problems of lower growth rate, low population density, lack of infrastructure development, and insurgency. Social inclusion in the north-east is closely linked to financial inclusion and corrective steps are needed in this direction (Box 12.1). Recognizing this reality, the Eleventh Five Year Plan aimed at faster and more inclusive growth by restructuring policies with special focus on this region. Within this policy paradigm, the Reserve Bank of India (RBI) has also launched a comprehensive programme with financial inclusion as a goal of the banking system.
POVERTY AND INCLUSIVE GROWTH

12.12 The HDR 2010 measures poverty in terms of a new parameter, namely multidimensional poverty index (MPI), which replaced the human poverty index Table 12.6 : Multidimensional Poverty Index
Population below Income Poverty Line Country Multidimensional Poverty Index* 2000-2008** (41) (57) 0.005 (65) 0.039 (73) 0.039 (83) 0.056 (89) 0.021 (91) 0.006 (92) 0.067 (97) 0.026 (101) 0.095 (108) 0.014(110) 0.075(113) 0.296 (119) 0.275(125) 0.302(128) 0.291(129) PPP $1.25 a day 2000-2008** Less than 2 Less than 2 Less than 2 5.2 2.6 15.9 14 Less than 2 22.6 Less than 2 29.4 26.2 21.5 41.6 22.6 19.7 49.6 National Poverty Line 2000-2008** 14.8 12.8 19.6 21.5 27 2.8 22.7 16.7 16.7 22.0 28.9 28.6 46.6 40.0
Poland Malaysia Russia Brazil Turkey China Sri Lanka Thailand Philippines Egypt Indonesia South Africa Vietnam India Pakistan Kenya Bangladesh
Source: HDR 2010. Note: * Not all indicators were available for all countries; Caution should thus be used in cross-country comparisons. ** Data refer to the most recent year available during the period specified. Figures in parentheses in Column 2 give ranking among 169 countries.
Human Development, Equity and Environemnt Table 12.7: Poverty Ratios by URP and MRP
(per cent) Sl. No. Category Years 1993-94 37.3 32.4 36.0 1999-2000 27.1 23.6 26.1 2004-05 28.3 25.7 27.5 2004-05 21.8 21.7 21.8 By URP Method 1. 2. 3. Rural Urban All India
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By MRP Method 4. 5. 6. Rural Urban All India
poverty line in rural areas while ensuring that the total number of such households corresponds to the Planning Commission estimates. The methodology of estimating poverty and the identification of BPL households have been a matter of debate. Two committees under the chairmanship of Prof. Suresh D. Tendulkar and Dr. N.C. Saxena have submitted their reports on methodology for estimation of poverty and methodology for conducting BPL census in Rural areas, respectively. Further, an expert Group under the chairmanship of Prof. S.R. Hasim has been set up to recommend methodology for identification of BPL families in urban areas (Box.12.2).
Source: Planning Commission.
Inequality
12.15 According to HDR 2010, inequality in India for the period 2000-10 in terms of the income Gini coefficient was 36.8. India's Gini index was more favourable than those of comparable countries like South Africa (57.8), Brazil (55), Thailand (42.5), Turkey (41.2), China (41.5), Sri Lanka (41.1), Malaysia (37.9), Vietnam (37.8), Indonesia (37.6), and even the USA (40.8), Singapore (42.5), Hong Kong (43.4), Portugal (38.5), and Poland (34.9) which are otherwise ranked very high in human development. 12.16 Inter-State inequality as reflected in the Lorenz ratio, estimated by the NSSO based on household consumer expenditure for 2004-05, for rural India and urban India for total consumption expenditure was 0.30 and 0.37 respectively. This indicates, higher relative inequality in urban areas. Lower inequality was seen in rural areas of Assam (0.197), Meghalaya (0.155), and Manipur (0.158) than in Kerala (0.341), Haryana (0.323), Tamil Nadu (0.315), and Maharashtra (0.310). Similarly, lower inequality was seen in urban areas of Arunachal Pradesh (0.243), Jammu & Kashmir (0.244), Meghalaya (0.258), and Manipur (0.175) than in Chattisgarh (0.439), Goa (0.405), Kerala (0.400), and Madhya Pradesh (0.397). Disparities in cereal consumption are less marked than disparities in total consumption expenditure, whereas greater disparities exist in consumption of durable goods than in total consumption.
approximately five years. The Commission has been estimating the poverty line and poverty ratio since 1997 on the basis of the methodology spelt out in the report of the Expert Group on 'Estimation of Number and Proportion of Poor' (known as Lakdawala Committee Report). On the basis of NSS 61st Round (July 2004 to June 2005) consumer expenditure data, the poverty ratio is estimated at 28.3 per cent in rural areas, 25.7 per cent in urban areas, and 27.5 per cent for the country as a whole in 2004-05 using uniform recall period (URP). In URP, consumer expenditure data for all the items are collected for a 30-day recall period. Based on mixed recall period (MRP) for the same period, the poverty ratios are 21.8 per cent in rural areas, 21.7 per cent in urban areas, and 21.8 per cent for the country as a whole. In MRP, consumer expenditure data for five non-food items, namely clothing, footwear, durable goods, education, and institutional medical expenses, are collected for a 365-day recall period and the consumption data for the remaining items are collected for a 30-day recall period. The poverty estimate in 2004-05 based on URP consumption (27.5) is comparable to that of 199394 (36). The poverty estimates in 2004-05 based on MRP consumption (about 21.8) is roughly (but not strictly) comparable to that of 1999-2000 (26.1). Table 12.7 shows the comparable poverty estimates based on the URP and MRP methods.
Methodology for Estimation of Poverty and BPL Households

12.14 While the estimation of poverty at national and State levels, separately for rural and urban areas, is done by the Planning Commission, the Ministry of Rural Development has been conducting the BPL census to identify individual households below the
Employment
12.17 The key strategy for achieving inclusive growth in the Eleventh Plan has been generation of productive and gainful employment, with decent working conditions, on a sufficient scale to absorb the growing labour force. The Eleventh Plan
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Box 12.2 : Expert Groups for Estimating Poverty and BPL Families
I. Tendulkar Committee Report to Review the Methodology for Estimation of Poverty The Planning Commission constituted an Expert Group in December 2005 under the chairmanship of Professor Suresh D. Tendulkar to review the methodology for estimation of poverty. The Expert Group submitted its report in December 2009. While acknowledging the multidimensional nature of poverty, the Expert Group recommended moving away from anchoring poverty lines to the calorie - intake norm to adopting MRP based estimates of consumption expenditure as the basis for future poverty lines and MRP equivalent of the urban poverty line basket (PLB) corresponding to 25.7per cent urban headcount ratio as the new reference PLB for rural areas. On the basis of the above methodology, the all-India rural poverty headcount ratio for 2004-05 was estimated at 41.8 per cent, urban at 25.7 per cent, and all-India at 37.2 per cent. It may, however, be mentioned that the Tendulkar Committee's estimates are not strictly comparable to the official poverty estimates because of different methodologies. The relevant estimates for 1993-94 and 2004-05 are shown in the Table. Poverty Ratios 1993-94 Year Planning Commission (URP) Tendulkar Estimates (2004-05) (MRP) Rural 37.3 50.1 Urban 32.4 31.8 Total 36.0 45.3 Rural 28.3 41.8 2004-05 Urban 25.7 25.7 Total 27.5 37.2
As has been indicated in the Mid Term Appraisal of the Eleventh Five Year Plan, the revised poverty lines for 2004-05 as recommended by the Tendulkar Committee have been accepted by the Planning Commission. The Tendulkar Committee has specifically pointed out that the upward revision in the percentage of rural poverty in 2004-05, resulting from the application of a new rural poverty line should not be interpreted as implying that the extent of poverty has increased over time. These estimates, as reported by the Committee, clearly show that whether we use the old method or the new, the percentage of BPL population has declined by about the same magnitude. II. Saxena Committee Report to Review the Methodology for Conducting BPL Census in Rural Areas An Expert Group headed by Dr N.C. Saxena was constituted by the Ministry of Rural Development to recommend a suitable methodology for identification of BPL families in rural areas. The Expert Group submitted its report in August 2009 and recommended doing away with score-based ranking of rural households followed for the BPL census 2002. The Committee has recommended automatic exclusion of some privileged sections and automatic inclusion of certain deprived and vulnerable sections of society, and a survey for the remaining population to rank them on a scale of 10. Automatic Exclusion Households that fulfil any of the following conditions will not be surveyed for BPL census: Families who own double the land of the district average of agricultural land per agricultural household if partially or wholly irrigated (three times if completely unirrigated). Families that have three or four wheeled motorized vehicles, such as, jeeps and SUVs. Families that have at least one mechanized farm equipment, such as, tractors, power tillers, threshers, and harvesters. Families that have any person who is drawing a salary of over ` 10,000 per month in a non-government/ private organization or is employed in government on a regular basis with pensionary or equivalent benefits. Income tax payers. Automatic Inclusion The following would be compulsorily included in the BPL list: Designated primitive tribal groups. Designated most discriminated against SC groups, called Maha Dalit groups. Single women-headed households. Households with a disabled person as breadwinner. Households headed by a minor. Destitute households which are dependent predominantly on alms for survival. Homeless households. Households that have a bonded labourer as member. Survey of the remaining rural households is to be conducted and scores given depending upon the different socio-economic parameters recommended by the committee. The Ministry of Rural Development is in the process of conducting the pilot studies and participatory rural appraisal (PRA) exercises to fine tune the methodology. III. Expert Group (S.R. Hashim Committee) on the Methodology for Identification of BPL Families in Urban Areas. The Ministry of Housing and Urban Poverty Alleviation (HUPA) is the nodal Ministry for issue of guidelines to identify BPL families in urban areas. Till now, no uniform methodology was being followed by the States/UTs to identify the urban poor. An Expert Group under the Chairmanship of Professor S.R. Hashim has been constituted by the Planning Commission to recommend the methodology for identification of BPL families in urban areas. The Expert Group is expected to submit its report shortly.
Human Development, Equity and Environemnt (2007-12) aims at generation of 58 million work opportunities in twenty-one high growth sectors so that the unemployment rate falls to 4.83 per cent by the end of the Plan. The 64th round (2007-08) of NSSO survey on employment-unemployment indicates creation of 4 million work opportunities between 2004-05 and 2007-08. 12.18 As highlighted in Economic Surveys of previous years based on NSSO data, employment on a current daily status (CDS) basis during 19992000 to 2004-05 had accelerated significantly as compared to the growth witnessed during 1993-94 to 1999-2000. During 1999-2000 to 2004-05, about 47 million work opportunities were created compared to only 24 million in the period between 1993-94 and 1999-2000 and employment growth accelerated from 1.25 per cent per annum to 2.62 per cent per annum. However, since the labour force grew at a faster rate of 2.84 per cent than the workforce, unemployment also rose. The incidence of unemployment on CDS basis increased from 7.31 per cent in 1999-2000 to 8.28 per cent in 2004-05.
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The CDS captures the unemployed days of the chronically unemployed, the unemployed days of the usually employed who become intermittently unemployed during the reference week, and unemployed days of those classified as employed according to the current weekly status criterion.
Employment in the Organized Sector

12.20 Employment growth in the organized sector, public and private combined, increased during the period 1994- 2008. This has primarily been due to employment growth in the private sector. Employment in establishments covered by the Employment Market Information System of the Ministry of Labour and Employment grew at 1.20 per cent per annum during 1983-94 but the growth decelerated to 0.05 per cent per annum during 19942008. This decline was mainly due to a decrease in employment growth in public-sector establishments from 1.53 per cent per annum in the earlier period to (-)0.65 per cent per annum in the later period. The private sector, on the other hand, showed accelerated growth from 0.44 per cent to 1.75 per cent per annum (Table12.9). Table 12.9 : Rate of Growth of Employment in the Organized Sector
(per cent per annum) 1983-94 Public Sector Private Sector Total Organized 1.53 0.44 1.20 1994-2008 -0.65 1.75 0.05
Unemployment
12.19 The next quinquennial round of survey i.e. the 66th NSS round for estimating unemployment rates is under way with fieldwork undertaken during 2009-10. The updated information based on this round is awaited. However, an estimate of unemployment rates based on the 64th round is shown in Table 12.8. A comparative study of different estimates of unemployment during 2007-08 indicates that the CDS estimate of unemployment rate being the broadest is the highest. The higher unemployment rates according to the CDS approach vis-a-vis weekly and usual status approaches indicate a high degree of intermittent unemployment. Table 12.8 : All-India Rural and Urban Unemployment Rates* from the NSS 64th Round 2007-08: Different Estimates
Sl. No. 1 2 3 4 Estimate UPS US(adj.) CWS CDS Rural 2.2 1.6 3.9 8.4 Urban 4.5 4.1 5.0 7.4
Source: Planning Commission and Directorate General of Employment and Training (DGET), Ministry of Labour and Employment.
Effect of Global Financial Crisis and Economic Slowdown

12.21 The global financial crisis of 2008 lowered the growth rate for 2008-09 to 6.8 per cent from over 9.0 per cent during each of the previous three years. As the Government was concerned about the possible fallouts of the global slowdown on the Indian economy, including job loss and on creation of additional employment, financial and fiscal stimulus packages were announced. As a result, the Indian economy started to recover robustly, climbing back to near pre-crisis levels, and recording one of the fastest growth rates in the world. The Government has been continuously monitoring the effect of the
Notes:* As per cent of labour force. UPS usual principal status; US (adj.)usually unemployed excluding subsidiary status workers; CWScurrent weekly status. Source: NSS Report No. 531(64/10.2/1).
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Economic Survey 2010-11 (Box 12.4). However, a word of caution is needed as the latest data for many of the important indicators are not available at national level. 12.23 The socio-economic performance of States has been varied. While developed states like Gujarat, Maharashtra, Karnataka, Haryana, Kerala, and Tamil Nadu have performed well in terms of many indicators, many hitherto backward states like Bihar, Orissa, and Uttarakhand are showing good growth performance and many of the backward states like Rajasthan, Uttar Pradesh, Madhya Pradesh, and Bihar are benefiting from poverty-alleviation employment schemes like the MGNREGS and NRHM.
Box 12.3 : Eighth Quarterly Survey Report on Effect of Economic Slowdown on Employment in India July to September 2010
The Labour Bureau conducted eight quarterly quick employment surveys to assess the impact of the economic slowdown on employment in India. The results for selected sectors, i.e. textiles including apparel, leather, metals, automobiles, gems and jewellery, transport, information technology (IT)/business process outsourcing (BPO) and handloom / powerloom are briefly summarized as follows:-
While comparing the results of the last four quarterly

surveys, i.e. September 2010 over September 2009, overall employment has increased by 12.96 lakh, with the highest increase of 9.36 lakh in IT/BPO followed by 0.79 lakh in textiles, 0.99 lakh in metals, 1.15 lakh in automobiles, and 0.39 lakh in gems and jewellery.
Poverty-alleviation and employment-generation programmes

12.24 With a view to achieving inclusive development, several poverty-alleviation and employment-generation programmes are being implemented by the Government of India. Some of the important schemes are as follows:
An upward trend in employment has been continuously

observed since July 2009. During the quarter July to September 2010, employment has increased in respect of all eight sectors and overall employment by 4.35 lakh. At sectoral level, the maximum increase of 2.45 lakh during the period is in textiles including apparel, followed by 1.08 lakh in IT/BPO, 0.29 lakh in automobiles, and 0.27 lakh in metals.
In export-oriented units, overall employment has

increased by 3.05 lakh whereas in non-exporting units, it has increased by 1.30 lakh during the period September 2010 over June 2010.
(i) The Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS):
12.25 This flagship programme of the Government of India touches the lives of the rural poor and promotes inclusive growth. The MGNREGS aims at enhancing livelihood security of households in rural areas of the country by providing at least one hundred days of guaranteed wage employment in a financial year to every household whose adult members volunteer to do unskilled manual work. It also mandates 33 per cent participation for women. The primary objective of the Scheme is to augment wage employment. This is to be done while also focussing on strengthening natural resource management through works that address causes of chronic poverty like drought, deforestation, and soil erosion and thus encourage sustainable development. The MGNREG Act was notified in 200 districts in the first phase with effect from 2 February 2006 and then extended to an additional 130 districts in the financial year 2007-08. The Act has been notified throughout the country with effect from 1 April 2008. During 200910, 5.26 crore households were provided employment under this scheme as against more than 4.51crore during 2008-09. During 2010-11, the budget estimate for the MGNREGS is ` 40,100 crore out of which ` 29,822.59 crore have been released to the States/ UTs till February 10, 2010.
global financial crisis and economic slowdown on employment in India. The Quarterly Quick Employment Surveys conducted by the Labour Bureau indicate that the upward trend in employment since July 2009 has been maintained (Box.12.3).
Socio- Economic Development: Inter State comparison

12.22 Inclusive development also includes the objective of reduction of inter-State and inter-regional disparities. The national Human Development Report 2001 of the Planning Commission had made detailed comparisons in this respect using development indicators. No such major official exercise has since been carried out , though there are many studies by different organizations. The Economic Survey 200708 had also made inter-State comparisons based on socio-economic indicators. The inter-State comparisons of socio-economic development of selected states based on the available indicators given in Table 12.10 show some interesting results
301
Box 12.4 : Socio-economic Development in Indian States

