All Chapter

State of the Economy and ProspectsThe fiscal year 2009-10 began as a difficult one. There was a significant slowdown in the growth rate in the second half of 2008-09, following the financial crisis that began in the industrialized nations in 2007 and spread to the real economy across the world. The growth rate of the gross domestic product (GDP) in 2008-09 was 6.7 per cent, with growth in the last two quarters hovering around 6 per cent. There was apprehension that this trend would persist for some time, as the full impact of the economic slowdown in the developed world worked through the system. It was also a year of reckoning for the policymakers, who had taken a calculated risk in providing substantial fiscal expansion to counter the negative fallout of the global slowdown. Inevitably, India’s fiscal deficit increased from the end of 2007-08, reaching 6.8 per cent (budget estimate, BE) of GDP in 2009-10. A delayed and severely subnormal monsoon added to the overall uncertainty. The continued recession in the developed world, for the better part of 2009-10, meant a sluggish export recovery and a slowdown in financial flows into the economy. Yet, over the span of the year, the economy posted a remarkable recovery, not only in terms of overall growth figures but, more importantly, in terms of certain fundamentals, which justify optimism for the Indian economy in the medium to long term. CHAPTER 1 1.2 The real turnaround came in the second quarter of 2009-10 when the economy grew by 7.9 per cent. As per the advance estimates of GDP for 2009-10, released by the Central Statistical Organisation (CSO), the economy is expected to grow at 7.2 per cent in 2009-10, with the industrial and the service sectors growing at 8.2 and 8.7 per cent respectively. This recovery is impressive for at least three reasons. First, it has come about despite a decline of 0.2 per cent in agricultural output, which was the consequence of sub-normal monsoons. Second, it foreshadows renewed momentum in the manufacturing sector, which had seen continuous decline in the growth rate for almost eight quarters since 2007-08. Indeed, manufacturing growth has more than doubled from 3.2 per cent in 2008-09 to 8.9 per cent in 2009-10. Third, there has been a recovery in the growth rate of gross fixed capital formation, which had declined significantly in 2008-09 as per the revised National Accounts Statistics (NAS). While the growth rates of private and Government final consumption expenditure have dipped in private consumption demand, there has been a pick-up in the growth of private investment demand. There has also been a turnaround in merchandise export growth in November 2009, which has been sustained in December 2009, after a decline nearly twelve continuous months. 1.3 The fast-paced recovery of the economy underscores the effectiveness of the policy response of the Government in the wake of the financial crisis. Moreover, the broad- based nature of the recovery creates scope for a gradual rollback, in due course, of some of the measures undertaken over the last fifteen to eighteen months, as part of the policy response to the global slowdown, so as to put the economy back on to the growth path of 9 per cent per annum. 2 Economic Survey 2009-10 Key indicators Data categories and components Units 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 1 GDP and Related 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 (growth) Electricity Generation (growth) 3 Prices Inflation (WPI) (52-week average) Inflation CPI (IW) (average) 4 External Sector Export Growth ( US$) Import Growth (US$) 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 Deficiti Revenue Deficit Primary Deficiti 7 Population AE i Rs crore % Rs crore % % of GDP % of GDP Rs Mn tonnes Per cent Per cent %change %change %change %change Us$ Bn. Rs/ US$ %change %change % of GDP % of GDP % of GDP Million 3239224 … 2967599 32.2 32.7 24095 198.4 8.4 5.1 6.5 3.8 30.8 42.7 -0.4 141.5 44.93 12.0 27.0 3.9 2.4 0.0 1089 3706473 14.4 3249130 9.5 33.1 34.3 27183 208.6 8.2 5.2 4.4 4.4 23.4 33.8 -1.2 151.6 44.27 16.9 30.8 4.0 2.5 0.4 1106 4283979 15.6 3564627 9.7 34.4 35.5 31080 217.3 11.6 7.3 5.4 6.7 22.6 24.5 -1.0 199.2 45.25 21.7 28.1 3.3 1.9 -0.2 1122 4947857 5574449QE 6164178 15.5 9.2 36.4 37.7 35430 230.8 8.5 6.3 4.7 6.2 29.0 35.5 -1.3 309.7 40.26 21.4 22.3 2.6 1.1 -0.9 1138 12.7 QE AE 10.6 4453064 7.2 na na 43749 na na na 1.6 11.4 -20.3 -23.6 -3.3 283.5 47.94 16.5 13.9 6.5 4.6 2.8 1170 b b AE 3893457 4154973 6.7 32.5 34.9 40141 233.9 a 2.6 2.7 8.4 9.1 13.6 20.7 -2.4 252 45.99 18.6 17.5 5.9 h 4.4 h c c d e f Current Account Balance (CAB)/GDP Per cent g g j j j 2.5 h 1154 GDP figures for 2009-10 are advance estimates; QE quick estimates na not yet available / released for 2009-10 a for 2008-09 the figures are the 4th advance estimates as on July 21, 2009. b Average Apr.-Dec. 2009. c Apr.-Dec. 2009. d CAB to GDP ratio for 2009-10 is for the period Apr.-Sept. 2009 e as of December 31, 2009 f Average exchange rate for 2009-10 (Apr.-Dec. 2009). g As on January 15, 2010. h fiscal indicators for 2008-09 are based on the provisional actuals for 2008-09. i fiscal indicators are as per revised GDP at current market prices based on National Accounts 2004-05 series. j fiscal deficit, revenue deficit and primary deficit were envisaged at 6.8, 4.8 and 3.0 per cent of GDP respectively at the time of presentation of the 2009-10 Budget. State of the Economy and Prospects 1.4 A major concern during the year 2009-10, especially in the second half, was the emergence of high double-digit food inflation. On a year-on-year basis, wholesale price index (WPI) headline inflation in December 2009 was 7.3 per cent but for food items (primary and manufactured) with a combined weight of 25.4 per cent in the WPI basket, it was 19.8 per cent. Thus, unlike the first half of 2008-09 when global cost-push factors resulted in WPI inflation touching nearly 13 per cent in August 2008, with inflation in primary and manufactured products just below the overall average and that in the fuel and power group at over 17 per cent, the upsurge in prices in the second half of 2009-10 has been more concentrated and confined to food items only. As of the week ending January 30, 2010 the inflation in primary food articles stood at 17.9 per cent, and that in fuel, power light and lubricants at 10.4 per cent. A significant part of this inflation can be explained by supply-side bottlenecks in some of the essential commodities, precipitated by the delayed and sub-normal southwest monsoons. Since December 2009, there have been signs of these high food prices, together with the gradual hardening of non-administered fuel product prices, getting transmitted to other non-food items, thus creating some concerns about higherthan-anticipated generalized inflation over the next few months. 1.5 At global level, following one of the deepest downturns in recent times, economic growth took root and extended to advanced economies in the second half of 2009. The pace and shape of recovery, however, remains uncertain. The International Monetary Fund’s (IMF) World Economic Outlook update of January 26, 2010 suggests that following a sharp decline of 3.2 per cent in 2009, output in the advanced economies has begun to expand since 3 the second half of 2009 and is now expected to grow by 2.1 per cent in 2010. In the case of emerging and developing economies, the modest 2.1 per cent output growth in 2009 is expected to be followed by a rise of about 6 per cent in 2010. For the world as a whole an output decline of 0.8 per cent in 2009 is projected to turn into a growth of 3.9 per cent in 2010. The rapid rebound in world output has been driven by the extraordinary amount of policy stimulus, monetary as well as fiscal. The concern about the recovery losing momentum, once the stimulus is withdrawn, remains. High unemployment rates, growing fiscal deficit and contraction of credit to productive sectors are areas of concern for the developed economies. For the emerging economies, which are already on the path to recovery, there are challenges emanating from increased capital flows with ramifications for monetary growth, inflation and exchange rate uncertainty, along with policy implications for the capital account. ECONOMIC GROWTH Overall GDP growth DURING 2009-10 1.6 With the release of the Quick Estimates of National Income for 2008-09, the CSO has effected a revision in the base year of its NAS from 1999-2000 to 2004-05. It includes changes on account of certain refinements in definitions of some aggregates, widening of coverage, inclusion of long-term survey results and the normal revision in certain data in respect of 2008-09. While there are no major changes in the overall growth rate of GDP at constant 200405 prices, except for 2007-08 where it has been revised upward from 9.0 to 9.2 per cent, there are some changes in growth rates at sectoral level and in the level estimates of GDP. Thus, for instance, Table 1.1 : Rate of growth at factor cost at 1999-2000 prices (per cent) 2005-06 Agriculture, Forestry & Fishing Mining & Quarrying Manufacturing Electricity, Gas & Water Supply Construction Trade, Hotels & Restaurants Transport, Storage & Communication Financing, Insurance, Real Estate & Business Services Community, Social & Personal Services GDP at Factor Cost 5.2 1.3 9.6 6.6 12.4 12.4 11.5 12.8 7.6 9.5 2006-07 3.7 8.7 14.9 10.0 10.6 11.2 12.6 14.5 2.6 9.7 2007-08 4.7 3.9 10.3 8.5 10.0 9.5 13.0 13.2 6.7 9.2 2008-09 2009-10 1.6 1.6 3.2 3.9 5.9 5.3 11.6 10.1 13.9 6.7 -0.2 8.7 8.9 8.2 6.5 8.3* 9.9 8.2 7.2 Source : CSO. * Transport & communication included for 2009-10 in trade, hotels and restaurants. 4 Economic Survey 2009-10 growth rates of GDP at market prices, at constant 2004-05 prices, in 2008-09 and 2009-10 at 5.1 per cent and 6.8 per cent have been considerably lower than the growth rates of GDP at factor cost. This is due to the significant decline in net indirect taxes (i.e. indirect taxes minus subsidies) in the said years on account of the fiscal stimulus implemented by the Government, which included tax relief to boost demand and increase in the expenditure on subsidies. 1.8 The recovery in GDP growth for 2009-10, as indicated in the advance estimates, is broad based. Seven out of eight sectors/sub-sectors show a growth rate of 6.5 per cent or higher. The exception, as anticipated, is agriculture and allied sectors where the growth rate is estimated to be minus 0.2 per cent over 2008-09. Sectors including mining and quarrying; manufacturing; and electricity, gas and water supply have significantly improved their growth rates at over 8 per cent in comparison with 2008-09. The construction sector and trade, hotels, transport and communication have also improved their growth rates over the preceding year, though to a lesser extent. However, the growth rate of community, social and personal services has declined significantly, though it continues to be around its pre-global crisis medium-term trend growth rate. Financing, insurance, real estate and business services have retained their growth momentum at around 10 per cent in 2009-10. In terms of sectoral shares, the share of agriculture and allied sectors in GDP at factor cost has declined gradually from 18.9 per cent in 2004-05 to 14.6 per cent in 2009-10. During the same period, the share of industry has the contribution of the agriculture sector to the GDP at factor cost in 2004-05 has declined from 17.4 per cent in the old series to 15.9 per cent in the new series. Similarly, while the contribution of registered manufacturing has declined from 10.9 per cent in the old series to 9.9 per cent in the new series, that of unregistered manufacturing has increased from 4.9 to 5.4 per cent. There is also an increase in the contribution of real estate, ownership of dwellings and business services from 8.2 per cent to 8.9 per cent. In the case of level estimates of GDP at current prices, the difference ranges from 3.1 per cent in 2004-05 to 6 per cent in 2008-09. As a result, there are also changes in the expenditure estimates of the GDP, which, as can be seen in the following paragraphs, has altered the analysis related to the impact of the global slowdown on the Indian economy as presented in the Economic Survey 2008-09. 1.7 The advance estimate of GDP growth at 7.2 per cent for 2009-10, falls within the range of 7 +/- 0.75 projected nearly a year ago in the Economic Survey 2008-09. With the downside risk to growth due to the delayed and sub-normal monsoons having been contained to a large extent, through the likelihood of a better-than-average rabi agricultural season, the economy has responded well to the policy measures undertaken in the wake of the global financial crisis. While the GDP at factor costs at constant 2004-05 prices, is placed at Rs 44,53,064 crore, the GDP at market prices, at constant prices, is estimated at Rs 47, 67,142 crore. The corresponding figures at current prices are Rs 57,91,268 crore and Rs 61, 64,178 crore respectively. It is worthwhile to note here that the Figure 1.1 11 Quarterly growth rates at constant 2004-05 prices Growth rate 10 9 3-quarter moving average Per cent 8 7 6 5 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Year State of the Economy and Prospects remained the same at about 28 per cent, while that of services has gone up from 53.2 per cent in 2004-05 to 57.2 per cent in 2009-10. 5 continued momentum in the recovery, which is reflected in the advance estimates for 2009-10. Quarterly trend 1.9 As per the revised quarterly GDP data on the new series of NAS, it now turns out that the GDP growth rate for Q3 2008-09 was 6.2 per cent as against 5.8 per cent on the old series. Thus the growth rates in the three quarters following the flare-up of the global financial crisis in September 2008, were 6.2, 5.8 and 6.1 per cent. As anticipated in the Economic Survey 2008-09, the economy exhibited a sharp ‘V’-shaped recovery within a span of a few months of the stimulus measures, both fiscal and monetary, working through the system. The turnaround in the growth momentum was confirmed with the Q2 2009-10 estimates, when the economy recorded a GDP growth of 7.9 per cent as against 7.5 per cent in the corresponding quarter of 2008-09. The recovery was broad based with mining and quarrying; manufacturing; and electricity, gas and water supply recording impressive growth rates. Understandably, as a consequence of the continued fiscal expansion, and in particular with the release of 60 per cent of the Sixth Pay Commission arrears in September 2009, community, social and personal services recorded a significant pick-up in growth. The partial data available since Q2 estimates on industrial growth, agriculture, as well as exports indicate the Per capita growth 1.10 The growth rates in per capita income and consumption, which are gross measures of welfare in general, have declined in the last two years. This is a reflection of the slowdown in the overall GDP growth. While the growth in per capita income, measured in terms of GDP at constant market prices, has declined from a high of 8.1 per cent in 2007-08 to 3.7 per cent in 2008-09 and then recovered to 5.3 per cent in 2009-10, per capita consumption growth as captured in the private final consumption expenditure (PFCE) shows a declining trend since 2007-08 with its growth rate in 2009-10 falling to onethird of that in 2007-08 (Table 1.3). The growth rate Table 1.3 : Per capita income and consumption at 2004-05 prices Income Rs (%) Growth Consumption Rs (%) Growth 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 29,745 32,012 34,533 37,328 38,695 40,745 7.6 7.9 8.1 3.7 5.3 17,620 18,909 20,168 21,841 23,012 23,626 7.3 6.7 8.3 5.4 2.7 Source: CSO. Note : Income is taken as GDP at market prices, Consumption is PFCE. Table 1.2 : Quarterly growth rates of GDP at constant 2004-05 prices Sectors AN Agriculture, Forestry & Fishing Mining & Quarrying Manufacturing Elec., Gas & Water Supply Construction Trade, Hotels, Transport and Communication Financing, Insurance, Real Estate & Business Services Community, Social & Personal Services GDP at Factor Cost 4.7 3.9 10.3 8.5 10.0 10.7 13.2 Q1 3.1 1.1 12.1 10.2 10.7 11.9 14.0 2007-08 Q2 Q3 3.9 4.6 10.3 9.1 13.1 9.5 13.8 8.7 4.5 10.7 7.1 9.6 10.7 13.3 Q4 2.1 5.1 8.3 7.8 7.1 10.9 11.9 AN 1.6 1.6 3.2 3.9 5.9 7.6 10.1 Q1 3.2 2.6 5.9 3.3 7.1 10.8 9.1 2008-09 Q2 2.4 1.6 5.5 4.3 8.0 10.0 8.5 Q3 -1.4 2.8 1.3 4.0 3.0 4.4 10.2 Q4 3.3 -0.3 0.6 4.1 5.6 5.7 12.3 AN -0.2 8.7 8.9 8.2 6.5 8.3 9.9 2009-10 Q1 Q2 2.4 7.9 3.4 6.2 7.1 8.1 8.1 0.9 9.5 9.2 7.4 6.5 8.5 7.7 6.7 9.2 4.2 9.3 7.0 9.4 5.3 9.7 9.8 8.5 13.9 6.7 8.7 7.6 10.4 7.5 28.7 6.2 8.8 5.8 8.2 7.2 6.8 6.1 12.7 7.9 6 Economic Survey 2009-10 of consumption expenditure in 2009-10. However, the overall share of consumption expenditure, both private as well as Government in GDP at market prices, at constant 2004-05 prices, has declined only marginally from 70.9 per cent in 2008-09 to 69.6 per cent in 2009-10 (Table 1.4). 1.12 At the same time, the growth rate of gross fixed capital formation in 2008-09 has also undergone a revision due to the change in the NAS base year. It was revised downward from 8.2 per cent in the earlier base to 4 per cent in the revised base for 2008-09. It is, however, estimated to grow by 5.2 per cent in 2009-10. Moreover, gross capital formation adjusted shows a negative 4 per cent growth in 2008-09 in the new NAS base. This is because of a significant decline in inventories (change in stocks) from Rs1,08,739 crore in the old base to Rs 59,812 crore in the new base. The share of gross fixed capital formation in GDP remains nearly the same at 32.5 per cent in 2009-10 and 32.9 per cent in 2008-09. 1.13 Thus it now appears that moderation in the decline in GDP growth rate, in the second half of of per capita consumption was lower than that of per capita income up to 2007-08; however since then it was higher in two years and became lower again in 2009-10. The average growth in per capita consumption over the period 2005-06 to 2009-10 was slower at 6.08 per cent than that in per capita income at 6.52 per cent. These year to year differences in growth rates can be explained by the rising savings rate and also the rise in tax collections that have been observed in some of these years. Aggregate demand and its composition 1.11 The change in the NAS series from the old base of 1999-2000 to the new base of 2004-05 has brought about significant revision in the expenditure estimates of the GDP for 2008-09. While growth of the PFCE in 2008-09 was revised upward from 2.9 per cent to 6.8 per cent, growth in Government final consumption expenditure was revised downwards from over 20 per cent in 2008-09 on the old base to 16.7 per cent on the new base. In 2009-10 a growth of 4.1 per cent is expected in private final expenditure and 8.2 per cent in Government final expenditure. There is therefore a significant decline in the growth Table 1.4 : 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 Capital Formation 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 59.2 11.0 32.7 28.8 59.1 10.9 34.2 30.3 58.4 10.3 35.8 31.7 58.5 10.3 38.2 33.3 59.5 11.5 34.9 32.9 58.0 11.6 na 32.5 57.3 9.8 51.4 47.3 -18.6 51.3 4.4 52.6 46.1 -8.0 59.7 10.4 62.7 50.1 -15.0 78.2 33.6 -29.6 25.8 -36.2 36.0 13.9 na 25.5 20.4 2005-06 9.3 9.0 8.3 14.7 15.3 24.8 25.9 32.5 2006-07 9.4 8.2 3.8 14.5 14.3 35.0 21.8 22.0 2007-08 9.6 9.8 9.7 16.9 15.2 15.1 5.2 10.0 2008-09 5.1 6.8 16.7 -4.0 4.0 -61.2 19.3 23.0 2009-10 6.8 4.1 8.2 na 5.2 4.7 -15.8 -17.2 Source: CSO. Note: Does not add to 100 because only major items are included in the table. Figures for 2009-10 are based on advance estimates. State of the Economy and Prospects 2008-09, was primarily a result of the boost provided by the fiscal stimulus to consumption demand, both private as well as Government, rather than the continued buoyancy in investment growth, as indicated in the Economic Survey 2008-09. This in fact was the intended purpose of the fiscal stimulus, which was not captured by the earlier NAS data. It implies that expansion in investments in the manufacturing sector may have declined a lot faster and, perhaps, earlier than the estimates for 2008-09 suggested in May 2009. This is, for example, reflected in the data on contribution to growth (Table 1.4), where the contribution of consumption, private as well as Government, to growth saw a steep rise in 2008-09 while that of gross capital formation declined. Further, though the growth in gross fixed capital formation (a proxy for investment growth) in 2009-10 has recovered to 5.2 per cent from 4 per cent in 2008-09, it is still below the GDP growth rate unlike in the pre-global crisis phase. This makes it necessary, therefore, to watch the growth recovery in private investment in the third and fourth quarters, in sequencing the rollback of the stimulus measures. Moreover, the contribution of net exports has become positive in 2009-10, after a considerable period of time. It may again turn negative as the demand for imports increases with a deepening of industrial recovery and a pick-up in domestic demand. 7 1.14 With growth in private expenditure on food, beverages and tobacco falling behind the overall growth in private consumption expenditure, the share of expenditure on food items has gradually been declining over the years. As per the CSO data, it was 35.3 per cent in 2008-09 as against 39.6 per cent in 2004-05. At the same time, the growth in expenditure on transport and communication and miscellaneous goods and services has been increasing, though with occasional aberrations, with the result that together they account for nearly the same share in total private consumption as the expenditure on food items. PRODUCTION Agriculture AND SUPPLY 1.15 Total foodgrains production in 2008-09 was estimated at 233.88 million tonnes as against 230.78 million tonnes in 2007-08 and 217.28 million tonnes in 2006-07. In the agricultural season 2009-10, the impact of the delayed and sub-normal monsoon is reflected in the production and acreage data for kharif crops. As per the first advance estimates, covering only the kharif crop, production of foodgrains is estimated at 98.83 million tonnes in 2009-10, as against the fourth advance estimates of 117.70 million Table 1.5 : 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 2006-07 2007-08 7.2 8.1 4.8 14.6 2.5 8.8 13.2 25.6 9.6 36.8 8.5 11.4 4.0 4.4 18.7 3.5 12.8 100.0 2008-09 2.7 -0.6 3.4 3.7 8.1 12.3 5.4 19.3 6.8 35.3 7.9 11.0 3.9 4.4 19.7 3.4 14.4 100.0 39.6 6.6 13.0 3.4 5.0 19.6 3.4 9.4 100.0 Annual Growth (per cent) 7.5 3.8 24.0 23.2 3.4 4.0 14.1 15.9 5.8 4.5 5.0 7.6 8.9 7.0 15.9 21.2 8.6 8.3 Share of Total (per cent) 39.2 37.6 7.6 8.6 12.4 11.9 3.5 3.8 4.8 4.7 19.0 18.9 3.4 3.4 10.0 11.2 100.0 100.0 8 Economic Survey 2009-10 Table 1.6 : Production of selected kharif crops (million tonnes) 2007-08(4th advance estimates) 2008-09 (4th advance estimates) 28.34 112.92 4.78 117.70 17.88 2009-10 (1st advance estimates) 22.76 94.41 4.42 98.83 15.23 Difference between 2009-10 and 2007-08 -9.13 -20.14 -1.98 -22.12 -5.48 Coarse Cereals Cereals Pulses Foodgrains Oilseeds 31.89 114.55 6.40 120.95 20.71 tonnes for the kharif crop in 2008-09 and a target of 125.15 million tonnes for 2009-10. Overall production of kharif cereals in 2009-10 has shown a decline of 18.51 million tonnes over 2008-09. Both for rice and coarse cereals, there has been a shortfall as compared to the targeted production and also the production level achieved in the previous year. In the case of rice the decline is about 15 per cent over the 2008-09 level and 17 per cent in comparison with the target for 2009-10. The decline in kharif coarse cereals in 2009-10 in comparison with 2008-09 is nearly 20 per cent and the shortfall with respect to the target for kharif 2009-10 is nearly 10 million tonnes. Total production of kharif pulses is estimated at 4.42 million tonnes in 2009-10, which is 8 per cent lower than the production during 2008-09 and 32 per cent lower than the targeted production for 2009-10. Similarly, total kharif production of the nine oilseeds in 2009-10 is about 15 per cent lower than the kharif production in 2008-09. 1.16 Sugarcane production in 2009-10 is estimated at 249.48 million tonnes, which is 9 per cent lower than the previous year and 27 per cent lower than the targeted production for 2009-10. Cotton production in 2009-10 is estimated at 236.57 lakh bales (of 170 kg each), which is higher than the fourth advance estimates of 231.56 lakh bales in 2008-09 by 2.2 per cent. However, it is lower than the target set for 2009-10 by 9 per cent. 1.17 In terms of acreage, the kharif 2009-10 season saw a decline of nearly 6.5 per cent or 46.18 lakh ha in the area covered under foodgrains. Almost the entire decline in this acreage was confined to the kharif rice crop. While the decline in kharif acreage under pulses was 5.63 per cent, the area under the nine oilseeds declined by 5.14 lakh ha. Some of this decline in acreage may have been made up by the increased acreage in the rabi season. As per the available estimates, wheat, pulses and groundnut have seen an increase in acreage as compared to last year. 1.18 During the south-west monsoon of 2009, the country as a whole received 23 per cent less rainfall as compared to the long period average (LPA). Central India, north-east India, north-west India and the southern peninsula experienced 20 per cent, 27 per cent, 36 per cent and 4 per cent deficient rainfall respectively. At district level, 9 per cent of the districts in the country received excess rainfall, 32 per cent normal rainfall, 51 per cent deficient rainfall and 8 per cent scanty rainfall. Monsoon rainfall over the country as a whole was 53 per cent of the LPA during June, 96 per cent during July, 73 per cent in August and 79 per cent during September. Some of this shortfall was made up during the post-monsoon season (October-December) of 2009, when the country as a whole received 8 per cent excess rainfall. 1.19 The total designed storage capacity at full reservoir level (FRL) of 81 major reservoirs in the country monitored by the Central Water Commission is 151.77 billion cubic metres (BCM). At the end of monsoon 2009, total water availability in the reservoirs was 90.48 BCM, which is less than the water availability of 113.74 BCM at the end of monsoon 2008 and the average of 100.95 BCM for the last 10 years. Industry and Infrastructure 1.20 The cyclical slowdown in the industrial sector which began in 2007-08 got compounded by the global commodity price shock and the impact of the global slowdown during the course of calendar year 2008 was arrested at the beginning of 2009-10. After the first two months of the current fiscal, there were clear signs of recovery. This is evident from the NAS data as well as the index of industrial production State of the Economy and Prospects (IIP). While the CSO’s advance estimates place industrial-sector growth at 8.2 per cent, as against 3.9 per cent in 2008-09, the IIP industrial growth is estimated at 7.7 per cent for the period AprilNovember 2009-10, significantly up from 0.6 per cent during the second half of 2008-09. The manufacturing sector, in particular, has grown at the rate of 8.9 per cent in 2009-10. 1.21 Growth in the major industrial groups has been a mixed bag. There was strong growth in automobiles, rubber and plastic products, wool and silk textiles, wood products, chemicals and miscellaneous manufacturing; modest growth in nonmetallic mineral products; no growth in paper, leather, food and jute textiles; and a slump in beverages and tobacco products in 2009-10. In terms of use-based classification, there was strong growth in consumer durables and intermediate goods (partly aided by the base effect); moderate growth in basic and capital goods; and sharp deceleration in consumer nondurables. 1.22 The improvement in the cost structure of manufacturing companies seems to have catalysed the recovery. As the data on gross capital formation are available with a considerable lag, the investment picture is not yet clear. Growth in the production of capital goods, a proxy for investment, is improving, but different components of the “capital goods” group reflect a mixed picture during the current year. The strength of the recovery so far has been helped by the favourable base effect and mild inflation in manufacturing articles, especially of industrial inputs. The declining trend in the number of mandays lost because of strikes and lockouts witnessed in recent years has continued in 2009-10. 1.23 Core industries and infrastructure services, led by the robust growth momentum of telecom services and spread across power, coal and other infrastructure like ports, civil aviation and roads, have also shown signs of recovery in 2009-10. In the current fiscal, electricity generation emerged from the lacklustre growth witnessed in the previous year and equalled its performance in 2007-08. That this was achieved despite constraints imposed by the inadequate availability of coal and the dismal hydelgeneration scenario due to the sub-normal monsoon, attests well to its potential. During April-December 2009, the peak deficit and total energy deficit came down considerably to 12.6 per cent and 9.8 per cent respectively from 13.8 per cent and 10.9 per cent during the corresponding period of the previous year. 9 This happened mainly due to the increase in the growth in electricity generation. The availability of gas from the KG basin (D6) and surplus utilization of gas available on fallback basis resulted in better utilization of capacity and higher plant load factor (PLF) as also high growth in electricity generated from gas-based plants. The overall PLF also improved during April-December 2009. 1.24 The domestic supply of crude oil remained around 34 million metric tonnes (mmt) and natural gas at about 32 billion cubic metric tonnes during the past five years. With 15 new oil and gas discoveries during 2009-10, the domestic availability is expected to improve. During 2009-10, the projected production for crude oil is 36.7 mmt, which is about 11 per cent higher than the actual crude oil production of 33.5 mmt in 2008-09. 1.25 Better resource management, through increased wagon load, faster turnaround time and a more rational pricing policy, led to perceptible improvement in the performance of the railways. There has been no across-the-board increase in freight rates in recent years. Railways have taken a number of steps to attract additional traffic, one of which is the dynamic pricing policy through which differential tariff is charged to take care of skewed demand during different periods of the year and between different regions. A new class of non-stop super fast passenger-carrying “Duronto” trains has been introduced in September 2009. Seven Duronto trains have already been launched. 1.26 In 2009-10, as against the stipulated target of developing about a 3,165 km of national highways under various phases of the National Highway Development Project (NHDP), the achievement up to end November 2009 has been about 1,490 km. Similarly, as against the 2009-10 target of about 9,800 km for awarding projects under various phases of the NHDP, projects totalling a length of about 1,285 km have been awarded up to end November 2009. 1.27 The opening of the telecom sector has not only led to rapid growth in subscriber base, but has also significantly helped in maximization of consumer benefits, particularly in terms of price discovery, following the forbearance approach in tariffs. From only 54.6 million telephone subscribers in 2003, the number increased to 429.7 million at the end of March 2009 and further to 562 million as of October 31, 2009 showing an addition of 96 million subscribers during the period from March to December 2009. 10 Economic Survey 2009-10 Table 1.7 : Ratio of savings and investment to GDP (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 Source: CSO. Note: Totals may not tally due to adjustment for errors and omissions. 2005-06 33.1 2.4 30.7 23.2 11.4 11.8 7.5 34.3 7.9 25.3 13.5 11.8 30.4 2.8 1.1 -5.5 5.4 2006-07 34.4 3.6 30.9 22.9 10.9 11.9 8.0 35.5 8.4 26.4 14.5 11.9 31.4 3.4 1.2 -4.8 4.4 2007-08 36.4 5.0 31.4 22.6 11.2 11.5 8.7 37.7 8.9 27.6 16.1 11.5 33.0 3.5 1.1 -3.9 3.8 2008-09 32.5 1.4 31.1 22.6 10.4 12.2 8.4 34.9 9.4 24.9 12.7 12.2 33.0 1.3 1.3 -8.0 6.2 32.2 2.3 29.9 23.3 9.8 13.5 6.6 32.7 7.4 23.8 10.3 13.5 28.8 2.5 1.3 -5.1 6.1 Service Sector 1.28 The service sector which has been India’s workhorse for well over a decade has continued to grow rapidly. Following the NAS classification, it comprises the sub-sectors trade, hotels, transport and communications; financing, insurance, real estate and business services; and community, social and personal services. As against a growth of 9.8 per cent in 2008-09 it grew at 8.7 per cent in 200910. While there has been a significant dip in the growth of community social and personal services in 2009-10, the other sub-sectors have either retained their growth momentum or improved upon it. A comparison between the old and the new series of NAS reveals considerable difference in the level estimates of the value added of service sub-sectors to GDP at current prices. Thus, for instance, there has been a decline, ranging from around 8 per cent in 2004-05 to 30 per cent in 2008-09, in the communication sub-sector. This has been partly offset by the increase in the level estimates of value added in real estate, ownership of dwellings, business and legal services, ranging from 11.6 per cent in 2004-05 to nearly 34.4 per cent in 2008-09. Savings and investments Gross domestic savings 1.29 Gross domestic savings (GDS) at current prices in 2008-09 were estimated at Rs 18,11,585 crore, amounting to 32.5 per cent of GDP at market Figure 1.2 Sectoral share in domestic saving 2008-09 Public sector 4% Private corporate sector 26% Household sector 70% State of the Economy and Prospects prices as against 36.4 per cent in the previous year. The fall in the rate of GDS has mainly been due to the fall in the rates of savings of the public sector (from 5.0 per cent in 2007-08 to 1.4 per cent in 2008-09) and private corporate sector (from 8.7 per cent in 2007-08 to 8.4 per cent in 2008-09). In respect of the household sector, the rate of saving has remained at the same level of 22.6 per cent in 2007-08 and 2008-09. Indeed, the change in the NAS series has had the most conspicuous effect on the savings and investment rates. The rate of GDS on the new series increased from 32.2 per cent in 2004-05 to 36.4 per cent in 2007-08 before declining to 32.5 per cent in 2009-10, as against the old series where it rose from 31.7 per cent in 2004-05 to 37.7 per cent in 2007-08. Thus, from 2005-06 to 2007-08, the GDS rate was overestimated in the NAS old series by an average of 1.3 per cent. Definitional refinements, better estimates of savings and a higher denominator due to an increase in the level estimates of GDP have contributed to the lowering of the rate of GDS in the new NAS series. 11 1.31 At sectoral level, the rate of gross capital formation or simply the investment rate has increased in both the public and private sectors. In the former it rose continuously from 7.4 per cent in 2004-05 to 9.4 per cent in 2008-09, whereas in the latter, it increased from 23.8 per cent in 2004-05 to 27.6 per cent in 2007-08 before falling to 24.9 per cent in 2008-09. Between 2007-08 and 2008-09, the investment rate for the private corporate sector declined significantly from 16.1 per cent to 12.7 per cent, whereas that of the household sector increased from 11.5 to 12.2 per cent. 1.32 The sectoral savings-investment gap, reflecting the gap between gross domestic savings and gross capital formation of a sector, declined significantly for the public sector as its savings increased until 2007-08. However, with a sudden drop in its savings rate by nearly 4 percentage points in 2008-09, this gap shot to a negative 8 per cent. In the case of the private corporate sector, the savingsinvestment gap has been consistently positive and has risen in 2008-09 to 6.2 per cent after falling to 3.8 per cent in 2007-08 from 6.1 per cent in 2004-05. Capital formation 1.30 Gross domestic capital formation(GDCF) at current prices (adjusted for errors and omissions) increased from Rs18,65,899 crore in 2007-08 to Rs19,44,328 crore in 2008-09 and at constant (2004-05) prices, it decreased from Rs16,22,226 crore in 200708 to Rs15,57,757 crore in 2008-09. The rate of gross capital formation at current prices rose from 32.7 per cent in 2004-05 to 37.7 per cent in 2007-08 before declining to 34.9 per cent in 2008-09. Sectoral investment 1.33 The sectoral investment rate is a useful indicator of the direction of new investments. While the overall growth of investment in India was in the range of 15 to 16 per cent per annum during the last few years, it plunged to - 2.4 per cent in 2008-09 as a result of the external shock-led slowdown. At sectoral level, there has been a welcome rebound in the growth rate of investment in the agricultural sector, which grew at 16.5 per cent and 26.0 per cent in 2007-08 and 2008-09 respectively. This is in contrast to the growth rate of 1.4 per cent recorded in 2006-07. Growth of investment in the industrial sector has been more than the total investment growth up to 2007-08. However, in 2008-09, this was reversed, when investment in the industrial sector declined by - 17.6 per cent as compared to a decline of - 2.4 per cent in total investment. Within the industrial sector, the decline was more prominent in manufacturing and the construction sector. Investment in the unorganized manufacturing sector declined by a negative 42 per cent, indicative, perhaps, of the difficulty faced by the sector in accessing credit due to the tight market conditions in the post financialcrisis phase. Investment in the services sector registered a growth of 20.2 per cent in 2006-07, which suddenly declined to - 16.0 per cent in 2007-08 as a result of a decline in investment in the trade, hotels Figure 1.3 Sectoral share in gross domestic capital formation 2008-09 Valuables 4% Household sector 34% Public sector 26% Private corporate sector 36% 12 Economic Survey 2009-10 Table 1.8 : 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 1.4 0.5 16.0 9.5 3.5 25.5 18.8 61.5 23.7 45.5 20.2 23.2 5.4 1.0 15.8 -2.0 19.3 -4.4 1.3 38.3 -0.4 12.3 13.9 10.2 16.1 2007-08 16.5 17.7 -20.0 9.5 14.6 19.8 24.4 1.4 8.7 23.5 -16.0 -21.0 12.2 26.3 14.0 27.8 8.4 34.1 16.8 1.4 17.8 16.4 15.7 17.4 15.2 2008-09 26.0 27.4 16.0 9.5 -7.8 -21.9 -17.6 -42.5 1.3 -22.8 19.4 23.9 1.7 30.3 17.5 13.7 32.8 65.1 10.5 -18.0 12.0 6.2 8.5 3.0 -2.4 18.1 18.7 27.3 9.5 40.0 14.8 39.1 -40.6 28.6 0.7 26.3 24.9 33.6 14.7 10.6 6.8 -268.5 27.0 5.7 46.3 4.4 18.0 16.0 20.8 16.0 and restaurants sub-sector. This decline in the said sub-sector was made up in 2008-09 when, on the strength of a growth of 19.4 per cent, there was a revival in investment growth rate in the services sector as a whole. Within the services sector, the global financial crisis has had a dampening effect on investment growth in the banking and insurance subsector in 2008-09. Behaviour of Prices and Inflation 1.34 The year-on-year WPI inflation rate has been fairly volatile in 2009-10. It was 1.2 per cent in March 2009 and then declined continuously to become negative during June-August 2009, assisted in part by the large statistical base effect from the previous year. It turned positive in September 2009 and accelerated to 4.8 per cent in November 2009 and further to 7.3 per cent in December 2009. For the fiscal year so far (March over December 2009) WPI inflation is estimated at 8 per cent. 1.35 Year-on-year inflation in the composite food index (with a weight of 25.4 per cent) at 19.8 per cent in December 2009 was significantly higher than 8.6 per cent last year. In respect of food articles, inflation on year-on-year basis in December was 19.2 per cent and on fiscal-year basis (i.e. over March 2009) it was 18.3 per cent. At the same time, the composite non-food inflation within the manufactured group of the WPI (with a weight of 53.7 per cent) at 2.4 per cent in December 2009, was lower than the 6.7 per cent recorded last year. This suggests concentrated inflation. Indeed, for several months, rapidly rising food inflation has been a cause for concern. 1.36 In December 2009, nearly 67 per cent of the overall WPI inflation could be attributed to food items (primary and manufactured), followed by 12 per cent in the fuel and power commodity group, the remaining 21 per cent being explained by manufactured nonfood and primary non-food articles. Among food items the major contributors to inflation are milk (20 per State of the Economy and Prospects cent), eggs, meat and fish (over 20 per cent), rice (about 10 per cent), wheat (6 per cent), pulses (about 9 per cent), potatoes (9 per cent) and tomatoes (6 per cent). 1.37 The recent period has witnessed significant divergence in the WPI and CPI inflation rates, principally on account of the larger weights assigned to the food basket in the CPIs and due to the fact that retail prices are relatively sticky downwards. Thus, due to the sharp increase in essential commodity prices, while all the four CPIs remained elevated since March 2008, rising gradually from about 7 to 8 per cent (month-on-month) to around 15 to 17 per cent in December 2009, WPI inflation first went up from around 8 per cent in March 2008 to 13 per cent in August 2008, then declined to about 1 per cent in March 2009, turned negative during June to August 2009 before rising again to over 7 per cent in December 2009. 1.38 A significant part of this inflation can be explained by supply-side bottlenecks in some of the essential commodities, precipitated by the delayed and sub-normal south-west monsoons as well as drought-like conditions in some parts of the country. The delayed and erratic monsoons may also have prevented the seasonal decline in prices, normally seen during the period from October to March for most food articles other than wheat, from setting in. At the same time, it could be argued that excessive hype about kharif crop failure, not taking into account the comfortable situation in respect of food stocks and the possibility of an improved rabi crop, may have exacerbated inflationary expectations encouraging hoarding and resulting in a higher inflation in food items. This is supported by the estimates on shortfall in production / availability of major food items in 2009-10 for rice and wheat, as also for some other items, except pulses. In the case of sugar, delay in the market release of imported raw sugar may have contributed to the overall uncertainty, thereby allowing prices to rise to unacceptably high levels in recent months. 1.39 The implicit deflator for GDP at market prices defined as the ratio of GDP at current prices to GDP at constant prices is the most comprehensive measure of inflation on annual basis, Unlike the WPI, the GDP deflator also covers prices in the services sector which now accounts for well over 55 per cent of the GDP. Overall inflation, as measured by the aggregate deflator for GDPMP, increased from 4.7 per cent in 2005-06 to 5.6 per cent in 2006-07 and then declined to 5.3 per cent in 2007-08, before rising 13 again to 7.2 per cent in 2008-09. It has been estimated at 3.6 per cent in 2009-10 as per the advance estimates. 1.40 Similarly, in the absence of an economy-wide consumer price index, it is useful to look at the deflator for the PFCE as a more comprehensive measure of consumer inflation on an annual basis. It is defined as the ratio of PFCE at current prices to PFCE at constant prices. Thus consumer inflation, as measured by the deflator for the PFCE, increased from 2.9 per cent in 2005-06 to 5.9 per cent in 2006-07, followed by a decline in 2007-08 to 4 per cent, before rising again to 7 per cent in 2008-09 and estimated at 6.4 per cent in 2009-10, as per the advance estimates. External-sector Developments 1.41 The global economy, led by the Asian economies especially China and India, has shown signs of recovery in fiscal 2009-10. While global trade is gradually picking up, the other indicators of economic activity such as capital flows, assets and commodity prices are more buoyant. BOP developments H1 2009-10 1.42 As per the latest data for fiscal 2009-10, exports and imports showed substantial decline during April-September (H1) of 2009-10 vis-à-vis the corresponding period in 2008-09. However, there has been improvement in the balance of payments (BoP) situation during H1 of 2009-10 over H1 of 2008-09, reflected in higher net capital inflows and lower trade deficit. The trade deficit was lower at US$ 58.2 billion during H1 (April-September) of 2009 as compared to US$ 64.4 billion in April-September 2008 mainly on account of decline in oil import. 1.43 Merchandise exports on a BoP basis posted a decline of 27.0 per cent in H1 (April-September 2009) of 2009-10 as against a growth of 48.1 per cent in the corresponding period of the previous year. Import payments declined by 20.6 per cent during April-September 2009 as against a sharp increase of 51.0 per cent in the corresponding period of the previous year. The decline in imports is mainly attributed to the base effect and decline in oil prices. 1.44 The net invisibles surplus (invisibles receipts minus invisibles payments) stood lower at US$ 39.6 billion during April-September of 2009 as compared to US$ 48.5 billion during April-September 2008. The current account deficit increased to US $ 18.6 billion in April-September 2009, despite a lower trade deficit, as compared to US $ 15.8 billion in April-September 2008, mainly due to the lower net invisibles surplus. 14 Economic Survey 2009-10 and silver imports registered negative growth of 7.3 per cent primarily on account of the volatility in gold prices. The continuous rise in prices of gold also dampened the demand. Non-POL non-bullion imports declined by 22.4 per cent reflecting slowdown in industrial activity and lower demand for exports. Import growth was at a positive 27.2 per cent in December 2009 due partly to the base effect and partly the 42.8 per cent increase in the growth of POL products with the pick-up in oil prices and industrial demand. Non-POL items also registered a significant growth in imports at 22.4 per cent, despite a high negative growth of gold and silver imports. 1.48 Trade deficit fell by 28.2 per cent to US$ 76.2 billion (as per customs data) in 2009-10 (April– December) from US$ 106 billion in the corresponding period of the previous year. There have been significant changes in the composition and direction of both exports and imports in this period. 1.45 Net capital flows to India at US $ 29.6 billion in April-September 2009 remained higher as compared to US $ 12.0 billion in April-September 2008. All the components, except loans and banking capital, that comprise net capital flows showed improvement during April-September 2009 from the level in the corresponding period of the previous year. Net inward FDI into India remained buoyant at US$ 21.0 billion during April-September 2009 (US $ 20.7 billion in April-September 2008) reflecting better growth performance of the Indian economy. Due to large inward FDI, the net FDI (inward FDI minus outward FDI) was marginally higher at US$ 14.1 billion in April-September 2009, reflecting better growth performance of the Indian economy. Portfolio investment mainly comprising foreign institutional investors’ (FIIs) investments and American depository receipts (ADRs)/global depository receipts (GDRs) witnessed large net inflows (US $ 17.9 billion) in April-September 2009 (net outflows of US $ 5.5 billion in April-September 2008) due to large purchases by FIIs in the Indian capital market reflecting revival in growth prospects of the economy and improvement in global investors’ sentiment. Foreign Exchange Reserves 1.49 During fiscal 2009-10, foreign exchange reserves increased by US$ 31.5 billion from US$ 252.0 billion in end March 2009 to US$ 283.5 billion in end December 2009. Out of the total accretion of US$ 31.5 billion, US$ 11.2 billion (35.6 per cent) was on BoP basis (i.e excluding valuation effect), because of higher inflows under FDI and portfolio investments, while accretion of US$ 20.3 billion (64.4 per cent) was on account of valuation gain due to weakness of the US dollar against major currencies. Besides, the Reserve Bank of India (RBI) concluded the purchase of 200 metric tonnes of gold from the IMF, under the IMF’s limited gold sales programme at the cost of US$ 6.7 billion in the month of November 2009. Further, a general allocation of SDR 3,082 million (equivalent to US$ 4,821 million) and a special allocation of SDR 214.6 million (equivalent to US$ 340 million) were made to India by the IMF on August 28, 2009 and September 9, 2009 respectively. Trade 1.46 Given the uncertain global context, the Government did not fix an export target for 2009-10, instead the Foreign Trade Policy (FTP) 2009-14 set the objective of an annual export growth of 15 per cent with an export target of US$ 200 billion by March 2011. With the deepening of the global recession, the beginning of 2009-10 saw acceleration in the fall of export growth rate. The upwardly revised export figures for the first half of 2008-09 also contributed to the faster decline in the growth rate. While the export growth rate was a negative 22.3 per cent in April-November 2008-09, in November 2009, it became a positive 18.2 per cent after a 13-month period of negative growth. This significant turnaround is due to the low base figures in November 2008 (at $11.2 billion compared to $14.1 billion in October 2008 and $13.4 billion in December 2008). The export growth rate in November 2009 over October 2009 was marginally positive at 0.04 per cent. In December 2009 the recovery in export growth has continued with a positive year-on-year growth of 9.3 per cent and a growth of 10.7 per cent over the previous month. 1.47 During 2009-10 (April-December) import growth was a negative 23.6 per cent accompanied by a decline in both POL and non-POL imports of 29.8 per cent and 20.7 per cent respectively. Gold Exchange Rate 1.50 In fiscal 2009-10, with the signs of recovery and return of FII flows after March 2009, the rupee has been strengthening against the US dollar. The movement of the exchange rate in the year 2009-10 indicated that the average monthly exchange rate of the rupee against the US dollar appreciated by 9.9 per cent from Rs 51.23 per US dollar in March 2009 to Rs 46.63 per US dollar in December 2009, mainly on account of weakening of the US dollar in the international market. State of the Economy and Prospects Figure 1.4 30 25 15 Y-o-Y Growth in broad money (M3) and non-food credit (% month end data) Broad money (M3) Non-food credit Per cent 20 15 10 5 0 Oct Nov Dec Jul 15 Jan Nov Dec Jul Oct May May Nov Dec Jan May Mar Jun Jun Jul Oct Jan Feb Mar Sep Aug Aug Aug Sep Sep Jun Feb Apr Apr Apr 2007-08 2008-09 2009-10 Year Conduct of Monetary Policy 1.51 Since the outbreak of the global financial crisis in September 2008, the RBI has followed an accommodative monetary policy. In the course of 2009-10, this stance was principally geared towards supporting early recovery of the growth momentum, while facilitating the unprecedented borrowing requirement of the Government to fund its fiscal deficit. The fact that the latter was managed well with nearly two-thirds of the borrowing being completed in the first half of the fiscal year not only helped in checking undue pressure on interest rates, but also created the space for the revival of private investment demand in the second half of the year. 1.52 The transmission of monetary policy measures continues to be sluggish and differential in its impact across various segments of the financial markets. The downward revisions in policy rates announced by the RBI post-September 2008 got transmitted into the money and G-Sec markets; however, the transmission has been slow and lagged the in the case of the credit market. Though lending rates of all categories of banks (public, private and foreign) declined marginally from March 2009 (with benchmark prime lending rates [BPLR] of scheduled commercial banks [SCBs] having declined by 25 to 100 basis points), the decline was not sufficient to accelerate the demand for bank credit. Consequently, while borrowers have turned to alternate sources of possibly cheaper finance to meet their funding needs, banks flush with liquidity parked their surplus funds under the reverse repo window. 1.53 There has been continuous moderation in the growth in broad money (M3) from around 21 per cent Table 1.9 : Deployment of gross bank credit by major sectors Sector Non-food Gross Bank Credit (1 to 4) 1. 2. 3. Agriculture and Allied Activities Industry Personal Loans Housing Advances against Fixed Deposits Credit Card Outstanding Education Consumer Durables 4. Services Transport Operators Professional Services Trade Real Estate Loans Non-banking Financial Companies Priority Sector % Variation (year-on-year) 2008-09(Nov. 21) 28.0 21.5 37.0 13.2 9.1 27.7 25.7 38.3 -9.8 32.9 24.4 80.1 20.5 49.0 54.0 22.6 2009-10(Nov. 20) 10.4 21.4 14.2 0.7 7.3 -11.8 -24.7 31.0 -11.8 7.9 10.6 7.0 14.4 15.3 19.5 15.4 16 Economic Survey 2009-10 1.56 There has been significant increase by Rs 50,000 crore during April-January 2009-10 in the availability of non-banking resources, which has helped industry meet its credit needs. Thus adjusted non-food credit that accounted for nearly 48 per cent of the total flow of funds to the commercial sector in 2008-09 (April-January), accounted for only 39 per cent of the flow of funds in 2009-10 (April-January). On the other hand, the contribution of non-bank sources increased from 52 per cent in 2008-09 to nearly 61 per cent in 2009-10 for the same period. This increase in flow of funds from non-banking sources was both from domestic and foreign sources and is indicative of structural rigidities that affect the monetary transmission mechanism (Table 1.10) particularly in respect of the credit markets. at the beginning of the fiscal year to 16.5 per cent as of mid-January 2010 and it has remained below the indicated growth projection for the period. While in the first half of the year, credit to the Government remained the key driver of money growth, since the third quarter of 2009-10 that too has moderated. 1.54 Demand for bank credit/non-food credit remained muted during 2009-10. It was only from November 2009 that some signs of pick-up became evident. On financial-year basis (over end March), growth in non-food credit remained negative till June 2009. It picked up thereafter, only to hover between 0.0 to 1.8 per cent till mid-September 2009. Consistent growth in non-food credit was recorded only after November 2009. As per the latest available data, non-food credit has recorded an increase of 8.7 per cent on financial-year basis (till January 15, 2010). It is also noteworthy that growth in aggregate deposits has remained higher than the growth in bank credit during 2009-10. The lower expansion in credit relative to the significant expansion in deposits during 2009-10 has resulted in a decline in the credit-deposit ratio from 72.4 in end March 2009 to 70.8 in midJanuary 2010, though with some signs of revival since December 2009. 1.55 Growth in sectoral deployment of gross bank credit on a year-on-year basis (as on November 20, 2010) shows that retail credit has not picked up during 2009-10 (Table 1.9). While growth in credit to agriculture remained more or less the same as on the corresponding date of the preceding year, for the other broad sectors–industry, personal loans and services—growth in credit decelerated as compared to the corresponding period of the preceding year. The personal loans category has fared the worst with credit deployment showing negative variation for subcategories like (i) Advances against Fixed Deposits, (ii) Credit Card Outstanding and (iii) Consumer Durables. It would be necessary to monitor these indicators for an improvement in credit growth, while sequencing measures to roll back the stimulus. Fiscal Policy Developments 1.57 The fiscal expansion undertaken by the Central Government as a part of the policy response to counter the impact of the global economic slowdown in 2008-09 was continued in fiscal 2009-10. The expansion took the form of tax relief to boost demand and increased expenditure on public projects to create employment and public assets. The net result was an increase in fiscal deficit from 2.6 per cent in 2007-08 to 5.9 per cent of the revised GDP (new series) in 2008-09 (provisional) and 6.5 per cent in the budget estimates for 2009-10 (as against 6.8 per cent of the GDP on the old series, reported earlier). Thus the fiscal stimulus amounted to 3.3 per cent of the GDP in 2008-09 and 3.9 per cent in 2009-10 from the level of the fiscal deficit in 2007-08. 1.58 As part of the fiscal stimulus, the Government also enhanced the borrowing limits of the State Governments by relaxing the targets by 100 basis points. As a result, the gross fiscal deficit of the States combined rose from 1.4 per cent of the GDP in 2007-08 to 2.6 per cent in 2008-09 (revised estimates [RE]) and was estimated at 3.2 per cent of the GDP in 2009-10 (BE). Table 1.10 : Contribution to total flow of resources to commercial sector (per cent) 2007-08 Adjusted Non-food Bank Credit* Flow from Non-banks Domestic Sources Foreign Sources 44.2 55.8 25.4 30.4 2008-09 45.7 54.3 34.0 20.3 2008-09 2009-10 (Apr.-Jan.) 47.7 52.3 28.1 24.2 39.2 60.8 33.0 27.8 Source: RBI. * Includes Non-food Credit and Non-SLR Investment by SCBs. State of the Economy and Prospects 1.59 In implementing the fiscal stimulus, the Central Plan expenditure was frontloaded. This is evident from its growth of 34.3 per cent and 18.0 per cent in 2008-09 and 2009-10 (BE), respectively. As a proportion of the GDP, the Plan expenditure at 5.3 per cent of the GDP in 2009-10(BE) was the highest in recent years. Non-Plan expenditure grew by 19.4 per cent and 14.8 per cent respectively in 2008-09 and 2009-10 (BE). 1.60 The relative success of the fiscal stimulus in supporting effective demand, particularly the consumption demand, in 2008-09 and 2009-10 could be traced to its composition. The approach of the Government was to increase the disposable income in the hands of the people, for instance by effecting reductions in indirect taxes (excise and service tax) and by expanding public expenditure on programmes like the National Rural Employment Guarantee Act (NREGA) and on rural infrastructure. The implementation of the Sixth Pay Commission recommendations and the debt relief to farmers also contributed to this end. The fact that the approach worked is attested to by the GDP growth rate and more specifically by the growth in private consumption demand in 2008-09 and also in 2009-10 as reflected in the relevant data on the NAS new series. Consumption expenditure, by its very nature, has short lags, and affects demand quickly, with little or no effect on productivity, while productive infrastructure expenditure takes much longer to translate into effective demand. The recovery having taken root now necessitates a review of public spending. It has to be geared towards building medium-term productivity of the economy and making up for the decline in investment growth in certain sectors of the economy. 1.61 The recommendations of the Thirteen Finance Commission (FC-XIII) have to be taken on board in shaping the fiscal policy for 2010-11 and in the medium term. The FC-XIII has recommended a calibrated exit strategy from the expansionary fiscal stance of 2008-09 and 2009-10 as the main agenda of the Central Government. Further, it has suggested that the revenue deficit of the Centre needs to be progressively reduced and eliminated, followed by emergence of revenue surplus by 2014-15. Perhaps for the first time, a cap on the overall debt of the Government has been recommended. It has suggested a target of 68 per cent of the GDP for the combined debt of the Centre and the States to be achieved by 2014-15. Thus the fiscal consolidation 17 path embodies steady reduction in the augmented debt stock of the Centre to 45 per cent of the GDP by 2014-15, and that of the States to less than 25 per cent of the GDP by 2014-15. The FC-XIII has also suggested the need for the FRBM Act to specify the nature of shocks that would require a relaxation of targets under the Act. It has recommended that the share of States in the net proceeds of shareable Central taxes be 32 per cent in each of the financial years from 2010-11 to 2014-15. (see Box 1.1) Social-sector Development 1.62 Fiscal 2009-10 saw the strengthening of several public initiatives and programmes with a view to cushioning the impact of the global slowdown on the more vulnerable segments of the population in the country. While some of these programmes were a part of the ongoing interventions to give effect to a more inclusive development strategy, there were some measures that were undertaken as a direct response to the slowdown of growth, especially in the tradable sectors of the economy. Thus emphasis in favour of higher allocation to social-sector development given in recent years continued to be reflected in the allocations under the Union Budget 2009-10. The share of Central Government expenditure on social services including rural development in total expenditure (Plan and non-Plan) increased to 19.46 per cent in 2009-10 (BE) from about 10.46 per cent in 2003-04. Similarly, expenditure on social services by General Government (Centre and States combined) as a proportion of total expenditure increased from 19.9 per cent in 2004-05 to 23.8 per cent in 2009-10 (BE). Further, sector-specific increases including in education, health and rural development were reinforced in the Budget allocations for 2009-10. 1.63 A major concern was regarding the possibility of a rise in unemployment due to the slowdown of the economy. While comprehensive employment data for the current financial year are not available, some sample surveys conducted by the Labour Bureau, Ministry of Labour and Employment, Government of India, indicated job losses in the wake of the global financial crisis, which seem to have been reversed in recent months. Thus employment is estimated to have declined by 4.91 lakh during the third quarter (October-December) of 2008; it increased by 2.76 lakh during January-March 2009, followed by a decline of 1.31 lakh during April-June 2009, and then an increase of 4.97 lakh during the second quarter (July-September) 2009. On the whole, for the period October 2008 to September 18 Economic Survey 2009-10 Box 1.1 : Thirteenth Finance Commission Following the mandate under the Presidential Order indicating the terms of reference, which flow from the articles 270, 275 and 280 of the Indian Constitution, the FC-XIII submitted its report on December 30, 2009. The FC-XIII’s overall approach was to foster “inclusive and green growth promoting fiscal federalism”. Observing that as against the level of 75 per cent targeted by the Twelfth Finance Commission, the combined debt-GDP ratio was 82 per cent in the terminal year (2009-10), the FC-XIII focused on anchoring the fiscal consolidation process in a medium-term debt reduction framework. The FC-XIII proposes reducing the combined debt-GDP ratio to 68 per cent by 2014-15 with the Centre’s debt-GDP ratio declining to 45 per cent. It recommended a calibrated exit strategy from the expansionary fiscal stance of 2008-09 and 2009-10. The FC-XIII has recommended fiscal consolidation through the elimination of revenue deficit as the long-term target for both the Centre and States. Following a design similar to that adopted by the recent Finance Commissions, the FC-XIII indicated a normative discipline for both Centre and States; with equal treatment which entailed no automatic priority for any level of Government and a focus on equalization (and not equity). The latter signalled the intent of the FC-XIII to ensure that States and local bodies have the fiscal potential to provide comparable levels of public service at reasonably comparable levels of taxation. This principle does not guarantee uniformity in public services across the country; but it addresses the fiscal requirements of each jurisdiction to enable such uniformity. Terming the goods and services Tax (GST) as a game-changing tax reform measure which will significantly contribute to the buoyancy of tax revenues and acceleration of growth as well as generate positive externalities, the FC-XIII proposed a grand bargain. The six elements of the grand bargain for the GST included: 1. the design; 2. operational modalities; 3. binding agreement between the Centre and States with contingencies for change in rates and procedures; 4. disincentives for non-compliance; 5. the implementation schedule and; 6. the procedure for States to claim compensation. For this purpose, the FC-XIII recommended the sanction of Rs 50,000 crore as compensation for revenue losses of States on account of the implementation of the GST. This amount would shrink to Rs 40, 000 crore were the implementation to take place on/after April 1, 2013 and further to Rs 30,000 crore were it to take place on/after April 1, 2014. The following are some of the key recommendations of the FC-XIII:  The share of States in net proceeds of shareable Central taxes shall be 32 per cent every year for the period of the award.  Revenue accruing to a State is to be protected to the levels that would have accrued to it had service tax been a part of the shareable Central taxes, if the 88th Amendment to Constitution is notified and followed up by a legislations enabling States to levy service tax.  Centre is to review the levy of cesses and surcharges with a view to reducing their share in its gross tax revenue.  The indicative ceiling on overall transfers to States on revenue account may be set at 39.5 per cent of gross revenue receipts of the Centre.  The Medium Term Fiscal Plan (MTFP) should be a statement of commitment rather than intent.  New disclosures have been specified for the Budget/MTFP including on tax expenditure, public-private partnership liabilities and the details of variables underlying receipts and expenditure projections.  The Fiscal Responsibility and Budget Management (FRBM) Act needs to specify the nature of shocks that would require relaxation of the targets thereunder.  States are expected to be able to get back to their fiscal correction path by 2011-12 and amend their FRBM Acts to the effect.  State Governments are to be eligible for the general performance and special area performance grants only if they comply with the prescribed stipulation in terms of grants to local bodies.  The National Calamity Contingency Fund (NCCF) should be merged with the National Disaster Response Fund (NDRF) and the Calamity Relief Fund (CRF) with the State Disaster Response Funds (SDRFs) of the respective States.  A total non-Plan revenue grant of Rs 51,800 crore is recommended over the award period for eight States. A performance grant of Rs 1500 crore is recommended for three special category States that have graduated from a non-Plan revenue deficit situation.  An amount of Rs 19,930 crore has been recommended as grant for maintenance of roads and bridges for four years (2011-12 to 2014-15).  An amount of Rs 24,068 crore has been recommended as grant for elementary education.  An amount of Rs 27,945 crore has been recommended for State-specific needs.  Amounts of Rs 5,000 crore each as forest, renewable energy and water sector-management grants have been recommended.  A total sum of Rs 3,18,581 crore has been recommended for the award period as grants-in-aid to States. State of the Economy and Prospects 2009, there may have been a net addition of 1.51 lakh jobs in the sectors covered under the said surveys. 1.64 Under the NREGA, which is a major rural employment initiative, during the year 2009-10, 4.34 crore households have been provided employment so far. Out of the 182.88 crore person days created under the scheme during this period, 29 per cent and 22 per cent were in favour of Scheduled Caste and Scheduled Tribe population respectively and 50 per cent in favour of women. 19 Climate change 1.65 While engaging constructively with the international community on the issue of climate change, India has pursued a strong domestic agenda for addressing the issue. The Copenhagen conference on climate change (CoP 15) was held from December 7-18, 2009 to discuss and reach an outcome on climate change issues. At the Copenhagen conference, the Danish Presidency of CoP15 had invited some of the participating countries for a discussion on relevant aspects of climate change and presented the results to the CoP in the form of a “Copenhagen Accord”. The CoP did not adopt the results of the discussion and only took note of the “Accord”. It has been decided to continue the negotiations with a view to concluding them at the next CoP scheduled in Mexico from November 29 to December 10, 2010. India recognizes that a strategy for addressing climate change has to be based on sustainable development. This is reflected in many of the major programmes addressing climate variability concerns. Current Government expenditure in India on adaptation to climate variability exceeds 2.6 per cent of the GDP, with agriculture, water resources, health and sanitation, forests, coastal zone infrastructure and extreme events being specific areas of concern. growing economies. In 2008-09 gross domestic savings as a percentage of GDP were 32.5 per cent and gross domestic capital formation 34.9 per cent. These figures, which are a little lower than what had been achieved before the fiscal stimulus was put into place, fall comfortably within the range of figures one traditionally associated with the East Asian economies. In 2007 South Korea had a savings rate of 30 per cent, Japan 28 per cent, Malaysia 38 per cent and Thailand 33 per cent. Since these indicators are some of the strongest correlates of growth and do not fluctuate wildly, they speak very well for India’s medium-term growth prospects. It also has to be kept in mind that, as the demographic dividend begins to pay off in India, with the working age-group population rising disproportionately over the next two decades, the savings rate is likely to rise further. Second, the arrival of India’s corporations in the global market place and informal indicators of the sophisticated corporate culture that many of these companies exhibit also lend to the optimistic prognosis for the economy in the medium to long run. 1.67 In the medium term it is reasonable to expect that the economy will go back to the robust growth path of around 9 per cent that it was on before the global crisis slowed it down in 2008. To begin with, there has been a revival in investment and private consumption demand, though the recovery is yet to attain the pre-2008 momentum. Second, Indian exports have recorded impressive growth in November and December 2009 and early indications of the January 2010 data on exports are also encouraging. Further, infrastructure services, including railway transport, power, telecommunications and, more recently but to a lesser extent, civil aviation, have shown a remarkable turnaround since the second quarter of 2009-10. The favourable capital market conditions with improvement in capital flows and business sentiments, as per the RBI’s business expectations survey, are also encouraging. Finally, and even though it is too early to tell if this is a trend, the manufacturing sector has been showing a buoyancy in recent months rarely seen before. The growth rate of the index of industrial production for December 2009—the latest month for which quick estimates are available—was a remarkable 16.8 per cent. There is also a substantial pick-up in corporate earnings and profit margins. 1.68 Hence, going by simple calculations based on the above-mentioned variables, coupled with the Prospects, Short Term and Medium Term 1.66 There are several factors that have emerged from the performance of the economy in the last 12 months, which, combined with an analysis of performance over the last couple of years, augur well for the Indian economy. There are some deep changes that have taken place in India, which suggest that the economy’s fundamentals are strong. First, the rates of savings and investment have reached levels that even ten years ago would have been dismissed as a pipedream for India. On this important dimension, India is now completely a part of the world’s fast- 20 Economic Survey 2009-10 are improvements in infrastructure, both urban and rural, and reform in governance and administration, which cuts down bureaucratic transactions costs that slow down enterprise in India and breed corruption, it is entirely possible for India to move into the rarefied domain of double-digit growth and even attempt to don the mantle of the fastest-growing economy in the world within the next four years. If this can be coupled with targeted Government interventions, some of which have recently been undertaken and some that are on the agenda, to include the marginalized segments of the population in this development process, then the ultimate aim of rapid growth, which is to raise the standard of living of the disadvantaged and to eradicate poverty, should also be within reach in the not-too-distant future. fact that agriculture did have a set-back this year and is only gradually getting back to the projected path, a reasonable forecast for the year 2010-11 is that the economy will improve its GDP growth by around 1 percentage point from that witnessed in 2009-10. Thus, allowing for factors beyond the reach of domestic policymakers, such as the performance of the monsoon and rate of recovery of the global economy, the Indian GDP can be expected to grow around 8.5 +/- 0.25 per cent, with a full recovery, breaching the 9 per cent mark in 2011-12. 1.69 Given the steadily improving fundamentals of the economy discussed at the start of this subsection, over and above the short-term improvements that occurred during the current fiscal year, the medium-term prospects of the Indian economy are really strong. If, in addition to this, there Micro-foundations of Inclusive Growth There have been few fiscal years in India’s history in which the outlooks at the start and the end have been as different as in the present one. In April 2009, India seemed to be mired in an economic slowdown that had begun over a year ago in the industrialized nations and had engulfed the entire world. During the two preceding quarters India had clocked an annualized growth rate of 5.8 per cent, which was much below the near-9 per cent that the nation had continuously achieved for five years. It appeared that while we were a little late in joining the global recession we were now firmly in it. A variety of stimulus packages were put in place in the second half of 2008-09, in the Interim Budget 2009-2010 and, again, three months later, in the main Budget 2009-2010. By the second quarter the economy showed signs of turning; and now, close to the end of the year, India seems to be rapidly returning to the buoyant years preceding 2008. As always with any economy, there are risks. The drought-hit agricultural sector is not yet back to normal performance. The risk of a second-dip recession in the industrialized nations continues to cast a shadow on our nascent recovery. Nevertheless, at the year’s end, it is good to see India having averted a recession and come out of the slowdown faster than pundits predicted in April 2009; and an analysis of various statistical trends that gird the economy suggests that the nation’s medium- and long-term prognosis is excellent. If we can put into effect some important structural policy measures, there is no reason why India cannot achieve double-digit gross domestic product (GDP) growth and a rapid diminution of poverty. CHAPTER 2 2.2 Detailed analyses of the performance of various sectors of the Indian economy and sector-specific policy options, and especially those pertaining to our immediate concerns, are conducted in the chapters that follow. The aim of this chapter is to go beyond these short-term and sector-specific concerns to broader questions of policymaking in India and, at the same time, to focus on the relatively neglected subject of the micro-foundations of macroeconomic policy. In the rush to attend to the immediate imperatives of policy, some of the foundational questions, for instance those pertaining to individual incentives to perform better, which have significant long-run implications for the Indian economy, are often neglected. Policy changes which are important but not so in any specific year run the risk of not being implemented in any year. The aim of this chapter is to make amends for this by deliberately thinking outside the box and taking an analytical look at the base of policymaking in India. Some of the policy alternatives discussed here are for debate and discourse, rather than immediate implementation. The hope is that this will lead to important practical ideas for India’s sustained development and inclusive growth and that some of them may enable us to create a road map for actual medium- and long-term policies. DEVELOPMENT AND DISTRIBUTION 2.3 In recent times India has grown fast not only compared to its own past but also in comparison 22 Rank 58 75 77 80 89 90 96 108 Economic Survey 2009-10 Table 2.1 : Ranks of 109 nations, by PPP-corrected GDP per capita 1975 Paraguay Grenadines Ghana Mauritania Solomon Islands India Bangladesh China 1984 Dominican Rep. Honduras Sri Lanka Solomon Islands India Rwanda China Nigeria 1994 Dominican Rep. Zimbabwe China India Georgia Senegal Congo,Dem.Rep. Rwanda 2004 China India Georgia Papua New Guinea Bangladesh Solomon Islands Burkina Faso Malawi Source: Computation based on World Bank data. Legend : The Table shows the ranks of 109 nations for which purchasing power parity (PPP)-corrected income data were available from 1975. In 1975 India was the 90th poorest nation, among these 109 nations. Over the 19-year period illustrated here, India steadily improved its rank. It was 75th poorest by 2004. The one nation that outstrips this performance is China, moving up from 108th rank to 58th, crossing over India somewhere between 1984 and 1994. with other nations (see Table 2.1). But there cannot be any room for complacency because it is possible for the Indian economy to develop even faster and also to spread the benefits of this growth more widely than has been done thus far. Before going into details of the kinds of micro-structural changes that we need to conceptualize and then proceed to implement, it is worthwhile elaborating on the idea of inclusive growth that constitutes the defining concept behind this Government’s various economic policies and decisions. A nation interested in inclusive growth views the same growth differently depending on whether the gains of the growth are heaped primarily on a small segment or shared widely by the population. The latter is cause for celebration but not the former. In other words, growth must not be treated as an end in itself but as an instrument for spreading prosperity to all. India’s own past experience and the experience of other nations suggests that growth is necessary for eradicating poverty but it is not a sufficient condition. In other words, policies for promoting growth need to be complemented with policies to ensure that more and more people join in the growth process and, further, that there are mechanisms in place to redistribute some of the gains to those who are unable to partake in the market process and, hence, get left behind. 2.4 A simple way of giving this idea of inclusive growth a sharper form is to measure a nation’s progress in terms of the progress of its poorest segment, for instance the bottom 20 per cent of the population. One could measure the per capita income of the bottom quintile of the population and also calculate the growth rate of its income; and evaluate our economic success in terms of these measures that pertain to the poorest segment. This approach is attractive because it does not ignore growth like some of the older heterodox criteria did. It simply looks at the growth of income of the poorest sections of the population. It also ensures that those who are outside of the bottom quintile do not get ignored. If that were done, then those people would in all likelihood drop down into the bottom quintile and so would automatically become a direct target of our policies. Hence the criterion being suggested here is a statistical summing up of the idea of inclusive growth. The policy discussions that follow do not explicitly refer to this but are inspired by this idea of inclusive growth, which, in turn, leads to two corollaries, to wit that India must strive to achieve high growth and that we must work to ensure that the weakest segments benefit from the growth. 2.5 For achieving inclusive growth there is critical need to rethink the role of the state. The early debate among economists about the size of the Government can be misleading. The need of the hour is to have an enabling Government. India is too large and complex a nation for the state to be able to deliver all that is needed. Asking the Government to produce all the essential goods, create all the necessary jobs, and keep a curb on the prices of all goods is to, at best, court failure, and, in greater likelihood, lead to a large, cumbersome bureaucracy and widespread corruption. The aim must be to stay with the objective of inclusive Micro-foundations of Inclusive Growth growth that was laid down by the founding fathers of the nation, but to take a more modern view of what the state can realistically deliver. This is what leads to the idea of an enabling state, that is, a Government that does not try to directly deliver to the citizens everything that they need. Instead, it (1) creates an enabling ethos for the market so that individual enterprise can flourish and citizens can, for the most part, provide for the needs of one another, and (2) steps in to help those who do not manage to do well for themselves, for there will always be individuals, no matter what the system, who need 23 support and help. Hence we need a Government that, when it comes to the market, sets effective, incentivecompatible rules and remains on the sidelines with minimal interference, and, at the same time, plays an important role in directly helping the poor by ensuring that they get basic education and health services and receive adequate nutrition and food. This rollback of the Government in the former will enable it to devote more energy and resources to and be more effective in the latter. This changing view of the state will briefly be elaborated upon and then some detailed policy suggestions taken up. Box 2.1 : Growth, poverty and the quintile income India’s growth performance over the last couple of decades or so has been a subject of a great deal of scholarly enquiry, as well as a cause for celebration. A measured optimism, in this regard, would be understandable–-but a spillover into unbridled euphoria would not. The case against complacence resides in the large magnitudes of both poverty and inequality which coexist with growth. A natural question that arises is: is there a simple summary statistic that might throw some light, all at once, on the phenomena of growth, inequality, poverty, and inclusion? In a broad and suggestive way, yes: the statistic in question is the “quintile income”, or average income, of the poorest 20 per cent of population. What can we say about the performance of the quintile consumption expenditure level in India? Based on data in various rounds of the National Sample Survey (NSS) on the distribution of consumption expenditure, and employing the Consumer Price Index of Agricultural Labourers (CPIAL) as a price deflator, the table below presents information on quinquennial trends in real average per capita consumption expenditure and real quintile expenditure. The vastly lower consumption of the bottom quintile is evident from this. From eyeballing the data it is evident that, in comparison with one’s own consumption, the poorest quintile has done better than the average person in the economy. But the qualifier, “in comparison with one’s own income,” gives the bottom quintile a natural advantage since you have to give them less for them to have as high a percentage gain as the rich. One way of correcting this is to define a “neutral” growth regime as one in which every quintile group gets the same share of the increase in aggregate income. Treating 1977-78 and 2004-05 as the base year and the terminal year respectively, it can be checked using the table below that the poorest quintile gets less than the 0.2 per cent of the aggregate increase in income which is its neutral growth share. This simple arithmetic exercise shows that, while the bottom quintile in India has seen good growth using the benchmark of its own starting income, it has had a smaller share of the aggregate growth accrue to it. Some statistics on mean and quintile monthly consumer expenditure for rural India 1977-78 Per Capita Average Consumption Expenditure (at 1977-78 Prices, in Rs) Quintile Consumption Expenditure (at 1977-78 Prices, in Rs) 1983 1987-88 1993-94 1999-2000 2004-05 68.89 71.17 78.27 77.95 84.55 90.35 29.14 31.43 35.91 37.29 42.79 44.91 Source: S. Subramanian, “A Practical Proposal for Simplifying the Measurement of Income Poverty”, in K. Basu and R. Kanbur (eds): Arguments for a Better World: Essays in Honour of Amartya Sen, Volume 1: Ethics, Welfare, and Measurement. Oxford University Press: Clarendon, 2009. Note : The price index employed is the CPIAL. The base year is taken to be 1977-78. 24 Economic Survey 2009-10 Unfortunately, on poverty India has some distance to go. The recent Expert Group Report (also known as the Tendulkar Report), commissioned by the Planning Commission, estimates India’s aggregate poverty to be 37.2 per cent. That is, a little over 37 per cent of our population lives below the poverty line, and, in particular, 41.8 per cent of the rural population and 25.7 per cent of the urban population is poor. It is, however, worth clarifying that the higher poverty estimates that Tendulkar reports, compared to existing estimates of the Planning Commission based on NSS data, do not reflect an increase in poverty, but merely a changed definition of what constitutes poverty. As calculations in a later chapter show, if we use the Tendulkar method to calculate poverty in earlier years those rates go up as well compared to standard estimates based on NSS data. Nevertheless, whether we take India’s poverty rate to be 37.2 per cent or 27.5 per cent (as is implied by the 61st round of NSS data of 2004-05), it is easy to argue that it is too high for a nation growing as rapidly as India, and that special initiatives are needed to combat it. 2.8 Over the last five years the Government has undertaken a large increase in budgetary allocations for anti-poverty programmes. In fact, one of the features of India’s stimulus package that distinguishes it from stimulus packages in many other nations is that the injection of demand has taken the form, largely, of enhancing the buying power of the poor and promoting social services. The share of Central Government expenditure on social services, including rural development, in total expenditure, Plan and nonPlan, was 10.46 per cent in 2003-04 and rose to 19.46 per cent in 2009-10. The subsequent firming up of the prices of food items consumed by the poor is testimony to the fact that some of this near doubling of social and welfare-related expenditures must have reached the poor and bolstered their incomes. 2.9 There are also numerous product-based subsidies, such as the ones given to fertilizer production and use, basic foodgrains, diesel and kerosene, which have been accumulated over the years with the ostensible purpose of helping the weaker sections of the population, be they merely consumers or farmers trying to eke out a living 2.6 In many poor nations the Government takes the stance that, when in doubt about the goodness or badness of two or more adults voluntarily conducting an exchange, stop them. An enabling state, on the contrary, takes the view that, when in doubt, do not interfere. There are, of course, many actions of individuals and groups that will need to be stopped for the welfare of society at large. But the default option of an enabling state is to allow rather than stop, to permit instead of prevent. This altered conception of the state can have dramatic effect on the functioning of an economy, in general by promoting greater efficiency and higher productivity. A concrete example can help clarify this. One repeated question that comes up in policy discussions concerns futures trade. Should we allow traders to strike advance deals about buying and selling wheat or rice or pulses in the future? Since for vital goods like these, a natural concern of every Government is to adopt policies that do not lead to inflationary pressures, our policy stance on futures markets depends on what we expect them to do to the spot prices. In other words, it depends on our view of what the existence of futures markets does to the level of prices in today’s market. An enabling Government takes the view that if we cannot establish a connection between the existence of futures trading and inflation in spot prices, we should allow futures trade. This is in contrast to what an intrusive Government tends to do. In the event of finding no firm connection between the two markets, it takes the stance that it will not give individuals the freedom to conduct futures trade. In fact, it is true that the theoretical literature maintains a somewhat ambivalent position on this. While allowing futures trade does take us towards a more complete market system, it is not true that allowing each additional market always leads to greater efficiency. However, the converse of these claims is not true either. What is being argued here is that, under these circumstances, Government should, ideally, desist from imposing an outright ban on futures trade and, instead, provide it with a regulatory structure to promote transparency and to discourage collusion. THE CHALLENGE OF POVERTY 2.7 The ultimate test of our policies has to be in terms of their success in curbing poverty. Micro-foundations of Inclusive Growth from their little land. The impact of these subsidies, using the yardstick of poverty mitigation, is, however, questionable. On the other hand, the steady build up of these numbers now constitutes a major fiscal burden and tends to crowd out the government’s ability to finance other vital activities in the economy that could promote productivity and eradicate poverty. Take, for instance, the fertilizer subsidy. The prices of fertilizers have been constant since 2002, which means that in real terms the price has declined. Since firms have to be compensated enough for them to remain in production, the gap between what the producers are paid and what farmers have to pay to buy fertilizers has steadily risen. As a consequence, the total subsidy that the Central Government gives to the fertilizer sector reached Rs 76,606 crore in 2008-09 and though this is expected to be lower this fiscal year, it remains large. 2.10 The main challenge is to direct the money already allocated to help eradicate poverty. The inability to do so has more to do with ideas than vested interests. Some propositions are obvious as soon as one gives them some thought; but not obvious when one gives them a lot of thought. These are the ones prone to policy mistakes. And once a policy is put into effect and kept in place for a while, vested interests gather in its favour and those interests resist change. But beyond that it is a question of having a road map of where we can go and demonstrating to the larger public that it is a potential beneficiary of the proposed change. Fortunately such a road map is feasible. There are systems of delivery of subsidies to the poor that can be vastly more effective, entail substantial savings and involve no extra organizational cost. In discussing these, it is useful to keep a few principles in mind. For goods that are important for the poor, it is only correct that the state should intervene to cushion the poor. The standard way to do this is by using some kind of a subsidy. However, a common mistake is to suppose that a subsidy scheme has to be coupled with price control. This is typically a slippery slope. In a large and complex economy, it is difficult for the state to gauge what the right price of a good is. Moreover, once the Government becomes involved in setting the price of a commodity, this becomes a matter of politics and lobbying, which cumulatively adds to the distortion. Hence prices are best left to the market. 25 If we want to ensure that poor consumers are not exposed to the vagaries of the market, the best way to intervene is to help the poor directly instead of trying to control prices, which almost invariably does more harm than good in the long run, and often even not so long a run. On agriculturesector policy and price control there is need to go the way India did with industry in 1991. Keeping this in mind, it is possible to outline systems of supporting the poor which are more efficient and better targeted than the present ones. 2.11 Through a vast network of public distribution system (PDS) outlets across the nation, we try to deliver some minimal supplies of heavily subsidized grain to our below poverty line (BPL) households and also some to our above poverty line (APL) households. The PDS stores are first given this subsidized grain and then instructed to deliver it at below market price to these specified households. It is believed many of these storekeepers (i) sell off this subsidized grain on the open market, and (ii) then adulterate the remaining grain and sell the diluted product to the BPL and APL households, who have no choice in the matter. We may harangue about the dishonesty of PDS store-keepers and all those entrusted with delivering the subsidies. It is indeed true that personal integrity, honesty and trustworthiness in the citizenry are vital ingredients for a nation’s economic progress—there is enough crosscountry evidence of this. But when crafting policy, there is need to be realistic about the system within which we work. To assume that all those entrusted with the task of administering the programme will do so flawlessly and then to blame them when the system fails, is not the mark of a good policy strategist. For effective policy, what is needed is to take people to be the way they are and then craft incentive-compatible interventions. 2.12 This paragraph outlines an altered system that, once in place, will be no more costly to run than the existing one and is likely to be much more effective. The plan suggested here is not novel and has been suggested on occasion by Indian policymakers and even in Budget documents. However, it has never been fully spelled out. The two planks of this system are (i) the subsidy should be handed over directly to the households, instead of giving it to the PDS store-keeper in the form of cheap grain and then have him deliver it to the needy households and 26 Economic Survey 2009-10 System, an initiative already launched by the present Government, under the Unique Identification Authority of India (UIDAI) (see Box 2.2) comes into play. Since the UID System will come into effect in 2012 and the roster of individuals registered in it will gradually move towards completion, it is possible to plan on a switch to a coupons system by 2012 and also let it achieve full maturity as the UID registration moves to completion. Since the Unique Identification will not, in itself, have information on people’s poverty status, these kinds of tailoring of information will need to be added on to the UID System. Further, since households do move in and out of BPL status there has to be provision for updating on information. However, it is not necessary to wait for the entire UID System to be in place to begin the switch to the coupons system. This is because even our current method of rations relies on ration shops having with them lists of BPL customers whom they are meant to serve. So some identification of BPL citizens is already available and this can be used to hand over coupons to these individuals. In the final measure, to keep the scheme lean and simple and also to maximize choice, we should not give individuals separate coupons for rice and wheat but a certain value of coupons that can be used to buy rice or wheat—the break-up between the two will be each individual’s decision, depending on her preference. Eventually, there will be no need to have separate PDS outlets. Food will be available on the open market and poor people will get a monthly ration of coupons which they can take anywhere and buy food. (ii) the household should be given the freedom to choose which store it buys the food from. Suppose the BPL household gets a net subsidy of Rs x for wheat each month. Instead of giving this by charging the household less than the market price for wheat, it should be given coupons worth Rs x, which can be used at PDS stores in lieu of money when buying wheat. Under this new system no grain will be given at a subsidized rate to the PDS stores and they will be free to charge the market price when selling grain irrespective of who the customer is. The only change is that the PDS stores are now allowed to accept these coupons which they can then take to the local bank and change to money, and the banks, in turn, can go to the government and have them changed to money. Further, households that get these coupons should be allowed to go to any PDS store of their choice. 2.13 Such a system will be more impervious to corruption. Since the store owner will get the same price for grain from all buyers, poor and rich, he will have no incentive, to turn the poor buyers away, as happens currently, and cater to those buying at market price. (If it is felt that changing coupons to money is a bother, we can have a provision for paying store owners an extra 2 per cent when they change coupons to money.) Second, since BPL buyers can go to any store with their coupons, they will be able to boycott stores that try to sell them poor-quality grain or mix gravel with the grain. 2.14 For the full success of this “coupons system” what is needed is an effective method of identifying the poor. This is where the Unique Identification (UID) Box 2.2 : UID System The UID System is envisioned as a means for residents to easily establish their identity, anywhere in the country. It will be an important step towards ensuring that residents in India can access the resources and benefits they are entitled to. The resident will be able to enrol for a UID number by providing basic demographic as well as biometric details (which may include photograph, fingerprints and iris scan) to the enrolling agency. The enrolling agency will transmit these details to a central UID server. The server will then perform a de-duplication check using the resident’s key demographic and biometric fields against existing UID records in the database, to ensure that she does not already have a UID number. Once the check confirms that a duplicate record does not exist, the central system will issue a UID number to the resident. The resident can then use the number with different service providers, who can verify his or her identity online. The agency has to transmit the UID number and information provided by the resident to the UID server, and the server immediately responds with a yes or a no. The UID can have a significant impact on service delivery. The existing patchwork of multiple agency databases in India gives individuals the incentive to provide different personal information to different agencies and also impersonate someone else. In the UID infrastructure, all resident records are stored in a central database, and each new entry is de-duplicated-consequently, residents can only have one UID number, which is mobile and can be used anywhere in the country. The lack of duplicates, and accuracy and mobility in identity verification, would reduce opportunities for fraud and enable agencies across the country to provide residents with targeted, effective services and benefits. Source : UIDAI, Planning Commission. Micro-foundations of Inclusive Growth 2.15 This new coupons system has one risk that one must be prepared for. In the event of a national food shortage, since the BPL individuals will have coupons to help them out of the problem, for nonBPL individuals the shortage will be more acute. The state will in such situations have to import or use whatever other means available to release foodgrains on the market to balance the amount taken away by the recipients of coupons. This is not a serious problem of the coupons system because, at one level, the current system encounters the same problem. Since the BPL consumers are somewhat shielded through food rations, during shortages the crisis gets more acute for non-BPL consumers. Under the current system the corrective measure of food release takes place automatically, since the BPL population receives not coupons but actual grain. Hence, even while the present system for targeting subsidies is being reformed, there is need to continue with the strategy of holding buffer stocks of essential foodgrains and releasing them in times of shortage. This is elaborated upon in a subsequent section. 27 Subsidies and Development 2.16 Similar ideas can be carried over to other products. The Expert Group on A Viable and Sustainable System of Pricing of Petroleum Products (also known as the Kirit Parikh Committee) has made similar proposals for subsidies on petroleum and related products. Another candidate for this kind of analysis is fertilizer subsidy, which has grown over the years into a large burden on the budget. Yet, somewhat like with other subsidies, these reach the target population, namely farmers and especially small farmers, in a trickle, with enormous leakages on the way. Farmers have also complained that what they get is frequently of poor quality, and the pricing and availability is such that they end up using less suitable fertilizers in larger quantities. In addition, differently from the case of food, since the subsidy is given across the board for fertilizers produced, all those who buy fertilizers, whether or not they are poor and need the subsidies, get them. If this system can be improved, it is arguable that by spending even half the money that is currently spent on subsidies, we can be much more effective in helping poor farmers; and, further, by improving quality, increase agricultural productivity across the nation, with beneficial multiplier effects spreading to all sectors. And the saved money can be used to retire a part of the fiscal deficit or directed to other use. 2.17 This problem of fertilizer quality was part of the Finance Minister’s Budget Speech on July 6, 2009: “In the context of the nation’s food security, the declining response of agricultural productivity to increased fertilizer usage is a matter of great concern.” The Budget then proposed making the much needed move towards a nutrient-based subsidy regime. It further noted: “In due course it is also intended to move to a system of direct transfer of subsidy to the farmers.” The idea of giving subsidies via coupons, in the same way as discussed above for food, merely takes the idea of “direct transfer of subsidy to the farmers” to its natural conclusion. Again, to jump to what the final design will be, the idea is that Government will have no dealing with fertilizer producers. Any firm will be free to produce any kind of fertilizer and sell it in the market at any price. The farmers, on the other hand, by whatever selection criterion that is decided upon, will be given coupons that can be used to buy fertilizers on the open market. Any seller of fertilizers who receives these coupons will be free to encash them at any bank and the bank, in turn, can give these coupons to the Government and collect cash. 2.18 A switchover to a coupons system for fertilizer subsidies will entail several ancillary decisions. There will be need to decide who gets these coupons. One option is to give a fixed quota of these to every farming household. This will mean giving a subsidy to all farmers but for small farmers the subsidy will be a larger fraction of their farming needs whereas for large farmers this will turn out to be a smaller fraction. A more sophisticated approach is to give larger amounts to farmers with larger land. And yet another approach is to take a page out of the idea behind progressive income taxation and not give any coupons to large farmers. Whatever system is adopted, we will need some form of identification of farmers and will need to have some information about their landholdings. This once again means that for the full-fledged adoption of the coupons system, there will be need to dovetail it to our UID System. If we are to move towards this, we should in fact work in tandem with the UID work so that some information that we will need alongside a person’s pure identity, such as whether or not the person belongs to a BPL household, whether her profession is agriculture and, if so, the amount of land she owns and so on can be fed into the system from the start. We may be able to save on some duplication of effort if we begin early in building such an information system. 28 Economic Survey 2009-10 supplying fertilizers and buyers having the freedom to shop from anybody, the largest cause of substandard fertilizer production will be cut out. We would see a large improvement in the quality of fertilizers and, with it, in overall agricultural productivity. In the present system Government has to do elaborate calculations about the costs that firms incur in producing fertilizers, with firms trying to inflate these costs. Under the new system, there will be no need for this, since the Government will not be paying anything to (or fixing the price of fertilizers produced by) the firms. The switchover to this organizationally leaner and directly targeted system means that even if the state substantially cuts back on the total size of the subsidy, say by Rs 20,000 crore, we should still see farmers getting more benefits than they currently do and agricultural productivity in the nation rising. 2.19 This system can easily be tweaked to ensure that we discourage the use of fertilizers that may be harmful for the soil in the long run or have negative externalities for neighbouring farms. All we have to do is to have different coupons for different kinds of fertilizers and vary the amount of subsidy for different fertilizers to keep individual incentives in line with long-run social objectives. 2.20 Moreover, it may be desirable to not impose any restrictions on farmers selling off the coupons. If the recipient of a coupon decides that she does not want to buy fertilizers but would rather spend the money on buying a television set instead, we have every right to have misgivings about this preference, but it is not a good idea to use the state’s enforcement machinery to correct this. Modern behavioural economics reminds us that there are situations where individuals act against their own interests because of lack of self-control or inconsistencies in their inter-temporal preferences, and so some paternalistic interventions can be good for them. While this is true, Government action to redirect individual choice ought to be measured and minimal. To try to meddle excessively in individuals’ preferences is a mistake because it encourages Government to reach out to doing more than it realistically can, creating unnecessary bureaucratic hurdles and breeding corruption. 2.21 The benefits of this coupons system can be very large. With many producers engaged in Bureaucratic Costs and Delays 2.22 India has one advantage over most emerging economies and even some industrialized ones–its vibrant democratic institutions and independent judiciary. This has greatly helped India gradually take its place among the leading global economies of the world. While this has helped the nation, there is another feature that has been a hindrance–India's high bureaucratic delays. Thanks to recent data collection from around the world on bureaucratic transactions costs, there are now hard statistics on Table 2.2 : Doing business : Cross-country experience Sl. No. Country Ease of doing business (rank) 129 49 89 133 122 15 23 51 85 120 1 105 12 4 How many days to start a business (days) 120 27 37 30 60 23 11 13 20 30 3 38 32 6 Days to enforce a contract (days) 616 480 406 1,420 570 360 585 415 976 281 150 1,318 479 300 Time to close a business (years) 4.0 4.5 1.7 7.0 5.5 0.6 2.3 1.8 2.8 3.8 0.8 1.7 2.7 1.5 Days to export 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Brazil Chile China India Indonesia Japan Malaysia Mexico Pakistan Russian Fed. Singapore Sri Lanka Thailand USA 12 21 21 17 21 10 18 14 22 36 5 21 14 6 Source : World Bank, Doing Business 2010. Micro-foundations of Inclusive Growth Table 2.3 : Doing business in India - Comparison among major cities/capitals Sl. No. Places in India Ease of doing business (rank) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 How many days to start a business (days) 33 33 37 33 35 32 31 38 38 30 32 30 40 37 34 41 36 Days to enforce a contract (days) 862 770 735 1,163 1,295 900 1,033 600 985 1,420 990 970 1,058 792 877 705 1,183 Time to close a business (years) 7.3 7 7.5 7 6.8 7 9.1 8.3 8.5 7 8 8.7 7.3 9.3 7.5 7.5 10.8 29 Days to export 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Ludhiana Hyderabad Bhubaneshwar Gurgaon Ahmedabad New Delhi Jaipur Guwahati Ranchi Mumbai Indore Noida Bengaluru Patna Chennai Kochi Kolkata 21 26 17 25 17 25 22 22 21 17 21 25 25 19 25 28 20 Source : World Bank, Doing Business in India 2009. where India stands. In terms of the ease of doing business, India ranks 133rd in the world. Singapore ranks 1st, Malaysia 23rd, and China 89th. The number of days it takes in India to enforce a contract is 1,420. It can no longer be argued that this is inevitable given the complexity of contracts because it takes 150 days for the same in Singapore, 300 days in the US and 406 days in China (see Table 2.2 and Table 2.3 for comparative data on 17 Indian cities). Likewise, for the time taken to close a business that has gone bankrupt. This takes 9 months in Singapore, 18 months in the US, 20 months in China and 7 years in India. 2.23 If one were to look at this from a brighter angle, India’s unpardonably large bureaucratic costs are like a valuable resource buried under the ground, waiting to be excavated and used. Cutting down these costs is like unearthing a free, valuable resource that was lying idle. It can release large energies in the nation and boost productivity and growth. Ironically, this can be India’s gold rush. 2.24 This problem is at times put down to the size of India’s bureaucracy. But that is not right. A complex economy such as that of India’s does need substantial numbers to regulate and run it. By comparison with even some vibrant market economies, the actual number of people running the Indian Government is not large (see Box 2.3 for illustration in the context of India’s tax administration). Further, there is a lot of talent in the Indian bureaucracy, since the selection process is highly competitive. The problem lies elsewhere, in our conception of the state, to wit that it has to directly deliver on every front and not be content with an enabling role; and also in the rules, regulations and procedures inherited from our colonial times, and made more cumbersome with layers of further procedures and regulations added like on a palimpsest. The situation is like a traffic jam–asking each person to move is useless advice. The need is to reform the system. If the current system of subsidies can be reformed, this itself will release a lot of human resource that is presently tied up in the pointless complexities of running an inefficient system. Also the changes in the tax system—the Goods and Services Tax and the Direct Tax Code— that are being contemplated can have substantial impact on not just improving the efficiency of the taxes but on simplifying the procedures for paying taxes. 2.25 The export sector is a good example of some of the principles discussed above. India has steadily 30 Economic Survey 2009-10 Box 2.3 : Higher revenue from reforms in income tax administration Low income tax compliance is known to limit the capacity of Governments in developing countries to raise revenue for developmental purposes. Many factors have been acknowledged as contributing to this problem, such as the large informal sector, weak legal system, ambiguity in tax laws, inadequate information and accounting system, and corruption. In rectifying this problem it is important to be realistic and separate out what can be changed in the short run and what cannot. Experience from around the world shows that reforming certain aspects of the tax administration–such as increasing the number of audit officers and their supporting staff and altering procedures for grouping taxpayers into assessment units– can be implementable options for reforming the tax system for generating higher revenues for the Government. Interestingly, a detailed econometric study shows that, in India, significant compliance gains would accrue from expanded employment. With regard to increased support staff in circles, both own and cross revenue effects turn out to be statistically positive and significant. Further, issues such as taxpayers strategically selecting into wards or circles, variation in support staff or enforcement effort generating spillover effects on workload and compliance in related units may be considered for change to increase the efficacy of tax collection. Hence the problem is not of the size of bureaucracy. If anything, there is scope for growth. The need is for administrative reform so that the resource of bureaucratic personnel can be used more effectively in promoting individual initiative. Research results show that consideration should be given to removing the ward/circle distinction, replacing it with random assignment rules. This will remove the strategic underfiling incentive, with beneficial compliance effects. Revenue gains may be achieved by reallocating support staff from wards to circles, where they can be more productive. Penalty and prosecution effort appears to have significant effect on compliance (though here one has to be cautious not to encourage corrupt officials to misuse the system). Encouraging efforts to improve the quality of information available to assessing officers and including measures of penalty effort in their performance evaluation will also be helpful in reforming the tax administration. Source : Arindam Das-Gupta, Dilip Mukherjee and Shanto Ghosh: “Tax Administration, Reform and Taxpayer Compliance in India” , International Tax and Public Finance, vol. 11, pp. 575-600. done better over the years. The groundwork for this was laid over a long time. In the Budget Speech of 1983, for instance, the need for “basic reforms in the international financial and trading system” was stressed. India is today in a position to see another expansion in exports. To achieve this quickly it will be useful for Government to undertake some coordinated policy actions, but there is one critical action that can single-handedly give India’s exports sector a boost. This is to do with governance and may be illustrated with the example of textiles and clothing. The aggregate global textile and clothing exports happen to be large. In the year 2008, these were worth $ 612 billion. China alone exported $185 billion worth of textiles and clothing that year, which constituted 30.3 per cent of the global value. In the same year, India exported textiles worth $21 billion, which was a paltry 3.5 per cent of global exports. Vietnam, a much smaller country than ours, had an export of $10.6 billon. Moreover, Vietnam’s share of global trade has been growing by leaps and bounds. In the year 2000 it had a share of 0.6 per cent, whereas it now has a 1.7 per cent share. In the year 2000, India had a share of 3.2 per cent, which rose to 3.5 per cent by 2006 and has remained at the same level since. The phasing out of the quota system in 2005 does not appear to have helped Indian exports. Given the abundance of cheap labour, aiming to double our share of global exports in three years is not an impossible target. 2.26 There are many factors behind India’s subpar performance, despite its natural comparative advantages (see Box 2.4). Our ports take long to clear and, because they are not well-equipped, often products have to travel by feeder ships to be transferred to larger vessels at other major ports, leading to delays. It, therefore, takes an unduly long time for garments and apparel to travel from our factory gates to stores in industrialized nations where they are to be retailed. Since timing is the heart of success for these fashion-sensitive industries, much can be achieved by bettering performance in this dimension. India has recently begun some welcome intiatives to attract foreign direct investment (FDI) in the textile and clothing sector. This can help modernize this industry and aid its integration into the global textile market. Apart from being labour-intensive, this sector also happens to be one that employs a large number of women labourers and labourers belonging to minority and disadvantaged groups. Micro-foundations of Inclusive Growth 31 Box 2.4 : Delays in infrastructure projects A recent study, based on comprehensive data from the Ministry of Statistics and Programme Implementation, of 894 projects completed during April 1992 and March 2009, provides information about the extent and nature of delays in India’s infrastructure projects and insights into the causes. First of all, delays are ubiquitous. The percentage of projects with positive time overruns goes from 60.75 per cent in the power sector (the star performer), through 79.67 per cent in the petroleum sector, 95.08 per cent in shipping and ports and 98.36 per cent in railways, to a well-rounded 100 per cent in health and family welfare. Further, most of these time overruns are accompanied by cost overruns. On the plus side, since the 1980s the propensity towards cost overruns has come down steadily and time overruns have come down marginally. In terms of region, the southern states—Andhra Pradesh, Karnataka, Kerala and Tamil Nadu—have fewer delays and smaller cost overruns. Among the causes of delay in completing these infrastructural projects and the cost overruns, the study identifies administrative delays by government departments, which, in turn, is caused by the hierarchical organizational structure of decision making in government. By way of policy prescription it is suggested that speeding up be effected at the stages of project approval, awarding of contracts and implementation. It is pointed out that incomplete contracts are a major cause of cost overruns. Source : Ram Singh, ‘Delays and Cost Overruns in Infrastructure Projects: An Enquiry into Extents, Causes and Remedies,’ Working Paper No. 181, Centre for Development Economics, Delhi School of Economics. LABOUR REGULATION, WAGES EMPLOYMENT AND 2.28 Almost all international studies conclude that India’s labour regulatory structure does not have the flexibility commensurate with a buoyant, growing economy. For firms in the organized sector having more than a certain critical number of labourers it is extremely hard to retrench workers or downsize the labour force. At first sight this looks like a pro-labour legislation, one that protects the interests of workers. On the other hand, it can be argued that most potential firms are far-sighted enough to realize that, once they become sufficiently large in terms of employment, if they later need to retrench workers because the demand for their product slacks off, they will not be able to do so easily. This is likely to prompt them to remain small or not go into business at all, since all laws also play an expressionist role whereby they affect behaviour beyond the actual ambit of the law. Hence it is arguable that our labour laws, such as the Industrial Dispute Act of 1947, if appropriately reformed, can lead to a greater demand for labour, and through that improve economic well-being of workers. 2.29 As a counter argument to this it has been suggested that, since most of these laws apply to the organized sector and India’s organized sector is miniscule, changes in this law are likely to have negligible effect one way or the other. However, it can be argued that the causality goes the other way around. India’s organized sector would grow if, in keeping with the times, we could amend the labour regulatory system, which would also influence the culture and custom of the labour market and encourage employment in the organized sector. 2.30 There are two different ways in which workers can gain power. One is through the conferring of rights to them and the other is by creating market conditions that result in greater demand for labour and thereby increase the ability of workers to ask for more and realistically expect the demands to be satisfied. In India, while there has been appreciation of the former, justice has not been done to the latter. The need is to bring these laws into the public space for open discussion and the weighing of the available scientific evidence, and then take decisions based on what emerges from such an exercise. 2.27 Boosting our textile and clothing exports would, therefore, amount to an anti-poverty programme and a pro-employment programme rolled into one. India’s textile and clothing sector currently employs 35 million people and is, after agriculture, the second largest provider of employment. Unlike agriculture, which has a natural tendency to shrink in terms of share of GDP as the economy grows, there is no such secular trend that has been observed for clothing and textiles around the world. Hence this can potentially be a major absorber of low-skilled labour and give a much-needed boost to our organized manufacturing sector. 32 Economic Survey 2009-10 in 1992-93 and 1996-97. And food inflation of over 10 per cent, non-food inflation negative and fuel, power, light and lubricant (FPL&L) inflation less than 10 per cent has never occurred. 2.32 This experience points to the need for developing a new system of nomenclature for inflations. What was occurring from the middle of last year to now (and is so nicely visible in Figure 2.1 in which the different graphs literally fan out from early 2009) is best described as “skewflation”, which, while not the most aesthetic of terms, captures the concept of lopsided inflation well. There is actually a need for creating some new terminology and concepts to differentiate between different kinds of inflation, since each type may require a different policy prescription. In most industrialized nations nowadays there is a practice of separating out “core inflation” and overall inflation. Core inflation refers to inflation in sectors other than food and fuels, in the belief that these are areas where prices often fluctuate because of sector-specific causes and one should not want to jump to economy-wide demand management measures to counter these sectorspecific price fluctuations. 2.33 India faced this same dilemma in December 2009 when our core inflation remained negligible while food inflation was large. One silver lining of such skewflations is that, unless one injects excessive demand into the economy through lax monetary policy, they do not last long. After each of the two previous episodes of skewflation, the food price A FAMILY OF INFLATIONS AND FOOD-SECTOR INTERVENTIONS 2.31 The fiscal year 2009-10 has been a time of inflationary concerns. It was a year of a somewhat unusual inflation. While food inflation soared, inflation in the non-food sector was negligible. The Government was concerned that the upward pressure on prices should not escalate to all sectors. And, at least till January, the experience has been that of a highly skewed food-sector inflation. The weekly foodprice inflation on a year-on-year calculation reached a maximum of 19.95 per cent for the week ending December 5, 2009. Since then the pressure has eased off a little. The skewedness of inflation that has been observed—some sectors are facing huge inflation, some no inflation and some deflation—is rather rare in the country’s history. For instance, in 1973-74 food inflation was 22.7 per cent and nonfood 36.4 per cent, in 1980-81 food inflation was 11.4 per cent and non-food 11.9 per cent, in 1986-87 food inflation was 10.2 per cent and non-food 11.4 per cent, in 1991-92 food inflation was 20.2 per cent and non-food 18.0 per cent, and there are several other years where the pattern was the same. The current inflation is of a different kind. It stands out for its lopsidedness across sectors. In 2009-10 (AprilNovember) , food inflation was 12.6 per cent and nonfood inflation minus 0.4 per cent. If we look at India’s inflation history from 1971, this kind of inflation, where food inflation is above 10 per cent and non-food inflation is negative, has happened only twice before– Figure 2.1 22 20 18 16 14 12 Trends in food and non-food inflation in WPI (per cent) All commdities (wt.100%) Food inflation (wt. 25.43%) Non-food inflation (wt. 74.57%) Per cent 10 8 6 4 2 0 -2 -4 -6 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 Year Micro-foundations of Inclusive Growth inflation came down rapidly. On the other hand, regular, balanced inflation tends to be more longlasting. The most famous one in India’s history, starting in 1972, saw three consecutive years of double-digit, food price inflation. Sustained inflations were also observed starting in 1980 and 1991. These all began as generalized, across-the-board inflation. The primary cause of the recent food-price inflation was the severe drought of 2009, which caused a downturn in food production in the third quarter of 2009-10 and the expectation of the resultant price rise itself fed further into the inflation. Government reacted carefully by easing up imports of relevant foodgrains and sugar and also releasing wheat and rice from the stocks held by the Food Corporation onto the market. 2.34 Interestingly, this problem has led to some rethinking of the strategy of foodgrain procurement and release. In general, while India has been effective in procuring foodgrains, mainly wheat and rice, its strategy of food release has scope for improvement. Fortunately, there is a lot of research in economics that can help Government device better policy. The standard method that we have used is to have a minimum support price (MSP) for wheat and another one for rice, and the state commits to buying whatever amount the farmers are willing to sell at these prices. The idea is that, in years of high production, the Government’s granaries will stock up, as indeed they do. Then, in years of low food production, when prices begin to rise, the Government will release this food onto the market to dampen the price rise. It is, however, easy to fall into two fault-lines in devising this release strategy. 2.35 First, as any reasonable authority would, the Government has stipulated norms for how much buffer stocks of foodgrains the Food Corporation of India (FCI) should hold. Thus there are pre-specified “buffer norms” and “strategic reserves”. However, if the Government becomes too steadfast in making sure that these norms will never be violated, they cease to play any role. In other words, if there are certain minimal amounts of grain that we are committed to holding at all times, then it is the same as not holding them. The traders and speculators realize this and so cease to worry about the dampening effect that the stocks could have on prices. In short, the FCI needs to make it amply clear that there are situations where it will offload all stocks, if need be, and violate the buffer norms. An inviolable buffer norm is indistinguishable from no buffer norm. 33 2.36 The second problem pertains to the “how” of releasing the grains that we decide to release. Suppose the Government has decided to release 10,000 tonnes of wheat on the market in some state and does it by forming batches of 1,000 tonnes (as it often does in reality) and offloading each batch through some form of open market sales, such as setting a reserve price and asking for tenders. There will in such a case be 10 persons or firms that will buy up the grain. Now consider the alternative of releasing the same total grain in much smaller batches to traders and millers or directly to retail consumers. The price impact of these two kinds of releases will be vastly different. The former creates an oligopoly, whereas the latter creates a competitive market by giving little amounts of grain to lots of people, and the downward pressure on prices in this latter case will be much greater. This use of standard industrial organization theory (Box 2.5 elaborates on this) can costlessly improve the efficacy of the FCI. 2.37 In January 2010 Government began using some of these kinds of interventions to improve its foodgrains release strategy. The decision was taken to release foodgrains in multiple locations in small quantities, at prices substantially below the market price. The effect of this action was soon evident on the market prices. On January 29, 2010, the Reserve Bank of India (RBI), also took some steps to mop up some excess liquidity from the market by announcing an increase in the cash reserve ratio (CRR) by 75 basis points. Given that food inflation is beginning to go down and there is slight increase in non-food inflation, this was a useful signal. Since it was coupled with substantial increase in the growth estimate for 2009-10 (which brings the RBI estimate virtually in line with the forecast that the Ministry of Finance made some time ago) this staved off any adverse reaction from the market. 2.38 The need now is to put together a standing plan, a kind of Standard Operating Procedure (SOP), for the kinds of actions that the state ought to take in the event of a skewed price rise in the food sector. An SOP will enable the FCI and other Government organizations to go into action as soon as the inflationary situation in food crosses a threshold, in particular, when the food price inflation is high and the gap between food and non-food price inflations goes above a certain critical level. Some of 34 Economic Survey 2009-10 Box 2.5 : The economics of foodgrain procurement and release The supply curve of wheat will be high in years of bounty and low in years of drought. If it follows that in years of bounty the price of wheat will be low, pL, and in years of drought it will be high, pH. The purpose of a procurement policy is to even out some of this price fluctuation without having to necessarily rely on food imports from other nations. So what the government does is to set an MSP somewhere above pL and buy up all the excess supply at that price. It follows, if the Government does this and then does not release the food thus procured, it will be contributing to a rise in prices on average because now in years of bounty the price will be MSP and in years of drought the price will be pH. To counter this, Government needs a policy of releasing food in years of food shortage. This is where the tricky problem of how the grains are released comes up. If they are released in large batches to a few traders or millers, the market structure that gets created is that of an oligopoly with a competitive fringe. Fortunately, the theory for this is well understood and this can be used to design effective interventions. At each price take the demand for wheat and subtract from this the supply of wheat that comes from the price-taking sellers. By doing this at each price we are left with what may be thought of as the “residual demand curve” for wheat. This is the demand curve that the oligopolistic sellers who buy the large releases of the Government come into play. They buy up wheat from the Government and then release it on this residual market. It can be shown that, if the number of oligopolists is small, the market price for wheat will be high and, moreover, not all the wheat on offer by the Government will be picked up by the sellers. Hence the Government’s problem is not just deciding how much wheat to release but in how many batches, since this will determine how many oligopolists are brought into the market. The larger this number, the lower will be the price. There is another corollary problem. At what price should the government release the grain? Earlier a somewhat mechanical accounting rule was used, which was to take the MSP price at which the wheat had been acquired and add to this the costs of freight and storage so as to ensure that the whole operation yielded an accounting profit. However, this method at times led to a price very close to the market price and, on some occasions, higher than the market price. Of course, that would mean no buyers for the grain and so no impact on the market price. This was corrected in January when it was decided that the release price must not be pegged to the historical purchase price and other costs but be released at a price substantially below the market price. There is, however, a risk that if the price is too low, it may be worthwhile for sellers to buy up what is on offer and sell it back to the Government at the MSP. If the release price is set below the anticipated MSP, this is bound to happen. But even if this is set slightly above the MSP, it may be worthwhile for large traders and millers to buy it up and sell it back at MSP. This operation will of course cause them a small loss but evacuating the wheat from the market could raise its price sufficiently for this to be worthwhile. Reference : Avinash Dixit and Nick Stern “Oligopoly and Welfare: A Unified Presentation with Applications to Trade and Development”, European Economic Review, vol. 13, 1982. the specificities of the intervention can be modified on each occasion through special orders of the relevant empowered group but there ought to be a minimal standing order. SOCIAL NORMS, CULTURE DEVELOPMENT AND 2.39 Hard-nosed Government documents usually make no mention of the role of social norms and culture in promoting development and economic efficiency. However, there is now a growing body of literature that demonstrates how certain social norms and cultural practices are vital ingredients for economic efficiency and growth. Groups and societies that are known to be honest and trustworthy tend to do better than societies that do not have this reputation. There have been broad cross-country studies and also laboratory experiments with the “trust game” that illustrate this. More generally, what is being argued is that a nation’s success depends of course on its resources, human capital and economic policies, for instance fiscal and monetary policies, but also on the cultural and social norms that permeate society. We go through life striking hundreds and thousands of minor contracts and deals..You give a person money one day and the understanding is that that person will repair your plumbing the next day or it can be the other way around (the person repairs your plumbing today and expects you to pay him the following day); you supply garments to a store and the store then pays you for it; someone gives you a hair-cut and, after that, you pay her. It is difficult to have such minor contracts enforced by a third party or some formal legal/bureaucratic machinery. If we try to do it that way, as we have on occasion in India, the result will be a cumbersome bureaucracy that is anyway Micro-foundations of Inclusive Growth unable to deliver. Societies that are endowed with personal integrity and trustworthiness have the natural advantage that no third party is required to enforce contracts. For outsiders the mere knowledge that a particular society is trustworthy is reason to do more business and trade with it. 2.40 One reason why these “social” causes of development do not get enough recognition in the literature on economic policy is that the science of how these economics-friendly social qualities are acquired is not yet fully understood. Fortunately, the new discipline of behavioural economics is beginning to give us some insights into the formation of customs and behaviour. It is, for instance, known that buildings and office spaces which are cleaner and aesthetically better maintained result in individuals being more honest and desisting from corrupt activity. It is almost as if we have a mental inclination not to defile a good ambience through acts of corruption. New York city’s notorious high crime was controlled, among other things, by cleaning up the city and removing graffiti from the walls. New York’s police department took a decision to deter vandalism and graffiti that scar public spaces. This act of making the cityscape more aesthetic somehow made potential criminals less prone to crime. One sees casual evidence of this in the behaviour of Delhites using the metro. It has been widely noted that people behave better when they travel on Delhi’s well-maintained metro (postponing their bad behaviour to when they come up to the surface again, some would add). All this is in keeping with the influential “broken windows” theory in sociology, which maintains that, if we control lowlevel, anti-social behaviour and take small steps to improve the environment, this will have a natural deterrent effect on larger criminal behaviour and acts of corruption. 2.41 Also, the sheer recognition and awareness that some collective qualities of citizens, such as honesty and trustworthiness, enable the entire society to do well prompts individuals to adopt those qualities and overcome the ubiquitous free-rider problem. Hence, for the long-run development of India, people need to be educated about the customs and qualities which, if possessed by all the people, can lead the nation to progress and development. This brings us back to the subject of education and emphasizes that this has to be more than learning from textbooks about facts and figures. While discoursing on technical economic policy matters, it is easy to be dismissive of the psychological and sociological determinants of economic outcomes. 35 While it is true that these interconnections have little to do with short-term fiscal decisions, in contemplating medium- to long-term policies for a nation’s development, which was the subject matter of this chapter, it would be remiss not to mention these non-economic foundations of economic prosperity. A MISCELLANY OF CONCERNS 2.42 While these opening chapters draw heavily from the rest of the Economic Survey devoted to specific sectors and there is no need to be comprehensive here, it may nevertheless be worth putting in a foreword for some specific areas of policymaking. For more than a decade now India’s services sector has been the powerhouse of the nation’s economic growth. This is also a sector that now produces more than half the GDP of the nation. In recent years the industrial sector has begun to stir and, as discussed above, growth in this sector, especially its labour-intensive sub-sectors, can be an important antidote to poverty. Fortunately, major manufacturing groups, like automobiles, rubber and plastic products, and chemicals, have shown robust, double-digit growth during April to November 2009; and, according to the advance estimate for 2009-10, the manufacturing sector as a whole has grown at the remarkable rate of 8.9 per cent. The sector that continues to cause concern and, all said and done, is still the mainstay of the Indian population, is agriculture. There is need to undertake serious policy initiatives to reach the Government’s target of sustained 4 per cent growth in this sector. 2.43 Here, as in other sectors, the aim of an enabling Government must be to provide the wherewithal of growth and enterprise and then leave it to the farmers’ initiative and industry to take the sector forward. This implies that the state has to take purposive action to enhance rural infrastructure and promote research and development (R&D) pertaining to agricultural productivity. These are elaborated upon later in this Economic Survey, but it is worth mentioning here that innovative investment in irrigation and water resources, and a steady supply of energy and power from conventional and newer sources, such as solar and wind, can go a long way in empowering farmers. The need for R&D stems from the fact that India’s agricultural productivity continues to be low, and improvement in this can go a great distance not only in helping us achieve the growth target of 4 per cent but also in building food security and keeping the lid on food price inflation. 36 Economic Survey 2009-10 education but to be a global hub of education and research. 2.44 The idea of a global hub has implications for India’s international and neighbourly relations. If the country can become a place where students come from not just all of South Asia but also Africa, South East Asia, South America and (given India’s cost advantage and long history of excellence in higher education) also North America and Europe, this can become a catalyst for international trade and investment and, in general, create a greater role for India in the global economy. Further, by promoting civil society interaction and intellectual cooperation among the neighbouring nations, this can be a catalyst of peace. The R&D sector is closely related to the state of health of higher education and the research institutes in the country. On these, India was once in the forefront of emerging economies but that may not be the case any longer. This is not because there have been changes in our system of higher education and research but, ironically, because there have not been. While other emerging economies, especially those in Asia, have modernized the organization and financing of higher education and research, India is only now beginning to stir on these fronts. With a couple of strategic steps to restructure, and the tapping of private-sector resources, it is possible for India to not only become a powerhouse in higher Fiscal Developments and Public Finance The fiscal space generated in the 2004-05 to 2007-08 period, following the Fiscal Responsibility Budget Management Act (FRBMA) mandate, mitigated the knock on effects of global financial and economic crisis in 2008-09 through facilitation of an expansionary fiscal stance to boost aggregate demand. While traditionally the assessment of public finances was confined to analysis of fiscal indicators, the macroeconomy-wide impact of the crisis underscored the importance of using national accounts data in tandem in such assessments. As per the national accounts data, in 2008-09, the deceleration in growth in private final consumption expenditure was partly made up for by the growth in Government consumption expenditure (over 2007-08), which resulted in a shoring up of the overall economic growth rate. The reversal in major fiscal deficit indicators in 2008-09 and 2009-10 constitutes a conscious policy-driven stimulus to counter the demand slowdown. CHAPTER 3 3.2 As the impact of the crisis continued through 2009-10, the expansionary fiscal stance was continued in the Budget for 2009-10. Given the relative levels of shares of private final consumption expenditure and government consumption expenditure, such expansion could only be a shortterm measure and the Medium Term Fiscal Policy Statement presented along with the Budget for 200910 favoured a resumption of the fiscal consolidation process, albeit a gradual one, with fiscal deficit declining to 5.5 per cent of the gross domestic product (GDP) and 4.0 per cent of the GDP in 201011 and 2011-12 respectively. In its Report, the Thirteenth Finance Commission has traced the path of fiscal consolidation for the Centre and States. The resumption of the path of fiscal prudence would complement the recovery process in the near term and lay the foundation for reviving the growth momentum in the long term. 3.3 The Budget for 2009-10, continuing with the policy of fiscal expansion to boost aggregate demand, envisaged a fiscal deficit of Rs 4,00,996 crore, equivalent of 6.8 per cent of the GDP (6.5 per cent based on Advanced Estimates of GDP 200405 series). In absolute terms, this implied a growth of 21.5 per cent in the level of fiscal deficit over 2008-09 (provisional). With growth in nominal GDP at only 10.6 per cent, as a proportion of the GDP, fiscal deficit was higher. The higher estimated levels of fiscal deficit in 2009-10 owe largely to the fuller impact of the tax cuts announced as a part of the fiscal stimulus packages late in the second half of fiscal 2008-09. The bulk of the expansion was also reflected in the rise in revenue deficit in 2008-09 and BE (budget estimate) 2009-10 (Table 3.1). The reversal of the trend of fiscal consolidation was thus marked in 2008-09 and BE 2009-10 (Figure 3.1). 3.4 The fiscal stimulus packages also facilitated an expansion in the fiscal deficit of the States through a relaxation in targets by 100 basis points. As a result, the gross fiscal deficit of the States combined rose from 1.4 per cent of the GDP in 2007-08 to 2.6 per cent in 2008-09 (RE) and was estimated at 3.2 per cent of the GDP in 2009-10 (BE). Following the high levels achieved in 200708, the reduced levels of revenue surplus at 0.1 38 Economic Survey 2009-10 Figure 3.1 7 6 Trends in deficits of Central Government Fiscal Deficit Per cent of GDP 5 4 3 2 1 0 -1 2004-05 2005-06 2006-07 2007-08 2008-09 (Prov) 2009-10(BE) Revenue Deficit Primary Deficit Year per cent of the GDP in 2008-09 (RE) and a modest deficit of 0.6 per cent of the GDP in 2009-10 (BE) also reflected this expansionary stance. With the award of the Thirteenth Finance Commission, the resumption of the progress in fiscal consolidation has a distinct timeframe for both the Centre and the States. 3.5 In advanced economies, the operation of Table 3.1 : Trends in deficits of Central Government Year Revenue deficit Fiscal Primary Revenue deficit deficit deficit as per cent of fiscal deficit (As per cent of GDP) Enactment of FRBMA 2003-04 2004-05 2005-06 2006-07 2007-08 2009-10(BE) 3.6 2.4 2.5 1.9 1.1 4.6 4.5 3.9 4.0 3.3 2.6 5.9 6.5 0.0 0.0 0.4 -0.2 -0.9 2.5 2.8 79.7 62.3 63.0 56.3 41.4 74.8 70.5 2008-09(Prov.)* 4.4 Source : Union Budget documents. BE–budget estimate. * Provisional and unaudited as reported by Controller General of Accounts, Department of Expenditure, Ministry of Finance. Notes: The ratios to GDP at current market prices are based on the Central Statistical Organization’s(CSO) National Accounts 200405 series. automatic stabilizers and discretionary fiscal policies pursued to obviate the adverse impact of the global financial and economic crisis was made possible by the space available and the largely cyclical nature of the fiscal deficit. In the literature on the nature of fiscal deficits in India, available evidence points to the predominance of the structural features and the relatively small cyclical component. Therefore, the rapid and significant fiscal consolidation achieved in the post- FRBMA period up to 2007-08 was indeed an important achievement that enabled greater fiscal space for a macroeconomic policy stance to counteract the impact of the global economic crisis. Besides, as a proportion of the GDP, the reductions in fiscal deficit in the period 2003-04 to 2007-08 were made possible in equal measure by higher tax revenues and expenditure compression. This facilitated use of both tax and expenditure measures in the expansionary fiscal policies to boost demand. As such, the progress in fiscal consolidation in India is different from the typical models elsewhere driven purely by expenditure compression. Having regard to the levels of tax-GDP ratio, expenditure commitments and needs, smaller social security contributions and weaker operation of automatic stabilizers, such a process was considered apposite and might inform the policy stance, going forward. CENTRAL GOVERNMENT FINANCES 3.6 A low and stagnant tax-GDP ratio characterized Central Government revenues for a considerable period since 1990-91. This reflected Fiscal Developments and Public Finance in part the reform of the tax structure through lower rates in indirect taxes and the levels of the tax base. The rapid growth momentum in the post-FRBMA period helped change the composition of taxes, deepen the process of rationalization of taxes and widen the base. As a proportion of gross tax revenue, direct taxes rose from a level of 19.1 per cent in 1990-91 to reach 49.9 per cent in 2007-08; in 2008-09 (provisional), they were at 55.5 per cent. In terms of year-on-year growth, in 2008-09, reflecting the two distinct halves of the financial year with different economic environments, direct taxes grew by 14.3 per cent with personal income tax rising by 20.8 per cent and corporate income tax by 10.8 per cent. This represented moderation from the levels that obtained in the period 2003-04 to 2007-08. There was corresponding decline in the share of indirect taxes in the 1990-91 to 2007-08 period; however, service tax has emerged as a major component with a 10 per cent share in 2008-09. In terms of year-on-year growth, in 2008-09, indirect taxes fared poorly with decline in both excise and customs and service tax moderating to a lower growth of 18.6 per cent. With non-tax revenues remaining at a level of around 2 per cent of the GDP and at the given levels of devolution, revenue receipts which were at 11.0 per cent of the GDP in 2007-08 declined to a level of 9.8 per cent in 2008-09 (provisional). 3.7 As a proportion of GDP, total expenditure fell from a level of 17.1 per cent in 2003-04 to 14.4 per cent in 2007-08, largely driven by the steep fall in capital expenditure with revenue expenditure falling relatively slowly (Figure 3.2). Total expenditure was 39 placed at Rs 8,81,469 crore in 2008-09, which implied a growth of 23.7 per cent over 2007-08 levels and 17.4 per cent over that assumed in 2008-09 (BE). The front loading of Plan expenditure was evident in the rise in its proportion to the GDP from a level of 4.1 per cent in 2007-08 to 4.9 per cent in 2008-09 (estimated initially at 4.6 per cent in BE 2008-09) (Table 3.2). Thus the reversal in major fiscal deficit indicators in 2008-09 and 2009-10 is a policydriven stimulus to counter the demand slowdown. BUDGETARY 2009-10 DEVELOPMENTS IN 3.8 The Budget for 2009-10 presented on July 6, 2009 was formulated in the midst of an uncertain macroeconomic environment with a focus on recovery from the economic slowdown following the knock-on effects of the global financial and economic crisis. The three challenges identified included leading the economy back onto the high growth path of 9 per cent at the earliest; deepening and broadening the inclusive agenda for development; and re-energizing the Government and improving the delivery mechanism. In view of the uncertainties associated with the impact of the crisis and not so strong signs of recovery, the Budget for 2009-10 continued fiscal expansion to boost demand. The Budget acknowledged the short-term nature of the stance through a medium-term policy indication of resumption of fiscal consolidation and the initiative to rein in fiscal deficit through institutional reform measures like the intention to move towards a nutrient- based subsidy regime (and ultimately to Figure 3.2 16 14 Receipts and expenditure of the Central Government Revenue Expenditure Revenue Receipts Capital Receipts Capital Expenditure Per cent of GDP 12 10 8 6 4 2 0 2004-05 2005-06 2006-07 2007-08 2008-09 (Prov) 2009-10(BE) Year 40 Economic Survey 2009-10 Table 3.2 : Receipts and expenditure of the Central Government 2004-05 2005-06 2006-07 2007-08# (Rs. 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 Receipt (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)] 3,05,991 2,24,798 81,193 3,84,329 1,26,934 44,753 43,862 78,338 1,92,261 62,043 4,424 1,25,794 1,13,923 4,98,252 1,32,292 3,65,960 1,25,794 -1,140 3,47,077 2,70,264 76,813 4,39,376 1,32,630 44,480 48,211 92,299 1,58,661 10,645 1,581 1,46,435 66,362 5,05,738 1,40,638 3,65,100 1,46,435 13,805 9.4 7.3 2.1 11.9 3.6 1.2 1.3 2.5 4.3 0.3 0.0 4.0 1.8 13.6 3.8 9.9 4.0 0.4 22,032 18,549 3,27,518 4,34,387 3,51,182 83,205 5,14,609 5,41,864 4,39,547 1,02,317 5,94,433 6,02,935 5,07,150 95,785 6,58,118 1,90,807 67,037 57,593 55,183 1,47,949 4,497 10,165 1,33,287 92,766 7,50,884 5,44,651 4,47,726 96,925 7,91,697 1,90,485 1,23,640 72,836 2,47,046 3,36,818 6,158 546 6,14,497 4,74,218 1,40,279 8,97,232 2,25,511 1,06,004 86,879 2,82,735 4,06,341 4,225 1,120 2008-09 (B.E.) 2008-09 (Prov.) 2009-10 (B.E.) 1,50,272 1,71,030 53,495 67,498 51,682 54,219 80,222 52,569 1,49,000 1,70,807 5,893 534 5,100 38,795 1,42,573 1,26,912 68,778 1,18,238 5,83,387 7,12,671 1,69,860 4,13,527 1,42,573 -7,699 (As per 10.1 8.2 1.9 12.0 3.5 1.2 1.2 1.9 3.5 0.1 0.0 3.3 1.6 13.6 4.0 9.7 3.3 -0.2 3,30,114 4,00,996 89,772 1,23,606 8,81,469 10,20,838 2,75,450 6,06,019 3,30,114 1,39,629 9.8 8.0 1.7 14.2 3.4 2.2 1.3 4.4 6.0 0.1 0.0 5.9 1.6 15.8 4.9 10.9 5.9 2.5 20,556 20,653 5,56,521 3,25,149 6,95,689 4,00,996 1,75,485 10.0 7.7 2.3 14.6 3.7 1.7 1.4 4.6 6.6 0.1 0.0 6.5 2.0 16.6 5.3 11.3 6.5 2.8 19,174 19,340 6,18,834 1. Revenue Receipts (a+b) 9.4 (a) Tax Revenue (Net of States’ Share) 6.9 (b) Non-tax Revenue 2.5 2. Revenue Expenditure 11.9 of which: (a) Interest Payments 3.9 (b) Major Subsidies 1.4 (c) Defence Expenditure 1.4 3. Revenue Deficit (2-1) 2.4 4. Capital Receipts 5.9 of which: (a) Recovery of Loans* 1.9 (b) Other Receipts (Mainly PSU Disinvestment) 0.1 (c) Borrowings and Other Liabilities $ 3.9 5. Capital Expenditure** 3.5 6. Total Expenditure [2+5=6(a)+6(b)] 15.4 of which: (a) Plan Expenditure 4.1 (b) Non-Plan Expenditure 11.3 7. Fiscal Deficit [6-1-4(a)-4(b)] 3.9 8. Primary Deficit [7-2(a)] 0.0 Memorandum Items (a) Interest Receipts 32,387 (b) Dividend and Profit 15,934 (c) Non-Plan Revenue Expenditure 2,96,835 2,05,082 2,43,386 5,07,589 5,07,498 1,26,912 1,33,287 -44,118 -57,520 cent of GDP) 11.0 11.4 8.9 9.6 2.1 1.8 12.0 12.4 3.5 1.4 1.1 1.1 3.5 0.1 0.8 2.6 2.4 14.4 3.6 1.3 1.1 1.0 2.8 0.1 0.2 2.5 1.7 14.2 4.6 9.6 2.5 -1.1 19,135 24,758 4,48,351 4.1 10.3 2.6 -0.9 (Rs crore) 22,524 21,060 18,969 21,531 3,72,191 4,20,861 Source : Union Budget documents. # Based on Provisional Actuals for 2007-08. * Includes receipts from States on account of Debt Swap Scheme for 2004-05. ** Includes repayment to National Small Savings Fund for 2004-05. $ Does not include receipts in respect of Market Stabilization Scheme, which will remain in the cash balance of the Central Government and will not be used for expenditure. Note : 1. The ratios to GDP at current market prices are based on CSO’s National Accounts 2004-05 series. 2. The figures may not add up to the total due to rounding/ approximations. Fiscal Developments and Public Finance direct cash transfers) in fertilizers; setting up of an expert group to advise on viable and sustainable pricing of petroleum products; encouraging people’s participation in public sector undertakings (PSUs) through disinvestment; and bringing about structural changes in direct taxes through the draft Direct Taxes Code and moving towards a harmonized goods and services tax (GST). 3.9 The Budget for 2009-10, acknowledging the importance of infrastructure development, significantly raised the allocation for the sector. This included a significant step up (by 87 per cent) in the allocation under the Jawaharlal Nehru National Urban Renewal Mission (JNNURM); a 23 per cent hike in the allocation under the National Highway Development Programme (NHDP); increase in allocation for the Railways from Rs10,800 crore in the Interim Budget 2009-10 to Rs15,800 crore; and increase of 144 per cent in the allocation under the National Rural Employment Guarantee Scheme (NREGS) taking the outlay to a level of Rs 39,100 crore. 41 per cent in 2008-09 to 57.7 per cent in 2009-10 (BE)(Figure 3.3). As proportion of the GDP, revenue from direct taxes marginally declined to a level of 6 per cent and revenue from indirect taxes substantially declined to reach 4.4 per cent. Thus, the marksmanship in indirect taxes took a knock in 2008-09. This also reflected the fact that as part of fiscal stimulus package to revive demand, it was excise that bore the brunt of tax cuts and the effect of economic slowdown was more pronounced in consumption than on income. Indirect taxes Customs 3.12 In the Budget for 2009-10, no change was made in the overall rate structure of customs duties. The peak rate for non-agricultural products at 10 per cent and the two major ad valorem rates at 5 per cent and 7.5 per cent were retained. However, some sector-specific changes in the rates of duty were made which are detailed below. The concessional rate of basic customs duty of 5 per cent on specified machinery for tea, coffee and rubber plantations, which was earlier available up to April 30, 2009, was extended up to July 6, 2010. Basic customs duty on ‘mechanical harvesters’ for coffee plantations was reduced from 7.5 per cent to 5 per cent. Such harvesters were also exempted from countervailing duty (CVD) by way of excise duty exemption. On permanent magnets for manufacture of PM synchronous generators above 500 KW for use in wind-operated electricity generators, basic customs duty was reduced from 7.5 per cent to 5 per cent. Full exemption from customs duty presently available to specified raw materials/inputs imported by manufacturer-exporters of sports goods was extended to five additional items. Similarly, full exemption from customs duty presently available to specified raw materials and equipment imported by manufacturerexporters of leather goods, textile products, and footwear industry was extended to some additional items. The basic customs duty on unworked corals was also reduced from 5 per cent to nil. Full exemption from basic customs duty available to set-top boxes was withdrawn and Revenue and capital receipts 3.10 As the fiscal stimulus packages were announced late in the second half of 2008-09, the full impact of the measures was expected to kick in the current fiscal, particularly on the revenue side. It was initially estimated that the tax cuts announced would entail a revenue loss of around 1per cent of GDP. Given the above, and the need to continue with the stimulus, the Budget for 2009-10 presented in July 2009 envisaged a growth of 5.1 per cent in gross tax revenue of the Centre and was estimated at Rs 6,41,079 crore (Rs 6,09,075 crore in 2008-09 provisional accounts and Rs 6,87,715 in BE 200809). While direct taxes were estimated to grow by 9.4 per cent from 2008-09 (prov.) levels, indirect taxes were estimated to grow marginally reaching a level of Rs 2,69,477 crore (Table 3.3). Within direct taxes, revenue from personal income tax was estimated to decline by 9.0 per cent and that from corporate income tax to grow by 20.1 per cent. While revenue from customs and excise was budgeted to decline marginally, the growth in revenue from service tax was estimated at 6.8 per cent, fully compensating the shortfall in the former. 3.11 These trends in individual taxes carried forward the tilt in composition in favour of direct taxes with their share in total tax revenue rising from 55.5 42 Economic Survey 2009-10 Table 3.3 : Sources of tax revenue 2004-05 2005-06 2006-07 2007-08 2008-09 (BE) 2008-09 (Prov.)@ 2009-10 (BE) (Rs. crore) Direct Taxes (a) Personal Income Tax Corporate Tax Indirect Taxes (b) Customs Excise Service Tax Gross Tax Revenue # 1,32,181 49,268 82,680 1,70,936 57,611 99,125 14,200 3,04,958 1,57,557 55,985 1,01,277 1,99,348 65,067 1,11,226 23,055 3,66,151 2,19,722 75,093 1,44,318 2,41,538 86,327 1,17,613 37,598 4,73,512 2,95,938 1,02,644 1,92,911 2,78,845 1,04,119 1,23,425 51,301 5,93,147 3,65,000 1,38,314 2,26,361 3,21,264 1,18,930 1,37,874 64,460 6,87,715 3,38,213 1,24,014 2,13,812 2,69,454 99,848 1,08,740 60,866 6,09,705 3,70,000 1,12,850 2,56,725 2,69,477 98,000 1,06,477 65,000 6,41,079 Tax revenue as a proportion of gross tax revenue (in per cent) Direct Taxes (a) Personal Income tax Corporate Tax Indirect Taxes (b) Customs Excise Service Tax 43.3 16.2 27.1 56.1 18.9 32.5 4.7 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 53.1 20.1 32.9 46.7 17.3 20.0 9.4 55.5 20.3 35.1 44.2 16.4 17.8 10.0 57.7 17.6 40.0 42.0 15.3 16.6 10.1 Tax revenue as a proportion of gross domestic product* (in per cent) Direct Taxes (a) Personal Income Tax Corporate Tax Indirect Taxes (b) Customs Excise Service Tax Gross Tax Revenue # 4.1 1.5 2.6 5.3 1.8 3.1 0.4 9.4 4.3 1.5 2.7 5.4 1.8 3.0 0.6 9.9 5.1 1.8 3.4 5.6 2.0 2.7 0.9 11.1 6.0 2.1 3.9 5.6 2.1 2.5 1.0 12.0 6.9 2.6 4.3 6.1 2.2 2.6 1.2 13.0 6.1 2.2 3.8 4.8 1.8 2.0 1.1 10.9 6.0 1.8 4.2 4.4 1.6 1.7 1.1 10.4 Source: Union Budget documents. @ Provisional and unaudited as reported by Controller General of Accounts, Department of Expenditure, Ministry of Finance. # includes taxes referred to in (a) & (b) and taxes of Union Territories and “other” taxes. * Refers to GDP at current market prices. Notes: 1. Direct taxes also include taxes pertaining to expenditure, interest, wealth, gift and estate duty. 2. The ratios to GDP at current market prices are based on the CSO’s National Accounts 2004-05 series. Figure 3.3 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 2008-09 (Prov) Year 2009-10 (BE) 1990-01 1995-96 2003-04 2004-05 2005-06 2006-07 2007-08 Fiscal Developments and Public Finance basic customs duty of 5 per cent was reimposed. Basic customs duty on LCD panels for manufacture of LCD televisions was reduced from 10 per cent to 5 per cent. Full exemption from 4 per cent special CVD on parts for manufacture of mobile phones and accessories was reintroduced for one year, that is up to July 6, 2010. Basic customs duty on nine specified drugs and bulk drugs for their manufacture, and one vaccine was reduced from 10 per cent to 5 per cent. These items were also exempted from CVD by virtue of full exemption from excise duty. Also, the basic customs duty on Patent Ductus Arteriosus/Atrial Septal Defect occlusion devices was reduced from 7.5 per cent to 5 per cent with nil CVD by way of excise duty exemption. Similarly, basic customs duty on artificial hearts (left ventricular assist devices) was reduced from 7.5 per cent to 5 per cent. This device already attracts nil excise duty/ CVD. Basic customs duty on cotton waste and wool waste was reduced from 15 per cent to 10 per cent. On packaged or canned software, CVD exemption has been provided on the portion of the value which represents the consideration for transfer of the right to use such software, subject to specified conditions. Service tax is leviable on this portion of the value as an “Information Technology Software Service”. Customs duty on serially numbered gold bars (other than tola bars) and gold coins was increased from Rs100 per 10 g to Rs 200 per 10 g. On other forms of gold, the customs duty was increased from Rs 250 per 10 g to Rs 500 per 10 g. Customs duty on silver was increased from Rs 500 per kg to Rs 1,000 per kg. 3.13 Some other changes announced in the Budget 2009-10 and thereafter are listed below: Basic customs duty on rock phosphate was reduced from 5 per cent to 2 per cent. CVD exemption on Aerial Passenger Ropeway Projects was withdrawn. Consequently, such projects will attract applicable CVD. Basic customs duty exemption for “concrete batching plants of capacity 50 cum per hour or 43 more” was withdrawn. Such plants will now attract 7.5 per cent basic duty. Inflatable rafts, snow skis, water skis, surfboards, sailboats and other water sports equipment were fully exempted from basic customs duty. Basic customs duty on bio-diesel was reduced from 7.5 per cent to 2.5 per cent. Nil rate of basic customs duty on import of raw sugar, earlier available up to August 1, 2009, has been extended up to December 31, 2010. Import of white/refined sugar (up to 10 lakh MT) at nil rate has been extended up to March 31, 2010. Semi- or wholly milled rice was fully exempted from basic customs duty till September 30, 2010. Excise 3.14 The resurgence in the manufacturing sector, which led to the robust growth momentum in the 2003-04 to 2007-08 period, owes also to the rationalization of excise duties. As a consequence of changes in ad valorem rates of Central excise duty for non-petroleum products on February 24, 2009 as part of the third fiscal stimulus package, a dual rate structure with rates of 4 per cent and 8 per cent ad valorem was put in place. This rate structure for non-petroleum products has been retained in Budget 2009-10. However, the rate of duty on several items attracting 4 per cent was restored to 8 per cent. Among the important sectors/items where such an increase occurred were ceramic tiles manufactures in a factory not using electricity for firing the kiln; plywood, flush doors and articles of wood; writing ink and other ink used in writing instruments; zip fasteners; and MP3/MP4 or MPEG4 players. Consequent upon increase in excise duty rate from 4 per cent to 8 per cent, abatement rates were revised suitably on items covered under retail sale price (RSP)-based assessment. 3.15 On the other hand, the 4 per cent rate was retained on mass consumption and essential items such as drugs and pharmaceutical products; medical equipment; certain varieties of paper, paperboard and articles made therefrom; food items such as sugar confectionary, biscuits of retail price exceeding Rs100/kg, cakes and pastries and sherbets; pressure cookers; power-driven pumps 44 Economic Survey 2009-10 Excise duty rate on special boiling point spirits and Naphtha reduced to 14 per cent. Excise duty on large cars/utility vehicles, having engine capacity exceeding 1999 cc, reduced from “20 per cent + Rs 20,000 per unit” to “20 per cent + Rs15,000 per unit”. Excise duty on petrol-driven trucks/lorries reduced from 20 per cent to 8 per cent. Excise duty on chassis of such truck/lorries also reduced from “20 per cent + Rs10,000” per chassis to “8 per cent + Rs10,000” per chassis. No change made either in the exemption limit or the eligibility limit for small- scale exemption. Brand name restriction relaxed in respect of printed laminated rolls. As a consequence, manufacturers of printed laminated rolls bearing the brand name of another person and fulfilling the conditions of notification entitled to full exemption from excise duty for their first clearances of this item (for home consumption) not exceeding Rs150 lakh during the remaining part of this financial year, that is 2009-10. Full exemption from excise duty has been provided to goods falling under Chapter 68 manufactured at the site of construction for use in construction work at such site. Full exemption from excise duty provided to tops manufactured from manmade fibres using the tow-to-top process under specified conditions. Articles of jewellery on which brand name or trade name is indelibly affixed or embossed (branded jewellery) fully exempted from excise duty. Full exemption provided to EVA compound manufactured on job-work basis for further manufacture of footwear. Partial exemption from excise duty provided to packaged or canned software so that the duty payable on that portion of the value which represents the consideration for the transfer of the right to use such software is exempted. Recorded smart cards and tags are exempt from excise duty. A condition had been added to this exemption so as to make it available only if the manufacturer has not availed of central valueadded tax (CENVAT) credit of the duty paid on inputs for these goods. designed for handling water; water filtration/ purification equipment; specified textile machinery; paraxylene; footwear of retail price exceeding Rs 250 per pair but not exceeding Rs 750 per pair; compact fluorescent lamps (CFL) and vacuum and gas-filled bulbs of retail price not exceeding Rs 20 per bulb. 3.16 The specific changes made included: Restoration of the scheme of optional excise duty of 4 per cent for pure cotton. Rate of duty on manmade fibre and yarn enhanced from 4 per cent to 8 per cent on mandatory basis. Beyond the fibre/yarn stage the optional levy of 8 per cent ad valorem restored (instead of pre-budget rate of 4 per cent). Similarly, textile items manufactured from natural fibre other than cotton such as silk, wool and flax to bear an optional levy of 8 per cent ad valorem instead of 4 per cent beyond the fiber stage. The enhanced rate of 8 per cent to also apply to blended fabrics and products. Corresponding changes made in the rates of duty applicable to export- oriented units (EOUs) using only indigenous raw materials when they make clearances of textile items in the domestic tariff area (DTA). Enhanced excise duty from 4 per cent to 8 per cent ad valorem on some important textile intermediates, namely polyester chips; di-methyl terephthalate (DMT), purified terephthalic acid (PTA); and acrylonitrile. The ad valorem component of excise duty on petrol intended for sale with a brand name converted into a specific rate. Consequently, such petrol to attract total excise duty of Rs 14.50 per litre instead of “6 per cent + Rs13 per litre”. Similarly, the ad valorem component of excise duty on diesel, intended for sale with a brand name converted into a specific rate. Consequently, such diesel to attract total excise duty of Rs 4.75 per litre instead of “6 per cent + Rs 3.25 per litre”. Exemption from basic excise duty, additional excise duty and special additional excise duty provided to high-speed diesel (HSD) oil blended with bio-diesels, up to 20 per cent by volume, provided both HSD and bio-diesel have paid the appropriate excise duty. Fiscal Developments and Public Finance 45 Service Tax 3.17 The introduction of service tax in 1994-95 ushered in a major structural change in indirect taxes in the form of wider base and facilitated the process of rationalization of excise duties resulting in lower tax burden on productive sectors. Over the years, there has been an increase in the number of services and the rate of service tax leviable (Table 3.4). The Budget for 2009-10 carried this process forward through the following measures: (a) Service tax retained at 10 per cent (which was reduced from 12 per cent on February 24, 2009 as part of the fiscal stimulus package). (b) The following four new services have been brought under the service tax net: (i) Services provided in relation to transport of coastal goods and goods through national waterways and inland water. (ii) Services provided in relation to transport of goods by rail (service tax kept in abeyance for some time). (iii) Cosmetic and plastic surgery services undertaken to preserve or enhance physical appearance or beauty. (iv) Legal consultancy services provided by a business entity to another business entity. (c) As relief to exporters : Two taxable services, namely “transport of goods by road” and “commission paid to foreign agents” exempted from the levy of service tax, should the exporter be liable to pay service tax on reverse charge basis. Table 3.4 : Service tax revenue Year 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10(P) No. of services 60 75 84 99 106 110 114 Tax rate in per cent 8 10 10 12 12 10 * 10 Revenue Growth in (Rs crore) per cent 7891 14200 23055 37598 51301 60702 36785 91.4 80.0 62.4 63.1 36.4 18.3 -6.5 # In respect of other taxable services, a new revamped and trust-based refund scheme notified with effect from July 7, 2009. Under the new scheme, refund to be granted to exporters within one month without any pre-audit based on certification. If the amount of refund claim does not exceed 0.25 per cent of the total f.o.b. value of exports under a claim, selfcertification by the exporter to the effect that the eligible services have been received and used for export by him and service tax payable thereon has been reimbursed would be sufficient to get the refund. In cases where amount of refund claim exceeds 0.25 per cent of the f.o.b. value of exports, the refund claim to be sanctioned on the basis of certification by the chartered accountant who audits the annual accounts of the exporter. A simplified format has been prescribed to file the refund claims. The condition for filing refund claims once in a quarter dispensed with and the time period for filing the refund claim increased to one year from the date of export. ‘Terminal handling charges’ added to the list of services eligible for refund. Services provided for transport of export goods through national waterways, inland water and coastal shipping included in the list of services eligible for refund of service tax. (d) Other relief measures included: Exemption from service tax provided to inter-State or intra-State transportation of passengers in a vehicle bearing “contract carriage permit”, with specified conditions. Federation of Indian Export Promotion Organization (FIEO) and specified export promotion councils exempted from the levy of service tax under the “Club or association service”. The exemption would be valid till March 31, 2010. Exemption from service tax leviable under “banking and other financial services” or under “foreign exchange broking services” provided to inter-bank purchase and sale Source: Receipts Budget and Principal Chief Controller of Accounts. * Reduced to 10 per cent with effect from February 24, 2009. # Over corresponding period April-December, 2008. (P) Revenue collection for 2009-10 (April-December 2009). 46 Economic Survey 2009-10 of foreign currency between scheduled banks. Services provided in relation to transport of goods by rail exempted from service tax. Services provided or to be provided in relation to management, maintenance or repair of roads exempted from service tax. Service tax exemption on taxable services provided in relation to transport of specified goods through national waterways, inland water and coastal shipping. Sub-brokers excluded from the definition of “stockbroker”. Service tax exemption provided on business auxiliary services provided in the manufacture of pharmaceutical products, medicines, perfumery, cosmetics or toilet preparations containing alcohol, which are charged excise duty under the Medicinal and Toilet Preparations (Excise Duties) Act 1955. Partial exemption from service tax granted to job workers providing business auxiliary service to the brand owners of alcoholic beverages to the extent of service tax leviable on inputs (i.e. raw materials and packing materials) used in the manufacture of such alcoholic beverages. Service tax exemption provided to canals built under works contracts, including EPC projects, provided they are not used for commercial purposes. Specified processes undertaken during the course of manufacture of parts of cycles or sewing machines exempted from service tax under business auxiliary services. and expanding the base. This was carried forward in 2009-10 through enhancement of the minimum level of income exempt under personal income tax by Rs10,000 for general taxpayers and by Rs 15,000 for senior citizens. The surcharge of 10 per cent on personal income tax was also eliminated. The fringe benefit tax was abolished to reduce the compliance burden on employers. The rate of minimum alternate tax was raised to 15 per cent to improve inter-se equity in the taxation of corporate taxpayers. 