Growth related The best performer in terms of growth during 2002-03 to 2008-09 was Gujarat, followed by Bihar, Orissa, Haryana, and Uttarakhand. States like Madhya Pradesh, Assam, Punjab, and Uttar Pradesh registred a relatively lower growth rate. Interestingly, the best performer in 2008-09 was Bihar with a growth rate of 16.59 per cent. While the good growth performance of some of the hitherto backward states like Bihar and Orissa is a welcome sign, this may also be partially due to the low base effect because of the growth deficit in earlier years. In fact, many states like Bihar, Chattisgarh, Orissa, and Uttarakhand that showed high growth in 2002-03 to 2008-09, had witnessed low growth in 1994-95 to 2001-02. Poverty Related
The percentage of people below the poverty line is very high in states like Orissa, Bihar, Chhattisgarh, Jharkhand,
Uttarakhand, and Madhya Pradesh, both in terms of URP and MRP. Punjab is the best performing state in terms of this indicator.
Income inequality measured by the Gini coefficient (in rural areas) is highest in Haryana followed by Kerala, Maharashtra,
Punjab, Tamil Nadu, and West Bengal. Though inequality is lowest in rural areas of Bihar and Assam, this may mean greater equality at low levels of income.
In urban areas, income inequality is highest in Madhya Pradesh followed by West Bengal, Haryana, Karnataka, Kerala,
Maharashtra, and Chhattisgarh. Health Related
Infant mortality rates (IMR) i.e. the number of infant deaths (one year of age or younger) per 1000 live births, for which
relatively recent data are available, were highest in Madhya Pradesh, Orissa, Uttar Pradesh, Assam, Rajasthan, Chhattisgarh, and Bihar. Kerala was by far the best performing State, way above Tamil Nadu and Maharashtra.
Birth rates in 2008 were lowest in Kerala, while UP had the highest rates, followed by Bihar, Madhya Pradesh, and
Rajasthan.
While death rates do not show large variation across States, the worst performer in this regard was Orissa, followed by
Madhya Pradesh, Assam, and Uttar Pradesh. Education Related
Interestingly, the best performer in terms of gross enrolment ratio (GER) for elementary education was Jharkhand,
followed by Madhya Pradesh, Chhattisgarh, and Gujarat and the worst performers were Haryana, Kerala, and Punjab which were the best performers in many other areas. This may be due to overage children studying in primary schools in backwards states and double entry of data in some states. GER for secondary education was highest in Himachal Pradesh, Tamil Nadu, Kerala, and Madhya Pradesh while Bihar was the worst performing State. MGNREGS
Under the Mahatma Gandhi National Rural Employment Guarantee Schemes (MGNREGS), maximum employment
during 2009-10 was provided in Rajasthan followed by Andhra Pradesh, Uttar Pradesh, Madhya Pradesh, Tamil Nadu and Bihar.
In terms of share in person days under the MGNERGS, the share of SCs was highest in Punjab followed by Tamil
Nadu, Uttar Pradesh, Haryana, and Bihar, while the share of STs was highest in Madhya Pradesh followed by Jharkhand, Gujarat, and Chhattisgarh. The share of women was highest in Kerala followed by Tamil Nadu, Rajasthan, and Andhra Pradesh. NRHM
Under the National Rural Health Mission (NRHM), the maximum number of primary health centres were operating
in Tamil Nadu, followed by Karnataka, Andhra Pradesh, Maharashtra, Uttar Pradesh and Bihar.
About 4.10 crore households have been provided employment during 2010-11 till December 2010. Out of the 145 crore person days created under the scheme during this period, 23 per cent and 17 per cent were accounted for by SC and ST population respectively and 50 per cent by women. Many initiatives are being taken for better and more effective implementation of the MGNREGS (Box 12.5). However, there is scope for improvements like shifting to permanent asset creation and
infrastructure building activities, reducing transaction costs, better monitoring, and extension to urban areas.
(ii) Swarnjayanti Gram Swarojgar Yojana (SGSY)

12.26 The SGSY is a major ongoing scheme launched in April 1999 to help poor rural families (Swarozgaris) cross the poverty line by assisting them to take up income- generating economic
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Table 12.10 : Socio Economic Profile of Major States of India

Socio Economic Indicators / Items Andhra Pradesh Assam Bihar Chhattisgarh Gujarat Haryana H.P.
Projected Population as on 01.10. 2010 (persons in 000) Growth Related (real growth rates of States-GSDP percentage at constant prices as on 26 April 2010) 2008-09 Average 1994-95 to 2001-02 Average 2002-03 to 2008-09 Poverty Related (% of population below poverty line) *URP(2004-05) *MRP(2004-05) Gini Coefficient(MRP-2004-05)* Rural Urban Health Related (Life Expectancy at Birth) (2002-06)** Male Female Infant Mortality Rates (per 1000 live births) 2009 Birth Rate (per 1000) 2009 Death Rate (per 1000) 2009 Education Related GER(6-10 years) (2007-08) Total GER(11-13 years) (2007-08) Total GER(6-13 years) (2007-08) Total Pupil-Teacher Ratio (2007-08) (6-10 years) Basic Amenities: Percentage Share in Total Energy Consumption (GWh) by Ultimate Consumers in 2007-2008 Progress under NRHM 24 x 7 (Primary Health Centres as on 31.01.2010) Social Sector Schemes Related Percentage Share in HH Provided Employment during 2009-10 Percentage Share in Employment during 2009-10 under MGNREGS of SCs STs Women
84,426
30,413
97,192
24,124
58,702
25,270
6,767
5.04 5.70 8.20
6.17 2.21 5.51
16.59 4.94 9.80
6.81 3.16 9.28
7.21*** 6.45 11.19
7.92 6.47 9.28
7.44 6.81 7.77
15.8 11.1
19.7 15
41.4 32.5
40.9 32.0
16.8 12.5
14 9.9
10.0 6.7
0.24 0.34
0.17 0.30
0.17 0.31
0.24 0.35
0.25 0.32
0.31 0.36
0.26 0.26
62.9 65.5 49.0 18.3 7.6
58.6 59.3 61.0 23.6 8.4
62.2 60.4 52.0 28.5 7.0
** ** 54.0 25.7 8.1
62.9 65.2 48.0 22.3 6.9
65.9 66.3 51.0 22.7 6.6
66.5 67.3 45.0 17.2 7.2
95.5 77.3 88.3 32
106.1 91.3 100.4 38
104.4 46.2 82.6 68
125.5 89.8 112.2 43
123.0 78.2 106.0 30
90.4 75.7 84.8 53
111.7 114.3 112.7 18
9.73 800
0.51 343
0.88 533
2.11 418
8.81 331
3.64 318
1.00 95
11.71
4.06
7.85
3.85
3.04
0.30
0.95
24.68 14.71 58.10
12.15 31.02 27.70
45.3 2.16 30.04
15.32 38.2 49.21
14.87 39.46 47.55
53.59 0.01 34.81
33.36 8.70 46.09
Source : Planning Commission, Office of Registrar General of India (RGI), Ministry of Human Resource Development (HRD), Ministry of Health and Family Welfare * MRPMixed recall period, *URP-Uniform recall period, HHhousehold. **Data relating to Bihar, MP, and UP include Jharkhand, Chattisgarh, and Uttrakhand respectively.
activities through a mix of bank credit and government subsidy. The scheme involves selection of key activities, planning of activity clusters, organization of the poor into self-help groups (SHGs), and building of their capacities through training and skill development, creation of infrastructure, and technological and marketing support. The SGSY specially focuses on vulnerable sections among the rural poor with SCs/STs to account for at least 50
per cent and women 40 per cent of the swarozgaris. The share of minorities and disabled persons will be 15 per cent and 3 per cent respectively. Also, 15 per cent of the SGSY allocation is set apart for special projects that are implemented with different models of self-employment generation and to enhance the income-generating capacity of the rural poor. Since its inception, up to December 2010, 40.04 lakh SHGs have been formed under the SGSY, with women
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AllIndia
Jharkhand
Karnataka
Kerala
Madhya Pradesh
Maharashtra
Orissa
Punjab
Rajasthan
Tamil Nadu
Uttar Pradesh
Uttarkhand
West Bengal
31,293
59,170
34,467
71,732
112,042
40,603
27,556
67,401
67,273
1,99,347
9,885
89,158
1,186,146
5.52 3.62 7.54
5.08 6.27 8.10
6.98 5.33 8.73
NA 4.73 4.51
NA 4.97 8.70
6.65 3.90 9.34
6.40 4.23 5.56
6.57 7.36 7.60
4.55 5.54 7.33
6.46 4.09 5.78
8.67 4.61 9.15
6.34 6.73 6.66
6.7 6.16 7.83
40.3 34.8
25 17.4
15 11.4
38.3 32.4
30.7 25.2
46.4 39.9
8.4 5.2
22.1 17.5
22.5 17.8
32.8 25.5
39.6 31.8
24.7 20.6
27.5 21.8
0.20 0.33
0.23 0.36
0.29 0.35
0.24 0.37
0.27 0.35
0.25 0.33
0.26 0.32
0.20 0.30
0.26 0.34
0.23 0.34
0.22 0.30
0.24 0.36
0.25 0.35
** ** 44.0 25.6 7.0
63.6 67.1 41.0 19.5 7.2
71.4 76.3 12.0 14.7 6.8
58.1 57.9 67.0 27.7 8.5
66 68.4 31.0 17.6 6.7
59.5 59.6 65.0 21.0 8.8
68.4 70.4 38.0 17.0 7.0
61.5 62.3 59.0 27.2 6.6
65.0 67.4 28.0 16.3 7.6
60.3 59.5 63.0 28.7 8.2
** ** 41.0 19.7 6.5
64.1 65.8 33.0 17.2 6.2
62.6 64.2 50.0 22.5 7.3
153.9 62.2 119.1 73
106.1 90.2 100 23
92.3 100.1 95.2 28
153.4 100 133.5 41
101.8 86.8 96.1 34
117.0 80.1 102.7 42
92.8 69.1 83.6 53
118.3 81.4 104.4 43
116.1 112.7 114.8 44
113.7 67.8 96.4 76
119.4 92.8 109.3 25
112.9 71.2 96.7 51
114.0 78.1 100.3 47
2.27 194
6.82 940
2.35 178
4.70 212
13.53 663
2.25 64
5.95 182
4.71 500
10.55 1215
7.48 648
0.94 94
5.23 168
100 8324
3.24
6.72
1.82
8.97
1.12
2.66
0.52
12.40
8.32
10.43
0.99
6.62
100
16.04 42.99 34.25
16.70 8.57 36.79
16.77 5.33 88.19
18.48 45.34 44.23
25.61 33.16 39.65
19.16 36.26 36.25
78.92 0.00 26.28
26.53 22.50 66.89
59.07 2.50 82.91
56.41 1.48 21.67
26.04 4.04 40.28
36.86 14.38 33.42
30.48 20.71 48.10
*** Quick estimates given in Key Statistics of Gujarat State, 2009-10, Directorate of Economics and Statistics, Government of Gujarat.
SHGs accounting for about 68 per cent of the total. During this period, a total of about 154.87 lakh swarojgaris have been assisted with bank credit and subsidy. The total investment under the SGSY is ` 37,927 crore, including ` 25,743.29 crore credit and ` 12,183.58 crore subsidy. Under the Special Project component of the SGSY, a placement-linked skill development programme has been taken up with the objective of helping a specific number of BPL
families cross the poverty line through regular wage employment. About 9.00 lakh rural BPL beneficiaries are to be covered through 116 projects sanctioned / approved so far with an outlay of about ` 1200 crore. About 2.25 lakh youth have already been trained / are under training and 1.75 lakh placed so far. A new initiative has also been taken up for setting up a Rural Self Employment Training Institute(RSETI) in each district of the country for basic and skill
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Box 12.5 : MGNREGS : Major Initiatives for Effective Implementation

Major initiatives for effective implementation of the MGNREGS are as follows: (a) Increasing Transparency and Public Accountability:
Social Audits: States have reported that social audits have been conducted in 93 per cent of the Districts . Around 2.41
lakh social audit reports have been uploaded on the MGNREGS website indicating verification of 45,428 lakh documents in 2009-10.
A new scheme for monitoring by eminent citizens has been introduced whereby 61 eminent citizens have been engaged.
Each has been assigned one district to provide first- hand feed-back on the implementation of the MGNREGS.
An ombudsman has been instituted in each district for effective grievance redressal.
(b) Effective Administrative and Financial Management of the MGNREGS:
Labour Budget: Under Section 14(6) of the NREGA, District Programme Coordinators are required to prepare labour
budgets in the month of December for the next financial year containing the details of anticipated demand of unskilled manual work. The procedures and principles for labour budget have been put in place and operationalized in 2010-11. The labour budget principle ensures smooth fund flow on rational basis to the districts for implementation of the MGNREGS scheme.
State Employment Guarantee Fund: Under Section 21(1) of the NREGA, States have been instructed to establish State
Employment Guarantee Funds. The State Funds will give greater flexibility to the States in fund management for implementation of the MGNREGS. State Funds have been set up in eleven States, namely Rajasthan, Andhra Pradesh, Karnataka, Himachal Pradesh, Orissa, West Bengal, Madhya Pradesh, Uttar Pradesh,Tamil Nadu, Punjab, and Gujarat. The Central fund for the MGNREGS has been directly released to State Fund accounts of the respective States.
Strengthening administrative support systems: Permission is given for the use of 6 per cent of the budget available for
administrative expenses by the State. The Central Government has recommended for the recruitment of one Gram Rozgar Sewak Sahayak in every panchayat, one technical assistant for every five gram panchayats, at least one computer assistant per block, and one full-time dedicated programme officer in every block. This issue has been constantly monitored with States.
Pilot Initiatives: To build on the current programme implementation and to leverage the MGNREGS for sustainable
development, the Central Government has started pilot projects in Rajasthan. These initiatives include training and skill building for MGNREGS workers, basic literacy, computer and financial literacy, and facilitating wage payment through the business correspondent mode.
Convergence: In view of the inter-sectoral linkages of the MGNREGS, the need to create durable assets, improve
livelihood security, facilitate more flexibility in choice of works to suit the specific conditions of States and serve better the common target groups of certain development programmes with the MGNREGS, the Central Government has developed and disseminated convergence guidelines with different schemes and specific programmes, namely the Indian Council of Agricultural Research, National Aforestation Programme, and other schemes of the Ministry of Forest and Environment, Schemes of the Ministry of Water Resources, the PMGSY (Department of Rural Development), Swarnjayanti Gram Swarozgar Yojana (SGSY) (Department of Rural Development), Watershed Development Programmes (Department of Land Resources, Ministry of Rural Development) , Ministry of Agriculture and Fisheries, and schemes of the Ministry of Agriculture. Convergence pilot projects have been taken up in 115 districts and 23 States across India. State-level reviews and field visits are being undertaken to monitor these initiatives. The National Institute of Rural Development (NIRD) and independent agencies are closely monitoring the convergence projects.
development training of rural BPL youth to enable them to undertake micro-enterprises and wage employment. The Government has approved 215 RSETIs out of which funds have been released to 149. During 2009-10, approximately 77,000 rural youth (including 54,000 BPL youth) were trained in 99 RSETIs functioning in the country
(iii) Swarna Jayanti Shahari Rozgar Yojana (SJSRY)

12.27 The SJSRY launched by the Government of India in December 1997 has been revamped with effect from April 2009. The scheme provides gainful
employment to the urban unemployed and underemployed through encouraging the setting up of self-employment ventures or provision of wage employment, The revamped scheme has the following five components: (i) Urban Self Employment Programme (USEP) (II) Urban Women Self-help Programme (UWSP) (iii) Skill Training for Employment Promotion amongst Urban Poor (STEPUP) (iv) Urban Wage Employment Programme (UWEP), and (v) Urban Community Development Network (UCDN). The annual budgetary provision under the SJSRY for the year 2010-11 is ` 589.68 crore of which ` 427.91 crore had been released by
Human Development, Equity and Environemnt 31 December 2010. A total of 6,80,325 beneficiaries have been benefited upto 31 December 2010.
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Social Protection Programmes

12.28 Keeping in view the importance of the informal sector's share in the total work-force, the Government has been focusing on expanding the coverage of social security schemes so as to provide a minimum level of social protection to workers in the unorganized sector and to ensure inclusive development (Box. 12.6).
areas, has six components, namely rural housing, irrigation potential, drinking water, rural roads, electrification, and rural telephony. It is an important initiative for reducing the gap between rural and urban areas and improving the quality of life of people in rural areas. 12.31 Rural Roads have been identified as one of the six components of Bharat Nirman and a goal has been set to provide connectivity to all villages with a population of 1000 (500 in hilly or tribal areas) with all-weather roads. New connectivity is proposed to be provided to a total of 54,648 habitations under Bharat Nirman. This will involve construction of 1,46,184 km of rural roads. In addition to new connectivity, Bharat Nirman envisages upgradation /renewal of 1,94,130 km of existing rural roads. Under the rural roads component of Bharat Nirman, 38,575 habitations have been provided all-weather road connectivity up to December 2010 and projects for connecting 14,995 habitations are at different stages of implementation. During 2010-11, over 28,963 km of all-weather roads has been completed up to December 2010. New connectivity has been provided to nearly 3949 habitations with an expenditure of ` 9677 crore under PMGSY.
Rural Infrastructure and Development