3.19 Overall, tax proposals on direct taxes were revenue neutral. In pursuance of a Budget announcement, the draft Direct Taxes Code and Discussion Paper was released in August 2009 for public comments (Box 3.1). An alternate dispute resolution mechanism was introduced in the Income-tax Act 1961 to facilitate expeditious resolution of tax disputes involving international transactions. Tax Expenditure Direct Taxes 3.20 As a part of the FRBMA mandate of norms for transparency and disclosures, a “Statement of Revenue Foregone” is tabled along with budget documents (Appendices in Receipts Budget). As per the Budget 2009-10, tax foregone on account of exemptions under corporate income tax for 200708 and 2008-09 was estimated at Rs 62,199 crore and Rs 68,914 crore respectively. Deduction on account of accelerated depreciation, deduction of export profits of units located in Software Technology parks and of EOUs were some of the major items under such corporate exemptions. Tax foregone on account of exemptions under personal income tax was estimated at Rs 33,278 crore and Rs 34,437 crore respectively in 2007-08 and 2008-09 with deduction on account of certain investments and payments under section 80C of the Income-tax Act being the main exemptions. Indirect Taxes 3.21 Estimates of total revenue foregone on the Central excise side for 2008-09 were placed at Rs1,28,293 crore as against the corresponding figure of Rs 87,468 for 2007-08. The sharp increase in revenue forgone is attributable to the reduction in mean effective rate of excise duty from 16 per cent to 14 per cent in the Budget for 2008-09; subsequent Direct Taxes 3.18 The Budget for 2009-10 pointed out that the thrust of tax reforms over the last few years had been on improving the efficiency and equity of the tax system by eliminating distortions in the tax structure, maintaining moderate levels of taxation Fiscal Developments and Public Finance 47 Box 3.1 : Direct Taxes Code The Budget for 2009-10 underscored the importance of continuing the process of structural change in Direct Taxes and promised a comprehensive code to this effect. A Discussion Paper (DP) along with a draft Direct Taxes Code was put in the public domain on August 12, 2009. The Code seeks to consolidate and amend the law relating to all direct taxes, that is income-tax, dividend distribution tax and wealth tax so as to establish an economically efficient, effective and equitable direct tax system which will facilitate voluntary compliance and help increase the tax-GDP ratio. All the direct taxes have been brought under a single code and compliance procedures unified, which will eventually pave the way for a single unified taxpayer reporting system. The need for the Code arose from concerns about the complex structure of the Income Tax Act, numerous amendments making it incomprehensible to the average tax payer and frequent policy changes due to the changing economic environment. The DP states that marginal tax rates have been steadily lowered and the rate structure rationalized to reflect best international practices and any further rationalization of the tax rates may not be feasible without corresponding increase in the tax base to enhance revenue productivity of the tax system and improve its horizontal equity. A threefold strategy for broadening the base has been articulated in the Code. The first element of the strategy is to minimize exemptions that have eroded the tax base. The removal of these exemptions would result in a higher tax-GDP ratio; enhance GDP growth; improve equity (both horizontal and vertical); reduce compliance costs; lower administrative burdens; and discourage corruption. The second element of the strategy seeks to address the problem of ambiguity in the law which facilitates tax avoidance. The third element of the strategy relates to checking of erosion of the tax base through tax evasion. Some key features The Discussion paper discusses the principles of residence-based taxation of income and source-based taxation of income in terms of international best practices that are mixes of the two. Under the Code, residence-based taxation is applied to residents and source-based to non-residents. A resident of India will be liable to tax in India on his world-wide income. However, a non-resident will be liable to tax in India only in respect of accruals and receipts in India (including deemed accruals and receipts). The draft Code simplifies the dualistic concepts of “previous year” and “assessment year” used in the Act and replaces them with the unified concept of “financial year” and decrees that all rights and obligations of the taxpayer and the tax administration will be made with reference to the “financial year”. The DP argues for special treatment of capital gains under an income tax regime for two reasons. Firstly, taxing gains each year, as they accrue, would strain the finances of an individual who is yet to receive these gains in hand. Second, the capital gain realized when a capital asset is sold is usually the accumulated appreciation in the value of the asset over a number of years. The “bunching” of such appreciation in the year in which the asset is sold pushes the seller into a higher marginal tax bracket, if the value of the asset is sufficiently high. As such, if no special treatment is accorded to capital gains, a progressive income tax would discriminate against those whose income from capital assets is in the form of capital gains as compared to those whose income is derived from interest or dividends. The Code also seeks to eliminate the present distinction between short-term investment asset and long-term investment asset on the basis of the length of holding period of the asset. On tax incentives, the DP argues that they are inefficient, distorting, inequitous, impose greater compliance burden on the taxpayer and on the administration, result in loss of revenue, create special interest groups, add to the complexity of the tax laws, and encourage tax avoidance and rent-seeking behaviour. Based on a comprehensive review, the Code proposes that profit linked tax deductions will be replaced by investment linked deductions in areas of positive externality. The draft Code argues against area-based exemption through allusion to economic distortion, that is allocate/ divert resources to areas where there is no comparative advantage. Such exemptions also lead to tax evasion and avoidance. It proposes that area-based exemptions that are available under the Income Tax Act 1961 will be grandfathered. The draft Code proposes to rationalise the tax incentives for savings through the introduction of the ‘ExemptExempt-Taxation’ (EET) method of taxation of savings. Under this method, the contributions are exempt from tax (this represents the first ‘E’ under the EET method), the accumulations/accretions are exempt (free from any tax incidence) till such time as they remain invested (this represents the second ‘E’) and all withdrawals at any time would be subject to tax at the applicable personal marginal rate of tax (this represents the ‘T’ under the EET method). 48 Economic Survey 2009-10 in total expenditure was of the order of 23.7 per cent and 43.2 per cent respectively over the levels in 200708. In 2008-09, the main components of expenditure significantly higher than their 2007-08 levels were major subsidies, social services, Plan expenditure and economic services. In 2009-10, the major components of the expansion were interest payments, defence, social services and economic services. 3.23 In a two-way classification of expenditure as Plan and non-Plan, the front loading of Plan expenditure is evident from the levels of growth of 34.3 per cent and 18.0 per cent in 2008-09 and 200910 (BE) respectively. Plan expenditure at 5.3 per cent of the GDP in 2009-10(BE) was the highest in recent years. Non-Plan expenditure grew by 19.4 per cent and 14.8 per cent respectively in 2008-09 and 2009-10 (BE). In the four-way classification of expenditure, growth in 2008-09 and 2009-10 (BE) respectively was 32.2 per cent and 11.2 per cent in non-Plan revenue expenditure; -3.3 per cent (after adjustment) and 55.3 per cent in non-Plan capital expenditure; 35.5 per cent and 18.4 per cent in Plan revenue expenditure; and 27.8 per cent and 16.1 per cent in Plan capital expenditure (Figure 3.4 & 3.5). reduction in excise duty rates on petrol and HSD in June 2008; across- the-board reduction in excise duty rates by 4 percentage points on non-petroleum products in December 2008; and further reduction in 10 per cent rate of excise duty to 8 per cent in February 2009. Since the tariff rate continued to remain unchanged at 16 per cent, the revenue foregone, that is the difference between tariff rate and effective rate, grew sharply in 2008-09 as compared to 2007-08. The estimated tax expenditure in respect of customs for 2008-09 was placed at Rs 2,25,752 crore as compared to Rs1,53,593 crore (provisional) in 2007-08. The increase in customs revenue foregone is due to exemptions given in 200809 to items like edible oils, crude petroleum, ores and concentrates. EXPENDITURE TRENDS 3.22 In the post-FRBMA period (2004-05 to 200708), average annual/compound growth in total expenditure was 11.2 per cent, which compared favourably with the 12.2 per cent in the previous four years. Within total expenditure, growth in capital expenditure was again lower than that in revenue expenditure. Adjusting for one-off distortions in capital expenditure like redemption of securities of the National Small Savings Fund in 2004-05 and the expenditure on acquisition of State Bank of India (SBI) shares from the Reserve Bank of India (RBI), growth in capital expenditure is more stable. While traditionally assessment of the trends in expenditure, particularly in the context of the fiscal consolidation process, had focused on the compression in terms of proportions of GDP, in view of the policy-driven expansion process it would be useful to understand the magnitude and direction of the expansion. In 2008-09 (provisional) and 2009-10 (BE), the increase Figure 3.4 350 INTEREST PAYMENTS 3.24 To the extent that rising interest payments reflect past consumption and do not contribute to current productive uses and are primarily tax financed, they are a drag on the present generation. Inter-generational equity concerns were one of the key objectives of institutionalizing the fiscal consolidation process in the form of the FRBMA. Interest payments appropriated substantial proportions of revenue receipts and the efforts in the Trends in Centre's revenue expenditure Interest Payments Major Subsidies Defence Expenditure Grants to States and UTs Others Rs. thousand crore 300 250 200 150 100 50 0 2004-05 2005-06 2006-07 2007-08 2008-09 (Prov) 2009-10(BE) Year Fiscal Developments and Public Finance Figure 3.5 100 80 49 Composition of revenue expenditure 29.9 31.9 32.5 Others 33.9 35.4 37.3 Per cent 60 40 20 0 14.0 11.4 11.6 16.8 11.0 10.1 16.5 10.0 10.4 29.2 18.2 9.1 11.4 28.8 15.7 9.2 15.6 24.1 16.0 9.7 11.8 25.1 Grants to States and UTs Defence expenditure Major subsidies Interest payments 33.0 30.2 2004-05 2005-06 2006-07 2007-08 2008-09 (Prov) 2009-10 (BE) Year FRBMA period were to reduce the level of deficits and incremental assumption of debt to contain the interest burden. Interest payments as a proportion of revenue receipts declined from a level of 52.1 per cent in 1998-99 to a level of 31.6 per cent in 200708. They were at the 35 per cent level in 2008-09 (provisional) and were budgeted at 36.7 per cent in 2009-10 (BE). The rise in the levels of gross market borrowings in 2008-09 and 2009-10 (BE) has resulted in a reversal of the trend towards fall in average cost of borrowings (Table 3.5 and Figure 3.6). Table 3.5 : Interest on outstanding internal liabilities of Central Government Outstanding internal liabilities Interest on internal liabilities Average cost of borrowings (per cent per annum) 8.5 8.1 8.4 8.5 8.4 8.7 (Rs. crore) 2004-05 2005-06 2006-07 2007-08 2008-09(RE) 2009-10(BE) 16,03,785 17,52,404 19,67,870 22,47,104 25,37,848 28,94,434 1,24,126 1,29,474 1,46,405 1,67,102 1,88,535 2,21,198 SUBSIDIES 3.25 The global commodity price shock (particularly in crude petroleum) that preceded the global financial crisis in 2008-09 led to a burgeoning of the subsidy bill and a sharp rise in the below-theline issuance of bonds to oil and fertilizer companies. A major part of the supplementary demand for grants that were approved by Parliament in 2008-09 was Source : Union Budget documents. Notes:1. Average cost of borrowings is the per centage of interest payment in year “t” to outstanding liabilities in year “t-1”. 2. Outstanding internal liabilities exclude National Small Saving Fund loans to States, with no interest liability on the part of the Centre. Figure 3.6 250 200 150 Interest on internal liabilities and average interest cost of borrowing 12 10 8 6 Interest on Internal Liabilities (Rs.) Average Cost of Borrowing (%) 100 4 50 0 1990-91 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 (Prov) 2009-10(BE) 2 0 Year Per cent per annum Rs. thousand crore 50 Economic Survey 2009-10 in cases involving New Service or New Instrument of Service. The main items entailing cash outgo included fertilizer subsidies (Rs 3,000 crore); food subsidy (Rs 3,459 crore); and pensions (inculding defence pension) (Rs 6,743 crore). devoted to payments to oil and fertilizer companies who had to be compensated for the less than full pass through in the administered prices of oil and fertilizers. As a proportion of GDP, major budgetary subsidies rose from 1.6 per cent in 2003-04 to 2.2 per cent in 2008-09 (provisional) and were budgeted at 1.7 per cent in 2009-10 (BE) (Figure 3.7). Besides, the above below-the-line issuance of oil and fertilizer bonds was of the order of 1.7 per cent of GDP in 2008-09. The Budget for 2009-10, recognizing the importance of institutional reforms, announced the intention to move towards a nutrient-based subsidy regime in respect of fertilizers and ultimately towards direct cash transfers and the setting up of an expert to advise on a viable and sustainable system of pricing for petroleum products. Work on operationalization of the former is being attempted by the Department of Fertilizers and the Report of the latter containing the recommendations on petroleum subsidies has been submitted on February 3, 2010. CENTRAL PLAN OUTLAY SUPPLEMENTARY DEMAND FOR GRANTS 3.26 The first batch of Supplementary Demands for Grants approved by Parliament in December 2009 included 61 Grants and two Appropriations. Total gross additional expenditure approved by Parliament is Rs 30,942.6 crore. This involves a net cash outgo aggregate of Rs 25,725.2 crore and technical supplementary involving gross additional expenditure, matched by savings of the ministries/departments or by enhanced receipts/recoveries aggregates of Rs 5,216.7 crore. Besides, token provision of Rs 73 lakh is being sought, one lakh for each item of expenditure, for enabling reappropriation of savings 3.27 Central Plan outlay of Rs 3,88,078 crore was envisaged in 2008-09 (RE) comprising gross budgetary support of Rs 2,04,128 crore (52.6 per cent) and internal and extra budgetary resources (IEBR) of Central public-sector enterprises (CPSEs) of Rs1,83,950 crore. The Budget for 2009-10 raised the Central Plan outlay by 15.4 per cent over 200809 (RE) to reach Rs 4,47,921 crore. The outlay was composed of budgetary support of Rs 2,39,840 crore and IEBR of CPSEs of Rs 2,08,081 crore. The broad sector-wise allocations for important sectors included energy (25.8 per cent); social services (23.2 per cent); transport (21.1 per cent); communication (3.7 per cent); rural development (11.6 per cent); industry and minerals (8.0 per cent); agriculture and allied activities (2.4 per cent); and irrigation and flood control (0.1 per cent). Central assistance to State and UT Plans in 2009-10 (BE) is placed at Rs 85,309 crore, a growth of 8.2 per cent over 2008-09 (RE). GOVERNMENT DEBT 3.28 Typically, the fiscal responsibility rules world over are anchored in balanced budget and debt targets with clear differences in framework across advanced economies and developing countries. In India, under the FRBMA, the rule focused on incremental assumption of liabilities. By and large this rule was adhered to in the post-FRBMA period; Figure 3.7 140 Subsidies as per cent of GDP 2.5 2.0 1.5 1.0 0.5 0 Rs. thousand crore 100 80 60 40 20 0 Per cent of GDP 120 Subsidies Subsidies as % of GDP 2004-05 2005-06 2006-07 2007-08 2008-09 (Prov) 2009-10(BE) Year Fiscal Developments and Public Finance since 2008-09, there has been a rise in the assumption of net incremental liabilities as a result of the expansionary fiscal policy stance. As a result, with the revised GDP series (2004-05) released by the CSO, the ratio of outstanding liabilities to the GDP after falling from a level of 61.6 per cent in 200405 to 56.3 per cent in 2008-09(RE), has risen marginally to 56.7 per cent in 2009-10(BE)(Table 3.6). Internal debt, mainly market borrowings, continued to be the main component of outstanding liabilities (Figure 3.8). AND FUNCTIONAL CLASSIFICATION 51 The Budget for 2009-10 placed the ratio of consumption expenditure to total expenditure at 22 per cent and the ratio of gross capital formation to total expenditure at 15.2 per cent. However, as about 34.4 per cent of the total expenditure is classified as unallocable, the real economy- wide impact needs to be reckoned for this purpose. 3.30 The share of salaries and wages within consumption expenditure was envisaged at 46.7 per cent in 2009-10 (BE), which was lower than the 47.7 per cent in 2008-09 (RE). The share of grants to total expenditure was 35.8 per cent in 2009-10 (BE) as against 35.3 per cent in 2008-08 (RE). A significant effect of the global recession and economic/fiscal stimulus announced by the Government is evident in the increase in dissavings of the Central Government from Rs (-)13,674 crore in 2007-08 to Rs 1,64,293 crore in 2008-09 (RE). Dissavings were budgeted at Rs 2,07,747 crore in 2009-10. As a proportion of GDP, dissavings of the Central Government were placed at 2.9 per cent in 2008-09 (RE) and at 3.4 per cent in 2009-10 (BE) (Table 3.7). ECONOMIC 3.29 While the national accounts data give broad magnitudes of the aggregate Government consumption expenditure and capital formation, the economic and functional classification (EFC) of the Central Government budget provides details specific to the Centre. The classification of financial transactions in the annual budget is designed to facilitate discussion and voting on demand for grants and is to be seen in the context of accountability to Parliament through institutional arrangements. The EFC reclassifies the expenditures and receipts of the Central Government by economic and functional categories making them amenable to larger macroeconomic analysis, particularly the influence of the budget on the various sectors of the economy. Of the total expenditure of the Centre, consumption expenditure remained in the range of 3.5 per cent to 2.7 per cent of GDP in the period 1997-98 to 200708. Gross capital formation, after rising to a level of 2.9 per cent of the GDP in 2007-08 declined to 2.5 per cent of GDP in 2008-09 and was budgeted at the same lavel i.e. 2.5 per cent of GDP in 2009-10. FISCAL OUTCOME 3.31 The twin global shocks and the resultant slowdown in the economy led to a policy response of fiscal expansion in the latter half of 2008-09, which continued through the current year. While, traditionally fiscal outcome is assessed in terms of Budget Estimates and year-on-year variations in key fiscal indicators in relation to the trend with particular focus on deficit levels, given the expansionary stance, it would be appropriate to focus on fiscal marksmanship in the current conjuncture. Figure 3.8 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 2004-05 2005-06 2006-07 2007-08 2008-09 (Prov) 2009-10(BE) Year 52 Economic Survey 2009-10 Table 3.6 : Outstanding liabilities of the Central Government (end-March) 2004-05 2005-06 2006-07 2007-08 2008-09 (RE) 30,14,441 20,14,451 13,58,940 6,55,511 9,99,990 1,21,634 31,36,075 300 31,35,775 54.1 36.1 24.4 11.8 17.9 2.2 56.3 2,64,076 4.7 32,78,517 58.8 27,07,443 48.6 29,71,519 53.3 n.a. 2009-10 (BE) 33,57,772 23,56,940 17,66,897 5,90,043 10,00,832 1,37,680 34,95,452 300 34,95,152 54.5 38.2 28.7 9.6 16.2 2.2 56.7 2,80,122 4.5 36,37,894 59.0 30,60,774 49.7 33,40,896 54.2 n.a. (Rs. 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 (Rs crore)@ (as Per Cent of GDP) (b) Total outstanding Liabilities (adjusted) (Rs crore) (as Per Cent of GDP) (c) Internal Liabilities (Non-RBI)## (as Per Cent of GDP) (d) Outstanding Liabilities (Non-RBI) ## (Rs crore) Outstanding Liabilities (Non-RBI) (as Per Cent of GDP) (e) Contingent Liabilities of Central Government (Rs crore) Contingent Liabilities of Central Government (as Per Cent of GDP) (f) Total Assets (Rs crore) Total Assets (as Per Cent of GDP) 19,33,544 12,75,971 7,58,995 5,16,976 6,57,573 60,878 19,94,422 300 19,94,122 59.7 39.4 23.4 16.0 20.3 1.9 61.6 1,91,182 5.9 21,24,726 65.6 17,71,117 54.7 19,62,299 60.6 1,07,957 21,65,902 13,89,758 8,62,370 5,27,388 7,76,144 94,243 22,60,145 300 22,59,845 58.4 37.5 23.3 14.2 20.9 2.5 61.0 1,94,078 5.2 23,59,980 63.7 19,69,106 53.1 21,63,184 58.4 1,10,626 24,35,880 15,44,975 9,72,801 5,72,174 8,90,905 1,02,716 25,38,596 300 25,38,296 56.9 36.1 22.7 13.4 20.8 2.4 59.3 2,01,204 4.7 26,37,084 61.6 22,17,671 51.8 24,18,875 56.5 1,09,826 27,25,394 18,08,359 10,92,468 7,15,891 9,17,035 1,12,031 28,37,425 300 28,37,125 55.1 36.5 22.1 14.5 18.5 2.3 57.3 2,10,083 4.2 29,35,477 59.3 24,71,396 49.9 26,81,479 54.2 1,04,872 (As per cent of GDP) 3.3 10,83,422 33.4 3.0 11,94,446 32.2 2.6 13,39,119 31.3 2.1 15,71,668 31.8 n.a. 15,80,300 28.3 n.a. 16,71,532 27.1 Source: 1. Union Budget documents. 2. Controller of Aid Accounts and Audit. 3. Reserve Bank of India. n.a. : not available. * External debt figures represent borrowings by Central Government from external sources and are based upon historical rates of exchange. @ Converted at year-end exchange rates. For 2004-05, the rates prevailing at the end of March 2005 and so on. # Internal debt includes net borrowing of Rs 64,211crore for 2004-05, Rs 29,062 crore for 2005-06, Rs 62,974 crore for 2006-07 Rs 1,70554 crore for 2007-08, Rs 88,773 crore for 2008-09(RE) and Rs 40,737 crore for 200910(BE) under the Market Stabilisation Scheme. ## This includes marketable dated securities held by the RBI. Note : The ratios to GDP at current market prices are based on the CSO’s National Accounts 2004-05 series. Fiscal Developments and Public Finance Table 3.7 : Total expenditure and capital formation of the Central Government (As per economic and functional classification of the Central Government budget) 2004-05 2005-06 2006-07 2007-08 2008-09 (RE) 53 2009-10 (BE) (Rs. crore) I. Total Expenditure 4,63,831 92,855 27,396 65,459 -60,378 1,53,233 5,01,083 84,757 34,450 50,307 -61,431 1,46,188 5,70,185 87,885 36,487 51,398 -33,918 1,21,803 6,88,908 1,43,892 43,652 1,00,240 1,30,218 8,87,032 10,00,019 1,40,085 55,973 84,112 3,04,378 1,52,119 63,364 88,755 3,59,866 II. Gross Capital Formation out of Budgetary Resources of the 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 the Central Government IV. Gap(II-III) Financed by a. Draft on other Sectors of the Domestic Economy (i) Domestic Capital Receipts (ii) Budgetary Deficit / Draw Down of Cash Balance b. Draft on Foreign Savings I. Total Expenditure 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 the 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 the Central Government Memorandum Items 1 2 1 2 Consumption Expenditure Current Transfers Consumption Expenditure Current Transfers 4.2 6.4 -2.2 0.5 3.0 3.5 -0.6 1.0 2.6 2.5 0.1 0.3 2.4 2.9 -0.5 0.2 5.1 4.5 0.5 0.4 5.5 5.5 0.0 0.3 1,35,918 2,08,259 -72,341 17,315 14.3 2.9 0.8 2.0 -1.9 4.7 1,09,799 1,30,687 -20,888 36,389 13.5 2.3 0.9 1.4 -1.7 3.9 1,10,801 1,06,284 4,517 11,002 13.3 2.1 0.9 1.2 -0.8 2.8 1,18,180 1,45,351 -27,171 12,038 13.9 2.9 0.9 2.0 0.3 2.6 2,82,424 2,52,440 29,984 21,954 15.9 2.5 1.0 1.5 -2.9 5.5 3,41,683 3,41,683 0 18,183 16.2 2.5 1.0 1.4 -3.4 5.8 13,674 -1,64,293 -2,07,747 (As per cent of GDP) II. Gross Capital Formation out of Budgetary (increase over previous year) 12.5 1,05,692 2,59,529 3.3 8.0 -8.7 1,16,305 2,97,267 3.1 8.0 3.7 63.7 (Rs crore) 1,21,609 3,56,560 2.8 8.3 1,31,396 4,08,676 2.7 8.3 -2.6 1,72,637 5,55,958 3.1 10.0 8.6 2,19,553 5,98,836 3.6 9.7 (As per cent of GDP) 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 Departmental Commercial Undertakings, loans written off, etc. are excluded from the current account. In the capital account, expenditure financed out of Railways, Posts &Telecommunications’ own funds, etc, is included. (vi) The ratios to GDP at current market prices are based on the CSO’s National Accounts 2004-05 series. 54 Economic Survey 2009-10 carried out between December 2008 and February 2009; that is the across-the-board excise duty reduction by 4 percentage points on December 7, 2008 on non-petroleum products; further reduction of the 10 per cent rate to 8 per cent on February 24, 2009; and reduction of service tax rate from 12 per cent to 10 per cent, are now showing their full impact on revenue collection during 2009-10. However, on a month-on-month basis, the decline in gross tax revenues is getting moderated. Though, year-on-year non-tax revenue grew by 23.7 per cent in (AprilDecember) 2009-10, it constituted only 58.2 per cent of the BE (Table 3.8). There is likely to be a shortfall 3.32 On the revenue side, the Budget for 2009-10 estimated growth in gross tax revenue at 5.1 per cent composed of a 9.4 per cent growth in direct taxes and an envisaged growth of almost the same level in indirect taxes. As per the data on Union Government accounts released by the Controller General of Accounts (CGA) for the year (AprilDecember 2009), gross tax revenue has declined by 2.5 per cent, composed of a 13.2 per cent growth in direct taxes and 20.4 per cent decline in indirect taxes. The declining trend in revenue collection from indirect taxes, which started in 2008-09, continues in the current fiscal on account of the duty reductions Table 3.8 : Central Government finances Budget Estimate 2009-10 1 2 April-December 2008-09 3 (Rs crore) 2009-10 4 Col.4 as per cent of 2009-10 (BE) 5 Per cent change over 2008-09 6 1. Revenue Receipts Gross Tax Revenue Tax (Net to Centre) Non-Tax 6,14,497 6,41,079 4,74,218 1,40,279 4,06,341 4,225 1,120 4,00,996 10,20,838 6,95,689 6,18,834 2,25,511 1,05,579 34,980 76,855 3,25,149 2,78,398 46,751 10,20,838 8,97,232 1,23,606 2,82,735 4,00,996 1,75,485 3,75,937 4,26,795 3,09,927 66,010 2,21,279 2,974 43 2,18,262 5,97,216 4,26,419 4,03,758 1,23,735 1,03,239 21,487 22,661 1,70,797 1,46,009 24,788 5,97,216 5,49,767 47,449 1,73,830 2,18,262 94,527 3,89,271 4,16,094 3,07,591 81,680 3,18,269 3,983 4,306 3,09,980 7,07,540 4,97,381 4,60,970 1,30,005 96,740 37,465 36,411 2,10,159 1,79,555 30,604 7,07,540 6,40,525 67,015 2,51,254 3,09,980 1,79,975 63.3 64.9 64.9 58.2 78.3 94.3 384.5 77.3 69.3 71.5 74.5 57.6 91.6 107.1 47.4 64.6 64.5 65.5 69.3 71.4 54.2 88.9 77.3 102.6 3.5 -2.5 -0.8 23.7 43.8 33.9 9,914.0 42.0 18.5 16.6 14.2 5.1 -6.3 74.4 60.7 23.0 23.0 23.5 18.5 16.5 41.2 44.5 42.0 90.4 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) Revenue Account (ii) Capital Account 6. Total Expenditure (4)+(5)=(a)+(b) (a) Revenue Expenditure (b) Capital Expenditure 7. 8. 9. Revenue Deficit Fiscal Deficit Primary Deficit Source: CGA, Ministry of Finance. Fiscal Developments and Public Finance in the non-tax revenues on account of delay in realization of spectrum auction proceeds. While direct taxes could partially compensate for the decline in excise, overall revenue marksmanship may take a knock. 3.33 On the expenditure side, the CGA data reveal that total expenditure in April-December grew by 18.5 per cent (as against the 15.8 per cent growth envisaged by the BE) and as a proportion of the BE for the year was placed at 69.3 per cent. Plan expenditure grew by 23.0 per cent and was at 64.6 per cent of the BE in April-December 2009. NonPlan expenditure grew by 16.6 per cent (as against the growth of 14.8 per cent envisaged by the BE) and as a proportion of BE for the year was placed at 71.5 per cent. Growth in two components, namely pensions and subsidies, has been faster than envisaged by the BE. Fiscal and revenue deficits were placed at 77.3 per cent and 88.9 per cent of the BE respectively reflecting the developments in revenue and expenditure in tandem (Table 3.9). 55 above, the Commission has also been mandated to review the state of finances of the Union and States, keeping in view, in particular, the operation of the States’ Debt Consolidation and Relief Facility 2005-2010 introduced by the Central Government on the basis of the recommendations of the Twelfth Finance Commission, and suggest measures for maintaining a stable and sustainable fiscal environment consistent with equitable growth. Subsequently, the Commission was given additional terms of reference including the mandate to review the roadmap for fiscal adjustments and suggest a suitably revised one with a view to maintaining the gains of fiscal consolidation through 2010 to 2015 particularly considering the need to bring the liabilities of the Central Government on account of oil, food and fertilizer bonds into the fiscal accounting, and the impact of various other obligations of the Central Government on the deficit targets. The TFC has since submitted its Report. COLLECTION RATES THE REPORT OF THE THIRTEENTH FINANCE COMMISSION (TFC) 3.34 The TFC was constituted in terms of the Presidential Order November 13, 2007 to make recommendations relating to tax devolution between the Centre and States; grants-in-aid to States; and measures needed to augment the Consolidated Fund of a State to supplement the resources of the Panchayats and Municipalities. In addition to the Trends in revenue collection in 2009-10 3.35 Assessment of the levels of protection in emerging economies with large differential in schedule and effective rates of tariffs through headline measures could be misleading and in such cases alternative measures like collection rates could be useful. Collection rates, which also include additional duties and special additional duties, have declined over the years and rule below-peak non-agricultural Table 3.9 : Trends in cumulative finances of Central Government for 2009-10 (Rs. crore) 2009-10 BE 1. Revenue Receipts Per Cent of BE 2. Capital receipts 3. Total Receipts Per Cent of BE 4. Non Plan Expenditure Per Cent of BE 5. Plan Expenditure Per Cent of BE 6. Total Expenditure Per Cent of BE 7. Revenue Expenditure Per Cent of BE 8. Revenue Deficit Per Cent of BE 9. Fiscal Deficit Per Cent of BE 4,00,996 2,82,735 8,97,232 10,20,838 3,25,149 6,95,689 4,06,341 10,20,838 6,14,497 April AprilMay 32,178 5.2 90,989 1,23,167 12.1 86,242 12.4 36,925 11.4 1,23,167 12.1 1,13,141 12.6 80,963 28.6 90,758 22.6 AprilJune 71,995 11.7 1,24,976 1,96,971 19.3 1,42,185 20.4 54,786 16.8 1,96,971 19.3 1,79,585 20.0 1,07,590 38.1 1,24,302 31.0 AprilJuly 1,05,378 17.1 1,59,866 2,65,244 26.0 1,94,868 28.0 70,376 21.6 2,65,244 26.0 2,40,156 26.8 1,34,778 47.7 1,58,554 39.5 AprilAugust 1,57,198 25.6 1,86,125 3,43,323 33.6 2,45,275 35.3 98,048 30.2 3,43,323 33.6 3,12,283 34.8 1,55,085 54.9 1,82 ,290 45.5 AprilSept. 2,44,471 39.8 2,04,377 4,48,848 44.0 3,22,070 46.3 1,26,778 39.0 4,48,848 44.0 4,09,454 45.6 1,64,983 58.4 1,97,775 49.3 AprilOct. 2,84,479 46.3 2,52,382 5,36,861 52.6 3,88,837 55.9 1,48,024 45.5 5,36,861 52.6 4,91,273 54.8 2,06,794 73.1 2,45,075 61.1 AprilNov. 3,07,125 50.0 3,14,547 6,21,672 60.9 4,47,995 64.4 1,73,677 53.4 6,21,672 60.9 5,65,027 63.0 2,57,902 91.2 3,06,221 76.4 AprilDec. 3,89,271 63.3 3,18,269 7,07,540 69.3 4,97,381 71.5 2,10,159 64.6 7,07,540 69.3 6,40,525 71.4 2,51,254 88.9 3,09,980 77.3 11,846 1.9 54,371 66,217 6.5 46,632 6.7 19,585 6.0 66,217 6.5 62,205 6.9 50,359 17.8 54,158 13.5 Source: CGA, Ministry of Finance. 56 Economic Survey 2009-10 Table 3.10 : Collection rates for selected import groups* (per cent) Sl. No. 1 2 3 4 5 6 7 8 9 10 11 Source : Notes: * Sl. Sl. Sl. Sl. Sl. Sl. No. No. No. No. No. No. 1 3 5 6 7 8 Commodity Group Food Products POL Chemicals Man-made fibres Paper & newsprint Natural fibres Metals Capital goods Others Non POL Total 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 (Prov.) 4 3 16 17 8 6 17 13 4 9 7 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 (in per cent) unadjusted for exemptions, expressed in percentage. includes cereals, pulses, tea, milk and cream, fruits, vegetables, animal fats and sugar. includes chemical elements, compounds, pharmaceuticals, dyeing and colouring materials, plastic and rubber. includes pulp and waste paper, newsprint, paperboards and manufactures and printed books. includes raw wool and silk. includes iron and steel and non-ferrous metals. includes non-electronic machinery and project imports, electrical machinery. basic customs duties (Table 3.10 and Figure 3.9). Exemptions, both general and specific, are a major reason for the difference between headline tariffs and collection rates. Besides, reduction in excise duty rates has also affected customs duty collection on account of reduced revenue from additional customs duty, commonly known as CVD on imports. PERFORMANCE OF THE DEPARTMENTAL ENTERPRISES OF THE CENTRAL GOVERNMENT Railways 3.36 With a freight loading of 833.3 million tonnes in 2008-09, Indian Railways achieved an Figure 3.9 70 60 50 incremental loading of 39.4 million tonnes over the 2007-08 level. The freight movement of the Railways was impacted by the slowdown in the economy in the second half of fiscal 2008-09 and the year-end achievement was short of the revised target by around 17 million tonnes. However, freight revenues for the fiscal were placed at Rs 53,433 crore reflecting a growth of 12.6 per cent over the 2007-08 level. The overall traffic revenues for 2008-09 were placed at Rs 79,837 crore, which implied a growth of 11.4 per cent over 2007-08. Taking into account a clearance of Rs 25 crore from traffic outstanding, the gross traffic receipts of the Railways for 2008-09 were placed at Rs 79,862 crore. Collection rates for selected import groups Total Food products POL Capital goods Per cent 40 30 20 10 0 Year 2008-09 (Prov) 1990-01 1995-96 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 Fiscal Developments and Public Finance 3.37 Ordinary working expenses at Rs 54,349 crore in 2008-09 grew by 32.5 per cent. This higher growth rate in ordinary working expenses is primarily attributable to increase in staff cost on account of implementation of the Sixth Central Pay Commission award including payment of 40 per cent arrears. The total working expenses including appropriations to Depreciation Reserve Fund and Pension Fund at Rs 71,839 crore reflect an increase of 31.9 per cent over the previous year. Taking into account the net variations of the miscellaneous receipts and miscellaneous expenditure, Railways’ net revenues in 2008-09 work out to Rs 9,175 crore. 3.38 Railways fully discharged the dividend liability for 2008-09, which amounted to Rs 4,718 crore. After payment of total dividend from the net revenues earned, Railways in 2008-09 generated a net surplus of Rs 4,457 crore. Lower growth of traffic revenues on account of the slowdown in the economy coupled with a sharp rise in staff cost due to implementation of the Sixth Central Pay Commission award adversely affected the financial health of the Railways in 2008-09. Thus the operating ratio deteriorated to 90.5 per cent from 75.9 per cent in the previous year. The net revenues as a proportion of capital-at-charge and investment from capital fund for the fiscal worked out to 8.8 per cent. 3.39 The Plan outlay for 2008-09 stood at Rs 36,856 crore including internally generated resources of Rs 18,942 crore, that is 51 per cent of the total outlay and market borrowings of Rs 7,804 crore by the Indian Railway Finance Corporation which also included borrowings of Rail Vikas Nigam Limited amounting to Rs 293 crore. Apart from strengthening of the golden quadrilateral under the National Rail Vikas Yojana, certain important projects and 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. Railways is also modernizing and upgrading its systems to augment rail services. 57 3.41 India Posts is the largest postal network in the world, with one post office serving 7,174 people and covering an area of approximately 21.2 sq. km. It provides access to postal services at affordable prices to all citizens in the country through its vast network, which has grown from 23,344 post offices at the time of Independence to 1,55,035 post offices as on March 31, 2008. Of the total, 1,39,173 post offices are in rural areas and 15,862 in urban areas. Rapid economic development led to increasing demand for postal services. To cater to this, India Posts plans to open 400 new post offices in rural areas and relocate 300 post offices to areas with greater demand for postal services in 2010-11. India Posts has introduced franchisee outlets to cater to this demand where it is not possible to open departmental post offices. So far, 850 franchised outlets have been opened and 3,200 more are planned in 2010-11. The Department of Posts has launched ‘Project Arrow’, a pilot project to lay the foundation for a comprehensive, long-term transformation of India Posts. The project aims at providing fast, reliable and efficient postal services to the customers, transforming India Posts into a vibrant and responsive organization with a clear focus on social obligations as well. Out of a total of 25,531 departmental post offices, 12,604 post offices have been computerized. Of these, 1,304 have so far been networked through leased lines with the National Data Centre. The Department of Posts has been given the responsibility to disburse wages to NREGS beneficiaries through Post Office Savings Bank accounts. Nearly 4 crore NREGS accounts have been opened up to November 2009, and the amount disbursed in this financial year alone to more than Rs 5,600 crores. The Department of Posts has been assisting other public authorities under the Central Government in implementing the Right to Information (RTI) Act by providing services of its designated Central Assistant Public Information Officers. Broadcasting 3.42 Prasar Bharati, a public service broadcaster gives due priority to matters of national importance as determined by the Government of the day. Total expenditure of Prasar Bharati in 2008-09 was Rs 2,518.9 crore excluding charges on account of space segment, spectrum charges and interest and depreciation costs. Total receipts were Rs 1,261.3 crore (gross) and Rs 1,096.8 crore (net) in 2008-09. Prasar Bharati has taken a number of steps to increase revenue generation through aggressive Department of posts 3.40 Gross receipts of the Department of Posts in 2008-09 were Rs 5,862 crore. Net working expenses during the year were Rs 9,455 crore, resulting in a deficit of Rs 3,593 crore. In BE 2009-10, gross receipts are budgeted to go up to Rs 6,136 crore and net working expenses estimated at Rs 11,768 crore. The deficit is thus projected to be Rs 5,632 crore. 58 Economic Survey 2009-10 GDP but was still well below the 3.0 per cent level mandated by the FRLs (Figure 3.10). With the relaxation in State-level fiscal targets to obviate the adverse impact of the global crisis, revenue deficit of 0.6 per cent of the GDP and fiscal deficit of 3.2 per cent of the GDP has been budgeted in 2009-10. marketing and content improvement. Nine marketing divisions functioning at Mumbai, Delhi, Kolkata, Chennai, Kochi, Guwahati, Hyderabad, Bangalore and Thiruvananthapuram cater to the advertising needs of All India Radio and Doordarshan through a single-window facility. Introducing digital technology including Digital Terrestrial Transmission (DTT) and television on mobile, expansion of Direct to Home (DTH) service of DD-Direct+ to 97 free-to-air channels would further improve Doordarshan services. Digitalization of transmitters, studios and connectivity would cover 70 per cent of the total population of India under All India Radio Network. Prasar Bharati is the host broadcaster during the forthcoming Commonwealth Games to be held in New Delhi in 2010. As such, Prasar Bharati will be providing coverage to various sports events as per international standards for relay by the member countries of the Commonwealth. Commonwealth Games 2010 will give Prasar Bharati an opportunity to introduce modern high definition television (HDTV) technology to cover sports events. However, a resource gap continues to exist and a budget of Rs 2,079.1 crore (including the Commonwealth Games) has been allocated in 2009-10 (BE) to cover the resource gap of Prasar Bharti. STATE-LEVEL REFORMS 3.45 The Debt Consolidation and Relief Facility (DCRF) has two components: (i) consolidation of Central loans (from the Ministry of Finance) contracted till March 31,2004 and outstanding as on March 31,2005 and (ii) provision of interest relief and grant of debt waiver to States based on their fiscal performance. Consolidation of Central loans has given interest relief to States. Debt waiver is granted to States based on their fiscal performance, for which an assessment is made annually. Benefits under the DCRF helped States by easing debt and interest pressures and also incentivized States to follow the path of fiscal correction. The Government of India relaxed the fiscal deficit target for States for 2009-10 from 3 per cent to 4 per cent of States’ respective GSDP, to enable States to borrow up to 4 per cent of their GSDP as projected under the DCRF guidelines, to undertake capital expenditure. 3.46 So far, Central loans to 26 out of 28 States have been consolidated to the extent of Rs 1,13,601.1 crore. Debt consolidation provided interest relief to these 26 States to the extent of Rs 4,392 crore, Rs 3,995 crore, Rs 3,903 crore, Rs 3,452.6 crore and Rs 2,945.7 crore in 2005-06, 2006-07, 2007-08, 2008-09 and 2009-10 respectively as against the Twelfth Finance Commission’s (TFC) estimates of Rs 4,562 crore, Rs 4,256.8 crore, Rs 3,937.8 crore, Rs 3,492.7 crore and Rs 3,000.16 crore respectievly. The difference is due to the fact that consolidations have been carried out for these States over five years as and when FRBMAs were enacted in line with the recommendations laid down by the TFC in this regard. 3.47 The second component of the DCRF is debt waiver. Consolidated debt of 15 States in 2005-06 amounting to Rs 3,984.4 crore was waived; for 200607 debt of 23 States amounting to Rs 5,007.5 crore was waived; and for 2007-08, debt of 23 States amounting to Rs 5514.0 crore was waived; for 200809 debt of 20 States to the extent of Rs 5153.8 crore was waived; and for 2009-10 debt of eight States amounting to Rs 2379.7 crore was waived. Thus, FINANCES OF STATE GOVERNMENTS 3.43 Following the adoption of fiscal responsibility legislations (FRLs), the combined finances of the States exhibited a faster than anticipated turnaround in 2005-06 with the level of fiscal deficit at 2.4 per cent of the GDP. There were, however, large variations amongst States with Assam having a fiscal surplus of 0.6 per cent of the gross State domestic product (GSDP) and Mizoram having a high fiscal deficit of 14.7 per cent of the GSDP in 2005-06. States combined posted a revenue surplus in 2006-07. The record of fiscal consolidation of the States combined was indeed remarkable and was facilitated by the growth in their own revenues following the successful adoption of State-level value-added tax (VAT), the buoyancy in Central taxes, the higher levels of transfers and the scheme of Debt Consolidation and Waiver linked to fiscal consolidation. 3.44 In 2008-09, there was a growth of 15.3 per cent in States’ own tax revenues and 26.6 per cent in non-tax receipts (Table 3.11). However, with higher levels of disbursements, which grew by 26 per cent, fiscal deficit went up to a level of 2.6 per cent of the Fiscal Developments and Public Finance Table 3.11 : Receipts and disbursements of State Governments* 2004-05 2005-06 2006-07 2007-08 2008-09 (RE) 59 2009-10 (BE) (Rs crore) Total Receipts(A+B) A. Revenue Receipts (1+2) 1. Tax Receipts of which: State’s Own Tax Revenues 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 Revenues 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. 5,63,660 3,63,512 2,60,577 1,82,027 1,02,935 8,648 2,00,148 5,95,629 4,31,022 3,06,332 2,12,307 1,24,690 9,380 1,64,607 6,73,604 5,30,555 3,72,841 2,52,548 1,57,714 11,825 1,43,049 7,47,365 6,10,262 4,34,232 2,84,169 1,76,030 12,643 1,37,103 7,798 7,31,680 5,66,856 1,51,006 13,818 -43,406 68,572 15.1 12.3 8.8 5.7 3.6 0.3 2.8 0.2 14.8 11.5 3.1 0.3 -0.9 1.4 9,05,382 7,22,055 4,99,132 3,27,711 2,22,923 16,551 1,83,327 11,666 9,21,673 7,14,718 1,90,316 16,639 -7,337 1,43,924 16.2 13.0 9.0 5.9 4.0 0.3 3.3 0.2 16.5 12.8 3.4 0.3 -0.1 2.6 10,02,710 7,85,046 5,47,368 3,63,511 2,37,678 12,989 2,17,664 4,906 10,34,426 8,22,104 1,98,599 13,723 37,058 1,97,186 16.3 12.7 8.9 5.9 3.9 0.2 3.5 0.1 16.8 13.3 3.2 0.2 0.6 3.2 8,039 8,904 7,579 5,53,427 5,61,682 6,57,281 4,02,670 4,38,034 5,05,699 1,34,235 1,09,224 1,37,793 16,522 14,424 13,789 39,158 7,012 -24,856 1,07,774 90,084 77,508 (As per cent of GDP) 17.4 16.1 15.7 11.2 11.6 12.4 8.0 8.3 8.7 5.6 3.2 0.3 6.2 0.2 17.1 12.4 4.1 0.5 1.2 3.3 5.7 3.4 0.3 4.4 0.2 15.2 11.8 2.9 0.4 0.2 2.4 5.9 3.7 0.3 3.3 0.2 15.3 11.8 3.2 0.3 -0.6 1.8 Source: Reserve Bank of India. * Data from 2007-08 pertains to 27 State Governments, of which two are Vote on Accounts. Notes: 1. The ratios to GDP at current market prices are based on the CSO’s National Accounts 2004-05 series. 2. Capital receipts include public accounts on a net basis. 3. Capital disbursements are exclusive of public accounts. 4. Negative (-) sign indicates surplus in deficit indicators. Figure 3.10 4 Revenue and fiscal deficit of states Gross fiscal deficit Revenue deficit Per cent of GDP 3 2 1 0 -1 -2 2008-09 (Prov) Year 2009-10 (BE) 2004-05 2005-06 2006-07 2007-08 60 Economic Survey 2009-10 model and road map for GST. The comments of Government of India on the proposed design of GST have been sent to the Empowered Committee of State Finance Ministers in January 2010. A joint group of officers has been constituted to prepare draft Constitutional bill, CGST legislation, model SGST legislation and rules required to introduce GST (Box 3. 2). from 2005 to 2009, States have been granted debt waivers for an aggregate amount of Rs 22,039.4 crore and interest relief of Rs 18,688.5 crore. VAT 3.48 VAT has been successfully introduced by all the States. The introduction of VAT by States resulted in good growth in State’s own tax revenue in the last few years. During 2008-09, growth in tax revenue in 33 VAT States/UTs was 14.4 percent in the revenue from VAT items. Under the specific scheme evolved for the purposes to facilitate introduction of VAT, the Central Government compensated the revenue losses at the rate of 100 percent of revenue loss during 2005-06, 75 percent during 2006-07 and 50 percent during 2007-08. An amount of Rs 2,558 crore has already been released to States till December 31, 2009 in the financial year 2009-10, so far. A total amount of Rs.17,364 crore has been released to the states so far under this scheme. Box 3.2 : First Discussion Paper on GST in India Design Some of the key features of the proposed model as proposed by the Discussion Paper are as follows: The GST is to have two components-Central GST and State GST—with separate rates, reflecting revenue considerations and acceptability. This dual GST model would be implemented through multiple statutes (one for the CGST and an SGST statute for every State). The Central GST and the State GST would apply to all transactions of goods and services (with some specified exceptions). The Central GST and State GST are to be paid to the accounts of the Centre and the States separately. Cross-utilization of input tax credit (ITC) between the Central GST and the State GST not to be allowed except in the case of inter-State supply of goods and services under the Inter-State Goods and Service Tax (IGST) model. Uniform State GST threshold of gross annual turnover of Rs10 lakh both for goods and services for all the States and Union Territories to be be adopted with adequate compensation for States (particularly northeastern region States and special category States) where lower threshold had prevailed in the VAT regime. Each taxpayer to be allotted a PAN-linked taxpayer identification number with a total of 13/15 digits. The proposed GST, as per the Discussion Paper, subsumes the following taxes/duties of the Centre: central excise; additional excise duties; service tax; additional and special additional customs duties; surcharges and cesses. The following State taxes and levies would also be subsumed under the GST: VAT / sales tax; entertainment tax (unless it is levied by local bodies); luxury tax; taxes on lottery, betting and gambling; State cesses and surcharges in so far as they relate to supply of goods and services; entry tax not in lieu of octroi. GST Rate Structure A two-rate structure –a lower rate for necessary items and goods of basic importance and a standard rate for goods in general—proposed with a special rate for precious metals and a list of exempted items. Exports would be zero-rated. The GST will be levied on imports with necessary Constitutional Amendments. Central sales tax reforms 3.49 Central Government in consultation with the Empowered Committee of State Finance Ministers (Empowered Committee of State Finance Ministers) chalked out the roadmap for phasing out Central Sales Tax (CST) to coincide with the introduction of the proposed GST, which included the critical component of compensating the States for 5the resultant revenue losses. The scheme finalized in consultation with the Empowered Committee of Stats provides for new revenue generating measures for States as the primary source of compensation. It also provides for meeting 100 percent of the residuary losses to a State, if any, thereafter, through the budgetary resources of the Centre. An amount of Rs.5,979 crore has been released to the States till December 31, 2009 in financial year 2009-10. A total amount of Rs.10,098 crore has been released to the States so far on account of CST compensation claims of States for financial years 2007-08 and 200809. GST 3.50 In the Budget for 2007-08, an announcement was made to the effect that GST would be introduced from April 1, 2010, and that the Empowered Committee of State Finance Ministers would work with the Central Government to prepare a road map for introduction of GST. The Empowered Committee of State Finance Ministers prepared a report on a Fiscal Developments and Public Finance 61 CONSOLIDATED GENERAL GOVERNMENT 3.51 The full picture of public finances and their impact on the macroeconomy is best analysed through the levels of deficits in the consolidated General Government. As a proportion of the GDP, revenue receipts of the consolidated General Government rose from a level of 19.0 per cent in 2004-05 to reach a level of 21.2 per cent in 200708. They were budgeted at 20.5 per cent in 200910(BE). With total disbursements remaining at more or less the same levels in four years ending 2007-08, the combined revenue and fiscal deficit came down (Table 3.12). In fact the combined levels of deficit were much lower than the levels (sum of Centre and States) mandated by the FRBMA and State-level FRLs. Reflecting the overall expansion Table 3.12 : Receipts and disbursements of consolidated General Government 2004-05 2005-06 2006-07 2007-08 2008-09 (RE) 2009-10 (BE) (Rs 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 8,88,345 10,14,689 11,25,499 13,11,589 16,42,815 18,39,239 6,15,644 4,92,481 1,23,163 19,223 2,72,701 4,424 14,968 8,69,757 7,30,405 1,13,304 26,048 1,14,761 2,34,721 27.4 19.0 15.2 3.8 0.6 8.4 0.1 0.5 26.9 22.5 3.5 0.8 3.5 7.2 7,07,054 5,76,596 1,30,458 18,735 3,07,635 1,590 11,651 8,06,366 1,32,585 20,904 99,312 2,39,560 27.4 19.1 15.6 3.5 0.5 8.3 0.0 0.3 25.9 21.8 3.6 0.6 2.7 6.5 8,77,075 10,48,406 11,66,470 12,65,947 7,24,023 1,53,052 21,744 2,48,424 2,440 -773 8,73,779 1,74,627 22,590 2,63,183 45,750 4,710 9,65,102 10,21,585 2,01,368 2,44,362 23,738 20,614 4,76,345 5,73,292 7,881 13,238 3,336 6,582 9,59,855 11,09,174 12,95,903 16,59,109 18,70,955 9,32,441 10,57,569 14,00,408 15,85,740 1,57,316 19,417 55,366 2,30,432 26.3 20.5 16.9 3.6 0.5 5.8 0.1 0.0 25.9 21.8 3.7 0.5 1.3 5.4 2,19,853 18,481 9,163 1,97,037 26.5 21.2 17.7 3.5 0.5 5.3 0.9 0.1 26.2 21.4 4.4 0.4 0.2 4.0 2,34,906 2,64,796 23,795 20,419 2,33,938 3,19,793 4,71,520 5,95,090 29.5 20.9 17.3 3.6 0.4 8.5 0.1 0.2 29.8 25.1 4.2 0.4 4.2 8.5 29.8 20.5 16.6 4.0 0.3 9.3 0.1 0.1 30.4 25.7 4.3 0.3 5.2 9.7 (As per cent of GDP) Source : Reserve Bank of India. Note : The ratios to GDP at current market prices are based on CSO’s National Accounts 2004-05 series. 62 Economic Survey 2009-10 Figure 3.11 12 Combined (centre and states) revenue and fiscal deficit Gross Fiscal Deficit Revenue Deficit Per cent of GDP 10 8 6 4 2 0 2004-05 2005-06 2006-07 2007-08 2008-09 (Prov) 2009-10(BE) Year to stimulate demand, fiscal and revenue deficit for 2009-10 (BE) is placed at 9.7 and 5.2 per cent of the GDP (Figure 3.11). OUTLOOK 3.52 Based on the trends available for AprilDecember 2009, there is likely to be a shortfall in revenue receipts on account of the large decline in indirect taxes like customs and excise and the likely lower-than-budgeted non-tax revenues. With some expenditure restraint, as a proportion of the GDP, it might still be possible to contain the deficit at budgeted levels. While the current year’s performance is relevant mainly in the context of fiscal marksmanship given the expansionary stance, it is the medium-term prospect that is really important. The largely structural nature of fiscal deficits in India, the levels of recovery in the economy and the sustainability of the recovery without fiscal stimulus call for resumption of the process of fiscal consolidation in a gradual manner. The Report of the Thirteenth Finance commission has provided an assessment of the state of public finances and the broad direction of fiscal consolidation by the Centre and States. Going forward, the nature of the fiscal consolidation – whether it should rely on revenue growth, which is in turn linked to the growth recovery, or on greater expenditure cuts— are important in the traditional incremental adjustment process; but lasting fiscal consolidation could accrue with reforms in the design and delivery of Plan schemes, outcome focus of expenditure and institutional reforms. Prices and Monetary Management The movements in the rate of inflation reflect changes in demand and supply conditions in the economy. Inflation management therefore, involves controlling the demand situation as well as reining in inflationary expectations through various monetary measures. On the supply side it would encompass various administrative and fiscal measures. The first half of the financial year 2008-09 was marked by high wholesale price index (WPI)-based inflation, primarily due to the rise in global commodity and fuel prices. The subsequent global economic meltdown starting September 2008 reversed the trend and WPI inflation slipped into negative territory during June to August 2009. This was due to the decline in commodity prices globally and the base effect. As regards food inflation, the upswing noticed in the first quarter of 2008-09, continued during 2009-10 due to unfavourable south-west monsoon, the worst since 1972. Though the current spectre of double-digit inflation in food articles is ascribable to supply-side constraints, it is necessary to ensure that the monetary policy stance does not lead to pressure on prices. The RBI has, therefore, initiated calibrated changes in rates to mop up the prevalent excess liquidity in the system through the second and third quarter reviews wherein increases in statutory liquidity ratio (SLR) and cash reserve ratio (CRR) respectively were announced. Suitable fiscal and administrative measures are also being taken by the Government to contain the food price inflation and preventing it from spilling over to generalised inflation. CHAPTER 4 PRICES 4.2 Monthly changes in headline inflation, yearon-year, measured in terms of the wholesale price index (WPI) exhibited significant volatility during financial year 2008-09 and varied from 1.20 per cent in March 2009 to 12.82 per cent in August 2008. The volatility continues during the current financial year (2009-10). There is, however, fundamental difference in the reasons for volatility observed last year and those seen this year. The volatility observed in the first half of 2008-09 was due to increasing international fuel and commodity prices which pushed WPI inflation to a high of 12.8 per cent. The subsequent decline in WPI inflation in the second half of 2008-09 was due to falling international fuel and commodity prices. International fuel and commodity prices stabilized in the first half of 200910 but at a relatively lower level than in the corresponding period of the last year. WPI inflation, however, continued to fall during the first half of 200910 due to the high base achieved last year during this period, and moved to negative zone from July to August 2009. From September, 2009 onwards WPI inflation has been rising at a very fast clip largely because of increase in the prices of food items, both primary and manufactured, and nonfood agricultural items. Apprehensions of shortages in agricultural production due to a deficient southwest monsoon this year are mainly responsible for increasing inflation. Average food inflation which was 7.56 per cent during fiscal 2008-09 increased to 13.54 per cent in the period April to December 2009. Overall food inflation in December 2009 was 19.77 per cent. However, it appears to have reached its peak in December 2009 and is expected to moderate herefrom and also stabilize overall WPI on account of the likely impact of several measures 64 Economic Survey 2009-10 taken by the Government to contain food price inflation. Recent monthly trends in WPI inflation 4.4 Based on rising international fuel and commodity prices and high domestic demand, inflation in the fuel and manufactured groups started accelerating from November 2007. The year 200809 started with 8.0 per cent WPI inflation, reached a peak of 12.8 per cent in August 2008 and declined thereafter due to falling international commodity prices. The year 2009-10 started with a low headline WPI inflation of 1.3 per cent in April 2009, which moved into the negative zone during June to August 2009 and was reported to be 7.31 per cent in December 2009 (Table 4.2). The increase in overall inflation since September 2009 is primarily due to rise in prices of primary articles, particularly food items, due to a deficient monsoon and expectations of shortage. Lately, a rising trend in food prices has also been observed in the global market, particularly in prices of sugar, palm oil, soyabean and tea. Average annual trends in WPI inflation 4.3 The years of relatively high average annual inflation, above 5.5 per cent, in this decade have been 2000-01, 2004-05 and 2008-09. All these were years of high fuel prices. The year 2004-05, however, also witnessed high inflation in manufactured products because of high growth in the gross domestic product (GDP) in this sector leading to high demand and 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 earlier two years as high inflation was witnessed in all the three sectors primarily because of high international fuel and commodity prices including of food items, reflective of gradual linking of the Indian economy with the world (Table 4.1). The year 200910 is totally out of sync with the trends seen in earlier years with overall average inflation (April to December) being low at 1.63 per cent and average inflation in the primary and fuel groups being 8.78 per cent and - 6.35 per cent respectively. Disaggregated analysis of WPI average inflation 4.5 Each major group in the WPI commodity basket is further disaggregated on the basis of use. Analysis at this level has assumed importance in Table 4.1 : Annual average inflation rate based WPI (per cent) Year Weights (%) 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2008-09(Apr.-Dec.) 2009-10(Apr.-Dec.)P Primary articles 22.02 2.8 3.6 3.3 4.3 3.7 2.9 7.9 7.6 10.1 10.93 8.78 Fuel, power, light & lubri. 14.23 28.5 8.9 5.5 6.4 10.1 9.5 5.6 0.9 7.5 11.32 -6.35 Manufactured products 63.75 3.3 1.8 2.6 5.7 6.3 3.1 4.4 5.0 8.1 9.47 1.77 All commodities 100.00 7.2 3.6 3.4 5.5 6.5 4.4 5.4 4.7 8.4 10.20 1.63 Source : Department of Industrial Policy & Promotion. P : Provisional. Table 4.2 : WPI inflation during 2008-09 and 2009-10 (per cent) Apr. 2008-09 2009-10 8.0 1.3 May 8.9 1.4 Jun. 11.8 -1.0 Jul. 12.4 -0.5 Aug. 12.8 -0.2 Sep. 12.3 0.5 Oct. 11.1 1.5 Nov. 8.5 4.8 Dec. 6.2 7.3 Jan. 4.9 Feb. 3.5 Mar. 1.2 Source : Department of Industrial Policy & Promotion. Note: WPI is provisional for November and December 2009. Prices and Monetary Management view of the fact that the current phase of relatively high inflation is concentrated in food items which is a subset of the primary group. Table 4.3 provides trends in disaggregated annual inflation at sub-sector level based on use. The high food inflation during the current financial year, both in the primary and manufactured groups, is marked. Another apparent fact that emerges is the relatively high inflation observed during the last five years in the minerals group. This indicates a demand-supply mismatch in the mining sector fuelled by rise in international prices of minerals and high growth rates achieved. The moderation in prices in this sector during the current financial year is because of the slowdown in domestic and international demand. 65 Food Inflation 4.6 For purposes of computing the food index, the components of food articles in the primary articles group and manufactured food products in the manufactured products group are clubbed. The overall weight of the composite food index in the WPI is 25.43 per cent, which comprises primary food articles with a weight of 15.40 per cent and manufactured food products with a weight of 10.03 per cent (after adjusting for oil cakes, weight= 1.42 per cent, and cattle feed, weight= 0.01per cent). A quarter-wise analysis of food inflation in the current WPI series (Base Year 1993-94=100), during the last 15 years, reveals that before the current spell of high food inflation, there were two earlier episodes in the fourth quarter (Q4) of 1996-97 (13.6 per cent) and third quarter Q3 of 1998-99 (17.1 per cent). The high inflation in 1996-97 was due to increase in prices of rice, wheat, gram and fruits & vegetables. High fuel prices in the international market also contributed to the higher food prices by increasing transportation costs. The spike in food prices in 1998-99 was in the aftermath of implementation of the Fourth Pay Commission recommendations leading to a demand-supply gap. During this year, High inflation was reported in the case of onions and potatoes among vegetables, pulses, rice and wheat. Among manufactured products high prices were reported in the case of edible oils but sugar prices were stable. The current spell of high food Table 4.3 : Annual average inflation by major heads in WPI (per cent) Commodities All Commodities I Primary Articles A. Food Articles B. Non-Food Articles C Minerals II Fuel, Power, Light & Lubricants A. Coal Mining B. Minerals Oils C. Electricity III Manufactured Products A. Food Products B. Beverages, Tobacco & its Products C. Textiles D. Wood & Wood Products E. Paper & Paper Products F. Leather & Leather Products G. Rubber & Plastic Products H. Chemicals & their Products I. Non-Metallic Mineral Products J. Basic Metal Alloys & Products K. Machinery & Machine Tools L. Transport Equipment & Parts Weight (%) 200405 200506 4.43 2.87 4.83 -4.48 26.54 9.49 3.72 13.93 4.07 3.07 1.09 4.85 -4.50 8.41 2.23 7.13 3.42 3.58 7.80 7.43 5.14 3.63 200607 5.42 7.85 7.78 5.14 28.13 5.61 0.00 7.87 3.15 4.43 3.22 7.36 2.16 6.01 6.83 -4.38 6.61 3.03 12.82 6.82 5.56 1.56 200708 4.66 7.61 5.46 12.64 13.20 0.93 2.68 0.95 0.48 4.97 4.27 10.27 -0.98 4.65 1.84 4.14 7.15 5.57 8.86 6.86 7.07 2.71 20082008200909 09(Apr.- 10 (Apr.Dec.) Dec.)P 8.39 10.06 8.02 11.17 34.90 7.46 6.60 11.08 1.06 8.09 10.04 9.50 5.95 8.34 4.38 1.08 4.66 7.23 3.74 14.44 4.74 5.22 10.20 10.93 7.57 14.24 45.53 11.32 9.08 17.17 1.40 9.47 10.59 9.53 4.96 8.30 4.23 0.83 5.47 8.85 4.32 19.65 5.44 6.09 1.63 8.78 13.31 0.43 -5.51 -6.35 -0.91 -10.12 -0.08 1.77 15.49 5.25 4.18 1.62 1.04 -0.99 1.79 3.20 3.27 -12.67 -1.34 0.05 100.00 6.48 22.03 3.69 15.40 2.70 6.14 0.70 0.48 110.31 14.23 10.14 1.75 15.34 6.99 15.17 5.48 1.73 63.75 6.26 11.54 4.98 1.34 5.26 9.80 3.04 0.17 0.06 2.04 0.75 1.02 5.99 2.39 -0.37 11.93 2.54 2.52 6.34 8.34 21.16 8.36 5.65 4.29 4.68 Source: Department of Industrial Policy & Promotion. P: Provisional. 66 Economic Survey 2009-10 Figure 4.1 18 16 14 12 10 8 6 4 2 0 -2 Trends in quarterly WPI inflation (per cent) WPI all commodities WPI total food items Inflation (Per cent) 1995-96 1996-97 1997-98 1998-99 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 1999-2000 Year inflation is across board for all food items except edible oils (Figure 4.1). Specifically, very high inflation can be observed in the case of sugar, pulses, vegetable & fruits and cereals. declining after reaching its peak in July 2009. (Figure 4.2) Food inflation in CPIs and WPI 4.8 Food inflation based on WPI and CPIs has been rising since April 2009 (Table 4.5) and does not reflect any significant divergence (Figure 4.3). Annual inflation as per different price indices 4.7 Inflation measured in terms of the consumer price indices (CPIs), has remained higher than WPI inflation in the last 14 months (November 2008December 2009) (Table 4.4). The divergence between the WPI and CPI (IW) still continues but is Main drivers of inflation 4.9 Besides the commodity-wise figures, the weight contributions of different commodities to total inflation also give an indication of the drivers of Table 4.4 : Annual inflation as per different price indices (per cent) Month 200809 April May June July August September October November December January February March Average 8.0 8.9 11.8 12.4 12.8 12.3 11.1 8.5 6.1 5.0 3.5 1.2 8.4 WPI 200910 1.3 1.4 -1.0 -0.5 -0.2 0.5 1.5 4.8 P 7.3 P CPI-IW 200809 7.8 7.8 7.7 8.3 9.0 9.8 10.4 10.4 9.7 10.4 9.6 8.0 9.1 200910 8.7 8.6 9.3 11.9 11.7 11.6 11.5 13.5 15.0 CPI-UNME 200809 7.0 6.8 7.3 7.4 8.5 9.5 10.4 10.8 9.8 10.4 9.9 9.3 8.9 200910 8.8 9.7 9.6 13.0 12.9 12.4 12.0 13.9 CPI-AL 200809 8.9 9.1 8.8 9.4 10.3 11.0 11.1 11.1 11.1 11.6 10.8 9.5 10.2 200910 9.1 10.2 11.5 12.9 12.9 13.2 13.7 15.7 17.2 CPI-RL 200809 8.6 8.8 8.7 9.4 10.3 11.0 11.1 11.1 11.1 11.4 10.8 9.7 10.2 200910 9.1 10.2 11.3 12.7 12.7 13.0 13.5 15.7 17.0 Source : Department of Industrial Policy and Promotion, Labour Bureau and Central Statistical Organization (CSO). P : Provisional. IW: Industrial Workers, UNME: Urban Non-Manual Employees, AL: Agricultural Labourer, RL: Rural Labour 2009-10 Prices and Monetary Management Figure 4.2 18 16 WPI CPI-IW CPI-RL 14 12 10 8 6 4 2 0 -2 Oct Nov May May Dec Mar Aug Aug Dec Oct Nov Jun Jul Feb Jul Sep Sep Jan Jun Apr Apr 67 Trends in inflation based on WPI and CPIs Inflation (Per cent) 2008-09 2009-10 Year Table 4.5 : Food inflation based on WPI, CPI-IW and CPI-AL/RL (per cent) Weight (%) Food (CPI_IW) Food (CPI_AL) Food (CPI_RL) Food (WPI) 46.20 69.15 66.77 25.43 Apr. 2009 10.42 9.09 9.09 9.04 May 2009 11.72 11.16 11.16 9.56 Jun. 2009 12.24 12.44 12.44 10.80 Jul. 2009 14.67 13.96 14.22 12.67 Aug. 2009 13.73 14.13 14.13 13.32 Sep. 2009 13.55 14.63 14.63 14.67 Oct. 2009 13.84 15.33 15.33 14.24 Nov. 2009 17.61 18.14 18.14 17.78P Dec. 2009 21.29 20.22 20.43 19.77P Source : Department of Industrial Policy and Promotion, Labour Bureau P : Provisional Figure 4.3 24 22 20 18 16 14 12 10 8 6 4 Trends in food inflation in WPI, CPI-IW and CPI-RL WPI (Total food) CPI-IW (Food) CPI-RL (Food) Inflation (Per cent) Oct May Oct Jul Nov May Dec Mar Aug 2008-09 2009-10 Year inflation. In December 2009, thirty essential commodities with a weight of 17.63 per cent and annual inflation of 21.89 per cent contributed 51.88 per cent to overall inflation. Food combined (comprising primary and manufactured food) with a weight of 25.43 per cent and annual inflation of 19.77 per cent contributed 66.56 per cent towards overall inflation. Table 4.6 identifies items which have contributed significantly towards overall inflation in December 2009. These are rice, wheat, pulses, vegetables and fruits, milk, fish and meat and tea in primary articles; non-administered mineral oils in the fuel group; and sugar/gur and oil cakes in manufactured products. Aug Dec Jul Nov Jan Feb Jun Jun Sep Sep Apr Apr 68 Economic Survey 2009-10 Table 4.6 : Weighted contribution and inflation in WPI (per cent) Weight (%) All Commodities Primary Articles Food combind Food Articles Food MP Essential Commodities Rice Wheat Pulses Vegetables Potatoes Onions Fruits Milk Eggs,Meat & Fish Tea Fuel and Power Rest mineral oils Manufactured Products Food Products Sugar Gur Oil Cakes 100.00 22.02 25.43 15.40 10.03 17.63 2.45 1.38 0.60 1.46 0.26 0.09 1.46 4.37 2.21 0.16 14.23 1.55 63.75 11.54 3.62 0.06 1.42 Weighted contribution Oct-09 100.00 137.15 232.53 140.38 92.14 209.39 21.48 8.78 11.44 7.67 17.60 2.03 7.21 28.70 36.96 0.29 -100.02 -66.59 60.11 117.69 76.82 1.40 25.52 Nov-09 P Inflation P Dec-09 Oct-09 1.46 8.67 14.24 12.99 16.68 18.53 14.29 9.31 25.08 7.06 98.60 33.10 5.90 10.03 23.37 2.96 -6.66 -21.96 1.60 17.33 46.26 40.02 21.14 Nov-09P 4.78 11.84 17.78 16.71 19.88 21.15 12.95 12.66 35.22 16.92 101.58 32.41 10.64 11.49 29.75 15.30 -0.89 9.53 3.99 24.70 53.76 32.60 50.39 Dec-09P 7.31 14.88 19.77 19.17 20.93 21.89 12.33 12.04 41.58 39.22 123.85 27.41 9.83 13.36 27.16 21.45 4.29 38.18 5.17 26.40 53.98 37.23 56.87 100.00 58.39 90.68 56.52 34.16 75.00 6.19 3.74 5.04 5.98 5.60 0.70 3.96 10.33 14.55 0.43 -3.94 6.46 46.10 51.30 27.95 0.37 17.14 100.00 48.23 66.56 42.54 24.02 51.88 3.99 2.39 3.95 7.28 3.70 0.42 2.43 8.06 9.03 0.37 12.03 13.77 39.46 36.33 18.72 0.28 12.31 Source : Department of Industrial Policy & Promotion. P : Provisions Sugar 4.10 Sugar production in India is cyclical in nature. Two to three years of high production are followed by two to three years of low production. The estimated area under sugarcane and sugarcane production fell significantly from the 2007-08 sugar crop year to 2009-10 sugar crop year (first advance estimates). Sugar production fell from 263 lakh tonnes in the 2007-08 sugar season to 146 lakh tonnes in the 2008-09 sugar season (provisional). Further, in years of shortage of sugarcane, the amount of cane available for crushing by sugar mills (termed drawl rate) is much lower with higher levels of diversion for other uses like production of gur and khandsari sugar. The sugar industry is envisaging production of 160 lakh tonnes in the 2009-10 sugar season. The estimated demand for the 2009-10 sugar season is 230 lakh tonnes. Domestic production may meet only about two-thirds this demand. This is putting tremendous pressure on sugar prices. Further, based on expectations of large sugar imports by India, international sugar prices are also hardening in recent months. This is also influencing sugar prices in India. Table 4.7 provides monthly changes in the sugar price index which shows monthly as well as annual fluctuations in sugar prices. Pulses 4.11 India has been a net importer of pulses. Domestic production of pulses has been around 14-14.8 million tonnes during the last three years while the demand is estimated at around 17-18 million tonnes. The gap between demand and supply is met by import of a variety of pulses from different countries depending upon their availability. In view of limited sources for different varieties of pulses, domestic prices fluctuate according to availability and prices in the international market. Kharif pulse production reached a peak in 2007-08 at 6.4 million tonnes and declined to 4.78 million tonnes in 200809 (fourth advance estimates). In 2009-10 it is estimated to further fall to 4.42 million tonnes (first advance estimates). Apprehensions of shortages Prices and Monetary Management Table 4.7 : Sugar (weight: 3.62 per cent ): month-on-month percentage change in the WPI Month Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan. Feb. Mar. Total (Apr.-Mar.) Apr.-Dec. 1996-97 1997-98 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 0.54 1.35 1.77 -1.39 1.41 -0.61 -1.57 3.11 3.10 -0.08 1.42 5.03 14.08 7.71 1.26 2.33 0.76 0.53 0.07 0.82 0.15 0.22 0.07 -0.44 -0.07 -0.22 5.47 6.21 0.70 0.17 0.69 3.88 4.81 0.24 0.79 0.16 -1.41 -1.35 8.13 -0.60 16.22 10.04 0.22 4.56 0.93 -0.14 2.27 2.77 -0.54 0.07 1.49 8.54 -1.35 0.37 19.19 11.63 -0.25 -0.75 -0.69 1.96 1.24 -0.67 0.43 1.17 -1.21 2.09 4.27 -0.87 6.71 1.22 0.00 0.81 -0.06 -0.92 -0.58 -0.94 -1.42 -1.08 -2.00 -3.90 -1.87 -1.97 -13.93 -6.19 -0.74 -2.97 -1.88 -0.14 -0.50 0.71 0.21 -0.42 -0.21 1.85 0.84 1.73 -1.51 -5.93 1.84 -0.33 -0.67 1.15 5.67 1.45 0.00 0.19 0.06 3.98 7.05 0.61 21.00 9.36 69 2009-10 5.99 2.46 3.06 0.35 7.31 7.23 0.82 5.32P 0.20P 32.73P Source : Department of Industrial Policy and Promotion P : Provisions may be the reason for high inflation in pulses. The progress in sowing of rabi pulses during the current crop year has so far been quite encouraging. A significant increase of about 7.806 lakh ha in the area under pulses (on February 4, 2010 compared to February 4, 2009) is expected to help in dampening prices. Wheat 4.13 In rabi marketing season (RMS) 2009-10 a total of 25.38 million tonnes of wheat has been procured as against 22.69 million tonnes in RMS 2008-09. The year is expected to end with sufficient stocks--more than the buffer norms. Further, the progress of wheat sowing in the rabi season during the current crop year (2009-10) has so far been quite encouraging. The area under wheat is estimated to increase by 1.71 lakh ha from 275.87 lakh ha on February 4, 2009 to 277.58 lakh ha on February 4,2010. Expectation of a better wheat harvest is likely to moderate wheat prices. Rice 4.12 According to first advance estimates released by the Ministry of Agriculture, rice production in the 2009-10 kharif marketing season (KMS) is 71.65 million tonnes. The production target in the rabi season is 14.5 million tonnes. Thus the total production of rice in 2009-10 is estimated at 86.15 million tonnes. Rice production in 2008-09 was 99.15 million tonnes (fourth advance estimates). Lower production by about 12.93 million tonnes may be the reason for the current phase of inflation in rice. However, market arrivals of paddy in Punjab and Haryana this year are higher than the market arrivals during the corresponding period last year. Rice procurement in the present marketing season as on February 3, 2010 has touched 20.14 million tonnes. This is only 3 per cent lower than last year’s procurement as of date despite severe drought in the kharif season this year. Punjab has contributed 9.27 million tonnes followed by Chhattisgarh 2.51 million tonnes, Andhra Pradesh 2.12 million tonnes, Uttar Pradesh 2.11 million tonnes, Haryana 1.81 million tonnes and Orissa 1.05 million tonnes. These developments are expected to contain inflation in rice in the coming months. Vegetables 4.14 Average WPI inflation in vegetables (weight:1.46 per cent in the WPI) from April to December 2009 was more than 52 per cent, which is significantly higher than the 9 per cent recorded during the same period last year. Month-on- month changes in the WPI index for vegetables displayed a relatively high increase in the months of April, June, July and November 2009. Potatoes, onions, tapioca, tomatoes, peas green and brinjal were the highest contributors to the inflation in vegetables. The increase in vegetable prices could be attributed to the failure of monsoon followed by floods in some of the southern states. With the arrival of the winter crop, vegetable prices have started to moderate and are expected to further fall. Table 4.8 gives month-on- month changes in the WPI index for vegetables. 70 Economic Survey 2009-10 Table 4.8 : Vegetables (weight: 1.46 per cent ): Month-on-month percentage change in the WPI Month Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan. Feb. Mar. Total (Apr.-Mar.) Apr.-Dec. 1996-97 1998-99 2001-02 2004-05 2005-06 2006-07 2007-08 2008-09 35.44 6.50 8.84 0.53 12.34 -5.90 0.87 1.60 0.12 -16.65 0.22 -9.71 34.20 60.34 22.90 7.58 19.95 6.01 -4.17 4.22 25.22 3.68 -23.96 -42.81 -24.85 5.17 -1.06 61.42 25.38 12.22 12.85 14.25 3.53 -14.89 7.19 6.65 -10.33 -22.39 -10.36 6.95 31.04 56.84 33.28 7.72 9.36 -1.74 11.57 -9.59 14.56 -8.38 -26.42 -8.84 -4.77 7.96 24.69 30.35 29.48 3.64 3.95 16.64 -5.39 0.00 7.13 4.42 -17.46 -10.06 -17.46 -0.63 14.27 42.42 20.87 3.14 22.49 0.18 -3.67 4.15 4.12 -4.84 -11.55 -4.34 -8.08 5.76 28.24 34.89 20.56 3.59 6.25 15.66 -1.65 -3.61 -10.69 -5.71 -8.90 -5.99 -2.78 11.78 18.52 15.51 11.13 -0.93 7.61 8.02 -5.39 2.56 3.45 3.99 -21.13 0.75 -10.21 -0.62 -0.76 9.32 52.35P 2009-10 36.56 3.01 10.72 13.29 -10.67 -3.56 -4.48 13.57P -6.09P Source : Department of Industrial Policy and Promotion. P : Provisions Milk 4.15 There is no apparent shortage of milk in the market. However, one of the reasons for increase in inflation in milk and milk products could be inflation in coarse cereals and oil cakes, which is used as feed for animals. Tea 4.16 There is shortfall in production of tea in India and other tea-producing countries. WPI-based domestic inflation in tea is 21 per cent in December 2009. The price of tea in the international market in December 2009 has risen by about 55 per cent over the price in the same month last year. WPI inflation in this group was negative in October 2009 and has moved to the positive zone from November 2009 and is currently at 38.2 per cent. Its weighted contribution to overall inflation is much higher than its weight in the commodity basket and therefore makes it a commodity to watch. Average international crude oil prices increased from 44.11$/ bbl in January-March 2009 to 75.5$/bbl in OctoberDecember 2009. This contributed to increase in inflation in non- administered petro products. World food inflation 4.18 A comparison of the food index published by the World Bank and WPI-based domestic food inflation reveals that since April 2008 world food prices reflected much higher volatility compared to the WPI food index (Figure 4.4). Further, Non-administered petro products 4.17 The inflation in non-administered petro products is linked to international crude oil prices. Figure 4.4 Inflation (Per cent) 80 60 40 20 0 -20 -40 Oct International and domestic food inflation World food WPI (domestic food) May Oct Jul Nov May Dec Mar Aug 2008-09 2009-10 Year Aug Dec Jul Nov Jan Feb Jun Jun Sep Sep Apr Apr Prices and Monetary Management Table 4.9 : WPI based domestic year-on-year inflation (per cent) Period Energy Non- Agri- Beveenergy culture rages ommodities 6.81 5.41 3.17 3.21 3.43 2.32 2.29 2.44 2.91 3.75 9.79 5.14 6.71 6.91 7.74 9.03 9.08 9.08 9.35 8.91 9.34 Food Fats Grains Other Raw and food mateoils rials 0.60 11.25 32.73 -3.01 13.14 25.52 -6.96 11.61 20.37 -4.05 11.92 15.66 -2.14 14.14 36.27 -7.85 14.39 26.50 -9.38 13.90 18.88 -7.29 14.19 13.90 -5.59 16.10 -3.93 14.75 7.19 4.83 71 Tim- Other Fertil Metals ber raw -izers and mateMinerials rals 0.19 -2.69 8.38 8.54 5.43 9.54 1.88 -7.47 Jan. 2009 Feb. 2009 Mar. 2009 Apr. 2009 May 2009 Jun. 2009 Jul. 2009 Aug. 2009 Sep. 2009 Oct. 2009 Nov. 2009P Dec. 2009P -1.70 -3.40 -6.00 -5.69 -6.14 -12.53 -10.37 -9.26 -8.18 -6.66 -0.89 4.29 9.37 9.32 8.07 9.98 10.05 1.76 0.56 1.86 -2.20 -5.18 -4.22 -3.57 -0.66 1.17 5.62 7.69 7.32 10.08 7.74 -12.90 3.57 -15.77 0.25 -18.08 0.25 -18.69 0.25 -17.04 0.25 -16.76 0.25 -14.47 0.25 0.25 -6.18 -2.31 5.88 10.14 5.60 10.62 5.99 11.13 5.45 12.36 5.14 12.98 4.75 13.75 4.75 14.67 4.47 19.75 5.29 21.94 2.55 10.05 -16.35 4.03 -12.11 -0.60 -12.19 -1.46 -13.95 -3.19 -15.03 -3.03 -13.46 -2.68 -12.74 -2.28 -11.68 -2.03 -3.52 -8.28 -6.93 6.30 12.61 8.09 16.01 -1.38 16.46 12.50 0.18 16.86 16.30 Source : Department of Industrial Policy and Promotion. P : Provisions Note : Catagorisation of WPI items/groups as compared to items stock groups in the world Bank Inksheet. used in Table 4.10 (Figures in brackets are items/groups in WPI basket): Energy (Fuel group); Non Energy Commodities (All commodities excluding energy); Agriculture (Food Articles and Non-Food Articles); Beverages (Beverages, Tobacco & Tobacco Products); Food (Food Articles and Food Products); Fats and Oils (Edible Oils, Butter and Ghee); Grains (Cereals and Pulses); Other Food (Other Food Articles); Raw Materials (Non-Food Articles and Minerals); Timber (Wood & Wood Products); Other Raw Materials (Naphtha and Basic Metals Alloys & Metals Products); Fertilizers (Fertilizers); Metals and Minerals (Basic Metals, Alloys & Metals Products and Minerals) a higher volatility was seen in the international market in almost all commodity groups compared to the domestic market in India (Tables 4.9 and 4.10). Table 4.10 : Inflation in world commodity price indices (per cent) Period Energy Non- Agri- Beveenergy culture rages ommodities Food Fats Grains Other Raw and food mateoils rials -7.57 -0.79 -19.25 -5.15 -23.94 Tim- Other Fertil Metals ber raw -izers and mateMinerials rals 4.08 -33.60 14.39 -37.75 -1.71 -37.50 -4.71 -42.46 -6.28 -38.52 -26.80 -42.95 -5.99 -33.79 -53.57 -34.49 -9.27 -38.49 -55.93 -36.04 -9.50 -22.76 -68.29 -21.27 -9.44 -17.97 -68.09 -16.97 -7.18 18.25 -59.72 4.10 -7.83 39.49 -52.05 23.12 -9.21 87.74 -41.70 42.79 Jan. 2009 Feb. 2009 Mar. 2009 Apr. 2009 May 2009 Jun. 2009 Jul. 2009 Aug. 2009 Sep. 2009 Oct-. 2009 Nov. 2009 Dec. 2009 -45.48 -23.64 -16.56 -51.58 -30.29 -23.60 -52.87 -32.04 -25.79 -52.31 -29.14 -22.00 -48.37 -31.14 -24.55 -52.48 -32.31 -26.17 -39.69 -22.70 -15.67 -35.07 -19.00 -11.59 -6.15 0.74 3.41 -19.07 -33.25 -7.26 -26.35 -38.60 -20.59 -5.53 -29.51 -33.62 -36.31 -4.97 -24.33 -26.81 -31.51 -7.92 -26.27 -30.98 -30.42 -0.06 -17.84 -17.95 -31.87 -52.00 -34.12 -28.39 -13.24 -31.61 -43.36 -26.51 -11.64 -26.16 -7.19 -23.27 -8.66 -27.96 2.03 -17.86 6.80 -8.67 -24.11 -11.08 -32.60 -45.23 -38.33 -8.10 -28.90 -34.68 -33.02 -10.17 -27.35 -14.23 -34.92 -61.46 -34.86 7.77 -14.17 -15.06 -31.78 12.90 -14.74 5.40 10.90 -14.37 22.27 -0.02 25.65 16.77 5.02 29.63 36.25 9.13 32.28 26.21 14.78 20.09 41.26 17.13 25.37 55.23 27.65 28.22 37.30 23.49 34.59 Source : World bank pink sheet. 72 Economic Survey 2009-10 dwelling and business services (in the financial sector) in overall GDP has increased from 8.9 per cent in 2004-05 to 9.2 per cent in 2008-09 (quick estimates). Both these sectors have grown at an average of 9.7 per cent (construction) and 9.6 per cent (real estate, ownership of dwelling and business services) during 2004-05 to 2008-09. 4.21 The launch of the National Housing Bank (NHB) RESIDEX in India in 2007 was a maiden effort to capture the trend of price movements in residential property on a comprehensive scale. Initially 2001 was taken as the base year for the NHB RESIDEX and price movements during the period 2001-05 were captured for five cities (Bangalore, Bhopal, Delhi, Kolkata and Mumbai). Subsequently, based on data from the housing finance companies (HFCs) and National Council of Applied Economic Research (NCAER) the NHB RESIDEX was updated for two years, 2006 and 2007. 4.22 The NHB RESIDEX has now been expanded to fifteen cities, namely Bangalore, Bhopal, Delhi, Kolkata, Mumbai, Ahmedabad, Faridabad, Chennai, Kochi, Hyderabad, Jaipur, Patna, Lucknow, Pune and Surat and updated up to December 2008 with 2007 as the new base year. From 2008 the NHB Inflation: Private Final Consumption Expenditure (PFCE) Deflator versus WPI and CPI-IW 4.19 The PFCE measures the average change over time in the price paid for all consumer purchases. For this reason, the PFCE deflator measures changes in the cost of living, and because it measures the price paid for all consumer purchases, versus just a basket of goods, it is considered a more accurate measure of inflation than the CPI. Table 4.11 provides annual inflation trends in PFCE deflator, based on new series of data released by the CSO with 2004-05=100, and its comparison with WPI and CPI-IW inflation. PFCE-based inflation is at a lower level than CPI-IW inflation during all the four years (2005-06 to 2008-09) (Figure 4.5). Housing Price Index 4.20 The importance of the construction and real estate sector in creation of both physical and financial assets has been growing. The share of the construction sector in the GDP at constant prices (2004-05) has increased from 7.7 per cent in 200405 to 8.0 per cent in 2008-09 (quick estimates). Similarly, the share of real estate, ownership of Table 4.11 : Annual trends in PFCE deflator, WPI, and CPI-IW inflation (per cent). Year 2005-06 2006-07 2007-08 2008-09 (QE) 2009-10 (AE) PFCE deflator(Base: 2004-05) 3.2 6.0 3.6 7.0 6.4 WPI inflation(Base: 1993-94) CPI-IW inflation(Base: 2001) 4.4 5.4 4.7 8.4 1.6* 4.4 6.7 6.2 9.1 11.4* Source: Department of Industrial Policy & Promotion, CSO and Labour Bureau. QE—quick estimates; AE—advance estimates; * Average April- December Figure 4.5 Inflation (Per cent) 12 10 8 6 4 2 0 Inflation trends in PFCE-deflator, WPI and CPI-IW PFCEdeflator (Base 2004-05) WPIinflation (Base 1993-94) 2005-06 2006-07 2007-08 2008-09 2009-10 Year Note: 1.WPI and CPI-IW for 2009-10 are avarage of Apr-Dec 2009. 2.PFCE for 2008-09 is quick estimate (QE) and for 2009-10 is advanced estimate (AE) CPI-IW inflation (Base 2001) Prices and Monetary Management Table 4.12 : City-wise RESIDEX (Base 2007) Cities Delhi Bengaluru Mumbai Kolkata Bhopal Hyderabad Faridabad Patna Ahmedabad Chennai Jaipur Lucknow Pune Surat Kochi Source : National Housing Bank. 73 2007 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 2008 Jan.- June 124 73 112 114 139 96 100 103 106 104 119 103 101 101 106 2008 July- Dec. 130 76 117 140 151 92 121 100 100 95 115 102 97 98 95 2009 Jan.-June 121 58 124 159 139 65 136 107 127 120 71 104 103 111 90 RESIDEX is being updated on half-yearly basis. The last update is for the period January–June 2009. In order to make it a truly national index the intention is to extend the NHB RESIDEX to 63 cities which are covered under the Jawaharlal Nehru National Urban Renewal Mission (JNNURM). 4.23 The movement in prices of residential houses has shown a mixed trend in the 15 cities covered under the NHB RESIDEX (base 2007) (Table 4.12 and Figure 4.6 ). During the first half of 2008 (January to June), out of 15 cities, residential housing prices in 12 showed an increasing trend, 2 cities reported a declining trend and there was no change in case Figure 4.6 170 160 150 140 of 1 city over the base year (2007). In the second half of 2008 (July to December), nine cities reported a decline in prices and there was an increase in the case of six cities over the previous half year figures. The first half of 2009 (January to June), however, shows some revival in housing prices over the previous half-year period (July-December 2008) with a higher price index reported in the case of nine cities, namely Ahmedabad (27 per cent), Chennai (26 per cent), Kolkata (14 per cent), Surat (13 per cent), Faridabad (12 per cent), Patna (7 per cent), Mumbai (6 per cent), Pune (6 per cent) and Lucknow (2 per cent). During the same period, the remaining Movement in City-wise Residex (Base 2007) Base: 2007 2008 Jan-Jun Index numbers 130 120 110 100 90 80 70 60 50 Bengaluru Hyderabad Faridabad Bhopal Mumbai Chennai Delhi Kolkata Ahmedabad Jaipur Lucknow Patna Kochi Surat Pune 2008 Jul-Dec 2009 Jan-Jun 74 Economic Survey 2009-10 wheat held by the FCI in January 2010 is 47.4 million tonnes comprising 24.3 million tonnes of rice and 23.1 million tonnes of wheat. Even after keeping the minimum buffer stock (8.2 million tonnes of wheat and 11.8 million tonnes of rice in January), there are enough foodgrains to intervene in the market to keep prices at a reasonable level. A strategic reserve of 5 million tonnes of wheat and rice has also been created. This is in addition to the buffer stock held by the FCI every year. However, the Central issue price (CIP) for rice at Rs 5.65 per kg for below poverty line (BPL) and Rs 3 per kg for Antyodaya Anna Yojana (AAY) and wheat at Rs 4. 15 per kg for BPL and Rs 2 per kg for AAY since July 2002 has also been maintained to protect the interests of BPL families and AAY beneficiaries. Box 4.1 lists some of the anti-inflationary measures taken by the Government. six cities, namely, Jaipur (-38 per cent), Hyderabad (-30 per cent), Bengaluru (-24 per cent), Bhopal (-8 per cent), Delhi (-7 per cent) and Kochi (-5 per cent) showed correction in prices. Three cities, namely Hyderabad, Jaipur and Kochi have shown correction in prices both in the second half of 2008 and first half of 2009. Anti-inflationary measures 4.24 The Government has taken a number of shortand medium-term measures to improve domestic availability of essential commodities and moderate inflation. Procurement of rice as on February 3, 2010 (KMS 2009-10) is 20.14 million tonnes as against 33.60 million tonnes procured during the entire KMS 2008-09. Procurement of wheat as on November 1,(RMS 2009-10) is 25.3 million tonnes against 22.7 million tonnes last year. The total stock of rice and Box 4.1 : Measures to contain inflation, particularly food inflation (a) Monetary Measures taken by the RBI in the current fiscal year (i) The monetary policy stance for 2009-10, inter alia, has been to maintain a monetary and interest rate regime consistent with price stability and financial stability, and supportive of the growth process. (ii) The RBI in its Second Quarter Review of monetary policy on October 27, 2009 made a minor modification in the statutory liquidity ratio (SLR) and restored it to 25 per cent of net demand and time liabilities (NDTL) with effect from the fortnight beginning November 7, 2009. (iii) In the Third Quarter Review of the RBI’s monetary policy on January 29, 2010, the CRR of scheduled banks was raised by 75 basis points from 5.0 per cent to 5.75 per cent of their NDTL in two stages; the first stage of increase of 50 basis points will be effective the fortnight beginning February 13, 2010, followed by the next stage of increase of 25 basis points effective the fortnight beginning February 27, 2010 . (b) Fiscal Measures (i) Reducing import duties to zero-–for rice, wheat, pulses, edible oils (crude) and sugar; and for maize (under TRQ of 5 lakh tonnes per annum, beyond which 15per cent duty will apply); (ii) Reducing import duties on refined and hydrogenated oils and vegetable oils to 7.5 per cent; (iii) Allowing import by sugar mills of raw sugar at zero duty under open general licence (OGL) up to August 1, 2009 (notified on April 17, 2009). This has since been extended to December 31,2010. (iv) Allowing import of white/ refined sugar by STC/MMTC/PEC and NAFED up to 1 million tonnes by august 1, 2009 under OGL at zero duty (notified on April 17, 2009). This has since been extended up to March 31, 2010. Furthermore, the duty-free import of white/refined sugar under OGL has been opened to other Central/ State Government agencies and to private trade in addition to existing designated agencies. (v) Removing levy obligation in respect of all imported raw sugar and white/ refined sugar. (c) Administrative Measures (i) 2 million tonnes of wheat and1 million tonnes of rice have been allocated to States for distribution to retail consumers over and above normal public distribution system (PDS) allocation for the period October 2009 to March 2010. (ii) One million tonnes of wheat has been allocated for release by the FCI in the open market through OMSS for the period October 2009 to March 2010. (iii) The National Agricultural co-operative Marketing Federation (NAFED) has been allocated 37,400 metric tonnes of wheat and 15,500 metric tonnes of rice for distribution through its outlets at the same rate at which allocations are made to State governments under OMSS (D). (Contd.... Prices and Monetary Management Box 4.1: Contd. ...) 75 (iv) The National Cooperative Consumers Federation (NCCF) has been allocated 32,684 metric tonnes of wheat and 11,000 metric tonnes of rice for distribution through its outlets at the same rate at which allocations are made to State Governments under OMSS (D). (v) Export of non-basmati rice, edible oils and pulses (except kabuli chana)has been banned. (vi) Effected no changes in Tariff Rate Values of edible oils; (vii) Imposed stock limit orders in the case of paddy, rice, pulses, sugar, edible oils and edible oilseeds upto 30.9.2010; In order to discourage non-household sector consumers from stockpiling sugar and to ensure adequate availability of sugar in the open market for actual consumers, the Central Government has issued a notification dated 22.08.2009 imposing stockholding limit on bulk consumers. (viii) Using Minimum Export Price (MEP) to regulate exports of onion (averaging at $500 per tonne for January 2010) and basmati rice ($900 PMT); (ix) Futures trading in rice, urad and tur suspended by the Forward Market Commission in the year 2007-08 and continues during 2009-10. Futures trading in sugar was suspended w.e.f. 27.5.2009 upto 31st December, 2009. This has been extended up to 30th September, 2010. (x) Distribution of imported edible oils to States/UTs at a subsidy of Rs.15/kg. (xi) To augment availability of pulses, permitted the Public Sector Undertakings (namely, STC, MMTC, and PEC) and NAFED to import and sell pulses under a scheme and the losses, if any, up to 15 per cent are reimbursed by the Government. (xii) Distribution of imported pulses through PDS at a subsidy of Rs.10 per kg to State Governments. (xiii) Permitted sugar factories to sell processed raw sugar in the domestic market and fulfill export obligation on tonne to tonne basis. (xiv) Proportion of sugar production requisitioned as levy sugar has been increased from 10 to 20 per cent for 2009-10 sugar season to ensure adequate levy sugar supplies under PDS. (xv) During 2009-10 sugar season, 19.34 lakh tonnes of raw sugar and 3.89 lakh tonnes of white/ refined sugar have arrived in the country/ would be arriving shortly. (xvii) Minimum Support Prices (MSPs) have been systematically increased, leading to increased acreage, production, productivity and central procurement. For the marketing season of 2008-09, the MSP of wheat was increased to Rs. 1,080. For different grades of paddy, for kharif marketing season 2009-10, the MSP has been increased to Rs.950-980 per quintal and a bonus of Rs 50 per quintal for all varieties. MONETARY DEVELOPMENTS 2009-10 DURING 4.25 The liquidity constraint that had emerged consequent to the global financial crisis, led the RBI to maintain an accommodative monetary policy stance since September 2008 which continued during 2009-10. The slew of measures introduced after September 2008 to enhance the liquidity in the system included a series of downward revisions in policy rates covering repo rate, reverse repo rate, CRR and SLR, besides providing specified windows for accommodating distressed sectors. These measures had a salutary effect on the overall liquidity situation. Though the policy during 2009-10 continued to broadly underscore the accommodative stance, the monetary authority reviewed the emerging economic situation from time to time. Keeping in view the comfortable liquidity position, the SLR was restored to its earlier level of 25 per cent of NDTL with effect from November 7, 2009. A few sector-specific measures provided earlier by way of accommodative windows, and whose utilization was lower than expected, were also withdrawn in the Second Quarter Review of Monetary Policy 200910 (October 27, 2009). In addition, in the Third Quarter Review (January 29, 2010) the RBI announced that the CRR was being raised from 5.0 per cent of NDTL to a level of 5.50 per cent effective the fortnight beginning February 13,2010 and to 5.75 per cent effective the fortnight beginning February 27,2010. Trends in Monetary Aggregates 4.26 During 2009-10, the growth rates in reserve money (M0) and narrow money (M1) have been higher as compared to the preceding year while broad money (M3) growth has been lower (Table 4.13). The moderation in growth of broad money is largely on account of the deceleration in growth of bank credit to the commercial sector. 76 Economic Survey 2009-10 Table 4.13 : Movement of select monetary parameters (per cent) Items Growth rates (%) 2007-08 M0 M1 M3 Source: RBI. Growth rates as on January15, 2010 Financial-year basis 2009-10 2008-09 -3.7 -1.1 12.8 3.8 7.8 10.8 Year-on-year basis 2009-10 14.8 18.2 16.5 2008-09 6.6 8.6 19.1 2008-09 6.4 8.4 18.6 30.9 19.4 21.4 Reserve Money (M0 ) 4.27 Reserve money grew by 6.4 per cent in 200809 as compared to 30.9 per cent during 2007-08. During 2009-10, on financial-year basis, M 0 increased by 3.8 per cent (up to January 15, 2010), as against a decline of 3.7 per cent during the corresponding period of the preceding year (Table 4.14). 4.28 Net foreign assets (NFA) of the RBI and net domestic assets (NDA) are the two main drivers of reserve money. On financial-year basis, the NFA declined by 0.4 per cent during end March-January 15, 2010, as against a decline of 0.9 per cent during the corresponding period of the previous year. On a year-on-year basis, as on January 15, 2010, the NFA expanded by 4.1 per cent as against a 9.7 per cent increase in the previous year (Figure 4.7). 4.29 Net RBI credit to the Central Government increased by Rs 29,638 crore during the financial year (up to January 15, 2010). This was mainly on account of unwinding of Market Stabilisation Scheme (MSS) balances and open market operations of the Reserve Bank, offset by increase in the cash balances of the Central Government and reverse repo operations. On year-on-year basis, increase in the net RBI credit to the Central Government, as on January 15, 2010, was Rs1,19,895 crore as against an increase of Rs1,27,184 crore during the corresponding period a year ago. Narrow Money (M1 ) 4.30 M1 growth decelerated in the second half of 2008-09 and staged a recovery in 2009-10. It increased by 8.4 per cent in 2008-09 as compared Table 4.14 : Sources of change in reserve money (per cent) Growth rate Financial-year basis Jan.16 Jan.15, 2009 2010 over over March 31, March 31, 2008 2009 3 -3.7 12.2 -31.4 -42.2 -0.9 6.7 54.9 4 3.8 12.5 -16.0 -30.7 -0.4 6.7 -8.0 Year -on-Year Jan.16 2009 over Jan.18, 2008 5 6.6 17.0 -15.6 10.0 9.7 8.7 135.8 Jan.15, 2010 over Jan.16 2009 6 14.8 17.3 8.6 -26.2 4.1 9.0 9.6 2008-09 1 Reserve Money (M0) A. Components a) Currency in Circulation b) Bankers’ Deposits with the RBI c) “Other” Deposits with the RBI B. Select Sources of Reserve Money 1. Net Foreign Exchange Assets ofthe RBI 2. Government’s Currency Liabilities to the Public 3. Net Non-monetary Liabilities of the RBI Source: RBI. 2 6.4 17.0 -11.3 -38.5 3.6 9.0 84.5 Prices and Monetary Management Figure 4.7 70 60 50 RM NFA 77 Reserve money and RBI net foreign exchange assets - annual growth rate Per cent 40 30 20 10 0 -10 Oct May May Jun Nov Dec Jun Oct Jul Jul Nov Dec Jan Mar Aug Sep Aug Sep Jan Feb Apr Apr 2008-09 2009-10 Year to an expansion of 19.4 per cent during 2007-08. During 2009-10, M1 increased by 7.8 per cent on a financial-year basis (up to January 15, 2010) as against a decline of 1.1 per cent during the corresponding period of the previous year. On yearon-year basis, as on January 15, 2010, M1 growth accelerated to 18.2 per cent as compared to 8.6 per cent a year ago (Figure 4.8). 4.31 The components of narrow money are currency with the public and deposit money of the public. As on January 15, 2010, currency with the public expanded by 12.3 per cent over end-March 2009, as against an increase of 12.2 per cent during the corresponding period of the preceding year. The main element of the other components, namely demand deposits with banks, witnessed a modest increase of 3.1 per cent during the period up to January 15, 2010 as against a decline of 13.6 per cent during the corresponding period of the previous year. On year-on-year basis, as on January 15, 2010, the growth of currency with the public was marginally higher at 17.3 per cent as compared with 17.2 per cent on the corresponding date a year ago. During the same period, growth in demand deposits accelerated to 19.8 per cent as compared with a decline of 0.8 per cent a year earlier. Broad money (M3) 4.32 Broad money (M3) increased by 18.6 per cent during 2008-09. During the current financial year (2009-10), up to January 15, 2010, the growth in M3 was 10.8 per cent as compared to 12.8 per cent during the corresponding period of the previous year. On year-on-year basis, M3 grew by 16.5 per cent as on January 15, 2010, as compared to 19.1 per cent on the corresponding date of the previous year. (Figure 4.9) Figure 4.8 24 22 20 18 Narrow Money (M1) – annual growth rate (per cent) 2009-10 2008-09 2007-08 Per cent 16 14 12 10 8 6 4 14 Mar 11 May 25 May 09 Nov 23 Nov 03 Aug 17 Aug 31 Aug 28 Mar 12 Oct 26 Oct 07 Dec 14 Sep 28 Sep 21 Dec 13 Apr 27 Apr 06 Jul 20 Jul 04 Jan 18 Jan 01 Feb 15 Feb 08 Jun 22 Jun 28 Feb 78 Economic Survey 2009-10 Figure 4.9 26 Broad Money (M3) – annual growth rate (per cent) 2009-10 24 2008-09 Per cent 22 2007-08 20 18 16 14 Mar 5 11 May 25 May 09 Nov 23 Nov 03 Aug 17 Aug 4.33 The main components and sources of broad money are indicated in Table 4.15. 31 Aug 4.34 The growth in M3 was primarily reflected in the expansion in aggregate deposits during this Table 4.15 : Sources of change in money stock (M3) Growth rate March March March January January 31, 2008 to 31, 2008 to 31, 2009 to 18, 2008 to 16, 2009 to March January January January January 31, 2009 16, 2009 15, 2010 16, 2009 15, 2010 1 2 3 4 Per cent Broad Money (M3) I. Components of M3 (1+2+3+4) 1. Currency with the Public 2. Demand deposits with Banks 3. Time Deposits with Banks 4. “Other” deposits with theRBI II. 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. Government’s Currency Liabilities to the Public 5. Banking sector’s 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. 4.15 1.12 12.8 17.3 19.8 15.6 15.9 11.4 22.8 25.1 21.3 18.8 42.0 20.0 16.8 16.4 4.4 9.0 16.2 28.7 17.1 11.0 11.0 -2.1 6.7 0.5 19.6 18.1 7.9 8.2 -2.1 6.7 -6.2 38.2 19.3 20.5 20.4 10.5 8.7 35.8 31.9 21.1 13.6 13.5 4.4 9.0 8.4 17.2 0.5 22.7 -38.4 12.2 -13.6 18.3 -42.2 12.3 3.1 11.9 -30.7 17.2 -0.8 23.1 10.0 17.3 19.8 16.0 -26.2 18.6 12.8 10.8 19.1 16.5 6 28 Mar 12 Oct 26 Oct 07 Dec 21 Dec 13 Apr 27 Apr 04 Jan 18 Jan 01 Feb 15 Feb 14 Sep 28 Sep 08 Jun 22 Jun 28 Feb 06 Jul 20 Jul Prices and Monetary Management Figure 4.10 30 79 Bank credit to commercial sector – annual growth rate (per cent) 2009-10 25 2008-09 Per cent 20 2007-08 15 10 5 14 Mar 14 Mar 11 May 25 May 09 Nov 03 Aug 17 Aug 31 Aug period. Within aggregate deposits, time deposits registered a growth (year-on-year) of 16.0 per cent as on January 15, 2010, as compared to 23.1 per cent on the corresponding date of the previous year. In 2009-10, there has been gradual deceleration in the growth of time deposits, with softening of interest rates, in contrast to the shift from demand to time deposits during the second half of 2008-09. On the other hand, demand deposits expanded by 19.8 per cent (year-on-year) as on January 15, 2010, as compared to a decline of 0.8 per cent a year ago. 4.35 During 2009-10, the banking system’s credit to the Government was the major driver of growth in broad money, a trend which has persisted since the third quarter of 2008-09. The increase in Government’s borrowing programme to finance the expansionary fiscal response to the economic slowdown was the underlying reason. However, M3 growth has shown signs of deceleration after September 2009. This owes to the fact that being front loaded, the major part of the government borrowing was completed in the first half of the year. 4.36 Among the sources of M3, bank credit to the commercial sector, which had been decelerating since October 2008, has shown a revival since November 2009 (Figure 4.10). Money multiplier 4.37 During 2008-09, the rate of expansion of M0 was lower than that of M3. Accordingly, the ratio of M3 to M0 (money multiplier) showed an increase. In end-March 2009, this ratio was higher at 4.8 as compared to 4.3 in end-March 2008. During the current financial year, the increasing trend in the money multiplier continued, with reserve money registering a lower growth than broad money supply. As on January 15, 2010, the money multiplier was 5.4 (Figure 4.11). Figure 4.11 6.0 Movements in money multiplier 2009-10 5.6 2008-09 Per cent 5.2 2007-08 4.8 4.4 4.0 23 Nov 11 May 25 May 09 Nov 23 Nov 03 Aug 17 Aug 31 Aug 31 Mar 12 Oct 26 Oct 07 Dec 14 Sep 28 Sep 21 Dec 13 Apr 27 Apr 06 Jul 20 Jul 04 Jan 18 Jan 01 Feb 15 Feb 08 Jun 22 Jun 28 Feb 31 Mar 07 Dec 14 Sep 28 Sep 21 Dec 13 Apr 27 Apr 12 Oct 26 Oct 06 Jul 20 Jul 04 Jan 18 Jan 01 Feb 15 Feb 08 Jun 22 Jun 28 Feb 80 Economic Survey 2009-10 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 GDP has shown a marginally increasing trend during this period. In 2004-05, this ratio was 18.5 per cent, which has increased to 20.4 per cent in 2008-09 (Table 4.16 and Figure 4.12). Movement in other monetary indicators 4.38 During 2009-10, bank credit recorded an increase of 8.4 per cent (end-March – January 15, 2010). As against this, bank deposits recorded an increase of 10.7 per cent during the same period. The lower expansion in credit relative to the expansion in deposits during 2009-10 has resulted in a decline in the credit-deposit ratio. It fell from 72.4 in end-March 2009 to 70.92 on January 15, 2010. The investment-deposit ratio increased from 30.4 per cent in end-March 2009 to 32.53 on January 15, 2010 as scheduled commercial banks (SCBs) preferred to invest a larger share of their deposits in SLR securites. Commercial banks’ holdings of SLR securities were 29.9 per cent of NDTL as on January 15, 2010 as against 28.1 per cent in end-March 2009 and 28.8 per cent a year earlier. This was consistently higher than the stipulated level of 24 per cent of NDTL with effect from November 7, 2008 and 25 per cent with effect from November 7, 2009 . 4.39 Monetary deepening, as measured by the ratio of average M3 to GDPMP (GDPat market prices), increased from 65.5 per cent in 2004-05 to 77.8 per cent in 2008-09. This could be attributed to the Liquidity Management 4.40 The monetary easing in the aftermath of the global financial crisis constituted the main theme of liquidity management during financial year 2009-10 with periodic fluctuations in cash balances of the Central Government providing temporary variations. The Reserve Bank continued its active policy of assuring liquidity during 2009-10 through Open Market Operations (OMO), Liquidity Adjustment Facility (LAF) and also unwinding (including desequestering) of balances under the Market Stabilization Scheme (MSS) to maintain appropriate liquidity in the system. 4.41 As a result, liquidity conditions remained comfortable during 2009-10. In its Annual Policy Statement 2009-10, the RBI had reduced the LAF repo and reverse repo rates by 25 basis points Table 4.16 : Select monetary aggregates (ratios to GDP) As per cent of GDPMP Currency Demand deposits with public with banks 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* 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 11.0 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 8.0 8.8 9.4 9.5 9.3 Time deposits with banks 28.5 28.8 29.8 30.3 30.4 29.8 30.5 33.0 35.5 37.7 41.3 44.9 49.0 48.9 47.0 46.8 48.8 52.7 57.4 Aggregate deposits 34.9 35.7 36.6 36.9 37.6 36.5 37.0 39.7 42.2 44.5 48.5 52.2 56.5 56.7 55.0 55.6 58.2 62.2 66.7 M1 15.3 15.9 16.0 15.7 16.7 16.6 16.1 16.3 16.0 16.4 17.0 17.5 18.2 18.7 18.5 19.3 20.0 20.1 20.4 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 77.8 Source : RBI. * Computed on revised GDP data released by the CSO (2004-05 onwards) on January 29, 2010. Prices and Monetary Management Figure 4.12 Ratios to GDP (per cent) 80 70 60 50 40 30 20 10 M3 81 Select monetary aggregates as per cent of GDP Aggregate Deposits M1 2004-05 2005-06 2006-07 2007-08 Year effective April 21, 2009 to 4.75 per cent and 3.25 per cent respectively. In recognition of the easing liquidity conditions, the 14-day term repo facility, a daily facility hitherto, was converted to a weekly facility effective April 27, 2009. The average daily net absorption under the LAF continued to remain over Rs1,20,000 crore during June 2009, notwithstanding advance tax collections around the middle of the month. This continued through JulyAugust 2009 and the LAF absorption under reverse repo reached a peak of Rs1,68,215 crore on September 4, 2009. Liquidity conditions continued to remain in surplus mode in October and November 2009 with average absorption under the LAF being around Rs1,00,000 crore. However, net LAF absorption declined by end December mainly on Figure 4.13 100 50 account of advance tax outflows (Table 4.17 and Figure 4.13) 4.42 During the year 2009-10, liquidity was also facilitated through OMOs purchased aggregating Rs 57,000 crore . Additionally, the decline in MSS balances and de-sequestering of around Rs 28,000 crore provided liquidity of around Rs 81,000 crore (Figure 4.14). 4.43 Consistent with the changed tempo of forex inflows, the ceiling for the MSS which was Rs 2,50,000 crore since November 2007 was scaled down to Rs 50,000 crore in July 2009. The average weekly outstanding on account of the MSS reflected the situation. From a level of Rs 75,146 crore in April, 2009 it steadily declined to around Rs 18,773 crore by November 2009 (Table 4.18). LAF reverse - repo and repo volume 2008-09 FLAF SLAF Oct Nov Dec Sep Jan Rupees ‘000 crores 0 -50 -100 -150 -200 May Jul Oct May Jun Nov Dec Jan Mar Feb Aug Sep Jun Apr Apr Jul Aug 2008-09 2009-10 Year Note : 1. Repo is positive and Reverse repo is negative. 2. All additional LAF are included in first LAF (FLAF) till July 31, 2008. the second LAF (SLAF) that was discontinued from August 6, 2007 was reintroduced from August 1,2008 on reporting Fridays and from September 17, 2008 on daily basis. Thereafter, the special fixed rate term repo under the LAF and forex swap facility are included in the second LAF. The second LAF, on daily basis, has again been discontinued from May 6, 2009 and is being conducted on reporting Fridays with effect from May 8, 2009. 82 Economic Survey 2009-10 Table 4.17 : Liquidity management (Rupees crore) Outstanding as on last Friday of the month 2008 January February March* April May June July August September October November December 2009 January February March* April May June July August September October November December LAF MSS Centre’s surplus@ Total 985 8,085 -50,350 32,765 -9,600 -32,090 -43,260 -7,600 -56,480 -73,590 -9,880 14,630 54,605 59,820 1,485 1,08,430 1,10,685 1,31,505 1,39,690 1,53,795 1,06,115 84,450 94,070 19,785 1,66,739 1,75,089 1,68,392 1,72,444 1,75,362 1,74,433 1,71,327 1,73,658 1,73,804 1,65,187 1,32,531 1,20,050 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 70,657 68,538 76,586 36,549 17,102 36,513 15,043 17,393 40,358 14,383 7,981 3,804 -9,166 -9,603 16,219 -40,412 -6,114 12,837 26,440 45,127 80,775 69,391 58,460 1,03,438 2,38,381 2,51,712 1,94,628 2,41,758 1,82,864 1,78,856 1,43,110 1,83,451 1,57,682 1,05,980 1,30,632 1,38,484 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 Source : RBI. Notes : @: excludes minimum cash balance with Reserve Bank in case of surplus. * : As on March 31. 1. Negative sign under LAF indicates injection of liquidity and negative sign under centre’s surplus indicates Ways & Means Advances / Overdrafts. Figure 4.14 300 250 Market stabilisation scheme Actuals Limits Rupees ‘000 crores 200 150 100 50 0 Jul Oct Nov Jun Dec Jul May Jan Jun Oct Nov Dec Jul Feb May Oct Mar Nov Jan Jun Aug Mar May Dec Apr Sep Feb Aug Sep Mar Aug Sep Jan Apr Apr 2007-08 2008-09 2009-10 Year Prices and Monetary Management Table 4.18 : Call money market Call turnover (Rs crore) 2008-09 Apr. 2008 May2008 Jun.2008 Jul. 2008 Aug. 2008 Sep. 2008 Oct. 2008 Nov. 2008 Dec. 2008 Jan. 20-09 Feb. 2009 Mar. 2009 2009-10 Apr. 2009 May 2009 Jun. 2009 Jul. 2009 Aug. 2009 Sep. 2009 Oct. 2009 Nov. 2009 Dec. 2009 21,820 19,037 17,921 14,394 15,137 16,118 15,776 13,516 13,302 3.28 3.17 3.21 3.21 3.22 3.31 3.17 3.19 3.24 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 3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.25 4.75 4.75 4.75 4.75 4.75 4.75 4.75 4.75 4.75 19,516 19,481 21,707 24,736 23,408 23,379 28,995 21,812 21,641 18,496 22,241 23,818 6.11 6.62 7.75 8.76 9.1 10.52 9.9 7.57 5.92 4.18 4.16 4.17 26,359 11,841 -8,622 -27,961 -22,560 -42,591 -45,612 -8,017 22,294 45,474 50,649 33,360 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 5.00 4.00 4.00 3.50 7.75 7.75 8.00/8.50 8.50 9.00 9.00 8.00 7.50 6.50 5.50 5.50 5.00 Call rate^ (Per cent) LAF# Reverse repo rate (Rs crore) (Per cent) Repo rate (Per cent) 83 MSS* (Rs crore) 1,70,726 1,75,565 1,74,433 1,72,169 1,71,944 1,75,666 1,69,123 1,47,648 1,24,848 1,13,535 1,02,934 88,077 75,146 45,955 27,140 22,159 19,804 18,773 18,773 18,773 18,773 Source: RBI. ^ : Average of daily weighted call rate. * : Average of weekly outstanding MSS. # : Average daily absorption under LAF. Money market 4.44 The money market remained by and large orderly during 2009-10, due to the prevailing surplus liquidity conditions. Call rate continued to hover around the reverse repo rate during Q1 of 2009-10 and averaged 3.2 per cent as compared to 4.2 per cent during the last quarter of 2008-09. During the second quarter of 2009-10, the call rate averaged 3.25 per cent. Even in the third quarter, the call rate continued to hover around the lower bound of the informal LAF corridor (Table 4.18). The average call rate was placed at 3.20 per cent during this period. 4.45 Interest rates in the collateralized segments of the money market--the market repo (outside the LAF) and the collateralized borrowing and lending obligation (CBLO)–-also moderated in tandem with the behaviour of the call rate and remained below the call rate during 2009-10. (Figure 4.15) The weighted average interest rate in the collateralized segment of the money market marginally increased from 2.4 per cent in the first quarter of 2009-10 to 2.7 per cent during the second quarter. During the third quarter of the year, it averaged 2.8 per cent. Transaction volumes in the CBLO and market repo segments remained at a relatively high level during 2009-10. Around 75 per cent of the lending in the collateralized segment was contributed by mutual funds, which reflected their enhanced lending capacity. The collateralized market remained the predominant segment of the money market and accounted for more than 80 per cent of its total volume. 84 Economic Survey 2009-10 Figure 4.15 12 9 Movement of money market rates Market Repo (Non-RBI) Call Money CBLO Per cent 6 3 Reverse Repo Rate 0 Oct May May Dec Mar Mar Aug Aug Dec Nov Sep Sep Nov Oct Jan Jul Jun Jun Jan Feb Feb Apr Apr Jul Repo Rate 2008 2009 Year Certificates of Deposit 4.46 With the persistence of surplus liquidity conditions, the fortnightly average issuance of certificates of deposit (CD) also remained high during much of 2009-10. The amount of outstanding CDs issued by SCBs increased from Rs 1,92,867 crore in end-March 2009 to Rs 2,43,584 crore as on December 4, 2009. The outstanding amount constituted 7.84 per cent (as on December 4, 2009) of aggregate deposits of CD-issuing banks with significant inter-bank variation. During April– December 4, 2009, the average issuance was of the order of Rs 11,000 crore as compared to Rs 6,131 crore during the corresponding period of the previous year. Most of the CDs issued were of more than six months duration. The weighted average discount rate declined from 7.53 per cent in endMarch 2009 to 4.84 per cent as on December 4, 2009. has declined. “Manufacturing companies” accounted for 45 per cent of the share in end-November 2009. (Table 4.19). Treasury Bills (T-bills) 4.48 T-bills issuances during the year 2009-10 were dynamically managed, keeping in view the emerging requirements of the Government and the market conditions. The T-bills issued for enhanced amounts in 2008-09 which became due for repayment both in the first and second quarters of 2009-10 were fully rolled over. The primary market yields for TBs of different tenors (91 days, 182 days and 364 days ) remained by and large stable during 2009-10 as compared to the pattern observed in 2008-09. (Figures 4.16, 4.17 and 4.18). 4.49 The introduction of a new short-term instrument, known as cash management bill (CMB), was announced in August 2009 to meet the temporary cash-flow mismatches of the Government. CMBs are non-standard, discounted instruments issued for maturities of less than 91 days. However, issuance of CMBs has not so far been resorted to during the year. Commercial Paper 4.47 During 2009-10, the commercial paper (CP) market also picked up with the easing of liquidity conditions and the size of fortnightly issuance increased significantly. The outstanding amount of CP issued by corporates has shown an increasing trend from Rs 44,171 crore in end-March 2009 to Rs1,03,915 crore as in end -November 2009, marginally coming down to a level of Rs 90,305 crore in end-December 2009 . The weighted average discount rate (WADR) of CP declined from 9.79 per cent as in end-March 2009 to 4.71 per cent as in end-July 2009 and increased to 5.17 per cent in end-November 2009. The shares of “manufacturing companies” and “other financial institutions” in total outstanding CPs have increased in the recent period while the share of “leasing and finance companies” Central Government Borrowing 4.50 The Union Budget (2009-10) placed the net market borrowings requirement of the Central Government at Rs 3,97,957 crore as against Rs 2,42,316 crore raised during the previous year. Including repayments of Rs 93,087 crore, gross market borrowing was estimated at Rs. 4, 91,044 crore (as compared to Rs 3,18,550 crore raised in the previous year). The actual issuances during the first half of the current year amounted to Rs 2,95,000 crore (as against issuances of Rs 1,06,000 crore during the corresponding period of the previous year); Prices and Monetary Management Table 4.19 : Activity in money market segments 85 (Rupees crore) Average daily volume (one leg) Year/ month Call Market repo CBLO Total Money market rate* (per cent) 5.31 6.29 7.35 8.09 8.65 9.26 8.66 6.58 5.37 3.99 3.89 3.76 2.41 2.34 2.69 2.83 2.62 2.73 2.7 2.87 2.91 Te r m money Commercial paper Outstanding WADR (percent) Certificates of deposit Outstanding WADR (percent) Apr. 2008 May 2008 Jun. 2008 Ju l. 2008 Aug. 2008 Sep. 2008 Oct. 2008 Nov. 2008 Dec. 2008 Jan. 2009 Feb. 2009 Mar. 2009 Apr. 2009 May 2009 Jun. 2009 Jul. 2009 Aug. 2009 Sep. 2009 Oct. 2009 Nov. 2009 Dec. 2009 9,758 9,740 10,854 12,368 11,704 11,690 14,497 10,906 10.820 9,248 11,121 11,909 10,910 9,518 8,960 7,197 7,569 8,059 7,888 6,758 6,651 14,966 14,729 11,262 8,591 10,454 10,654 9,591 15,191 16,943 18,053 19,929 21,593 20,545 22,449 21,694 20,254 23,305 27,978 23,444 22,529 20,500 38,828 36,326 35,774 23,669 22,110 20,547 16,818 24,379 32,261 31,794 38,484 48,319 43,958 48,505 53,553 46,501 57,099 62,388 58,313 54,875 55,338 63,552 60,795 57,890 44,628 44,268 42,891 40,906 50,476 60,024 59,095 69,534 81,821 75,413 80,472 84,207 73,952 87,973 98,425 89,645 84,162 82,489 374 420 253 226 501 335 345 319 415 454 669 451 332 338 335 389 461 381 225 37,584 42,032 46,847 51,569 55,036 52,038 48,442 44,487 40,391 51,668 52,560 44,171 52,881 60,740 68,721 79,582 83,026 79,228 98,835 8.85 9.02 10.03 10.95 11.48 12.28 14.17 12.42 10.7 9.48 8.93 9.79 6.29 5.75 5 4.71 5.05 5.04 5.06 5.17 - 1,50,865 1,56,780 1,63,143 1,64,892 1,71,966 1,75,522 1,58,562 1,51,493 1,51,214 1,64,979 1,75,057 1,92,867 2,10,954 2,18,437 2,21,491 2,40,395 2,32,522 2,16,691 2,27,227 2,45,101 2,43,584+ 8.49 8.95 9.16 10.23 10.98 11.56 10 10.36 8.85 7.33 6.73 7.53 6.48 6.2 4.9 4.96 4.91 5.3 4.70 4.86 4.84+ 191 1,03,915 289 - Source: RBI. + As on December 4, 2009. WADR : Weighted average discount rate. * Weighted average rate of call, market repo and CBLO. the issuance calendar for dated securities released on September 29, 2009 proposed to raise Rs 1,23,000 crore during the second half of the year. Figure 4.16 10 9 8 7 6 5 4 3 2 1 0 May Jul 4.51 The gross borrowing requirement in 2009-10 was 54 per cent higher than in 2008-09. In order to carry out the borrowing programme in a non-disruptive Auction cut-offs in 91 day T-bill auctions 2009-10 2008-09 Cut off yields (per cent) Oct Nov Dec Jan Mar Jun Aug Sep Feb Apr 86 Economic Survey 2009-10 Figure 4.17 10 9 8 7 6 5 4 3 2 1 0 Auction cut-offs in 182 day T-bills 2009-10 2008-09 Cut off yields (per cent) May Oct Dec Jan Figure 4.18 10 9 8 7 6 5 4 3 2 1 0 Auction cut-offs in 364 day T-bills 2009-10 2008-09 Cut off yields (per cent) May Oct Jul Nov Dec manner, a number of steps were taken. First, the borrowing programme of the Central Government for 2009-10 was frontloaded as credit offtake by the private sector is usually low in the first half. Further, MSS securities of the order of Rs 28,000 crore were de-sequestered. Besides, the Reserve Bank resorted to active liquidity management by way of unwinding of MSS securities and purchase of securities through a pre-announced OMO calendar. The unwinding of MSS securities through redemption was of the order of Rs 42,000 crore during the first half of the year; as against the OMO announcement of Rs 80,000 crore through the auction route for the first half of 2009-10, the actual purchases were Rs 57,487 crore, the shortfall from the projected level being on account of easy liquidity conditions. 4.52 During 2009-10 ( up to January 15, 2010), gross market borrowing raised through dated securities by the Central Government (excluding issuances under the MSS) was Rs 3,93,000 crore (net Rs 3,51,911 crore) as against Rs1,80,000 crore (net Rs 1,35,972 crore) raised during the corresponding period of the previous year. This also included floating rate bonds amounting to Rs 2,000 crore with a tenor of 11 years issued on December 18, 2009. Keeping in view market preferences, the weighted average maturity of dated securities issued during the year so far ( up to January 15, 2010) worked out lower at 11.17 years as compared to 14.62 years for issues during the corresponding period of the previous year. The weighted average yield of dated securities during 2009-10 (uptil January 15, 2010) was lower at 7.22 per cent as compared to 8.15 per cent during the corresponding period of the previous year (Figure 4.19). Yields on 10-Year Government Securities (10-year G-Sec) 4.53 The movement in yields in the 10-year G-Sec market may be categorized into three broad phases. During the first phase (April 2009), the yield on 10-year G-Sec declined from 7.01 per cent to 6.23 per cent between end-March and end-April 2009; this was due to substantial easing of liquidity conditions, decline in inflation rate, OMO purchase auctions and reduction in LAF policy interest rates. Mar Jun Aug Sep Jan Feb Apr Mar Nov Jul Jun Aug Sep Feb Apr Prices and Monetary Management 87 Figure 4.19 10 Weighted average yield of primary issues of dated securities (cumulative) 2009-10 9 Per cent 2008-09 8 7 6 May Jul Jun Oct Nov Dec Jan Mar Apr Aug Sep Feb 4.54 During the second phase (May 2009-August 2009), the 10-year yields started rising following the increase in size of primary auctions (from Rs12,000 crore to Rs15,000 crore) as well as anticipation of overwhelming supplies in view of the large borrowing programme of the Government. The 10-year yield rose to 7.17 per cent in end-September 2009 as compared to 6.23 per cent as in end-April 2009. 4.55 During the third phase (SeptemberDecember 2009), the G-sec yields traded in a broad range with a hardening bias. The yield declined on the back of the RBI’s decision to hike SLR by 1 percentage point to 25 per cent (as announced in the Second Quarter Review of Annual Policy Statement for 2009-10, on October 27, 2009). However, the G-Sec yield rose subsequently on account of a host of factors including absence of announcement of the OMO purchase auction calendar during the second half of the fiscal year 2009-10, and expectation by market participants that the policy rates might be raised due to increase in the inflation level (as reflected by the increase in the WPI). The 10 year G-Sec yield was at 7.72 per cent as on January 12, 2010 as compared to 7.17 per cent as in end-September 2009. Governments aggregated to Rs 1,05,937.71 crore as compared to Rs 52,842.74 crore raised during the corresponding period last year. The weighted average yield of the auctions so far has been 8.03 per cent as compared to 7.74 per cent during the corresponding period last year. Monetary Policy Stance During 2009-10 4.57 Conditioned by the need for monetary policy to respond to the then slackening economic growth, the RBI’s monetary policy stance during 2009-10 was aimed at providing a policy regime that would enable credit expansion at viable rates while preserving credit quality so as to support the return of the economy to a steady growth path. The Annual Policy Statement of the RBI for 2009-10 (April 21, 2009) clearly indicated the continuance of the policy being followed since mid-September 2008 to minimize the impact of the global financial crisis on the domestic economy and restore the economy to a high growth path consistent with price and financial stability. With the resolve to maintain a soft interest rate regime, the repo rate was further reduced from 5.00 per cent to 4.75 per cent with effect from April 21, 2009, while the reverse repo rate was reduced from 3.50 per cent to 3.25 per cent. There were no major changes in policy rates during 2009-10, except for restoration of the SLR to the earlier level of 25 per cent of NDTL (from 24 per cent ) in November 2009 and an increase of 75 basis points in CRR effective February 2010. The changes in policy rate since 2008-09 are brought out in Table 4.20. State Government Borrowings 4.56 In the light of the policy measures to minimize the adverse impact of the global financial crisis, the Union Budget had announced that State Governments could borrow an additional 0.5 per cent of their gross State domestic product (GSDP) up to a ceiling of 4 per cent of GSDP in 2009-10. Accordingly, the net market borrowings of the States were placed at Rs.1,40,000 crore for 2009-10 (gross : Rs 1,56,238 crore), compared to actual net market borrowings of Rs 1,03,766 crore (gross: Rs 1,18,138 crore) in 2008-09. During the current year 2009-10 (up to January 15, 2010), the amount raised by State Quarterly Reviews 4.58 The RBI’s First Quarter Review of the Monetary Policy 2009-10 (July 28, 2009) did not announce any revisions in policy rates. While continuing the accommodative monetary stance, it ,however, noted that there could be a reversal of the expansionary measures to anchor inflation 88 Sl. no. Economic Survey 2009-10 4.59 The Second Quarter Review recognized the dilemma that while growth drivers warranted a delayed exit from the accommodative policy regime, inflation concerns called for an early exit. The RBI noted that a premature exit from the accommodative stance could derail the growth, but a delayed exit could also potentially engender inflation expectations. Therefore, while keeping the bank, repo and reverse repo rates unchanged, it announced closure of some special liquidity support measures, which were not being fully utilized, besides restoring the SLR to the earlier level of 25 per cent of NDTL. The following measures were announced in the Second Quarter Review of the Monetary Policy Statement: i. Taking note of the fact that the SCBs’ investment in SLR securities was higher than the stipulated 24 per cent, the RBI announced that the SLR which had earlier been reduced from 25 per cent of NDTL to 24 per cent in November 2008, was being restored to 25 per cent with effect from the fortnight beginning November 7, 2009. ii. Liabilities of scheduled banks arising from transactions in CBLO (which were earlier exempted from CRR prescription), would be brought into the fold for maintenance of CRR with effect from the fortnight beginning November 21, 2009. iii. Keeping in view the large increase in credit to the commercial real estate sector, provisioning requirements to the sector classified as “standard assets” were increased from 0.40 to 1 per cent. iv. The limit for the export credit refinance facility [(under section 17(3A) of the RBI Act], which was raised to 50 per cent of eligible outstanding rupee export credit, was returned to the pre-crisis level of 15 per cent. v. The two non-standard refinance facilities: (i) special refinance facility for SCBs under section 17(3B) of the RBI Act (available up to March 31, 2010), and (ii) special term repo facility for SCBs (for funding to mutual funds, non-banking finance companies , and housing finance companies) (available up to March 31, 2010) have been discontinued. vi. The forex swap facility to banks for tenor up to three months (available up to March 31, 2010) has been discontinued. Table 4.20 : Revision in policy rates Date Repo rate Reverse repo rate 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.0 6.0 6.0 6.0 6.0 6.0 5.0 4.0 4.0 3.5 3.25 3.25 CRR 2008 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 2009 15. 16. 17. 18. 2010 19. 20. February 13 2010 February 27 2010 4.75 5.5* 5.75* January 5, 2009 January 17,2009 March 5, 2009 April 21, 2009 5.5 5.5 5.0 4.75 5.5 5.5 5.0 5.0 April 26, 2008 May 10, 2008 May 24, 2008 June 12, 2008 June 25, 2008 July 5, 2008 July 19, 2008 August 30, 2008 October 11, 2008 October 20, 2008 October 25, 2008 November 3, 2008 November 8, 2008 December 6, 2008 7.75 7.75 7.75 8.00 8.50 8.50 8.50 9.0 9.0 8.0 8.0 7.5 7.5 6.5 7.75 8.00 8.25 8.25 8.25 8.50 8.75 9.0 6.5 6.5 6.0 6.0 5.5 5.5 Source : RBI SLR : The prescribed SLR as a per cent of NDTL was lowered from a level of 25 per cent to 24 per cent w.e.f. . November 8, 2008. This has been restored to 25 per cent w.e.f November 7, 2009 in the Second Quarter Review of Monetary Policy 2009-10. * : A two-stage increase in CRR announced in RBI’s Third Quarter Review of Monetary Policy 2009-10 (January 29, 2010) effective February 13 and 27, 2010. expectations and subdue inflationary pressures, if so warranted. The RBI’s Second Quarter Review of Monetary Policy 2009-10 (October 27, 2009) made an overall assessment of the economy and indicated that the stance of monetary policy for the remaining period of 2009-10 would be to: (i) maintain a monetary and interest rate regime consistent with price stability and financial stability, and supportive of the growth process; (ii) keep a vigil on the trends in inflation and be prepared to respond swiftly and effectively through policy adjustments to stabilize inflation expectations; and (iii) monitor the liquidity situation closely and manage it actively to ensure that credit demands of productive sectors are adequately met while also securing price and financial stability. Prices and Monetary Management Table 4.21 : RBI’S indicative projections of macro parameters for 2009-10 Indicative projections for growth rates (per cent) Annual Policy 2009-10 (April 21,2009) GDP Growth WPI Inflation Money Supply Growth (M3) Aggregate Deposits of SCBs Adjusted Non-food Credit 6.0 4.0 17.0 18.0 20.0 First Quarter Review (July 28, 2009) 6.0 with an upward bias 5.0 18 19.0 20 Second Quarter Review (October 27, 2009) 6.0 with an upward bias 6.5 with an upward bias 17 18.0 18 89 Third Quarter Review (Jan. 29, 2010) 7.5 8.5 16.5 17 16 4.60 The RBI has in its Third Quarter Review of the Monetary Policy (January 29, 2010) indicated that its stance is shaped by three important considerations ; i. The need to shift policy stance from “managing the crisis” to “managing the recovery” which implies reversal from the crisis-driven expansionary stance, thereby recognizing the need for carrying forward the process of exit further . ii. Though the inflationary pressures in the domestic economy stem predominantly from the supply side, consolidating recovery increases the risks of these pressures spilling over into a wider inflationary process. iii. Strong anti-inflationary measures, while addressing one problem may precipitate another by undermining the recovery, particularly by deterring private investment and consumer spending. 4.61 Based on its assessment, the RBI left the bank rate, repo and reverse repo rates and SLR unchanged ; however, it announced that the CRR was being raised by 75 basis points from 5.0 per cent to 5.75 per cent in two stages; the first stage of increase of 50 basis points to be effective the fortnight beginning February 13, 2010, followed by the next stage of increase of 25 basis points effective the fortnight beginning February 27, 2010. The hike in CRR is estimated to have potential to absorb around Rs 36,000 crore from the system which is presently witnessing surplus liquidity. 4.62 The response of the monetary authority to the changing economic environment was also reflected in the indicative projections for macro-level parameters made by the RBI for 2009-10 in the Annual Policy Statement for the year and subsequent quarterly reviews. The revisions considered by the RBI are summarized in Table 4.21. CHALLENGES AND OUTLOOK 4.63 Food prices are cyclical in nature. A sharp increase in food prices during the recent period has been a cause of concern. A significant part of this inflation could be explained by supply-side bottlenecks in some of the essential commodities, precipitated by the delayed and sub-normal southwest monsoon as well as drought-like conditions in some parts of the country. However, inflation in some of the commodities, like wheat and rice, in which there is ample stock available, could have been exacerbated due to inflationary expectations. Making available adequate and timely quantities of these items and at different locations to overcome supplydemand mismatches is the real challenge. 4.64 India cannot be immune to global price situations especially when a significant proportion of our requirement of edible oils, pulses and sugar (in years of shortages) is met through imports. At the same time, for a large country like India the scope for imports for many commodities is limited. Any decision to import food items raises global prices which impacts domestic prices as well. Proper and timely assessment of the supply-demand situation and preventive action become the essence of supply-side management. 4.65 The concentrated pressure on headline inflation arising from high food prices entails the risk of getting transmitted over time to other non-food items through expectations-driven wage price revisions, and thereby manifesting into a generalized inflation. 90 Economic Survey 2009-10 in global commodity prices in response to recovery in advanced economies. 4.68 While the fiscal issues including fiscal rectitude are important, the transmission of the monetary policy stance to the monetary and real sectors is equally critical. It would therefore also be incumbent on the policy authorities not only to address the inflationary expectations but also monitor and ensure that the growth in money supply and credit to productive sectors is at the envisaged levels so that the growth prospects in the near to medium terms are sustained on an even keel, without ,at the same time, jeopardizing the price scenario. 4.66 The international crude oil prices have increased from $ 44/bbl in January-March, 2009 to $ 77/bbl in January, 2010. Despite this, the administered prices of petroleum products in the domestic market have been maintained at the same level since July 2009. Sustaining current levels of domestic petroleum prices in this scenario of rising international prices may not be viable for long from the fiscal side; at the same time, increase in prices would have its impact on inflation levels. 4.67 As of now, the outlook for inflation is conditioned by supply-side pressures in the near term, possible return of pricing power with stronger recovery in growth, further revival in private demand with improving consumer and business confidence, and possible spurt Financial Intermediation and Markets The financial markets today encompass not only traditional banking institutions, but also many other financial entities such as insurance companies, pension funds, mutual funds, venture capital funds and stock and commodity exchanges that perform the function of financial intermediation. This development has been accompanied by the advent of market-based instruments of the stock and bond markets, financial products such as asset-backed securities, financial futures and derivative instruments. While reducing the dependence of investors on bank credit to fund their investments, these have also contributed to reallocation of risks and putting of capital to more efficient use. Financial markets also serve the need for greater financial inclusion. The recent experience from the global financial crisis, has however, shown that, despite the variety of instruments and the sophistication of the markets, they may not remain immune to crisis, if the investors/institutions do not pay adequate attention to the fundamentals or if the pricing of risk and the ratings for these instruments are not transparent, and if the regulatory oversight is poor. An efficient and healthy financial market, should therefore avoid the shortcomings as gleaned from the experience of the global financial markets in the last couple of years. The deepening and broadening of financial markets also underscores the importance of institutional safeguards for monitoring and analysing the domestic as well as external developments to ensure that the regulatory system is efficient and effective. This chapter summarizes the developments in the financial sector in India in the last year, which has remained relatively immune to the global financial turbulence through a proactive response to the challenges. CHAPTER 5 BANK CREDIT 5.2 The accommodative monetary policy stance adopted by the Reserve Bank, post-September 2008, in response to the global financial crisis, continued during 2009-10. Though the policy focused on maintaining a market environment conducive to the flow of credit to the productive sectors of the economy, growth in bank credit remained low during 2009-10. The prevalent economic conditions as well as the cost of funds appear to have contributed to the slowdown in non-food bank credit from the banking sector. In addition, banks also reined in credit to the retail sector due to perceptions of increased risk on account of the general slowdown and to guard against bad loans. 5.3 While the overall credit demand of the manufacturing sector from the banking sector slowed down during the 2009-10, corporates could access non-bank domestic sources of funds and external financing (which had almost dried up earlier during the crisis period) at lower costs. Thus, while bank credit during 2009-10 continued to decelerate, there was a turnaround in financing from non-bank domestic sources. It is likely that revival of growth in bank credit would manifest in the near-term economic recovery process. 5.4 As against an increase of 22.3 per cent in 2007-08, bank credit increased by 17.5 per cent in 2008-09. Non-food credit during the same periods was 23.0 per cent and 17.8 per cent respectively. During 2009-10, on financial-year basis, growth in bank credit extended by scheduled commercial banks (SCBs) stood at 8.4 per cent (end March 2009 to January 15, 2010), as compared to 11.9 per cent during the corresponding period in 2008-09 (Table 5.1). This 92 Economic Survey 2009-10 Table 5.1 : Flow of bank credit As of January 15, 2010 Outstanding as in end March Rs. crore 2007 2008 2009 16-Jan-09 15-Jan-10 Financial year so far Year on year (Percentage variation) 200809 11.9 11.9 11.9 13.6 -14.5 19.1 17.2 17.7 200910 8.4 -8.0 8.7 10.7 3.4 11.8 18.3 18.2 200809 22.0 26.8 21.9 20.1 -1.6 23.9 19.5 20.0 200910 13.9 -14.4 14.4 16.8 20.6 16.3 21.1 21.1 1. Bank Credit (a) Food Credit (b) Non-food Credit 19,31,188 46,520 18,84,668 23,61,914 44,399 23,17,515 31,96,940 5,24,310 26,72,630 9,71,715 9,58,662 27,75,549 46,211 27,29,338 38,34,110 5,23,085 33,11,025 11,66,410 11,55,785 2642077 49,695 2592382 3630875 448440 3182435 1139279 1128489 3008909 42,534 2966375 4242574 540660 3701914 1380157 1366055 2. Aggregate Deposits 26,11,932 (a) Demand Deposit (b) Time Deposit 3. Investments ( SLR) (a) Government Securities (b) Other Approved Securities Source : RBI. 15,459 4,29,730 21,82,202 7,91,517 7,76,058 13,053 10,625 10,790 14,102 -17.3 32.7 -18.3 30.7 is also below the Reserve Bank’s indicative projected trajectory for the full year, of 20.0 per cent as set out in the First Quarter Review and 18.0 per cent in the Second Quarter Review for 2009-10. The year-on-year growth in bank credit as on January 15, 2010 was 13.9 per cent as against 22.0 per cent on the corresponding date of the previous year. Growth in non-food credit so far in 2009-10 on financial-year basis and on year-on-year basis was lower than the previous year’s levels. Growth in aggregate deposits in 2009-10 was broadly compatible with the growth in the previous year. The lower expansion in credit relative to the significant expansion in deposits during 2009-10 has resulted in a decline in the credit-deposit ratio to 70.92 on January 15, 2010 from 72.4 in end-March 2009. (Figure 5.1). 5.5 During 2009-10, public-sector banks (PSBs) were observed to be faring better in terms of growth in credit extended as compared to the deceleration in private banks and decline in foreign banks. Higher market borrowing by the Government, low credit growth and the ample liquidity in the system led to banks’ investment in statutory liquidity ratio (SLR) securities. Commercial banks’ holdings of such securities close to 30 per cent of their net demand and time liabilities (NDTL) remained higher than the Figure 5.1 76 75 74 Credit-deposit ratio 2009-10 2008-09 2007-08 Per cent 73 72 71 70 69 68 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Fortnights Financial Intermediation and Markets 93 Figure 5.2 34 33 Investment-deposit ratio 2009-10 2008-09 2007-08 Per cent 32 31 30 29 28 27 stipulated SLR level of 24 per cent (25 per cent with effect from November 7, 2009). Consequently, the investment-deposit ratio increased from 30.4 per cent in end-March, 2009 to 32.53 on January 15, 2010 as SCBs preferred to invest their resources in SLR securities (Figure 5.2). Interest rates i. Domestic Deposit Rates 5.6 Deposit rates of SCBs softened during 200910. Interest rates offered by PSBs on deposits of 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 BPLR PSBs Private-Sector Banks Foreign Banks Source: RBI. 1 2 3 4 5 6 7 8 2.75-8.50 8.25-9.25 8.00-9.00 2.50-9.25 7.25-9.25 7.25-9.75 2.25-9.25 3.50-9.75 3.60-9.50 12.25-13.50 13.00-16.50 10.00-15.50 9 Mar.-08 10 11 12 Fortnights 2.75-10.25 8.75-10.25 8.50-9.75 3.00-9.75 8.30-10.50 8.25-10.25 3.50-9.75 3.50-10.50 3.60-11.00 13.75-14.75 13.75-17.75 10.00-16.00 13 Sep.-08 14 maturity of one year to three years declined from the 8.00-9.25 per cent range in March 2009 to 6.007.25 per cent in December 2009, while those on deposits of maturity of above three years came down from the 7.50-9.00 per cent range to the 6.25-7.75 per cent during the same period. The term deposit rates of private-sector banks and foreign banks on deposits of maturity of one year up to three years also declined from the 7.50-10.25 per cent and 2.509.50 per cent range respectively in March 2009 to the 5.25-7.50 per cent and 2.25-7.75 per cent range in December 2009 (Table 5.2). 15 16 12.50-14.00 13.00-17.25 10.00-17.00 17 Dec.-08 2.75-10.25 8.50-10.75 8.50-9.75 3.00-10.00 9.00-11.00 8.50-11.00 3.50-9.75 3.50-11.25 3.60-11.00 18 19 20 12.75-16.75 10.00-17.00 21 2.75-8.25 8.00-9.25 7.50-9.00 3.00-8.75 7.50-10.25 7.50-9.75 2.50-8.50 2.50-9.50 2.50-10.00 11.50-14.00 22 Mar.-09 23 24 25 1.00-6.50 6.00-7.25 6.25-7.75 2.00-7.00 5.25-7.50 5.75-8.00 1.25-7.00 2.25-7.75 2.25-8.50 11.00-13.50 12.50-16.75 10.50-16.00 26 Dec.-09 94 Economic Survey 2009-10 ii. Lending Rates 5.7 The benchmark prime lending rates (BPLRs) of PSBs moved from the 12.25-13.50 per cent range in March 2008 to 11.50-14.00 per cent in March 2009 and 11.00-13.50 per cent in December 2009. The BPLRs of PSBs, private-sector banks and foreign banks decreased from their September 2008 levels in March 2009 and further declined in December 2009. However, the movement in the BPLRs does not fully and accurately reflect the changes in effective lending rates as nearly twothirds of banks’ lending takes place at sub-BPLR rates; the share of sub-BPLR lending of all SCBs (excluding export credit and small loans) was nearly 67.0 per cent in March 2009, and increased further to 70.4 per cent in September 2009. To address this anomaly, the Reserve Bank announced the constitution of the Working Group on BPLR in its Annual Policy Statement of 2009-10 to review the system and suggest changes to make credit pricing more transparent. The Group submitted its report on October 20, 2009. The Working Group has recommended replacing the existing BPLR system with a base rate system. With the proposed base rate system, banks will not need to lend below the base rate as it would represent the bare minimum rate below which it would not be viable for them to lend. The proposed base rate may include all those cost elements which can be clearly identified and which are common across borrowers. The actual lending rates charged to borrowers could work out to be the base rate plus borrower-specific charges that would include product-specific operating costs, credit risk premium and tenor premium. iv. Rupee Export Credit 5.9 In view of the difficulties being faced by exporters on account of the weakening of external demand, the Reserve Bank on November 15, 2008 extended the period of entitlement of the first slab of pre-shipment rupee export credit, which was available at a concessional interest rate ceiling of the BPLR minus 2.5 percentage points from 180 days to 270 days. Furthermore, on November 28, 2008 the period of entitlement of the first slab of post-shipment rupee export credit was extended from 90 days to 180 days for availing of a concessional interest rate ceiling of the BPLR minus 2.5 percentage points. On December 8, 2008, the Reserve Bank extended the concessional interest rate ceiling of the BPLR minus 2.5 percentage points to overdue bills up to 180 days from the date of advance. The validity of the reduction in the interest rate ceiling to 250 basis points below the BPLR on pre-shipment rupee export credit up to 270 days and post-shipment rupee export credit up to 180 days has been further extended up to April 30, 2010. 5.10 Factoring in the prevalent economic scenario, the Government of India extended interest rate subvention of 2 percentage points with effect from December 1, 2008 till March 31, 2010 on pre- and post-shipment rupee export credit, for certain employment-oriented export sectors. Banks have been allowed to charge the identified sectors interest rates not exceeding the BPLR minus 4.5 percentage points on pre-shipment credit up to 270 days and post-shipment credit up to 180 days on the outstanding amount for the period December 1, 2008 to March 31, 2010. However, the total subvention will be subject to the condition that the interest rate, after subvention, will not fall below 7 per cent, which is the rate applicable to the agriculture sector under priority-sector lending. Banks are also required to ensure that the benefit of the 2 per cent interest subvention is passed on completely to the eligible exporters. iii. NRE/FCNR(B) Deposits 5.8 To encourage the inflow of foreign funds, interest rate ceilings on Foreign Currency Non Resident Bank accounts {FCNR(B)} and Non Resident (External) Rupee Account {NR(E)RA} deposits of all maturities were revised upwards by 50 basis points each on September 16 and October 15, 2008. After a review, the Reserve Bank further increased the interest rate ceiling on FCNR(B) and NRE deposits by 75 basis points each on November 15, 2008. At present, the interest rate ceiling on such deposits stands at Libor/Swap rates plus 100 basis points and Libor/Swap rates plus 175 basis points, respectively. SECTORAL DEPLOYMENT OF CREDIT 5.11 Disaggregated data on sectoral deployment of gross bank credit from 49 banks accounting for about 95 per cent of bank credit and non-food credit available up to November 20, 2009 showed that among the major sectors, credit (year-on-year) to agriculture recorded a growth of 21.4 per cent (23.0 per cent in March 2009), while that to industry Financial Intermediation and Markets Table 5.3 : Sectoral deployment of gross bank credit Outstanding as on Sl. No. Item Mar. 27, 2009 Nov. 20, 2009 Absolute variation Mar. 27, 2009 over Mar. 28, 2008 % variation 95 Mar. 27, Nov. 20, 2009 over 2009 over Mar. 28, Nov. 21, 2008 2008 17.9 4.1 18.1 22.5 23.0 22.7 21.9 18.6 21.0 12.9 7.4 -7.0 44.6 11.6 -45.3 9.9 -15.3 10.4 15.4 21.4 19.3 4.7 12.8 27.4 0.3 7.3 -11.8 15.3 22.7 -36.8 (amount in Rs. crore) Gross Bank Credit 26,48,501 27,58,069 4,01,212 1 Public Food Procurement Credit 46,211 41,852 1,812 2 Non-Food Gross Bank Credit 26,02,290 27,16,217 3,99,400 a) Priority Sectors 9,15,886 9,49,428 1,68,506 i. Agriculture 3,38,656 3,43,070 63,314 ii. Micro and Small Enterprises (MSEs) 3,09,196 3,35,654 57,119 iii. Other Priority Sectors 2,68,034 2,70,704 48,073 b) Industry ( Medium & Large) 8,85,393 9,65,057 1,25,330 c) Wholesale Trade (Other than Food Procurement) 67,425 80,922 11,723 d) Other Sectors 7,33,586 7,20,810 93,841 Of Total Non-Food Gross Bank Credit, 1. Housing 2,76,957 2,91,760 19,165 2. Consumer Durables 8,187 8,028 -612 3. Real Estate Loans 91,575 88,581 28,261 4. Tourism and Hotels and Restaurants 13,625 15,667 1,420 5. Loans to Individuals against Shares, Debentures, Bonds,etc. 2,286 2,347 -1,891 Source : RBI. Note : Data are provisional and relate to select banks which account for around 95 per cent of the gross bank credit of all SCBs. Figures are as on the last reporting Friday of the month. (medium and large) recorded a growth of 12.8 per cent (as against 18.6 per cent in March 2009). Credit to wholesale trade recorded a growth of 27.4 per cent (as against 21.0 per cent in March 2009). 5.12 Credit to the priority sector grew by 15.4 per cent (year-on-year) in November 2009 as compared to 22.5 per cent in March 2009. Among the priority sub-sectors, credit to micro and small enterprises (MSEs) (including service-sector enterprises) recorded a growth of 19.3 per cent (year-on-year) in November 2009 as compared to 22.7 per cent in March 2009. (Table 5.3). Priority-sector Lending 5.13 Domestic SCBs, both in the public and private sectors are required to meet a target of 40 per cent of their adjusted net bank credit (ANBC) or credit equivalent amount of off-balance sheet exposures (OBEs), whichever is higher, for lending to the priority 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. In respect of foreign banks having offices in India, the target for lending to the priority sector has been kept at 32 per cent of ANBC or credit equivalent amount of OBE, whichever is higher. Within the overall target of 32 per cent to be achieved by foreign banks, advances to the MSE 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. The outstanding advances by PSBs, private-sector banks and foreign banks to the priority sector as on the last reporting Fridays of March 2007, 2008 and 2009 are given in Table 5.4. 5.14 Though the public, private-sector and foreign banks, as individual groups, achieved the overall priority-sector lending targets as on the last reporting Friday of March 2009, there were shortfalls in all the categories included in the priority sector. 5.15 Out of 27 public-sector banks, three did not achieve the overall priority-sector lending target of 40 per cent as on the last reporting Friday of March 96 Economic Survey 2009-10 Table 5.4 : Particulars of advances to the priority sector A. PUBLIC SECTOR BANKS As on the last reporting Friday of Detail Total priority sector advances Total advances to agriculture # Total advances to micro & small enterprises * Advances to weaker sections March 2007 5,21,376 (39.7%) 2,02,614 (15.4%) 1,02,550 (7.8%) 93,747 (7.1%) March 2008 6,10,450 (44.7%) 2,49,397 (18.3%) 1,51,137 (11.1%) 1,21,740 (8.9%) March 2009 (provisional) 7,20,083 (42.5%) (17.2%) 2,98,211 1,91,307 (11.3%) 1,67,041 (9.8%) (Rs crore) # Indirect agriculture is reckoned only up to 4.5 per cent of the ANBC or credit equivalent of OBEs, whichever is higher. B. PRIVATE SECTOR BANKS As on the last reporting Friday of Detail Total priority sector advances Total advances to agriculture# Total advances to micro & small enterprises * Advances to weaker sections March 2007 1,44,549 (42.9%) 52,034 (12.7%) 13,136 (3.9%) 5,223 (1.6%) March 2008 1,64,068 (47.8%) 58,567 (17.0%) 46,912 (13.7%) 7,152 (2.0%) March 2009 (provisional) 1,90,207 (46.8%) 76,062 (15.9%) 47,916 (11.8%) 15,832 (3.9%) # Indirect agriculture is reckoned only up to 4.5 per cent of the ANBC or credit equivalent of OBEs, whichever is higher. C. FOREIGN BANKS As on the last reporting Friday of Detail Total priority sector advances Total advances to micro & small enterprises * Total Export credit (includes SSI export) March 2006 37,831 (33.4%) 11,637 (10.3%) 20,711 (18.3%) March 2007 50,254 (39.5%) 15,489 (12.2%) 28,954 (22.7%) March 2008 (provisional) 55,483 (34.3%) 18,138 (11.2%) 31,511 (19.4%) Source : RBI * Figures for 2007 represent small-scale industries. In terms of revised guidelines on lending to the priority sector, MSEs are defined on basis of the Micro, Small and Medium Enterprises Development (MSMED) Act 2006. Figures in parentheses for the year 2007 show percentage of advances to net bank credit while those for the years 2008 and 2009 show percentage to ANBC. 2009. As regards lending to agriculture by PSBs, only 14 banks achieved the target of 18 per cent. In the case of private-sector banks, out of 22 banks, five did not achieve the overall priority- sector lending target of 40 per cent and only eight achieved the target of 18 per cent for lending to agriculture. While the target for lending to the weaker sections (10 per cent) was achieved by 15 PSBs, only four private- Financial Intermediation and Markets sector banks achieved the same as on the last reporting Friday of March 2009. Out of 27 foreign banks, only four did not achieve the overall prioritysector lending target of 32 per cent as on the last reporting Friday of March 2009. The number of foreign banks, which did not achieve the targets of 10 per cent and 12 per cent for lending to the MSE and export sectors respectively, stood at six. 5.16 In order to improve and enhance the flow of credit to the priority sector, a number of policy initiatives were taken during 2009-10 including the following: 97 dealing in essential commodities (fair price shops), consumer cooperative stores; and advances granted to private retail traders with credit limits not exceeding Rs 20 lakh] would henceforth be part of the small (service) enterprises. Rural Infrastructure Development Fund (RIDF) 5.19 The Government of India initiated the settingup of an RIDF to be raised from the commercial banks to the extent of their shortfall in agricultural lending. The Fund has since been continued, with its corpus being announced every year in the budget. Over the years, coverage under the RIDF has been made 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 announced in the Union Budget has gradually increased from Rs 2,000 crore in 1995–96 (RIDF I) to Rs 14,000 crore in 2009-10 (RIDF XV). The aggregate allocations have reached Rs 1,00,000 crore. Further, Table 5.5 : Sanctions and disbursements Under the RIDF and Bharat Nirman (As on December 31, 2009) (Rs crore) Region Sanctions Disbursements Disbursements as per cent of sanction 64.35 69.96 66.13 62.61 52.22 55.21 63.04 85.34 66.21 Housing Banks were advised that loans granted to housing finance companies (HFCs) for on-lending to individuals for purchase/construction of a dwelling unit per family be classified as housing loans under the priority sector, provided the housing loans granted by HFCs do not exceed Rs 20 lakh per dwelling unit. Eligibility under this measure was restricted to 5 per cent of the individual bank’s total priority-sector lending, on an ongoing basis. This special dispensation is made applicable for loans granted by banks to HFCs up to March 31, 2010. Small-scale Sector Banks have been advised that loans granted for certain activities under micro and small (service) enterprises would be included within the priority sector provided such enterprises satisfy the definition of micro and small (service) enterprises in respect of investment in equipment (original cost excluding land and building, furniture, fittings and other items not directly related to the service rendered or as may be notified under the MSMED Act 2006) (i.e. not exceeding Rs10 lakh and Rs 2 crore respectively). 5.17 The activities which would be included within the priority sector are, consultancy services including management services, composite broker services in risk and insurance management, third-party administration (TPA) services for medical insurance claims of policy holders, seed grading services, training-cum-incubator centres, educational institutions, training institutes, retail trade, practice of law, i.e. legal services, trading in medical instruments (brand new), placement and management consultancy services and advertising agency and training centres. 5.18 There will be no separate retail trade category under the priority sector. Loans granted by banks for retail trade [i.e. advances granted to retail traders South West North Central East North-eastern Region & Sikkim Total Bharat Nirman Grand Total 27,068.41 17,417.90 14,354.92 10,042.81 27,997.49 18,513.68 8,956.38 5,607.56 16,901.57 8,825.99 4,375.76 2,415.68 99,654.53 62,823.62 16,500.00 14,080.70 1,16,154.53 76,904.32 Source : NABARD (National Bank for Agriculture and Rural Development). a separate window has been created under the RIDF with a corpus of Rs 4,000 crore, with annual replenishment, for partly funding the rural roads and bridges components of the Bharat Nirman Programme from 2006–07 to 2008-09. This amount was raised to Rs 4,500 crore in 2009-10. 5.20 As against the total allocation of Rs1,00,000 crore, encompassing RIDF I to XV, sanctions aggregating Rs 99,654.53 crore have been accorded 98 Economic Survey 2009-10 crore to the agricultural sector, thereby exceeding the target by around 4 per cent. Commercial banks and regional rural ranks (RRBs) together extended credit to 81.02 lakh new farmers during 2008-09. In addition to this, cooperative banks provided loans to 13.88 lakh new farmers during the period, thus taking the total number of farmers financed by the banking system to 94.90 lakh. 5.23 The total credit flow to agriculture during 200910 up to October 31, 2009 by commercial banks, cooperative banks and RRBs was of the order of Rs 1,65,439.37 crore, amounting to 51 per cent of the annual target of Rs 3,25,000 crore (Table 5.7). Table 5.6 : Disbursements during 2009-10 (As on December 31, 2009) (Rs crore) Region Disbursement AchieveTarget Achieve- ment(%) ment 1,367.15 795.27 261.23 392.74 1,384.91 214.12 6,771.42 2,081.70 8,853.12 32.28 33.84 58.81 32.73 44.67 31.49 42.28 46.26 43.15 South 4,235 West 2,350 North 4,450 Central 1,200 East 3,100 North-eastern Region & Sikkim 680 RIDF Total 16,015 New Delhi–NRRDA 4,500 Grand Total Source: NABARD. Kisan Credit Card Scheme (KCC) 5.24 The KCC scheme has become a widely accepted mechanism for delivery of credit to farmers. The banking system has issued 878.30 lakh KCCs as of November 30, 2009. The scheme now also covers borrowers of the long-term cooperative credit structure. The KCC has thus become a single window for a comprehensive credit product. The year-wise and agency-wise break up of the cards issued since inception is given in Table 5.8. 20,515 to various State Governments, and disbursements under the Fund amounted to Rs 62,823.62 crore, up to end December 2009. The National Rural Roads Development Agency (NRRDA) was sanctioned during the tranches RIDF XII to RIDF XV and it has so far availed of a disbursement of Rs 14, 080.70 crore. (Table 5.5). 5.21 During 2009-10 the aggregate disbursement to the States amounted to Rs 8,853.12 crore till end December 2009 and that to the NRRDA was Rs 2,081.70 crore (Table 5.6). INITIATIVES FOR THE AGRICULTURAL SECTOR Personal Accident Insurance Scheme (PAIS) 5.25 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, however, to keep in mind the guiding principles of PAIS, especially the premium- sharing formula,and coverage while negotiating with insurance companies. AGRICULTURAL CREDIT Flow of Agricultural Credit 5.22 As against the target of Rs 2,80,000 crore (provisional) for agricultural credit in 2008-09, the banking system disbursed credit of Rs 2,92,437 Table 5.7 : Flow of institutional credit to agriculture and allied activities (Rs crore) Sl. No. Agency 1. 2. 3. Cooperative Banks % share RRBs % share Commercial Banks % share Total (1+2+3) Source : NABARD. $ : Including Others ^ : Provisional $ 2004-05 31,424 25 12,404 10 81,481 65 1,25,309 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* 32,925 20 20,065 12 1,12,449 68 1,65,439 * : Up to October 31, 2009. Financial Intermediation and Markets Table 5.8 : Agency-wise KCCs issued and amount sanctioned (as of November 30, 2009) Agency Cooperative Banks RRB Commercial Banks Total 22.97 14.06 48.08 85.11 Cards issued (lakh) 2006-07 2007-08 2008-09 2009-10 20.91 17.73 46.06 84.70 13.44 14.15 58.34 85.93 12.17 11.02 8.45^ 31.64 373.61 125.73 378.96 878.30 Amount sanctioned (Rs. crore) Total # 2006-07 2007-08 2008-09 2009-10@ 13,141 7,373 26,215 46,729 19,991 8,783 59,530 88,262 8,428 5,648 39,009 53,085 99 Total # 5,241 1,38,229$ 4,93,44$ 6,657^ 1,93,497* 5,512 17,329 3,81,070 Source : NABARD # Since inception of the scheme in 1998. ^: Data up to 30 June 2009 @ Break-up i.e term loan is not available $ Total amount sanctioned includes Rs 2,859 crore for term loan under KCC for 2008-09. $$ Total amount sanctioned includes Rs 2,304 crore for term loan under KCC for 2008-09. * Total amount sanctioned includes Rs 10,279 crore for term loan under KCC for 2008-09. Enlargement of the scope of KCC 5.26 With a view to making it more user-friendly, NABARD has enlarged the scope of the KCC scheme to cover term loans for agriculture and allied activities, including a reasonable component for consumption needs, besides the existing facility of providing crop loan limit. Rs 3,785.39 crore as on March 31, 2008. Thus more than 8.06 crore poor households were associated with banking agencies under the SHG- Bank Linkage Programme. 5.30 As on March 31, 2009, commercial banks had the maximum share of SHG savings with savings of 35,49,509 SHGs (58 per cent) amounting to Rs 2,772.99 crore (50 per cent); this was followed by RRBs with savings bank accounts of 16,28,588 SHGs (26.6 per cent) and savings amount of Rs1,989.75 crore (35.9 per cent) and cooperative banks with savings bank accounts of 9,43,050 SHGs (15.4per cent) and savings amount of Rs 782.88 crore (14.1 per cent). 5.31 The share of the Swarnajayanti Gram Swarozgar Yojana (SGSY) in SHG savings accounts was 15,05,581 SHGs, forming 25 per cent of the total SHGs having savings accounts in banks. During 2008-09, the average savings per SHG with all banks increased from Rs 7,556 as on March 31, 2008 to Rs 9,060 as on March 31, 2009, varying between a high of Rs 12,218 per SHG with RRBs and a low of Rs 7,812 per SHG with commercial banks. As on March 31, 2009, the share of women SHGs in total SHGs with savings bank accounts was 48,63,921, accounting for 79.46 per cent as compared to the previous year’s share of 79.56 per cent. 5.32 During 2008-09, banks financed 16,09,586 SHGs, including repeat loans to existing SHGs, as against 12,27,770 SHGs during 2007-08—a growth of 31.1 per cent (number of SHGs). As on March 31, 2009, 42,24,338 SHGs had outstanding (cumulative) bank loans of Rs 22,679.85 crore as against 36,25,941 SHGs with outstanding bank loans of Rs16,999.90 crore as on March 31, 2008 (Table 5.9). This included 9,76,887 SHGs (6.5 per Crop Insurance on KCC 5.27 Crop loans disbursed under the KCC Scheme for notified crops are covered under the Rashtriya Krishi Bima Yojana (National Crop Insurance Scheme), introduced to protect the interests of the farmer against crop loss caused by natural calamities, pest attacks, etc. MICRO FINANCE Self-Help Groups (SHGs) 5.28 In an effort to mainstream micro credit and increase its outreach, the RBI had issued comprehensive guidelines in February 2000 stipulating that micro credit extended by banks to individual borrowers directly or through any intermediary would henceforth be reckoned part of their priority-sector lending. Banks were given the freedom to formulate their own model[s] or choose any conduit/intermediary for extending micro credit. The SHG-Bank Linkage Programme implemented by commercial banks, RRBs and cooperative banks has emerged as the major micro- finance programme in the country. 5.29 Under the SHG-Bank Linkage Programme, as on March 31, 2009, 61,21,147 SHGs held savings bank accounts with total savings of Rs 5,545.62 crore as against 50,09,794 SHGs with savings of 100 Year Economic Survey 2009-10 Table 5.9 : Progress under SHG-Bank Linkage New SHGs financed by banks During the year No. 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09# 2,55,882 3,61,731 5,39,365 6,20,109 11,05,749* 12,27,770* 16,09,586* Growth (%) 29 41 49 15 — 11 31.1 Cumulative during the year No. 7,17,360 10,79,091 16,18,456 22,38,565 28,94,505@ 36,25,941 42,24,338 Amount$$ 1,022.34 1,855.53 2,994.25 4,499.09 6,570.39 8,849.26 12,256.51 Growth (%) 87 81 62 50 — 35 38.5 Bank loan** Cumulative Amount$$ 2,048.68 3,904.21 6,898.46 11,397.55 12,366.49$ 16,999.90$ 22,679.85$ Source : NABARD * Include existing SHGs also, which were provided repeat bank loan. ** Includes repeat loans to existing SHGs. # Provisional $ Outstanding. $$ Amount in Rs. Crore. @ from 2006-07 onwards, data in respect of number of SHGs financed by banks and bank loans are inclusive of SHGs financed under the Swarnajayanti Gram Swarozgar Yojana (SGSY) and the existing groups receiving repeat loans. Owing to this change, NABARD discontinued compilation of data on cumulative basis from 2006-07. As such data from 2006-07 onwards are not comparable with the data of the previous years. cent) with outstanding bank loans of Rs 5,861.72 crore (21.7per cent) under the SGSY as against 9,16,978 SHGs with outstanding bank loans of Rs 4,816.87 crore as on March 31, 2008. Commercial banks had the maximum share of around 70 per cent of outstanding bank loans to SHGs followed by RRBs with a share of 23 per cent and cooperative banks with the balance. As on March 31, 2009, the average bank loan outstanding per SHG was Rs 53,689 as against Rs 46,884 as on March 31, 2008. It varied from a high of Rs 57,037 per SHG in the case of commercial banks to a low of Rs 31,460 per SHG in the case of cooperative banks. 5.33 Pursuant of the announcement made in the Reserve Bank’s Annual Policy Statement for the year 2007-08, all regional offices (ROs) of the Reserve Bank were advised to undertake an evaluation of the SHG-Bank Linkage Programme. This was intended to ascertain the degree of transparency in maintaining accounts by SHGs and their adherence to best practices. The evaluation of SHGs carried out by the ROs revealed that there was scope for improvement in the area of maintenance of books of accounts. It also brought out that rotation of group leaders was generally not followed by SHGs. However, other best practices like strict adherence to attendance of group meetings, recording minutes of the meetings and prompt repayment of bank loans were being followed. 5.34 The momentum of growth in the micro-finance sector has brought into focus the importance of regulating the sector to function in an efficient and orderly manner. There would be need for greater transparency in their functioning and for facilitating their reach to un-banked population of the country. FINANCIAL PERFORMANCE OF BANKS 5.35 The balance sheets of SCBs in India available as of 2008-09 indicate that the SCBs remained robust. However, the Indian banking sector was not completely insulated from the effects of the slowdown in the economy in 2008-09. 5.36 The consolidated balance sheets of SCBs expanded by 21.2 per cent as in end-March 2009 as compared to 25.0 per cent in the previous year. While the balance sheets of PSBs maintained their growth momentum, private-sector and foreign banks registered a deceleration in growth. The working results of SCBs under different categories are abstracted in Table 5.10. 5.37 During 2008-09, the growth rate of banks’ lending to industries, personal loans and services witnessed a deceleration, while the growth rate of banks’ lending to agriculture and allied activities increased substantially. Overall, the incremental credit–deposit (C-D) ratio declined sharply reflecting the slowdown in credit growth. Financial Intermediation and Markets Table 5.10 : Working results of scheduled commercial banks Items PSBs 2007-08 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) F Total Assets G Net Income (Aii + E) 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) Memo Item 1 Operating Expenses as Per Cent of Net Income Source: RBI. 2,45,872 2,13,075 32,797 2,19,280 1,48,902 46,663 23,715 73,255 26,592 64,173 30,21,924 96,970 8.14 7.05 1.09 7.26 4.93 1.54 0.78 2.42 0.88 2.12 2008-09 3,15,608 2,73,428 42,180 2,81,215 1,93,447 55,190 32,578 89,583 34,393 Foreign banks 2007-08 35,005 24,417 10,588 28,392 10,604 10,353 7,435 16,966 6,613 2008-09 Old pvt. sector banks 2007-08 16,798 14,614 2,184 14,821 9,960 3,235 1,626 5,212 1,977 2008-09 21,572 18,783 2,789 19,163 12,834 3,939 2,390 6,348 2,409 New pvt. sector banks 2007-08 71,199 56,377 14,822 63,654 38,535 17,032 8,087 24,577 7,545 2008-09 81,443 66,283 15,160 72,985 44,123 17,840 11,022 26,298 8,458 All SCB 2007-08 3,68,874 3,08,483 60,391 3,26,147 2,08,001 77,283 40,863 1,20,010 42,727 101 2008-09 4,63,836 3,88,816 75,020 4,11,067 2,63,221 89,268 58,578 1,42,037 52,769 (Rs Crore) 45,213 30,322 14,891 37,704 12,817 12,299 12,588 19,808 7,509 79,981 13,813 17,505 4,654 37,66,716 3,64,099 4,47,149 1,94,544 1,22,161 8.38 7.26 1.12 7.47 5.14 1.47 0.86 2.38 0.91 2.12 24,401 9.61 6.71 2.91 7.80 2.91 2.84 2.04 4.66 1.82 3.79 32,396 10.11 6.78 3.33 8.43 2.87 2.75 2.82 4.43 1.68 3.91 6,838 8.63 7.51 1.12 7.62 5.12 1.66 0.84 2.68 1.02 2.39 5,949 17,842 22,160 1,00,482 1,25,595 2,32,001 7,45,599 7,95,464 43,26,166 52,41,330 8,738 9.30 8.10 1.20 8.26 5.53 1.70 1.03 2.74 1.04 2.56 32,664 9.55 7.56 1.99 8.54 5.17 2.28 1.08 3.30 1.01 2.39 37,320 10.24 8.33 1.91 9.18 5.55 2.24 1.39 3.31 1.06 2.79 1,60,873 8.53 7.13 1.40 7.54 4.81 1.79 0.94 2.77 0.99 2.32 2,00,615 8.85 7.42 1.43 7.84 5.02 1.70 1.12 2.71 1.01 2.40 (As per cent of total assets) 48.12 45.18 42.43 37.96 47.31 45.08 52.14 47.80 48.04 44.50 5.38 The consolidated balance sheets of SCBs, expanded by 21.2 per cent as in end-March 2009, as compared to 25.0 per cent in end-March 2008. The growth rate of aggregate deposits of SCBs decelerated to 22.4 per cent as in end-March 2009 from 23.1 per cent as in end-March 2008. The growth rate of aggregate loans and advances of SCBs decelerated to 21.2 per cent as in end-March 2009 from 25.0 per cent in the previous year. Apart from cyclical factors which led to slowdown after a period of high credit growth, the deceleration was accentuated this year because of the overall slowdown in the economy in the aftermath of the global financial turmoil. The capital to risk-weighted assets ratio (CRAR) of SCBs improved to 13.2 per cent as in end-March 2009 from 13.0 per cent as in end-March 2008, remaining significantly above the stipulated minimum of 9.0 per cent. 5.39 Growth in investments by banks decelerated to 23.1 per cent as of end-March 2009. However, the share of investments under the SLR category increased during 2008-09, due to banks’ preference to park their funds in low-risk and low-return instruments against the backdrop of prevailing 102 Economic Survey 2009-10 However, though this was higher than the Rs 28,283 crore written off in 2007-08, it was lower than the fresh NPAs added (Rs 52,382 crore) during the year. Though some slippage was to be expected in the current global context, it has been moderate as compared to the problems faced by banks all over the world. Among the various channels of recovery available to banks for dealing with bad loans, the SARFAESI Act and the Debt Recovery Tribunals (DRTs) have been the most effective. 5.45 The gross NPAs to gross advances ratio for SCBs remained constant at 2.3 per cent during 2008-09 as in 2007-08. However, though the gross NPA to gross advances ratio of PSBs declined from 2.2 per cent in March 2008 to 2.0 per cent as of March 2009, that of old private banks increased from 2.3 to 2.4 per cent and that of foreign banks from 1.8 to 4.0 per cent in March 2009 over the level of March 2008. The net NPA ratio (net NPAs as percentage of net advances) increased marginally from 1.0 to 1.1 in the case of SCBs in March 2009. uncertainties. On other hand, growth of banks’ investments in non-SLR securities (i.e. bonds/ debentures/ shares and commercial papers) decelerated. The total flow of funds from SCBs to the commercial sector comprising credit and nonSLR investments increased by 17.5 per cent (Rs 4,21,091 crore) in 2008-09 as compared to 22.6 per cent (Rs 4,44,807 crore) in 2007-08. 5.40 SCBs did not raise any resources from the equity market during 2008-09 though they accessed the debt market for the purpose. The return on assets (ROA) remained at the previous year’s level of 1.0 per cent, while the return on equity (ROE) increased to 13.3 per cent during 2008-09 from 12.5 per cent during 2007-08. 5.41 The Indian banking sector was, however, not completely insulated from the effects of the slowdown in the economy as evident from the financial performance of the SCBs. The growth rates of income as well as expenditure of the SCBs slowed down, leading to deceleration in growth of net profits. Capital Adequacy Ratio 5.42 One of the major indicators suggesting that the Indian banking system has withstood the pressure of global financial turmoil is the improvement in the CRAR. The overall CRAR of all SCBs improved to 13.2 per cent by end-March 2009 from 13.0 per cent a year earlier, thus remaining significantly above the stipulated minimum of 9.0 per cent. While the CRAR of as many as 78 banks was above 10 per cent, that of only one bank was in the range of 9 to 10 per cent. 5.43 All commercial banks in India excluding RRBs and local area banks have become Basel II compliant as of March 31, 2009. To begin with, the Standardised Approach for Credit Risk, Basic Indicator Approach for Operational Risk and Standardised Duration Approach for Market Risk have been implemented in India. However, the implementation of advanced approaches under the Basel II framework would bring about the upgradation of the risk management framework as well as capital efficiency in the Indian banking system. Technological Developments in Banks 5.46 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. 5.47 During 2008-09, the transmission of clearing data—both for cheque and electronic clearing services—and collation of inputs from currency chests as part of the Integrated Currency Chest Operations and Management System (ICCOMS) was done using secured websites. The prevalent IT system to process the accounting requirements of the State and Central Governments was replaced by the Centralised Public Accounts Department System (CPADS), which is considered more robust and user friendly. 