12.29 The Government of India has accorded highest priority to building rural infrastructure with the objective of facilitating a higher degree of ruralurban integration and for achieving an even pattern of growth for the poor and disadvantaged sections of society. Some of the initiatives taken by the Government to facilitate building of rural infrastructure and development include the PMGSY, Bharat Nirman, Total Sanitation Campaign, and NRHM.
Bharat Nirman
12.30 This programme, launched in 2005-06 for building infrastructure and basic amenities in rural
Box 12.6 : Some Important Social Protection measures taken by the Government
Aam Admi Bima Yojana (AABY) : Under this scheme launched on 2 October 2007, insurance is provided against natural as well as accidental and partial /permanent disability of the head of the family of rural landless households in the country. Up to July 2010, the scheme has covered 1.45 crore lives. Rashtriya Swasthya Bima Yojana (RSBY): The RSBY was launched on 1 October 2007 to provide smart card-based cashless health insurance cover of ` 30, 000 per family per annum to BPL families (a unit of five) in the unorganized sector. The scheme became operational from 1 April 2008. The premium is shared on 75:25 basis by the Centre and State Governments. In the case of States of the north-east region and Jammu and Kashmir, the premium is shared on 90:10 basis. The scheme provides for smart card portability by splitting the card value for migrant workers. Till 31 January 2011, 27 States and Union Territories have initiated the process of implementing the scheme. Out of these 27 States/UTs, 25 States/UTs have started issuing smart cards and more than 2.26 crore smart cards have been issued. The Unorganized Workers' Social Security Act 2008: The Act came into force from 16 May 2009 with the objective of providing social security to unorganized workers. The Unorganized Workers' Social Security Rules, 2009 have also been framed. The Act provides for constitution of the National Social Security Board and State Social Security Boards which will recommend social security schemes for unorganized workers. The National Social Security Board has since been constituted. As part of its mandate, the National Social Security Board constituted a Sub-Committee of the Board to explore the extension of social security schemes to unorganized workers. Subsequently, the Board recommended that social security schemes, namely the RSBY providing health insurance, Janashree Bima Yojana (JBY) providing death and disability cover, and Indira Gandhi National Old Age Pension Scheme (IGNOAPS) providing old age pension, may be extended to building and other construction workers, MGNREGA workers, Asha workers, Anganwadi workers and helpers, porters/coolies/gangmen, and casual and daily wagers. Bilateral Social Security Agreements: Bilateral social security agreements have been signed with Belgium, Switzerland, the Netherlands, and Denmark to protect the interests of expatriate workers and companies on a reciprocal basis. Negotiations for a similar agreement have been completed with Norway. These agreements help workers by providing exemption from social security contribution in case of posting, totalization of contribution period, and exportability of pension in case of relocation to the home country or any third country.
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Economic Survey 2010-11 for changing the behaviour of people from a young age. The components of the TSC include start-up activities, IEC, individual household latrines (IHHL), community sanitary complexes (CSC), SSHE, Anganwadi toilets, alternate delivery mechanism, in the form of rural sanitary marts (RSMs) and production centres (PCs), and administrative charges. The component of solid/liquid waste disposal in villages was included in TSC projects in 2006, providing up to 10 per cent of each district project cost. A total of 607 TSC projects have been sanctioned so far in rural districts of the country at a total outlay of ` 20,024 crore, with a Central share of ` 13,026 crore. The annual budgetary support for the TSC has gradually been increased from ` 202 crore in 2003-04 to ` 1580 crore in 2010-11. With the scaling up of the TSC, combined with higher resource allocation, the implementation of the programme has resulted in substantial increase in rural sanitation coverage from 21.9 per cent in 2001 to about 67.86 per cent as on November 2010. 12.34 The Nirmal Gram Puraskar (NGP) incentive scheme has been launched to encourage Panchayati Raj institutions (PRIs) to take up sanitation promotion. The award is given to those PRIs which attain 100 per cent open-defecation-free environment. The concept of Nirmal Gram Puraskar has been acclaimed internationally as a unique tool of social engineering and community mobilization and has helped a difficult programme like sanitation to pick up. Each gram panchayat getting the NGP has a ripple effect on the surrounding villages, a movement sustained by active people's participation. The Nirmal Gram Puraskar has ignited the imagination of Panchayat leaders throughout the country and made them champions of sanitation. Under the NGP, a total of 22,443 gram panchayats, 165 intermediate panchayats, and 10 district panchayats have received the award in the last five
Rural Drinking Water

12.32 Supply of safe drinking water in uncovered, slipped back and quality-affected habitations is one of the components of Bharat Nirman. Habitations with arsenic and fluoride content in water have been accorded highest priority followed by those with iron, salt, and nitrate content. Expenditure for drinking water supply during the Bharat Nirman period increased considerably from ` 4098 crore in 200506 to ` 7989.72 crore in 2009-10. In order to give effect to the policy initiatives mentioned in the Eleventh Five Year Plan document, the guidelines for the rural water supply programme have been revised. The revised programme called the National Rural Drinking Water Programme (NRDWP) has a budgetary provision of ` 9000 crore for 2010-11 against which ` 7103.56 crore has been utilized so far. Considering the importance of the Bharat Nirman Programme and its implementation status at the end of 2008-09, the Government has extended Phase II of the programme up to 2012. The implementation status of the NRDWP under Bharat Nirman Phase II shows that against a physical target of 76,316 habitations to be covered up to 2010-11, a total of 43,193 habitations have been covered as on 31 December 2010 (Table 12.11). All the uncovered and quality- affected habitations that may still be uncovered by the end of 2010-11 are targeted to be covered during 2011-12.
Rural Sanitation: Total Sanitation Campaign (TSC)

12.33 The TSC is one of the flagship programmes of the Government of India. The TSC follows a community-led and people-centred approach. It places emphasis on information, education, and communication (IEC) for demand generation for sanitation facilities. It also places emphasis on school sanitation and hygiene education (SSHE)
12.11 : Status of NRDWP under Bharat Nirman Phase II as on December 31, 2010
Components Total Rural Habitations Balance Remaining as on 1 April Target (2009-10 and 2010-11) Cumulative Achievement during Bharat Nirman Phase II (2009-10 and 2010-11 (till 31 Dec. 2010) 544 43,193 43,737
Uncovered habitations Quality affected habitations Total 16,61,073
627 1,79,999 1,80,626
627 75,689 76,316
Human Development, Equity and Environemnt years. Sikkim has become the first 'Nirmal State' in the country.
307
Affordable Housing in Partnership (AHIP)

12.37 The Government has launched the AHIP scheme with an outlay of ` 5000 crore for construction of one million houses for the EWS/LIG/ middle income group (MIG) with at least 25 per cent for the EWS category. The scheme aims at partnership between various agencies/ Government/ parastatals/ ULBs/ developers for realizing the goal of affordable housing for all.
Urban Infrastructure, Housing, and Sanitation

12.35 The Government of India is playing an important role in shaping policies and programmes related to urban infrastructure, housing, and sanitation in the country as a whole. Apart from deciding national policy issues, the Central Government is also allocating resources to State Governments through various centrally sponsored schemes and providing finances through national financial institutions in the country as a whole. Some of the initiatives taken by the Government in this area are as follows:
Rajiv Awas Yojana (RAY)

12.38 The Government has announced the vision of a 'slum-free India' through a new scheme, the Rajiv Awas Yojana. Subsequent to this announcement, extensive consultations have been held with various Ministries, experts, state Governments, nongovernmental organizations (NGOs), financial and urban experts, and private industry to frame the guidelines. These draft guidelines have been critically appraised by an expert committee. The preparatory phase of RAY, called the Slum Free City Planning Scheme has been implemented. Under this scheme an amount of ` 60 crore has been released to States for undertaking slum surveys, mapping of slums, developing slum information systems, undertaking community mobilization, preparation of slum-free city/ State plans, etc. before seeking support under RAY. A budgetary allocation of ` 1270 crore has been made for the preparatory phase of RAY for the year 2010-11.
Jawahar Lal Nehru National Urban Renewal Mission (JNNURM)

12.36 The JNNURM, a seven year programme launched in December 2005, provides financial assistance to cities for infrastructure, housing development, and capacity development. Two of its four components-Basic Services to the Urban Poor (BSUP) for 65 select cities and Integrated Housing and Slum Development Programme (IHSDP) for other cities and towns--are devoted to shelter and basic service needs of the poor. The JNNURM also emphasizes the implementation of the following three mandatory pro-poor key reforms to enhance the capacity of urban local bodies (ULBs) - (i) internal earmarking within local body budgets for basic services to the urban poor;(ii) earmarking at least 20-25 per cent of developed land in all housing projects (both public and private agencies) for the economically weaker section (EWS)/lower income group (LIG) category; (iii) implementation of seven-point charter for provision of seven basic entitlements/services. As the first national flagship programme for urbanization, the JNNURM has significantly triggered the creation of many innovative ideas in States that will increase their ability to maintain the momentum of the urban transformation they have initiated. More than 1.5 million houses have been sanctioned by 8 February 2011 and 1456 projects with an outlay of more than ` 37,771.30 crore have been approved with a committed Central share of ` 20,787.90 crore (89.6 per cent of sevenyear allocation for 2005-12). Additional Central assistance of ` 10,013.37 crore has been released. While all States are covered under the BSUP, all States and UTs except Goa and UT of Lakshadweep have been covered under the IHSDP.
Skill Development
12.39 As mentioned in the Economic Survey 200910, a three-tier structure for coordinated action on skill development has been set up. The three-tier structure consists of (i) the Prime Minister's National Council on Skill Development, (ii) the National Skill Development Coordination Board (NSDCB), and (iii) the National Skill Development Corporation (NSDC). The Prime Minister's National Council has outlined the core operating principles which, inter alia, advocate the need for co-created solutions for skill development based on partnerships between States, civil society, and community leaders. The emphasis is on making skills bankable for all sections of society including the poorest of the poor. The issue of optimum utilization of existing infrastructure available in the States and using the same for skill training is also emphasized. By the end December 2010, 28 States and five Union Territories had set up Skill Development Missions. As a next step, all these States/UTs need to assess the skill gaps in the major
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Economic Survey 2010-11 about 80 per cent of residents have given consent for opening bank accounts during enrolment. In order to simplify the process of opening Aadhaar-enabled bank accounts for the marginalized population, the Aadhaar-based Know Your Resident (KYR) leading to issue of Aadhaar numbers has been accepted as equivalent to banks' Know Your Customer (KYC) norms. Further, the Aadhaar letter has been declared an officially valid document for opening of bank accounts by the Government in December 2010. The UIDAI is also working towards linking MNREGS payments with the Aadhaar number of the resident and routing the payments through his/her Aadhaarenabled bank account. The stage is now set for realizing the service-delivery potential of Aadhaar. In addition to help in cleaning up databases by ensuring that there are no duplicates and fakes, Aadhaar can help in better targeting and delivery of services and reducing the cost of delivery. Transformation in the delivery of services is expected through the use of Aadhaar authentication services.
sectors and formulate action plans for bridging them. The NSDC, set up on 31July 2008 as a non-profit public-private partnership (PPP) in skill development for co-coordinating/ stimulating private-sector initiatives, has been mandated to achieve the target of creation of skilled workforce of 150 million persons by 2022 under the National Skill Development Policy. As a first step towards achieving the target, a comprehensive skill gap study for 21 high-growth sectors has been completed in order to build a baseline for formulation of a comprehensive strategy. This has generated a lot of interest in private sector in investing in skill development. The corporation has developed a strong governance structure for the disbursal of funds. So far 22 projects have been approved by the NSDC. This will result in creation of 38.59 million skilled workforce over a period of 10 years. The contribution of the NSDC in the form of equity/loan/grant for the 22 projects is ` 607.56 crore. Out of the 22 projects, two that had the mandate to create a skilled workforce of 1.018 million over 10 years were approved in 2009-10 with a total contribution of ` 35.68 crore from the NSDC.
Education
12.42 India is a nation of young people. Out of a population of above 1.1 billion, 672 million people are in the age group 15 to 59 years, which is usually treated as the 'working-age population'. It is predicted that India will see a sharp decline in the dependency ratio over the next 30 years, which will constitute a major 'demographic dividend' for India. But this advantage can only be realized if it is supplemented with skill enhancement of the young through the medium of education. In the year 2001, 11 per cent of the population of the country was in age group 1824 years and this is expected to rise to 12 per cent by the end of the Eleventh Five Year Plan. This young population should be considered as a valuable asset which, if well equipped with education and skills, can contribute effectively to the development of the national as well as global economy.
Unique Identification Authority of India (UIDAI)

12.40 Significant progress has been made since the UIDAI was created through a notification issued by the Government in January 2009. Phase II of the UIDAI now referred to as the Aadhaar programme has commenced with an allocation of ` 3023.01 crore in July 2010 for enrolling 10 crore residents through multiple registrars and for setting up of other infrastructural requirements for the project phase of five years ending March 2014. The scheme was formally launched on 29 September 2010 at Thembali village of Nandurbar district in Maharashtra when all the residents in the village were enrolled making it the first 'Aadhaar Gaon'. All the 35 States and UTs have signed a memorandum of understanding (MoU) with the UIDAI. MoUs have also been signed with the Ministry of Human Resource Development, Ministry of Rural Development, Ministry of Petroleum and Natural Gas, Department of Posts, 23 publicsector banks, the Life Insurance Corporation of India, Indira Gandhi National Open University, and the National Coalition of Organizations for Security of Migrant workers. 12.41 The UIDAI is partnering with financial institutions to both augment enrolments through them and to provide bank accounts to residents during Aadhaar enrolment. Enrolment statistics indicate that
Right of Children to Free and Compulsory Education Act 2009 (RTE Act)
12.43 Free education for all children between the age of 6 and 14 years has been made a fundamental right under the RTE Act 2009. While the RTE Act was notified on 27 August 2009 for general information, the notification for enforcing the provisions of the Act with effect from 1 April 2010 was issued on 16 February 2010. The Ministry of HRD had set up a committee to identify Sarva Shiksha Abhiyan(SSA) norms that require to be brought in conformity with RTE norms and standards,
Human Development, Equity and Environemnt including, for example, pupil-teacher ratio and teacher-classroom ratio. On the basis of the recommendation of this committee, SSA norms have been modified to align them with the requirement of the RTE Act 2009. The main changes made in the norms relate to opening of new primary and upper primary schools as per neighborhood norms , upgradation of all alternate schooling facilities provided through centres under the Education Guarantee Scheme (EGS), revised pupil-teacher ratio (PTR) norms, provision of special training for out-of-school and drop-out children to facilitate age-appropriate admission, provision of grant and teaching learning equipment to facilitate States to merge Classes V and VIII in primary and upper primary cycle stage and approval of additional 1073 Kasturba Gandhi Balika Vidyalayas (KGBVs) for educationally backward blocks (EBBs) .
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down from 134.6 lakh in 2005 to 81.5 lakh in 2009. Kasturba Gandhi Balika Vidyalayas (KGBVs): The KGBV is a scheme for setting up residential schools at upper primary level for girls belonging predominantly to the SC/ ST, OBC, and minority communities. The scheme is being implemented in the EBBs where rural female literacy is below 30 per cent and in select urban areas where female literacy is below the national average. The KGBV scheme was merged with the (SSA) with effect from 1 April 2007. The scheme provides for minimum reservation of 75 per cent of the seats for girls belonging to SCs, STs, OBCs or minority communities and priority for the remaining 25 per cent to girls from BPL families. The scheme is being implemented in 27 States. The Government of India has sanctioned 2573 KGBVs up to 31 March 2010 and 2565 KGBVs are reported to be functional in the states. A total of 2,38,600 girls were enrolled in KGBVs with SC and ST girls accounting for 27.14 per cent and 28.67 per cent respectively. While the shares of OBC girls and BPL girls stood at 26.84 per cent and 9.19 per cent respectively, minority girls accounted for 8.17 per cent. National Programme for Education of Girls at Elementary Level (NPEGEL): The NPEGEL, is a focused intervention of the Government of India to reach the 'Hardest to Reach' girls. It is an important component of the SSA, which provides additional support for enhancing girl's education over and above the normal SSA interventions. The programme provides for setting up of a 'model school' in every cluster with more intense community mobilization and supervision of girls' enrolment in schools. Gender sensitisation of teachers, development of gender-sensitive learning materials, and provision of need-based incentives like escorts, stationery, workbooks, and uniforms are some of the endeavours under the programme. The scheme is being implemented in the EBBs where the level of rural female literacy is less than the national average and gender gap is above the national average; in blocks of districts which are not covered under EBBs but where at least 5 per cent of population is SC/ST and where SC/ST female literacy is below 10 per cent; and also in select urban slums. About 3286 educationally backward blocks are
Elementary and Secondary Education Schemes