5.48 To facilitate a smoother and faster bidding in the Primary Dated Securities Auctions held by the Reserve Bank, a new version of the Negotiated Dealing System Auction module, developed and hosted by the Clearing Corporation of India, was developed in 2008-09, leading to its launch with effect from May 11, 2009. 5.49 One of the major achievements during 200809 was the increase in the number of branches providing Core Banking Solutions (CBS). The total Non-performing Assets (NPAs) of the Banking Sector 5.44 Indian banks recovered a higher amount from NPAs during 2008-09 as compared to the previous year, pointing towards efforts for improvement in the asset quality of banks. The total amount recovered and written-off in 2008-09 was Rs 38,828 crore Financial Intermediation and Markets number of branches of PSBs that have implemented CBS increased from 35,464 as on March 31, 2008 to 44,304 as on March 31, 2009. 5.50 The computerization of the banking sector, which is regarded as the precursor to other technological initiatives, is almost in completion stage. The proportion of PSB branches that achieved full computerization increased from 93.7 per cent as of end-March 2008 to 95.0 per cent as of end-March 2009. That continuous progress is being made by banks is reflected in the increase in the number of banks moving into the ‘more than 90 per cent but less than 100 per cent’ category. During 2008-09, the total number of automated teller machines (ATMs) installed by banks grew by 25.4 per cent. 103 Table 5.11 : Utilization of refinance facilities (Amount in Rs crore) AIFIs Re- Cumulative finance amount sanction drawn up -ed June 26, 2009 Cumulative amount disbursed up to June, 26, 2009 No.of beneficiaries SIDBI 7,000 Exim Bank 5,000 NHB 4,000 Total 16,000 5,684 988 7,747 3,000 3,979 21,398 4,971 1,043 1,841 3,478 3,979 15,312 33* 22** 5,179 35 14# 5,283 Source: RBI * State Finance Corporations (SFCs) and banks. ** Non Banking Finance Companies # Housing Finance Companies NON-BANKING FINANCIAL INSTITUTIONS (NBFIS) 5.51 While banks account for a major share of the Indian financial system, NBFIs also play an important role in providing a wide range of financial services. While banks have an edge in providing payment- and liquidity-related services, NBFIs tend to offer enhanced equity and risk-based products. The major intermediaries that are included in the NBFI group are development finance institutions (DFIs), insurance companies, non-banking financial companies (NBFCs), primary dealers (PDs) and capital market intermediaries such as mutual funds. The NBFIs provide medium- to long-term finance to different sectors of the economy. facility was to be charged at the repo rate under the Liquidity Adjustment Facility (LAF) of the RBI. The amount outstanding under the special refinance facility remained small up to February 2009 for each institution, but picked up in the subsequent months (Table 5.11). 5.54 The ‘umbrella limit’ for aggregate borrowings by financial institutions (FIs) (through five specified instruments, namely term deposits, term money borrowings, certificates of deposits [CDs], commercial papers [CPs] and inter-corporate deposits [ICDs]) which was stipulated not to exceed 100 per cent of their net owned funds (NOFs) at any time, as per their latest audited balance sheets, was also raised to 200 per cent of NOFs for one year with effect from December 8, 2008 for EXIM Bank and from January 15, 2009 for the NHB, subject to review and subject to the asset liability management (ALM) guidelines of the Reserve Bank. 5.55 During 2008-09, though there was increase in financial assistance both sanctioned and disbursed by FIs, the increase in disbursements (93.3 per cent) was more pronounced than that in sanctions (70.2 per cent). A major part of the increase in financial sanctions and disbursements was accounted for mainly by investment institutions (especially the LIC) followed by term-lending institutions (Table 5.12). 5.56 Resources raised by the FIs during 2008-09 were considerably higher than those during the previous year. The increase was largely in the shortterm mode, while the raising of long-term and foreign currency resources declined as compared to the preceding year. Resources raised by FIs from the money market rose sharply during 2008-09 with the Financial Institutions (FIs) 5.52 Based on the major activity undertaken by FIs, they could be classified into three broad categories, namely (i) term-lending institutions whose main activity is direct lending by way of term loans and investments (e.g. EXIM Bank); (ii) refinance institutions which mainly extend refinance to banks as well as NBFIs (e.g. NABARD, the Small Industries Development Bank of India [SIDBI] and National Housing Bank [NHB]); (iii) investment institutions which deploy their assets largely in marketable securities (e.g. the Life Insurance Corporation of India [LIC]). 5.53 In the context of the emergent liquidity constraints following the onset of the global financial crisis, the RBI in December 2008, provided a window for refinance facilities of Rs 7,000 crore, Rs 5,000 crore and Rs 4,000 crore for SIDBI, EXIM Bank and the NHB respectively. Accommodation under this 104 Economic Survey 2009-10 Table 5.12 : Financial assistance sanctioned and disbursed by financial institutions (Rs crore) Category 2007-08 S (i) (ii) All-India Term-Lending Institutions* Specialised Financial Institutions# 18,696 366 39,670 58,732 D 17,379 189 28,460 46,028 Amount 2008-09 S 33,660 597 65,731 99,988 D 31,604 283 57,086 88,973 S 80.0 63.1 65.7 70.2 Percentage variation 2008-09 D 81.9 49.7 100.6 93.3 (iii) Investment Institutions@ Total assistance by FIs(i+ii+iii) Source : RBI S Sanctions * Relating to SIDBI and Industrial Investment Bank of India. D Disbursements # Relating to IVCF and ICICI Venture. @ Relating to LIC and GIC & erstwhile subsidiaries All data are provisional. utilization of the “umbrella limit” reaching 58.0 per cent in 2008-09 as compared to 22.9 per cent in the preceding year. External sources contributed 30.7 per cent of sources of funds during 2008-09 as compared to 51.7 per cent during the preceding year. 5.57 FIs recorded improvement in their asset quality during 2008-09. In terms of net NPA to net loans ratio, the asset quality of SIDBI and EXIM Bank improved during the year. The net NPA ratio of NABARD increased marginally. None of the FIs had any assets in the ‘loss’ category as of end-March 2009. 5.58 Net interest and non-interest incomes of FIs increased by 22.5 per cent and 31.1 per cent respectively during 2008-09. The operating profit increased by 33.5 per cent during the year. The net profit of FIs also increased despite higher provisions for taxation. The capital adequacy ratio of all the FIs continued to be significantly higher than the minimum stipulated norm of 9 per cent. important non-deposit taking NBFCs (NBFCs-ND) were permitted, as a temporary measure, to raise foreign currency short-term borrowings under the approval route subject to certain conditions. 5.60 The total number of NBFCs registered with the Reserve Bank, consisting of deposit-taking NBFCs (NBFCs-D), residuary non-banking companies (RNBCs), mutual benefit companies (MBCs), miscellaneous non-banking companies (MNBCs) and Nidhi companies, declined from 12,809 in end-June 2008 to 12,740 in end-June 2009. The number of NBFCs-D also declined from 364 in end-June 2008 to 336 in end-June 2009, mainly due to the exit of many NBFCs from deposit-taking activity (Table 5.13). 5.61 The ratio of deposits of reporting NBFCs to the aggregate deposits of SCBs dropped to 0.53 per cent in end-March 2009 from a level of 0.73 per cent in end- March 2008, mainly due to the decline in deposits of reporting NBFCs. Table 5.13 : Number of NBFCs Registered with the RBI End June Number of registered NBFCs 13,764 13,261 13,014 12,968 12,809 12,740 Number of NBFCs-D 604 507 428 401 364 336 NON-BANKING FINANCIAL COMPANIES (NBFCS) 5.59 The NBFCs as a whole account for 9.1 per cent of the assets of the total financial system. In the wake of the recent global financial crisis and its fallout for FIs, the RBI undertook measures to preserve financial stability and arrest the moderation in the growth momentum. As a measure aimed at expanding rupee liquidity, the Reserve Bank provided a special repo window under its LAF for NBFCs. In addition, an existing special purpose vehicle (SPV) was used as a platform to provide liquidity support to NBFCs. In December 2008, systemically 2004 2005 2006 2007 2008 2009 Source: RBI. Financial Intermediation and Markets 5.62 Total assets of NBFCs declined to Rs 95,727 crore during 2008-09 from Rs 99,014 crore in the preceding year. Public deposits also recorded a decline to Rs 21,548 crore in end- March 2009 from Rs 24,400 crore in end-March 2008. The NOFs of NBFCs witnessed a growth of 8.8 per cent and stood at Rs13,458 crore as in end-March 2009. The share of RNBCs in NBFCs in terms of total assets, public deposits and NOFs recorded marginal decline during 2008-09 over the preceding year. 5.63 Total assets/liabilities of NBFCs (excluding RNBCs) expanded at the rate of 1.3 per cent during 2008-09 as compared to 53.6 per cent during 200708. Borrowings, which are the major source of funds for NBFCs, increased by 9.3 per cent during the year, while public deposits declined by 4.9 per cent indicating the continuing shift in the pattern of raising of resources. On the assets side, hire purchase assets and loans and advances, which are major items of assets, witnessed growth of 6.3 per cent and 12.0 per cent respectively in 2008-09, as compared to 27.9 per cent and 70.2 per cent respectively, during the earlier year. Growth of total investments of NBFCs decelerated mainly due to deceleration in investment in approved securities. Other investments increased by 37.4 per cent during 2008-09 as compared to 30.0 per cent during 2007-08. 5.64 Among NBFC groups, asset finance companies (AFCs) held the largest share in total assets/liabilities (70.3 per cent), followed by loan companies (28.9 per cent), hire purchase companies (0.6 per cent) and equipment leasing (0.3 per cent). The increase in assets/liabilities of AFCs was mainly on account of reclassification of NBFCs, which was initiated in December 2006. 5.65 Of the total deposits held by all NBFCs, AFCs held the largest share in total deposits of NBFCs (70.5 per cent); loan companies and hire purchase companies accounted for low shares of 19.9 per cent and 9.6 per cent respectively. 5.66 Continuing the trend of the previous year, public deposits held by all groups of NBFCs taken together declined moderately during 2008-09. This trend is indicative of the shift in preference of NBFCs from public deposits to bank loans/ debentures. The decline in public deposits was mainly evident in the case of loan companies and equipment-leasing companies due to reclassification of some of these companies as asset finance companies. Deposits of asset finance companies increased by 17.5 per cent during 2008-09. 105 5.67 The asset size of NBFCs varied significantly between less than Rs 25 lakh to above Rs 500 crore. The asset-holding pattern remained skewed in 200809, with 12 NBFCs with asset size of “above Rs 500 crore” holding 95.8 per cent of the total assets of all NBFCs, while the remaining 263 NBFCs held only about 4.2 per cent in end-March 2009. 5.68 Financial performance of NBFCs in terms of income and net profit improved during 2008-09. While growth in expenditure decelerated over the previous year, it, however, witnessed higher growth than income, resulting in a decline in operating profit by 2.2 per cent. Net profit registered a moderate growth mainly due to lower provisioning for tax. The cost to income ratio deteriorated from 68.9 per cent in 200708 to 74.1 per cent in 2008-09. Non-interest cost at 97.6 per cent continued to constitute the dominant share in the total cost of NBFCs during 2008-09. Concomitantly, the interest cost accounted for a small share. 5.69 Gross NPAs (as percentage of gross advances) of asset finance, equipment leasing, investment and hire purchase companies declined during 2008-09. Net NPAs (as percentage of net advances) increased marginally in the case of asset finance companies and hire purchase companies, while those of equipment leasing and investment companies decreased. NPAs of loan companies remained negative during 2008-09 also. Asset quality of various types of NBFCs as reflected in various categories of NPAs (substandard, doubtful and loss) showed that there was sharp improvement in the asset quality of equipment leasing companies and deterioration in the asset quality of hire purchase companies during 2008-09 over the previous year. 5.70 CRAR norms were made applicable to NBFCs in 1998, in accordance with which every deposittaking NBFC is required to maintain a minimum capital, consisting of Tier-I and Tier-II of not less than 12 per cent (15 per cent in the case of unrated deposit-taking loan/investment companies) of its aggregate risk-weighted assets and of risk-adjusted value of off-balance sheet items. The number of NBFCs with less than the minimum regulatory CRAR of 12 per cent declined to 9 in end-March 2009 from 47 in end- March 2008. In end-March 2009, 198 out of 207 NBFCs had CRAR of 12 per cent or more as against 280 out of 327 NBFCs in end-March 2008. The number of NBFCs with CRAR more than 30 also declined to 168 in end- March 2009 from 239 in endMarch 2008. 106 Economic Survey 2009-10 5.76 In October 2008, taking into consideration the need for enhanced funds for increasing business and meeting regulatory requirements, the Reserve Bank decided that NBFCs-ND-SI may augment their capital funds by issue of perpetual debt instruments (PDIs). Such PDIs are eligible for inclusion as Tier I capital to the extent of 15 per cent of total Tier I capital as on March 31 of the preceding year. 5.77 In December 2008, systemically important NBFCs-ND-SIs were permitted, as a temporary measure, to raise foreign currency short-term borrowings under the approval route subject to certain conditions. In this connection, all the NBFCs-ND-SI that have availed of short-term foreign currency loans were advised to furnish a monthly return as per the prescribed format within ten days from the end of the month to which it pertains. 5.78 To enable the RBI to verify that “fit and proper” management of NBFCs is continuously maintained, it has been decided that any takeover/acquisition of shares or merger/ amalgamation of an NBFC-D with another entity or any merger/amalgamation of an entity with an NBFC-D that would give the acquirer/ another entity control of the NBFC-D, would require prior permission of the RBI with effect from September 17, 2009. 5.79 To hedge the underlying exposures of NBFCs, directions were issued covering the framework for trading of interest rate futures by NBFCs in exchanges in India recognized by the Securities Exchange Board of India (SEBI) subject to RBI/SEBI guidelines. 5.80 The turbulence in the international financial markets in 2008 also affected the domestic financial sector including NBFCs sector, particularly a few NBFCs-ND-SI. These entities have been financing long-term assets with short-term commercial paper and non-convertible debentures which were subscribed to mainly by mutual funds (MFs). Such NBFCs-ND-SI faced difficulties as MFs were not in a position to roll over these instruments during the crisis period. The measures undertaken by the Reserve Bank in respect of the NBFC sector following the financial crisis were as follows: i) NBFCs-ND-SI were permitted as a temporary measure to raise short-term foreign currency borrowings under the approval route subject to fulfillment of certain conditions. While the resources raised were to be used only for refinancing of short-term liabilities and not for creation of fresh assets, it was also advised that the maturity of such borrowing should not 5.71 Regulation of non-banking entities is being progressively strengthened and the process had started before the onset of the global financial crisis. Issues relating to the level playing field between banksponsored NBFCs and non-bank associated NBFCs and other issues of regulatory convergence and regulatory arbitrage were examined with respect to systemic implications. NBFCs-ND with asset size of Rs100 crore and above are defined as systemically important and an elaborate prudential framework has been put in place to regulate these entities. 5.72 Initially, with a view to protecting the interests of depositors, regulatory attention was mostly focused on NBFCs accepting public deposits (NBFCs-D). Over the years, however, this regulatory framework has been widened to include issues of systemic significance. The sector is being consolidated and while deposit-taking NBFCs have decreased both in size as well as in terms of the quantum of deposits held by them, NBFCs-ND have increased in terms of number and asset size. NBFCsND with asset size of Rs100 crore and above are subject to CRAR and exposure norms prescribed by the RBI. 5.73 A reclassification of NBFCs was effected in December 2006, whereby companies financing real/ physical assets for productive/ economic activities are classified as AFCs, while the other two categories are loan companies (LCs) and investment companies (ICs). 5.74 In July 2008, the Reserve Bank revised the approach towards monitoring of frauds in NBFCs which was earlier issued in March 2008. NBFCs have been advised to report frauds in their subsidiaries and affiliates/joint ventures, and directions were also issued in January 2009, requiring them to adopt an interest rate model which precludes high interest rates and at the same time be transparent to the customers. 5.75 The final guidelines regarding non-deposit taking systemically important NBFCs (NBFC-NDSI) were issued on August 1, 2008. According to these guidelines, the minimum CRAR for each NBFCND-SI was raised from the existing 10 per cent to 12 per cent to be reached by March 31, 2009 and 15 per cent to be reached by March 31, 2010. In view of the economic downturn and based on several requests received, this requirement has been postponed for one year. The NBFCs-ND-SI were required to make additional disclosures relating to CRAR, exposure to the real estate sector and the maturity pattern of assets and liabilities in their balance sheet from the year ending March 31, 2009. Financial Intermediation and Markets exceed three years and the maximum amount should not exceed 50 per cent of the NOF or US$10 million (or its equivalent), whichever was higher. ii) Banks were permitted, on a temporary basis, to avail of liquidity support under the LAF window through a relaxation in the maintenance of SLR up to 1.5 per cent of their NDTL, exclusively for meeting the funding requirements of NBFCs and mutual funds. iii) The risk weight on banks’ exposure to NBFCsND-SI was reduced to 100 per cent from 125 per cent irrespective of credit rating, while exposure to AFCs which attracted a risk weight of 150 per cent was also reduced to 100 per cent. iv) NBFCs-ND-SI were permitted to augment their capital funds by the issue of PDIs. The amount of PDI raised by NBFCs-ND-SI would not be treated as ‘public deposit’ within the meaning of Reserve Bank directives. v) The proposed increase in the CRAR to be maintained by NBFCs-ND-SI to 12 per cent and subsequently to 15 per cent was deferred by one year, i.e. 12 per cent by March 31, 2010 and 15 per cent by March 31, 2011. vi) The RBI provided direct lending facility as a lender of last resort (LOLR) to NBFCs-ND-SI against their rated CPs through an SPV by subscribing to its bonds. The facility was operationalized in January 2009 through an SPV called ‘IDBI SASF Trust’ to provide liquidity support against investment grade paper of NBFCs, subject to their fulfilling certain conditions. It was designed as an LOLR facility to allow an orderly downsizing of the balance sheets of financially sound NBFCs which faced short-term temporary liquidity requirement. The facility has been availed of by only one NBFC so far, which has drawn Rs1,040 crore under the scheme and there is no outstanding balance as of date. The Government of India had extended the facility for any paper issued till September 30, 2009 and the SPV would cease to make fresh purchases after December 31, 2009 and would recover all dues by March 31, 2010. The NBFC sector has been witnessing a consolidation process in recent years, wherein the weaker NBFCs are gradually exiting, paving the way for a stronger NBFC sector. 107 CAPITAL AND COMMODITY MARKETS 5.81 The capital and commodity markets exhibited buoyancy during 2009 as the markets recovered and gained strength against the backdrop of a distinct improvement in the risk appetite of investors leading to a sharp rise in international capital flows to emerging markets including India. Positive domestic factors, namely better than expected performance of corporates and banks and higher GDP growth during the second quarter (Q2) of 2009-10 also supported an uptrend in the Indian capital market. Capital Market 5.82 The Indian equity markets, which had declined sharply during 2008, reflecting the volatility in international financial markets and foreign institutional investment outflows, began the year 2009 on a subdued note. The market remained range bound during April-March 2009 but exhibited signs of recovery from April 2009. With the revival of foreign institutional investors’ (FIIs) interest in emerging market economies including India, the equity markets gained strength during May-July 2009. There was a fresh spell of bullish sentiment in September 2009, with the Bombay Stock Exchange (BSE) Sensex recording a high of 17,126.84 during the month. The Indian equity markets closed lower at 15,896.28 in end-October 2009, before showing an improvement during November-December 2009. The movement in equity indices in the Indian capital market was in line with trends in major international equity markets, a sign of increasing integration. Against the backdrop of these trends in Indian equity markets, the regulatory measures initiated during the year were clearly in the direction of introducing greater transparency, protecting investors’ interests and improving efficiency in the working of Indian equity markets, while also ensuring the soundness and stability of the Indian capital market. Primary Market 5.83 Though resource mobilization from the primary market through equity investments was sluggish in 2009 both in terms of number of issues and amount raised through public rights issues and follow-on public offerings, there was an increase in debt market activity and private placements. The total number of initial public offerings (IPOs) declined to 20 in 2009 from 37 in 2008. The total amount mobilized through equity issues in 2009 was lower at Rs 23,098 crore as compared to Rs 49,485 crore raised in 2008. The amount raised through IPOs, however, increased 108 Economic Survey 2009-10 Table 5.14 : Resource mobilization through the primary market (Rs crore) Calendar Year Mode 1. Debt 2. Equity of which, IPOs Number of IPOs Mean IPO size 3. Private Placement 4. Euro Issues (ADR/GDR) Total (1 to 4) 2006 389 32,672 24,779 75 330 1,17,407 11,301 1,61,769 2007 594 58,722 33,912 100 339 1,84,855 33,136 2,77,307 2008 0 49,485 18,393 37 497 1,55,743 6,271 2,11,499 2009(P) 3,500 23,098 19,296 20 965 2,38,226 15,266 2,80,090 Source : SEBI and RBI (for Euro Issues) P Provisional Table 5.15 : Trends in resource mobilization (net) by MFs (Rs crore) Sector 2006 1. 2. 3. 4. UTI Public Sector Private Sector Total (1 to 3) 6,426 12,229 86,295 1,04,950 Calendar Year 2007 9,245 8,259 1,20,766 1,38,270 2008 -2,704 14,587 -12,506 -624 2009 12,056 17,624 1,14,095 1,43,775 Source : SEBI slightly in 2009 to Rs 19,296 crore from Rs 18,393 crore in 2008. The mean IPO size increased to Rs 965 crore in 2009 from Rs 497 crore in 2008. There was no debt issue in 2008. The total amount mobilized through three debt issues during 2009 was Rs 3,500 crore. The total amount raised through private placement of debt in 2009 at Rs 2,38,226 crore was higher by 53.0 per cent than its previous year’s level of Rs 1,55,743 crore. Total resources mobilized through the primary market at Rs 2,80,090 crore recorded an increase of 32.4 per cent in 2009 (Table 5.14). 5.84 During 2009, total net resources mobilized by MFs increased to Rs 1,43,775 crore as compared to net redemptions amounting to Rs 624 crore in 2008. Private-sector mutual funds, which had witnessed heavy redemption pressure in 2008, recorded a turnaround with total net resource mobilization of Rs 1,14,095 crore in 2009 as against a net redemption of Rs12,506 crore in 2008. Total funds mobilized by public-sector mutual funds were marginally higher at Rs 17,624 crore in 2009 (Rs 14,587 crore in 2008). The Unit Trust of India (UTI), which had recorded net redemptions of Rs 2,704 crore in 2008, mobilized Rs12,056 crore in 2009 (Table 5.15). Secondary market 5.85 Indian equity markets witnessed a revival in the secondary market segment, which had recorded a sharp decline in the wake of the global financial crisis during the later half of 2008 (Figure 5.3). The secondary market staged a handsome recovery in 2009 following stimulus measures implemented by the Government and resurgence of foreign portfolio flows displaying renewed interest by foreign investors. The subdued global commodity prices in the beginning of 2009 also lifted the sentiments in the Indian capital market. Furthermore, election results announced in May 2009 removed uncertainty on economic policies and as such boosted Indian equity markets and both benchmark and sectoral indices rallied. The equity markets gained further till September 2009 on positive cues from the global markets, before declining during October 2009. Market sentiments improved during NovemberDecember 2009, leading to gains in equity prices and an uptrend in equity market indices. Financial Intermediation and Markets Figure 5.3 12000 10000 8000 6000 4000 2000 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 109 Movement of indices of NSE and BSE 20000 15000 10000 5000 0 NSE Indices BSE Indices Nifty Closing Nifty Junior Sensex Closing 2009 Year 5.86 Amongst the National Stock Exchange (NSE) indices, both Nifty and Nifty Junior recorded positive annual equity returns (current year-end index divided by previous year-end index multiplied by 100) of 75.8 per cent and 128.6 per cent in 2009 as against negative annual equity returns of 51.8 per cent and 63.5 per cent respectively during the calendar year 2008. 5.87 In terms of month-to-month movement, the NSE S&P CNX Nifty index showed improvements during March-May, July-September and November– December 2009. The S&P CNX Nifty index moved up from its previous year’s closing level of 2,959 to 5,201 on December 31, 2009, recording an increase of 75.8 per cent over the year. Nifty junior was on an uptrend in terms of month-end values from March to December 2009, except a marginal decline in its value in end-October 2009. The rise in the Nifty Junior index, on a point-to-point basis, was 128.6 per cent in end-December 2009. The movement in the BSE Sensex and BSE 500 indices was more or less in the same direction as in the case of Nifty indices during the year 2009. 5.88 During 2009, the Asian stock markets were on a recovery path. The cumulative change in global indices in end-December 2009 over the endDecember 2003 level revealed a significant rise in these indices across countries. The Jakarta Composite index (Indonesia) registered a rise of 264.1 per cent to 2,510 at end-December 2009, while the BSE Sensex was up by 199.1 per cent to 17,465 in end-December 2009. Nikkei 225, Japan, however remained lower than its endDecember 2003 level. Notwithstanding an improvement in global stock indices during the year, they were still lower than the levels reached in 2007 (Table 5.16). 5.89 Market capitalization of shares traded on the BSE and NSE increased sharply in 2009. Market capitalization, which had reached record levels in 2007, recovered in the case of Nifty, Nifty junior, the BSE Sensex and BSE 500 by end-December 2009. It surpassed the 2007 level in the case of Nifty junior, while for other indices it remained lower than 2007 levels (Table 5.17). Table 5.16 : 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 Kuala Lumpur Comp. Index, Malaysia TSEC weighted Index, Taiwan SSE Composite Index, China 13.1 13.2 44.5 7.6 10.5 14.2 4.2 -15.4 Cumulative change over end-2003 level 2005 61.0 18.3 68.1 50.9 69.7 13.4 11.2 -22.4 2006 136.1 58.8 161.0 61.3 76.8 38.0 32.8 78.7 2007 247.4 121.2 296.8 43.4 133.9 82.0 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 Source : Derived from various country sources. * End year closing. 110 Index Economic Survey 2009-10 Table 5.17 : Equity returns, volatility, market capitalization & P/E ratio Calendar Year 2006 2007 2008 2009 NNifty : Returns (per cent) End-year Market Capitalization Daily volatility * End-year P/E Nifty Junior : Returns (per cent) End-year Market Capitalization Daily volatility * End-year P/E BSE Sensex : Returns (per cent) End-year Market Capitalization Daily Volatility * End-year P/E BSE 500 : Returns (per cent) End-year Market Capitalization Daily Volatility * End-year P/E Source: BSE and NSE. * Standard deviation values. P/E—price to earnings ratio. (Rs cr.) 39.83 19,75,603 1.64 21.26 28.24 3,33,693 1.96 21.78 46.7 17,58,865 1.6 22.8 38.9 33,36,509 1.6 20.2 54.77 35,22,527 1.60 27.62 75.73 6,43,625 1.71 26.48 47.2 28,61,341 1.5 27. 7 63.0 64,70,881 1.5 29.1 -51.79 18,32,610 2.81 12.97 -63.52 2,95,471 3.15 8.99 -52.48 14,63,165 2.85 12.36 -58.74 29,40,741 2.75 12.4 75.76 33,14,447 2.14 23.17 127.91 6,55,899 2.23 16.28 76.35 26,49,482 2.19 22.36 85.34 56,87,505 2.05 21.9 (Rs cr.) (Rs cr.) (Rs cr.) 5.90 Market volatility, as measured by the standard deviation of daily volatility of the Indian indices, declined significantly in 2009. However, the volatility of weekly returns of Indian indices, namely Sensex and BSE 500, in 2009 was even higher than that in 2008, while Nifty indices, namely Nifty and Nifty junior, recorded lower volatility in 2009 (Table 5.18). 5.91 The P/E ratio of the major stock market indices, which partly discounts future corporate earnings reflecting investors’ expectations of corporate profit, witnessed a sharp increase in 2009. The valuation of stocks in terms of P/E ratios of the Table 5.18 : Volatility of weekly returns on the equity markets (standard deviation) Class of stocks Jan 2008 Dec 2008 India Top 50 (Nifty) Next 50 (Nifty Junior) Sensex BSE 500 Source : NSE and BSE Sensex and Nifty increased to 22.36 and 23.17 respectively as on December 31, 2009 as against 12.36 and 12.97 respectively as on December 31, 2008. This trend was also seen in P/E ratios of stock indices across select emerging market economies (EMEs) during 2009. Moreover, the differences in valuation of stocks in terms of P/E ratios amongst EMEs were not very sharp (Table 5.19). 5.92 The price of a security depends largely on demand and supply conditions and is influenced by the impact cost, which represents the cost of executing a transaction in a given security, for a Table 5.19 : P/E ratios in select emerging markets Index/market South Korea KOSPI Thailand SET Indonesia JCI Malaysia KLCI Taiwan TWSE India BSE Sensex India S&P CNX Nifty Source : SEBI Dec. 2008 10.95 7.26 8.26 10.09 9.31 12.36 12.97 Nov. 2009 21.32 25.23 26.46 22.18 N.A 21.53 22.37 Period Jan 2009 Dec 2009 3.89 4.39 5.12 5.29 4.30 4.89 4.57 4.68 Financial Intermediation and Markets Table 5.20 : Equity spot market liquidity : Impact cost (%) Calendar year Portfolio Nifty NSE Impact Cost at Rs 50 lakh Nifty Junior NSE Impact Cost at Rs 25 lakh Source : NSE 111 2006 2007 2008 2009 0.08 0.08 0.11 0.06 0.16 0.14 0.19 0.09 5.95 The number of registered FIIs rose to 1,706 at the end of 2009 from 1,594 in 2008. The number of sub-accounts also increased to 5,331 from 4,872 during the same period. The FII in the spot market increased to Rs 83,424 crore in 2009 as compared to withdrawals of Rs 52,987 crore in 2008. Further, net investment in debt was lower at Rs 4,563 crore in 2009 as compared to Rs 11,772 crore in 2008. Total net investment by FIIs in equity and debt markets taken together, increased considerably to Rs 87,987 crore in 2009 compared to a net decline of Rs 41,216 crore in 2008 (Table 5.22). 5.96 The cumulative assets under management of mutual funds increased by 60.9 per cent to Rs 6,65,146 crore as on December 31, 2009 from Rs 4,13,365 crore as on December 31, 2008. The share of income- /debt-oriented schemes in total assets under management was higher at 54.2 per cent in 2009 as against 47.7 per cent in 2008. The assets under management of equity- /growth-oriented schemes during 2009 accounted for 26.3 per cent of the total assets under management (23.9 per cent during 2008). However, the share of assets under money market schemes in total assets under management declined to 12.0 per cent during 2009 from 20.0 per cent during 2008 (Table 5.23). predefined order size, at any given point of time. Market liquidity and impact cost are inversely related. The impact cost for purchase or sale of Nifty and Nifty Junior portfolios was lower than in the previous three years (Table 5.20). 5.93 The turnover in the spot and derivatives segment on the NSE recorded an increase of 19.6 per cent and 33.6 per cent respectively in 2009. The BSE spot market turnover in 2009 declined further by 3.8 per cent over and above a decline of 6.4 per cent in 2008. The turnover in the derivatives market on the BSE was only Rs 36 crore in 2009 as against Rs 75,178 crore in 2008 (Table 5.21). 5.94 The spot market turnover (one way) for the NSE and BSE at Rs 50,86,096 crore in 2009 was higher by 12.7 per cent over its previous year’s level of Rs 45,12,562 crore in 2008. The turnover in the derivatives segment for the NSE and BSE, taken together, at Rs 1,55,65.799 crore, also posted a rise of 32.7 per cent in 2009. The turnover in the NSE spot and derivative markets, as a proportion of market capitalization of the Nifty, was 115 per cent and 470 per cent respectively. The turnover in the BSE spot market was 22 per cent of market capitalization of the BSE (500) Index. Table 5.21 : Market turnover Debt Market 5.97 The Indian debt market has two segments, namely Government securities and corporate debt. Government Securities 5.98 The fresh issues of Government of India (GoI) dated securities in 2009 amounted to Rs 4,89,000 crore as against Rs 2,04,317 crore [including securities issued under the Market Stabilisation Scheme (MSS)] in 2008. The outstanding dated securities of the GoI increased from Rs 14,16,443 crore in end-December 2008 to Rs 18,26,774 crore in end-December 2009. Yields (Rs crore) Market 2006 NSE Spot BSE Spot NSE Derivatives BSE Derivatives Source: NSE and BSE Calendar year 2007 30,93,982 14,14,727 1,19,40,877 2,19,824 2008 31,88,509 13,24,053 1,16,54,375 75,178 2009 38,12,031 12,74,065 1,55,65,763 36 19,16,227 9,61,653 70,46,665 18,071 112 Economic Survey 2009-10 Table 5.22 : Transactions of FIIs (Rs crore) Transactions End-year Number of FIIs (in numbers) End-year Number of Sub-accounts (in numbers) 1. Equity Market Activity Spot Gross Buy Gross Sell Net (Gross Buy-Gross Sell) 2. Debt Gross Buy Gross Sell Net (Gross Buy-Gross Sell) 3. Total FII Investment (1+2) Gross Buy Gross Sell Net (Gross Buy-Gross Sell) Source : SEBI 2007 1,219 3,644 Calendar year 2008 1,594 4,872 2009 1,706 5,331 8,14,877 7,43,391 71,486 31,418 21,990 9,428 8,46,295 7,65,380 80,915 7,21,606 7,74,593 -52,987 48,019 36,248 11,772 7,69,625 8,10,841 -41,216 6,24,238 5,40,814 83,424 1,11,772 1,07,209 4,563 7,36,010 6,48,023 87,987 Table 5.23 : Assets under management of mutual funds (Rs crore) Schemes 2006 Money Market Gilt Income Growth Balanced ELSS Gold ETF Other ETF 97,757 (30.2) 2,057 (0.6) 86,349 (26.7) 1,19,539 (36.9) 9,170 (2.8) 8,725 (2.7) NA NA At the end of 2007 1,12,349 (20.4) 1,975 (0.4) 1,97,342 (35.9) 1,92,129 (34.9) 19,938 (3.6) 19,063 (3.5) 467 (0.1) 6,674 (1.2) 2008 82,776 (20.0) 6,368 (1.50) 1,97,132 (47.7) 99,081 (23.9) 11,349 (2.8) 11,577 (2.8) 734 (0.2) 1,761 (0.4) 2,588 (0.6) 4,13,365 2009 80,102 (12.0) 3,609 (0.5) 3,60,469 (54.2) 1,74,680 (26.3) 17,602 (2.7) 23,198 (3.5) 1,352 (0.2) 1,031 (0.2) 3,103 (0.5) 6,65,146 securities declined to 7.10 per cent in 2009 from 8.20 per cent in 2008. The weighted average maturity of dated securities was shorter at 11.5 years in 2009 (13.1 years in 2008). 5.99 The volume of secondary market transactions (outright) in government securities marginally improved during the year, with the turnover ratio (volume of transactions as a ratio of end-period stock) increasing to 1.7 in the calendar year 2009 from 1.5 in 2008. 5.100 In the secondary market, the yields on dated government securities hardened during the year, particularly after July 2009, reflecting the impact of the announcement of a relatively large government borrowing programme for the year 2009-10. Yields gradually moved up during the course of the year. Yields on dated securities of five and 10-year maturities increased to 7.30 per cent and 7.59 per cent respectively in end-December 2009 from 5.41 per cent and 5.25 per cent respectively in endDecember 2008. FoF Investing Overseas Total 3,23,598 5,49,936 Source : SEBI Figures in parenthesis show percentage share. Corporate debt 5.101 In pursuance of the guidelines of the High Level Expert Committee on Corporate Bonds and Securitisation (December 2005) and the subsequent announcement made in the Union Budget 2006-07, SEBI authorized the BSE (January 2007), NSE (March 2007) and Fixed Income Money Market and Derivatives Association of India (FIMMDA) (August 2007) to set up and maintain corporate bond reporting on securities showed relatively lower intra-year variations in 2009 as compared to the previous year. The cut-off yield-to-maturity (YTM) range on fresh issuances during the year narrowed from 6.24-10.03 per cent in 2008 to 4.86-8.43 per cent in 2009. The weighted average yield on primary issuances of dated Financial Intermediation and Markets Figure 5.4 10.0 113 Secondary market yields on 10-year benchmark G-Sec 2009-10 2008-09 Rate (Per cent) 9.0 8.0 7.0 6.0 5.0 4.0 Figure 5.5 12.0 11.0 02 Apr Yield on 5 year G-sec and corporate debt paper Yield on GOI Bonds (5-year maturity) Yield on AAA Bonds (5-year maturity) 02 May 02 Jun 02 Jul 02 Aug 02 Sep Period 02 Oct 02 Nov 02 Dec 02 Jan 02 Feb 02 Mar Rate (Per cent) 10.0 9.0 8.0 7.0 6.0 5.0 4.0 Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2007 2008 2009 Years platforms for capturing all information related to trading in corporate bonds as accurately as possible. In the second phase of development, the BSE and NSE put in place corporate bonds trading platforms in July 2007 to enable efficient price discovery in the market. This was followed by operationalization of a DvP-I(trade-by-trade)- based clearing and settlement system for over-the-counter trades in corporate bonds by the clearing houses of the exchanges. In view of these market developments, the Reserve Bank of India announced in its Second Quarter Review of the Annual Policy Statement for 2009-10 in October 2009 that the repo in corporate bonds can now be introduced. In pursuance of the same, the RBI issued ‘Repo in Corporate Debt Securities (Reserve Bank of India) Directions, 2010’ on January 8, 2010 which will come into force with effect from March 1, 2010. 5.102 Total traded volume in corporate bonds during April-December 2009 was Rs 2,42,686 crore, that is higher by 173.4 per cent over the Rs 88,750 crore during April-December 2008. 5.103 During 2009-10 up to December 2009, the yield on corporate debt paper (with AAA rating) for five-year maturity moved in the range of 7.71-8.94 per cent. The yield on corporate debt paper softened till mid-May 2009 but remained above the 8.0 per cent level thereafter. The spread between yield on five-year GoI bonds and corporate debt paper (AAA rating) with five-year maturity, which was around 330 basis points in the beginning of 2009, narrowed down to 150 basis points by end-June and further to around 110 points by end-December 2009. Currency derivatives 5.104 Exchange Traded Currency Futures were introduced in the Indian market following guidelines issued by the Standing Technical Committee set up jointly by the RBI and SEBI on August 6, 2008. The underlying idea was to facilitate transparency and efficiency in price discovery, eliminate counterparty credit risk, provide access to all types of market participants, standardize products and provide a transparent trading platform. Trading in the currency futures segment commenced at the NSE in August 2008. Later, the BSE and the Multi Commodity Exchange of India Ltd. (MCX) were also given permission to trade in currency derivatives. Trading in Currency Futures (INR/US$ contract) started on the NSE, the BSE and the Multi Commodity Exchange- Stock Exchange (MCX-SX) on August 114 Economic Survey 2009-10 Table 5.24 : Currency futures segment at the NSE and the MCX-SX Month/year JanuaryDecember 2009 No. of Contracts Traded Trading Value (Rs crore) Average Daily Trading value (Rs crore) Source : SEBI NSE AugustDecember 2008 11,514,000 56,005 MCX-SX JanuaryDecember 2009 224,273,548 1,071,583 4,433 AugustDecember 2008 8,876,000 43,572 226,362,368 1,082,258 4,473 29, 2008, October 1, 2008 and October 7, 2008 respectively. 5.105 The total number of contracts traded and traded value at the NSE were 2,263.62 lakh and Rs 10,82,258 crore in 2009, while the MCX-SX recorded 2,242.74 lakh contracts with traded value of Rs 10,71,583 crore during 2009 (Table 5.24). The month-to-month average daily traded value at both the exchanges increased—from Rs 1,199 crore in January 2009 to Rs 9,115 crore in December 2009 at the NSE and from Rs 1,221 crore to Rs 9,452 crore at the MCX-SX for the same period. Trading volumes at the BSE were not significant during the year under consideration. 5.106 In order to facilitate direct hedging of risk in major currency pairs by market participants, the Reserve Bank of India proposed in October 2009 that the recognized stock exchanges be permitted to offer currency futures contracts in currency pairs of euro-INR, Japanese yen-INR and pound sterlingINR, in addition to US dollar-rupee contracts which are already permitted. Accordingly, SEBI issued a circular on January 19, 2010, permitting eligible stock exchanges to introduce currency futures on euroINR, pound sterling-INR and Japanese yen-INR. however, remained low. LIC and Central Bank of India have recently come forward to support transactions in the IRF market by buying securities from various market participants who wish to liquidate the securities received as part of their IRF obligations. The NSE has announced new steps, namely narrowing the basket of deliverable securities to exclude the more illiquid ones and delaying the settlement date to the last business day of the month, so that participants have more trading days than previously, aimed at increasing traded volumes in IRFs. Policy Developments during 2009-10 5.108 Some of the salient policy initiatives relating to the capital market taken during the year were: I. Primary Market In its continuing endeavour to make the existing public issue facility more efficient, SEBI introduced Applications Supported by Blocked Amount (ASBA Phase I) as a supplementary facility which was available to retail individual investors in public issues only. ASBA Phase I was subsequently extended to rights issues. It has been decided to introduce ASBA Phase II, which will be applicable to all public issues and rights issues with single payment option which are opening on or after January 1, 2010. The amended SEBI (Disclosure and Investor Protection) Guidelines 2000 provide that an unlisted company making an IPO shall list the securities being issued through the IPO on at least one stock exchange having nationwide trading terminals. A concept of Anchor Investor in public issues through book building has also been introduced. The existing listing requirements for IDRs (Indian Depository Receipts) issued by issuing companies from countries whose securities Exchange Traded Interest Rate Futures 5.107 Exchange traded interest rate futures (IRFs) contracts on a 10-year notional coupon bearing Government of India security started trading at the NSE on August 31, 2009. Market participants include banks and primary dealers, mutual funds, insurance companies, corporate houses, brokers, FIIs and retail participants. IRFs enable banks and primary dealers to mitigate risk and improve process efficiency, while mutual funds, insurance companies and corporates can use them to manage risk pertaining to volatility in interest rates. The minimum contract size for an IRF is Rs 2 lakh. The trading volumes in IRFs have, Financial Intermediation and Markets market regulators are signatories to the Multilateral Memorandum of Understanding (MMOU) of the International Organization of Securities Commissions (IOSCO) were simplified. Accordingly, a Model Listing Agreement containing listing requirements for listing of IDRs of such issuing companies was specified. In order to enhance disclosures regarding shareholding pattern in a listed Company and also to bring more transparency and efficiency in the governance of a listed company, it has been decided to introduce a uniform procedure for dealing with unclaimed shares and dividend declarations by listed companies and reduce the notice period for all corporate actions like dividend and bonus for all scrips, whether in demat or physical, whether in the F&O segment or not. The notice period for record dates and board meetings has been reduced to seven and two working days respectively. The listing agreement should disclose the shareholding pattern for each class of shares and voting rights pattern in the company. Listed companies have been prohibited from issuing shares with superior voting or dividend rights vis-à-vis the rights on equity shares that are already listed. 115 agreement (MCA)/tripartite agreement in case a sub-broker is involved, (b) a know-your-client (KYC) form and (c) a risk disclosure document (RDD). A copy of all the documents executed by the client shall be given to him, free of charge, within seven days from the date of execution of the documents by him. In case a stock exchange has no trading for a period of less than six months, it shall ensure that necessary regulatory requirements have been complied with before resuming trading and the matter may be placed before its Board with reasons, if any. Stock exchanges have been permitted to set their trading hours (in cash and derivatives segments) subject to the condition that these are between 9 am and 5 pm and the Exchange has in place a risk-management system and infrastructure commensurate with the trading hours. Taking note of the fact that stock exchanges had reduced/waived transaction charges, they were advised, while revising such transaction charges, to ensure that their systems were capable of handling additional load and it did not affect the existing risk- management system. The revised charges should be uniformly applied to trades of similar nature and implemented in a fair and transparent manner. SEBI-registered stockbrokers (including trading members) of stock exchanges have been allowed to provide access to clients through authorized persons. It was decided that in case of a buy transaction in the cash market, VaR margins, extreme loss margins and mark-to-market losses together should not exceed the purchase value of the transaction. However, in case of a sale transaction in the cash market, the existing practice would continue, namely VaR margins and extreme loss margins together shall not exceed the sale value of the transaction and mark-to-market losses would also be levied. It was decided to bring in parity between domestic venture capital funds and foreign venture capital investors (FVCIs). Applicants desirous of registering with SEBI as FVCIs are required to obtain firm commitment from their investors for contribution of an amount of at least US$ 1 million at the time of submission of applications seeking registration. II. Secondary Market It is mandatory for the transferee(s), in case of securities market transactions and off-market/ private transactions involving transfer of shares in physical form of listed companies, to furnish a copy of the PAN card to the Company/RTAs for registration of such transfer of shares. In order to bring in more transparency in the grievance redressal mechanism available in stock exchanges, it was decided that they will henceforth disclose the details of complaints lodged by clients/investors against trading members and companies listed in the exchange, on their website. The aforesaid disclosure shall also include details pertaining to arbitration and penal action against the trading members. With a view to instilling greater transparency and discipline in dealings between clients and stockbrokers, stockbrokers have been advised to register a client by entering into an agreement with him. The registration requirements include both mandatory and non-mandatory documents. The former include (a) a member-client 116 Economic Survey 2009-10 It was decided to introduce an exchange-traded 10-Year notional coupon bearing GoI security futures. III. Corporate Bonds In order to develop the primary market for corporate bonds in India, it has been decided to put in place a Simplified Listing Agreement for Debt Securities. Where the equity of an issuer is listed, and such an issuer seeks listing of debt securities (whether by way of public issue or private placement), minimal incremental disclosures related to the debt security issuance would be sufficient, since a large amount of information is already in the public domain. All trades in corporate bonds between specified entities, namely mutual funds, FIIs/ subaccounts, venture capital funds, FVCIs, portfolio mangers, and RBI-regulated entities as specified by the RBI should necessarily be cleared and settled through the National Securities Clearing Corporation Limited (NSCCL) or the Indian Clearing Corporation Limited (ICCL). This is applicable to all corporate bonds traded over the counter (OTC) or on the debt segment of stock exchanges on or after December 1, 2009. However, trades in corporate bonds that are traded on the capital market segment/equity segment of stock exchanges and are required to be settled through clearing corporations/ clearing houses of stock exchanges are exempt from these guidelines. The Simplified Listing Agreement for Debt Securities put in place by SEBI has been amended, requiring issuers to maintain 100 per cent asset cover sufficient to discharge the principal amount at all times for the debt securities issued; submit half-yearly certificates regarding maintenance of 100 per cent asset cover (banks, NBFCs and issuers of Governmentguaranteed bonds are exempt from this stipulation); furnish a half-yearly statement on deviations in use of issue proceeds, if any, to the stock exchange; deposit 1 per cent of the amount of debt securities offered for subscription to the public; submit/publish financial statements to the exchange. V. FIIs The overall limit for investments by FIIs and subaccounts is US$ 5 billion for government securities and treasury bills and US$ 15 billion for corporate debt. Investments by FIIs/ subaccounts in debt-oriented mutual fund units (including units of money market and liquid funds) are considered corporate debt. A major part of the debt limit is allocated to FIIs/subaccounts on an open bidding platform provided by the stock exchanges. The auction process is performed alternatively on NSE and BSE offered platforms. Maximum and minimum limits vary as per the total amount available for auction. The limits availed of in this process need to be utilized within 45 days. The remaining part of debt limit is allocated on a ‘first-come-first-served’ basis subject to ceiling. The limits availed of in this process need to be utilized within 11 working days. VII. Mutual Funds In order to empower investors to decide the commission to be paid to distributors in accordance with the level of service received, to bring about more transparency in payment of commissions and to incentivize long-term investment, it was decided that there should be no entry load for all mutual fund schemes; the scheme application forms should carry a suitable disclosure to the effect that the upfront commission to distributors will be paid by the investor directly to the distributor, based on his assessment of various factors including service rendered; of the exit load charged to the investor, a maximum of 1 per cent of the redemption proceeds should be maintained in a separate account which can be used by the Asset Management Companies to pay commissions to the distributor and to take care of other marketing and selling expenses. Any balance should be credited to the scheme immediately. It was decided that no distinction among unit holders should be made based on the amount of subscription while charging exit loads. Considering the importance of a systems audit in the technology-driven asset-management activity, it was decided that mutual funds should IV. Derivatives Stock exchanges have been allowed flexibility to set the expiry date/day for equity of derivative contracts while at the same time ensuring that there is no change in contract specifications or the risk-management framework and the integrity of the market is not affected in any manner. Financial Intermediation and Markets have a systems audit conducted by an independent CISA/CISM-qualified or equivalent auditor once in two years. For the financial years April 2008–March 2010, the systems audit should be completed by September 30, 2010. Units of mutual fund schemes were permitted to be transacted through registered stockbrokers of recognized stock exchanges. All intermediaries of mutual funds units have been advised to follow the code of conduct strictly. It was decided that no mutual fund should invest more than 30 per cent of net assets in money market instruments of an issuer. In case of existing schemes where the investments in money market instruments of an issuer are not in compliance with this guideline, the AMC should ensure compliance within a period of three months from the date of notification. It was clarified that mutual funds can invest in IDRs [Indian Depository Receipts as defined in Companies (Issue of Indian Depository Receipts) Rules 2004] subject to compliance with SEBI (Mutual Funds) Regulations 1996 and guidelines issued thereunder, specifically investment restrictions as specified in the Seventh Schedule of the Regulations. With a view to ensuring that the value of debt securities reflects the current market situation in the calculation of net asset value, it was decided to indicate the discretionary markup and markdown in the case of rated and unrated debt securities. It was also decided that the discretionary mark up or down limit, as detailed in a circular dated June 12, 2009, should be applied for valuation of securities purchased after its issuance. 117 making an IPO earlier available to a banking company, corresponding new bank and infrastructure companies, and firm allotment in public issues has been removed. In order to facilitate the issuance of IDRs, SEBI has laid down a regulatory structure by carrying out suitable amendments to the SEBI (Custodian of Securities) Regulations 1996 (to enable the custodian to undertake the activity of domestic depository for IDRs), SEBI (Depository Participants) Regulations 1996 (to make IDRs eligible as security for dematerialization), SEBI (Foreign Institutional Investor) Regulations 1995 (to allow FIIs also to invest in IDRs). The fees payable by some of the intermediaries and market participants, namely custodian of securities, FIIs, FVCIs, mutual funds and stockbrokers and sub-brokers, have been modified. The SEBI (Mutual Funds) Regulations 1996 have been amended in April and June 2009 to make listing of close-ended schemes mandatory and to provide that the units under close-ended schemes shall not be repurchased before maturity. Close-ended debt schemes have been allowed to invest in securities of initial or residual maturities not exceeding their own maturity. Furthermore, a mutual fund scheme can invest only up to 30 per cent of its net assets in money market instruments of an issuer. However, this limit is not applicable to investments in Government securities, treasury bills and collateralized borrowing and lending obligations. COMMODITY FUTURES MARKET 5.109 Commodities traded in the commodity futures market during 2009 included a variety of agricultural commodities, bullion, crude oil, energy and metal products. Several new commodities were introduced for futures trading in 2009, such as almond, imported thermal coal, carbon credits and platinum. The total value of trades in the commodity futures market rose from Rs 50.34 lakh crore in 2008 to Rs 70.90 lakh crore during 2009. 5.110 The average daily value of trades in the commodity exchanges improved from Rs 16,400 crore during 2008 to Rs 23,200 crore in 2009. Agricultural commodities, bullion and energy accounted for a large share of the commodities traded in the commodity futures market. VII. Regulatory Developments The SEBI (Delisting of Equity Shares) Regulations 2009 notified on June 10, 2009 provide a mechanism for voluntary as well as compulsory delisting of equity shares of a company and listing of delisted equity shares. The SEBI (Issue of Capital and Disclosure Requirements) Regulations 2009 provide for, inter alia, offer for sale by listed companies and stipulate that the allotment/refund period in public issues should be 15 days and issue period for all types of issuers 10 days. Under these regulations, exemption from eligibility norms for 118 Economic Survey 2009-10 Table 5.25 : Turnover on commodity futures markets (Rs crore) Calendar year Name of the exchange Multi Commodity Exchange (MCX), Mumbai National Commodity and Derivatives Exchange (NCDEX) National Multi Commodity Exchange, (NMCE) Others Total Source : Ministry of Consumer Affairs 2007 27,30,415 7,74,965 25,056 1,24,051 36,54,487 2008 42,84,653 6,28,074 37,272 83,885 50,33,884 2009 59,56,656 8,05,720 1,95,907 1,32,173 70,90,456 Box 5.1 : Regulation and development of commodity futures markets The year 2009 began on an optimistic note for the commodity futures market with the revocation of suspension of futures trading in chana, soy oil, rubber and potato in December 2008. This was followed six months later, in May 2009, by the revocation of suspension of trading in wheat. However, futures trading in sugar was suspended on May 26, 2009 for a period of six months till December 31, 2009, which was further extended to September 30, 2010. Agricultural commodity futures staged a remarkable recovery, recording a trading value of Rs10.88 lakh crore in 2009, displaying growth of 48 per cent over the previous year. During the year, a new national commodity exchange, i.e. the ICEX became operational. 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 broad-base the market. The emphasis was on participation of physical market participants, especially farmers, as hedgers, to counterbalance the speculative element in price discovery and to increase the awareness level of farmers and other market participants. The Commission undertook various regulatory measures to facilitate hedgers’ participation and promote delivery in agricultural commodities, such as introduction of the Exchange of Futures for Physicals (EFP) and Alternate Futures Settlement Mechanism, allowing higher position limits to NAFED to facilitate hedging and delivery by it and introduction of an early delivery system in select commodities. In addition, efforts were made to develop an “aggregation” model in collaboration with commodity exchanges to promote participation of farmers. The FMC also undertook several regulatory initiatives to prevent market manipulation and ensure market integrity, financial integrity and customer protection. Major policy developments initiated by the Forward Markets Commission included the issuance of guidelines for bringing members of the commodity exchanges under the purview of the Money Laundering Act and guidelines for divestment of the equity by the existing national exchanges after five years of their operation. A price dissemination project was initiated by the FMC, under which spot and future prices of agricultural commodities would be made available to farmers on a real-time basis on price ticker boards placed at Agricultural Produce Marketing Committees. Source: Ministry of Consumer Affairs. 5.111 The MCX, Mumbai, recorded the highest turnover in terms of value of trade during 2009, followed by the National Commodity & Derivatives Exchange Ltd.(NCDEX) and National Multi Commodity Exchange of India Ltd.(NMCE) respectively. (Table 5.25) the foreign direct investment (FDI) route to 26 per cent of the paid-up equity of the insurance company. New entrants in the insurance sector 5.113 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 the national reinsurer) in the year 2000 to 44 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]). Two of the general insurance companies, namely Star Health and Alliance Insurance Company and Apollo DKV function as standalone health insurance companies. INSURANCE AND PENSION FUNDS Insurance 5.112 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 Financial Intermediation and Markets 119 Box 5.2 : Development of electronic spot exchanges The Government and FMC have allowed the national commodity exchanges to set up three spot exchanges in the country, namely the National Spot Exchange Ltd. (NSEL), NCDEX Spot Exchange Ltd. (NSPOT) and National Agriculture Produce Marketing Company of India Ltd. (NAPMC). During 2009, there was significant expansion of spot exchanges’ trading facilities in India. These spot exchanges have created an avenue for direct market linkage among farmers, processors, exporters and end users with a view to reducing the cost of intermediation and enhancing price realization by farmers. They would also provide the most efficient spot price inputs to the futures exchanges. The spot exchanges would encompass the entire spectrum of commodities across the country and would bring home the advantages of an electronic spot trading platform to all market participants in the agricultural and non-agricultural segments. On the agricultural side, the exchanges would enable farmers to trade seamlessly on the platform by providing them real-time access to price information and a simplified delivery process, thereby ensuring them the best possible prices. On the buy side, all users of the commodities in the commodity value chain would have simultaneous access to the exchanges, which would be able to procure at the best possible prices. Therefore, the efficiency levels attained as a result of such seamless spot transactions would result in major benefits for both producers and consumers. Thus the exchanges would enhance the efficiency of the existing OTC markets in the country So far, Maharashtra, Karnataka, Gujarat, Rajasthan, Orissa and Madhya Pradesh have given licences to the spot exchanges to undertake electronic spot trading. The agricultural commodities traded on the spot exchange platform are cotton, castor seed, desi channa, guar seed, RM seed, wheat, barley, red arecanut, maize, yellow peas, urad, lemon tur, soyabean, jeera, ground nut, sugar, moong and pepper. In the process, farmers’ realization has increased by 4-5 per cent. The total turnover of the three exchanges during 2009 was Rs 2,810 crore. Source: Ministry of Consumer Affairs. Of the 21 insurance companies that have set up operations in the life segment post opening up of the sector, 19 are in joint venture with foreign partners. Of the 15 insurers who have commenced operations in the non-life segment, 14 are in collaboration with foreign partners. The two standalone health insurance companies have been set up in collaboration with foreign joint venture partners. Thus, as of date, 33 insurance companies in the private sector are operating in the country in collaboration with established foreign insurance companies from across the globe. Non-life insurance 5.115 The non-life insurers (excluding specialized institutions like the Export Credit Guarantee Corporation and Agriculture Insurance Corporation and the standalone health insurance companies) underwrote premium of Rs 30,352 crore in 2008-09 in India, as against Rs 27,824 crore in 2007-08. Insurance Penetration 5.116 Insurance penetration is defined as the ratio of premium underwritten in a given year to 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 4.60 in 2008 (life 4.00 and non-life 0.6). The increase in levels of insurance penetration has to be assessed against the average growth of over 8.2 per cent in the GDP in the last five years. Life insurance 5.114 The post-liberalization period has been witness to tremendous growth in the insurance industry, more particularly so in the life segment. However, in 2008-09, on account of the financial meltdown, the life insurance segment saw a downward trend. The first-year premium, which is a measure of new business secured, underwritten by the life insurers during 2008-09 was Rs 87,006 crore as compared to Rs 93,713 crore in 2007-08, registering a negative growth of 7.2 per cent. In terms of linked and non-linked business during the year 2008-09, 50.9 per cent of the first-year premium was underwritten in the linked segment while 49.1 per cent was in the non-linked segment as against 75:25 in the previous year. The shift towards the traditional segment is significant during the year 2008-09. Initiatives taken in the insurance sector 5.117 The initiatives taken by the insurance authority in the sector include the following: 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 120 Economic Survey 2009-10 regulations issued by the IRDA have provided a fillip to propagating micro insurance as a conceptual issue. With the positive and facilitative approach adopted under microinsurance regulations, it is expected that all insurance companies would come out with a progressive business approach and carry forward the spirit of the regulations thereby extending insurance penetration to all segments of society. Nine insurance companies have filed 26 microinsurance products both in the individual and group segments. It may be mentioned that some of the insurers had been selling products that fall within the parameters stipulated for eligibility as micro insurance even prior to notification of micro-insurance regulations. Amendments to the Regulations on Rural and Social Sector Obligations: The obligations of the new insurers towards the rural and social sectors for the sixth to tenth years of their operations have been linked to their past performance in the said sectors. With a view to giving a fillip to micro insurance, the performance in these sectors has now been benchmarked to the insurance policies satisfying the definition of ‘micro insurance’ as laid down in the Micro Insurance Regulations 2005. The regulations have been further amended to provide for relaxation in obligations based on whether the insurance company had commenced operations in the first or second half of the financial year. For insurance companies commencing operations in the first half of the financial year, the applicable obligations for the first year shall be 50 per cent of the obligations as specified in the Regulations. In case of companies which commence operations in the second half of the financial year and are in operation for less than six months, it is stipulated that no rural- or socialsector obligations shall be applicable for that year and the annual obligations as indicated in the Regulations shall be applicable from the next financial year of operations. Guidelines on the Anti-Money Laundering (AML) Programme: The IRDA issued guidelines on the AML Programme to the insurance industry on March 31, 2006, in terms of which insurers were advised to put a proper AML policy framework in place in case of life insurance companies and non-life insurance companies effective from August 1, 2006 and January 1, 2007 respectively. The AML Programme the Insurance Act and the IRDA Act focus on the current regulatory requirements; the proposed changes provide for more 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. De-tariffing: The road map for de-tariffing was notified by the IRDA on September 23, 2005, based on the demand from various stakeholders that continuance of the tariff regime was inconsistent with the opening up of the sector to provide healthy competition. As a first step, de-tariffing was confined to decontrol of rates only and terms and conditions of the policy were not permitted to be changed till March 31, 2008. De-tariffing of the non-life industry was notified with effect from January 1, 2007. In order to moderate the impact of tariff increase on commercial vehicle owners, the IRDA has retained the powers to determine the rates of motor-third party premium for commercial vehicles, and to ensure that all insurers undertake commensurate exposure to this line of business, a Motor Pool has been created under Section 34 of the Insurance Act 1938. All non-life insurers are required to collectively participate in a pooling arrangement to share in all motor-third party insurance business for commercial vehicles underwritten by them with effect from April 1, 2007. The IRDA decided to permit the general insurers to file variations in deductibles from those prescribed under the erstwhile tariffs subject to written disclosures and acceptance by the insured prior to finalization of the insurance policy and add-on covers over and above the erstwhile tariff covers with appropriate additional premiums with effect from January 1, 2009. The insurers were also permitted to extend engineering insurances to mobile/ portable equipments. Industrial All Risk (IAR) policies could now be issued to all industries including the petrochemical industry with the sum insured less than Rs100 crore. However, the general insurers were not permitted to abridge the scope of standard covers available under erstwhile tariffs. Micro Insurance: Micro insurance is widely accepted as one of the essential ingredients of financial inclusion packages to provide a hedge against unforeseen risks. Micro-insurance Financial Intermediation and Markets emphasizes KYC norms and requires insurers to document identity, residence, sources of funds etc. as part of the due diligence process. While the guidelines are applicable to life insurance companies on all contracts, in the case of general insurance companies, the compliance is required at the payout stage, i.e. during claims/refunds of over Rs1.00 lakh. Cash acceptance thresholds have been fixed at Rs 50,000, beyond which premium/proposal deposits have to be remitted through banking channels. 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. 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. Public Awareness Campaigns/Programmes: The IRDA’s 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. Cap on ULIP Charges: The insurance industry has introduced unit-linked insurance plans (ULIPs) which have found favour with insurance 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 clearly understandable by the customers, the IRDA has 121 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. Corporate Governance Guidelines for Insurance Companies: Corporate Governance guidelines have been rolled out for insurance companies, which are effective from April 1, 2010. The objective of the guidelines is to ensure that the structure, responsibilities and functions of the Board of Directors and senior management of the company fully recognize the expectations of all stakeholders as well as those of the regulator. The guidelines broadly cover major structural elements of corporate governance in insurance companies. Pension Sector: Highlights 5.118 Pension-sector reforms were initiated in India to establish a robust and sustainable social security arrangement in the country seeing that only about 12-13 per cent of the total workforce was covered by any formal social security system. The New Pension System (NPS) was introduced by the Government from January 1, 2004 for new entrants to the Central Government service, except the Armed Forces, and was extended to the general public from May 1, 2009 on a voluntary basis. The features of the NPS design are self-sustainability, portability and scalability. Based on individual choice, it is envisaged as a low-cost and efficient pension system backed by sound regulation. As a pure “defined contribution” product with no defined benefit element, returns would be totally market related. The NPS provides various investment options and choices to individuals to switch over from one option to another or from one fund manager to another, subject to certain regulatory restrictions. 5.119 The Pension Fund Regulatory & Development Authority (PFRDA), set up as a regulatory body for the pension sector, is engaged in consolidating the initiatives taken so far regarding the full NPS architecture and expanding the reach of the NPS distribution network. The full NPS architecture comprising a Central Recordkeeping Agency (CRA), pension fund managers (PFMs), trustee bank, custodian and NPS Trust has been put in place and is fully operational. The National Securities Depository Limited (NSDL) has been selected as the CRA. The PFRDA has also appointed six Pension Fund Managers (PFM) for 122 Economic Survey 2009-10 operation since May 1, 2009, Tier II, the withdrawable account has been made operational from December 1, 2009. The PFRDA has also enhanced the maximum entry age into the NPS from 55 years to 60 years. These initiatives are expected to help realize the full potential of the NPS in terms of economies of scale and benefit the subscribers in terms of lower fees and charges and higher returns. 5.123 The pension fund managers manage three separate schemes 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. The fund managers will invest only in index funds that replicate either the BSE sensitive index 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/ unwilling to exercise any choice regarding asset allocation, his contribution will be invested in accordance with the “auto choice” option with a predefined portfolio. 5.124 Pension reforms in India have made substantial progress. With the extension of the NPS to all citizens from May 1, 2009, every citizen in the country now has the opportunity to participate in a regulated pension market. This will contribute significantly to old age income security in the country. the unorganized sector, namely UTI Retirement Solutions Limited, SBI Pension Funds Pvt. Ltd., ICICI Prudential Life Insurance Company Ltd., IDFC Asset Management Company Ltd., Reliance Capital Asset Management Ltd. and Kotak Mahindra Asset Management Company Ltd., as pension fund sponsors under the NPS. 5.120 NPS implementation in the Central Government has stabilized with more than 5.64 lakh employees already covered. Reconciliation of data pertaining to the period prior to coming into force of the CRA is on the verge of completion. Currently, the total amount under management of the three fund managers appointed by the PFRDA for Central Government employees is over Rs 3,200 crore. These PFMs are SBI Pension Fund Private Ltd., UTI Retirement Solution Ltd. and LIC Pension Fund Ltd. The NPS has also been well received by the State Governments and 23 State Governments/ Union Territories have notified similar schemes for their new recruits under the ambit of the NPS. The PFRDA has been working with all the States to enable them to log on to the NPS architecture with ease. NPS Trust and CRA have been in continuous dialogue with State Governments/Union Territories for facilitating their entry into the NPS. As of date, the CRA has already signed agreements with 11 State Governments whereas the NPS Trust has signed agreements with nine State Governments. 5.121 Efforts are under way to extend the reach of the NPS to new segments like Central and State autonomous bodies and the organized sector and introduce micro-pension initiatives focusing on a low cost model of the NPS to be implemented through SHGs and similar bodies. More than 250 Central autonomous bodies have evinced interest in joining the NPS. Several State Government autonomous bodies and undertakings are in dialogue with the PFRDA for extending the NPS to their employees. The PFRDA has also launched a scheme for management of the pension corpus of various corporates under the NPS architecture. 5.122 For all citizens including workers in the unorganized sector, the NPS is currently available through nearly 900 service provider (SP) branches of 21 Points of Presence (PoP). The PFRDA has also recently appointed the Department of Posts as PoP in addition to seven other financial institutions which will expand the PoP-SP network by more than five times. While Tier I, the non-withdrawable pension account under the NPS has been in CHALLENGES AND OUTLOOK 5.125 Institutional players and corporates constitute major players in the Indian capital market. The retail investor participation remains limited in the corporate debt market and mutual funds. The interdependence between corporate and mutual funds has recently raised concerns relating to volatility in financial markets. 5.126 The recent global financial turmoil raised many issues about governance of financial intermediaries and awareness of investors. Investor awareness is a prerequisite for investor protection. In fact, investor protection and education are two sides of the same coin. Neither will have the desired impact in isolation. A simultaneous and coordinated effort on both fronts would help investors take wellinformed financial decisions besides protecting their interests and ensuring orderly conditions in markets. Greater effort therefore is needed for investor education and promoting investors’ protection. Financial Intermediation and Markets 5.127 Pension reforms in India have generated widespread interest internationally. The PFRDA faces the challenge of expanding the distribution network of the NPS to cover the entire unorganized sector in the country, educate citizens to take appropriate investment decisions, based on their risk and return profile, and contribute to improved financial literacy levels. Provision of a statutory status to the pension regulator would help the PFRDA perform its regulatory and developmental roles effectively. The success of pension reforms will not only facilitate the flow of long-term savings for development, but also help 123 establish a credible and sustainable social security system in the country. 5.128 Capital market solutions for catastrophe risk insurance are another area that needs focus. This essentially transfers insurance risk of natural calamities like earthquakes, hurricanes and floods to the capital markets through issue of catastrophe bonds. The instrument is widely used in advanced countries and there is scope for introducing it in countries like India to provide insurance against contingencies. Balance of Payments iscal 2009-10 has witnessed a global recovery after a crisis of severe worldwide proportions. The risks of double-dip recession, however remain, with need for caution in dealing with high public debt and unwinding of fiscal and monetary stimuli. The Indian economy also saw a turnaround, registering 7 per cent growth during H1 (April –September 2009) of 2009-10, after touching a low of 5.8 per cent in the third and fourth quarters of 2008-09. The balance-of-payments (BoP) situation improved on the back of a surge in capital flows and rise in foreign exchange reserves, which have been accompanied by rupee appreciation. CHAPTER 6 F THE GLOBAL CRISIS AND BEYOND 6.2 The last two and a half years have been the most turbulent for the global economy since World War II. The crisis that began in a small corner of the financial system, i.e. the sub-prime mortgage market in the United States spread like wildfire to engulf the entire global financial system. The fall of Lehman in September 2008 was the proverbial last straw, making the crisis truly global in terms of outreach, impact and severity for both advanced and developing countries. 6.3 Countries have, however, been affected by the crisis differently and in varying degrees. Advanced economies as a group have been more severely affected with 3.2 per cent negative growth forecast for 2009 (IMF World Economic Outlook, January 2010). All rich countries, with the exception of Australia, experienced decline, before a likely upturn in 2010 in most economies. 6.4 Developing countries are likely to grow by 2.1 per cent in 2009 and 6.0 per cent in 2010, led by India and China, which remained the most resilient to the crisis. The impact on the emerging world was through reversal of capital flows, fall in stock markets, depreciation of local currency, decline in exports and general risk aversion, which affected consumption and investment. The social impact of the crisis, though, has been more severe for the emerging economies, as they have fewer cushions against shocks. 6.5 The response to the crisis, however, has been equally swift, with concerted and coordinated efforts by governments and monetary authorities, through conventional and non-conventional fiscal and monetary instruments. As a result, there are signs of recovery in the global economy with the US, Euro Zone and Japan already out of recession and the momentum of growth picking up in emerging economies (Table 6.1). 6.6 Risks however remain, with rich countries continuing to be more vulnerable to double-dip recession. First, levels of unemployment remains high despite expansionary polices. Second, the extensive use of fiscal policy has meant a sizeable increase in fiscal deficit with the gross public debt to gross domestic product (GDP) ratio in advanced economies likely to rise from 75 to 115 per cent during 2008-2014. Third, the timing of exit is important. An early exit could increase the risk of another recession, while late exit could worsen public debt ratios, crowd out private investment and fuel inflationary expectations. Fourth, return of recession could cause havoc. With most policy toolkits already exhausted, public debt ratios skyrocketing and the balance sheets of central banks stretched, little ammunition remains for dealing with another crisis. 6.7 As emerging economies are ahead on the recovery curve, a major fallout has been large flows of capital from rich countries seeking to benefit from Balance of Payments Table 6.1 : Selected Economic Indicators : World Sl. Items No. I World Output (per cent change) # a b Advanced Economies Other Emerging Market and Developing Countries of which Developing Asia China India 2008 3.0 0.5 6.1 7.9 9.6 7.3 2009 Projection -0.8 -3.2 2.1 6.5 8.7 5.6 125 2010 Projection 3.9 2.1 6.0 8.4 10.0 7.7 II Net Capital Flows to Emerging Market and Developing Countries (US$ billion) i Net Private Capital Flows (a+b+c) (a) Net Private Direct Investment (b) Net Private Portfolio Investment (c) Net Other Private Capital Flows ii Net Official Flows Trade Volume Export Volume US China India Middle East 129.5 425.0 -85.4 -210.1 -105.7 3.0 2.8 -4.9 9.8 -2.2 18.3 -52.5 279.0 -99.8 -231.6 50.3 -11.9 -11.4 -2.6 7.8 -2.2 2.6 28.3 269.5 -110.4 -130.8 -14.2 2.5 2.6 -2.2 8.6 -2.5 7.9 III World Trade @ i ii IV Current Account Balance (per cent to GDP) i ii iii iv Source : For item I-International Monetary Fund (IMF), World Economic Outlook, January 2010; for items II to IV–World Economic Outlook, October 2009. # growth rates are based on GDP at purchasing power parities @ Average of annual percentage change for world exports and imports of goods and services. Box 6.1 : Asset price bubbles in emerging economies There are strong signs of recovery in the global economy. The emerging economies, particularly in Asia, are, however, ahead on the recovery curve. This has negative fallout for emerging economies by way of outsized inflows of capital to take advantage of higher returns.The higher returns are due to both interest differentials and stock market returns, with the Emerging Market MSCI Index rising by 77.1 per cent during 2009. The rush of portfolio investment that is not supported by fundamentals like high economic growth is fuelling the rise in stock markets. A major fallout of the capital inflow is appreciation of domestic currency through creating a supply-demand imbalance in the foreign exchange market. The implication is similar to ‘Dutch disease’, a concept that owes its origin to offshore natural gas finds in the Netherlands in the 1960s, which led to a surge in capital flows and domestic currency appreciation that made exports uncompetitive and affected domestic industry through cheaper imports. The large inflows are more serious for countries with current account deficits, as domestic currency appreciation generally worsens the deficit. Together with loss of international competitiveness due to pegged exchange rates in some countries, the currency appreciation may make the recovery process more difficult in many emerging economies. The sharp increase in stock market prices also increases speculative activity, besides contributing to market volatility. The boom and bust cycle in stock markets, since the onset of the crisis, has followed surge and reversal of capital flows to a significant extent. Such price volatility is detrimental for the orderly development of the capital markets and for stock markets to be a viable source for financing capital expenditure. Another area of asset price bubble is commodities (oil, metals and agricultural), which have emerged as an ‘asset class’ due to high returns, their role as a hedge against inflation and diversification benefits on account of low correlations. A number of instruments like exchange traded funds (ETFs) are available, which make commodity investment accessible to institutional and individual investors. The rise in the global price of oil, however, could affect nascent recovery in oil- importing emerging economies. Besides, many emerging economies like India are being affected by the high food prices, where apart from domestic supply factors, investment demand appears to be playing a contributory role. A key element in the speculative flows is ‘carry trade’, which is characterized by borrowing in currencies with low interest and investment in higher interest currencies to take advantage of interest differentials. The carry trade money has also been flowing into stock markets in emerging economies to take advantage of higher returns. Record low interest rates in the US and other advanced countries are reportedly behind the trade. Carry trade and its unwinding have contributed significantly to currency volatility in the international markets during the recent past. The same mechanism is now fuelling asset price bubbles in emerging economies and leading to domestic currency appreciation. 126 Economic Survey 2009-10 account for 15 per cent of the GDP), the Indian economy has exhibited considerable resilience in the face of the crisis. interest rate differentials and a stock market boom. As such outsized inflows are not supported by economic fundamentals, they are contributing to asset price bubbles and appreciation of domestic currency, which may affect the process of recovery (Box 6.1). 6.8 The Indian economy was initially affected through a reversal of capital flows, rupee depreciation and stock market decline. Thereafter, especially after the collapse of Lehman Brothers, the real sector was affected through a fall in exports and general risk aversion. The decline, however, was partly offset by the resilience of the rural economy due to improvement in the agricultural terms of trade because of higher support prices for agricultural produce, income generated through the National Rural Employment Guarantee Scheme, agriculture loan waivers, building up of rural infrastructure under the Bharat Nirman programme and increasing awareness through media and mobile phone penetration. Together with the fact that it is largely domestic demand driven, (merchandise exports Table 6.2 : Balance of payments : Summary BALANCE OF PAYMENTS (BOP) 6.9 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) Services–travel, transportation, insurance, Government not included elsewhere (GNIE) and miscellaneous, which latter encompasses 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. 