12.44 Several initiatives have been undertaken by the Government in the field of elementary and secondary education in recent years. Some of the important schemes are as follows: The Sarva Shiksha Abhiyan SSA : The programme is being implemented in partnership with the States to address the needs of children in the age group of 6-14. The goals of the SSA inter alia include enrolment of all children in school, education guarantee centres (EGCs), alternate schools, 'back-to-school' camp, retention of all children till the upper primary stage by 2010, bridging of gender and social category gaps in enrolment with retention and learning, and ensuring that there is significant enhancement in the learning achievement levels of children at the primary and upper primary stages. The achievements under the SSA till September 2010 include opening of 309,727 new schools, construction of 254,935 school buildings, construction of 1,166,868 additional classrooms, 190,961 drinking water facilities, construction of 347,857 toilets, supply of free textbooks to 8.70 crore children, and appointment of 11.13 lakh teachers. Moreover, around 14.02 lakh teachers have received inservice training under this programme. There has been significant reduction in the number of outof-school children on account of SSA interventions. An independent study states that the number of out-of-school children has come
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Economic Survey 2010-11 scheme of Integrated Education for Disabled Children (IEDC). It provides 100 per cent Central assistance for inclusive education of disabled children studying in Classes IX-XII in Government, local body, and Government-aided schools. The aim of the scheme is to facilitate continuation of education of children with special needs up to higher secondary level. The scheme provides for personal requirements of the children in the form of assistive devices, helpers, transport, hostel, learning material, scholarship for the girl child, etc up to ` 3000 per disabled child per annum. A budget of ` 70.00 crore was allocated for this scheme during 2010-11. Over 1.30 lakh disabled children are proposed to be covered with the assistance of 3000 teachers in 20,000 Government secondary and higher secondary schools in 2010-11.The scheme is extremely important as a natural corollary to the success achieved in enrolment and retention of children at elementary stage (SSA). Saakshar Bharat : In the context of the Government's overall policy aimed at empowerment of women and in recognition of the fact that literacy is a prerequisite for socioeconomic development, the National Literacy Mission has been recast as 'Saakshar Bharat' with prime focus on female literacy. This flagship programme of the Government will cover all adults in the age group of 15 and above though its primary focus will be on women. Several new features have been added to the scheme and basic literacy, post literacy, and continuing education programmes, will now form a continuum, rather than sequential segments under this programme. Besides the volunteer-based mass campaign approach, provision has been made for alternative approaches to adult education. The Jan Shiksha Kendras (adult education centres-AECs) will be set up to coordinate and manage all programmes within their territorial jurisdiction. The state governments, as against the districts in the earlier versions, and Panchyati Raj institutions, along with communities, will be the valued stakeholders. The budgetary support has also been substantially enhanced. To minimize regional, social, and gender disparities, the programme in its first phase, that is during the Eleventh Plan period will remain confined to 365 districts with female adult literacy rates of 50 per cent or below as per the 2001 census.
covered under the scheme in 25 eligible States. National Programme of Midday Meals in schools: Under the National Programme of Midday Meals in schools, cooked mid-day meal is provided to all the children attending Classes I-VIII in Government, local body, Governmentaided and National Child Labour Project schools. EGCs/alternate and innovative education centres including madarsas/maqtabs supported under the SSA across the country are also covered under this programme. At present the cooked midday meal provides an energy content of 450 calories and protein content of 12 grams at primary stage and an energy content of 700 calories and protein content of 20 grams at upper primary stage. Adequate quantity of micro-nutrients like iron, folic acid and vitamin A are also recommended for convergence with the NRHM. During 200910, the budget allocation under this program was ` 7359.15 crore against which the total expenditure incurred was ` 6937.79 crore. A total number of 11.04 crore children (7.85 crore in primary and 3.19 crore in upper primary stages) have been benefitted under the programme during 2009-10. Rashtriya Madhyamik Shiksha Abhiyan (RMSA): The RMSA was launched in March 2009 with the objective of enhancing access to secondary education and improving its quality. The implementation of the scheme started from 2009-10. It envisages raising the enrolment rate at secondary stage from 52.26 per cent in 200506 to 75 per cent within five years by providing a secondary school within reasonable distance of any habitation. The other objectives include improving quality of education imparted at secondary level by ensuring that all secondary schools conform to prescribed norms, removing gender, socio-economic and disability barriers, providing universal access to secondary-level education by 2017, i.e. by the end of the Twelfth Five Year Plan, and achieving universal retention by 2020. The Central Government and State Government bear 75 per cent and 25 per cent of the project expenditure respectively during the Eleventh Five Year Plan. The funding pattern is in the ratio of 90:10 for the north-eastern States. Inclusive Education for the Disabled at Secondary Stage (IEDSS): The IEDSS scheme was launched in 2009-10 replacing the earlier
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Box 12.7 : Main Findings of ASER 2010

Enrolment : In 2010, 96.5 per cent of children in the 6 to 14 age group in rural India are enrolled in school. While 71.1
per cent of these children are enrolled in government schools, 24.3 per cent are enrolled in private schools.
Out of school girls: In 2010, 5.9 per cent of girls in the 11-14 age group are still out of school. However, this percentage
has gone down as compared to 6.8 per cent in 2009. In states like Rajasthan and Uttar Pradesh this percentage remains high and shows little change since 2009 whereas in Bihar, the percentage of out of school girls and boys in all age groups has been declining steadily since 2005.
Rise in private school enrolment: Enrolment in private schools in rural India increased from 21.8 per cent in 2009 to
24.3 per cent in 2010. This number has risen steadily since 2005 when it was 16.3 per cent nationally. Between 2009 and 2010, the southern states have shown a substantial increase in private school enrolments. While the percentage of children in private schools increased in southern states like Andhra Pradesh , Tamil Nadu, Karnataka and Kerala and in northern states like Punjab, enrolment remained low in Bihar, West Bengal, Jharkhand , Orissa and Tripura.
Increasing numbers of five year olds enrolled in school: The percentage of five year olds enrolled in schools increased
from 54.6 per cent in 2009 to 62.8 per cent in 2010. The highest increase was observed in Karnataka. Enrolment of five year olds increased substantially between 2009 and 2010 in several other states such as Punjab, Haryana, Rajasthan , Uttar Pradesh and Assam.
Nationally, not much change in reading ability, except in some states: Even after five years in school, close to half
of all children are not even at the level expected of them after two years in school. Only 53.4 per cent children in Std V could read a Std II level text. However, Andhra Pradesh, Gujarat, Haryana and Rajasthan saw an increase in the proportion of children in Std I who were able to recognize letters. There was also an increase in the proportion of children in Std V who could read Std II level text in Andhra Pradesh, Gujarat, Assam, Himachal Pradesh, Punjab, Uttar Pradesh and West Bengal.
Maths ability shows a declining trend: On an average, there has been a decrease in children's ability to do simple
mathematics. The proportion of Std I children who could recognize numbers from 1-9 declined from 69.3 per cent in 2009 to 65.8 per cent in 2010. Similarly, the proportion of children in Std III who could solve two digit subtraction problems decreased from 39 per cent to 36.5 per cent in the same period. Children in Std V who could do simple division problems also dropped from 38 per cent in 2009 to 35.9 per cent in 2010. Contrary to this trend, Punjab's performance in basic arithmetic has improved over the last few years.
Middle school children weak in everyday calculations: About two thirds of all children could answer questions
based on a calendar and only half could do the calculations related to area. The questions related to area seemed to be the most difficult for children to solve, even though such problems are usually found in textbooks in Std IV or V. Children in Std VIII in Kerala and Bihar solved the area related questions the best.
Tuition going down for private school children: A clear decrease is seen in the incidence of tuition among children
enrolled in private schools across all classes up to Std VIII. This proportion has not changed much among children enrolled in government schools, although in states like Bihar, West Bengal and Orissa, where private school enrolment is low, the proportion of children in Std V enrolled in government schools who take tuition classes is high.
RTE compliance: Over 60 per cent of the 13,000 schools visited satisfied the infrastructure norms specified by the RTE.
However, more than half of these schools will need more teachers. A third will need more classrooms. The all India percentage of primary schools (Std 1-4/5) with all teachers present on the day of the visit shows a consistent decrease over three years, falling from 73.7 per cent in 2007 to 69.2 per cent in 2009 and 63.4 per cent in 2010. For rural India as a whole, children's attendance shows no change over the period 2007- 2010. Attendance remained at around 73 per cent during this period. But there is considerable variation across states. Source: ASER 2010, Press Release Dated 14 January 2010, website http://images2.asercentre.org/aserreports/ ASER_2010_PRESS_RELEASE.pdf
Besides, 33 districts affected by left wing extremism will also be covered, irrespective of the existing literacy rate in those districts. 12.45 The Annual Status of Education Report (ASER) by Pratham, an NGO, is an annual survey of rural children since 2005. In 2010, which is its sixth year, the ASER was conducted in 522 districts, over 14,000 villages, 300,000 households, and almost
700,000 children. Over six years, the ASER has observed a clear rise in enrolment (Box 12.7).
Higher and Technical Education

12.46 Higher Education is of vital importance for the country, as it is a powerful tool to build a knowledge-based twenty-first century society. Improvement of access along with equity and
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Economic Survey 2010-11 During the current financial year, 14 proposals have so far been approved and 18 are in the pipeline. Setting up of new Indian Institutes of Information Technology (IIITs): To address the increasing skill challenges of the Indian IT industry, the Government has approved setting up of twenty new IIITs on a PPP basis. The partners in setting up the IIITs would be the HRD Ministry, Governments of the respective States where each IIIT will be established, and industry, with the capital cost of `128 crore for each IIIT to be contributed in the ratio of 50:35:15 by the three partners respectively. In the north-eastern States, industry participation for capital expenditure will be kept at 7.5 per cent whereas Central and State Government participation will be 57.50 per cent and 35 per cent respectively. During the first four years of setting up of each IIIT, the Central Government will provide assistance towards recurring expenditure to the extent of ` 10 crore, year-wise requirement of which will vary depending on the growth of institutes and requirement of funds. The project is targeted to be completed in nine years from 2011-12 to 2019-20. In the first year, 5-10 new IIITs would be set up depending upon the response of the State Governments and private partners. Establishment of institutions : The Government has approved setting up of ten new National Institutes of Technologies (NITs) in Arunachal Pradesh, Sikkim, Meghalaya, Nagaland, Manipur, Mizoram, Goa, Delhi, Uttarakhand, and Pudduchhery. The Government of India has set up five Indian Institute of Science Education and Research (IISERs) at Pune, Kolkata, Mohali, Bhopal, and Thiruvananthapuram. The IISERs are envisaged to carry out research in frontier areas of science and to provide quality science education at undergraduate and postgraduate levels. All the five new IISERs have become functional. During the first four years of the Eleventh Plan, five new Indian Institutes of Management (IIMs) have already become operational and the remaining two will become operational in 2011-12. Eight new Indian Institute of Technology (IITs) and two new School of Planning and Architecture (SPAs) have also been opened in the first four years of the Eleventh Plan. Reform measures in the higher and technical education Sector: The Department of Higher
excellence, adoption of State-specific strategies, enhancement of the relevance of higher education through curriculum reforms, vocationalization, networking and information technology (IT), and distance education are some of the main policy initiatives in the higher education sector. The other important policy initiatives in higher education are programmes for general development of universities and colleges; special grants for the construction of hostels for women; scholarships to students; scheme to provide interest subsidy on educational loans for professional courses to ensure that nobody is denied professional education because he or she is poor; and making interventions to attract and retain teaching talent in higher and technical education. Emphasis has been laid on expansion with equity, use of information and communication technology (ICT), and promotion of quality education. Some of the major initiatives taken during the Eleventh Plan for promoting higher and technical education are as follows: Scheme for incentivising States for establishing new higher educational institutions/expanding existing ones: A new Scheme has been envisaged in the Eleventh Plan for providing Central assistance to State Governments in the ratio of 1:2 (1:1 for special category States) for establishing new higher educational institutions/ expanding existing ones. The scheme will be taken up on a pilot basis for the remaining duration the Eleventh Plan. The physical targets for this scheme are (i) 8 new universities (including 2 in special category States), (ii) 83 new colleges, (iii) 10 new engineering colleges, and (iv) Expansion of colleges so as to achieve additional enrolment of 100,000 (one lakh) students. Priority will be given for setting up of institutions in locations predominantly inhabited by SCs/STs/ educationally backward minorities so as to address equity concerns. Scheme of setting up of 374 Model Colleges: In order to remove regional imbalance, the Government has planned to set up 374 Model Degree Colleges one each in identified educationally backward districts where the GER is less than the national average. Under this scheme, the Central Government shall provide assistance to the extent of one-third of the capital cost for establishment of each college, with a limit of ` 2.67 crore. For special category States, the Centre's share shall be 50 per cent of the capital cost, with a limit of ` 4.00 crore.
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Box : 12.8 Reform Initiatives in the Higher and Technical Education Sector
An important challenge in the higher education sector is to bring about reforms not only in the institutions of higher learning but also in the regulatory structures of the higher education system. There are also the challenges of maintaining quality and excellence while ensuring rapid expansion and attracting and retaining good faculty in adequate numbers to meet the demands of the rapidly expanding sector. The Government has accordingly taken a number of steps for reforms in the regulatory and governance structures of the higher education system. A few of these reform initiatives are as under:
Proposal to establish an autonomous overarching authority for prescribing standards and laying down policy for higher education and research to subsume the University Grants Commission (UGC), All India Council for Technical Education (AICTE), National Council for Teacher Education (NCTE), and academic functions of other regulatory bodies in higher education.
Proposal for prohibition and punishment of unfair practices in technical educational institutions, medical educational institutions and universities. Proposal for mandatory assessment and accreditation in higher education including institutions and programmes and creation of an institutional structure for the same. Qualifying the National Eligibility Test (NET) has been made mandatory for appointment as teacher in universities and colleges with exemption provided to those who have obtained PhD degree in accordance with the standards specified by the regulation. Review of performance of deserving institutions like research councils, deemed universities.
Education has initiated a number of steps for educational reforms including in regulatory and governance structures in the higher education system (Box. 12.8).
suggests that significant progress has been made over the last three decades (Table 12.12). 12.48 However, despite this progress, as per HDR 2010, India fares poorly when compared to countries like China and Sri Lanka in terms of parameters like per capita expenditure on health, number of physicians/hospital beds (per 10,000 persons), and IMR. In addition, within the country, the improvement has been quite uneven across
Health
12.47 An analysis of the performance of health delivery facilities in terms of selected indicators
Table 12.12 : India Selected health indicators

Sl. No. 1. 2. 3. 4. 5. Parameter 1981 33.9 12.5 4.5 NA 110 1991 29.5 9.8 3.6 NA 80 Current level 22.5 (2009*) 7.3 (2009*) 2.6 (2008*) 254 (2004-06*) 50 (2009*) 49 52 41.2 (1981-85) 55.4 55.4 55.7 26.5 (1989-93) 59.4 59.0 59.7 15.2 (2008*) (2002-06)** 63.5 62.6 64.2
Crude Birth Rate (CBR) (per 1000 population) Crude Death Rate (CDR)(per 1000 population) Total Fertility Rate (TFR)(per woman) Maternal Mortality Rate (MMR) (per 100,000 live births) Infant Mortality Rate (IMR)(per 1000 live births): Male Female
6. 7.
Child (0-4 years) Mortality Rate ( per 1000 children) Life Expectancy at Birth: Total Male Female
Source: Ministry of Health and Family Welfare. *Sample Registration Survey (SRS). ** Abridged Life Table 2002-06, RGI India.
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Economic Survey 2010-11 hygiene, nutrition, and safe drinking water as the basic determinants of good health. Keeping this in view, it seeks greater convergence among the related social-sector departments, namely AYUSH (Ayurveda, Yoga and Naturopathy, Unani, Siddha, and Homoeopathy), Women & Child Development, Sanitation, Elementary Education, Panchayati Raj, and Rural Development. The achievements under the NRHM as on September 2010 are as follows:
regions/States, gender, rural/urban areas, etc. The health system in India is a mix of the public and private sectors, with the NGO sector playing a small role. Over the last six decades, a large number of health institutions catering to the health needs of the people at primary, secondary, and tertiary levels have been set up. The country has developed a well-structured three-tier public health infrastructure, comprising community health centres (CHCs), primary health centres (PHCs), and sub-centres spread across rural and semi-urban areas as well as tertiary medical care comprising multispecialty hospitals and medical colleges located almost exclusively in the urban areas. However, the inadequate health-related infrastructure, including shortages of doctors and paramedical professionals has severely restricted the delivery of health services, particularly in rural areas. In order to bridge the gap in existing health infrastructure and to provide accessible, affordable, and equitable health care, the Government of India has launched a large number of programmes and schemes as follows: National Rural Health Mission (NRHM): The NRHM was launched in 2005 to provide accessible, affordable, and accountable quality health services to rural areas with emphasis on poor persons and remote areas. It is being operationalized throughout the country, with special focus on 18 states, which include 8 empowered action group States (Bihar, Jharkhand, Madhya Pradesh, Chhattisgarh, Uttar Pradesh, Uttarakhand, Orissa, and Rajasthan), 8 north-eastern States, Himachal Pradesh, and Jammu and Kashmir. The NRHM aims to provide an overarching umbrella to the existing programmes of Health and Family Welfare including the Reproductive Child Health Project (RCH-II) and Malaria, Blindness, Iodine Deficiency, Filaria, Kala Azar, T.B., Leprosy and Integrated Disease Surveillance programmes by strengthening the public health delivery system at all levels. The Sub-centres, PHCs, and CHCs are being revitalized through better human resource management, including provision of additional manpower, clear quality standards, revamping of existing medical infrastructure, better community support, and through untied funds to facilitate local planning and action. Flexible, decentralized planning is the pivot on which the Mission rotates. Further, the Mission addresses the issue of health in the context of a sector-wide approach addressing sanitation and
ASHAs/Link Workers: So far 8.33 lakh accredited social health activists (ASHAs) have been selected. Of these, 7.82 lakh have received training in at least the first module and 5.7 lakh have been provided with drug kits in their respective villages. Addition of Human Resources: Under the NRHM 1572 specialists, 8284 MBBS doctors, 26,734 staff nurses, 53,552 auxiliary nurse midwives (ANMs), 18,272 paramedics have been employed on contract. Conversion of Health Facilities into 24 X 7: A total of 16,338 additional primary health centres (APHCs), PHCs, CHCs, and other sub-district facilities are functional on 24 x 7 basis. Janani Suraksha Yojana (JSY) Beneficiaries: Over 3.4 crore women have so far been covered under the JSY. Rogi Kalyan Samitis (RKSs): Around 599 district hospitals (DHs), 4210 CHCs, 1136 other than CHC hospitals, and 17,097 PHCs have their own RKSs with untied funds for improving quality of health services. Village Health and Sanitation Committees: So far, 4.98 lakh villages (78 per cent) have their own Village Health and Sanitation Committees and each of them has been provided `10,000 as untied grant per year. Village Health and Nutrition Days (VH& NDs): Thirty-five lakh VH& NDs in 2006-07, 49 lakh in 2007-08, 58 lakh in 2008-09, 58.7 lakh in 200910, and 34.6 lakh so far in 2010-11 have been observed to reach basic health services to rural areas. Mobile Medical Units (MMUs): About 381 MMUs are functional under the NRHM so far. AYUSH: AYUSH services have been co-located in 14,766 health facilities and 9578 AYUSH doctors and 3911 AYUSH paramedics have been added to the system.
Human Development, Equity and Environemnt Table 12.13: Health Care Infrastructure
Facilities Sub-centre /PHC/CHC*(2009) Dispensaries and Hospitals (all) ** Nursing personnel (2009)** Doctors (modern system) (2009)** No. 1,73,795 35,071 16,52,161 7,57,377
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Sources:* RHS: Rural Health Statistics in India 2009. ** National Health Profile, 2009.
Programme Management Units: Under the NRHM, 627 district programme managers, 618 district accounts managers, 539 district data managers, 635 district programme management units (DPMUs), 3529 block managers, 3261 accountants, and 3529 Block PMUs have been added.
Strengthening of primary health infrastructure and improving service delivery: There has been a steady increase in health care infrastructure available over the Plan period ( Table12.13). However, there is still shortage of 20,486 subcentres, 4477 PHCs, and 2337 CHCs as per 2001 population norms. Further, almost 40 per cent of the existing health infrastructure is in rented buildings or rent-free panchayat /voluntary society buildings. Poor upkeep and maintenance and high absenteeism in rural areas are the main problems in the public-sector health delivery system. The NRHM seeks to strengthen the public health delivery system at all levels. Janani Suraksha Yojana (JSY): The JSY was launched with focus on demand promotion for institutional deliveries in States and regions where these are low and integrates cash assistance with delivery and post-delivery care. It targets lowering of the maternal mortality rate (MMR) by ensuring that deliveries are conducted by skilled birth attendants. The JSY scheme has shown rapid growth in the last three years, with the number of beneficiaries reaching 100.78 lakh in 2009-10. The strengthening of infrastructure, coupled with improvement in manpower and training, has resulted in significant improvement of institutional deliveries in all major states. A mid-term evaluation of the RCH II programme also confirmed the increase in the number of JSY beneficiaries. The issues of governance, transparency, and grievance redressal mechanisms are now the thrust areas for the JSY.
Pradhan Mantri Swasthya Suraksha Yojana (PMSSY): The PMSSY has been launched with the objectives of correcting regional imbalances in the availability of affordable/reliable tertiary healthcare services and augmenting facilities for quality medical education in the country. The PMSSY has two components in its first phase. The first is the setting up of six All India Institute of Medical Sciences (AIIMS)-like institutions. The civil works related to the construction of medical colleges and hostels have commenced in all sites. The construction of residential complexes in Rishikesh and Patna is expected to be completed by March 2011 whereas in Bhopal and Bhubaneswar, it is likely to be completed by June 2011 and August 2011 respectively. As regards the work on hospital complexes, lay-out work is under way for all the institutions. The second component of the PMSSY is the upgradation of 13 existing Government medical college institutions. Civil works under this component have been completed in the medical colleges in Trivandrum, Salem, Bangalore, and Lucknow, are on the verge of completion in Hyderabad, Kolkata, Jammu, Tirupati, and Mumbai, and in Varanasi, Srinagar, Ahmadabad, and Ranchi are likely to be completed by mid-2011. In the second phase of the PMSSY, two more AIIMS-like institutions will be set up and upgradation of six more medical colleges is being taken up. National AIDS Control: According to recent HIV estimates based on HIV Sentinel Surveillance 2008-09, the number of people living with HIV in India in 2009 was 23.9 lakh, with an adult HIV prevalence of 0.31 per cent. The estimates highlight an overall reduction in adult HIV prevalence and HIV incidence (new infections) in India. Adult HIV prevalence at national level has declined from 0.41 per cent in 2000 to 0.31 per cent in 2009. The estimated number of new annual HIV infections has declined by more than 50 per cent over the past decade from 2.7 lakh in 2000 to 1.2 lakh in 2009. The epidemic is concentrated with high prevalence among the high risk groups (HRGs), injecting drug users (IDUs) (9.2 per cent), men who have sex with men (MSMs) (7.3 per cent), females sex workers (FSWs) (4.9 per cent), and sexually transmitted infection (STI) clinic attendees (2.5 per cent). Based on sentinel surveillance, 156 districts have been identified as category 'A' districts where prevalence of HIV among antenatal clinic attendees (proxy for general population) is more than 1 per cent; and
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Economic Survey 2010-11 linkages for post-harvest management, marketing, infrastructure, certification, and crop insurance in a Mission mode. During the current financial year, 26 States have been covered and financial support of ` 46.41 crore was released for undertaking different activities under the scheme including cultivation of important medicinal plant species in over 24,214 hectare of land. 12.49 The demand for health services is likely to rise considerably in the future with increase in health-seeking behaviour resulting from better levels of education, income status, and urbanization. The role of the Government is critical for meeting the health-care needs of major sections of the population and to control escalation of cost of health care, while private-sector investment is crucial for satisfying the increasing demand for health services. The private sector plays a dominant role the delivery of health services in the country. The sector is predominant in medical education, training, diagnostics and technology, manufacture of pharmaceuticals, hospitals design, and construction and management of ancillary services. As per the National Commission on Macroeconomics and Health (NCMH) 2005, around 70 per cent of all hospitals and 37 per cent of total beds in the country are in the private sector. 12.50 Another important development in the Indian health-care sector has been the growing use of telemedicine. In 2001, the Indian Space Research Organization (ISRO) launched a pilot project that connects 78 hospitals in remote areas to super specialty hospitals in the cities. Telemedicine has opened up possibilities of professionals providing expert healthcare service in remote rural areas from their locations in cities. It has also opened up the possibility of patients in India availing of professional advice from physicians in the developed countries. 12.51 Human resources are the critical variable for effective provision of health care to the population. To increase human resources in medical education, the Central Government has revised the teacherstudent ratio from 1:1 to 1:2 which has resulted in approximately 4000 additional postgraduate seats in various disciplines in Government medical colleges from the academic year 2010-11. Further, in order to increase the number of medical colleges and specialists, the Central Government has also relaxed the norms in respect of land requirement, bed strength, bed occupancy, maximum admission capacity, and age of teaching faculty . Besides, the
39 districts as category 'B' districts where prevalence amongst high risk population is greater than 5 per cent. These districts are given high priority in the implementation of the programme. The National AIDS Control Programme Phase-III (NACP-III) is being implemented for the period 2007-12 with a total outlay of ` 11,585 crore. Others : Others programmes like the Revised National TB Control Programme (RNTCP), National Vector Borne Diseases Control Programme (NVBDCP), National Programme for Control of Blindness (NPCB), and National Leprosy Eradication Programme have also been strengthened and are being implementation in a time-bound and focused manner. The Integrated Disease Surveillance Project (IDSP) has been launched with the objective of detecting and responding to early warning signals of disease outbreaks. Surveillance units have been established at all State and district headquarters. The Central Surveillance Unit of the IDSP presently receives weekly disease surveillance data from 85 per cent districts in the country, Of these, 55 per cent districts report data through portal also which is for data entry, view reports, outbreak reporting, data analysis, training modules, and resources related to disease surveillance. A total of 553 outbreaks were reported and responded to by States in 2008, 799 in 2009 and 938 in 2010 (up to December 2010). Ayurveda, Yoga & Naturopathy, Unani, Siddha and Homeopathy (AYUSH): Mainstreaming of AYUSH in national health care delivery is an important goal under the NRHM, for which the Government has sanctioned ` 165.70 crore in the current financial year upto 31 January, 2011. In September 2009 a new component Upgradation of AYUSH Hospitals in the States was incorporated in the existing Centrally Sponsored Scheme of Development of AYUSH Hospitals and Dispensaries. Further, in July 2010 Upgradation of AYUSH Dispensaries in the States has been incorporated as a new component in the existing Centrally Sponsored Scheme of development of AYUSH Hospitals and Dispensaries. The Government has already recognized Ayurveda, Yoga and Naturopathy, Unani, and Siddha as official Indian Systems of medicine. It is implementing the National Mission on Medicinal Plants which is aimed at supporting market-driven medicinal plant cultivation on private land with backward linkages for establishment of nurseries and supply of quality planting material, and forward
Human Development, Equity and Environemnt Central Government also provides financial assistance to State Government medical colleges for increasing the postgraduate seats to strengthen the existing public health delivery system. Thirtyfour Government medical colleges have been approved for Central assistance during 2010-11. With the implementation of the scheme by 201112, approximately 4000 additional postgraduate seats would be available.
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up to 31December 2010. Of the total 7073 sanctioned ICDS projects, 6719 were operational as on 31 December 2010. Of the total 13.67 lakh sanctioned AWCs, 12.42 lakh were operational as on 31 December 2010. Rajiv Gandhi Scheme for Empowerment of Adolescent Girls (RGSEAG): This scheme was launched on 19 November 2010 with the objective of empowering adolescent girls in the age group 11-18 years by bringing improvement in their nutritional and health status and upgrading various skills like home skills, life skills, and vocational skills. To start with, it will be implemented in 200 selected districts across the country on a pilot basis. RGSEAG would be implemented through State Governments / UT Administrations with 100 per cent financial assistance from the Central Government for all inputs other than nutrition provision for which 50 per cent Central assistance to states/UTs would be provided. Anganwadi centres will be the focal points for delivery of services. Nearly 100 lakh adolescent girls in 200 districts are expected to be benefited per annum under the scheme. In these 200 districts, Kishori Shakti Yojna (KSY) and the Nutrition Programme for Adolescent Girls (NPAG) have been merged in the RGSEAG. In the remaining districts, the KSY will continue as before. The Rajiv Gandhi National Creche Scheme for Children of Working Mothers: This scheme provides for day-care facilities to 0-6 year-old children of working mothers by opening crches and development services, i.e., supplementary nutrition, health-care inputs like immunization, polio drops, basic health monitoring, and recreation. The combined monthly income of both the parents should not exceed ` 12000 for availing of the facilities. The scheme is presently being implemented through the Central Social Welfare Board (CSWB) and Indian Council for Child Welfare (ICCW). As of now 22,599 crches are functional and the number of beneficiary children is 5,64,975. Under the revised scheme, an amount of ` 1.70 lakh per annum per crche has been proposed against ` 42,384 per annum per crche in the existing scheme. This will provide for better nutritional support as well as better services for children. Integrated Child Protection Scheme (ICPS): This scheme was launched in 2009-10 with the objective of providing a safe and secure
Women and Child Development

12.52 The Government has started several schemes and initiated many new policy initiatives for the welfare and development of women and children. These include initiatives for economic and social empowerment of women and for securing gender equality in various aspects of social, economic, and political life. The scope and coverage of the schemes for women and child development has been expanding, as is reflected in the progressive increase of expenditure incurred under various plan schemes by the Government. Some of the important schemes of the Ministry are as follows: Integrated Child Development Services (ICDS) Scheme: This was launched in 1975 for holistic development of children below 6 years of age and for proper nutrition and health education of pregnant and lactating mothers with 33 projects and 4891 anganwadi centres (AWCs). It has been continuously expanded to uncovered areas and has now been universalized with the Government of India cumulatively approving 7076 projects and 14 lakh AWCs including 20,000 anganwadis 'ondemand'. Apart from universalizing the ICDS Scheme, the Government has taken various steps, such as revision in financial norms of existing interventions including the Supplementary Nutrition Programme (SNP), revision in nutritional and feeding norms of supplementary nutrition, and introduction of new WHO growth standards. In addition, the Government of India also introduced cost-sharing between the Centre and States from 2009-10 in the ratio of 90:10 for all components including the SNP for the north-east. This ratio will be 50:50 for the SNP and 90:10 for all other components for all States other than north-east. Alongside gradual expansion of the scheme, its budgetary allocation has also increased. The Annual Plan outlay for 2010-11 for the ICDS was ` 8700 crore against which an amount of ` 6988.88 crore has been released to States/ UTs
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Economic Survey 2010-11 Other Schemes : Some of the other schemes implemented by the Ministry of Women and Child Development, include: (i) Dhanlakshmi, which is a conditional cash transfer scheme for the girl child which was launched as a pilot project in March 2008. The objective is to encourage families to educate girl children and to prevent child marriage. The scheme provides for cash transfers to the family of a girl child on fulfilling certain specific conditionalities relating to birth and registration, immunization, and enrolment and retention in school up to Class VIII. The Scheme is being implemented in 11 blocks of seven States on pilot basis. The entire approved outlay of ` 5 crore for 2009-10 was released, benefiting 42,077 girls. During 2010-11, 10,384 families had been supported up to 30 September 2010. (ii) Scheme for the Welfare of Working Children in Need of Care and Protection providing for nonformal education, vocational training, etc. to working children to facilitate their entry/re-entry into mainstream education. There are 120 projects of 100 children each currently being funded under the Scheme. (iii) Bal Bandhu Scheme for protection of children in areas of civil unrest is being implemented through the National Commission for Protection of Child Rights (NCPCR) with the grant sanctioned from the Prime Minister's National Relief Fund. (iv) Swadhar scheme for providing temporary accommodation, maintenance, and rehabilitative services to women and girls rendered homeless and women in difficult circumstances (v) Short Stay Home (SSH) scheme being implemented by the Central Social Welfare Board with similar objectives/target group as in case of the Swadhar scheme. (vi) Ujjawala, a comprehensive scheme for prevention of trafficking with five specific components prevention, rescue, rehabilitation, reintegration, and repatriation of victimswas launched on 4 December 2007. Under this scheme, 134 projects including 73 rehabilitation homes, spread over 16 States, have been sanctioned. Scheme for Gender Budgeting : This has been included in the Eleventh Plan. At present, 56 Ministries / Departments have set up gender budget cells and a number of Ministries / Departments have reflected allocation for women in the Gender Budget Statement of the Union Budget. National Mission for Empowerment of Women (NMEW) : This has been set up with a view to
environment for comprehensive development of children in the country who are in need of care and protection as well as children in conflict with the law. The ICPS provides preventive and statutory care and rehabilitation services to any vulnerable child including, but not limited to, children of potentially vulnerable families and families at risk, children of socially excluded groups like migrant families, families living in extreme poverty, families subjected to or affected by discrimination and minorities, children infected and / or affected by HIV / AIDS, orphans, child drug abusers, children of substance abusers, child beggars, trafficked or sexually exploited children, children of prisoners, and street and working children. The allocation of funds under this scheme for 2010-11 is ` 300 crore. The Scheme is Centrally Sponsored and is being mainly implemented through State Governments / UT Administrations from 2009-10 and 33 states/UTs have signed the MOUs for implementation of this scheme. During 2010-11, ` 82.37 crore have been released under the scheme upto 11 February, 2011. Thirteen more States/ UTs have agreed to implement this it and are at various stage of preparation of plans including financial proposals. Support to Training and Employment Programme for Women (STEP) Scheme : This scheme seeks to provide updated skills and new knowledge to poor women in 10 traditional sectors for enhancing their productivity and income generation. It is being implemented through public-sector organizations, State corporations, cooperatives, federations, and registered voluntary organizations with minimum existence of three years. With a view to expanding the reach of the programme and further strengthening implementation and monitoring, the norms and parameters of this scheme have been revised in November 2009. The major changes in the norms relate to the number of beneficiaries to be covered, project duration, and per capita cost and the scheme now provides for introduction of locally appropriate sectors in consultation with State governments. The number of beneficiaries in each project may now vary from 200 to 10,000 with the funding ceiling at ` 16,000 per beneficiary up to a period of five years. During 2010-11, a total number of 91 STEP projects were ongoing and 196 more were under consideration at various stages as on 30 November 2010. A sum of ` 25 crore has been allocated in the financial year 2010-11 to achieve a target of 35,000 beneficiaries.
Human Development, Equity and Environemnt empowering women socially, economically, and educationally. The Mission aims to achieve empowerment of women on all these fronts by securing convergence of schemes / programmes of different Ministries / Departments of the Government of India as well as State Governments. Alongside, the Mission shall monitor and review gender budgeting by Ministries / Departments as well as effective implementation of various laws concerning women. Rashtriya Mahila Kosh (RMK) : This was created in 1993 with a corpus fund of ` 31crore. Since, its creation, the RMK has established itself as a premier micro-credit agency of the country, with its focus on poor women and their empowerment through the provision of credit for livelihood-related activities. The RMK provides micro-credit in a quasi-informal manner, lending to intermediate micro-credit organizations (IMOs) (for example NGOs/voluntary organizations, women development corporations, women's cooperative societies, and suitable Government / local bodies). The IMOs in turn lend to self-help groups (SHGs), which, in turn, lend to individual members at a rate not above the ceiling prescribed by the RMK, i.e. 18 per cent per annum on reducing balance method.
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Welfare and Development of SCs, STs, OBCs, and other weaker sections
12.53 As part of the strategy to achieve inclusive development, the Government is committed towards the economic and social empowerment and educational upliftment of socially disadvantaged groups and marginalized sections of society. Accordingly, a number of schemes and programmes are implemented by the Central Government through State Governments, UT Administrations, and NGOs. The PPP approach is also being explored for effective delivery of services with more accountability and transparency.
Scheduled Castes (SCs)