6.10 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 (US$ million) Sl. Items No. 1 2 3 4 Exports Imports Trade Balance Invisibles (net) Non-factor Services Income Private Transfers 5 6 7 8 9 10 Goods and Services Balance Current Account Balance External Assistance (net) External Commercial Borrowings (net) Non -resident Deposits (net) Foreign Investment (net) of which (i) FDI (net) (ii) Portfolio (net) 11 12 Other Flows (net)a Total Capital Account (net) (including errors and omission) 13 Reserves [increase (-) / decrease (+)] (-)26159 (-)15052 (-)36606 (-)92164 (+)20080 (+)2499 (-)9533 2004-05 2005-06 2006-07 2007-08 2008-09 Apr-Sep. Apr-Sep. 2008 2009 PR 85206 118908 -33702 31232 15426 -4979 20525 -18276 -2470 1923 5194 -964 13000 3713 9287 9476 28629 105152 157056 -51904 42002 23170 -5855 24493 -28734 -9902 1702 2508 2789 15528 3034 12494 2427 24954 128888 190670 -61782 52217 29469 -7331 29825 -32313 -9565 1775 16103 4321 14753 7693 7060 9219 46171 166162 257629 -91467 75731 38853 -5068 41706 -52614 -15737 2114 22609 179 43326 15893 27433 39673 107901 189001 307651 -118650 89923 49631 -4507 44567 -69019 -28728 2637 7941 4290 3467 17498 -14030 -9687 8648 PR 111085 175483 -64398 48549 25110 -1646 25091 -39288 -15849 869 3166 1072 8349 13867 -5518 -106 13350 P 81139 139356 -58217 39599 15371 -2353 26695 -42846 -18618 571 745 2864 32088 14142 17946 -8117 28151 Source : RBI PR: Partially Revised P: Preliminary a Includes, among others delayed export receipts and errors and omissions. Balance of Payments capital. Foreign investment comprising foreign direct investment (FDI) and portfolio investment represents non-debt liabilities, while loans (external assistance, external commercial borrowings and trade credit) and banking capital including non-resident Indian (NRI) deposits are debt liabilities. 6.11 India’s BoP exhibited considerable resilience during fiscal 2008-09 despite one of the severest external shocks. The current account balance [ (-) 2.4 per cent of GDP in 2008-09 vis-à-vis (–) 1.3 per cent in 2007-08] remained well within the sustainable limits and there was limited use of foreign exchange reserves, despite massive decline in net capital flows to US$ 7.2 billion in 2008-09 as against US$ 106.6 billion in 2007-08. As per the latest BoP data for fiscal 2009-10, exports and imports showed substantial decline during April-September (H1) of 2009-10 vis-à-vis the corresponding period in 2008-09. There has been improvement in the BoP scenario during H1 of 2009-10 over H1 of 2008-09, reflected in higher net capital inflows and lower trade deficit. However, the invisible surplus declined and current account deficit widened vis-a-vis the corresponding period last year (Table 6.2). 127 34.0 billion in Q3. For the full fiscal 2008-09, however, trade deficit witnessed a marked expansion to US$ 118.7 billion (9.7 per cent of GDP) as compared to US$ 91.5 billion (7.4 per cent of GDP) in 2007-08. 6.13 India’s current account position during the first half of 2009-10 (April-September) continued to reflect the impact of the global economic downturn and deceleration in world trade witnessed since the second half of 2008-09. Growth in exports and imports continued its declining trend during the first half of 2009-10. On a BoP basis, India’s merchandise exports, which started falling in October 2008, recorded a decline of 27.0 per cent in H1 (AprilSeptember 2009) of 2009 as against a significant increase of 48.1 per cent during the corresponding period of the previous year. 6.14 Similarly, the declining trend in imports, which began during the third quarter of 2008-09, after a gap of almost seven years, continued during the first half of 2009-10. Import payments, on a BoP basis, registered a decline of 20.6 per cent during H1 of 2009-10 as compared to robust growth of 51.0 per cent in the corresponding period of the previous year. 6.15 According to the Directorate General of Commercial Intelligence and Statistics (DGCI&S) data, oil imports recorded a decline of 45.0 per cent in April-September 2009 as against a significant rise of 83.0 per cent during April-September 2008. During the same period, non-oil imports showed a relatively modest decline of 26.3 per cent (as against an increase of 43.8 per cent in April-September 2008). In absolute terms, oil imports accounted for about 26 per cent of total imports during April-September 2009 (34.2 per cent in the corresponding period of the previous year). According to the data released by the Gem & Jewellery Export Promotion Council, total import of gems and jewellery declined by 12 per cent during April-September 2009 as against an increase of 33.6 per cent during the corresponding period of the previous year. 6.16 Trade deficit, however, remained lower at US$ 58.2 billion during April-September 2009 as compared to US$ 64.4 billion in April-September 2008 (9.6 per cent decline), mainly on account of the decline in oil imports. A detailed analysis of India’s trade performance occurs in the next chapter. CURRENT ACCOUNT Merchandise (exports and imports) 6.12 The impact of the global financial crisis was transmitted to India through various external sector transactions, mainly the trade and financial routes. The transmission of external demand shocks was much more swift and severe on export growth, which, on a BoP basis, declined from a peak of 57 per cent in Q1 (April-June 2008) of 2008-09 to (-) 8.4 per cent in Q3 (October – December 2008) and further to (-)20 per cent in Q4 (January – March 2009) of 2008-09–-a fall for the first time since 2001-02. Import growth, which remained robust till the Q2 (July – September 2008) of 2008-09, declined by 20.8 per cent in Q3 over Q2 and 20.1 per cent in Q4 over Q3, moving in tandem with the slowdown in domestic industrial demand and sharp decline in international crude oil and other primary commodity prices. Thus trade deficit generally expanded in the first two quarters of 2008-09 due to the combined effect of a high crude oil prices-driven increase in imports and the collapse in external demand. However, in Q4 of 2008-09, with the pace of decline in imports outpacing that in exports, trade deficit narrowed down significantly to US$ 20.2 billion as compared to US$ 25.3 billion in Q1, US$ 39.1 billion in Q2 and US$ Invisibles 6.17 Two components of the current receipts, which remained relatively resilient in the face of the 128 Economic Survey 2009-10 to charitable/religious institutions. Private transfer receipts, comprising mainly remittances from Indians working overseas, increased to US$ 27.5 billion in H1 of 2009 as compared to US$ 26.4 billion in the corresponding period of the previous year. Private transfer receipts constituted 17.6 per cent of current receipts in April-September 2009 (13.4 per cent in the corresponding period of the previous year). 6.21 NRI deposits, when withdrawn domestically, form part of private transfers because once withdrawn for local use these become unilateral transfers and do not have any quid pro quo. Such local withdrawals/ redemptions from NRI deposits cease to exist as liability in the capital account of the BoP and assume the form of private transfers, which are included in the current account of the BoP. Under NRI deposits, both inflows as well as outflows remained steady. A major part of outflows from NRI deposits is in the form of local withdrawals. These withdrawals, however, are not actually repatriated but are utilized domestically. During April-September 2009, the share of local withdrawals in total outflows from NRI deposits was 63.4 per cent as compared to 64.9 per cent in April-September 2008. 6.22 Under private transfers, inward remittances for family maintenance accounted for 53.3 per cent of total private transfer receipts, while local withdrawals accounted for 43.0 per cent in AprilSeptember 2009 as against 52.6 per cent and 42.3 per cent respectively in April-September 2008. 6.23 Software receipts at US$ 21.4 billion in AprilSeptember 2009 showed a decline of 11.5 per cent as against a growth of 35.3 per cent in AprilSeptember 2008. Miscellaneous receipts, excluding software exports, stood at US$ 7.8 billion in AprilSeptember 2009 (US$ 14.9 billion in April-September 2008). Receipts under non-software miscellaneous services like business services, construction and royalties, copyrights and licence fees declined. 6.24 The key components of business services receipts and payments were trade-related services, business and management consultancy services, architectural, engineering and other technical services and services relating to maintenance of offices. Receipts of architectural, engineering and other technical services, maintenance of offices abroad and business and management consultancy services declined while payments related to these services rose moderately, resulting in decline in net exports of these services. Investment income receipts amounted to US$ 7.3 billion in April- global economic meltdown, were software services and workers’ remittances, mainly responsible for higher invisible surplus. The invisibles account reflects the combined effects of transactions relating to international trade in services, income associated with non-resident assets and liabilities, labour and property and cross-border transfers, mainly workers’ remittances. India’s net invisibles (invisible receipts minus payments) increased by 18.7 per cent in 2008-09, led mainly by receipts under private transfers and software services. The net invisibles surplus increased from US$ 75.7 billion (6.1 per cent of GDP) in 2007-08 to US$ 89.9 billion (7.4 per cent of GDP) during 2008-09. 6.18 Services have shown relative resilience as compared to other components of India’s BoP in the face of the global economic slowdown, with the net services surplus expanding from US$ 38.9 billion during 2007-08 to US$ 49.6 billion during 2008-09, led primarily by software services exports. Services exports, however, declined in the last quarter of 2008-09, after a long phase of sustained growth. The impact of the global economic shocks on India’s software exports was evident during 2008-09, especially in the second half of the year. Notwithstanding this, software exports during 2008-09 (US$ 43.5 billion) recorded a growth of 17.7 per cent (27.2 per cent during 2007-08). Among other major services, travel receipts were adversely affected during 2008-09 as the growth of tourist arrivals in the country significantly went down. Against the backdrop of slowdown in global trade, business services exports declined marginally in 2008-09, with growth remaining volatile over the quarters and exhibiting significant decline in the second half of the year. 6.19 Reflecting the adverse impact of continuing global financial crisis, invisible receipts, comprising services, current transfers and income, recorded a decline of 11.6 per cent (US$ 75.4 billion) during H1 of 2009-10 as compared to an increase of 32.5 per cent (US$ 85.3 billion) in H1 of 2008-09, mainly attributable to the lower receipts under almost all components of services. However, private transfer receipts, which had marginally declined during the second half of 2008-09, increased by 4.3 per cent in the first half of 2009-10. 6.20 Private transfers are mainly in the form of (i) inward remittances from Indian workers abroad for family maintenance, (ii) local withdrawal from NRI rupee deposits, (iii) gold and silver brought through passenger baggage, and (iv) personal gifts/donations Balance of Payments Table 6.3 : Selected indicators of the external sector Sl. Items No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Growth of Exports – BoP (%) Growth of Imports – BoP (%) Growth of Non-factor Services (Credit) (%) Growth of Non-factor Services (Debit) (%) Exports/Imports—BoP (%) Exports/Imports of Goods and Services (%) Import Cover of FER (No. of months) External Assistance (net)/ TC (%) ECB (net)/TC (%) NRI Deposits / TC (%) Exports Imports Trade Balance Invisible Balance Goods and Services Balance Current Account Balance ECBs FDI (net) Portfolio Investment (net) Total Capital Account (net) External Debt 2004-05 28.5 48.6 61.0 66.4 71.7 87.5 14.3 6.9 18.5 -3.4 11.8 16.5 -4.7 4.3 -2.6 -0.4 0.7 0.5 1.3 4.0 18.1 2005-06 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 16.7 2006-07 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 4.9 17.5 2007-08 28.9 35.1 22.4 16.2 64.5 83.0 14.4 2.0 21.2 0.2 13.5 21.0 -7.4 6.1 -4.3 -1.3 1.8 1.3 2.2 8.8 18.1 129 2008-09 Apr-Sep. Apr-Sep. 2008 2009 13.7 19.4 12.5 1.1 61.4 80.8 9.8 30.5 91.8 49.6 15.4 25.1 -9.7 7.4 -5.6 -2.4 0.7 1.4 -1.2 0.6 20.5 48.1 51.0 29.1 20.3 63.3 80.5 10.8 6.5 23.7 8.0 18.9 29.8 -10.9 8.3 -6.7 -2.7 0.5 2.3 -0.9 2.3 -27.0 -20.6 -21.4 -4.6 58.2 73.9 12.4 2.0 2.6 10.2 14.5 24.9 -10.4 7.1 -7.7 -3.3 0.1 2.5 3.2 5.0 - As per cent of GDPmp Source: RBI TC: Total Capital Flows (net); FER: Foreign Exchange Reserves; ECBs: External Commercial Borrowings; GDPmp: Gross Domestic Product at current market prices. Figure 6.1 Current account deficit, goods & services balance, trade balance, invisibles balance and net capital inflows as a per cent of GDP during 2004-05 to 2008-09 8.8 5.0 3.0 0.6 -0.4 -2.6 -4.7 -6.2 -6.5 -1.2 -3.4 -1.0 -3.4 -1.3 -4.3 -5.6 -7.4 -9.7 2004-05 2005-06 2006-07 2007-08 2008-09 Invisibles balance Net capital inflows 5.5 6.1 4.9 7.4 Current account deficit Goods & services balance Trade balance 10 8 6 As per cent of GDP 4 2 0 -2 -4 -6 -8 -10 -12 4.3 4.0 -2.4 Year 130 Economic Survey 2009-10 September 2009 and remained at almost the same level as of the previous year. 6.25 Invisibles payments have also shown a decline of 2.6 per cent in April-September 2009 (against an increase of 15.0 per cent in AprilSeptember 2008). This decline is mainly due to lower payments towards travel, transportation, non-software services and private transfers. Lower transportation payments in April-September of 2009 (a decline of 29.4 per cent) mainly reflected the lower volume of imports. In addition, lower payments may also be attributed to the lower freight rates on international shipping as compared to the corresponding period of last year. Investment income payments, reflecting mainly interest payments on commercial borrowings, external assistance, non-resident deposits and reinvested earnings of FDI enterprises operating in India, amounted to US$ 9.4 billion in April-September 2009 higher than that of US$ 8.7 billion during AprilSeptember 2008. The increase in investment income payments was mainly due to a rise in reinvestment earnings of the FDI companies. 6.26 Consequently, net invisibles (invisibles receipts minus invisibles payments) stood lower at US$ 39.6 billion during April-September 2009 as compared to US$ 48.5 billion during April-September 2008. At this level, the invisibles surplus financed about 68.0 per cent of trade deficit during AprilSeptember 2009 as against 75.4 per cent during April-September 2008. (Table 6.3 and Figure 6.1). Current Account Balance 6.27 The trade channel of the BoP played an important role in transmitting global economic shocks to India. A swifter impact of the slowdown in global demand on exports and relatively lagged response of imports to domestic demand slowdown tended to widen the trade deficit, notwithstanding the sharp decline in international crude oil prices in the second half of 2008-09. Some of the adverse impact of the considerable widening of the trade deficit on the overall current account during the year was, however, partly contained by the relative resilience of software services exports and remittances from overseas Indians. A notable feature in the last quarter of 2008-09, however, was significant narrowing down of the trade deficit on account of a larger decline in imports relative to exports, which along with the sustained invisibles surplus led to a significant reduction in the current account deficit (CAD). However, for fiscal 2008-09, despite the higher invisibles surplus of US$ 89.9 billion (7.4 per cent of GDP), the CAD increased to US$ 28.7 billion (2.4 per cent of GDP), mainly on account of the widening trade deficit, as compared to US$ 15.7 billion (1.3 per cent of GDP) in 2007-08. 6.28 The CAD, despite lower trade deficits, increased to US$ 18.6 billion in H1 (April-September) of 2009-10 from US$ 15.8 billion in April-September 2008 mainly due to a lower net invisibles surplus. (Figure 6.2) Figure 6.2 Current account deficit, goods & services balance, trade balance, invisibles balance and net capital inflows as a per cent of GDP during H1 of 2008-09 and 2009-10 8.3 7.1 5.0 2.3 Goods & services balance -2.7 -6.7 -10.9 2008-09 H1 (Apr-Sep) -3.3 Trade balance -7.7 -10.4 2009-10 H1 (Apr-Sep) Invisibles balance Net capital inflows Current account deficit 10 8 6 As per cent of GDP 4 2 0 -2 -4 -6 -8 -10 -12 Balance of Payments 131 CAPITAL ACCOUNT 6.29 The impact of the global financial crisis through the financial channel was reflected in the sharp turnaround in the capital flows cycle from a sustained phase of surges in inflows to large outflows, particularly in Q3 (October-December 2008) of 2008-09. The early signs of the impact of the financial crisis on capital inflows were evident in the portfolio outflows that started in February 2008. Following the failure of Lehman Brothers, there was a sudden change in the external environment, characterized by a global liquidity squeeze and increased risk aversion on the part of international investors. As in the case of other major emerging market economies (EMEs) there was a withdrawal of funds from the domestic equity markets by portfolio investors as part of the global deleveraging process as also a significant reduction in the access of Indian corporates to overseas financing. Thus there were large capital outflows by portfolio investors during September-October 2008, with concomitant pressures in the foreign exchange market. 6.30 The deteriorating external financing conditions also rendered Indian firms’ access to external commercial borrowings and trade credits somewhat difficult. The resilience shown by FDI inflows, however, reflects the continued confidence in the Indian economy as a long-term investment destination. 6.31 On the whole, the adverse impact of the global financial market turmoil was reflected in lower capital inflows during 2008-09. There was massive decline in net capital flows from US$ 106.6 billion in 2007-08 (8.8 per cent of GDP) to US$ 7.2 billion (0.6 per cent of GDP) in 2008-09. The decline was mainly due to net outflows under portfolio investment including foreign institutional investments (FIIs), American depository receipts (ADRs)/ global depository receipts (GDRs) (US$ 14.0 billion), banking capital including NRI deposits (US$ 3.2 billion) and short-term trade credit (US$ 1.9 billion). However, notwithstanding these adverse developments, the resilience of FDI inflows (US$ 17.5 billion in 2008-09) reflected the growing perception of India as one of the favourite long-term investment destinations. 6.32 The revival in capital flows witnessed during Q1 of 2009-10 gathered momentum during Q2 of 2009-10. Net capital flows at US$ 29.6 billion in AprilSeptember 2009 remained higher as compared to US$ 12.0 billion in April-September 2008. All the components under net capital flows, except loans and banking capital, showed improvement during April-September 2009 from their levels in the corresponding period of the previous year. In banking capital, net inflows under non-resident deposits remained higher during April-September 2009 as compared to their previous year’s level. 6.33 Net inward FDI into India remained buoyant at US$ 21.0 billion during April-September 2009 (as against US$ 20.7 billion in April-September 2008) reflecting the continuing liberalization and better growth performance of the Indian economy. During this period, FDI was channeled mainly into manufacturing (21.4 per cent) followed by communication services (12.8 per cent) and the real estate sector (12.6 per cent). Net outward FDI of India at US$ 6.8 billion in April-September 2009 remained at almost the same level as that of the corresponding period of 2008-09. Due to the large inward FDI, the net FDI (inward minus outward) was marginally higher at US$ 14.1 billion in AprilSeptember 2009. Portfolio investment mainly comprising FIIs and ADRs/ GDRs witnessed large net inflows (US $ 17.9 billion) in April-September 2009 (net outflows of US $ 5.5 billion in AprilSeptember 2008). This was mainly due to large purchases by FIIs in the Indian capital market reflecting revival in the growth prospects of the economy and improvement in global investors’ sentiment. The inflows under ADRs/GDRs increased to US$ 2.7 billion in April-September 2009 (as against US$ 1.1 billion in April-September 2008). 6.34 The net external commercial borrowings (ECBs) inflow remained lower at US$ 0.7 billion in April-September 2009 than the US $ 3.2 billion in April-September 2008. Banking capital (net) amounted to US$ 1.1 billion in April-September 2009 as compared to US$ 5.0 billion in April-September 2008. Among the components of banking capital, NRI deposits witnessed higher net inflows of US$ 2.9 billion in April-September 2009 as compared to US$ 1.1 billion in April-September 2008. Short-term trade credit recorded a net outflow of US$ 0.6 billion (inclusive of suppliers’ credit up to 180 days) during April-September 2009 as against a net inflow of US$ 4.9 billion during the same period of the previous year. Other capital includes leads and lags in exports, special drawing rights (SDR) allocation, funds held abroad, advances received pending issue of shares under FDI and other capital not included elsewhere (n.i.e). Other capital recorded a lower net outflow of US$ 4.3 billion in April-September 2009 as compared to US$ 10.3 billion in April-September 2008. 132 Economic Survey 2009-10 Development (IBRD), Asian Development Bank (ADB), International Development Association (IDA), etc. Both the US dollar and euro are intervention currencies. Foreign currency assets are maintained in major currencies like the US dollar, euro, pound sterling, Australian dollar and Japanese yen. Foreign exchange reserves are denominated and expressed in the US dollar only. 6.36 Beginning from a low level of US$ 5.8 billion at end-March 1991, foreign exchange reserves increased gradually 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. They reached their peak at US$ 314.6 billion in end-May 2008. The reserves declined thereafter to US$ 252.0 billion at the end of March 2009. The decline in reserves in 2008-09 was inter alia a fallout of the global crisis and strengthening of the US dollar vis-à-vis other international currencies and the fact that our reserves are measured in dollar terms. During 2009-10, the level of foreign exchange reserves increased from US$ 252.0 billion at the end of March 2009 to US$ 283.5 billion at the end of December 2009, mainly on account of valuation gain as the US dollar depreciated against most of the other major international currencies in 2009. The component-wise details of foreign exchange reserves from 1950-51 to 2009-10 (up to December 2009) in rupees and US dollars are given in Appendix 6.1 (A) and 6.1 (B). 6.37 In fiscal 2008-09, the widening of the CAD coupled with net capital outflows resulted in the drawdown of foreign exchange reserves of US$ 20.1 billion (excluding valuation) as against an accretion of US$ 92.2 billion in 2007-08. During 2009-10, the accretion in foreign exchange reserves on a BoP basis (i.e. excluding valuation) was US$ 9.5 billion in H1 (April-September 2009) of 2009-10 as against a decline of US$ 2.5 billion during the corresponding period of the previous year. This was mainly on account of higher capital inflows to the tune of US$ 17.9 billion in the form of portfolio investment vis-avis an outflow of US$ 5.5 billion in H1 (AprilSeptember 2008) of 2008-09. 6.38 Taking into account the valuation effect, India’s foreign exchange reserves recorded a decline of US $ 57.7 billion during 2008-09 to US $ 252.0 billion as at end-March 2009. Valuation loss arising out of depreciation of major currencies against the US dollar, at US$ 37.6 billion, accounted for 65.2 per cent of the total decline in foreign exchange reserves during 2008-09. However, in 2009-10 foreign Box 6.2 : Dubai Financial Crisis and the Indian Economy Dubai World, the flagship holding company of the Dubai Government with active participation in some large real estate projects, sought a debt restructuring and six-month standstill in its debt repayment (estimated at US$ 59 billion as of August 2009) on November 25, 2009. Although there was initial reaction in the domestic foreign currency and Indian stock markets, the impact was insignificant and short-lived. The primary capital market remained unaffected and there was no visible effect of the Dubai news on the money and government securities markets. The markets recovered immediately, backed by the news of 7.9 per cent GDP growth in Q2 of 2009-10. As regards its impact on the real sector, a quick assessment suggests that it may be modest. There could be some impact on India’s exports and imports, keeping in view the significant share of the UAE in India’s international trade. As Indian expatriates comprise a large percentage of the total workforce in Dubai, the crisis may lead to salary cuts or job losses for Indian workers in the construction sector with consequent effect on remittances and NRI deposits. The UAE accounts for 10 per cent of total remittances and 11.3 per cent of NRI deposits. Subsequent developments indicate that the impact of the Dubai crisis on financial markets around the world has been contained, following the announcement by the UAE central bank that it would stand behind UAE banks and branches of foreign banks operating in the UAE. Furthermore, the Government of Abu Dhabi and the UAE central bank agreed to provide financial support to Dubai World. The Government of Abu Dhabi has agreed to grant US$ 10 billion to the Dubai Financial Support Fund for meeting a series of upcoming obligations of Dubai World including sukuk (Islamic bond) obligations of US$ 4.1 billion, which fell due on December 14, 2009. These assurances to trade creditors and contractors have provided confidence to the financial markets. FOREIGN EXCHANGE RESERVES 6.35 Foreign exchange reserves are an important component of the BoP and an essential element in the analysis of an economy’s external position. India’s foreign exchange reserves comprise foreign currency assets (FCA), 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 RBI’s 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 the International Bank for Reconstruction and Balance of Payments 133 Table 6.4 : Sources of variation in foreign exchange reserves on BoP basis and valuation effect (US$ billion) April-September Sl.No. Items 2007-08 2008-09 2008-09 2009-10 I II 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 +) Valuation Change Total Reserve Change (III+IV) (Increase in reserves (+) / Decrease in reserves (-)) (-) 15.7 107.9 43.3 15.9 27.4 20.3 6.6 22.6 11.8 0.2 15.9 2.1 11.0 1.3 92.2 (-) 92.2 18.4 110.6 (-) 28.7 8.6 3.5 17.5 (-) 14.0 (-) 15.0 1.2 7.9 (-)3.2 4.3 (-)1.9 2.6 -1.5 1.4 (-)20.1 (+) 20.1 (-) 37.6 (-) 57.7 (-)15.8 13.4 8.3 13.9 (-)5.5 (-)6.6 1.1 3.2 5.0 1.1 4.9 0.9 (-)10.3 1.4 (-) 2.5 (+) 2.5 (-) 20.9 (-) 23.4 (-)18.6 28.2 32.1 14.1 17.9 15.3 2.7 0.7 1.1 2.9 (-) 0.6 0.6 (-)4.3 -1.4 9.5 (-)9.5 19.8 29.3 III IV 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. 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. exchange reserves recorded an increase of US$ 29.3 billion in H1 (April-September 2009) of which US$ 19.8 billion was on account of valuation gain (Table 6.4). Table 6.5 : Summary of changes in foreign exchange reserves (US$ billion) Sl. No. Year Foreign exchange reserves at the end of financial year (end March) 141.5 151.6 199.1 309.7 252.0 283.5 Total Increase / decrease in reserves + 28.6 + 10.1 + 47.5 + 110.6 - 57.7 +31.5 Increase/decrease in reserves on a BoP basis +26.2 (91.6%) +15.0 (148.5%) +36.5 (76.8%) +92.2 (83.4%) -20.1 (34.8%) +11.2 (35.6%) Increase/decrease in reserves due to valuation effect + 2.4 (8.4%) (-) 4.9 (- 48.5%) + 11.0 (23.2%) + 18.4 (16.6%) - 37.6 (65.2%) + 20.3 (64.4%) 1 2 3 4 5 6 2004-05 2005-06 2006-07 2007-08 2008-09 2009-2010 (upto Dec. 2009) Source: RBI. Note: Figures in parentheses indicate percentage share in total change. 134 Economic Survey 2009-10 million (equivalent to US$ 340 million) under special allocation from the IMF. These SDR allocations have resulted in an increase of US$ 5.2 billion in India’s foreign exchange reserves. The third major development was the purchase of gold from the IMF by the RBI (Box 6.3). 6.41 In line with the principles of preserving the long-term value of the reserves in terms of purchasing power and minimizing risk and volatility in returns, the RBI holds foreign currency assets (FCAs) in major convertible currencies instruments. These include deposits of other-country central banks, the Bank for International Settlements (BIS) and toprated foreign commercial banks, and in securities representing debt of sovereigns and supranational institutions with residual maturity not exceeding 10years, to provide a strong bias towards capital preservation and liquidity. The annualized rate of return, net of depreciation, on the multi currencymulti asset portfolio of the RBI and gold declined marginally to 4.2 per cent in 2008-09 from 4.8 per cent in 2007-08. 6.42 Country-wise details of foreign exchange reserves reveal that India is the fourth largest foreign exchange reserves holder in the world, after China, Japan and Russia (Table 6.6). 6.39 A summary of changes in the foreign exchange reserves since 2004-05 with a breakdown into increase/decrease on a BoP basis and valuation effect is presented in Table 6.5. 6.40 In 2009-10, three major developments have taken place in the area of foreign exchange reserves management. The first relates to investment of foreign exchange reserves in infrastructure projects. Pursuant to the announcement made in the Union Budget 2007-08 about using a part of the foreign exchange reserves for financing domestic infrastructure requirements without the risk of monetary expansion, the India Infrastructure Finance Company Limited was set up as a wholly owned subsidiary in London, UK, called IIFC (UK) in April 2008. The subsidiary will borrow up to US$ 5 billion in tranches from the RBI by issuing US dollardenominated bonds and on-lend the resources to Indian infrastructure companies for meeting their capital expenditures outside India. It has already raised the first tranche of US$ 250 million. The second development relates to the IMF’s allocation of SDRs to member countries including India. A general allocation of SDRs for an amount equivalent to US$ 250 billion and a special SDR allocation pursuant of the fourth amendment of the IMF’s Articles of Agreement, amounting to US$ 33 billion, was made by the IMF to member countries on August 28, 2009 and September 9, 2009 respectively. India received SDR 3,082 million (equivalent to US$ 4,821 million) under general allocation and SDR 214.6 Table 6.6 : Foreign exchange reserves of some major countries Sl. No. Country Foreign exchange reserves during 2009 (US$ billion) 2399.2 1049.4 439.0 283.5 270.0 256.3 238.5 189.5 188.9 140.1 139.1 Box 6.3 : RBI purchase of gold from the IMF The Executive Board of the IMF, on September 18, 2009 announced its decision to sell 403.3 metric tonnes of gold as a central element of its New Income Model and in order to increase its resources for lending to low-income countries. The IMF also decided that the initial offer of the sale would be directly to official holders, including central banks. Consequent of this, the RBIconcluded the purchase of 200 metric tonnes of gold from the IMF, under the IMF’s limited gold sales programme, at the cost of US$ 6.7 billion, in November 2009, as part of its foreign exchange reserves management operation. The purchase was an official- sector off-market transaction and was executed over a two-week period during October 19-30, 2009 at market-based prices. With this purchase, gold holdings in the country’s foreign exchange reserves have increased from 357.7 tonnes to 557.7 tonnes, which is about 6 per cent of the reserves. Post–purchase, India has become the 10th largest official gold-holding country in the world. 1 2 3 4 5 6 7 8 9 10 11 China (December 2009) Japan (December 2009) Russia (December 2009) India (December 2009) Korea (December 2009) China P R Hong Kong (November 2009) Brazil (December 2009) Germany (November 2009) Singapore(November 2009) Italy (November 2009) France (November 2009) Source: IMF except China. Balance of Payments Table 6.7 : International comparison of foreign exchange reserves (US $ billion) and ratio of reserves to imports of goods & services Country/ Country Group 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) 467.6 413.4 (165.5) (112.3) 1531.3 1950.3 (148.0) (158.2) 267.6 (95.1) 179.5 (113.8) 87.1 (28.5) 248.0 (73.6) 192.9 (87.6) 95.1 (28.5) 380.7 (163.2) 2240.0 (227.8) 263.1 (81.1) 219.8 (129.6) 93.5 (36.3) 135 2005 2006 2007 2008 2009 (Proj.) 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. 6.45 In fiscal 2008-09, the rupee depreciated against major international currencies, except the pound sterling, due to deceleration in capital flows and widened trade deficit. The annual average exchange rate of the rupee in 2008-09 was Rs 45.99 per US dollar, Rs 64.98 per euro and Rs 46.22 per 100 yen, indicating depreciation by 12.5 per cent, 12.2 per cent and 23.5 per cent respectively over the annual average exchange rate during 2007-08. However, annual average exchange rate of the rupee per pound sterling of 78.29 in 2008-09 indicated appreciation by 3.2 per cent over 2007-08. 6.46 In fiscal 2009-10, the rupee has strengthened against the US dollar on the back of significant turnaround in FII inflows, continued inflows under FDI and NRI deposits, better macroeconomic performance of the Indian economy and weakening of the US dollar in international markets. Additionally, the outcome of the general elections, which generated expectations of political stability, buoyed the market sentiment and strengthened the rupee, especially in the second half of May 2009. The rupee exhibited significant strength against the US dollar in October 2009. However, since then it has generally been rangebound moving in the range of Rs 46-47 per US dollar. As a result, the rupee/US dollar exchange rate, which was Rs 50.95 per dollar in end-March 2009, appreciated to Rs 46.64 per dollar as on January 1, 2010. At this level, the Indian rupee has appreciated by 9.2 per cent over its March 31, 2009 level. Over the same period, the rupee recorded an appreciation of 1.0 per cent against the euro and 3.5 per cent against the Japanese yen. However, it depreciated by 3.4 per cent against the pound sterling. Movement in exchange rate of the rupee vis-à-vis major international currencies, month-wise, during 2009-10 (up to December 2009) is presented in Figure 6.3. Country Group Developing 202.8 Asia (38.4) (excluding China & India) Middle 357.7 East (87.4) 250.7 (42.3) 332.6 (49.0) 339.3 (41.8) 363.8 (53.6) 491.1 (99.3) 695.6 825.9 (112.8) (101.1) 870.3 (113.0) Source : World Economic Outlook Database, October 2009. Note : Reserves are based on offical holding of gold valued at SDR 35 an ounce. This convention results in a marked underestimation of reserves for countries that has substantial gold holdings. India’s FOREX reserves were US$ 283.5 billion (end of December 2009) and US$ 252.0 billion at the end of March 2009. Figures in parentheses indicate ratio of reserves to imports of goods and services. 6.43 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 6.7. Among the country groups, “Developing Asia” and the “Middle East” accumulated reserves during the period 2005- 09, leading to steady improvement in the ratio of reserves to import of goods and services. EXCHANGE RATE 6.44 The exchange rate policy is guided by the broad principles of careful monitoring and 136 Economic Survey 2009-10 Figure 6.3 5 4 Month on month appreciation(+)/depreciation(-) of rupee against major international currencies during 2009-10 US$ Pound Sterling Euro Yen Appreciation/depreciation 3 2 1 0 -1 -2 -3 -4 -5 -6 Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2009 Figure 6.4 53 Monthly average exchange rate (Rupee per US dollar) during Mar - Dec 2009 and appreciation/depreciation over the previous month 4 3 2 1 0 -1 -2 -3 -4 Appreciation/depreciation Rupee per US dollar 52 51 50 49 48 47 46 45 Mar Apr May Jun Jul Aug Sep Oct Nov Dec Monthly average exchange rate (Rs. per US dollar) - LHS Appreciation / Depreciation - RHS 2009 6.47 In 2009-10, on a month-on-month basis, the average monthly exchange rate of the rupee appreciated during April-June, August and OctoberNovember while it depreciated during July, September and December. The average monthly exchange rate of the rupee strengthened from Rs 51.23 per US dollar during March 2009 to Rs 46.63 per US dollar during December 2009 (Figure 6.4). 6.48 The month-wise details of the exchange rate of the rupee against major international currencies and the RBI’s sale/purchase of foreign currency in the foreign exchange market during 2009-10 are indicated in Table 6.8. 6.49 The exchange rate of the rupee vis-à-vis select international currencies since 1980-81, yearwise, and during 2009-10, month-wise, is indicated in Appendix 6.5. 6.50 During 2008-09, the US dollar generally appreciated against most currencies, except the Japanese yen and Chinese yuan. During 2009-10 so far, the appreciating trend has been reversed because of declining safe haven flows to the US, large-scale quantitative easing in the US and change in market sentiment against the dollar. However, the dollar gained some strength against major currencies, especially in December 2009, on the back of various Balance of Payments 137 Table 6.8 : Exchange rates and RBI’s sale/purchase of foreign currency in the exchange market during 2009-10 Monthly average exchange rates (Rupee per foreign currency)*, Month US$ Pound Sterling 78.29 (3.24) 72.90 (-2.85) 73.58 (-0.92) 74.83 (-1.67) 78.16 (-4.25) 79.35 (-1.50) 79.93 (-0.73) 79.35 (0.74) 75.73 (4.78) 77.33 (-2.07) 75.76 (2.06) Euro Yen** RBI Net sale (-) / purchase (+) (US$ million) (-) 3,388 Average 2008-09 March 2009 2009-10 April 2009 May 2009 June 2009 July 2009 August 2009 September 2009 October 2009 November 2009 December 2009 45.99 (-12.46) 51.23 (-3.84) 50.03 (2.39) 48.53 (3.09) 47.77 (1.59) 48.48 (-1.46) 48.30 (0.37) 48.44 (-0.29) 46.72 (3.68) 46.57 (0.33) 46.63 (-0.13) 64.98 (-12.20) 66.92 (-6.03) 65.81 (1.69) 66.20 (-0.60) 66.98 (-1.16) 68.24 (-1.85) 68.87 (-0.92) 70.44 (-2.22) 69.29 (1.66) 69.50 (-0.31) 68.18 (1.93) 46.22 (-23.53) 52.51 (1.83) 50.84 (3.29) 50.22 (1.25) 49.45 (1.56) 51.26 (-3.55) 50.80 (0.92) 52.85 (-3.89) 51.76 (2.12) 52.28 (-1.0) 52.00 (0.52) (-) 2,487 (-) 1,437 (+) 1,044 (-) 55 (+) 181 (+) 80 (+) 75 (-) 36 Source : RBI * FEDAI indicative rate; ** Per 100 Yen. Figures in parentheses indicate appreciation (+) and depreciation (-) over the previous month/year. indicators suggesting a pick-up in economic activity in the US and financial market conditions turning more conducive to economic growth. Between endMarch and end-December 2009, the US dollar Table 6.9 : Exchange rate of US dollar against international currencies during 2009-10 Month / Year (End month) March 2009 April 2009 May 2009 June 2009 July 2009 August 2009 September 2009 October 2009 November 2009 December 2009 US$ Appreciation (+) / Depreciation (-) (End December 2009 over March 2009) Source: RBI GBP/USD 1.4327 1.4787 1.5511 1.6466 1.6721 1.6276 1.6257 1.6202 1.6570 1.6278 -11.99 Euro/USD 1.3249 1.3226 1.3690 1.4036 1.4250 1.4249 1.4506 1.4772 1.4886 1.4696 -9.85 USD/JPY 98.84 98.57 96.79 96.33 94.68 95.18 90.85 90.18 88.08 89.65 -9.30 AUD/USD 0.6921 0.7252 0.7656 0.8070 0.8354 0.8321 0.8544 0.8949 0.9156 0.9044 -23.47 138 Economic Survey 2009-10 per cent against the six-currency trade-weighted NEER during 2009-10 (March to November 2009). The average six-currency trade-weighted REER (base:1993-94=100) increased from 98.58 in April 2009 to 104.94 in November 2009 mainly on account of appreciation of the rupee against the US dollar and increase in inflation differentials between India and its trading partners (Table 6.10 and Appendix 6.6). depreciated by 12.0 per cent against the pound sterling, 9.9 per cent against the euro, 9.3 per cent against the Japanese yen and 23.5 per cent against the Australian dollar. Among Asian currencies, it depreciated against the Indian rupee, Indonesian rupiah, Malaysian ringgit, South Korean won and Thai Baht. The exchange rate of the US dollar vis-avis other major international currencies, namely pound sterling, euro, Japanese yen and Australian dollar is presented in Table 6.9. 6.51 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. 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 for eurozone, pound sterling, Japanese yen, Chinese renminbi and Hong Kong dollar) and 36 currency indices of NEER and REER. 6.52 The rupee appreciated against the US dollar by 10.0 per cent during 2009-10 till November 2009. The rupee appreciation was, however, modest at 3.23 THE G-20 6.53 The G-20 is taking up the cause of global stability, policy coordination and growth at global level. The details of G-20 summits held in 2009 are as under: London Summit (UK): April 2, 2009 6.54 The summit was held against a backdrop of economic and financial crisis of enormous proportions. The leaders resolved to restore confidence, growth and jobs; repair the financial system to restore lending; strengthen financial regulation to rebuild trust; fund and reform the international financial institutions; promote global trade and investment and reject protectionism; and build an inclusive and sustainable recovery. 6.55 The ‘Global Plan for Recovery and Reform’ brought out at the Summit, inter alia, pledged significant reforms towards: Table 6.10 : Movement of rupee and indices of NEER and REER during 2009-10 Month/Year Rs per US dollar Appreciation (+)/ depreciation (-) in Rs per dollar over previous month NEER * REER * Appreciation Appreciation (+)/ (+)/ depreciation depreciation (-) in NEER (-) in REER over previous over previous month month 2008-09 (April-March) March 2009 2009-10 April 2009 (P) May 2008 (P) June 2009 (P) July 2009 (P) August 2009 (P) September 2009 (P) October 2009 (P) November 2009 (P) December 2009 (P) 45.99 51.23 50.03 48.53 47.77 48.48 48.30 48.44 46.72 46.57 46.63 2.39 3.09 1.59 (-) 1.46 0.37 (-) 0.29 3.68 0.33 (-) 0.13 64.87 60.35 61.49 62.31 62.43 61.36 61.22 60.61 62.40 62.30 104.47 95.68 98.58 101.37 101.11 100.64 101.52 101.25 103.84 104.94 1.89 1.33 0.19 1.71 0.23 1.00 2.95 0.16 3.03 2.83 (-) 0.26 (-) 0.46 0.81 (-) 0.27 2.56 1.05 (-) (-) (-) (-) Source : RBI * Six-Currency Trade Based Weights- Base: 1993-94 (April-March) =100 Balance of Payments Restoring growth and jobs; Strengthening financial supervision and regulation; Strengthening our global financial institutions; Resisting protectionism and promoting global trade and investment; and Ensuring a fair and sustainable recovery for all. 6.56 As per the London communique the leaders have agreed to treble resources available to the IMF to $ 750 billion, to support a new SDR allocation of $ 250 billion, to support at least $100 billion of additional lending by the multilateral development banks (MDBs), to ensure $ 250 billion of support for trade finance, to use the additional resources from agreed IMF gold sales for concessional finance for the poorest countries and to constitute an additional $ 1.1 trillion programme of support to restore credit, growth and jobs in the world economy. 139 secured and to adopt the policies needed to lay the foundation for strong, sustained and balanced global growth in the 21st century. The G-20 leaders agreed to: Launch a framework that lays out the policies and the way we act together to generate strong, sustainable and balanced global growth. Make sure the regulatory system for banks and other financial firms reins in the excesses that led to the crisis. Reform the global architecture to meet the needs of the 21st century. Take new steps to increase access to food, fuel and finance among the world’s poorest while clamping down on illicit outflows. Phase out and rationalize over the medium term inefficient fossil fuel subsidies while providing targeted support for the poorest. Maintain openness and move toward greener, more sustainable growth. 6.58 The Pittsburgh Summit agreed that the G20 would be the premier forum for international economic issues. The Summit agreed on an at least 5 per cent shift in the IMF quota to underrepresented countries and on a new framework for global macrobalances that includes contributions that individual countries can make through their own policies, with a process of peer review. The objective is that members agree on shared policy objectives, set out medium-term policy frameworks and work together to assess the collective implications of national policy for global growth, identifying potential risks to financial stability and based on mutual assessment, and agree on actions to meet common goals. 6.59 The G-20 leaders also announced that there would be two meetings in 2010, in Canada in June 2010 and in Korea in November 2010 to coincide with the APEC Summit, and annual summits thereafter. Box 6.4 : What is the G-20? The Group of Twenty (G-20) Finance Ministers and Central Bank Governors was established in 1999 in Berlin to bring together systemically important industrialized and developing economies to discuss key issues in the global economy. The member countries of the G-20 are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom, the United States of America and the European Union represented by rotating Council presidency and the European Central Bank. To ensure that global economic fora and institutions work together, the Managing Director of the IMF and the President of the World Bank, plus the chairs of the International Monetary and Financial Committee and Development Committee of the IMF and World Bank, are ex-officio members of the G-20. Together G-20 member countries represent 90 per cent of global gross national product, 80 per cent of world trade as well as two-thirds of the world’s population. Pittsburgh Summit (USA): September 24-25, 2009 6.57 The summit of G-20 leaders was held in the midst of a critical transition from crisis to recovery to turn the page on an era of irresponsibility and to adopt a set of policies, regulations and reforms to meet the needs of the 21st century global economy. The Summit declaration, inter alia, pledged to sustain a strong policy response until a durable recovery is St Andrews Meeting (Scotland): November 7, 2009 6.60 G20 Finance Ministers and Central Bank Governors observed that though the economic and financial conditions have improved following coordinated response to the crisis, the recovery is uneven and remains dependent on policy support, with high unemployment being a major concern. To restore the global economy and financial system to 140 Economic Survey 2009-10 unprecedented and most coordinated expansionary macroeconomic policies, including fiscal expansion of US$ 5 trillion and establishment of the FSB, and substantially strengthening the IFIs, including the expansion of resources and the improvement of their precautionary lending facilities. 6.64 Reflecting on these achievements and recognizing that more needs to be done to ensure a strong, sustained and balanced global recovery, the G-20 leaders at Pittsburgh designated the G-20 as the premier forum for international economic cooperation. health, it was agreed to maintain support for the recovery until it is assured. 6.61 To underscore the new approach to economic cooperation, the G20 has launched a ‘Framework for Strong, Sustainable and Balanced Growth’, adopted a detailed timetable and initiated a new consultative mutual assessment process to evaluate whether policies will collectively deliver the agreed objectives. The first challenge in using the Framework is the transition from crisis response to stronger, more sustainable and balanced growth, consistent with the goals of sustainable public finances; price stability; stable, efficient and resilient financial systems; employment creation; and poverty reduction. The International Financial Institutions (IFIs) will play an important role in supporting the work to secure sustainable growth, stability, job creation, development and poverty reduction. In addition to strengthening the global financial system, the G-20 agreed to work with the Financial Stability Board (FSB) to maintain the momentum of the programme of reforms, and ensure its full, timely and consistent implementation and a level playing field. EXTERNAL DEBT 6.65 India’s external debt stock stood at US $ 224.59 billion (Rs 1,142,618 crore) in end-March 2009, that is fractionally higher than its previous year’s level of US$ 224.41 billion (Rs 897,314 crore). 6.66 During the first half of 2009-10, total external debt increased by US$ 18.2 billion (8.1 per cent) to US$ 242.8 billion (Rs 1,166,217 crore). Long-term debt posted an increase of US$ 19.2 billion (10.6 per cent) to stand at US$ 200.4 billion, while shortterm debt fell by US$ 985 million (-2.3 per cent) to stand at US$ 42.4 billion. The share of long-term debt was higher at 82.5 per cent in end-September 2009 as against 80.7 per cent in end-March 2009. Concomitantly, the share of short-term debt declined to 17.5 per cent in end-September 2009 from 19.3 per cent in end-March 2009. 6.67 The valuation effect arising due to depreciation of the US dollar against major international currencies contributed an increase of US$ 8.3 billion in the total increase of US$ 18.2 billion in external debt as in end-September 2009 over the end-March 2009 level. Excluding the valuation effect, the increase in external debt would have been US$ 9.9 billion. 6.68 Commercial borrowings remained the largest component of external debt with a share of 27.5 per cent in end-September 2009 (27.8 per cent in end-March 2009). Reflecting the impact of an increase in NRI deposits attributable to an upward revision in interest rate ceiling on these deposits, there was an improvement in their share from 18.5 per cent in end-March 2009 to 18.9 per cent in endSeptember 2009. Multilateral debt accounted for 17.4 per cent of total external debt, followed by bilateral debt (9.1 per cent), export credits (6.3 per cent), IMF representing SDR allocations (2.6 per cent) and rupee debt (0.7 per cent) as in end-September 2009. Achievements of the G-20 6.62 The G-20 has made considerable progress over a range of issues since 1999, including agreement about policies for growth, reducing abuse of the financial system, dealing with financial crises and combating terrorist financing. The G-20 also aims to foster the adoption of internationally recognized standards through the example set by its members in areas such as transparency in fiscal policy and combating money laundering and the financing of terrorism. In 2004, G-20 countries committed to new higher standards of transparency and exchange of information on tax matters. This aims to combat abuses of the financial system and illicit activities including tax evasion. The G-20 also aims to develop a common view among members on issues related to further development of the global and financial system. 6.63 To tackle the financial and economic crisis that spread across the globe in 2008, the G-20 members were called upon to further strengthen international cooperation. Since then, the concerted and decisive actions of the G-20 have helped the world deal effectively with the current financial and economic crisis. The G-20 has already delivered a number of significant and concrete outcomes. For example, it committed to implementing the Balance of Payments Table 6.11 : India’s external debt Components (US$ billion) End March 2005 2006 2007R 2008 R 2099 PR End-June 2009 PR 141 EndSept. 2009 QE Long-term Debt Short-term Debt Total External Debt (Rupee crore) Long-term Debt Short-term Debt Total External Debt 116.28 17.72 134.00 5,08,777 77,528 5,86,305 119.58 19.54 139.11 5,33,367 87,155 6,20,522 144.23 28.13 172.36 6,28,771 1,22,631 7,51,402 178.68 45.74 224.41 7,14,433 1,82,881 8,97,314 181.23 43.36 224.59 9,21,710 2,20,908 1,142,618 187.75 42.03 229.78 9,01,840 2,01,234 1,103,074 200.45 42.38 242.82 9,62,640 2,03,577 1,166,217 R: Revised; PR: Partially Revised; QE: Quick Estimates. Trade-related credits at US$ 39.3 billion constituted 92.8 per cent of total short-term debt and 16.2 per cent of total external debt at the end of September 2009. Box 6.5 : External commercial borrowing (ECB) policy measures during 2009-10 The broad ECB policy stance towards liberalization continued during the first half of 2009-10. However, it has been decided to roll back some of the policy measures which were introduced against the backdrop of tightness in financial markets during the period of financial crisis. These policy measures have become effective from January 1, 2010. Non-banking financial companies (NBFCs), exclusively involved in financing of the infrastructure sector, were allowed to avail of ECBs from multilateral/regional financial institutions and Government-owned development financial institutions for on-lending to borrowers in the infrastructure sector under the approval route, subject inter alia to the condition that the direct lending portfolio of these lenders vis-à-vis their total ECB lending to NBFCs, at any point of time, should not be less than 3:1 (January 2, 2009). On a review of the policy, it was decided to dispense with this condition with effect from July 1, 2009 (June 30, 2009). Furthermore, it has been decided with immediate effect to allow NBFCs exclusively involved in financing infrastructure projects to avail of ECB from the recognized lender category including international banks under the approval route, subject to complying with the prudential standards prescribed by the Reserve Bank and the borrowing entities fully hedging their currency risk (December 9, 2009). Payment for obtaining licence/permit for the 3G Spectrum was allowed as an eligible end-use for the purpose of ECB under the automatic route (October 22, 2008). It has been decided to permit eligible borrowers in the telecommunication sector with immediate effect to avail of ECB for the purpose of payment for spectrum allocation (December 9, 2009). It was decided to extend the permission granted to corporates engaged in the development of integrated township to avail of ECBs under the approval route until December 31, 2009. This has been extended further to December 31, 2010 (December 9, 2009). Keeping in view the prevailing market conditions, the all-in-cost ceilings applicable to ECBs under the approval route were dispensed with until June 30, 2009 (January 2, 2009). On considering the continuing pressure on credit spreads in the international markets, it was decided in June 2009 to extend the relaxation in all-in-cost ceilings under the approval route until December 31, 2009. However, in view of the improvement in credit market conditions and narrowing credit spreads in the international markets, it has been decided to withdraw the existing relaxation with effect from January 1, 2010. The all-in-cost ceilings under the approval route for ECBs, where loan agreements have been signed on or after January 1, 2010, will be 300 basis points and 500 basis points over six month Libor for an average maturity period of three years and up to five years and more than five years, respectively (December 9, 2009). Buy-back/pre-payment of foreign currency convertible bonds (FCCBs) The procedure relating to premature buyback of FCCBs by Indian companies, both under the automatic and approval routes was liberalized on December 6, 2008, by which the Reserve Bank could consider proposals from Indian companies for buyback of FCCBs under the approval route subject to the buyback value of the FCCB being at a minimum discount of 25 per cent on the book value and use of funds out of internal accruals of the company. Total amount of buyback under the approval route is subject to a limit of US$ 50 million of the redemption value per company. The date for completing the entire procedure for buyback of FCCBs was extended from March 31, 2009 to December 31, 2009. Keeping in view the prevailing macroeconomic conditions and global developments, especially the improvement in the stock prices, it has recently been decided to discontinue the facility with effect from January 1, 2010 (December 9, 2009). 142 Economic Survey 2009-10 Table 6.12 : Currency composition of India’s external debt and sovereign external debt (as per cent of total external debt) Sl. Currency No. March 2008R 55.3 10.5 16.2 12.0 3.5 2.2 0.3 100.0 Total external debt As at the end of March June 2009R 2009PR 54.1 52.3 9.8 15.4 14.3 4.1 2.0 0.3 100.0 10.0 16.3 14.5 4.3 2.2 0.4 100.0 Sovereign external debt Sept. 2009QE 51.4 12.0 16.6 13.6 3.9 2.1 0.4 100.0 March 2008R 26.7 40.8 7.9 18.6 5.9 0.1 0 100.0 March 2009R 29.6 39.5 5.7 19.9 5.2 0.1 0 100.0 June Sept. 2009PR 2009QE 29.1 25.8 39.2 6.7 19.8 5.2 0 0 100.0 44.2 6.8 18.4 4.8 0 0 100.0 1. US Dollar 2. SDR 3. Indian Rupee 4. Japanese Yen 5. Euro 6. Pound Sterling 7. Others Total R: Revised PR: Partially Revised. QE Quick Estimates billion in end-September 2009, attributable mainly to additional SDR allocations of 3,082.51 million under general allocation on August 28, 2009 and 214.57 million under special allocation on September 9, 2009 by the IMF. The ratio of Government debt to GDP remained around 5.0 per cent in the last three years. 6.71 US dollar-denominated debt accounted for 51.4 per cent of total external debt in end-September 2009, followed by Indian rupee (16.6 per cent), Japanese yen (13.6 per cent), SDR (12.0 per cent), Euro (3.9 per cent) and pound sterling (2.1 per cent) denominated debt. The currency composition of Government debt indicates predominance of SDRdenominated debt, which is attributable to borrowing from the International Development Association (IDA), that is the soft loan window of the World Bank under the multilateral agencies and inclusion of SDR allocations by the IMF as an external debt liability of the Government. The share of the Japanese yen in Government debt is also higher on account of borrowing from Japan, which is denominated in Japanese yen. 6.72 The debt sustainability indicator, that is ratio of foreign exchange reserves to total external debt showed an improvement from 112.1 per cent in endMarch 2009 to 115.4 per cent in end-June 2009 and further to 115.8 per cent in end-September 2009. The ratio of short-term external debt to foreign exchange reserves, which had increased from 14.8 per cent in end-March 2008 to 17.2 per cent in endMarch 2009, was also lower at 15.1 per cent in endSeptember 2009. The concessional debt portion of external debt has declined steadily and worked out 6.69 Short-term debt by residual maturity, which comprises principal repayments during a one-year reference period under medium- and long-term debt liabilities, and short-term debt with original maturity of one year or less are important indicators of debt sustainability in volatile financial market conditions. Short-term external debt by original maturity stood at US$ 42.4 billion in end-September, while total short-term debt by residual maturity was US$ 93.2 billion, accounting for 38.4 per cent of total external debt outstanding in end-September 2009. NRI deposits maturing within a period of one year at US$ 36.7 billion worked out to 39.4 per cent of total shortterm debt by residual maturity. However, 69.3 per cent of these deposits are denominated and payable in Indian rupees. The observed redemption pattern of NRI deposits indicates that these are generally locally withdrawn and are also renewed by NRIs. Between end-March and end-September 2009, there was an improvement in the ratio of short-term debt by residual maturity to foreign exchange reserves from 37.0 per cent to 33.1 per cent. 6.70 Government debt stood at US$ 65.7 billion in end-September 2009 while non-Government debt amounted to US$ 177.1 billion. The share of Government debt in total external debt declined from 40.6 per cent in end-March 2004 to 24.9 per cent in end-March 2009, before rising to 27.1 per cent in end-September 2009. The external assistance component of Government debt at US$ 55.1 billion in end-September 2009 was higher than its endMarch 2009 level of US$ 51.8 billion. Other Government external debt also recorded an increase from US$ 4.1 billion in end-March 2009 to US$ 10.6 Balance of Payments Table 6.13 : India’s key external debt indicators (per cent) Year External debt (US$ billion) Ratio of total external debt to GDP 28.7 27.0 21.1 18.0 18.1 16.7 17.5 18.1 20.5 Debtservice ratio@ Ratio of Ratio of Ratio of foreign conces- short-term exchange sional debt debt to reserves to to total foreign total exexternal exchnage ternal debt debt r e s e r v e s 7.0 23.1 54.7 100.3 105.6 109.0 115.6 138.0 112.1 115.4 127.2 115.8 45.9 44.7 35.9 35.8 30.7 28.4 23.0 19.7 18.7 18.9 18.4 18.4 146.5 23.2 5.1 3.9 12.5 12.9 14.1 14.8 17.2 15.9 17.7 15.1 143 Ratio of shortterm debt to total debt 10.2 5.4 2.8 3.9 13.2 14.1 16.3 20.4 19.3 18.3 22.5 17.5 1990-91 1995-96 2001-02 2003-04 R 2004-05 R 2005-06 R 2006-07 R 2007-08 R 2008-09PR End-June 2009 PR End-Sept. 2008 PR End-Sept. 2009 QE R: @ ** ^ # 83.8 93.7 98.8 112.7 134.0 139.1 172.4 224.4 224.6 229.8 225.1 242.8 35.3 26.2 13.7 16.1** 5.9 ^ 10.1# 4.7 4.8 4.4 - Revised; PR: Partially Revised; QE: Quick Estimates. Not worked out for the broken period. Debt-service ratio is the proportion of gross debt service payments to External Current Receipts (net of official transfers). Works out to 8.2 per cent, with the exclusion of pre-payment of US$ 3,797 million and redemption of Resurgent India Bonds (RIBs) of US$ 5,549 million. Works out to 5.7 per cent with the exclusion of pre-payment of US$ 381 million. Works out to 6.3 per cent, with the exclusion of IMDs repayments of US$ 7.1 billion and pre-payment of US$ 23.5 million. Table 6.14 : International comparison of top 20 debtor developing countries 2007 Sl Countries No. External debt stock (US $ million) External debt to GNI (per cent) Short-term debt to external debt (per cent) Foreign Concessional exchange debt to total reserves to external debt external debt (per cent) (per cent) 36.1 75.9 28.7 413.9 46.6 28.1 125.2 40.4 18.4 189.9 49.0 51.2 33.6 46.8 129.1 75.9 138.7 30.4 44.1 78.2 1.3 1.0 0.4 10.1 2.1 2.1 21.7 26.2 1.0 6.1 0.6 20.0 0.4 1.6 0.4 9.6 2.1 2.2 0.5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Argentina Brazil Chile China Colombia Croatia India Indonesia Kazakhstan Malaysia Mexico Philippines Poland Romania Russian Federation South Africa Thailand Turkey Ukraine Venezuela All developing countries 1,27,758 2,37,472 58,649 3,73,635 44,976 48,584 2,20,956 1,40,783 96,133 53,717 1,78,108 65,845 1,95,374 85,380 3,70,172 43,380 63,067 2,51,477 73,600 43,148 34,66,045 49.7 18.7 40.3 11.6 22.5 97.7 18.9 33.9 103.7 29.4 17.7 41.9 47.7 51.5 29.4 15.8 26.5 38.8 52.9 18.7 29.8 16.5 22.7 54.5 11.9 10.5 19.8 24.8 12.2 28.4 5.1 10.8 30.9 35.7 21.4 38.2 34.3 16.6 31.1 27.1 24.5 Source : Global Development Finance 2009, World Bank. 144 Economic Survey 2009-10 to 18.4 per cent in end-September 2009 as against 18.7 per cent in end-March 2009 (Table 6.13). CHALLENGES 6.75 Indian economy has been one of the least affected by the global crisis. In fact, India is one of the growth engines, along with China, in facilitating faster turnaround of the global economy. Risks, however, remain. Firstly, despite recovery, advanced countries continue to face risk of double-dip recession with high unemployment rate, growing fiscal deficit and high public debt - GDP ratios. Such risks can have direct implications for the Indian economy, which is increasingly integrated with the rest of the world. 6.76 Secondly, with interest rates at historic low in most advanced economies, capital flows from these countries are finding their way into the fast growing Asian economies including India. The issues that arise are whether the inflows are in excess of the domestic absorptive capacity and whether they could lead to overheating of the economy. The related issue is the need to balance the competing objectives of price and exchange stability. This can also be looked at as the “impossible trinity” dilemma of policy choice between price stability, exchange rate stability and capital mobility. International Comparison level 6.73 A cross-country comparison of external debt of 20 most indebted developing countries, based on the data given in World Bank’s publication titled Global Development Finance, 2009 showed that India was the fifth most indebted country in 2007 in terms of stock of external debt. The ratio of India’s external debt stock to gross national income (GNI) as of 2007 at 18.9 per cent was the sixth lowest with China having the lowest ratio at 11.6 per cent. The element of concessionality in India’s external debt portfolio was the second highest after that of Indonesia. 6.74 In terms of the cover of external debt provided by foreign exchange reserves, India’s position was the fifth highest at 125.2 per cent after China, Malaysia, Thailand and the Russian Federation. A comparison of the share of short-term debt in total external debt across countries reveals that India’s position was the eighth lowest with Mexico having the lowest ratio. International Trade CHAPTER 7 The years 2008 and 2009 were tumultuous ones for global trade. The simmering sub-prime crisis in the US in 2007 which triggered the global financial crisis in September 2008 spread its tentacles in full, leading to a full blown global recession resulting in unprecedented fall in global trade. World trade volume (goods and services) grew by only 2.8 per cent in 2008 compared to 7.3 per cent in 2007, with trade growth tumbling down month after month from September 2008 onwards. While the fall seems to have been stalled with the recent recovery, world trade continues to be vulnerable given the nature of the recovery. WORLD TRADE 7.2 The deepening world recession had profound impact on world trade. The US$16 trillion global trade of 2008 collapsed, reaching US $ 5.8 trillion in the first half of 2009 compared to US$8.2 trillion in the corresponding period of 2008. As a result, growth of world output and trade volume of goods and services fell to (-) 0.8 and (-) 12.3 per cent respectively in 2009 according to the International Monetary Fund’s (IMF) World Economic Outlook (WEO) January 2010. The World Trade organization (WTO) in March 2009 forecast a 9 per cent decline in global trade for 2009, the largest in over 60 years. The decline was more marked in the case of advanced economies (Table 7.1) 7.3 The World Bank’s Global Economic Prospects, 2010, estimates world real GDP growth and world trade volume to fall by (-) 2.2 per cent and (-) 14.4 per cent respectively in 2009. As per the World Bank, the dollar value of world trade plummeted 31 per cent between August 2008 and its low point in March 2009. After discounting for falling commodity prices Table 7.1 : Trends in growth in trade volumes (per cent change) Projections 2008 World Trade Volume (Goods and Services) Imports Advanced Economies Emerging and Developing Economies Exports Advanced Economies Emerging and Developing Economies Source: IMF:WEO, January 2010 2009 (-)12.3 2010 5.8 2011 6.3 2.8 0.5 8.9 (-)12.2 (-)13.5 5.5 6.5 5.5 7.7 1.8 4.4 (-)12.1 (-)11.7 5.9 5.4 5.6 7.8 146 Economic Survey 2009-10 corresponding monthly exports/imports in 2009 in almost all the months. The concern is more in the case of imports with monthly imports in 2007 being relatively higher than the corresponding monthly imports for most of the trading partners of India in 2009. The growth rates of exports/imports in 2009 over 2007 given in Figures 7.1(A to H) also clearly shows that while the freefall of global trade has been stopped, real growth from pre-crisis levels is yet to happen. and exchange rate fluctuations, global trade volumes were down by 22 per cent by March 2009. 7.4 The crisis seems largely to have petered out in the second half of 2009 and beginning of 2010 with global trade recovering from the troughs and the appearance of green shoots and the IMF even projecting a better-than-expected growth in world trade volume of 5.8 per cent and 6.3 per cent for 2010 and 2011 respectively, which is also a reflection of the higher-than-expected world output growth projections of 3.9 per cent and 4.3 per cent in 2010 and 2011 respectively. Though we are still not out of the woods, there is a greater degree of confidence, particularly in countries with strong fundamentals like India and China which have weathered the crisis with great dexterity and spearheaded the recovery. 7.5 Examination of the month-wise exports and imports for the world, India and some major trading partners of India from 2008 onwards [Figures 7.1 (A to H)] indicates a recovery in trade with export growth becoming positive in November 2009 over November 2008 in the EU(11.4 per cent), Hong Kong (1.3per cent), India (18.2 per cent), Japan (1.5 per cent) and Singapore (13.3 per cent) and remaining marginally negative in the USA (-2.5 per cent) and China (-1.2 per cent). Pick up in import growth rates was led by China (26.7 per cent), followed by Hong Kong (6.5 per cent), the EU (5.2 per cent) and Singapore (4.4 per cent). Import growth also became less negative in the case of the US (-3.8 per cent), India (-2.6 per cent) and Japan (- 9.9 per cent). 7.6 As observed in the previous chapter, while the global recession seems to be lifting, a note of caution is needed as recovery of trade is still vulnerable and fragile given the fact that it is mainly Government support and policy driven and some policies like the “cash for clunkers” scheme in the US and similar schemes for the automobile sector in other countries could have simply brought forward the demand. Besides, the turnaround in trade growth is largely due to the lower base effect of the last year (2008) which was in fact a lost year on the trade front as the progress in export sector of earlier years was mercilessly frittered away by the onslaught of the global recession. This is evident if we see the actual exports and imports in the pre-recession months along with those in the corresponding recession/postrecession months. It is a matter of concern that except for India in the case of exports and India and China in the case of imports, for the world and all other countries considered here, the actual monthly exports/imports in 2007 were higher than the TRADE CREDIT RECESSION DURING WORLD Impact of the crisis on trade credit 7.7 The global economic crisis also impacted trade credit. A number of banks, global buyers and firms surveyed independently by the World Bank, International Monetary Fund (IMF) and Bankers Association for Finance and Trade (BAFT), have felt that lack of trade credit and other forms of finance, such as working capital and pre-export financing, has affected growth in world trade. In addition, the costs of trade credit have substantially gone up and are higher than they were in the pre-crisis period, raising the challenge of affordability of credit for exporters. Higher funding costs and increased risk continue to put upward pressure on the price of trade credit. In 2008, as the financial crisis intensified, the spreads on trade finance increased by a factor of three to five in major emerging markets, like China, Brazil, India, Indonesia, Mexico, and Turkey. For example, the spread (over the six-month LIBOR) for Turkey jumped to 200 basis points in November 2008 from 70 basis points in the third quarter(Q3), while Brazil’s spread almost trebled in 2008 (from 60 bps to 175 bps); India’s spread increased from 50 bps to 150 bps during the same year. Similarly, spreads for several Sub-Saharan countries jumped from 100 basis points to 400 basis points. (Figure 7.2) 7.8 Small and Medium Enterprises (SMEs) and exporters in emerging markets appear to have faced the greatest difficulties in accessing affordable credit. Increased uncertainty initially led exporters and importers to switch from less secure forms of trade finance to more formal arrangements. Exporters increasingly asked their banks for export credit insurance (ECI) or asked importers to provide Letters of Credit (LCs). Importers were asked to pay for goods before shipment and exporters sought more liquidity to smooth their cash flow. Further, the realization of export proceeds was not taking place International Trade Figure 7.1 50 40 147 Export/import growth (month wise) 7.1A USA Exports 2009/08 Imports 2009/08 Exports 2009/07 Imports 2009/07 Growth rate (per cent) 30 20 10 0 -10 -20 -30 -40 -50 Jul Oct Jul Feb May Feb May Dec Nov Oct Mar Mar Aug Sep Aug 2008 50 40 Sep Nov Nov Nov Nov Jan Jun Jan Jun Apr Apr 2009 7.1B EU(27) Exports 2009/08 Imports 2009/08 Exports 2009/07 Imports 2009/07 Growth rate (per cent) 30 20 10 0 -10 -20 -30 -40 -50 Jul Jan Jul Jan Oct Nov May May Dec Feb Mar Mar Jun Jun Feb Aug Aug Sep 2008 50 40 Sep Apr Apr Oct 2009 7.1C China Exports 2009/08 Imports 2009/08 Exports 2009/07 Imports 2009/07 Growth rate (per cent) 30 20 10 0 -10 -20 -30 -40 -50 Jan Jun Jan Jun Oct Feb May May Feb Nov Dec Mar Mar Sep 2008 50 40 Aug Aug Sep Apr Apr Oct Jul Jul 2009 7.1D Hong Kong Exports 2009/08 Imports 2009/08 Exports 2009/07 Imports 2009/07 Growth rate (per cent) 30 20 10 0 -10 -20 -30 -40 -50 Jan Jul Jan Oct Feb May May Nov Feb Mar Dec Mar Jun Jun Aug 2008 Aug Sep Sep Apr Apr Oct Jul 2009 148 Economic Survey 2009-10 Figure 7.1 50 40 Export/import growth (month wise) 7.1E Japan Exports 2009/08 Imports 2009/08 Exports 2009/07 Imports 2009/07 Growth rate (per cent) 30 20 10 0 -10 -20 -30 -40 -50 Oct May Oct May Dec Nov Mar Mar Sep 2008 50 40 Aug Aug Sep Nov Nov Nov Nov Jul Jun Jun Jan Feb Jan Feb Apr Apr Jul 2009 7.1F Singapore Exports 2009/08 Imports 2009/08 Exports 2009/07 Imports 2009/07 Growth rate (per cent) 30 20 10 0 -10 -20 -30 -40 -50 May May Oct Dec Nov Mar Mar 2008 40 Aug Aug Sep Sep Jan Jun Jun Feb Jan Feb Apr Apr Oct Jul Jul 2009 7.1G World Exports 2009/08 Exports 2009/07 Growth rate (per cent) 30 20 10 0 -10 -20 -30 -40 Oct May Dec Nov May Mar Mar Sep 2008 80 70 60 50 40 30 20 10 0 -10 -20 -30 -40 -50 Aug Aug Sep Jan Feb Jun Jun Jan Feb Apr Apr Oct Jul Jul 2009 7.1H India Exports 2009/08 Imports 2009/08 Exports 2009/07 Imports 2009/07 Growth rate (per cent) Oct Dec Nov May May Jun Mar Jun Mar Jan Sep Jan Feb Aug 2008 Aug Sep Feb Apr Apr Oct Jul Jul 2009 International Trade 149 Figure 7.2 250 Spike in spreads on trade finance in 2008 India 200 Brazil China Indonesia Turkey Basis points 150 100 50 Russian Federation 0 2008e 2003 2004 2005 2006 2007 Years Source: World Bank, Global Development Finance 2009. on the due date. This led firms to trim down inventories, and direct the funds so generated to meet their working capital requirements. 7.9 While there is strong anecdotal evidence that the financial crisis might have reduced the availability of trade credit leading to decline in the volume of trade and possibly deepening and prolonging the recession, data from the IMF indicates that the pace of decline in trade finance was just one-fourth that of the decline in trade volumes during the period October 2008 to January 2009. The World Bank estimates that the shortage in trade finance in the market would have accounted for 10-15 per cent of the decline in trade. A survey carried out by the IMF and BAFT in August-September 2009 shows that decreases in the value of trade finance business accelerated between October 2008 and June 2009. The regions most affected were the industrialized countries and Latin America. Table 7.2 : Export Credit Outstanding as on Export Variations Export Credit (Per credit as (Rs. Crore) Cent) per cent of NBC 39,118 43,321 42,978 49,202 57,687 69,059 86,207 1,04,926 1,29,983 1,28,940 1,24,360 9.0 10.7 -0.8 14.5 17.2 19.7 24.8 21.7 23.9 -0.8 -3.6 9.8 9.3 8.0 7.4 7.6 6.3 5.7 5.4 5.5 4.6 4.1 March 24, 2000 March 23, 2001 March 22, 2002 March 21, 2003 March 19, 2004 March 18, 2005 March 31, 2006 March 30, 2007 March 28, 2008 March 27, 2009 Jan. 15, 2010* Source: Reserve Bank of India (RBI). * Variation over the March 27, 2009 figure Note : 1. Data upto March 2004 relate to select banks accounting for 90 percent of bank credit. 2. March 18, 2005 onwards, data pertain to all scheduled banks excluding RRBs availing export credit refinance from the RBI. Trade credit: Indian scenario 7.10 As a result of difficult financing conditions prevailing in the international credit markets and increased risk aversion by the lending counterparties, gross inflows of short-term trade credit to India declined by 12.2 per cent to US$ 41.8 billion during 2008-09. Export credit as a percentage of net banking credit also fell from 5.5 per cent as on March 28, 2008 to 4.6 per cent as on March 27, 2009 and further to 4.1 per cent as on January 15, 2010 (Table 7.2). 7.11 On the other hand, short-term trade credit repayments registered an increase of 37.9 per cent during 2008-09 to touch US$ 43.7 billion. Since the gap between the inflows and outflows of short-term trade credit to India were limited to a net outflow of US$ 1.9 billion during 2008-09, financing of shortterm trade credit did not pose much of a problem. 7.12 This trend also continued in 2009-10. During the first half of 2009-10, the gross inflow of shortterm trade credit stood at US$ 21.7 billion, lower by 9.2 per cent than that in the corresponding period in 2008-09, while the outflows at US$ 22.3 billion were higher by 17.5 per cent, thereby resulting in a net outflow of US$ 0.6 billion (inclusive of suppliers’ credit up to 180 days) compared to a net inflow of US$ 4.9 150 Economic Survey 2009-10 7.15 In the wake of the crisis, most banks moved away from funding open-account facilities to more traditional forms of cash-backed or collateralized letters of credit. Several countries entered into bilateral agreements to ease the strains on access to foreign currencies, including trade credit. In December 2008, the US Federal Reserve entered into currency swap agreements with some of its counterparts, including Brazil and Mexico. Each partner in the agreement received a swap line of US$ 30 billion. In addition, the United States and China – acting through their respective import-export banks – created a bilateral trade facility of US$ 20 billion. In March 2009, China entered into similar agreements with its major trading partners (Argentina, Belarus, the Republic of Korea, Malaysia, Indonesia, and the Philippines) by providing swap facilities in its currency. 7.16 Export Credit Agencies (ECAs) have also greatly helped Governments, particularly in the developing countries, channel trade finance to firms. In addition, some Governments’ actions directly targeted the reported shortage of trade finance to firms. According to the World Bank, while some Governments have tried to achieve this objective by establishing rediscount and refinance facilities to increase liquidity for trade loans and export credit, many have implemented direct measures through the established ECAs or Export Import (Exim) Banks. Being mostly under public sector, these entities typically serve as channels for the Government to issue trade credits, loans, and guarantees and insurance to the private sector. In many emerging countries, public ECAs and Exim Banks served as “providers of last resort” for trade finance as in Brazil, India, the Philippines, South Africa and Turkey. ECAs and Exim Banks were used by national governments to channel new lines of trade credit and loans. For example, the Brazilian government established new credit lines via the National Bank for Economic and Social Development (BNDES) to provide pre-export and export finance. 7.17 In the absence of formal entities established by the Government, that offer trade finance instruments, some Governments have decided to set them up or make existing ones legal and use other public bodies. For example, in Indonesia, the Government passed legislation in December 2008 to transform an existing government agency into an official EximBank that would provide funding and insurance for trade finance. In the Ukraine, the parliament passed a law that granted the billion during the corresponding period of the previous year. Although the higher net outflows during the second half of 2008-09 and in the first half (H1) of 2009-10 suggest some challenges in rolling over maturing trade credits, the continuing trend in inflows indicates no significant problem in servicing shortterm debt. This is also indicative of the confidence enjoyed by Indian importers in the international financial markets. The various policy initiatives taken by the Government and RBI have also helped ease the pressure on trade financing. This is further corroborated by the increase in share of short-term trade credit (both inflows and outflows) in the overall gross capital flows with share in inflows increasing from 10.9 per cent in 2007-08 to 13.4 per cent in 2008-09 and share in outflows increasing from 9.6 per cent to 14.3 per cent, thereby indicating that the impact of global financial crisis on trade credit was less when compared to other forms of capital flows such as portfolio investment and external commercial borrowings (ECBs). POLICY RESPONSE Response of Multilateral Institutions and Governments 7.13 Governments and multilateral institutions have responded with a range of trade finance programmes, including a pledge by the G20 leaders at their April 2009 London Summit to provide US$ 250 billion of support for trade finance. The commitment of G-20 leaders was reaffirmed in the Pittsburg Summit in September 2009, calling for swift implementation of the package and a collective fight against protectionism as also stated in chapter 6. Multilateral agencies also responded quickly to counter the trade finance aspect of the crisis (Box 7.1). 7.14 Governments across the world have also taken various policy initiatives. According to a World Bank survey on “Trade and Trade Finance Developments in 14 Developing Countries Post September 2008”, these policies include various combinations of shortterm solutions to provide immediate relief to firms and banks and long-term adjustment strategies to bolster countries’ export competitiveness. According to the survey, the main actions taken by Governments can be grouped in two categories: (i) to increase banks’ liquidity to alleviate liquidity pressure including for trade finance; (ii) to enhance the long-term competitiveness of the country’s exports by developing and expanding export promotion programmes. International Trade 151 Box 7.1 : Measures by International Institutions related to Trade Finance The World Bank Group’s (WBG) support to bolster trade finance includes the following: The Global Trade Finance Program (GTFP) has been doubled to US $ 3 billion over a three-year period to provide additional guarantees to mitigate risks in trade transactions with local banks in emerging markets. The Global Trade Liquidity Program (GTLP) is expected to contribute up to US $ 50 billion over a three-year period to channel trade finance liquidity to developing countries. The World Bank has also launched a US $ 40 million Trade Facilitation Facility (TFF) to support developing country priorities to improve trade facilitation systems, including infrastructure, institutions, services, procedures and regulatory systems. World Bank Trade-Related Lending has more than doubled from US $ 1.4 billion in FY 2008 to US $ 3.4 billion in FY 2009, driven by projects in the Europe, Central Asia and Africa regions, in support of trade facilitation, regional integration and export competitiveness. Support was also provided by the World Bank Group to select developing countries like India, Indonesia, Kenya, Turkey, Tunisia and Ukraine. In the Indian case, the World Bank has established a US $ 120 million line of credit for SMEs and a small guarantee fund. This project was scheduled to close in June 2009, but as a response to the crisis, the Bank recently negotiated additional financing of US$400 million to extend the original project by four years. The Asian Development Bank(ADB) had allocated a total of US $ 8.94 billion in crisis support for 43 projects as on October 31, 2009. The ADB’s crisis-related lending is expected to increase by more than US $ 10 billion in 2009-10 comprising US $ 1 billion for trade finance. The Inter America Development Bank (IDB) enhanced its Trade Finance Facilitation Program (TFFP) from US $ 400 million to a maximum of US $ 1 billion in January, 2009. The IDB also added loans to its offering of guarantees and now supports non-dollar- denominated trade finance transactions. The European Bank for Reconstruction and Development (EBRD) announced in January 2009 that it would raise the ceiling on its Trade Finance Program (TFP) from •800 million to •1.5 billion to increase trade with and within Eastern Europe, Central Asia, Russia and the Ukraine. The African Development Bank (AfDB) established a multi-phase US $ 1 billion Trade Finance Initiative (TFI) in March 2009. The AfDB launched a new trade finance line of credit that will allow African commercial banks and development finance institutions to use AfDB resources to support trade finance operations. The Bank also launched a “multi-purpose” line of credit that enables the borrower to use the proceeds for trade finance as well as long-term project and corporate finance operations. The International Finance Corporation (IFC) doubled its Global Trade Finance Program (GTFP) ceiling to US $ 3 billion in November 2008. The GTFP offers confirming banks partial or full guarantees covering payment risk on banks in the emerging markets for trade-related transactions. The IFC Global Trade Liquidity Program (GTLP) is the newest programme to be instituted in May 2009 in response to the crisis. The programme is designed to support up to US $ 50 billion in international trade in the next three years. Ukreximbank the status of official export credit agency and supports plans to establish a Government export insurance company, “Ukrainian Export Insurance Company”. Policy Response by India 7.18 India has also taken many steps to ease the problems related to trade finance due to the global economic crisis (Box 7.2). Prospects of Recovery 7.19 According to the IMF and BAFT survey, the upward price pressures seem to be easing for some trade financing instruments, with increasing evidence that the collapse in trade is bottoming out, as demand starts to recover and banks become more positive about the economic outlook. For example, price increases have started to ease for export credit insurance and LCs. The survey notes that the shift towards bank-intermediated trade finance appears to be continuing. It is estimated that open account transactions (for which exporters provide credit directly to importers) as a share in the total, continued to remain subdued, at less than 40 per cent in the second quarter of 2009, as compared to 45 per cent that prevailed at the end of 2007. This has been largely offset by the increasing reliance of traders on bank finance –mainly LCs – as well as by a more modest shift toward cash-in-advance transactions (for which importers pay for goods before shipment). INDIA’S MERCHANDISE TRADE 7.20 India’s merchandise exports have shown remarkable resilience in recent years with a growth rate of 20 per cent plus in dollar terms since 2002- 152 Economic Survey 2009-10 03. The global recession jolted this continued upward growth with initial estimates showing a growth rate of only 3.6 percent for 2008-09 as stated in last year’s Economic Survey. However, according to revised figures, export growth in 2008-09 stands at a respectable 13.6 per cent, indicating that India had weathered the crisis better than other countries. The compound annual growth rate (CAGR) for India’s merchandise exports for the five-year period 200405 to 2008-09 increased to 23.8 per cent from the 14.0 per cent of the preceding five-year period. India’s ranking in the leading exporters in merchandise trade which slipped marginally from 26th in 2007 to 27th in 2008 is likely to improve in 2009 due to its reasonably good export growth when world export growth fell. However, this overall reasonably good picture for the whole year hides the travails through which the export sector went in the 13 crisis-ridden months. This can be seen by comparing India’s export performance in the pre-recession period with that in the recession period (Table 7.3). Table 7.3 growth : Quarterly export and import (Percentage) Box 7.2 : India’s policy response related to trade finance Select measures taken by the Government of India since the outbreak of crisis in September 2008 include the following: Interest rate ceiling of 250 basis points p.a. below the benchmark prime lending rate (BPLR) for pre-shipment rupee export credit up to 270 days and post-shipment rupee export credit up to 180 days has been extended to the end of April 30, 2010. The ceiling rate on export credit in foreign currency increased to LIBOR plus 350 basis points. The all-in-cost ceiling for raising trade credit was revised to 200 basis points over six months of LIBOR from the then (October 2008) prevailing ceiling of 75 basis points over six months of LIBOR. The prescribed interest rate as applicable to postshipment rupee export credit was extended to overdue bills up to 180 days. Limit for Export Credit Refinance facility was increased from 15 per cent to 50 per cent of eligible outstanding export credit to provide additional liquidity support to banks (returned to the pre-crisis level of 15 per cent in the Second Quarter Review of Monetary Policy for the Year 2009-10). A refinance facility of Rs 50 billion was established for the Exim Bank of India on 15, December 2008 which has since been extended to March 2010. Interest subvention has been extended up to March 2010 for pre- and post-shipment export credit (in rupees) for certain employment-oriented export sectors such as textiles (including readymade garments and handloom), handicrafts, carpets, leather, gems and jewellery, marine products and SMEs. The period of entitlement has been extended by 90 days for the first slab of pre-shipment and postshipment rupee export credit with effect from November 15, 2008 and November 28, 2008 respectively. Foreign exchange (US dollars) has been sold through agent banks to augment supply in the domestic foreign exchange market or intervene directly to meet any demand-supply gaps. Special market operations have been undertaken to meet the foreign exchange requirements of public-sector oil marketing companies against oil bonds. A foreign exchange swap facility with tenure up to three months has been given to Indian public and private sector banks having overseas operations in order to provide them flexibility in managing their short-term funding requirements at their overseas offices (discontinued subsequent to the Second Quarter Review of Monetary Policy for the Year 2009-10). 