12.54 A number of schemes are being implemented to encourage SC students to continue their studies from school to higher education level. During the year 2010-11, the physical target under the Scheme of Pre-Matric Scholarship for those students whose parents are engaged in unclean occupations was eight lakh beneficiaries/students. Against an allocation of ` 80 crore for 2010-11, an
amount of ` 51.26 crore has already been released to State Governments/UT Administrations for providing scholarships to an estimated 6.30 lakh beneficiaries up to 31 December 2010. The scheme of Post-Matric Scholarships for students belonging to SCs for studying in India has been revised with effect from 1 July 2010 so as to (i) raise the parental annual income ceiling for eligibility from ` one lakh to ` two lakh, (ii) rationalize the grouping of courses, and (iii) upwardly revise maintenance and other allowances by 60 per cent . Consequent upon the revision in the Scheme, an ad hoc Central assistance of ` 378 crore was released to nine States that had fulfilled the eligibility criteria up to December 2010. The number of beneficiaries during 2010-11 is estimated at 45 lakh. The Rajiv Gandhi National Fellowship Scheme was launched in 2006 to provide financial assistance to SC students pursuing M Phil and Ph D courses. The number of scholarships under the Scheme has been increased from 1333 to 2000 with effect from 1 April 2010. During 2010-11, an amount of ` 113 crore was released up to December 2010 against the revised allocation of ` 160 crore for 2000 new fellowships and 5332 renewals. The specified subjects under National Overseas Scholarships have been revised for the selection year 2010-11 and subjects, namely medicine, pure sciences, engineering, agricultural sciences and management, have been specified for providing financial assistance to pursue Masterslevel courses and PhD/post-doctoral courses abroad. Thirty awards are given per year. During 2010-11, the amount released up to December 2010 was ` 1.92 crore against an allocation of ` 6 crore. The earlier Centrally sponsored scheme for hostels for SC boys and girls was revised and renamed Babu Jagjiwan Ram Chhatrawas Yojna with effect from 1 January 2008. As part of this revision, Central assistance for the construction of girls hostels was raised from 50 per cent to 100 per cent. During 2010-11, the physical target is to construct 49 hostels for girls and 59 for boys and `11.74 crore was released up to December 2010 against an allocation of ` 121 crore for construction of 12 hostels. Special Central assistance is given to the Scheduled Castes Sub Plan, a major scheme for economic advancement of SCs. During 2010-11, the physical target is to cover over 6 lakh beneficiaries. An amount of ` 518.69 crore was released to State Governments/UT Administrations against a revised allocation of ` 600 crore up to December 2010. During 2010-11, the National
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Economic Survey 2010-11 pursuing higher studies abroad in specified fields at Masters and Ph D level under the National Overseas Scholarship Scheme. 12.57 The economic empowerment of STs by means of extension of financial support through the National Scheduled Tribes Finance and Development Corporation (NSTFDC) continued. Financial support is extended to ST beneficiaries/entrepreneurs in the form of loans and micro-credit at concessional rates of interest for income-generating activities. The Tribal Cooperative Marketing Development Federation of India Limited (TRIFED) is engaged in marketing development of tribal products and their retail marketing through its sales outlets. As per information collected from the States till 31 December 2010, more than 30,31,624 claims have been filed under the Scheduled Tribes and Other Traditional Forest Dwellers (Recognition of Forest Rights) Act and more than 11,06,541 titles have been distributed. Around 32,000 titles are ready for distribution. A scheme for Strengthening of Education among ST Girls in Low Literacy Districts to bridge the gap in literacy levels between the general female population and tribal women is being implemented.
Scheduled Castes Finance and Development Corporation (NSCFDC) has given concessional loans amounting to ` 121 crore to 33,659 beneficiaries as on 31December 2010. 12.55 The Scheme of Top Class Education for SCs provides financial assistance for quality education to SC students up to degree/post-degree level. SC students, who secure admission in the notified institutions, are awarded scholarships. During 201011, the amount released up to December 2010 was ` 9.64 crore to assist 1036 SC students studying in institutions like IITs and IIMs against a budget allocation of ` 25 crore. Two new IITs (Indore and Mandi) and three new IIMs (Ranchi, Raipur, and Rohtak) have been added in the notified list of premier institutions under the Scheme with 12 scholarship slots per annum per institute, with effect from the current financial year.
Scheduled Tribes (STs)

12.56 For the welfare and development of the STs, an outlay of ` 3206.50 crore has been provided in the Annual Plan for 2010-11. During 2010-11, ` 960.50 crore has been provided as Special Central Assistance (SCA) to the Tribal Sub-Plan (TSP), which includes ` 60.50 crore for development of forest villages. The SCA to TSP is a 100 per cent grant extended to States as additional funding to their TSP for family-oriented income-generating schemes, creation of incidental infrastructure, extending financial assistance to SHGs, communitybased activities, and development of forest villages. The outlay for grants-in-aid under Article 275(1) during 2010-11 is ` 1046.00 crore. The funds are provided to States with the objectives of promoting the welfare of STs and improving administration to bring them on a par with the rest of the States and to enable them take up such special welfare and development programmes which are otherwise not included in the Plan programmes. Under the Scheme for Post-Matric Scholarships, 100 per cent financial assistance is provided to ST students whose family income is less than or equal to ` 1.45 lakh per annum to pursue post-matric-level education including professional and graduate and postgraduate courses in recognized institutions. The Scheme of Top Class Education for STs provides financial assistance for quality education to 625 ST students per annum to pursue studies at degree and post-degree level in any of 125 identified Institutes. The family income of the beneficiary ST student from all sources should not exceed ` 2 lakh per annum. Financial assistance is also provided to 15 eligible ST students for
Minorities
12.58 Five communities-Muslims, Christians, Sikhs, Buddhists, and Parsis-were notified by the Government as minority communities under Section 2 (c) of the National Commission for Minorities Act 1992. As per the 2001 Census, minority communities constitute 18.42 per cent of total population. For the development of minorities, the plan outlay was raised from ` 1740 crore in 2009-10 to ` 2600 crore in 201011. Three scholarship schemes, namely Pre-Matric, Post-Matric, and Merit-cum-means-based, are being implemented exclusively for the minorities with the total provision enhanced from ` 450 crore in 200910 to ` 850 crore in 2010-11. A Multi-sectoral Development Programme to address the 'development deficits', especially in education, skill development, employment, health and sanitation, housing, and drinking water, in 90 minority concentration districts (MCDs) was launched in 200809. The outlay for this programme was enhanced from ` 990 crore in 2009-10 to ` 1400 crore in 201011. Work on implementation of this programme to improve the selected development indices in the MCDs has picked up momentum. The corpus of the Maulana Azad Education Foundation (MAEF) has been enhanced from ` 100 crore in 2005-06 to ` 550 crore in 2010-11 to expand its activities for implementation of educational schemes for
Human Development, Equity and Environemnt educationally backward minorities. The authorized share capital of the National Minorities Development and Finance Corporation (NMDFC) has been raised from ` 650 crore in 2006-07 to ` 1500 crore in 2010-11 for expanding its loan and micro-finance operations to promote self-employment and other economic ventures among backward sections of the minority communities. The progress of the Prime Minister's New 15 Point Programme for Welfare of Minorities is being reviewed once in six months by the Government. The programme has been enlarged by covering more schemes and its monitoring mechanism has been strengthened by including elected representatives of State Assemblies and Parliament. Two schemes, namely the (i) Maulana Azad National Fellowship for Minority Students with an allocation of ` 30 crore in 2010-11 and (ii) 'Computerization of Records of State Wakf Boards' with an allocation of ` 13 crore in 2010-11, has been under implementation since 2009-10. Another scheme, namely 'Leadership Development of Minority Women' launched in 2009-10 is also being implemented with an allocation of `15 crore for 2010-11. National Level Monitors have been deputed to monitor the progress of the schemes of the Ministry. Efforts are being made to improve the management of wakf properties and a scheme for the computerization of records of the Wakf Board is a step in this direction. The Wakf Amendment Bill 2010 was passed by the Lok Sabha on 7 May 2010. The Bill was referred to the Rajya Sabha on 18 May 2010. The Rajya Sabha has referred the matter to the Select Committee on 31 August 2010 to examine the Bill.
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enable them to pursue higher studies, an amount of ` 7.83 crore was released up to December 2010 against an allocation of ` 45 crore for 5000 additional hostel seats. During 2010-11, the National Backward Class Finance and Development Corporation (NBCFDC) has given concessional loans amounting to ` 106 crore to 80,660 beneficiaries as on 31 December 2010. 12.60 The Central lists of backward classes have been amended vide Gazette Notification dated 18 August 2010: No lists had so far been notified for the States of Chhattisgarh and Jharkhand, which have been created in the year 2000. Lists have been notified for these two States for the first time, comprising 64 and 119 entries respectively. Twenty-six new entries have been added in the existing lists of Himachal Pradesh (2 entries) and Daman and Diu (24 entries), and Modifications/corrections in 26 existing entries pertaining to four States (Haryana, Himachal Pradesh, Karnataka, and Rajasthan) and one UT (Daman and Diu).
Persons with Disabilities

12.61 A large number of programmes are implemented through national and apex institutes dealing with various categories of disabilities. These institutes conduct short- and long-term courses for various categories of personnel for providing rehabilitation services to those needing them. Under the Scheme of Assistance to the Disabled for Purchase/Fitting of Aids and Appliances (ADIP), approximately 2 lakh persons with disabilities are provided assistive devices every year. During 201011, ` 27.71 crore was released to implementing agencies up to December 2010 against a revised allocation of ` 90 crore under the scheme. The target is to cover 2 lakh persons with disabilities. Under the Deen Dayal Disabled Rehabilitation Scheme (DDRS), ` 37.64 crore has been released up to December 2010 against a revised allocation of ` 90 crore during 2010-11 to voluntary organizations for running special schools for children with hearing, visual, and mental disability and vocational rehabilitation centres for persons with various disabilities and for manpower development in the field of mental retardation and cerebral palsy. The targeted number of beneficiaries is 76,000. During 201011, the National Handicapped Finance and Development Corporation (NHFDC), has given
Other Backward Classes (OBCs)

12.59 The Government provides Central Assistance to State Governments /UT Administrations for educational development of OBCs. During 2010-11, the Scheme of Pre-Matric Scholarships for OBC, proposes to provide scholarships to 14 lakh OBC students. An amount of ` 38.17 crore was released against an allocation of ` 50 crore to State Governments/UT Administrations up to December, 2010 during the year 2010-11. Under the Scheme of Post-Matric Scholarships for OBCs, it is proposed to provide scholarships to 15 lakh OBC students. An amount of ` 238.78 crore was released to State Governments/UT Administrations up to December 2010 against an allocation of ` 350 crore during the financial year 2010-11. In order to provide hostel facilities to OBC students studying in middle and secondary schools, colleges, and universities to
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Economic Survey 2010-11 Regional Resource and Training Centres, and other projects. During 2010-11, ` 13.50 crore has been released up to December 2010 against a revised allocation of ` 31 crore. The scheme aims to benefit 1.2 lakh persons. For effective implementation of social defence schemes, personnel engaged in delivery of services in this area are being trained under various programmes being organized by the National Institute of Social Defence (NISD). During 2010-11, an amount of ` 5 crore was released up to December 2010 to the NISD against a revised allocation of ` 7.50 crore.
concessional loans amounting to ` 19.86 crore to 4 511 beneficiaries as on 31December 2010. 12.62 The Scheme of Incentives to Employers in the Private Sector for Providing Employment to Persons with Disabilities was launched with effect from 1 April 2008. Under the Scheme, the Government will bear as an incentive the employer's contribution to the Employees Provident Fund and Employees State Insurance for the first three years for every employee with disabilities appointed on or after 1 April 2008 with monthly emoluments up to ` 25,000.
Social Defence Sector

12.63 Under the Integrated Programme for Older Persons (IPOP) scheme, grants-in-aid are given to NGOs for running old age homes (OAH), day care centres (DCCs), and mobile medical units (MMUs. The Scheme has been revised with effect from 1 April 2008. Besides an increase in the amount of financial assistance for existing projects, several new projects have been made eligible for financial assistance under the scheme. During 2010-11, ` 10.18 crore was released up to December 2010 against the revised allocation of ` 30 crore. The scheme targets support to 0.45 lakh beneficiaries during the year. The Maintenance and Welfare of Parents and Senior Citizens Act 2007 was enacted in order to ensure need-based maintenance for parents and welfare measures for senior citizens. The Act has been notified by 22 States and all the UTs so far. 12.64 Grants-in-aid are provided to NGOs for running Integrated Rehabilitation Centres for Addicts,
Environment and Climate change

12.65 Economic Development without environmental considerations can cause serious environmental damage, in turn impairing the quality of life of present and future generations. Such environmental degradation imposes a cost on the society and needs to be explicitly factored into economic planning, with necessary remedial measures incorporated. The challenge of sustainable development thus requires integration of the country's quest for economic development with its environmental concerns. Environment management in India has, over the years, recognized these sustainable development concerns. The National Environment Policy 2006 has attempted to mainstream environmental concerns in all our developmental activities. It underlines that 'while conservation of environmental resources is necessary to secure livelihoods and well being of all, the most secure basis for conservation is to ensure that people dependant on particular resources obtain better livelihoods from the fact of conservation, than from degradation of the resource'. The
Box : 12.9 Why Environment Matters to Achieve Sustainable Development in the Specific Context of India.
Our environmental standards are set through Government policies aimed at a development process that is environmentally sustainable and foregrounds well-being of the people. The broad objectives of our environmental policies and programmes are: Conservation of flora, fauna, forests, and wildlife; Prevention and control of pollution; Afforestation and regeneration of degraded areas; Protection of the environment. As a country, India has been in the forefront of preserving biodiversity, sustainable management of forests, reducing emissions intensity of the economy, and following sustainable consumption and production patterns. Specifically, India has been following a development path that takes into consideration the needs of the present generation without compromising the ability of future generations to meet their needs. Suitable attention has been given to protecting and conserving critical ecological systems and resources and invaluable natural and man-made heritage, which are essential for life-support, livelihoods, economic growth, and a broad conception of human well-being. Moreover, the effort has been to ensure equitable access to environmental resources and quality for all sections of society, in particular to ensure that poor communities which are most dependent on environmental resources for their livelihoods are assured secure access to these resources.
Human Development, Equity and Environemnt Government of India, through its various policies, has been factoring ecological concerns into the development process so that economic development can be achieved without critically damaging the environment. The strong sustainable development agenda followed by India incorporates rigorous environmental safeguards for infrastructure projects, strengthening of the environmental governance system, revitalizing of regulatory institutions, focusing on river conservation, and efforts for improvements in air and water quality, on a continuous basis (Box 12.9).
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A few recent initiatives

12.66 The Ministry of Environment and Forests has notified the Wetlands (Conservation and Management) Rules 2010 in order to ensure that there is no further degradation of wetlands. The rules specify activities which are harmful to wetlands such as industrialization, construction, dumping of untreated waste and reclamation and prohibit these activities in the wetlands. Other activities such as harvesting and dredging may be carried out in the wetlands but only with prior permission from the concerned authorities. The National Green Tribunal (NGT) Act, 2010 came into force on 18th October, 2010. As per the provisions of the NGT Act 2010, the National Environment Appellate Authority (NEAA), established under the NEAA Act, 1997 stands dissolved and the cases pending before NEAA stand transferred to the NGT. The Act provides for the establishment of a NGT for the effective and expenditious disposal of cases relating to environmental protection and conservation of forests and other natural resources including enforcement of any legal right relating to environment and giving relief and compensation for damages to persons and property and for matters connected therewith or incidental thereto. Coastal ecosystems are a critical reservoir of our biodiversity and provide protection from natural disasters such as floods and tsunamis and are a source of livelihood to hundreds of millions of families. Hence, as a major national initiative in this direction, the Coastal Regulation Zone Notification has been published in the gazette of India on 6th January, 2011. The Government of India and World Bank have signed a loan agreement for the implementation of an Integrated Coastal Zone Management Project, which will be implemented at a total cost of ` 1156 crore. The World Bank will contribute an amount of ` 897 crore (77.7 per cent), the Government of India ` 177 Crore (15.4 per cent), and the States ` 80 Crore (6.9 per cent). This project
is for a period of five years and it is estimated that it will benefit 3.56 crore people directly 6.30 crore indirectly. India has always maintained that economic and social development is its prime objective. At the same time, it has promoted clean energy solutions which include activities aimed at promotion of energy efficiency in industrial, residential and commercial use, solar power and projects that build fuel efficient transport infrastructure, clean energy hydro power plants, and efficient water supply and waste water systems. India also has programmes aimed at building a climate-resilient economy especially for helping farmers, fishing communities, and other vulnerable communities safeguard their livelihoods against the vagaries of a changing climate.
Climate Change
12.67 Climate Change, as a global environmental problem has been receiving intense political attention at domestic and international levels. 'Climate change' means a change of climate which is attributed directly or indirectly to human activity that alters the composition of the global atmosphere and which is in addition to natural climate variability observed over comparable time periods. Increasing levels of fossil fuel burning and land use changes have emitted, and are continuing to emit, greenhouse gases (mainly carbon dioxide [CO2], methane, and nitrous oxide) into the earth's atmosphere. This increasing level of emissions of greenhouse gases has caused a rise in the amount of heat from the sun trapped in the earth's atmosphere, heat that would normally be radiated back into space. This has led to the greenhouse effect, resulting in climate change. The major characteristics of climate change are rise in average global temperature, ice cap melting, changes in precipitation, and increase in ocean temperature. The efforts needed to address the climate change problem include mitigation of greenhouse gas emissions on the one hand and building of capacities to cope with the adverse impacts of climate change on various sectors of the society and economy on the other.
Assessing the scale of the problem

12.68 According to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC 2007), over the century, atmospheric concentrations of carbon dioxide increased from a pre-industrial value of 278 parts per million to 379 parts per million in 2005, and the average global temperature rose by 0.740C. Projections indicate that global warming will continue and accelerate.
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Economic Survey 2010-11 and sector (Box 12.10). Total global emissions grew by 12.7 per cent between 2000 and 2005, an annual average of 2.4 per cent. CO2 is the predominant gas accounting for 77 per cent of world GHG emissions in 2005 followed by methane (15 per cent) and nitrous oxide (7 per cent). North America accounted for 18 per cent of world GHG emissions, China for 16 per cent, and the EU for 12 per cent in 2005. India's share stood at 4 per cent in 2005. Per capita CO2 emissions of major countries are illustrated in Figure 12.1.
Box 12.10 : World Greenhouse Gas Emissions

While the worldwide emissions of GHGs have increased since 1945, with the largest increases taking place in carbon dioxide (CO2) emissions, scientists attribute the global problem of climate change not to the current GHG emissions but to the stock of historical GHG emissions. Most of the countries, particularly the industrialized countries, having large current emissions, are also the largest historic emitters and the principal contributors to climate change. A relatively small number of such countries are responsible for the largest chunk of the stock of global GHG emissions. The industrialized countries with the largest total emissions also rank among those with the highest per capita emissions. Per capita emissions are generally higher in wealthier countries.
International Response
12.70 The issue of climate change is now placed firmly on national and international agendas, subject to scrutiny by public and media, and is even shaping the strategies of a number of businesses. Internationally, the United Nations Framework Convention on Climate Change (the Convention) was set up in 1992 and entered into force in 1994. This was a crucial step in putting in place the institutions and processes for the world's Governments to take coordinated and effective action. The Convention enjoins near universal membership. As on date, 194 countries are Parties to the Convention. The ultimate objective of the Convention is to stabilize the concentrations of GHGs in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system. Such a level should be achieved within a time frame sufficient to allow ecosystems to adapt naturally to climate change to ensure that food production is not threatened and to enable economic development to proceed in a sustainable manner. Although global in scope, it differentiated the commitments/
Thus climate change represents additional stress on ecological and socio-economic systems that are already facing tremendous pressure due to rapid economic development. With climate change, the type, frequency, and intensity of extreme events, floods, and droughts are expected to increase. Hence addressing climate change is a major challenge in terms of policies and resources needed to address it at domestic and international levels.
Global Greenhouse Gas Emissions Trends

12.69 Global Greenhouse Gas (GHG) emissions have risen sharply since 1945. As per a working paper published by the World Resources Institute, total GHGs were estimated at 44,153 MtCo2 equivalents (million metric tons) in 2005. This is the most recent year for which comprehensive emissions data are available for every major gas Figure 12.1
20 18
CO2 emissions
1992
Metric tons per capita
16 14 12 10 8 6 4 2 0
Russian Federation United States The Netherlands Australia Finland Germany Canada Denmark China Brazil Japan Norway Spain India
2007
Human Development, Equity and Environemnt responsibilities of Parties on the basis of respective capabilities, economic structures, and resource bases and on the basis of the principle of 'equity' which is at the core of the climate change debate. Hence, any discussion on stabilization of the concentrations of GHGs in the atmosphere should be preceded by a paradigm for equitable access to global atmospheric resources that determines the development space of nations. The Convention lays down legally binding commitments for the developed countries, taking into account their historical responsibilities. These commitments are to be implemented in the form of reduction of GHG emissions by the developed countries with reference to 1990 levels and provision of support to developing countries in terms of finance and technology so as to enable them to take voluntary mitigation and adaptation measures. The Convention recognizes that economic and social development and poverty eradiation are the 'first and overriding priorities' of the developing countries. 12.71 The Convention laid the groundwork for concerted international action, which in 1997 led to the adoption of the Kyoto Protocol containing a legally binding quantitative time-bound target for developed countries. The Kyoto Protocol set a target for developed countries (individually or jointly) to reduce overall emissions by at least 5 per cent below 1990 levels in the first commitment period, 2008 to 2012. Recognizing that relying on domestic measures alone to meet the target could be onerous, the Kyoto Protocol offers considerable flexibility through three mechanisms: Clean Development Mechanism (CDM), Joint Implementation (JI), and Emissions Trading (ET). Through the CDM, industrial countries can finance mitigation projects in developing countries contributing to their sustainable development. Credits received from such projects can be used to meet commitments under the Kyoto Protocol. Through JI, industrialized countries acquire emissions credit by financially supporting projects in other industrialized countries. ET allows countries that expect their emissions to be above target to buy unused quotas from other countries. All major countries except the USA have ratified the Kyoto Protocol. 12.72 The Conference of Parties (CoP), which is the supreme body of the Convention, meets annually. During the 13th CoP held at Bali, Indonesia, in December 2007, a comprehensive process called the Bali Action Plan to enable the full, effective, and sustained implementation of the Convention through Long Term Cooperative Action,
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now, up to, and beyond 2012 was launched. Currently, international actions for addressing climate change are being pursued under the Bali Action Plan and the mandate of the Kyoto Protocol. The 15th CoP held at Copenhagen in December 2009 made some advance in the form of the 'Copenhagen Accord', which reflects the political understanding
Box 12.11 : Elements of the Cancun Agreements

(i) Industrialized country targets are officially recognized under the multilateral process and these countries are to develop low-carbon development plans and strategies and assess how best to meet them, including through market mechanisms, and to report their inventories annually. (ii) Developing country actions to reduce emissions are officially recognized under the multilateral process. A registry is to be set up to record and match developing country mitigation actions to finance and technology support from by industrialized countries. Developing countries are to publish progress reports every two years. (iii) Parties meeting under the Kyoto Protocol agree to continue negotiations with the aim of completing their work and ensuring there is no gap between the first and second commitment periods of the treaty. (iv) The Kyoto Protocol's CDM has been strengthened to drive more major investments and technology into environmentally sound and sustainable emission reduction projects in the developing world. (v) Parties launched a set of initiatives and institutions to protect the vulnerable from climate change and to deploy the money and technology that developing countries need to plan and build their own sustainable futures. (vi) A total of $30 billion in fast start finance from industrialized countries to support climate action in the developing world up to 2012 and the intention to raise $100 billion in long-term funds by 2020 are included in the decisions. (vii) In the field of climate finance, a process to design a 'Green Climate Fund' under the Conference of the Parties, with a Board with equal representation from developed and developing countries, is established. (viii)A new Cancun Adaptation Framework is established to allow better planning and implementation of adaptation projects in developing countries through increased financial and technical support, including a clear process for continuing work on loss and damage. (ix) Governments agree to boost action to curb emissions from deforestation and forest degradation in developing countries with technological and financial support. (x) Parties have established a technology mechanism with a Technology Executive Committee and Climate Technology Centre and Network to increase technology cooperation to support action on adaptation and mitigation.
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reached by a select group of countries. However, this was only 'noted' and not adopted by the Parties to the Convention. The recent negotiations held at Cancun during 29 November - 11 December 2010 have resulted in a set of decisions that cover various areas of action, for example mitigation, adaptation, technology and finance as outlined in the Bali Action Plan, while agreeing to work towards an ambitious target of emissions reduction under the Kyoto Protocol. The Cancun Agreements include decisions under both the Convention and Kyoto protocol negotiating tracks (Box 12.11). They are widely perceived as a modest, small step forward and a reaffirmation of faith in the multilateral process. As per the Cancun Agreements, all Parties to the Convention (including the developed and developing countries) have agreed to report their voluntary mitigation goals for implementation. These will be subject to measurement and verification or international consultation, as appropriate, in accordance with agreed international guidelines. Decisions were taken at Cancun to set up a Green Climate Fund, a Technology Mechanism, and an Adaptation Committee at global level to support developing country actions for adaptation and mitigation. These decisions are significant because they reflect, to a large degree, the political understanding that was reached by a select group of countries in the form of the Copenhagen Accord in December 2009. Table 12.14 : A Comparison of GHG Emissions by Sector between 1994 and 2007
(in million tons of CO2 equivalent)
1994 2007 CAGR (per cent) 5.6 4.5 4.4 1.9 6.0 2.0 2.2 -0.2 7.3 3.3 142.04 (7.5) 137.84 (7.2) 100.87 (5.3) 129.92 (6.8) 117.32 (6.2) 165.31 (8.7) 57.73 (3.0) 1904.73 -177.03 1727.71 2.9
India's Greenhouse Emissions

12.73 Although India ranks in the top five in terms of GHG emissions, the per capita emissions are much lower compared to those of the developed countries, even if the historical emissions are excluded. Its high level of emissions is due to large populace, geographical size and large economy. The most recent data available for India are the assessment carried out by the Indian Network for Climate Change Assessment (INCCA) in May 2010. The key results of the assessment are that the total net GHG emissions from India in 2007 were 1727.71 million tons of CO2 equivalent (eq.), of which carbon dioxide emissions were 1221.76 million tons; methane 20.56 million tons; and nitrous oxide 0.24 million tons. In 1994, the total net GHG emissions for India were 1228.54 million tons of CO2 eq. This represents a compounded annual growth rate of 2.9 per cent during the period 1994 to 2007 (Table 12.14).GHG emissions from the energy, industry, agriculture, and waste sectors in 2007 constituted 58 per cent, 22 per cent, 17 per cent, and 3 per cent of the net CO2 eq. emissions respectively. India's per capita CO2 eq. emissions including land use, land use change, and forestry (LULUCF) were 1.5 tons per capita in 2007.
Impacts of Climate Change in India

12.74 Climate change has enormous implications for the natural resources and livelihoods of the people. It will have wide-ranging effects on the environmental and socio-economic and related sectors. Various studies indicate that the key sectors
Electricity Transport Residential Other Energy Cement Iron & Steel Other Industry Agriculture Waste
355.03 (28.4) 719.30 (37.8) 80.28 (6.4) 78.89 (6.3) 78.93 (6.3) 60.87 (4.9) 90.53 (7.2) 125.41 (10.0) 23.23 (1.9) 1251.95 14.29 1228.54
Box 12.12 : Why India is concerned about climate change.

India is a country which will be severely impacted by climate change. This puts additional hurdles in its developmental path in addition to the challenges of poverty eradication and growing population. The projected impacts of climate change cut across various sectors, natural systems such as coastal areas, water resources, forests, agriculture, and health. With a large agrarian population, India is vulnerable to changes in weather parameters. Further, rainfall, variability and melting of glaciers will impact replenishment of rivers, thereby affecting availability of water in river basins and watersheds. In India, most of the rivers flowing in the northern regions are dependent on snow and glacial melt, thus climate change threatens the perennial nature of these rivers. This has huge implications for agriculture and allied activities and resultant livelihoods. This is a serious concern for an economy that is tied to its natural resource base along its developmental path.
344.48 (27.6) 334.41 (17.6)
Total without LULUCF LULUCF Total with LULUCF
Note: Figures in brackets indicate percentage emissions from each sector with respect to total GHG emissions without LULUCF in 1994 and 2007 respectively.
Human Development, Equity and Environemnt in India such as the agriculture, water, natural ecosystem, biodiversity, and health are vulnerable to climate change (Box 12.12). This is happening precisely at a time when it is confronted with huge development imperatives. The Indian Network for Climate Change Assessment (INCCA) released a report in November 2010 on assessment of the impact of climate change on key sectors and regions of India in the 2030s. The assessment covers four key sectors of the Indian economy, namely agriculture, water, natural ecosystems and biodiversity, and health in four climate sensitive regions, namely the Himalayan region, the Western Ghats, the Coastal Area, and the North-east region. The report warns of impacts such as sea-level rise, increase in cyclonic intensity, reduced crop yield in rainfed crops, stress on livestock, reduction in milk productivity, increased flooding, and spread of malaria. This calls for urgency of action in reducing vulnerability to adverse impacts of climate change and enhancing adaptive capacity through sectorspecific interventions and efforts.
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2022, doubling the present share of 3 per cent of nuclear power in the energy mix over the next decade, putting in place a major market-based programme to stimulate energy efficiency, imposing clean energy cess on coal for funding research and development (R&D) of clean energy technologies even though coal will continue to play a key role in our future energy strategy, and aggressively expanding the use of natural gas in power production. Third, India has been pursuing aggressive strategies for forestry and coastal management to increase the quality and quantity of forest cover and has launched a major new programme on coastal zone management to address the adaptation challenges facing over 300 million people in our country who live in vulnerable areas near our coast. 12.76 As part of its international obligations under the United Nations Framework Convention on Climate Change (UNFCCC) India periodically prepares the National Communication (NATCOM) that gives an inventory of the GHG emissions in India, assesses the vulnerability and impacts, and makes appropriate recommendations regarding social, economic and technological measures for addressing climate change. The First NATCOM was presented to the UNFCCC in 2004. The Government is now engaged in preparing NATCOM II, which will be presented to the UNFCCC in 2011. Preparation of NATCOM is an exercise of high scientific rigour based on an extensive network of research and scientific institutions in India and draws upon expertise and excellence from different institutions. India has set up an elaborate Indian Network for Comprehensive Climate Change Assessment of some 250 scientists and 120 research institutions to assist in this work. This Network has already published India's GHG inventory for the year 2007 and a 4x4 assessment of climate change impacts on four key sectors and four key regions of the country for the 2030s, a time frame for which decisive interventions can be made now. This network is expected to put in place a programme for measuring, monitoring, and modeling the impact of black carbon which could have climate change and public health impacts. 12.77 India's strategy for enhancing its adaptive capacity to climate variability is reflected in many of its social and economic development programmes. For developing countries like India, adaptation ultimately boils down to assisting the vulnerable population during exigencies and empowering them to build their lives and cope with uncertainties in the long run. Several of India's social-sector schemes,
India's Strategies
12.75 India's total CO2 emissions are about 4 per cent of total global CO2 emissions and the energy intensity of India's output has been falling with improvements in energy efficiency, autonomous technological changes, and economical use of energy. India's climate modeling studies show that even with 8-9 per cent gross domestic product (GDP) growth every year for the next decade or two, its per capita emissions will be around 3-3.5 tonnes of CO2eq. by 2030, as compared to the present 1-1.2 tonnes. These are well below developed country averages by any estimation. India's determination in addressing climate change is evident from the fact that an indicative target of increasing energy efficiency by 20 per cent by 2016-17 is already included in the Eleventh Five Year Plan. This has now been supplemented with the domestic mitigation goal of reducing emissions intensity of the GDP by 20-25 per cent of the 2005 level by 2020 through proactive policies. The resources for the measures required to achieve this objective will need to be mobilized from various sources including the national planning process. Studies in respect of a low carbon strategy for development aimed at ensuring inclusive growth are being conducted with the aim of including this as one of the key pillars in the Twelfth Five Year Plan. Second, India is taking conscious steps to diversify the energy fuel mix such as setting up of 20,000 MW of solar power-generating capacity by
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Figure 12.2
14 12 10
Total expenditure on adaptation oriented schemes