2008-09 (PreRecession) Q1 Exports 57.0 Q2 39.5 73.8 Q3 2009-10 (Recession) Q4 Q1 Q2 Q3 -4.0 -20.3 -38.6 -21.0 6.0 7.4 -24.0 -35.0 -33.6 1.2 Imports 38.7 7.21 As a result of the full-blown global recession coupled with the deepening of the global financial crisis in 2008, India’s export growth rate started plummeting from the high 40 per cent to 63 per cent range witnessed during April to August 2008 to 26.1 per cent in September, turning negative from October 2008 to October 2009 except for December 2008 with a low 4.2 percent as per revised estimates. This type of situation was not witnessed in the last twenty four years. Even in 2001-02 and 1998-99 when export growths were negative at (-) 1.6 per cent, (-) 5.1 per cent respectively, such a long period of continuous negative monthly export growths was not witnessed. Only in 1985-86 when export growth was negative at (-)9.9 percent there was a similar situation with continuous negative growth for twelve months. The Government had set an export target of US$ 200 billion for 2008-09 which was revised to US$ 175 billion. With merchandise exports reaching US$ 185.3 billion in 2008-09, the target was surpassed International Trade by 5.9 per cent which is no mean achievement in trying times like these. 7.22 Given the uncertain global scenario, the Government did not fix an export target for 2009-10, instead the Foreign Trade Policy (FTP) 2009-14 set the objective of an annual export growth of 15 per cent with an annual export target of US$200 billion by March 2011. The beginning of 2009-10 saw acceleration in the fall of export growth with further deepening of the global recession. The upwardly revised export figures for the first half of 2008-09 also partly contributed to this. While export growth rate was (-) 22.3 per cent in April-November 2009-10, in the month of November 2009, it became positive at 18.2 per cent after a nearly continuous 12-month spell of negative growth. However, this is due to the low base figures in November 2008 (at $11.2 billion compared to $14.1 billion in October 2008 and $13.4 billion in December 2008). The month-over-month export growth rate in November 2009 over October 2009 was marginally positive at 0.04 per cent. In Figure 7.3 120 100 80 153 December 2009 also export growth rate over December 2008 was positive at 9.3 per cent and over the previous month it has been better at 10.7 per cent. 7.23 While export growth in dollar terms accelerated in 2007-08 and decelerated in 2008-09, in rupee terms it exhibited an opposite movement (Table 7.4 and Figures 7.3 and 7.4) reflecting the direct effect of appreciation of the rupee by 12.4 per cent in 2007-08 and its depreciation by 12.5 per cent in 2008-09. In 2009-10 (April-December), as a result of global recession, export growth was negative both in dollar and rupee terms, with the latter being less negative due to the depreciation of the rupee by 6.7 per cent. 7.24 The deceleration in export growth in rupee terms in 2007-08 though due to slowing down of growth in both volume and unit values, was more so because of the latter. This was mainly due to the export unit values registering zero growth in manufactured goods classified chiefly by materials Export growth and exchange rate movement 6 4 2 0 -2 -4 -6 -8 Export growth in US$ terms Export growth in Rs. terms Exchange rate changes (month over month) Exchange rate changes Export growth 60 40 20 0 -20 -40 -60 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 2008 2009 Years Figure 7.4 120 100 80 Import growth and exchange rate movement 6 4 2 0 -2 -4 -6 -8 Import growth in US$ terms Import growth in Rs. terms Exchange rate changes (month over month) Exchange rate changes Import growth 60 40 20 0 -20 -40 -60 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 2008 2009 Years 154 Economic Survey 2009-10 Table 7.4 : Trade Performance : Volume and Unit Values (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 2009-10a 2.7 22.1 15.0 27.9 21.6 25.3 14.7 28.2 -13.7 -1.6 20.3 21.1 30.8 23.4 22.6 29.0 13.6 -20.3 0.8 19.0 7.3 11.2 15.1 10.2 7.9 9.0 —Imports Value Rupee US$ Volume terms terms 6.2 21.2 20.8 39.5 31.8 27.3 20.4 35.8 -17.6 1.7 19.4 27.3 42.7 33.8 24.5 35.5 20.7 -23.6 4.0 5.8 17.4 17.2 16.0 9.8 14.1 20.2 —Terms of Trade Unit Value 2.8 14.3 3.1 18.9 14.0 15.1 1.9 13.8 —Net Income -2.1 -9.8 3.6 -3.5 -6.0 -1.3 2.6 2.5 —-1.3 7.4 11.2 7.3 8.2 8.8 10.7 11.7 —- Unit Value 1.0 2.9 7.5 14.9 6.1 13.7 5.1 16.9 —- Source : Computed from data of Directorate General of Commercial Intelligence and Statistics(DGCI&S), Kolkata a April-December 2009. Volume and unit value index of exports and imports are with new base (1999-2000=100) and miscellaneous manufactured articles and low growth in another major item, i.e. chemicals and related products, despite a very high growth in nonfuel crude materials and high growth in mineral fuels, lubricants and related materials. 7.25 In 2008-09, contrary to general expectations, the highest export growth in the whole decade in rupee terms was registered which apart from the depreciation of the rupee, was due both to volume and unit value growth, but more so the latter which has registered the highest growth of 16.9 per cent in the decade. This in turn was due to the high growth in export unit value indices of miscellaneous manufactured articles, manufactured goods classified chiefly by materials, besides mineral fuels, lubricants and related materials and non-fuel crude materials. The major data revisions for 2008-09, particularly in the new SEZs for gems and jewellery items where a lot of trading took place leading to high trade volumes could also have contributed to this phenomenon. In fact the quantum index of exports of pearls and precious stones shows a high growth rate of 19.7 per cent in 2008-09 over and above the 26.8 per cent growth in 2007-08. This is higher than the growth rate for manufactured goods. 7.26 The region-wise quantum indices show high growth in export volumes to Organization of Petroleum Exporting Countries (OPEC), the AsiaPacific Economic Cooperation (APEC) and the European Union (EU) in 2008-09. The bilateral quantum indices available for some trading partners show high growth in export volumes to the United Arab Emirates, Germany and Russia. In the case of China, the quantum index is very high though it is slightly lower than in 2007-08. 7.27 Import growth in rupee and dollar terms also shows the same see-saw movement in 2007-08 and 2008-09 due to exchange rate movements. The deceleration of imports in rupee terms in 2007-08 is mainly due to a major slowing down in growth of unit value indices. This is due to the negative growth in unit value of machinery and transport equipment and manufactured goods classified chiefly by materials and low growth in chemicals and related products. In 2008-09 the acceleration in imports in rupee terms is due to the high growth in both volume and unit value indices. The sectors which contributed to this are manufactured goods classified chiefly by materials, chemicals and related products, mineral fuels and non-fuel crude materials, in the case of unit value indices; and all categories of manufactured goods including machinery and transport equipments and chemicals and related products, in the case of the quantum index indicating high import of machinery and inputs needed for industrial recovery in 200809. 7.28 The net terms of trade, which measures the unit value index of exports as a proportion of unit value index of imports, grew by more or less the same percentage in both 2007-08 and 2008-09 due to the relatively higher growth in export unit value indices, the only difference being that the growth in both the export and import unit value indices in 200809 was very high, while in 2007-08, it was very low. Income terms of trade, reflecting the capacity to import, grew at more than 10 per cent in both 200708 and 2008-09, due to the combined effect of improvement in net barter terms of trade and moderately high growth in export volume indices. International Trade 7.29 India’s share in world merchandise exports, after remaining unchanged at 1.1 per cent between 2007 and 2008, reached 1.2 per cent in 2009 (January-June) mainly due to the relatively greater fall in world export growth than India (Table 7.5). The increase in China’s share of world exports between 2000 and 2008 at 5.0 percentage points is around 39 per cent of the total increase in the share of emerging and developing countries over this period. However, China’s export growth rate which was above 25 per cent in this decade till 2007 moderated to 17.3 per cent in 2008 and declined to (-) 21.7 per cent in the first half of 2009, as a result of global recession. Although India’s export growth was also negative at (-)18.4 per cent in the first half of 2009 it was lower than the negative growth of the other major emerging and developing countries and other select countries except Hong Kong. However, in absolute terms, India is way behind China with its exports constituting only 12.4 per cent of China’s in 2008. While India’s exports were higher than those of China till 1954, they started lagging thereafter. Ironically the gap started widening since the 1990s, the period of India’s reforms. In 1990, the shares in world exports of China and India were 1.8 per cent and 0.5 per cent respectively and in 2008, their respective shares stood at 8.9 percent and 1.1 percent. This growing gap between India and China calls for greater introspection on the part of India. 7.30 India’s merchandise imports were also affected by the global recession though with a slight 155 lag and grew by 20.7 per cent to US$ 303 billion in 2008-09. This was due to the moderate growth of 23.5 per cent in import of non-petroleum, oil and lubricants (non-POL) products and 14.7 per cent in POL products. POL import growth was low mainly due to both low volume growth by 6.2 per cent and low growth of import price of the Indian crude oil import basket by 5.5 per cent (Figure 7.5). 7.31 International oil prices recorded unprecedented rise during 2008 and remained considerably volatile during the entire ensuing period. The price of Indian basket of crude oil which moved in tune with international oil prices was also volatile, averaging at 83.57 per barrel during 2008-09 after reaching an unprecedented US $ 142 per barrel on July 3, 2008 before declining sharply following the global recession. The monthly movements in oil prices during 2007-08 to 2009-10 (April-December) clearly reflect this volatility (Figure 7.6) 7.32 Non-POL non-bullion imports grew by 23.6 in 2008-09 per cent reflecting relatively low demand for imports for industrial activity, partly due to low industrial growth and partly due to the use of inventories, and also for imports used as inputs for exports due to fall in global demand following the world economic recession. 7.33 During 2009-10 (April-December) import growth was negative at (-)23.6 per cent accompanied by a decline in both POL and non-POL imports at (-) 29.8 per cent and (-)20.7 per cent respectively. Table 7.5 : Export growth and share in world exports : India and other select countries Value (US$ CAGR billion) 2008 2000-06 Growth rate % Annual 2007 2008 2009 (JanJun) -21.7 -16.7 -31.2 -28.3 -23.4 -31.7 -18.4 -22.8 -30.3 -46.8 -22.7 -27.6 -29.5 Share in world exports (%) change in shares 2008/ 2000 5.0 -0.9 -0.2 -0.1 0.0 -0.1 0.4 0.4 -0.8 1.3 -0.1 12.9 — 2000 2007 2008 2009 (JanJun) 9.1 2.5 1.2 0.9 1.2 2.1 1.2 1.2 1.8 2.2 2.9 38.4 100.0 China 1,429 Hong Kong 363 Malaysia 210 Indonesia 148 Thailand 173 Singapore 338 India 177 Brazil 198 Mexico 292 Russia 472 Korea 422 Emerging & Develop. Eco. 6,218 World 16,001 25.4 7.8 8.5 7.9 11.3 12.0 19.1 16.5 7.1 19.3 11.2 17.3 11.2 25.6 8.7 9.6 14.7 17.0 10.1 21.4 16.6 8.6 16.6 14.1 15.2 14.1 17.3 5.3 19.1 24.4 12.9 13.0 20.4 23.2 7.3 33.1 13.6 25.7 16.2 3.9 3.2 1.5 1.0 1.1 2.2 0.7 0.9 2.6 1.7 2.7 25.9 100.0 8.8 2.5 1.3 0.9 1.1 2.2 1.1 1.2 2.0 2.6 2.7 35.9 100.0 8.9 2.3 1.3 0.9 1.1 2.1 1.1 1.2 1.8 2.9 2.6 38.9 100.0 Source : Computed from International Financial Statistics, IMF, November 2009. 156 Economic Survey 2009-10 Figure 7.5 450 400 POL imports 120 POL imports (Rs ‘000 crore ) POL imports (quantity MMT) Brent price (US$/bbl) Crude price (US$/bbl) Value (Rs.’000 crore) and quantity (MMT) 100 350 300 250 60 200 150 100 20 50 0 2006-07 2007-08 2008-09 2008-09 (Apr-Dec) 2009-10 (Apr-Dec) 0 40 80 Price (US$/bbl.) Gold and silver imports registered negative growth of (-) 7.3 per cent. The continuous rise in prices of gold also dampened demand. Non-POL non-bullion imports declined by 22.4 per cent due to slowdown in industrial activity and exports. Import growth is positive in December 2009 at 27.2 per cent partly due to the base effect, partly due to the 42.8 per cent positive growth of POL products with the pick up in oil prices and industrial demand, and partly due to growth of non-POL items at 22.4 per cent including a high growth of gold and silver imports. 7.34 Trade deficit fell by 28.2 per cent to US$ 76.2 billion (as per customs data) in 2009-10 (April– December) from US$ 106 billion in the corresponding period of the previous year. Net POL import growth Figure 7.6 140 120 100 80 60 40 20 0 Jul Oct Nov Dec Jul which has been positive since 2002-03 stood at 25.7 per cent in 2008-09 compared to 32.4 per cent in 2007-08. However, during 2009-10 (April-September), it fell by 40 per cent with the softening of international oil prices compared to the corresponding previous period (Table 7.6). Trade Composition Export composition 7.35 There were substantial changes in the composition of exports in 2008-09 and 2009-10(AprilSeptember) with the fall in share of petroleum, crude and products and primary products resulting in corresponding rise in share of manufactured goods. Crude oil price (Indian basket) ($/bbl) Crude oil price Crude oil price Oct Nov Dec Jul Oct Nov May May May Mar Mar Aug Aug Aug 2007 2008 2009 Years Dec Jan Jun Jun Jan Feb Feb Sep Sep Jun Sep Apr Apr Apr International Trade Table 7.6 : Growth in POL trade and non-POL imports (US$ terms) Total imports 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 (Apr-Sept) 1.7 19.4 27.3 42.7 33.8 24.5 35.5 20.7 -32.9 POL imports -10.5 26.0 16.6 45.1 47.3 30.0 39.4 14.7 -41.0 POL exports 9.8 21.6 38.5 95.9 69.8 59.3 53.6 -4.6 -44.0 Net POL imports -13.4 26.8 12.9 34.4 40.4 19.1 32.4 25.7 -39.7 Non- POL imports 7.2 17.0 31.5 41.8 28.8 22.2 33.8 23.5 -28.6 Gold & silver imports -1.2 -6.4 59.9 62.6 1.5 29.4 22.0 22.3 -24.9 157 Non-POL, nongold & silver imports 8.5 20.3 28.5 39.0 33.1 21.4 35.3 23.6 -29.2 Source : DGCI&S and own calculations. The share of petroleum, crude and products fell from 17.8 per cent in 2007-08 to 14.9 per cent in 2008-09 and 14.2 per cent in the first half of 2009-10, while the share of primary products fell from 15.5 per cent in 2007-08 to 13.3 per cent in 2008-09 and further to 12.7 per cent in the first half of 2009-10. The share of manufactured exports increased by 2.3 percentage points to 66.4 per cent in 2008-09 and further to 69.2 per cent in the first half of 2009-10 (Table 7.7). 7.36 India’s moderate growth of 13.6 per cent in 2008-09 which was due to the high growth in the first half of the year prior to the setting in of global recession, was only due to manufactured exports as both primary products and petroleum, crude and products registered negative growths of (-)2.4 per cent and (-)4.6 per cent respectively. Among manufactured products, the major drivers were gems and jewellery, engineering goods and chemicals and related products with export growths of 42.1 per cent, 18.7 per cent and 7.2 per cent respectively. 7.37 The first half of 2009-10 when the global recession was in full swing, also saw an accentuation in the fall of India’s export growth resulting in negative growth of (-) 29.7 per cent compared to the positive 48.1 per cent in the corresponding period of the previous year. All the three sectors were badly affected during this period with petroleum, crude and products being the worst affected at (-)44 per cent export growth due to the low crude oil prices in the first half of 2009-10, which started declining from the high reached in the first half of 2008-09. Primary product exports also registered a decline of 32.4 per cent with fall in growth of both ores and minerals and agriculture and allied products. Manufactured goods registered negative export growth of (-)24.9 per cent, with the worst affected sectors being engineering goods at (-)34.6 per cent, followed by handicrafts including carpets at (-) 33.7 per cent and leather and leather manufactures at (-) 24.2 per cent. 7.38 Examination of composition cum direction of exports in the Economic Survey 2007-08 had clearly shown the possible effect of the US slowdown on India’s exports and the Economic Survey 2008-09 had shown the worsening effect of the US and global recession on India’s exports. A comparison of the commodity-wise growth of major exports to the United States, the European Union and ‘Others’ in 2008-09 and 2009-10 (April-September) shows that the fall in the shares of petroleum crude and products and primary products for the period was mainly in the ‘Others’ category. The consequent rise in share of manufactured goods during the above period was also in the case of ‘Others’. Though the share of manufactures continues to be more important in the case of India’s exports to the US market, there is a fall in the share in the first half of 2009-10 after a marginal rise in 2008-09. Exports of manufactured goods to the EU followed a similar pattern (Table 7.7). 7.39 The export growth performance of different categories of exports in 2008-09 shows that while primary products and petroleum products buckled under the pressure of world recession, despite a good growth in the first half of 2008-09, manufactured goods exports particularly to the EU and ‘Others’ were more resilient, though there was a moderation in growth. However, India’s exports of manufactures to the US market grew by only 2.2 percent. This was due to the accentuation of the negative growth in textiles exports and the growth in gems & jewellery exports to the US turning negative. Textiles exports growth to the EU and ‘Others’, though low was 158 Economic Survey 2009-10 Table 7.7 : Composition of exports by major markets Percentage share CAGR Growth ratea 2000-01 2007-08 2008-09 2008-09 2009-10 2000-01 2007-08 2008-09 2008-09 2009-10 (Apr.(Apr.(Apr.(Apr.(Apr.to (Apr.(Apr.(Apr.(Apr.Mar.) Mar.) Mar.) Sept.) Sept.) 2006-07 Mar.) Mar.) Sept.) Sept.) I Primary Products World 16.0 15.5 USA 9.4 7.2 EU 13.1 9.4 Others 19.8 19.1 Agri & Allied Products World 14.0 9.9 USA 9.0 5.5 EU 11.9 7.4 Others 16.8 11.6 Ores and Minerals World 2.0 5.5 USA 0.4 1.7 EU 1.3 2.0 Others 3.0 7.5 Manufactured Goods World 78.8 64.1 USA 90.6 82.1 EU 86.8 71.9 Others 70.9 58.3 Textiles incl. RMG World 23.6 11.2 USA 27.2 19.8 EU 29.2 19.2 Others 19.8 6.9 Gems & Jewellery World 16.6 12.1 USA 29.3 24.0 EU 11.5 7.5 others 13.9 11.2 Engineering Goods World 15.7 20.7 USA 13.4 21.0 EU 14.0 23.1 Others 17.2 19.9 Chemical & Related Products World 10.4 13.0 USA 5.7 13.4 EU 9.7 13.8 Others 12.5 12.6 Leather & Leather Mnfrs World 4.4 2.1 USA 3.7 1.5 EU 11.4 6.6 Others 1.6 0.8 Handicrafts including Carpet Handmade World 2.8 0.9 USA 6.0 2.4 EU 4.4 1.5 Others 0.8 0.4 Petroleum, Crude & Products World 4.3 17.8 USA 0.0 3.2 EU 0.0 11.5 Others 7.9 22.7 Total Exports World 100.0 100.0 USA 100.0 100.0 EU 100.0 100.0 Others 100.0 100.0 13.3 7.4 8.3 16.2 9.1 6.2 6.9 10.5 4.2 1.2 1.4 5.7 66.4 82.9 72.6 63.0 10.2 18.6 18.4 6.5 15.1 21.9 8.3 16.4 21.6 24.1 25.7 20.3 12.3 15.0 13.2 11.8 1.9 1.7 5.9 0.7 0.6 1.6 1.1 0.2 14.9 0.7 10.7 19.0 100.0 100.0 100.0 100.0 13.2 7.5 8.5 15.5 9.1 6.2 7.0 10.2 4.1 1.3 1.5 5.3 64.8 82.4 73.2 59.7 9.2 17.1 16.3 5.8 15.9 24.2 9.8 16.5 21.3 24.5 27.6 19.0 11.5 13.4 12.4 11.0 1.9 1.6 5.9 0.7 0.6 1.7 1.1 0.2 17.8 1.3 10.3 22.6 100.0 100.0 100.0 100.0 12.7 7.0 9.0 14.8 9.0 5.8 7.3 10.0 3.7 1.1 1.6 4.8 69.2 78.9 68.8 67.7 11.1 18.6 18.3 7.7 17.8 24.7 7.1 19.7 19.8 16.5 22.8 19.5 13.1 15.9 12.8 12.7 2.0 1.6 6.7 0.7 0.5 1.5 1.1 0.2 14.2 1.8 12.8 16.6 100.0 100.0 100.0 100.0 16.9 8.3 11.5 19.5 10.4 3.9 8.7 12.0 40.4 45.6 28.8 42.1 16.1 10.9 13.9 19.2 7.5 8.5 11.3 4.1 13.7 9.7 8.7 17.9 24.9 20.3 26.3 25.6 24.6 26.8 23.8 24.5 7.5 -1.5 7.8 12.5 1.5 -1.2 3.4 3.4 46.3 230.3 883.9 43.2 19.0 12.5 16.6 21.9 38.2 5.5 20.0 44.7 43.0 7.6 22.8 52.6 30.5 -0.6 10.4 34.1 21.8 8.2 22.9 25.6 12.0 -1.0 12.4 20.3 23.2 4.6 28.5 31.6 27.2 14.7 31.8 28.4 22.2 26.8 28.1 19.3 16.1 -1.2 20.2 13.0 7.2 -4.7 -6.8 65.8 53.6 136.0 99.3 46.7 29.0 9.8 28.7 33.5 -2.4 4.5 -0.1 -3.3 4.4 15.2 4.4 3.4 -14.6 -29.7 -17.1 -13.6 17.7 2.2 14.1 23.3 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 -4.6 -77.6 5.4 -4.2 13.6 1.3 13.0 14.1 44.5 18.0 20.0 51.5 53.7 30.9 30.8 62.1 27.2 -19.6 -13.6 34.4 45.4 22.2 35.4 56.0 13.0 0.2 12.4 20.5 82.4 16.8 72.6 111.8 48.8 50.4 56.1 45.5 29.0 35.7 24.4 29.3 17.6 20.1 17.6 16.6 -12.2 -23.8 -3.8 -6.9 49.9 -64.5 65.8 52.4 48.1 18.6 38.1 57.3 -32.4 -30.7 -26.3 -33.2 -30.9 -29.9 -26.8 -31.8 -35.6 -34.9 -23.7 -35.7 -24.9 -28.6 -34.5 -20.7 -14.7 -18.6 -21.7 -7.3 -21.7 -23.6 -49.6 -16.4 -34.6 -49.7 -42.5 -28.2 -20.3 -11.2 -27.8 -19.6 -24.2 -27.4 -21.8 -29.0 -33.7 -35.0 -33.2 -32.9 -44.0 1.4 -13.3 -48.5 -29.7 -25.4 -30.3 -30.0 (a) (b) II (a) (b) ( c) (d) (e) (f) III Source: DGCI&S and own calculations. Note : a Growth rate in US dollar terms. International Trade positive, while growth of gems & jewellery exports to ‘Others’ was very robust at 66.2 per cent and was at 24.8 per cent to the EU market. In the case of chemicals and related products and leather and leather manufactures, India’s export growth to the US was better than to other markets. 7.40 In the first half of 2009-10, India’s export growth of all items to almost all three destinations was negative with global recession in full swing. Among manufactured goods, textiles export growth was comparatively less negative mainly to ‘Others’, whose share also rose. India’s gems & jewellery exports and chemicals & related products exports were more affected in the EU market, while the worst affected sector was engineering goods, especially in the US and EU markets with negative export growths of (-)49.7 per cent and (–)42.5 per cent, respectively. The performance of handicrafts (including carpets) exports which were badly affected even in 2008-09, worsened in all the three markets with a negative growth above 30 per cent in all of them. 159 Import composition 7.41 The composition of imports also underwent changes. Reflecting growing domestic concerns like inflation, the share of food and allied products imports which fell from 2.3 per cent in 2007-08 to 2.1 per cent in 2008-09 increased to 3.5 per cent in the first half of 2009-10 with the increase in imports of edible oils and pulses (Table 7.8). The share of fuel imports fell from 34.2 per cent in 2007-08 to 33.4 per cent in 2008-09 and 33.2 per cent in the first half of 200910. Among fuel items, the share of POL, the major item, fell to 30.1 per cent in the first half of 2009-10 from 34.2 per cent in the corresponding period of 2008-09 reflecting the relatively lower oil prices. The share of fertilizers increased suddenly from 2 per cent in 2007-08 to 4.3 per cent in 2008-09 with growth in imports of nearly 250 per cent, but fell to 2.5 per cent in the first half of 2009-10. The most notable change is the fall in share of capital goods imports from 18.7 per cent to 15.5 per cent in 2008-09 and to 14.3 per cent in the first half of 2009-10. The commodity group ‘Others’ saw increase in share from 38.9 per cent in 2007-08 to 40.0 per cent in 2008-09 Table 7.8 : Commodity composition of imports Commodity Group Percentage share 2000-01 2008-09 2008-09 2009-10 (Apr.(Apr.(Apr.(Apr.Mar.) Mar.) Sept.) Sept.) CAGR Growth rate (per cent) a 2000-01 2007-08 2008-09 2008-09 2009-10 to (Apr.(Apr.- (Apr.(Apr.2006-07 Mar.) Mar.) Sept.) Sept.) I. 1 2 3 II. 4 Food and Allied Products, of which Cereals Pulses Edible Oils Fuel, of which 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 2.1 0.0 0.4 1.1 33.4 30.1 4.3 15.5 7.8 1.2 4.4 40.0 5.0 5.5 7.2 7.7 100.0 1.5 0.0 0.3 0.8 37.3 34.2 4.1 13.7 7.3 1.2 3.6 40.8 5.1 5.7 8.3 7.0 100.0 3.5 0.0 0.6 2.0 33.2 30.1 2.5 14.3 8.2 1.2 2.3 43.4 5.8 4.4 9.3 8.6 100.0 21.6 112.4 41.1 8.3 24.3 24.1 28.9 33.8 31.8 26.4 54.3 22.9 21.9 7.7 21.1 28.7 24.5 8.6 -46.8 55.2 21.4 39.4 39.4 66.2 62.7 43.9 46.5 113.1 22.7 25.8 6.5 22.0 26.5 35.5 9.1 -93.3 -2.4 34.4 17.7 14.7 156.8 -3.9 7.7 27.7 -34.3 23.8 23.0 107.7 22.3 15.3 20.7 9.7 32.6 -10.3 4.7 84.1 82.8 249.4 71.7 46.6 82.3 134.9 46.5 59.0 122.2 32.3 31.1 55.1 52.9 -6.7 40.0 67.6 -40.3 -41.0 -59.4 -30.2 -24.2 -29.1 -57.3 -28.6 -23.3 -48.0 -24.9 -17.7 -32.9 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. a Growth rate in US dollar terms. 160 Economic Survey 2009-10 more in 2008 over 2007. Four items lost global shares which include carpets and other textiles floor coverings; other made textile articles, sets, worn clothing, etc; lac, gums, resins, vegetable saps and extracts, n.e.s.; and pearls, precious stones, metals, coins, etc. One item, namely silk had stagnant growth. In the remaining 31 items, 10 lost their shares in 2008 over 2007. 7.46 While India has diversified its export basket as well as export markets, a more systematic approach of diversification of dynamic products to developed countries and non-dynamic products to developing countries could pay better dividends (Box 7.3). and 43.4 per cent in the first half of 2009-10. Even gold and silver and electronic goods increased their import shares in the first half of 2009-10 over the corresponding period in the previous year, despite high negative growths, as other items in the import basket had still higher negative growths. 7.42 In 2008-09 there was high import growth of fertilizers reflecting the rise in fertilizer prices mirroring skyrocketing POL prices in the first half of the year, besides chemicals, pearls, precious and semi-precious stones and gold and silver. The high import growth of the last two items also contributed to the high export growth of gems and jewellery including diamond trading. In the first half of 200910, the only category showing positive and high import growth is food and allied products to meet the domestic needs. Composition of Imports by Broad Economic Categories (BEC) 7.43 The classification of imports as per BEC introduced by the UN shows that most of India’s imports consist of intermediate goods followed by capital goods. While the share of intermediate goods is still dominant, it fell from 83.5 per cent in 2001 to 76.8 per cent in 2006. In 2007, there was a marginal rise to 77.2 per cent. Share of capital goods imports has increased from 8.9 per cent in 2001 to over 14 per cent in 2006 and 2007. The share of consumption and other goods is quite low. Contrary to the general belief, not only is the share of consumer goods low, it has fallen from 4.3 per cent in 2001 to 3.5 per cent in 2007 (see Table 7.9). 7.44 The WTO’s “International Trade Statistics 2009” has indicated that increasing trade in intermediate goods is one of the major reasons for world trade experiencing larger changes than world GDP. The higher composition of intermediate goods also has tariff policy implications as higher duties on these items make our exports and manufacturing less competitive (also see Tariff Policy section). Direction of trade 7.47 The directional pattern of India’s trade has been changing constantly during the decade with the share of the top 15 trading partners increasing by 9.5 percentage points to 61.3 per cent in between 200405 and 2008-09 (Table 7.11). In the first half of 200910, their share was 59.6 per cent. The major development in the direction of India’s trade is that USA which was in the first position in 2007-08 has been relegated to the third position in 2008-09, with UAE becoming India’s largest trading partner, followed by China. However, in the first half of 200910, with oil prices moderating, China has gained a slight edge over the UAE to become India’s major trading partner. 7.48 According to the WTO’s “International Trade Statistics 2009” the global recession reduced the trade imbalances of many countries. Japan’s trade surplus fell from 2.1 per cent of the GDP before the crisis to 0.4 per cent in 2008, turning into a trade deficit of 0.02 per cent of the GDP during the first quarter of 2009. Germany’s trade surplus of 8 per cent of the GDP until 2008 fell to 7 per cent in 2008 and United States’ trade deficit of 6.8 per cent of the GDP in 2006 fell to 6.2 per cent in 2008 and further to 3.4 per cent in the first quarter of 2009. For the BRIC(Brazil, Russia, India and China) countries trade balances as a percentage of the GDP were more volatile due to trade in primary commodities, Russia and Brazil being specific examples. The report states that India has faced a structural deficit in merchandise trade that has grown especially from 2000 onwards. China’s trade surplus of 7.6 per cent of the GDP in 2007 fell to 6.7 per cent in 2008 and 4.7 per cent in the first quarter of 2009, though initial monthly figures indicate that it is benefiting noticeably from the initial recovery of trade. Export- Export diversification 7.45 In 2008, India had a global export share of 1 per cent or more in 42 out of a total of 99 commodities at two digit Harmonised System (HS) level, but a significant share of 5 per cent or more in eleven items (Table 7.10). Three items, vegetable textile fibres n.e.s., paper yarn, woven fabric; vegetable plaiting materials, vegetable products, n.e.s.; and residues, wastes of food industry and animal fodder, had an increase in global share by 0.5 per cent point or International Trade Table 7.9 : Distribution of India’s imports according to BEC: 2001 to 2007 BEC Descriptions 2001 2006 2007 161 (Percentage of value of imports) Total 1 11 111 112 12 121 122 2 21 22 3 31 32 321 322 4 41 42 5 51 52 521 522 53 6 61 62 63 7 Total Imports Food &Beverages - Primary - For Industry - For Households - Processed - For Industry - For Households Industrial Supplies - Primary - Processed Fuels & Lubricants - Primary - Processed - Motor Spirit - Fuels and Lubricants, Processed (Other than Motor Spirit) Machinery - Capital Equipment - Parts Transport - Passenger Cars - Other - Industrial - Non-industrial - Parts Consumption Goods - Durable - Semi-durable - Non-durable Goods n.e.s. Others (unclassified) Total $ bn/Nos/% Memorandum: Capital Goods (41+521) Intermediate Goods (111+121+21+22+31+322+42+53) Consumption Goods (112+122+522+61+62+63) Other Goods (321+51+7)/(51+7) Source : Based on UN data. No. of Basic duty tariff (per cent) lines UnweighPeak ted average 100 5.1 2.1 0 2.1 3 2.6 0.5 43.9 14.2 29.7 29.9 26.9 2.9 2.1 0.8 15.4 7.8 7.7 2.7 0 1.1 1.1 0 1.6 1.7 0.4 0.5 0.8 1.3 51.9 8.9 83.5 4.3 3.4 100 3.2 1.8 0.7 1.1 1.4 1.2 0.1 36.8 9.3 27.5 32.9 27.3 5.6 3.5 2.1 18.3 11.6 6.7 5.4 0.1 3.3 3.2 0.1 2 2.1 0.8 0.7 0.6 0.1 185.38 14.8 76.8 3.4 3.7 100 3 1.7 0.6 1.1 1.3 1.2 0.1 37.4 8.4 28.9 33.2 26.9 6.3 4 2.3 19.1 12.4 6.7 4 0.1 1.7 1.7 0.1 2.1 2.2 0.7 0.9 0.6 1.2 218.64 14.1 77.2 3.5 5.3 116 334 148 447 724 5671 13 15 49.83 38.89 50 51.92 13.76 9.45 11.54 8.67 100 100 150 150 70 150 55 10 22 1,323 573 37 89 37 197 270 727 576 21 16 11,356 1,412 7,454 2,391 58 7.95 7.41 7.59 100 9.17 63.19 9.05 9.72 9.91 11.08 9.52 14.69 13.46 7.52 11.14 22.9 67.24 10 30 10 100 10 100 10 10 10 60 10 150 30 150 150 100 162 Economic Survey 2009-10 Box 7.3 : Consistency of Indian Exports with Global Demand In the recent episode of global recession, the shocks were transmitted very fast from industrialized countries to developing countries, through international trade among other channels. The pace of export growth recovery could be relatively faster, if the export basket is in harmony with the globally dynamic products, though the depth of recession affecting different segments of the world economy also counts. Dynamic products play a crucial role in the global economic recovery as demand for these products picks up very fast with change in global trade winds. Based on the twin criteria of export growth and market share, 1,242 export products at the four-digit level are classified into five different groups. Two sub-periods, 19992001 and 2004-06 are taken for computation of the CAGR. The sub-period 2004-06 is taken for global exports share of products. Based on the twin criteria, five groups of products are identified as 1) trend setters, 2) champions, 3) under achievers, 4) achievers in adversity and 5) losers in declining markets. Dynamic products falling under the “trend setters” group with high CAGR and high share and “champions” group with high CAGR and relatively high share are the drivers of global trade. Most of the dynamic products fall under four broad categories of exports: machinery, auto components and cinematography which are high and medium technology-intensive; chemicals and plastics which are medium technologyintensive; gems and jewellery and base metals which are mainly low technology-intensive; and mineral products which are mainly primary and resource-based products. The non-dynamic products include all the other three categories, namely the “under- achievers” with high CAGR but low share and heavily concentrated in sectors like processed food, minerals, chemicals, plastics, T&C and base metals; “achievers in adversity” with high share and low or declining growth rate mostly concentrated in sectors like processed food, pulps of wood, T&C, machinery and auto components; and “losers in Declining Markets “with low share and low CAGR concentrated in sectors like vegetable products, chemicals, pulps of wood, T&C, plaster & cement, base metals and machinery with bleak prospects of revival in the medium term. Securing market access for the last two sets of product groups is a major concern, because the global market is shrinking for these products. Global dynamic products constitute nearly 10 per cent of products but slightly less than 50 per cent of value. On the contrary, the product share of non-dynamic products is around 90 per cent and value share is slightly above 50 per cent. In the Indian case, dynamic products constitute 10 per cent of products and 51.3 per cent of value, while non-dynamic products constitute 90 per cent of products and 48.7 per cent of value. Thus the general pattern of composition of dynamic and nondynamic products is similar in India and the world. (Table 1). Table 1 : Compositon of Dynamic & Non-dynamic products (Percentage) World India Number Value Number Value Dynamic products 9.8 (121) 47.6 10.0 (40) 51.3 Non-dynamic products 90.2 52.4 90.0 48.7 (1121) (1217) Source: Computed from PC-TAS CD, 2008, ITC, Geneva and India Trades, Online, CMIE, Mumbai. Note: World figures refer to 2006 and figures for India correspond to 2006-07. Figures in brackets indicate actual number of products. Since the Asian Crisis, dynamic export products have provided a new direction to Indian exports. Products under the “trend setters” group have consistently improved their share in Indian exports from 21.5 per cent in 1998-99 to 35 per cent in 200607, posting a CAGR of 26.3 per cent during 1999/2000-2006/07 in rupee terms. The robust performance of the “trend setters” has been supported by the sustained growth of these products in global exports. The “champions” have also significantly improved their share in Indian exports from 10.8 per cent in 1998-99 to 16.3 per cent in 2006-07. This segment of exports has registered the fastest CAGR of 27.1per cent, even better than the “trend setters”, during the period 1999/20002006/07. While the share of the tiny emerging products, that is the group of “under achievers”, is almost stagnant even during the period of global export boom, the two weak segments of the export sector, namely “achievers in adversity” and “losers in declining markets” together have a share of nearly 35 per cent. The differing performances of dynamic versus non-dynamic products are particularly important in the context of multilateral vs regional/ bilateral trade. The composition of India’s exports by the two categories in the Regional Trading Arrangements (RTAs) of India with developing countries shows that the share of dynamic products is high in value terms in all the RTAs, while the share of non-dynamic products is very high in terms of numbers and quite substantial in value terms in all the RTAs (Table 2) Table 2 : Share of dynamic and non-dynamic products in India’s exports to RTAs. RTA ASEAN Andean COMESA GCC MERCOSUR SAARC Other Countries* (Percentage) (Value) (No.) (Value) (No.) (Value) (No.) (Value) (No.) (Value) (No.) (Value) (No.) (Value) (No.) Dynamic products 56.2 11 47.7 15.3 55.4 11.3 61.2 10.6 59.3 14.7 37.7 10.7 51 10.2 Non-dynamic products 43.8 89 52.3 84.7 44.6 88.7 38.8 89.4 40.7 85.3 62.3 89.3 49 89.8 Source: Computed from PC-TAS CD 2008, ITC, Geneva. Note: *Includes all other countries not in the RTAs given above. Import preference for globally non-dynamic products is either thinly spread across the globe or heavily concentrated in some select regions. Marketing globally dynamic products could be done with ease under the multilateral set up without any preferential arrangement, while the regional approach could help in exporting sizeable amounts of globally non-dynamic products. As India is actively engaged in the process of regional trade, sizeable amounts of such products could find market in different regional, sub-regional and bilateral trading arrangements through negotiations. Thus systematic planning could help in diversification of India’s commodity basket as well as markets. International Trade 163 Table 7.10 : India’s share in world exports: Commodity- wise ( share of more than 1 per cent) Sl. HS No. 1 2 3 4 5 6 7 8 9 10 11 50 13 52 57 53 71 63 14 9 23 67 Chapter Silk Lac, gums, resins, vegetable saps and extracts n.e.s. Cotton Carpets and other textile floor coverings Vegetable textile fibres n.e.s., paper yarn, woven fabric Pearls, precious stones, metals, coins, etc. Other made textile articles, sets, worn clothing, etc. Vegetable plaiting materials, vegetable products n.e.s. Coffee, tea, mate and spices Residues, wastes of food industry, animal fodder Bird skin, feathers, artificial flowers, human hair 2007 10.53 9.48 8.51 8.74 4.61 6.60 5.73 4.66 5.23 4.01 5.03 2008 10.53 9.45 8.84 8.51 6.27 5.72 5.52 5.48 5.30 5.16 5.09 Change 0.00 -0.03 0.34 -0.24 1.66 -0.88 -0.20 0.83 0.07 1.15 0.06 Source : Calculated from National Centre for Trade Information (NCTI) data based on UN-ITC Trade Map Data, 2008. Import ratios in Table 7.11 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 2008-09 and the first half of 2009-10. India’s 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 the first half of 2009-10. The fall in export-import ratio from 0.8 in 2004-05 to the present 0.3 in the case of China needs special attention. Among the countries not in the top 15, Brazil is an interesting case. India’s export-import ratio which had stabilized at above 2 till 2008-09 indicating a high trade surplus for India has suddenly turned into a trade deficit at 0.64 in the first half of 2009-10. The disaggregated data for April-June 2009 indicate that this was probably due to the sudden fall in India’s exports of refined POL to Brazil because of softening of crude oil prices and the sudden high rise in imports from Brazil of crude Table 7.11 : India's trade and export-import ratio with major trading partners Share in total trade Export/Import ratioa 2004-05 2007-08 2008-09 2008-09 2009-10 2004-05 2007-08 2008-09 2008-09 2009-10 (Apr(Apr(Apr(AprSept) Sept) Sept) Sept) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 UAE China USA Saudi Arabia Germany Singapore Iran Hong Kong Korea RP UK Australia Switzerland Japan Malaysia Nigeria Total (1 to 15) Total trade 6.1 6.5 10.6 1.4 3.5 3.4 0.8 2.8 2.3 3.7 2.3 3.3 2.7 1.7 0.4 51.8 100.0 7.0 9.2 10.1 5.6 3.6 3.7 3.1 2.2 2.1 2.8 2.2 2.5 2.5 2.1 2.1 60.7 100.0 9.8 8.6 8.2 5.1 3.8 3.3 3.0 2.7 2.6 2.6 2.6 2.5 2.2 2.2 2.1 61.3 100.0 8.7 7.4 6.9 5.6 3.1 3.3 3.2 1.8 2.2 2.2 2.5 3.1 2.0 1.9 2.3 56.3 100.0 9.2 9.4 8.1 4.4 3.5 3.2 3.3 2.5 1.9 2.4 2.9 2.8 2.3 1.9 1.9 59.6 100.0 1.6 0.8 2.0 1.1 0.7 1.5 3.0 2.1 0.3 1.0 0.2 0.1 0.7 0.5 13.3 1.0 0.7 1.2 0.4 1.0 0.2 0.5 0.9 0.2 2.3 0.5 1.4 0.1 0.1 0.6 0.4 0.1 0.6 0.6 1.0 0.3 1.1 0.3 0.5 1.1 0.2 1.0 0.5 1.1 0.1 0.1 0.4 0.5 0.2 0.5 0.6 1.5 0.3 1.4 0.3 0.6 1.4 0.2 2.8 0.5 1.3 0.1 0.0 0.4 0.4 0.1 0.6 0.6 1.5 0.3 1.2 0.3 0.5 1.1 0.2 2.1 0.0 1.3 0.1 0.0 0.5 0.7 0.2 0.6 0.6 Source : Computed from DGCI&S data. a A coefficient of export and import ratio between 0 and 1 implies that India’s imports are greater than exports and a coefficient greater than one, that India exports more than what it imports. 164 Economic Survey 2009-10 and education have become tradeable across borders without movement of natural persons. 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. petroleum, besides sugar to meet domestic needs. High growth in imports of beverages, iron and steel, fats and oils from Brazil also seems to have contributed to the trade deficit. 7.49 The UAE has displaced the USA as the topmost destination of India’s exports in 2008-09 and 2009-10 (April-September) with an export share of 13.1 per cent and 14.4 per cent respectively. India’s exports to all the top three export destinations—the UAE followed by the USA and China—registered negative growth of (-) 28.7, (-) 25.3 and (-) 21.9 per cent respectively. Region-wise, over half of India’s exports (55 per cent) in the first half of 2009-10 were to Asia (including ASEAN), up from around 40 per cent in 2001-02. During 2009-10 (April-September), exports to Asia (including ASEAN) declined by 27.6 per cent and to Europe by 30.9 per cent. India’s merchandise exports to South Asian countries declined by 30.4 per cent. 7.50 In 2009-10 (April-September), Asia and ASEAN continued to be the major source of India’s imports accounting for 61.3 per cent of the total. Country-wise, China remained the largest source with a share of 12 per cent in India’s total imports followed by the USA (5.95 per cent), UAE (5.93 per cent) and Saudi Arabia (5.5 per cent). As a result of global recession, India’s import growth from 14 of the top 15 trading partners was negative, Indonesia being the exception. World trade in services 7.52 The US$ 3.78 trillion world export of commercial services was dominated by the developed countries in 2008, with the exception of India and China which were also among the top 10 exporters. As in the case of merchandise trade, India has improved its rank in commercial services trade. As per the latest “International Trade Statistics 2009”brought out by the WTO, world export and import growth in services decelerated from 19 and 18 per cent respectively to 12 per cent in both the cases. The deceleration was more or less similar in most of the major regions like North America, Europe and Asia. Import growth in commercial services in the US was particularly low at 8 per cent, while its deceleration in EU by 9 percentage points was particularly sharp. While India ranks 27th in world merchandise exports in 2008 compared to China at 2ndposition , in commercial services exports it ranks 9th compared to China at 5th rank. 7.53 The three broad categories of commercial services, namely transport, travel and other commercial services witnessed a decline in export growth in 2008 compared to a high growth in 2007 (Table 7.12). 7.54 In commercial services imports, India moved from 15th position in 2004 to 13th position in 2005, and remained in 13th position in 2008, with a 2.4 per cent share. The United States, the European Union15 and Japan are the major importers of services in the world. 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 computer and information services, commercial SERVICES TRADE 7.51 Trade in some services like transportation of goods is directly dependent on merchandise trade while in some others like financial services it is complementary. However, some other services like tourism and software are near standalone services not directly related to merchandise trade. There are many such services and with the spread of telecommunications and computer technology, virtually all commercial services including health care Table 7.12 : World exports of commercial services trade by major category, 2008 Value (US$ billion) 2008 Commercial services Transport Travel Other commercial services Source : WTO Annual percentage change 2000-08 12 13 9 14 2006 14 11 10 17 2007 20 20 15 22 2008 12 16 10 11 3730 890 950 1935 International Trade services, communication services including telecommunications services and other business services and in the import of computer and information services, financial services and transport services (Table 7.13). 7.55 The Global Economic Prospects 2010 report of the World Bank states that the global economic crisis also affected services trade which, however, was more resilient than merchandise trade. However, systematic and up to date information on trade in services is lacking. The term “Invisibles”, which is generally used as a synonym for services, is most apt for this sector as regards recent data and information. Any analysis on the impact of the crisis on trade in services has to be made from the titbits of information available from several widely spread out sources. Piecing these bits of information together shows that the global financial crisis which affected trade credit and also resulted in a slump in merchandise trade had both a direct and indirect bearing on trade in services. Some services like transport for which goods trade itself is a barometer of performance were severely hit. The Baltic Dry Index (BDI) which reached a record high of 11440 in May 2008 fell by 93 per cent in December 2008. In the case of other services, the tight financial situation 165 coupled with depressed economic activity led to deceleration in growth in trade of these services 7.56 As per the WTO’s “International Trade Statistics 2009”, world exports of commercial services which increased by 20 per cent on average on a year-on-year basis in the first two quarters of 2008, decelerated in the third quarter and dropped by 6 per cent in the last quarter. Preliminary figures for the first quarter of 2009 suggest a more pronounced decline of 19 per cent. While transportation and Travel were severely hit due to the global crisis, financial services plummeted due to the turmoil in the financial sector with the WTO’s preliminary figures for the first quarter of 2009 showing a further decline in exports for the leading exporters ranging from 13 per cent for the US to an estimated 30 per cent for the EU. However, some of the sharpest declines in the first quarter of 2009 were recorded in Asian economies such as Hong Kong, China (a drop of 32 per cent), Chinese Taipei (53 per cent) and the Republic of Korea (56 per cent). Other commercial services have shown more resilience to the economic recession than transportation and travel services as the decline in the last three months of 2008 was only 5 per cent. In the first quarter of 2009, however, exports of commercial services were Table 7.13 : India’s sector-wise rank and share in world exports / imports of services Services 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 Exporta Importa Export Import Export Import Exporta Importa Exporta Importa Exporta Import Rank 2008 11 5 14 15 4 9 4 13 9 11 7 7 8 5 2 4 5 6 6 .. Share 2000 0.6 2.1 0.7 0.6 .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. 2008 1.2 4.0 1.2 1.1 4.1 2.0 3.3 1.1 1.3 1.1 2.1 2.7 1.4 2.9 18.1 4.4 4.0 3.0 1.6 .. Per cent Change 2008 23 34 10 17 18 3 10 22 .. .. 35 19 121 175 .. .. .. .. .. .. Source: Compiled from WTO, International Trade Statistics 2009. WTO. Notes: * data relate to 2007; a WTO Secretariat estimates. 166 Economic Survey 2009-10 and cargo yields are expected to improve by 0.9 percent, passenger yields are not expected to improve from their extraordinary low level due to excess capacity in the market and reduced corporate travel budgets. Thus as per IATA eventhough demand continues to improve, there is still a lot of ground to be recovered. 7.58 The World Bank in a report has also given some such examples of fall in services trade. Quoting reports of World Tourism Organization, the World Bank states that tourism arrivals were off by 7 per cent in the first six months of 2009. The outbreak of A H1NI compounded the woes of some countries like Mexico which was particularly hard hit. Notwithstanding widespread efforts to support tourism through special tax deductions, the easing of visa restrictions and investment plans, the World Tourism Organization expects global tourist volumes to have declined by between 4 and 6 per cent during 2009. estimated to have declined by 15 per cent globally, possibly due to the lagged effect of the economic recession. 7.57 The Organisation for Economic Cooperation and development(OECD) data shows that in Q3 2008, the value growth of exports and imports of services in OECD countries, measured in current US dollars decelerated turning negative in all the subsequent quarters till Q3 2009 for which latest data are available. The fall was at its peak in Q2 2009 with both export and import growth rates at (-)20.2 percent and (-) 18.4 percent respectively, In Q3 2009 the extent of negative growth has been slightly less, with signs of turnaround. The seasonally adjusted quarterly value growth over previous quarter which had turned negative since Q3 2008, both for exports and imports of services of OECD has become positive in Q2 and Q3 with growth rates of 1.8 per cent and 2.6 percent for exports respectively and 1.6 percent and 3.3 percent for imports respectively. The contraction in the Air Transportation sector which began in the end of 2008 continued in 2009. As per the International Air Transport Association (IATA), in 2009 international passenger demand and cargo demand declined by 4.1 percent and 13.0 percent respectively with passenger and cargo yields plummeting by 12 percent and 15 percent respectively. In 2010, while passenger traffic and cargo demand are expected to grow by 4.5 percent and 7 percent respectively Table 7.14 : India's exports of services Commodity Groups Sl. No. 1 2 3 4 5. India’s services exports 7.59 India, which is moving towards servicesdominated GDP growth with a 9 per cent CAGR for services which is higher than the 5.8 per cent for non-services during 2000-01 to 2006-07, is also moving towards a services-dominated export growth with a CAGR of 28.7 per cent for services during 2000-01 to 2006-07 which is higher than the 19 per Percentage share CAGR April2000-01 September to 2000- 2008- 2008- 2009- 200601 09 09 10 07 10.7 11.1 1.4 0.4 76.4 45.5 30.9 16.2 3.9 2.1 100.0 10.4 11.1 1.4 0.4 76.7 47.5 29.2 16.5 4.5 2.5 100.0 12.0 12.6 1.9 0.5 73.0 53.4 19.5 12.7 4.6 1.8 100.0 17.3 25.4 28.1 -14.6 33.4 30.5 38.0 87.6 44.1 12.1 28.7 200708 24.4 25.6 37.2 30.8 21.3 28.8 11.6 15.3 3.6 6.5 22.4 Growth ratea AprilSeptember 2008- 2008- 200909 09 10 -4.0 12.7 -13.4 17.5 15.9 14.9 17.5 -1.9 22.7 -9.8 12.5 22.0 39.9 1.8 30.2 27.4 35.3 16.3 9.9 58.4 11.0 27.6 -9.2 -10.6 6.1 -5.2 -25.2 -11.5 -47.5 -39.5 -19.2 -42.0 -21.4 Travel 21.5 Transportation 12.6 Insurance 1.7 GNIE 4.0 Miscellaneous 60.3 a) Software Services 39.0 b) Non-software Services 21.3 of which i) Business Services 2.1 ii) Financial Services 2.1 iii)Communication Services 7.0 Total Services Exports 100.0 Source: Calculations based on RBI data. Note: a Growth rate in US dollar terms. GNIE = Government Not Included Elsewhere International Trade cent for merchandise exports during the corresponding period. Services exports reached US$ 102 billion in 2008-09 with a moderate growth of 12.5 per cent over the previous year. Growth has been reasonably good in the miscellaneous services category which has increased its share by 16.1 percentage points to 76.4 per cent in 2008-09 compared to 2000-01. While the share of software services increased by 6.5 percentage points to 45.5 per cent, the share of non-software services increased by 9.6 percentage points to 30.9 per cent. The CAGR of miscellaneous services was very high at 33.4 per cent during 2000-01 to 2006-07 followed by annual growth rates of 21.3 per cent and 15.9 per cent respectively in 2007-08 and 2008-09 (Table 7.14). While the high growth rate of the US $ 47 billion (2008-09) software services exports is well known, the high CAGR of non-software services during 2000-01 to 2006-07 is noteworthy. This was due to the high growth in communication services and business services exports, which, however, have fared very badly in both 2008-09 and the first half of 2009-10 with negative growth rates ; and financial services which registered high CAGR during 200001 to 2006-07 and high growth in 2008-09. 7.60 The impact of global recession was visible on India’s services exports, the growth of which declined to (-)21.4 per cent in the first half of 2009-10 compared to the high growth of 27.6 per cent in the corresponding period of the previous year . Except insurance, all the items witnessed a negative growth. While fall in transportation exports is a reflection of the fall in merchandise trade, fall in travel services is a reflection of the decline in tourist arrivals which Table 7.15 : India's imports of services Percentage share Sl. Commodity Group No. 2000-01 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 19.2 24.4 1.5 2.2 52.6 4.1 48.6 7.0 13.5 0.9 100.0 2008-09 18.1 24.6 2.2 1.5 53.6 5.4 48.2 29.7 5.7 2.1 100.0 CAGR Growth rate a 167 declined by 1.8 per cent in the first quarter of 200910. In 2009, Foreign Tourist Arrivals (FTAs) at 5.11 million registered a negative growth of (-)3.3 percent as compared to the 4 percent positive growth in 2008. Foreign Exchange Earnings (FEE) from tourism which grew by 9.5 percent in 2008 fell to US $11.39 billion in 2009 with a negative growth of (-)3 per cent 7.61 Services exports are expected to grow in 2009-10, though at a relatively slower pace. While the lower merchandise trade affected transportation exports in the first half of the year, with pick up in global and India’s trade, transportation exports are also expected to pick up. Software including BPO services after a negative export growth in the first half of 2009-10 has shown a recovery with an estimated positive but tepid growth of 5 percent in 2009-10 and a projected 13-15 per cent growth in 2010-11, according to NASSCOM. Receipts under business and professional services are also expected to be higher. According to the Ministry of Tourism, though foreign tourist arrivals declined in the first quarter of 2009-10, the growth rate has marginally improved during April-September 2009 as compared to the corresponding period of the previous year. In fact, both FTA and FEE have picked up in December with growth rates of 21 percent and 44.4 percent respectively over December 2008. Given the trend, travel receipts are also expected to improve in the remaining period of the year. India’s services imports 7.62 Imports of commercial services have become important in recent years reaching US$ 52.0 billion in 2008-09 though growth had decelerated to 1.1 per April-September 2000-01 to 2008-09 2009-10 2006-07 18.8 27.4 2.1 0.8 50.9 6.9 44.1 28.0 6.1 2.0 100.0 17.8 20.2 2.7 0.9 58.3 3.4 55.0 34.3 8.4 2.5 100.0 15.6 14.6 19.3 4.0 24.5 25.1 24.4 57.9 7.2 35.8 20.4 April-September 2007-08 38.5 42.7 62.6 -6.7 2.7 48.1 -1.2 4.3 4.7 8.0 16.2 2008-09 1.8 11.3 8.2 110.9 -4.8 -16.2 -3.4 -6.8 -5.6 26.4 1.1 2008-09 2009-10 23.3 39.2 13.6 -13.4 12.0 20.1 10.7 7.3 37.8 27.3 20.2 -9.8 -29.4 22.9 12.6 9.3 -53.4 19.1 16.9 30.0 19.5 -4.6 Total Services Imports Source : Calculations based on RBI data. Note: a Growth rate in US dollar terms. 168 Economic Survey 2009-10 cent due to global recession (Table 7.15). Business services is the most important category of services imports, followed by transportation and travel. Import growth of business services which declined by (-) 6.8 per cent in 2008-09 picked up by 16.9 per cent in the first half of 2009-10. Import growth of transportation and travel which decelerated in 200809 was negative in the first half of 2009-10 and particularly so in the case of transportation. Insurance, financial and communication services have registered positive growths. Policies related to services 7.63 Given the difficult situation arising out of the global economic crisis, which also affected services trade, the Government took some specific measures for the services sector, besides the general measures related to liquidity and trade finance. Some such specific policy measures in the Union Budget and Foreign Trade Policy include extension of the 10A sunset clause for Software Technology Parks of India (STPI) for the financial year 2010-11 and exemption Box 7.4 : Policy suggestions for India’s services sector Some policy suggestions for India’s services sector based on interactions with service providers and literature survey are given below. This is only an indicative and not exhaustive list. FDI related Opening some segments of the insurance sector like health insurance and removing the 10-year disinvestment clause; and liberalizing FDI in the animation sector. Making available FDI policy on the website in a user-friendly way. Tariff and Tax related Rationalizing taxes in the shipping sector and addressing the issue of multiple levies and duties the in telecom sector. Rationalizing the entry fees for monuments and privatization of these services. Relocation of business of the Indian film industry from foreign countries to India by addressing the tax credit issue. Addressing the inverted duty issue in the printing sector. Allowing advance tax instead of tax deduction at source (TDS) in some services like engineering and construction. Abolishing octroi at least for capital goods used in hospitals including super speciality hospitals exporting health-care services and in health-related research centres. Making TDS uniform for all heads of income with exemptions for small incomes up to a certain minimum limit Expediting the measures related to transfer pricing. Single return for service tax and excise tax which is being administered by the same department Credit and Finance related Exempting ECBs from withholding tax for financing export-related activities and overseas acquisition including of ships. Encouraging venture capital in services. Operationalizing offshore financial centres. Other trade related Increasing visibility of India in services through trade fairs, buyers-sellers meets and setting up convention centres; facilitating services exports by setting up joint offices with common facilities; setting up a portal for services and devoting some SEZs exclusively to services. Speeding up 3 G technology auctions. Strengthening Indian fleets and providing long-term contracts for Indian flags. Resolving the issue of precondition in most of the overseas tenders wherein equipment to be supplied by the contracting company should necessarily be sourced from an approved list of suppliers from developed countries. Facilitating International accreditation for Indian health services. Tapping outsourcing opportunities in niche areas like actuarial and accounting services. Totalization agreements with target countries and necessary changes in domestic laws. Revamping the system of teaching, research, etc. in universities/ institutions, phased introduction of education reforms, allowing foreign educational institutions in higher education with proper checks and balances, etc. Skill certifying unskilled labour. Source : Ministry of Finance, Government of India, “Draft Policy Paper on Services 2009” and “Strategy for India’s Services sectors: Broad Contours”, Working paper No.1/2007/DEA,. International Trade from service tax for certain services linked to exports (see Box 7.5). Well-thought- out policy measures could give a further boost to this sector. While policies like disinvestment of services’ PSUs and easing domestic regulations can create the conducive atmosphere, liberalization of foreign investment-related policies could also help as trade in services is usually accompanied by foreign investment in services due to the high intra-firm trade of multinational parent firms with affiliates. These should be complemented by specific trade policies including tariff, tax and credit-related policies for services (see Box 7.4) 169 Policy for promoting State-wise exports 7.66 State-wise exports are reflected in the data on state of origin of export goods which at present are the only available comparable data for State-wise exports (Table 7.16). This does not include export of services 7.67 In 2008-09 and the first half of 2009-10, the major exporters were Maharashtra, followed by Gujarat, Tamil Nadu and Karnataka as in 2007-08. In 2008-09, the two major exporting states, namely Maharashtra and Karnataka, registered negative growth rates along with West Bengal. Kerala with growing SEZ exports, registered the highest growth rate with doubling of exports. This was followed by UP, Delhi, AP, Goa and Tamil Nadu with high export growth rates. The importance of states likes Kerala, UP and Delhi in the export effort is rising. In the first half of 2009-10, negative growth was registered by all the states except Kerala with 9.2 per cent growth and Haryana with a paltry 0.1 per cent growth. 7.68 To encourage exports by States, outlay under the Assistance to States for Developing Export Infrastructure and Allied Activities (ASIDE) Scheme has been increased in the Eleventh Five Year Plan to Rs. 3,793 crore (tentative) as against the actual release of funds of Rs. 2,050.5 crore in the Tenth Five Year Plan. During 2008-09, Rs. 437.84 crore and Rs. 131.4 crore were sanctioned/released under the State and Central-Sector components respectively out of an actual outlay of Rs. 570 crore. In 2009-10, as on December 22,2009, out of the outlay of Rs. 570 crores, Rs 296.65 crore and Rs. 82.83 crore have been released to the States and Centre respectively. Under ASIDE, projects aimed at setting up of critical infrastructure for exports are approved, namely creation of new SEZs and augmenting of facilities in existing ones, equity participation in infrastructure projects, development of complementary infrastructure such as roads connecting production centres to ports, setting up of ICDs and CFSs, stabilizing of power supply, etc. 7.69 State-wise allocation of funds under the ASIDE scheme for the past few years shows only slight change. However, highest allocation to Maharashtra followed by Gujarat, Tamil Nadu, Karnataka, Uttar Pradesh and West Bengal continued. The top 15 States had a share of 92.8 per cent in total allocation in 2008-09. TRADE POLICY Recent trade policy measures 7.64 Trade policy measures taken by the Government and the RBI this year focused on mitigating the adverse impact of the global recession on the Indian economy and on checking inflation. Many measures were taken including three stimulus packages announced in 2008-09, measures by the RBI and the Government in the Union Budget 200910 and the Foreign Trade Policy (2009-14) to help the export sector in general and the employmentintensive sectors affected by the world recession in particular (Box 7.5) 7.65 Trade Policy measures to check inflation caused mainly by supply-side constraints include among others, the following–-reducing import duties to zero for sugar, rice, wheat, pulses, edible oil (crude) and maize; reducing import duties on refined and hydrogenated oils and vegetable oils to 7.5 per cent; allowing import of raw sugar at zero duty under open general licence (OGL) up to December 31, 2010 and opening import of raw sugar to private trade up to December 31, 2010 for being processed by domestic factories on job basis; allowing import of white/refined sugar up to 1 million tonnes by the STC/MMTC/PEC and NAFED under OGL at zero duty up to March 31, 2010 and also extending it to other Central/State Government agencies and to private trade; banning export of non-basmati rice, edible oils and pulses (except kabuli chana); use of minimum export price (MEP) to regulate exports of onion and basmati rice; scheme for permitted publicsector units (PSUs) to import and sell pulses; permitting sugar factories to sell processed raw sugar in the domestic market and fulfil export obligation on tonne-to-tonne basis; and not changing the tariff values of edible oils. 170 Economic Survey 2009-10 Box 7.5 : Trade Policy Measures The latest trade policy measures for 2008-09 and 2009-10 include the following: Interest subvention of 2 per cent from December 1,2008 to September 30, 2009 to the labour-intensive sectors of exports such as textiles (including handloom), handicrafts, carpets, leather, gems and jewellery, marine products andSMEs. This was further extended to March 2010. Inclusion of handicrafts items in the Vishesh Krishi and Gram Udyog Yojana (VKGUY); Provision of an additional Rs 1,100 crore to ensure full refund of CST/terminal excise duty/duty drawback claims on deemed exports. Extension of the DEPB scheme till the end of December 2010. Restoration of DEPB rates for all items where they were reduced in November 2008 and increase in duty drawback rates on certain items effective from September 1, 2008. Provision of additional fund of Rs 1,400 crore for the textile sector to clear the backlog claims of the Technology Upgradation Fund (TUF). Excise duty reduction across the board by 4 per cent for all products except petroleum products and those products where the current rate was less than 4 per cent. Extension of the adjustment assistance scheme to provide enhanced Export Credit Guarantee Corporation (ECGC) cover at 95 per cent to badly hit sectors up to March 2010. Sections 10A and 10B related to sunset clauses for STPI and EOUs schemes respectively extended for the financial year 2010-11. Anomaly removed in Section 10AA related to taxation benefit of ‘unit vis-à-vis assessee’; Additional items allowed within the existing duty-free imports entitlement for some employment-oriented sectors like sports goods, leather garments, footwear and textile items. Measures related to service tax which include, among others, exemption from service tax on services linked to exports like the transport of goods by road and commission paid to foreign agents. Diversification of exports to emerging markets of Africa, Latin America, Oceania and CIS countries under the Focus Market Scheme and Market Linked Focus Product Scheme. Setting up a Directorate of Trade Remedy Measures to support Indian industry and exporters especially the MSMEs, in availing of their rights through trade remedy instruments under the WTO framework. Higher support for market and product diversification and additional resources under the MDA and MAI. Introduction of EPCG at zero duty for engineering and electronic products, basic chemicals, pharmaceuticals, apparels and textiles, plastics, handicrafts, chemicals and allied products and leather and leather products till March end 2011. Duty drawback facilities on jewellery exports to neutralize duty incidence Expanding the Market Linked Focus Product Scheme to bicycle parts, motor cars and motor cycles, apparels and clothing accessories, auto components etc. for exports from April 4,.2009 to September 30, 2009. Enhancement of the Export Obligation Period under the Advance Authorization Scheme from 24 to 36 months without payment of composition fee. Widening the coverage of the ECGC by making available back up guarantee to the ECGC to the extent of Rs350 crore to enable it to provide guarantees for exports to difficult markets/products. Abolishing basic customs duty of 5 per cent on rough / unworked corals. Constituting two high-level committees, one chaired by the Prime Minister and the other by the Cabinet Secretary for regular monitoring. A Committee under the Chairmanship of Finance Secretary constituted to resolve all problems related to non-availablity of dollar credit to exporters by the concerned Banks. To accelerate exports and encourage technological upgradation, additional duty credit scrips for status holders @ 1 per cent of the f.o.b. value of past exports for certain specified sectors upto March end 2011. New incentives in January 2010 by adding new products in FPS, new products and markets under MLFPS, new products under VKGUY and new markets under FMS. International Trade Table 7.16 : State-wise exports of top 15 states 171 (US$ million) (April-September) Sl. No. 1 2 3 4 5 6 7 8 9 10 11 State 2007-08 2008-09 2008-09 2009-10 Share(%) 2008-09 Growth rate (%) 2008-09 2009-10 (Apr-Sept.) -21.2 -38.7 -27.1 -46.9 -12.3 -55.2 -51.1 -49.1 0.1 9.2 -44.3 -24.8 -27.9 -43.4 -13.5 -29.7 Maharashtra Gujarat Tamil Nadu Karnataka Andhra Pradesh Delhi Uttar Pradesh West Bengal Haryana Kerala Orissa 44,841 34,736 14,816 14,641 7,427 5,183 4,295 5,679 4,414 2,364 3,024 3,276 2,598 2,915 1,387 163,132 44,667 40,272 18,540 12,296 9,897 8,467 7,571 5,583 4,792 4,753 3,351 3,313 3,016 2,946 1,781 185,295 25,612 26,802 10,654 7,877 5,231 4,936 5,284 3,554 2,478 2,544 2,189 1,815 1,628 1,596 640 108,907 20,180 16,433 7,770 4,181 4,585 2,214 2,586 1,808 2,481 2,778 1,220 1,365 1,175 904 554 76,589 24.1 21.7 10.0 6.6 5.3 4.6 4.1 3.0 2.6 2.6 1.8 1.8 1.6 1.6 1.0 100.0 -0.4 15.9 25.1 -16.0 33.3 63.4 76.3 -1.7 8.6 101.0 10.8 1.1 16.1 1.1 28.4 13.6 12 Rajasthan 13 Punjab 14 15 Madhya Pradesh Goa India’s total exports Source : DGCI&S SEZs 7.70 The Special Economic Zones (SEZs) Policy supported by the SEZ Act 2005 and SEZ Rules 2006 intends to make SEZs an engine for economic growth supported by quality infrastructure, complemented by an attractive fiscal package, both at the Central and State levels and with the single-window clearance mechanism. The process of globalization has enhanced the relevance of SEZs, which have become an important component in the export-led industrialization strategy, playing a crucial role in promoting the manufacturing sector, including providing an enabling investment climate for SMEs and offer platform for attracting export-oriented FDI. The spin-off effects of SEZs, particularly the new generation ones, are creation of employment, development of infrastructure and additional economic activity in the hinterland. 7.71 In a short span of about three years since the SEZs Act and Rules were notified in February 2006, formal approvals have been granted for setting up of 571 SEZs out of which 346 have been notified. A total of 105 SEZs are exporting at present. Out of these 65 are information technology(IT)/information technology enabled services (ITES), 15 multi-product and 25 other sector-specific SEZs. The total number of units in these SEZs is 2761. 7.72 Out of the total employment of 4,90,358 persons in SEZs, an incremental employment of 3,55,654 persons was generated after February 2006 when the SEZ Act came into force. At least double this number obtain 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. Physical exports from the SEZs have increased by 50 per cent to Rs 99,689 crore in 2008-09 with a CAGR of 48.4 per cent during 2003-04 to 2008-09 compared to the CAGR of 23.4 per cent for total merchandise exports of the country for the same period. Exports during the first three quarters of the current year have been to the tune of Rs. 1,51,785 crores. 7.73 Even during the current economic meltdown, SEZs have registered impressive growth in exports (Table 7.17), besides investment and employment generation. 172 Economic Survey 2009-10 Box 7.6 : Progressive reduction of peak customs duty India has been progressively lowering peak customs duty. Contrary to popular belief, the fall in peak duty has neither led to a fall in revenue collections, nor a wiping out of the domestic manufacturing sector. In fact, peak duty falls have been accompanied by rise in customs duty collections. The trend follows the Laffer curve effect which indicates that lowering of taxes produces higher economic activity and higher revenue realization (Table 1) Table 1. Peak duty reductions, customs duty collection and import values Year Peak duties (per cent) 40 38.5 35 30 25 20 15 12 10 10 Customs duty collection (Rs cr.) 47,091 49,066 42,256 44,610 48,857 55,470 63,656 81,015 97,691 1,01,710 Imports (Rs cr.) 2,15,237 2,30,873 2,45,200 2,97,206 3,59,108 5,01,065 6,60,409 8,40,506 10,12,312 13,74,436 Customs duty as a percentage of imports 21.88 21.25 17.23 15 13.6 11.08 9.64 9.64 9.65 7.4 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Source: DGCI&S, Kolkata, Receipt Budget of Union of India and Budget Speeches of Finance Minister. However, as a result of progressive reduction in customs duty rates and exemptions on various counts, customs duties as a proportion of imports have been falling quite rapidly, which is in fact a positive sign of liberalization. The customs duty was only 7.40 per cent of imports in 2008-09 compared to 21.88 per cent in 1999-2000. Given the situation created by the global economic crisis when countries were frantically looking for avenues to export their products, a pause button was pressed to this progressive reduction of peak duties, resulting in peak duties remaining at 10 per cent in 2008-09. A small forward movement in our tariff reforms related to lowering of peak duties even during these difficult times when revenue concerns are important, could help our manufacturing sector and also improve the options for our trade negotiations. This can be done with considerable ease as 77.5 per cent of our imports in value terms had duties of 7.5 per cent and less, though the share was only 39.4 per cent in terms of tariff lines in 2008-09 (Table 2). The shares are similar even if only nonagricultural items are considered. Table 2 : Tariffs, imports and notional duties in 2008-09 Capital goods Basic Duty No. of tariff Imports Notional duty (Rs cr) (Rs cr) Intermediate goods No. of tariff Imports duty (Rs cr) (Rs cr) Consumer goods tariff duty (Rs cr) (Rs cr) Notional No. of Imports Notional lines lines lines Total Share Total Share no. of of notional of tariff tariff duty Imports lines lines (%) (Rs cr) (%) 7.5% or Less 10% Above 10% Total 1079 334 15 1428 1,64,198 33745 31 1,97,974 38358 10082 9 48449 3353 3429 738 7520 8,96,459 2,14,816 24591 11,35,866 89046 64181 5842 1,59,069 40 1522 846 2408 3944 21728 14924 40596 886 6492 9292 16670 4472 5,285 1599 11356 39 47 14 100 1,28,290 80755 15143 2,24,188 78 20 3 100 Source: Customs data base, Department of Economic Affairs, Ministry of Finance & Academy of Business Studies, United Nations and DGCI&S Further, exemptions result in a fall in revenue by around 55 per cent of notional collections. If these are also factored into the calculations for items with 10 per cent duty or less, the actual duties will be still less. Thus, while practically our peak duties are below 10 per cent in terms of number of tariff lines and in the 7.5 per cent and below categories in value terms, we are not able to use these arguments in our favour in multilateral and bilateral negotiations because of the 10 per cent peak duty tag. Leaving aside consumer goods for the present, if most items under capital goods which enjoy a concessional rate of 0-3 per cent duty under the EPCG scheme and some items under intermediate goods which are inputs for exports and industrial activity are moved from the 10 per cent duty category to 7.5 per cent duty, our peak duties could be 7.5 per cent even in terms of number of tariff lines. International Trade Table 7.17 : Exports from special economic zones Year 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 (up to 31.12.2009) Value of exports from SEZs (Rs crore) 13,854 18,314 22,840 34,615 66,638 99,689 1,51,785 Growth rate(per cent) (over the previous year) 39 32 25 52 93 50 - 173 Tariff Reforms 7.74 Tariff policy has occupied the centre stage of trade policy for quite some time in India. Following the opening up of the economy, India’s customs tariff regime also underwent drastic changes. Though the tariff policy in 2008-09 was more focused on tackling inflation caused by supply-side constraints, some forward movement could also be seen towards the objective of making India’s tariff structure comparable to international standards, particularly to that of its immediate competitors. The FTA of India with Association of South East Asian Nations (ASEAN) countries is a move in this direction. 7.75 Bold reforms were taken by India in 1991 following the balance-of-payments crisis. Further tariff reforms at present, in the aftermath of the global economic crisis, could involve continuation of the twin strategy of (i) progressively lowering the peak customs duty rate (Box 7.6) and (ii) reducing enduse exemptions to check revenue loss due to duty foregone and streamlining export promotion schemes (Box 7.7). Stimulus packages for exports except during crisis should be in the form of duty cuts for capital goods and intermediate goods imports needed for exports instead of doles in different forms. Besides plugging leakages, this could also help in lowering our duties to international levels. 7.77 Anti-dumping investigations of all countries after reaching a peak in 2001 had started falling, numbering163 in 2007. However, in 2008, they have again started rising with 208 anti-dumping initiations. In line with the world trend, India’s anti-dumping initiations increased in 2008 to 54 from 47 in 2007 (Table 7.18). During 2009-10( up to December 31,2009) , the Directorate General of Antidumping & Allied Duties (DGAD) has initiated 11 fresh antidumping investigations. The products involved are synchronous digital hierarchy(SDH) transmission equipment, recordable digital versatile disc(DVD), circular weaving machines, barium carbonate, coumarin, pencillin-G potassium and 6-APA, phenol, 1,1,1,2-tetrafluoroethane or R-134 of all types, acetone, PVC paste resin, and sodium tripoly phosphate. The countries involved in these investigations are China, Israel, Malaysia, Thailand, Vietnam, Mexico, Japan, South Korea, Russia and Taiwan. During the financial year 2009-10, the DGAD has not initiated any fresh countervailing duty (antisubsidy) investigation. 7.78 The bail-out packages of some countries have also introduced new protectionist measures. Economic Survey 2008-09 had given a select list of such trade restrictions and distortionary measures introduced after the global financial crisis. The most trade-distorting measures are those that have clauses related to providing preference for domestic purchases. For example, the US passed a $ 787 billion stimulus package known as the American Recovery and Reinvestment Act in February 2009 which excludes procurement of iron, steel and manufactured goods used in construction projects from countries like India which are not members of the Agreement on Government Procurement (GPA) unless the procurement increases the overall cost of the project by 25 per cent. Price preferences for Contingency trade policy and non- tariff measures 7.76 Contingency trade policy and non-tariff measures (NTMs) which continued to act as significant barriers to exports from developing countries, but with somewhat reduced intensity in recent years, have started a comeback with the accentuation of the global economic crisis, resulting in protectionist tendencies amongst various countries. 174 Economic Survey 2009-10 Box 7 .7 : Customs duty exemptions and export promotion schemes The Budget 2009-10, while succinctly bringing out the estimates of revenue loss, observed that the amount of revenue foregone continues to increase year after year. As a percentage of aggregate tax collection, revenue foregone remains high and shows an increasing trend. The effect is severe specially in the financial year 2008-09 which is bearing the strain of the reduction in excise duties in the stimulus package. In 2007-08, only 51.1 per cent of the notional customs duties was collected and collection percentage has worsened to 44.6 per cent in 2008-09. Thus ,while imports have gone up by 35.8 per cent in 2008-09, collections have barely risen, largely due to exemptions, which has resulted in 55 per cent of notional duties being foregone. Within customs duty, revenue foregone on account of export promotion of Rs 49,053 crore in 2008-09 is an important head of revenue loss, while revenue leakage due to end-use exemptions other than exports is up by 125.6 per cent to reach a staggering Rs 77,380 crore. Substantial revenue is foregone on account of the different export promotion schemes (Table 1). In 2009-10, revenue foregone could continue to be significant at more than Rs 50,000 crore due to enlargement of the scope of schemes in the Foreign Trade Policy 2009-14 (FPS/FMS/VKGUY) and improvement in the export promotion rates in the DEPB coupled with the bottoming out of the export fall. Table 1 : Revenue foregone on account of export promotion schemes (Rs crore) Sl.No 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. Name of the scheme Advance Licence Scheme EOU/EHTP/STP SEZ EPCG DEPB Scheme DFRC Duty Free Import Authorisation Scheme Duty Free Entitlement Credit Certificate Target Plus Scheme VKGUY Focus Market Scheme Served from India Scheme (SFIS) Total Source: Receipts Budget 2009-10 of Union of India. 2007-08 17,654 18,978 1,804 10,521 5,341 607 1,359 740 923 538 41 642 59,149 2008-09 12,389 13,401 2,324 7,833 7,092 111 1,268 418 1,220 2,059 408 531 49,053 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 EPCG scheme. At present, basic duty for capital goods in the general case is 7.5 per cent. In 2007-08, more than 20 per cent of machinery imports were on EPCG account. This has come down to 12.9 per cent in 2008-09 due to significant reduction in the differential between normal and EPCG duty. As a result, revenue forgone was Rs10, 521 crore in 2007-08 and Rs7,833 crore in 2008-09. The EPCG duties at present are Nil for export-oriented, labour-intensive sectors and 3 per cent for others. 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 (Table 2). Table 2 : Duty foregone and imports under EPCG Year Capital goods duties (basicexcise-4% SAD)1 Total duty EPCG duties Duty foregone Revenue foregone (DoR2 estimate) (Rs cr) Estimated Machinery EPCG and parts imports imports in on the Ch. 84, 85 of basis of customs revenue tariff foregone (Rs cr) (Rs cr) Share of EPCG in machinery import (%) 2005-06 2006-07 2007-08 2008-09 2009-10 15- 16-4 12.5-16-4 7.5- 16-4 7.5- 14-4 7.5 -8-4 40.369 37.250 31.011 28.639 21.523 5 5 5 3 0*/3 35.369 32.250 26.011 25.639 21. 5*/ 18.5 5,332 9,152 10,521 7,833 NA 15,075 28,378 40,448 30,551 NA 1,14,286 1,50,152 1,82,603 2,36,216 NA 13.2 18.9 22.2 12.9 NA *Concession for export-oriented, labour-intensive sectors. Covers engineering and electronic products, basic chemicals and pharmaceuticals, apparels and textiles, plastics, handicrafts, chemicals and allied products, leather and leather products. 1 SAD= Special Additional Duty of 4 per cent for VAT. 2 Department of Revenue The time is possibly ripe for another reduction of import duties for all capital goods preferably to the 3 per cent duty fixed under the general EPCG with a simultaneous withdrawal of EPCG scheme. This will help in avoiding revenue leakages and serve as a major step forward in rationalizing our export promotion schemes besides giving an upfront push to the import of capital goods for modernization of the manufacturing and services sector in general and export manufacturing in particular. The Laffer Curve effect could also help in lessening revenue impact as volumes could double in three to four years. The above is just one example and there is a lot of scope for reforms in the other schemes as well. International Trade Table 7.18 : Investigations initiated by top ten users of anti-dumping measures 1995-2008 Country India United States European Community Argentina South Africa Australia Brazil Canada China PR Turkey All Countries Source: WTO 175 19952008 564 418 391 241 206 197 170 145 151 137 3,427 1995 6 14 33 27 16 5 5 11 0 0 157 2000 41 47 32 43 21 15 11 21 6 7 292 2001 79 75 28 27 6 23 17 25 14 15 366 2002 81 35 20 14 4 16 8 5 30 18 312 2003 46 37 7 1 8 8 4 15 22 11 232 2004 21 26 30 12 6 9 8 11 27 25 214 2005 28 12 25 12 23 7 6 1 24 12 200 2006 35 8 35 11 3 10 12 7 10 8 202 2007 47 28 9 8 5 2 13 1 4 6 163 2008 54 16 19 19 1 6 23 3 14 22 208 local companies exist in the measures of other developed country markets as well. 7.79 With non-tariff measures (NTMs) coming in new forms and with greater vigour, the need was felt to check such tendencies, lest they proved counterproductive if retaliatory measures are taken by other countries. Leaders in fora like the G-20, World Economic Forum and the WTO expressed their commitment towards tackling the protectionist measures and ensuring an early conclusion of the Doha Round. The WTO set up a monitoring mechanism for the trade policy measures that members adopted during the financial crisis. However, intentions should translate into actions and protectionist tendencies should be nipped in the bud. The developed countries who have been the champions of liberalization and globalization should take the lead in pressing the stop button on rising protectionism. several complex subjects, the negotiations were slow to resume following the December 2008 break at the WTO. Based on discussions during the MiniMinisterial Meeting held in July 2008, the Chairs of the Negotiating Groups on Agriculture and Non Agricultural Market Access (NAMA) brought out fresh drafts of modalities for Agriculture and NAMA on December 6, 2008. However, discussions on these texts began only in September 2009 partly due to national elections in the US and India and partly due to a general standstill in Geneva and a reluctance to negotiate seriously with a view to narrowing differences. 