Expenditure as per cent of total govt expenditure Expenditure as per cent of GDP
Per cent
8 6 4 2 0
2000-01 2003-04 2005-06 2008-09 2009-10
Year
with their emphases on livelihood security and welfare of the weaker sections, aim to do just that. India implements a series of Central sector and centrally sponsored schemes under different Ministries/ Departments aimed at achieving social and economic development. Many of these schemes contain elements (objectives and targets) that are decidedly geared to adaptation. In other words, there is substantial adaptation orientation in many of the sectoral schemes currently under operation. An exercise has been carried out to measure the expenditure on adaptation-related programmes with critical adaptation components: (a) crop improvement and research, (b) poverty alleviation and livelihood preservation, (c) drought proofing and flood control, (d) risk financing, (e) forest conservation, (f) health, and (g) rural education and infrastructure. It has been found that India's expenditure on these adaptationoriented schemes has increased from 1.45 per cent of GDP in the year 2000-01 to 2.84 per cent during 2009-10 (Figure12.2). This is a fairly impressive level of spending and is an obvious reflection of the multiplicity of economic and social welfare
programmes under implementation in India (Table 12.15). 12.78 India has announced a National Action Plan on Climate Change (NAPCC) in June, 2008 which incorporates its vision of sustainable development and the steps it must take to realize it. The NAPCC is coordinated by the Ministry of Environment and Forests and implemented through the nodal Ministries and is aimed at advancing relevant actions in specific sectors/areas. Eight national missions in the areas of solar energy, enhanced energy efficiency, sustainable agriculture, sustainable habitat, water, Himalayan ecosystem, increasing the forest cover, and strategic knowledge for climate change form the core of NAPCC (Box 12.13). State Governments are also preparing, under the advice of the Central Government, State Action Plans aimed at creating institutional and programmeoriented capacities to address climate change. These, together with the National Missions, will enhance climate change-related actions in the public and private domains.
Table 12.15 : Total Expenditure on Adaptation-oriented Schemes

Year GDP (Rs. crore) Grand Total of Expenditure Budget (Rs. Crore) Expenditure on Adaptationoriented Programmes (Rs. Crore) Expenditure on Adaptation oriented Programmes as per cent of total Expenditure Budget 8.06 8.39 12.20 11.82 12.34 Expenditure on Adaptation oriented Programmes as per cent of GDP
2000-01 2003-04 2005-06 2008-09 2009-10
1,864,301 2,222,758 3,254,216 4,162,509 4,493,743
335,523 474,254 508,705 900,953 1,021,546
27,028 39,792 62,071 106,463 126,028
1.45 1.79 1.91 2.56 2.84
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Box 12.13 : Eight National Missions

Jawaharlal Nehru National Solar Mission (JNNSM) The government has launched the JNNSM in January 2010 with a target of 20,000 MW grid solar power (based on solar thermal power- generating systems and solar photovoltaic [SPV] technologies), 2000 MW of off-grid capacity by 2022. The Mission will be implemented in three phases. The first phase will last three years (up to March 2013), the second till March 2017, and the third till March 2022. The Government has also approved the implementation of the first phase of the Mission (up to March 2013) and the target to set up 1100 MW grid-connected solar plants including 100 MW of rooftop and small solar plants and 200 MW capacity-equivalent off-grid solar applications and a 7 million sq.m solar thermal collector area in the first phase of the Mission, till 2012-13. Energy Conservation and Efficiency The objective of the National Mission for Enhanced Energy Efficiency (NMEEE) is to achieve growth with ecological sustainability by devising cost-effective strategies for end- use demand-side management. The Ministry of Power and Bureau of Energy Efficiency have been entrusted with the task of preparing the implementation plan for the NMEEE and upscaling the efforts to create and sustain market for energy efficiency to unlock investment of around Rs 74,000 crore. The Mission is likely to achieve about 23 million tons oil-equivalent of fuel savings--in coal, gas, and petroleum products-by 2014-15, along with an expected avoided capacity addition of over 19,000 MW. The carbon dioxide emission reduction is estimated to be 98.55 million tons annually. National Mission on Strategic Knowledge for Climate Change (NMSKCC) The NMSKCC has been launched with the broad objectives of mapping of the knowledge and data resources relevant to climate change and positioning of a data-sharing policy framework for building strategic knowledge among the various arms of the Government, identification of knowledge gaps, networking of knowledge institutions after investing critical mass of physical, intellectual, and policy infrastructure resources, creation of new dedicated centres within the existing institutional framework, building of international cooperation on science and technology for climate change agenda through strategic alliances and assistance for the formulation of policies for a sustained developmental agenda. National Mission for Sustaining Himalayan Ecosystem (NMSHE) The broad objectives of the NMSHE include: understanding the complex processes affecting the Himalayan ecosystem and evolving suitable management and policy measures for sustaining and safeguarding it, creating and building capacities in different domains, networking of knowledge institutions engaged in research and development of a coherent data base on the Himalayan ecosystem, detecting and decoupling natural and anthropogenic-induced signals of global environmental changes in mountain ecosystems, studying traditional knowledge systems for community participation in adaptation, mitigation, and coping mechanisms inclusive of farming and traditional health care systems, and developing regional cooperation with neighbouring countries, to generate a strong data base through monitoring and analysis so as to eventually create a knowledge base for policy interventions. National Water Mission The objectives of the National Water Mission are 'conservation of water, minimizing wastage and ensuring its more equitable distribution both across and within States through integrated water resources management'. The goals of the Mission are a comprehensive water data base in the public domain, assessment of the impact of climate change on water resources, promotion of citizen and State actions for water conservation, augmentation and preservation, focused attention to overexploited areas, increasing water use efficiency by 20 per cent, and promotion of basin-level integrated water resources management. Green India Mission The Mission aims at responding to climate change through a combination of adaptation and mitigation measures. These measures include enhancing carbon sinks in sustainably managed forests and other ecosystems, adaption of vulnerable species/ecosystems to the changing climate, and adaptation of forest-dependent communities. The objectives of the Mission are increased forest/tree cover on 5 million ha of forest/non-forest lands and improved quality of forest cover on another 5 million ha (a total of 10 million ha), improved ecosystem services including biodiversity, hydrological services, carbon sequestration as a result of treatment of 10 million ha), increased forest-based livelihood income for about 3 million households living in and around the forest, and enhanced annual CO2 sequestration by 55 million tonnes in the year 2020. National Mission on Sustainable Habitat (NMSH) The NMSH seeks to promote sustainability of habitats through improvements in energy efficiency in building and urban planning, improved management of solid and liquid waste including recycling and power generation, modal shift towards public transport, and conservation. It also seeks to improve ability of habitats to adapt to climate change by improving resilience of infrastructure, communitybased disaster management, and measures for improving advance warning systems for extreme weather events. National Mission for Sustainable Agriculture The National Mission for Sustainable Agriculture (NMSA) seeks to address issues regarding 'sustainable agriculture' in the context of risks associated with climate change by devising appropriate adaptation and mitigation strategies for ensuring food security, enhancing livelihood opportunities, and contributing to economic stability at national level. Under this Mission, the adaptation and mitigation measures would be mainstreamed in research and development activities, absorption of improved technology and best practices, creation of physical and financial infrastructure and institutional framework, facilitating access to information and promoting capacity building. While promotion of dryland agriculture would receive prime importance by way of developing suitable drought- and pest-resistant crop varieties and ensuring adequacy of institutional support, the Mission would also expand its coverage to rainfed areas for integrating farming systems with livestock and fisheries so that agriculture continues to grow in a sustainable manner.
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Economic Survey 2010-11 to set up a 'Green Climate Fund', to be designated as an operating entity of the Financial Mechanism of the Convention under Article 11. The Green Climate Fund is accountable to and functions under the guidance of the CoP. The Fund will be governed by a Board of 24 members chosen evenly from developed and developing nations. The Fund will support environment-related projects, programmes, policies, and other activities in developing countries. The concerns of different regions of the world need to be addressed by the Board having balanced representation from different UN regional groups. The Green Climate Fund will have a 'trustee' accountable to the Board for the performance of its fiduciary responsibilities. The World Bank has been invited to serve as the 'interim' trustee subject to a review three years after operationalization of the Fund. The operation of the Fund will be supported by an independent Secretariat and designed by a Transitional Committee with 40 members--15 from developed countries and 25 from developing countries. Further, a Standing Committee under the CoP was established for improving coherence and coordination in the delivery of climate change financing. In addition, the Cancun Agreement called upon developed countries to submit information on the resources provided to fulfil the commitment to 'fast start finance' approaching US$30 billion for the period 2010-12. It also recognized the goal of jointly mobilizing US$ 100 billion per year by 2020 as 'longterm finance' to address the needs of developing countries. The goal of US$100 billion falls short of developing countries' call for assessed contributions of 1.5 per cent of developed countries' GDP. Further, developing countries had been insisting on public funds as the major source, whereas, the Cancun Agreement does not specify how the finances would be mobilized by the developed countries. 12.82 India's initiatives will succeed if the global framework of actions is effective and supportive. While the outcomes in Cancun on Climate Fund, Technology Mechanism, and Adaptation Framework and Forestry (REDD+) are welcome, further work is needed on strengthening of weak mitigation pledges by developed countries, preventing unilateral trade actions in the name of climate change, and continuing a dialogue on intellectual property rights as part of technology development and transfer efforts. Moreover, a successful global effort for addressing climate change must be built on sound principles of equity and common but differentiated responsibilities. Equity in terms of equitable access to global atmospheric resources should define the pathway to attainment of a long-term goal in line
Climate Change Financing

12.79 Climate change is a complex policy issue with major implications in terms of finances for addressing mitigation of GHG emissions on the one hand and coping with the adverse impacts of climate change on the community and population, ecosystem, economy and livelihood on the other. All actions to address climate change ultimately involve costs. Funding is vital in order for countries like India to design and implement adaptation and mitigation plans and projects. The problem is more severe for developing countries like India, which would be one of the hardest hit by climate change and with very little capacity to adapt. Most countries do indeed treat climate change as a real threat and are striving to address it in a more comprehensive and integrated manner with the limited resources at their disposal. But financial ways and means must be found to enable developing countries to enhance their efforts to address climate change, especially enhancing their adaptive capacity. Thus climate change is both an environmental issue and an economic costs and development issue. 12.80 Lack of funding is a large impediment to implementing adaptation plans. Article 4 of the Convention states that developed countries shall provide financial resources to assist developing country Parties in addressing climate change. The funds that are currently available under the Convention and the Kyoto Protocol are small compared to the magnitude of the need assessed by many studies. The UNFCCC has estimated a requirement of US$ 200-210 billion in additional investment in 2030 to return GHG emissions to current level. Further, additional investment needed worldwide for adaptation is estimated to be US$ 60182 billion in 2030 by UNFCCC, inclusive of an expenditure of US$ 28-67 billion in developing countries. As various estimates point to the enormity of funds to address climate change, developing countries including India have been arguing that a global mechanism for generating and accounting for additional resources, mainly from public sources, is essential for meeting the long-term finance requirements for adaptation and mitigation. There should be a multilateral financial mechanism under the Convention that should be set up with resources provided by developed countries on the basis of assessed contributions. 12.81 One of the important outcomes of the Cancun Agreements from the finance point of view is the decisions on 'fast start finance, long-term finance, and Green Climate Fund'. At Cancun, it was decided
Human Development, Equity and Environemnt with the broad findings of science. In future negotiations, developing countries need to ensure a space for them for equitable access to atmospheric resources. The continuation of the Kyoto Protocol in its second commitment period and adoption of robust mitigation commitments by developed country Parties in accordance with the principle of 'common but differentiated responsibilities' will be essential for maintaining the credibility of the multilateral process and for a science-based and adequate response of the global community to climate change. In other words, any solution to climate change, as a global problem, must be based on the participation of all countries, with reorganization of common but differentiated responsibilities and the principle of 'equity'.
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and employment- generation schemes, policy structures need to be firmed up to facilitate effective implementation of these programmes and to ensure that allocation results in outputs and outputs in outcomes. Initiatives like the outcome budget and the setting up of the Unique Identification Authority of India by the Government are some steps in this direction. 12.84 Given the advantage of a young population, the realization of the democratic dividend is another factor that calls for some more reforms in the education system and health sector. While a skilled, trained and healthy young population with the right type of education is an asset, an uneducated or ill educated, unskilled, less healthy, and unemployed population could lead to a demographic disaster. Reaping the demographic dividend needs a vision, a long-term plan, and bold decisions. While the National Skill Development Mission is a step in the right direction, much more is required both in terms of achievements and speed. The RTE Act must face no implementation deficit for it to work towards realizing the demographic dividend. Similar reforms are needed in university and higher education and the demand-supply mismatch in the job market needs to be corrected. Mobilization of funds for higher education is indeed a challenge for the Government. The gap in available resources could possibly be met by a tailor-made Public-Private Partnership (PPP) mode of funding without diluting the regulatory oversight of the Government. Private-sector participation in social sectors, such as health and education, sometimes referred to as public-socialprivate partnership (PSPP), could be one of the possible alternatives for supplementing the ongoing efforts of the Government. However, in order to put in place such mechanisms, crucial issues such as risks and returns associated with such high cost projects need to be suitably addressed to ensure that there are enough takers for such PSPP projects in the market on a self-sustainable basis. While the potential of the demographic dividend is high, the effort to realize it also has to be in similar proportions. 12.85 Another challenge for the Government is proper balancing of the climate challenge and the growth challenge. The increasing importance of climate-related issues should not shake the foundations of our inclusive growth strategy. Careful planning and customized policies are needed to ensure that the green growth strategies do not result in a slow growth strategy.
OUTLOOK
AND
CHALLENGES
12.83 Post global crisis of 2008, the Indian economy has continued to recover robustly helped by the Government policies to counter the adverse impact of the crisis. On the employment front also, the Country has been able to withstand the adverse impact of the global crisis and generate employment since July 2009, as reported in the quarterly surveys conducted by the Labour Bureau. Unlike other developed countries, where the measures to counter job losses were ad hoc and contained elements of protectionism, in the Indian case, the programmes of employment generation were planned with a longterm outlook free of any elements of protectionism. The employment generation programmes of the Government like the MGNREGS have been instrumental in creating employment opportunities and placing additional income in the hands of the poor and the disadvantaged sections of society. Further improvements in the scheme like shifting to permanent asset building and infrastructure development activities, reducing transaction costs, better monitoring, and extension of the MGNREGS to urban areas can yield better results. It also needs to be ensured that implementation of the programme doesn't result in shortage of labour during the peak agricultural season. Since a number of programmes are being run concurrently by the Government to address the twin issues of unemployment and poverty alleviation, there is need for better convergence of the schemes to avoid duplication and leakages and to ensure that the fruits of the schemes reach the targeted beneficiaries. While the Government has consciously undertaken a large increase in budgetary allocations for anti-poverty programmes

105 Mag Economic Survey

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State of the Economy and Prospects

Economic Survey 2010-11

0.1 KEY INDICATORS

` crore % ` crore % % of GDP % of GDP `

3692485 13.9 3254216 9.5 33.5 34.7

4293672 16.3 3566011 9.6 34.6 35.7

4986426 16.1 3898958 9.3 36.9 38.1

5582623PE 12.0 4162509PE 6.8 32.2 34.5

6550271QE 17.3 4493743QE 8.0 33.7 36.5

7877947AE 20.3 4879232AE 8.6 na na

Mn tonnes (growth) Per cent Per cent

208.6 8.0 5.2

217.3 11.9 7.2

230.8 8.7 6.4

234.5 3.2 2.8

218.1a 10.5 6.0

% change % change Per cent Us$ Bn. ` / US$

23.4 33.8 -1.2 151.6 44.27

22.6 24.5 -1.0 199.2 45.25

29.0 35.5 -1.3 309.7 40.26

13.6 20.7 -2.3 252.0 45.99

-3.5 -5.0 -2.8 279.1 47.42

29.5e 19.0e na 297.3 f 45.68 g

% of GDP % of GDP % of GDP Million

4.0 2.5 0.4 1106 (2005)

3.3 1.9 -0.2 1122 (2006)

2.5 1.1 -0.9 1138 (2007)

6.0 4.5 2.6 1154 (2008)

6.3i 5.1i 3.1i 1170 (2009)

4.8 3.5 1.7 1186 (2010)

5.1 1.3 10.1 7.1 12.8 12.1 12.7 7.0 9.5

4.2 7.5 14.3 9.3 10.3 11.7 14.0 2.9 9.6

5.8 3.7 10.3 8.3 10.7 10.7 11.9 6.9 9.3

-0.1 1.3 4.2 4.9 5.4 7.6 12.5 12.7 6.8

0.4 6.9 8.8 6.4 7.0 9.7 9.2 11.8 8.0

5.4 6.2 8.8 5.1 8.0 11.0 10.6 5.7 8.6

REVIEW OF ECONOMIC DEVELOPMENTS

State of the Economy and Prospects Figure 1.1

Aggregate demand and its composition

Table 1.2 : Growth in GDP at constant market prices

State of the Economy and Prospects

40.0 6.6 13.8 3.4 5.0 19.3 3.0 8.9 100.0

Savings and investment

Savings-investment gap narrows; but still wide

Agriculture is critical for macroeconomic stability and sustained growth

Table 1.6 : Sectoral investment growth rates at 2004-05 prices

Behaviour of prices and inflation

Industry and Infrastructure

Deseasonalised sequential month-on-month movement

2.0 1.5 1.0 0.5 0 -0.5

Six core industries growing; but not at full steam

Rate of growth (per cent)

6 5 4 3 2 1 0 -1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

6.25 5.0 2.5 0 -2.5

Rate of growth (per cent)

Rate of growth (per cent)

Rate of growth (per cent)

Rate of growth (per cent)

State of the Economy and Prospects

Infrastructure a mixed bag of performances

Services Sector the potential growth engine

Foreign Exchange Reserves

State of the Economy and Prospects