7.82 Going by the political commitments expressed by WTO members in international fora, India took the initiative and hosted a Ministerial Conference in New Delhi from September 3-4, 2009 which was the first occasion since July 2008 for ministers representing practically all shades of opinion and interests in the WTO to come together. There was unanimous affirmation of the need to expeditiously conclude the Doha Round, particularly in the present economic situation, and for development remaining at the heart of the Doha Round. 7.83 The Seventh WTO Ministerial meeting which was the first full Ministerial meeting of the WTO in the aftermath of the global economic meltdown was held in Geneva from November 30-December 3, 2009. While the Conference was not intended as a negotiating forum, it provided a platform for different groups and caucuses to assess the direction of the negotiations. India and her coalition partners reiterated their commitment to upholding the WTO NEGOTIATIONS AND INDIA 7.80 The Doha Round of trade negotiations at the WTO has been under way since 2001. The negotiations cover several areas such as agriculture, market access for non-agricultural products, traderelated intellectual property rights, rules (covering anti-dumping and subsidies) and trade facilitation. The conduct, conclusion and entry into force of the outcome of the negotiations are parts of a single undertaking, that is “nothing is agreed until everything is agreed”. 7.81 While the years 2007 and 2008 saw intensive discussions in the WTO and progress achieved on 176 Economic Survey 2009-10 duty. In the area of subsidies, India is opposed to enlargement of the scope of prohibited subsidies in the Agreement on Subsidies and Countervailing Measures (ASCM) and /or limiting of the existing flexibilities for developing countries. In the negotiations on new disciplines on fisheries subsidies, India is seeking effective special and differential treatment (S&D) for developing countries, particularly in the light of employment and livelihood concerns of small, artisanal fishing communities and for retaining sufficient “policy space” so as to enable it to develop its infrastructure. development dimension, the centrality of the multilateral process and the need to safeguard livelihood concerns, particularly of the poor, subsistence farmers in their countries. 7.84 The major issues in the current negotiations in the WTO are related to Agriculture and NAMA discussions which resumed on the basis of the draft modalities on Agriculture and NAMA issued by the Chairs of the respective Negotiating Groups on December 6, 2008. As per the draft agriculture modalities, developed countries would have to reduce their bound tariffs in equal annual instalments over five years with an overall minimum average cut of 54 per cent. Developing countries would have to reduce their bound tariffs with maximum overall average cut of 36 per cent over a larger implementation period of ten years. Both developed and developing members would have the flexibility to designate an appropriate number of tariff lines as sensitive products, on which they would undertake lower tariff cuts. The revised draft modalities propose a special product (SP) entitlement of 12 per cent of agricultural tariff lines. The average tariff cut on SPs is proposed as 11 per cent, including 5 per cent of total tariff lines at zero cuts. This is a special and differential treatment for developing countries. In the case of 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, and a coefficient of 8 for tariff reduction of developed countries. 7.85 In services negotiations, the Services Clusters were held in March–April 2009, June 2009, October, 2009 and November, 2009 in which India participated actively. Other than multilateral and plurilateral discussions, bilateral discussions were also held with important trading partners, wherein India conveyed its disappointment over their ambiguous and inadequate signals in the key areas of our interest which were conveyed earlier during the signalling conference of July 2008. India is actively participating in the working party discussions on Domestic Regulations (WPDR) as disciplining of DRs is an area of its interest. 7.86 In the current negotiations on rules, taking place in the Negotiating Group on Rules (NGR), India is 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 Bilateral and Regional Cooperation 7.87 Multilateral negotiations at the WTO continue to be at the centre of India’s trade negotiations. However, given the long and protracted nature of these negotiations and recognizing the fact that regional cooperation would continue to feature for a long time in world trade, India has been active in regional and bilateral trading arrangements in recent years. RTAs, which help in expanding India’s export market are considered as “building blocks” towards the overall objective of trade liberalization and multilateral negotiations. 7.88 Some of the recent developments in the current year related to bilateral and regional trade and cooperation are the following: Indian-ASEAN CECA: A Framework Agreement on Comprehensive Economic Cooperation between ASEAN and India was signed by the Prime Minster of India and the Heads of Nations/ Governments of ASEAN members during the Second ASEAN-India Summit on October 8, 2003 in Bali, Indonesia. The Agreement on Trade in Goods was signed on August 13, 2009. The India-ASEAN Trade in Goods Agreement has come into effect on January 1,2010. The 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. Negotiations towards trade in services and investment are expected to conclude by August 2010. India-South Korea Comprehensive Economic Partnership Agreement (CEPA): The Agreement was signed on August 7, 2009. It is India’s first FTA with an OECD country. CEPA covers trade in goods, investments and services and bilateral cooperation in areas of common interest. Under CEPA, tariffs will be reduced or International Trade eliminated on 93 per cent of Korea’s tariff lines and 85 per cent of India’s tariff lines. The Agreement will facilitate trade in services through additional commitments made by both countries to ease movement of independent professional and contractual service suppliers. India-Japan CEPA: Agreements in goods, services and investment are under negotiation. Twelve meetings of the Joint Task Force have so far been held. The 12th meeting of the JTF was held during September 29 - October 1, 2009 in Tokyo. India-EU Trade and Investment Agreement: With the EU, a broad- based bilateral Trade & Investment Agreement is being negotiated. Negotiations cover trade in goods, services and investment, sanitary and phytosanitary measures, technical barriers to trade, rules of origin, trade facilitation and customs cooperation, competition, trade defence mechanism, Government procurement, dispute settlements, Intellectual Property Rights (IPR) and Geographical Indications (GIs). Eight rounds of negotiations have so far alternately been held at Brussels and New Delhi respectively; the eighth round was held during January 25-29, 2010 in New Delhi. India-European Free Trade Association (EFTA): A broad based bilateral trade and investment agreement is being negotiated with EFTA Countires. First round of negotiations took place in New Delhi in October 2008. Fourth round of negotiations took place in New Delhi in September 2009. 177 per cent in 2009. While the gap between the projected output growth for advanced economies (at 2.1 per cent and 2.4 per cent for 2010 and 2011 respectively) and emerging and developing economies (at 6.0 and 6.3 per cent in 2010 and 2011 respectively) is rather high, it is substantially narrower in projections of import volume of goods and services of advanced economies (at 5.5 per cent both for 2010 and 2011) and emerging and developing economies (at 6.5 and 7.7 per cent in 2010 and 2011 respectively). 7.90 The Baltic Dry Index which fell to a low of 774 in December 2008 has recovered since then, with a continuous upward trend, though with sudden ups and downs reaching 3887 in November 2009 and falling marginally to 3118 in January 2010. The extraordinary financial stimulus by different countries, a turn in the inventory cycle and the lead by developing and emerging economies, particularly India and China, with strong fundamentals have all contributed to the recovery, which is now considered to pick up, albeit at a slow pace. The latest import growth figures (December 2009) of some trading partners of India though operating from a lower base, are also encouraging, with growth of China’s imports from the world and India at 55.6 per cent and 71 per cent respectively. Growth in Hong Kong’s imports from the world has turned positive at 19.3 per cent and from India, highly positive at 58.5 per cent. Japan’s import growth rate from the world is less negative at (-) 4.1 percent, while growth in its imports from India has turned positive at 3 per cent. Even in the case of the USA, which is still registering negative import growth, the extent of negative growth has become less, with imports from the world and India growing at (-)3.1 and (-) 10 per cent respectively in November 2009. 7.91 The downside risks for world and Indian trade lie in the fact that though the fall has been arrested, both output and trade recoveries are still fragile given the fact that the recovery has been pumped up by the stimulus given by different countries including India, the effects of which may dry up if natural recovery doesn’t follow. There is also the fact that the early signs of pick up in output, industrial and trade growth in India and other countries, are due to the low base and are even lower than the absolute values of the pre-crisis period. The high unemployment rates in some developed countries forcing even world leaders like the USA to resort to protectionist measures, as in the case of the recent tax breaks for companies giving jobs in the US, could give wrong signals. CHALLENGES AND OUTLOOK 7.89 The outlook for India’s trade sector in 2010 has brightened with prospects of recovery in world output and trade volumes. The World Bank has forecast real GDP growth rates of 2.7 per cent and 7.5 per cent for the world and India respectively for 2010 and growth in world trade volume of 4.3 per cent and 6.2 per cent in 2010 and 2011 respectively. The International Monetary Fund (IMF) projections are a tad better than the World Bank estimates, with projections of output growth for the world and India at 3.9 per cent and 7.7per cent respectively. The world trade volume growth projections are also higher at 5.8 per cent and 6.3 per cent in 2010 and 2011 respectively. This is a remarkable improvement compared to the fall in world trade volumes by 12.3 178 Economic Survey 2009-10 and employment-intensive non-dynamic products to developing country markets; and continuing with our proactive role in multilateral trade negotiations while taking care of livelihood concerns and the needs of the domestic sector. 7.94 In the case of the services sector, a more conducive environment for trade can be created by liberalizing FDI in services like health insurance, rural banking and higher education as FDI inflows and trade in services have a close relationship given the nature of intra-firm trade of multinational parent firms with affiliates; making FDI policy available in a userfriendly manner on the official website; rationalizing taxes in services like shipping and telecom along with facilitation measures like single returns for service tax and excise tax administered by the same department; continuing with the present initiative on totalization agreements; streamlining many of our domestic regulations like licensing requirements and procedures, technical standards and regulatory transparency which can help in the growth and export of services; continuing with our focus on services in multilateral and bilateral negotiations; and negotiating for streamlining of domestic regulations in our major trading partner countries which can increase our market access. These, along with systematic marketing of services, collection and dissemination of market information by setting up a portal for services and streamlining the services data system, could help the services sector in making further strides. 7.92 India which has admirably weathered the present economic crisis, however, need not be unduly worried. Instead it could lead from the front by taking bold steps towards reforms as it did in 1991 on the back of the balance-of- payments crisis, and thus force the wavering leaders of liberalization and globalization not to backtrack. 7.93 In the Indian case, while in the short-term relief and stimulus measures have worked, some fundamental policy changes are needed. For the merchandise sector these include furthering tariff reforms by lowering the peak duties from the present 10 per cent to 7.5 per cent (which has already been attained in value terms though not in terms of number of tariff lines) by tweaking the rates in the dominant intermediate goods category of imports besides capital goods; weeding out unnecessary customs duty exemptions and streamlining export promotion schemes to reduce duty foregone which could include reduction of tariffs on all capital goods to a uniform 3 per cent while simultaneously withdrawing the EPCG Scheme; further reduction in excise duties to make exports and industry competitive; giving special attention to export infrastructure along with rationalization of port service charges based on services rendered by ports in tune with our competing countries; rationalizing the tax structure including specific duties in a calibrated manner taking into account the specific duty levels in our trading partner countries; fine tuning the trade strategy by targeting exports of dynamic products to developed markets Agriculture and Food Management ood monsoon between 2005-06 and 2008-09 and the efforts of our farmers led to consistent increase in food production during the period and a record production of 233.88 million tonnes of foodgrains in 2008-09. Notwithstanding the fact that the south-west monsoon was the most deficient since 1972, by 23 per cent compared to the long period average (LPA), the overall agricultural gross domestic product (GDP) is estimated to have fallen by only 0.2 per cent in 2009-10 (advance estimates) as against the previous years growth rate of 1.6 per cent. Foodgrain area sown in kharif season declined by 6.5 per cent compared to last year and food production is expected to be short by 16 per cent compared to the fourth advance estimates of 2008-09. Rising food prices, spurred by expectations of shortfall in food production, have brought the issues of food security, food stocks management and need for improving food production and productivity to the forefront of national strategy. CHAPTER 8 G 8.2 Agriculture including crop and animal husbandry, fisheries, forestry and agro processing provides the underpinnings of our food and livelihood security. Agriculture provides significant support for economic growth and social transformation of the country. As one of the world’s largest agrarian Table 8.1 : Agriculture sector: Key indicators at constant prices (2004-05) in per cent Item 1 Growth in GDP in Agriculture & Allied Sectors Agriculture Forestry and Logging Fishing Share in GDP - Agriculture and Allied Sectors Agriculture Forestry and Logging Fishing Share of Agriculture & Allied Sectors in total GCF. Agriculture Forestry and Logging Fishing Share of Agricultural Imports in Total Imports at Current Prices Share of Agricultural Exports in Total Exports at Current Prices Employment in the agriculture Sector as Share of Total Employment in 2004-05 as per CDS 2007-08 4.7 5.0 2.2 6.0 16.4 13.9 1.7 0.8 7.01 6.43 0.07 0.51 2.95 12.05 2008-09 1.6 1.1 2.9 6.3 15.7 13.2 1.7 0.8 9.05 8.39 0.09 0.58 2.74 10.23 52.1 2 3 4 5 Source : Central Statistical Organization (CSO) and Department of Agriculture and Cooperation. Notes : GCF—gross capital formation; CDS—current daily status. 180 Economic Survey 2009-10 that it has consistently declined in real terms (at 1999-2000 prices) from the Sixth Plan to the Ninth Plan (Sixth Plan [1980-85]—Rs 64,012 crore, Seventh Plan [1985-90]—Rs 52,108 crore, Eighth Plan [1992-97]—Rs 45,565 crore and Ninth Plan [1997-2002]—Rs 42,226 crore). However, this trend was reversed in the Tenth Plan (2002-07) and public investment in agriculture registered an increase of Rs 25, 034 crore and stood at Rs 67,260 crore, which is a positive and welcome trend. Investment in agriculture and allied sector since 2004-05 is given in Table 8.2. 8.4 The GCF in agriculture and allied sectors as a proportion of total GDP stood at 2.66 per cent in 2004-05 and improved to 3.34 per cent in 2008-09. Similarly, the GCF in agriculture & allied sectors relative to GDP in this sector has also shown an improvement from 14.07 per cent in 2004-05 to 21.31 per cent in 2008-09 (Table 8.3). economies, the agriculture sector (including allied activities) in India accounted for 15.7 per cent of the GDP (at constant 2004-05 prices), in 2008-09, compared to 18.9 per cent in 2004-05, and contributed approximately 10.2 per cent of total exports during 2008-09. Notwithstanding the fact that the share of this sector in the GDP has been declining over the years, its role remains critical as it provides employment to around 52 per cent of the workforce. The rates of growth and share of agriculture and allied activities in the GDP of the country are given in Table 8.1. CAPITAL FORMATION IN AGRICULTURE AND ALLIED SECTORS GROSS 8.3 The public investment in agriculture in real terms has witnessed steady decline from the Sixth Five Year Plan to the Tenth Plan. Trends in public investment in agriculture and allied sectors reveal Table 8.2 : Public and Private Investment in Agriculture & Allied Sector at 2004-05 Prices Year Investment in agriculture & allied sectors (Rs crore) Total 2004-05 2005-06 2006-07 2007-08 2008-09 Source : CSO. Share in total investment (per cent) Public 20.5 21.4 24.3 20.9 17.6 Private 79.5 78.6 75.7 79.1 82.4 Public 161,83 199,09 22,978 23,039 24,452 Private 62,665 73,211 71,422 86,967 1,14,145 78,848 93,121 94,400 1,10,006 1,38,597 Table 8.3 : Gross capital formation in agriculture in Rs crore at 2004-05 prices Year GDP Agriculture & allied activities GCF GDP GCF/GDP in agriculture & allied activities 14.07 15.79 15.44 17.18 21.31 GCF in agriculture as per cent of total 2.66 2.87 2.65 2.83 3.34 2004-05 2005-06 2006-07 2007-08 2008-09 Source : CSO. 29,67,599 32,49,130 35,64,627 38,93,457 41,54,973 78,848 93,121 94,400 1,10,006 1,38,597 5,60,308 5,89,697 6,11,409 6,40,315 6,50,461 Agriculture and Food Management Table 8.4 : Foodgrain production (million tonnes) Crop 2007-08 Final Targets Fourth advance estimates 2008-09 Percentage increase (+) decrease(-) over final 2007-08 2.5 2.6 -3.1 1.5 -0.7 1.3 181 Percentage increase (+) decrease (-) vis-à-vis target for 2008-09 2.2 2.6 -6.0 0.8 -5.4 0.4 1 2 3 4 5 6 Rice Wheat Coarse Cereals Cereals Total Pulses Total Foodgrains 96.69 78.57 40.76 216.02 14.76 230.78 97.0 78.5 42.0 217.5 15.5 233.0 99.15 80.58 39.48 219.21 14.66 233.88 Source : Department of Agriculture & Cooperation. Table 8.5 : Production of commercial crops Crop Units 2007-08 Final 2008-09 Targets Fourth advance estimates 281.57 2,739.31 231.56 104.07 Per cent increase over 2007-08 -5.4 -21.3 -10.5 -7.2 ## bales of 180 kgs. Per cent increase vis-a vis target -11.3 -19.4 -10.9 -5.4 Total Nine Oilseeds Sugarcane Cotton # Jute & Mesta## Lakh tonnes Lakh tonnes Lakh bales Lakh bales 297.55 3,481.88 258.84 112.11 317.50 3,400.00 260.00 110.00 Source : Department of Agriculture & Cooperation. # bales of 170 kgs each CROP PRODUCTION 2008-09 8.5 For three consecutive years, from 2005-06 to 2008-09 (fourth advance estimates), foodgrains production recorded an average annual increase of over 8 million tonnes. Total foodgrains production in 2008-09 was estimated at 233.88 million tonnes as against 230.78 million tonnes in 2007-08 (Table 8.4). However, the production of major commercial crops (oilseeds, sugarcane, cotton, jute and mesta) declined in 2008-09 compared to 2007-08 levels (Table 8.5) estimates (kharif only) for 2009-10, production of foodgrains is estimated at 98.83 million tonnes which is lower than the target of 125.15 million tonnes set for the year as also lower than the fourth advance estimates (kharif only) of 117.70 million tonnes for 2008-09. Rice 8.7 As per the first advance estimates, the production of kharif rice is at 71.65 million tonnes in 2009-10, a decrease of about 15 per cent over 200809 levels and 17 per cent over the target for 2009-10. CROP PRODUCTION 2009-10 Coarse Cereals 8.8 Total kharif production of coarse cereals in 2009-10 is expected to decline to 22.76 million tonnes against 28.34 million tonnes in 2008-09 and a target of 32.65 million tonnes for kharif 2009-10. 8.6 Deficiency in rainfall in the south-west monsoon season during 2009, particularly in July and August, severely affected kharif crops, especially paddy. The recovery of monsoon in September and post-monsoon (October-December) cumulative rainfall of 8 per cent above normal protected the kharif crops to some extent and improved the prospects of rabi crops in 2009-10. As per the first advance Cereals 8.9 The overall production of kharif cereals in 200910 is expected to decline by 18.51 million tonnes over 2008-09. 182 Economic Survey 2009-10 Table 8.6 : Compound growth rates of area, production and yield (as % per annum with Base T.E 1981-82=100) Pulses 8.10 Total production of kharif pulses is estimated at 4.42 million tonnes in 2009-10, which is 8 per cent lower than the production during 2008-09 and 32 per cent lower than the targeted production for 2009-10. Growth rates Area Production Yield 1949-50 to 1964-65 Rice 1967-68 to 2008-09* Oilseeds 8.11 Total kharif production of the nine oilseeds is estimated at 152.33 lakh tonnes in 2009-10, which is about 15 per cent lower than the kharif production in 2008-09. 1.21 3.50 2.25 Wheat 2.69 3.98 1.27 Coarse Cereals 0.90 2.25 1.23 Pulses 1.72 1.41 -0.18 Sugarcane 3.28 4.26 0.95 Cotton 2.47 4.55 2.04 Nine Oilseeds 2.53 3.12 0.00 0.50 2.46 1.99 1.20 3.69 2.46 -1.41 0.67 1.99 0.01 0.75 0.72 1.69 2.64 0.94 0.42 3.06 2.63 1.44 3.16 1.69 Area Production Yield Area Production Yield Area Production Yield Area Production Yield Area Production Yield Area Production Yield Sugarcane 8.12 Sugarcane production in 2009-10 is estimated at 249.48 million tonnes, which is lower than the production of 273.93 million tonnes during 2008-09. This represents a decline of 9 per cent over the previous year and 27 per cent vis-à-vis the targeted production for 2009-10. Cotton 8.13 Cotton production in 2009-10 is estimated at 236.57 lakh bales (of 170 kg each), which is higher than the fourth advance estimates of 231.56 lakh bales in 2008-09 by 2.2 per cent. Jute and Mesta 8.14 The production of jute and mesta is estimated at 102.43 lakh bales (of 180 kg each) in 2009-10. This is lower than the targeted production of 112.00 lakh bales and also lower than the 104.07 lakh bales produced in 2008-09. GROWTH RATES OF AREA, PRODUCTION AND YIELD 8.15 Growth in production of agricultural crops depends upon acreage and yield. Limitations of expansion in agricultural land suggest multiple cropping as a means to increase the gross cropped area. It is clear that the main source of long-term output growth can only be improvement in yields. Trends in indices of area, production and yield of different crops till 2008-09 (Base triennium ending 1981-82=100) are given in Table 8.6. Trends in area and production are given in Figure 8.1. Source : Department of Agriculture & Co-operation. Note: *Growth rates are based on fourth advance estimates for 2008-09. increase in growth in production. However, the index of area under rice shows negative growth during the above period. Wheat 8.17 The area under wheat that was around 25 million ha in 2002-03 increased to 26.4 million ha in 2005-06 and further to 28 million ha in 2008-09. The compound growth indices of area, production and yield during 1991-2000 and 2001-08 have shown perceptible decline. Rice 8.16 The compound growth index of rice yield has shown a growth of 1.9 per cent per annum during 2001-08 compared to the 1990s leading to an Coarse Cereals 8.18 Growth in index of area during 2001-08 improved compared to the 1990s. The growth index Production (Million Tonnes) 100 105 160 170 180 190 200 210 220 230 240 65 70 75 80 85 90 95 65 70 75 80 85 Production (Million Tonnes) Production (Million Tonnes) Production (Million Tonnes) Figure 8.1 25 27 29 31 33 35 37 39 41 2000-01 2000-01 2000-01 2000-01 8.1D 8.1C 8.1B 2001-02 2001-02 2001-02 8.1A Rice Wheat 2001-02 2002-03 2002-03 2002-03 Food Grains Coarse Cereals 2002-03 2003-04 2003-04 2003-04 2003-04 Area and production of principal crops Year 2004-05 2004-05 2005-06 2005-06 2006-07 2006-07 2007-08 2007-08 2008-09 39 40 41 42 43 44 45 46 47 Year Year Year 2004-05 2004-05 2005-06 2005-06 2006-07 2006-07 2007-08 2007-08 2008-09 25 26 27 28 29 2008-09 111 113 115 117 119 121 123 125 127 Agriculture and Food Management 27 Area Area (Million Hectares) 28 29 30 31 Area (Million Hectares) Production Area (Million Hectares) Area Production Area (Million Hectares) Area Production Production Area 183 184 Production (Lakh Bales of 170 Kg each) 140 160 180 220 240 260 280 300 2000 2250 2500 2750 3000 3250 3500 3750 4000 200 11 12 13 14 15 Production (Lakh Tonnes) Production (Lakh Tonnes) Production (Million Tonnes) 100 125 150 175 200 225 250 275 Figure 8.1 75 2000-01 2000-01 2000-01 2000-01 8.1F 8.1G 8.1E 8.1H 2001-02 2001-02 2001-02 2001-02 Cotton Pulses Economic Survey 2009-10 Sugarcane Nine Oilseeds 2002-03 2002-03 2002-03 2002-03 2003-04 2003-04 2003-04 2003-04 Area and production of principal crops Year 2004-05 2004-05 2005-06 2005-06 2006-07 2006-07 2007-08 2007-08 2008-09 3.7 3.9 4.1 4.3 4.5 2.7 4.9 5.1 5.3 Year Year Year 2004-05 2004-05 2005-06 2005-06 2006-07 2006-07 2007-08 2007-08 2008-09 2008-09 21 22 23 24 25 26 27 28 29 2008-09 20 21 22 23 24 7.5 Area Area (Million Hectares) 8.0 8.5 9.0 9.5 Area (Million Hectares) Production Area (Million Hectares) Area Production Area (Million Hectares) Area Production Production Area Agriculture and Food Management of yield increased significantly, leading to an increase in growth in production. 185 Pulses 8.19 Gram and tur are the major contributors to total pulses production in the country. During 200001 to 2008-09, there has been improvement in the growth indices of area and yield in tur and index of area in gram resulting in increase in the growth of production. pesticides, micronutrients and irrigation. Each of these plays a role in determining yield level and in turn augmentation in the level of production. Seeds 8.25 Seeds, which are considered the carriers of new technology for crop production and higher crop yields, are a critical input for sustained growth of agriculture. In India more than four-fifths of the farmers rely on farm-saved seeds leading to a low seed replacement rate. The Indian Seed Programme includes the participation of Central and State Governments, the Indian Council of Agricultural Research (ICAR), State Agricultural Universities, the cooperative and private sectors. There are 15 State Seed Corporations besides two national-level corporations, namely National Seeds Corporation and State Farms Corporation of India. Year-wise details of production of breeder and foundation seeds and distribution of certified seeds are given in Table 8.7. Table 8.7 : Production of breeder and foundation seeds and distribution of certified seed Year Production of Production of breeder foundation seeds seeds (quintals) (lakh quintals) Distribution of certified/ quality seeds (lakh quintals) Sugarcane 8.20 The compound growth rate index of area under sugarcane increased significantly during 2001-08. However, the growth index of yield moderated but remained positive. Cotton 8.21 The yield of cotton went up from 307 kg/ha in 2003-04 to 419 kg/ha in 2008-09 (fourth advance estimates). The compound growth rate index of yield increased significantly from - 0.41 per cent during the1990s to 13.64 per cent during 2001 to 2008. However, the growth in index of area moderated but remained positive. The combined effect on the index of production was an increase in growth from 2.29 per cent during the 1990s to 15.48 per cent during 2001-08. Oilseeds 8.22 The growth in indices of yield and area under oilseeds has shown perceptible improvement during 2001-08 compared to the 1990s. 2004-05 2005-06 2006-07 2007-08 2008-09 66,460 68,654 73,829 91,960 1,00,000 (Anticipated) 6.9 7.4 7.96 8.22 9.69 (Anticipated) 113.10 126.74 155.01 179.05 190.00 (Anticipated) AREA COVERAGE 2009-10 8.23 The area coverage of 667.84 lakh ha under total foodgrains during kharif 2009-10 compared to 714.02 lakh ha during kharif 2008-09 shows a decline of 46.18 lakh ha. The area coverage under kharif rice during 2009-10 is around 361.62 lakh ha, which is 44.85 lakh ha less than the 406.47 lakh ha during kharif 2008-09. The area coverage under oilseeds during kharif 2009-10 is 175.19 lakh hectares, which is lower by 9.49 lakh ha than kharif 2008-09. The area coverage under sugarcane during the current year is 41.78 lakh ha, which is also lower by about 2.18 lakh ha than that in the previous year. Source : Department of Agriculture & Cooperation. AGRICULTURAL INPUTS 8.24 Improvement in yield, which is key to longterm growth, depends on a host of factors including technology, use of quality seeds, fertilizers, 8.26 The Ministry of Agriculture is implementing the Central-sector Development and Strengthening of Infrastructure Facilities for Production and Distribution of Quality Seeds scheme. The aim of the scheme is to make quality seeds of various crops available to farmers timely and at affordable price. Under this scheme, the seed component of the Prime Minister’s Relief Package is being implemented in 31 suicide-affected districts of Maharashtra, Andhra Pradesh, Karnataka and Kerala, to supply certified seeds at 50 per cent of seed cost. During the year 2008-09, Rs 445.81 crore was released under the Prime Minister’s Relief 186 Economic Survey 2009-10 Package. The scheme is being implemented on all India basis from the year 2005-06. The major thrusts under the scheme are on improving quality of farmsaved seeds through Seed Village Programmes to enhance seed replacement rate, boosting seed production in the private sector and helping publicsector seed companies to contribute to enhancing seed production. Some of the remarkable achievements under the scheme during 2008-09 were that more than 25,000 seed villages were organized across the country; certified/quality seed production increased from 194.31 lakh quintals during 2006-07 to 250.35 lakh quintals during 2008-09; 52 seed infrastructure development proposals were sanctioned for boosting seed production in the private sector; and financial sanctions were given for establishing tissue culture facilities in Orissa (banana) and Maharashtra (pomegranate). Further, Biotech Consortium of India Limited (BCIL) was engaged as an expert agency to undertake public awareness programmes in nine BT cotton- growing States at State capital, district and tehsil levels. The BCIL has been provided financial assistance of Rs 26.65 lakh during the year 2008-09. 8.27 The Protection of Plant Varieties and Farmers’ Rights (PPV&FR) Authority, established in November 2005 at the National Agricultural Science Complex (NASC), New Delhi, has been mandated to implement provisions of the PPV&FR Act 2001. Fourteen crops, namely rice, wheat, maize, sorghum, pearl millet, chick pea, pegion pea, green gram, black gram, lentil, field pea, kidney bean, cotton and jute were notified for the purpose of registration under the Act. There are plans to extend its operations and coverage to forestry and aromatic and medicinal plants. 8.28 Considering the vital importance of the seeds sector in promoting agricultural growth, it is proposed to replace the existing Seeds Act 1966 by suitable legislation. 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 varietal development and for enhanced investment in research and development (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 would be taken up for consideration by Parliament. Fertilizers 8.29 Chemical fertilizers have played a significant role in the development of the agricultural sector. The per hectare consumption of fertilizers in nutrients terms increased from 105.5 kg in 2005-06 to 128.6 kg in 2008-09. However, improving the marginal productivity of soil still remains a challenge. This requires increased NPK application and application of proper nutrients, based on soil analysis. Fertilizer consumption for the last five years is given in Table 8.8. 8.30 The Government has taken a number of measures to improve fertilizer application in the country. A new scheme, the National Project on Management of Soil Health & Fertility (NPMSF), has been introduced in 2008-09 with a view to setting up of 500 new Soil Testing Laboratories (STLs) and 250 Mobile Soil Testing Laboratories (MSTLs) and strengthening of the existing State STLs for micronutrient analysis. In order to ensure adequate availability of fertilizers of standard quality to farmers and to regulate trade, quality and distribution in the country, fertilizers have been declared an essential commodity as per the Fertilizer Control Order (FCO) 1985 promulgated under Section 3 of the Essential Commodity Act 1955. The procedure for incorporation of new products has been liberalized and simplified to encourage manufacture and use of fortified fertilizers. Eight fertilizers have been specified as fortified fertilizers in FCO 1985. To encourage balanced use of fertilizers, a new concept of customized fertilizers has been introduced. These fertilizers are soil specific and crop specific. Organic fertilizers, namely city-based compost and vermin compost, and bio-fertilizers, namely rhizobium, azotobacter, azospirillum and phosphate solubilizing bacteria, have been recognized and incorporated in FCO 1985. Table 8.8 : Fertilizer consumption in nutrient terms during 2005-06 to 2009-10 (in lakh tonnes) Product 2005 -06 2006 -07 2007 -08 2008 2009-10 -09 (only kharif*) 74.86 41.32 16.07 65.06 33.13 Nitrogenous (N) 127.23 137.73 144.19 150.90 Phosphatic (P) Potassic (K) Total (N+P+K) Per ha Consumption (kg) 52.04 24.13 55.43 23.35 55.15 26.36 203.40 216.51 225.70 249.09 132.25 105.5 111.80 116.80 128.6 - Source : Department of Fertilizers. Note : *Estimated Agriculture and Food Management 187 Irrigation 8.31 Irrigation is one of the most important critical inputs for enhancing the productivity that is required at different critical stages of plant growth of various crops for optimum production. 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 ha in 1991-92 to 102.77 million ha by March 2007. 8.32 The Central Government initiated the Accelerated Irrigation Benefit Programme (AIBP) from 1996-97 for extending 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, Rs 34,783.7823 crore of Central Loan Assistance (CLA)/grant has been released up to March 31, 2009. An additional irrigation potential of 54.858 lakh ha has been created under the AIBP up to March 2009. As on March 31, 2009, 268 projects have been covered under the AIBP and 109 completed. cent of annual rainfall is received during the southwest monsoon season (June-September). During winter (January-February) of 2009, the country as a whole received 46 per cent less rainfall than the LPA. In the pre-monsoon period of 2009 (March-May), rainfall was 32 per cent below the LPA. During the south-west monsoon season of 2009, the country as a whole received 23 per cent less rainfall than the LPA. Central India, north-east India, north-west India and the southern peninsula experienced 20 per cent, 27 per cent, 36 per cent and 4 per cent deficient rainfall respectively. At district level, 9 per cent of districts received excess rainfall, 32 per cent normal rainfall, 51 per cent deficient rainfall and 8 per cent scanty rainfall. South-west monsoon (JuneSeptember, 2009) rainfall for the country as a whole and the four broad geographical regions is given in Table 8.9. 8.34 Out of 36 subdivisions, 23 recorded deficient rainfall during the south-west monsoon in 2009. Out of the remaining 13 subdivisions, only three recorded excess rainfall and the remaining 10 normal rainfall. Out of 526 meteorological districts for which data are available, 215 (41 per cent) received excess/ normal rainfall and the remaining 311 (59 per cent) received deficient/scanty rainfall during the season (Table 8.10). 8.35 During the post-monsoon season (OctoberDecember) of 2009, the country as a whole has received 8 per cent above normal rainfall. Reservoir storage status 8.36 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 2009, the total water availability in these reservoirs was 90.48 BCM which is less than the water availability of 113.74 BCM at the end of RAINFALL Rainfall AND RESERVOIR STORAGE 8.33 Rainfall greatly influences crop production and productivity in a substantial way. More than 75 per Table 8.9 : South-west monsoon season (June to September 2009) rainfall Region All-India North-west India Central India Southern Peninsula North-east India Actual (mm) 689.9 392.1 795.4 692.9 1,037.7 LPA(mm) 892.5 611.7 995.1 722.5 1,427.3 Actual per cent of LPA 77 64 80 96 73 Coefficient of variation(CV) per cent of LPA 10 19 14 15 8 Source: Indian Meteorological Department. 188 Year Economic Survey 2009-10 Table 8.10 : Monsoon performance 2001 to 2009 (June – September) Number of meteorological subdivisions Normal Excess Deficient/ scanty Percentage of districts with normal/ excess rainfall 67 39 77 56 72 60 72 76 41 Percentage of LPA rainfall for the country as a whole 92 81 102 86 99 99 105 98 77 2001 2002 2003 2004 2005 2006 2007 2008 2009 29 14 26 23 23 20 17 30 10 1 1 7 0 9 6 13 2 3 5 21 3 13 4 10 6 4 23 Source : India Meteorological Department. Note: Excess= +20 per cent or more of LPA; Normal=+19 per cent to –19 per cent of LPA; Deficient= -20 per cent to –59 per cent of LPA; Scanty= -60 per cent to –99 per cent of LPA. Table 8.11 : Reservoir storage (at the end of the monsoon season) Item Storage in BCM At the beginning of the monsoon season(as on June 4, 2009) At the end of the monsoon season (as on October 1, 2009) Increase in Storage Source : Central Water Commission 2009 % of FRL 12 60 48 Storage in BCM 29.24 113.74 84.50 2008 % of FRL 19 75 56 Average of last 10 years Storage in BCM 21.02 100.95 79.93 % of FRL 14 67 53 17.50 90.48 72.98 the monsoon in 2008 and the 100.95 BCM which is the average of the last 10 years (Table 8.11). procurement operations with the objective of ensuring that market prices do not fall below the MSPs fixed by the Government. 8.38 The Government decides the support prices for various agricultural commodities after taking into account the recommendations of the Commission for Agricultural Costs and Prices (CACP), the views of State Governments and Central Ministries as well as such other relevant factors as considered important for fixation of support prices. The Government has fixed the MSPs of 2009-10 kharif and rabi crops. The MSPs for paddy (common) and paddy (Grade A) have been raised by Rs 100 per quintal and fixed at Rs 950 per quintal and Rs 980 per quintal respectively. An incentive bonus of Rs 50 per quintal is also payable over and above the MSP of paddy. The MSP of arhar (tur) has been raised over the 2008-09 level by Rs 300 per quintal and fixed at Rs 2,300 per quintal while that of moong PRICE POLICY PRODUCE FOR AGRICULTURAL 8.37 The Government’s price policy for agricultural commodities seeks to ensure remunerative prices to the growers for their produce with a view to encouraging higher investment and production, and to safeguard the interests of consumers by making supplies available at reasonable prices. The price policy also seeks to evolve a balanced and integrated price structure in the perspective of the overall needs of the economy. Towards this end, the Government announces minimum support prices (MSPs) each season for major agricultural commodities and organizes purchase operations through public and cooperative agencies. The designated Central nodal agencies intervene in the market to undertake Agriculture and Food Management Table 8.12 : Minimum support prices 189 (Rs. per quintal) Commodity MSP 2009-10 (crop year) Kharif crops Paddy (common) Paddy (Gr.A) Jowar (Malindi) Maize Arhar (Tur) Moong Cotton (F-414/H-777/J34) Groundnut in shell 950 + Rs. 50 per quintal bonus 980 + Rs. 50 per quintal bonus 860 840 2,300 2,760 2,500a 2,100 Sugarcane Wheat Gram Masur (lentil) Rapeseed / mustard Barley Other crops 129.84b Commodity MSP 2009-10 (crop year) Rabi crops 1,100 1,760 1,870 1,830 750 Source: Department of Agriculture & Cooperation. Notes: a staple length (mm) of 24.5-25.5 and Micronaire value of 4.3-5.1; b Fair and Remunerative Price. has been raised by Rs 240 per quintal and fixed at Rs 2,760 per quintal. The MSP of sesamum has been fixed at Rs 2,850 per quintal, raising it by Rs 100 per quintal. The MSPs of other kharif crops have been retained at their 2008-09 levels. The MSP of wheat has been raised to Rs 1,100 per quintal from Rs 1,080 per quintal and of barley to Rs 750 per quintal from Rs 680 per quintal. The MSPs of gram and safflower have been raised by Rs 30 per quintal each. The MSPs of masur and rapeseed/ mustard have been retained at their previous year’s levels of Rs 1,870 per quintal and Rs1,830 per quintal respectively (Table 8.12). National Agricultural Cooperative Marketing Federation of India Limited (NAFED), which is the Central nodal agency, at the MSP declared by the Government. NAFED is also the Central agency for procurement of cotton under the PSS in addition to the Cotton Corporation of India (CCI). NAFED undertakes procurement of oilseeds, pulses and cotton under the PSS as and when prices fall below the MSP. Procurement under the PSS is continued till prices stabilize at or above the MSP 8.40 During 2009-10 (up to January 4, 2010) NAFED has procured 64,802 metric tonnes of various oilseeds costing Rs 278.07 crore under the PSS (Table 8.13). Price Support Scheme (PSS) 8.39 The Department of Agriculture & Cooperation is implementing the Price Support Scheme (PSS) for procurement of oilseeds and pulses through the Market Intervention Scheme (MIS) 8.41 The Department of Agriculture & Cooperation implements the MIS on the request of State/Union Table 8.13 : Procurement made by NAFED under the PSS during 2009-10 (up to January 4, 2010) Sl. Commodity No. 1. Ball Copra 2. Milling Copra 3. AP Copra 4. Cotton 5. Sunflower Seed TOTAL Source: Department of Agriculture & Cooperation. Crop season Season -2009 Season -2009 Season -2009 Kharif-2009-10 Kharif -2009-10 MSP (Rs per quintal) 4,700 4,450 3,900 2,850 & 3,000 2,215 Quantity procured (in metric tonnes) 1,250 47,916 510 1,408 13,718 64,802 Value (in Rs lakh) 638.38 23,200.92 219.30 405.37 3,343.08 27,807.05 190 Economic Survey 2009-10 Some of the salient features of the revised Scheme are: the practice of allocating funds to States/UTs on historical basis has been replaced by new allocation criteria based on gross cropped area and area under small and marginal holdings; assistance is provided to the States/UTs as 100 per cent grant; the subsidy structure has been rationalized to make the pattern of subsidy uniform under all the schemes implemented by the Department of Agriculture & Cooperation; the revised subsidy norms indicate the maximum permissible limit of assistance. States may either retain existing norms, or increase them to a reasonable level provided that the norms do not exceed the revised upper limits specified; two new components have been added, namely (a) pulses and oilseeds crop production programmes for areas not covered under the Integrated Scheme of Oilseeds, Pulses, Oil palm and Maize (ISOPOM) and (b) Reclamation of Acidic Soil along with the existing component of Reclamation of Alkali Soil; the permissible ceiling for new initiatives has been increased from the existing 10 per cent to 20 per cent of the allocation; at least 33 per cent of the funds is required to be earmarked for small, marginal and women farmers; active participation of all tiers of the Panchayati Raj institutions (PRIs) would have to be ensured in the implementation of the Revised MMA including review, monitoring and evaluation at district/sub-district level. Territory (UT) Governments for procurement of agricultural and horticultural commodities that are generally perishable in nature and not covered under the PSS. The MIS is implemented in order to protect the growers of these commodities from having to make distress sales. In the event of a bumper crop and glut in the market, prices tend to fall below economic levels/cost of production. Procurement under the MIS is made by NAFED as the Central agency and by State-designated agencies. 8.42 During 2009-10, the rates of most of the horticultural crops ruled to the benefit of growers. Thus only a couple of proposals were received, one from the Government of Karnataka for procurement of arecanut and another from the Government of Mizoram for procurement of passion fruit. PROGRESS OF AGRICULTURE-SECTOR SCHEMES/PROGRAMMES 8.43 Agriculture being a state subject, State Governments have an important role and responsibility for increasing agriculture production, enhancing productivity and exploring the vast untapped potential of the sector. Simultaneously, the Central Government must supplement the efforts of State Governments and a number of Centrally sponsored and Central-sector schemes are being implemented for the enhancement of agricultural production and productivity in the country, and to increase the income of the farming community. (i) Macro Management 8.44 The Macro Management of Agriculture Scheme (MMA) was formulated in 2000-01, by bringing together under one umbrella 27 Centrally sponsored schemes relating to cooperatives, crop production programmes, watershed development programmes, horticulture, fertilizer, mechanization and seeds. The Scheme has been revised during 2008-09 to improve its efficacy in supplementing/ complementing the efforts of the States towards enhancement of agricultural production and productivity. The role of the Scheme has been redefined to avoid overlapping and duplication of efforts and to make it more relevant to the present agricultural scenario in the States in order to achieve the basic objective of food security and to improve the livelihood system for rural masses. The Revised MMA comprises 10 sub-schemes relating to crop production and natural resource management. (ii) National Food Security Mission (NFSM) 8.45 With a view to enhancing the production of rice, wheat and pulses by 10 million tonnes, 8 million tonnes and 2 million tonnes respectively by the end of the Eleventh Plan, the Centrally sponsored NFSM has been launched from the rabi 2007-08 season. The three major components of the Mission are NFSM-rice, NFSM-wheat and NFSM-pulses. The Mission aims to increase production through area expansion and productivity enhancement; restore soil fertility and productivity; create employment opportunities; and enhance the farm-level economy to restore confidence of farmers. The NFSM is presently being implemented in 312 identified districts of 17 States of the country. Agriculture and Food Management 8.46 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. 191 (iii) Rashtriya Krishi Vikas Yojana (RKVY) 8.47 The RKVY, a flagship scheme of the Government in the agriculture and allied sectors was launched in August 2007 to reorient current agricultural development strategies to meet the needs of farmers and rejuvenate the agricultural sector so as to achieve 4 per cent annual growth during the Eleventh Five Year Plan. The scheme has an envisaged outlay of Rs 25,000 crore for the Plan period in the form of Additional Central Assistance (ACA). Funds to the tune of Rs 4,133.69 crore were released to the States/UTs during 2007-08 and 200809. For the current year, a sum of Rs 4,100.00 crore has been allocated of which Rs 3,243.76 crore has been released to the States by December 31, 2009. Up to 83 per cent and 85.95 per cent of the allocations for 2007-08 and 2008-09 respectively have been utilized by the end of November 2009. 8.48 During 2008-09, the areas of focus in the agriculture sector were seeds, fertilizers, IPM testing laboratories, horticulture, farm mechanization, extension, crops, marketing and cooperatives. A welcome feature observed during 2008–09 was that States have stepped up activities in the animal husbandry, dairy and fisheries sectors. Further, about 25 per cent of the approved funds was earmarked for projects related to these allied sectors. Besides these, projects related to micro irrigation, agricultural research, watershed and others were also approved. 8.49 Apart from the RKVY, there are many other programmes and policies responsible for growth of agriculture and allied sectors in the States; however, the RKVY is expected to play a major role. The RKVY also incentivizes States to allocate more for agriculture and allied sectors in their plans. The States have indeed stepped up allocation to agriculture and allied sectors. Allocation to agriculture and allied sectors was 5.11 per cent of total State Plan Expenditure in 2006-07. This has gone up to 5.84 per cent in 2008-09 (revised estimates[RE]/Approved). Scheme of Oilseeds, Pulses, Oil Palm and Maize which is being implemented in 14 major States for oilseeds and pulses, 15 States for maize and 8 States for oil palm. About 75-80 per cent area of pulses is already in the NFSM-Pulses districts under 14 States. 8.51 The Oil Palm Development Programme under ISOPOM is being implemented in the States of Andhra Pradesh, Karnataka, Tamil Nadu, Gujarat, Goa, Orissa, Kerala, Tripura, Assam and Mizoram. The year-wise targets and achievements for the period 2007-08, 2008-09 and 2009-10 in respect of area coverage under oil palm through implementation of the Oil Palm Development Programme are given in Table 8.14. Table 8.14 : Targets and achievements in area coverage under oil palm through implementation of the Oil Palm Development Programme Year 2007-08 2008-09 2009-10 Target (ha) 29,580 31,500 16,711 Achievement (ha) 21,330 26,178 9,594 (up to October 2009) Source: Department of Agriculture & Cooperation. 8.52 The area under maize cultivation is 81.80 lakh ha with production of 192.80 lakh tonnes in 200809. About 90 per cent of the maize cultivated in kharif is rainfed. Maize is cultivated mainly for food, fodder, feed and industrial use. Under ISOPOM, the Maize Development Programme is being implemented in 15 States, namely Andhra Pradesh, Bihar, Chhatisgarh, Himachal Pradesh, Jammu &Kashmir, Gujarat, Karnataka, Madhya Pradesh, Maharashtra, Orissa, Punjab, Rajasthan, Tamil Nadu, Uttar Pradesh and West Bengal. (v) National Rainfed Area Authority (NRAA) 8.53 The Government of India has also constituted the NRAA to give focused attention to the problem of rainfed areas of the country. The Authority is an advisory, policymaking and monitoring body charged with examining guidelines in various existing schemes and in the formulation of new schemes including all externally aided projects in this area. Its mandate is wider than mere water conservation and covers all aspects of sustainable and holistic (iv) ISOPOM 8.50 The Ministry of Agriculture has restructured oilseeds, pulses, oil palm and maize development programmes into one Centrally Sponsored Integrated 192 Economic Survey 2009-10 Zonal conferences and a Rabi Campaign Programme with the State Governments were held to enable formulation of an appropriate action plan for the rabi season; Funds were made available under Centrally sponsored programmes like the RKVY, NFSM, NHM, MMA and ISOPOM to enable taking up of an agricultural reconstruction programme. development of rainfed areas, including appropriate farming and livelihood systems approaches. It would also focus on issues pertaining to landless and marginal farmers, since they constitute the large majority of inhabitants of rainfed areas. The NRAA has formulated common guidelines for the Watershed Development Project and is in consultation with all the States for its implementation as per instructions contained in the guidelines. (vi) Drought Management 8.54 During the year 2009-10, drought/scarcity/ drought-like situation has been declared in 334 districts by 14 State Governments. The States have ready availability of funds under the Calamity Relief Fund (CRF) for taking immediate necessary measures in the wake of natural calamities including drought. For natural calamities of severe nature, the State Governments can seek additional assistance from the National Calamity Contingency Fund (NCCF), by submitting a detailed Memorandum with relevant details. Several steps were taken to mitigate the hardship being faced by the States due to the drought situation. Some of the important measures were: States were requested to prepare alternate plans for unsown/germination-failed areas with shortduration/alternate crops; The Diesel Subsidy Scheme was launched to provide supplementary protective irrigation to save the standing crops (50 per cent of the cost of the subsidy with cap of Rs7.50/litre given by the States was borne by the Central Government); Use of Truthfully Labelled (TL) seeds, relaxation of age for seed varieties and distribution of mini kits were allowed under the NFSM, RKVY; Area-specific approach was adopted to achieve higher production through provisioning of inputs like fertilizers, credit and pest control measures in areas with higher rainfall; Agricultural advisories for appropriate crop programmes were telecast/broadcast through the media for the benefit of farmers. Scientists from ICAR institutions, Krishi Vigyan Kendras (KVKs) as well as experts of the National Rainfed Area Authority (NRAA) helped the States in their efforts to counter the impact of deficit rainfall/ drought on agriculture; ALLIED SECTORS Horticulture 8.55 India is a major producer of fruits and vegetables in the world. For the holistic development of the horticulture sector, a Centrally sponsored scheme called the National Horticulture Mission (NHM) was launched in 2005-06. The objectives of the Mission are to enhance horticulture production and improve nutritional security and income support to farm households and others through area-based regionally differentiated strategies. All States and two Union Territories (Andaman & Nicobar Islands and Lakshadweep) are covered under the Mission except the eight north-eastern States including Sikkim and the States of Jammu & Kashmir, Himachal Pradesh and Uttarakhand which are covered under the Technology Mission for Integrated Development of Horticulture in the North Eastern States (TMNE). At present, 344 districts have been included under the NHM. Crops such as fruits, spices, flowers, medicinal and aromatic plants, plantation crops of cashew and cocoa are included for area expansion, whereas vegetables are covered through seed production, protected cultivation, integrated nutrient management/ integrated pest management (INM/ IPM) and organic farming. Under the scheme, 1,710 new nurseries have been set up, an additional area of 8.26 lakh ha has been brought under various horticultural crops and an area of 1.2 lakh ha of old and senile plantations has been rejuvenated. Further, organic farming and Integrated Pest Management programmes have been taken up in 0.76 lakh ha and 4.0 lakh ha respectively. Under the post harvest management component, 898 pack houses, 46 cold storages, 14 refrigerated vans, 7 wholesale markets and 45 rural markets have been set up. The impact of the Mission can be seen in the increasing area and production of fruits and vegetables. 8.56 Under the Technology Mission for Integrated Development of Horticulture in the North Eastern Region during 2008-09, an additional area of 1,48,071 lakh ha has been brought under different horticultural Agriculture and Food Management crops. Further, infrastructure facilities for improving production and productivity of crops such as model nurseries, community tanks, tube wells, greenhouses, model floriculture centres, mushroom units, vermi-compost units, training of farmers/ trainers, training of women and market infrastructure and processing units, which are project based, have also been created. Apart from introduction of improved production technology in traditional crops, a significant contribution of the Mission has been in the promotion of commercial cultivation of potential crops, namely citrus, fruits, banana, pineapple, strawberry, kiwi, apple, passion fruits; anthuriums, roses, liliums, orchids and other cut flowers; and high value vegetable crops. The most remarkable development under the scheme has been the expansion of area under specific crops in the States and in clusters which will facilitate easy marketing access in the future. 8.57 A proposal for implementation of a pilot project for Replanting and Rejuvenation of Coconut Gardens in Thiruvananthapuram, Kollam and Thrissur districts of Kerala and the Union Territory of Andaman & Nicobar Islands has been approved. 193 have been established for supply of quality planting material and 29,831 farmers/entrepreneurs/field functionaries have been trained to raise quality bamboo plantations and in marketing of bamboo produce. So far, the NBM has been concentrating on plantation and related activities; there are plans to extend the Mission to the development of handicraft and marketing of bamboo. The Mission intends to establish 195 bamboo bazaars and 10 retail outlets (showrooms) in different metropolitan cities by the end of 2010-11, to promote marketing of bamboo and its products. Rubber 8.60 India is the fourth largest producer of natural rubber (NR) with an 8.9 per cent share in world production in 2008. The smallholding sector accounted for 89 per cent of rubber planted area and 93 per cent of NR production. Despite not having regions geographically best suited to growing NR, India continued to record the highest productivity in the world with an average yield of 1,867 kg/ha. Productivity is further being improved through the Rubber Plantation Development Schemes in the Eleventh Five year Plan. The Schemes provide subsidy on planting, supply of critical inputs with price concession, assistance for soil and water conservation and generation and distribution of quality planting materials. 8.61 In 2008-09, the estimated export of NR was 46,926 tonnes against an import of 77,616 tonnes. The export of NR is promoted through Export Promotion Schemes, which include participation in international trade fairs, assistance to exporters to participate in trade fairs and, organizing buyer-seller meets. Micro Irrigation 8.58 A Centrally sponsored scheme on micro irrigation (MI) was launched in January 2006 for promoting water-use efficiency by adopting drip and sprinkler irrigation. All States and Union Territories and all horticultural as well as agricultural crops are covered under the scheme. The National Committee on Plasticulture Applications in Horticulture (NCPAH) provides the required technical guidance in association with Precision Farming Development Centres (PFDCs) at 22 locations. The PRIs are involved in selecting the beneficiaries. Since its inception, about 10 lakh ha has been covered under drip and sprinkler irrigation and a sum of Rs 1425.23 crore has been released as Government of India share (40 per cent of the total cost) in the scheme. Coffee 8.62 Among plantation crops, coffee has made significant contribution to the Indian economy during the last 50 years. Indian coffee has created a niche for itself in the international market, particularly Indian Robusta, which is highly sought after for its blending quality. Arabica coffee from India is also well received in the international market. 8.63 In India, coffee is cultivated in an area of around 3.94 lakh ha. The post-monsoon crop estimate for the 2009-10 season is estimated at 2.90 lakh tonnes comprising 0.95 lakh tonnes of Arabica and 1.95 lakh tonnes of Robusta. The current year’s production is about 10.6 per cent more than the previous year’s. National Bamboo Mission (NBM) 8.59 The NBM is a Centrally sponsored scheme with 100 per cent Central assistance. The scheme commenced in 2006-07 and aims at holistic development of the bamboo sector in India. The thrust of the Mission is area-based regionally differentiated strategy for forest and non-forest areas. So far, 1,05,508 ha has been covered under bamboo plantation, 30,167 ha of existing stocks has been treated for productivity improvement, 1,104 nurseries 194 Economic Survey 2009-10 8.66 A major programme for genetic improvement of cattle and buffaloes named 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 with an allocation of Rs 402 crore and Rs 775.9 crore respectively. The NPCBB envisages genetic upgradation and development of indigenous breeds on priority basis. At present, 28 states and one UT are participating in the project. Financial assistance to the tune of Rs 485.73 crore was released to these states up to 2008-09. During the current financial year, Rs 93.31 crore has been released under the scheme to the implementing agencies till December 2009. ANIMAL HUSBANDRY, DAIRYING AND FISHERIES 8.64 The livestock and fisheries sector contributed over 4.07 per cent of the total GDP during 2008-09 and about 26.84 per cent value of output from total agriculture and allied activities. The Eleventh Five Year Plan envisages an overall growth of 6-7 per cent per annum for the sector. In 2008-09, this sector contributed 108.5 million tonnes of milk, 55.6 billion eggs, 42.7 million kg wool and 3.8 million tonnes of meat. The 17th Livestock Census (2003) has placed the total livestock population at 485 million and total of poultry birds at 489 million. The 18th Livestock Census has been conducted throughout the country with the reference date of October 15, 2007, results of which are awaited. 8.65 India ranks first in world milk production, its production having increased from 17 million tonnes in 1950-51 to 108.5 million tonnes by 2008-09. The per capita availability of milk has increased from 112 grams per day in 1968-69 to 258 grams per day in 2008-09, but is still low compared to the world average of 265 grams per day (Table 8.15). About 80 per cent of milk produced in the country is handled in the unorganized sector and the remaining 20 per cent is equally shared by cooperatives and private dairies. Over 1.33 lakh village-level dairy cooperative societies, spread over 265 districts in the country, collect about 25.1 million litres of milk per day and market about 20 million litres. The efforts of the Government in the dairy sector are concentrated in promotion of dairy activities in non-Operation Flood areas with emphasis on building cooperative infrastructure, revitalization of sick dairy cooperatives and federations and creation of infrastructure in the States. Livestock insurance 8.67 A Centrally sponsored scheme for livestock insurance is being implemented in all the States with the twin objectives of providing a protection mechanism to farmers and cattle rearers against loss of their animals due to death and to demonstrate the benefit of livestock insurance to the people. The scheme benefits farmers (large, small and marginal) and cattle rearers having indigenous/crossbred milch cattle and buffaloes. In 2009-10, Rs 23.28 crore has been released up to December 2009 and 13.16 lakh animals have been insured up to 2008-2009. The scheme has been extended from 100 districts to 300 districts from December 2009, covering all States. Poultry 8.68 Poultry continues to play an important role in providing livelihood support and food security, especially to the rural population. India produces more than 55.6 billion eggs per year, with per capita availability of 47 eggs per annum. As per the estimate provided by the Food and Agriculture Organization (FAO) for 2008, the annual chicken meat production in India is around 2.49 million tonnes. The value of exports was around Rs 422 crore during 2008-09. Eggs and poultry are among the cheaper source of animal protein. During 2009-10, a new Centrally sponsored Poultry Development Scheme with an outlay of Rs 150 crore was launched. The scheme, through its Rural Backyard Poultry Development component is expected to cover below poverty line (BPL) sections of the society to help them gain supplementary income and nutritional support. In order to encourage entrepreneurship skills of individuals, a Poultry Venture Capital Fund is also being implemented covering various poultry activities. Table 8.15 : Production and per capita availability of milk Year 1990-91 2000-01 2005-06 2006-07 2007-08 2008-09 Per capita (grams/day) 176 220 241 246 252 258 Milk production (MT) 53.9 80.6 97.1 100.9 104.8 108.5 Source: Department of Animal Husbandry and Dairying. Agriculture and Food Management 195 Livestock health 8.69 Animal wealth in India has increased manifold and animal husbandry practices have also changed to a great extent. With increased trade activity, the chances of ingress of exotic diseases into the country have also increased. With improvement in the quality of livestock through launching of extensive cross- breeding programmes, the susceptibility of this livestock to various diseases, including exotic diseases, has increased. To ensure maintenance of disease-free status and compliance with the standards laid down by the World Animal Health Organization, major animal health schemes and programmes have been initiated. Further, for control of major livestock and poultry diseases, the Government of India provides financial assistance to States/UTs in their efforts to prevent, control and contain animal diseases and also to strengthen veterinary services including reporting of animal diseases. All avian influenza outbreaks reported were effectively controlled and the country was free from avian influenza in October 2009. Control and containment operations for the recent outbreak reported on January 14, 2010 in Khargram block of West Bengal are in full swing. and sustaining the ongoing genetic improvement programme. It is estimated that there is green fodder shortage of about 34 per cent in the country. To increase the availability of fodder, the Department of Animal Husbandry & Dairying is implementing a Centrally sponsored Fodder Development Scheme throughout the country to supplement the efforts of the States. Financial assistance to the tune of Rs 719.76 lakh (up to December 2009) has been provided to the States during 2009-10. A Central Minikit Testing Programme is also being implemented under which minikits of latest high-yielding fodder varieties are distributed free of cost to farmers for their popularization. During the current year (200910) 9.23 lakh minikits have been allotted to the States for distribution to farmers. CREDIT AND INSURANCE Agricultural Credit 8.72 In order to provide adequate and timely credit support from the banking system to farmers for their cultivation needs, including purchase of all inputs, in a flexible and cost-effective manner, the Kisan Credit Card Scheme (KCC) was introduced in August 1998. About 878.30 lakh KCCs have been issued up to November 2009. The Scheme includes a reasonable component of consumption credit and investment credit within the overall credit limit sanctioned. 8.73 From kharif 2006-07, farmers have been receiving crop loans up to a principal amount of Rs 3 lakh, at 7 per cent rate of interest. Additional subvention of 1 per cent will be paid from the current year, as incentive to those farmers who repay shortterm crop loans on schedule resulting in bringing down the rate of interest to 6 per cent per annum. Fisheries 8.70 Fish production increased from 7.1 million tonnes in 2007-08 to 7.6 million tonnes in 2008-09. Fishing, aquaculture and allied activities are reported to have provided livelihood to over 14 million persons in 2006-07 apart from being a major foreign exchange earner (Table 8.16). Feed and fodder 8.71 Adequate availability of feed and fodder for livestock is very vital for increasing milk production Table 8.16 : Production and export of fish Fish production (million tonnes) Year 1990-91 2000-01 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Marine 2.3 2.8 3.0 2.8 2.8 3.0 2.9 2.9 Inland 1.5 2.8 3.4 3.5 3.8 3.8 4.2 4.7 Total 3.8 5.6 6.4 6.3 6.6 6.8 7.1 7.6 Export of marine products Qty (‘000 tonnes) 140 503 412 482 551 612 541 603 Value (Rs crore) 893 6,288 6,087 6,460 7,019 8,363 7,620 8,608 Source: Department of Animal Husbandry & Dairying. 196 Economic Survey 2009-10 and diseases. The scheme is open to all the farmersloanee and non-loanee-irrespective of their size of holding. Loanee farmers are covered on compulsory basis in a notified area for notified crops. For nonloanee farmers, participation in the scheme is on voluntary basis. The scheme envisages coverage of all food crops, oilseeds and annual commercial/ horticultural crops, in respect of which past yield data are available for adequate number of years. The scheme is being implemented by 25 States and two Union Territories. During the period from rabi 19992000 to rabi 2008-09, 1,347 lakh farmers over an area of 2,109 lakh ha have been covered, insuring a sum of Rs 1,48,250 crore. 8.78 The pilot Weather Based Crop Insurance Scheme (WBCIS) is being implemented in 13 States to provide insurance protection to farmers against adverse weather incidences which are deemed to adversely impact crop production. During five crop seasons (from kharif 2007 to kharif 2009), about 21.77 lakh farmers have been covered under the pilot scheme and claims to the tune of about Rs 388 crore have been paid against a premium of about Rs 444 crore. 8.79 The Coconut Palm Insurance Scheme (CPIS) has been launched on pilot basis during 2009-10 in selected areas of Andhra Pradesh, Goa, Karnataka, Kerala, Maharashtra, Orissa and Tamil Nadu. The pilot scheme will continue during 2010-11. To benefit from the scheme, a farmer should have at least 10 healthy nut-bearing palms in the age group 4 to 60 years in contiguous area/plots and to have been enrolled by the State Agriculture/Horticulture Department or Coconut Development Board (CDB) or any other such agency under a rehabilitation/ development/expansion scheme. The Agriculture Insurance Company of India (AIC) which is implementing the scheme is responsible for making payment of all claims within a specified period. The CDB administers the scheme. 8.74 In January 2006, the Government announced a package for revival of short-term Rural Cooperative Credit involving financial assistance of Rs 13,596 crore. The National Agriculture and Rural Development Bank (NABARD) has been designated as the implementing agency for the purpose. States are required to sign memorandums of understanding (MoUs) with the Government of India and NABARD, committing to implementing the legal, institutional and other reforms as envisaged in the revival package. So far twenty-five States have executed MoUs with the Government of India and NABARD. This covers 96 per cent of the primary agricultural credit societies (PACS) and 96 per cent of the Central cooperative banks (CCBs) in the country. As on November 2009, Rs 7,051.75 crore has been released by NABARD as the Government of India share for recapitalization of 37,303 PACS. 8.75 Government is implementing a rehabilitation package for 31 suicide-prone districts in the States of Andhra Pradesh, Karnataka, Kerala and Maharashtra involving financial outlay of Rs 16978.69 crore. An amount of Rs16,953.04 crore has been released under this package till September 2009. For the state of Kerala, the Government is implementing separate packages for the development of the Kuttanad Wetland Eco-System and mitigation of agrarian distress in Idukki district with an outlay of Rs1,840.75 crore and Rs.764.45 crore respectively. 8.76 A debt waiver and debt relief scheme for farmers announced by the Government in the Union Budget 2008-09 is under implementation. Direct agricultural loans disbursed by scheduled commercial banks, regional rural banks and cooperative credit institutions up to March 31, 2007, overdue as on December 31, 2007 and which remained unpaid until February 29, 2008, are eligible for debt waiver or debt relief as the case may be. About 3.68 crore farmers have benefited from the scheme involving debt waiver and debt relief of Rs 65,318.33 crore. Agricultural Insurance 8.77 The frequency and severity of droughts, floods, cyclones and erratic climatic changes accentuate uncertainty and risk in agricultural production and livestock breeding in India. The National Agricultural Insurance Scheme (NAIS) is being implemented since rabi 1999-2000, as part of the strategy for risk management in agriculture with the intention of providing financial support to farmers in the event of crop failure as a result of natural calamities, pests MARKETING AND EXTENSION Agricultural Marketing 8.80 Organized marketing of agricultural commodities has been promoted in the country through a network of regulated markets. Most of the State and Union Territory Governments have enacted legislations (Agriculture Produce Marketing Committee Act) to provide for regulation of agricultural produce markets. There are 7,139 regulated markets in the country as on March 31, 2009. The country Agriculture and Food Management Table 8.17 : Progress of reforms in agricultural markets (APMC Act) as on 31.12.2009 Sl. No. 1. Stage of reforms States/ UTs where reforms to the APMC Act have been undertaken as suggested. Name of State/ Union territory 197 Andhra Pradesh, Arunachal Pradesh, Assam, Chattisgarh, Goa, Gujarat, Himachal Pradesh, Jharkhand, Karnataka, Madhya Pradesh, Maharashtra, Nagaland, Orissa, Rajasthan, Sikkim, Tripura a) b) c) Direct Marketing: NCT of Delhi Contract Farming: Haryana, Punjab and Chandigarh Private Markets: Punjab and Chandigarh 2. States/ UTs where APMC Act has been partially reformed) by amending the APMC Act/ resolution 3. States/ UTs where there is no APMC Act and hence not requiring reforms Kerala, Manipur, Bihar*, Andaman & Nicobar Islands, Dadra & Nagar Haveli, Daman & Diu and Lakshadweep Tamil Nadu 4. States/ UTs where APMC Act already provides for the reforms States/ UTs where administrative action has been initiated for reforms 5. Mizoram, Meghalaya, Haryana, Jammu&Kashmir, Uttarkhand, West Bengal, NCT of Delhi and Pondicherry Note: * APMC Act has been repealed with effect from September 1, 2006. has 20,868 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 the wholesale assembling level. But rural periodic markets in general and tribal markets in particular have remained outside the developmental ambit of the APMC Act. 8.81 The Ministry of Agriculture has formulated a Model Law on agricultural marketing for guidance of and adoption by State Governments. The legislation provides for establishment of private markets/yards, direct purchase centres, consumers’/farmers’ markets for direct sale and promotion of public-private partnership in the management and development of agricultural markets in the country. Provision has also been made in the law for constitution of State Agricultural Produce Marketing Standards Bureaus for promotion of grading, standardization and quality certification of agricultural produce. This would facilitate pledge financing, direct purchasing, forward/ futures trading and exports. Sixteen States/UTs have amended their APMC Acts and the remaining States are in the process of doing so (Table 8.17). APMC Model Rules based on the Model Law are under formulation in consultation with States. Extension reforms 8.82 The Government supports transfer of agricultural technologies and information to the farming community through various initiatives. The Support to State Extension Programmes for the Extension Reforms scheme launched in 2005-06, aims to make the extension system farmer driven and farmer accountable by way of new institutional arrangements for technology dissemination in the form of an Agricultural Technology Management Agency (ATMA) at district level. The ATMA has active participation of farmers/farmer groups, nongovernmental organizations (NGOs), KVKs, PRIs and other stakeholders operating at district level and below. Up to January 2010, 595 districts-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. Since inception, out of a total of 10.19 crore farmer beneficiaries, 25.80 lakh women farmers (25.34 per cent) have participated in various extension activities under the scheme. Further, the Mass Media Support to Agriculture scheme is focusing on the use of Doordarshan infrastructure for providing agriculture-related information and 198 Economic Survey 2009-10 knowledge to the farming community. The other component of the mass media initiative is use of 96 FM transmitters of All India Radio (AIR) to broadcast area-specific agricultural programmes with 30minute radio transmission in the evening, six days a week. The Kisan Call Centres scheme provides the farming community agricultural information through toll-free telephone lines. A country-wide common eleven digit number “1800-180-1551” has been allocated for the Kisan Call Centres . The Agri-clinic and Agri-business Centres Scheme launched in 2002 provides extension services to farmers through agriculture graduates on payment basis by setting up of economically viable self-employment ventures. NABARD monitors the credit support to Agri-clinics through commercial banks. Provision of a creditlinked back-ended subsidy at 25 per cent of the capital cost of the project funded through bank loan as well as full interest subsidy on the bank credit for the first two years has recently been approved under the scheme. The subsidy would be 33.33 per cent in respect of candidates belonging to Scheduled Castes (SC), Scheduled Tribes (ST), women and other disadvantaged sections and those from the north-eastern and hill States. Under the scheme, 19,854 unemployed agriculture graduates have been trained up to December 2009. FOOD MANAGEMENT 8.83 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 the MSP and central issue price (CIP). The nodal agency which undertakes procurement, distribution and storage of foodgrains is the Food Cororation 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 for other welfare schemes of the Government of India. Offtake of foodgrains under the TPDS has been increasing in the last five years and has gone up from 29.7 million tonnes in 2004-05 to 34.8 million tonnes in 2008-09 (Table 8.18). Procurement of foodgrains 8.84 Overall procurement of rice and wheat which was 35.8 million tonnes in 2006-07, increased marginally to 37.6 million tonnes in 2007-08. However, increased MSP along with various other steps taken by the Government has resulted in record wheat procurement of 22.69 million tonnes in 2008-09 and Table 8.18 : Procurement and offtake of wheat and rice (million tonnes) 2004-05 2005-06 2006-07 2007-08 2008-09 April- Dec. 2008-09 2009-10 22.1 22.7 44.8 14.9 8.1 23.0 10.5 6.1 6.4 2.0 0.1 25.1 22.9 25.4 48.3 18.1 14.4 32.4 12.4 12.5 7.4 2.9 0.5 35.8 Procurement of Wheat and Rice under the Central Pool Rice 24.0 26.7 26.3 Wheat Total Rice Wheat Total (A) BPL (Rice+Wheat) APL (Rice+Wheat) AAY (Rice+Wheat) Welfare Scheme (B) Open sales/ Exports (C) Total (A+B+C) 16.8 41.6 16.6 13.1 29.7 17.5 6.7 5.5 10.6 1.2 41.5 14.8 42.4 19.2 12.2 31.4 15.6 8.3 7.4 9.7 1.1 42.1 9.2 35.8 21.2 10.4 31.6 14.2 8.7 8.7 5.1 0.0 36.7 26.3 11.1 37.6 22.6 10.9 33.5 15.1 9.0 9.4 3.9 0.02 37.4 32.8 22.7 55.5 22.2 12.6 34.8 15.7 9.6 9.5 3.4 1.2 39.5 Offtake of Wheat and Rice for the TPDS Offtake of Wheat and Rice for Other Schemes Source: Department of Food and Public Distribution. Agriculture and Food Management Table 8.19 : Procurement of rice (marketing year-wise) Qty (lakh tonnes) State/UT A & N Islands Andhra Pradesh Assam Bihar Chandigarh Chhattisgarh Delhi Gujarat Haryana Himachal Pradesh J&K Jharkhand Karnataka Kerala Madhya Pradesh Maharashtra Nagaland Orissa Pondicherry Punjab Rajasthan Tamil Nadu Uttar Pradesh Uttaranchal West Bengal Total 2006-07 53.28 4.76 0.1 28.65 17.77 0.05 0.22 1.51 0.74 0.97 20.02 0.07 78.29 0.1 10.77 25.59 1.76 6.42 251.07 2007-08 74.17 5.12 0.09 27.43 0.19 15.72 0.19 0.18 1.68 0.69 1.6 23.38 0.06 79.08 0.19 9.68 28.91 1.47 15.08 284.91 2008-09 90.61 0.03 10.83 0.10 28.48 14.25 0.06 1.35 1.07 2.37 2.45 2.61 27.90 0.07 85.53 0.11 11.99 36.87 3.49 16.67 336.84 2006-07 21.22 1.90 0.04 11.41 7.08 0.02 0.09 0.60 0.29 0.39 7.97 0.03 31.18 0.04 4.29 10.19 0.70 2.56 100 Percentage share 2007-08 0.00 26.03 0.00 1.80 0.03 9.63 0.07 5.52 0.07 0.06 0.59 0.24 0.56 8.21 0.02 27.76 0.07 3.40 10.15 0.52 5.29 100 199 2008-09 26.90 0.01 3.22 0.03 8.46 4.23 0.02 0.4 0.32 0.7 0.73 0.77 8.28 0.02 25.39 0.03 3.56 10.95 1.04 4.95 100 Source: Department of Food & Public Distribution 25.38 million tonnes in 2009-10 (April to December). As regards rice, the procurement in 2008-09 was 32.8 million tonnes and 22.9 million tonnes in 200910 (April – December). The record procurement of rice and wheat during 2007-08, 2008-09 and 200910 (April December) has resulted in comfortable foodstock availability to meet the TPDS needs and buffer stocks norms. 8.85 As in earlier years, procurement of foodgrains by the FCI continues to be higher in the States of Punjab, Haryana, Uttar Pradesh and Andhra Pradesh. These four States accounted for nearly 69.7 per cent of the rice procured for the Central Pool in 2006-07, 69.46 per cent in 2007-08 and 67.47 per cent in 2008-09 (Table 8.19). 8.86 Punjab and Haryana which accounted for 91.1 per cent of procurement of wheat for the Central Pool in 2007-08, accounted for 66.88 per cent in 2008-09 and 69.53 per cent in 2009-10, indicating an increased share in procurement by other states (Table 8.20). 8.87 The overall procurement of coarse grains in the kharif marketing season (KMS) 2008-09 has increased to 13.75 lakh tonnes due to a substantial increase in MSPs of coarse grains in KMS 2008-09 (Table 8.21). Decentralized Procurement Scheme (DCP) 8.88 A number of states have opted for implementation of the (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 CIPis 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 reducing transportation costs. Food 200 Economic Survey 2009-10 Table 8.20 : Procurement of wheat (marketing year-wise) State/UT 2007-08 Bihar Haryana Himachal Pradesh Madhya Pradesh Punjab Rajasthan Uttaranchal Uttar Pradesh Chandigarh Delhi Gujarat Maharashtra Jharkhand J&K Total 0.08 33.5 0.57 67.81 3.83 0.02 5.46 111.27 Qty (lakh tonnes) 2008-09 5 52.31 24.1 99.39 9.35 0.85 31.37 0.1 0.07 4.15 0.1 0.02 0.01 226.82 2009-10 4.97 69.24 0.01 19.68 107.25 11.52 1.45 38.82 0.12 0.57 253.82 2007-08 0.07 30.11 0.51 60.94 3.44 0.02 4.91 100 Percentage share 2008-09 2.20 23.06 10.63 43.82 4.12 0.37 13.83 0.00 0.00 1.83 0.04 0.01 100.00 2009-10 1.96 27.28 7.75 42.25 4.54 0.57 15.29 0.05 0.22 100.00 Source: Department of Food & Public Distribution. Table 8.21 : Details of coarse grain procurement during last four years and the current KMS (lakh tonnes) Year 2005-06 2006-07 2007-08 2008-09 2009-10 (till Dec. 2009) Procurement 11.50 0.002 2.03 13.75 0.80 subsidy released to various States under DCP operations from 2007-08 is given in Table 8.22. 8.89 In the case of rice, States under DCP operations have shown a healthy trend of increasing procurement. In KMS 2007-08, rice procurement in DCP States was 107.83 lakh tonnes as against 94.7 lakh tonnes in KMS 2006-07. In KMS 2008-09, rice procurement by DCP States was 128.84 lakh tonnes (Table 8.23). 8.90 In the case of wheat, however, the procurement in DCP States, particularly Uttar Pradesh and Madhya Pradesh, was rather low in rabi marketing Source : Department of Food & Public Distribution. Table 8.22 : Food subsidy released to various States under DCP operations from 2007-08 (Rupees crore) State/UT Madhya Pradesh Uttar Pradesh West Bengal Chhattisgarh Uttaranchal Tamil Nadu Orissa Kerala Karnataka Total 2007-08 41.596 1,625.618 269.020 621.000 68.650 272.210 503.480 97.840 0.590 3,500.00 2008-09 1,101.810 2,875.640 657.400 842.830 98.050 592.240 724.820 31.190 0.000 6,923.98 2009-10* 882.620 3,978.170 901.210 655.610 180.400 524.420 727.800 224.270 0.000 8,074.50* Source: Department of Food & Public Distribution. * as on December 29, 2009. Agriculture and Food Management Table 8.23 : Procurement of rice in DCP States (in lakh tonnes) State Chhattisgarh Karnataka Kerala Orissa Tamil Nadu Uttar Pradesh Uttranchal West Bengal A&N Islands Total KMS 2002-03 12.9 8.9 1.1 13.6 2.3 1.3 40.1 KMS 2003-04 23.7 13.7 2.1 25.5 3.2 9.3 Neg. 77.5 KMS 2004-05 28.4 0.2 0.3 15.9 6.5 29.7 3.2 9.4 Neg. 93.6 KMS 2005-06 32.7 0.5 0.9 17.9 9.3 31.5 3.4 12.8 109.0 KMS 2006-07 28.6 0.2 1.5 19.9 10.8 25.5 1.8 6.4 94.7 KMS 2007-08 27.43 0.18 1.70 23.38 9.68 28.91 1.47 15.08 0.0 107.83 201 KMS 2008-09 28.48 1.07 2.37 27.90 11.99 36.87 3.49 16.67 0 128.84 Source: Department of Food & Public Distribution. Neg. : below 500 tonnes. seasons (RMS) 2006-07 and 2007-08, primarily due to aggressive purchases by private companies on expectation of higher market prices, lower rates of taxes and levies compared to Punjab and Haryana and proximity to markets in southern and western states of the country. However, there was record procurement of wheat in RMSs 2008-09 and 200910 (Table 8.24). wheat against buffer norms of 11.8 million tonnes and 8.2 million tonnes respectively. This is adequate to meet the requirements under the TPDS and welfare schemes during the current financial year (Table 8.25). Economic cost of foodgrains to the FCI 8.92 The economic cost of foodgrains consists of three components, namely MSP (and bonus) as the price paid to farmers, procurement incidentals and the cost of distribution. The economic cost for both wheat and rice witnessed a significant increase during the last three years due to increase in MSPs. The economic costs of wheat and rice for 2009-10 (budget estimates[BE]) are estimated at Rs1,504.39 per quintal and Rs1,893.71 per quintal respectively (Table 8.26). The FCI is reimbursed the difference between the economic cost of foodgrains and the issue price in the form of food subsidy. It has been pointed out that the high incidence of taxes and levies of over 10 per cent ad valorem on the procurement of foodgrains in the major processing States of Punjab, Haryana and Andhra Pradesh increases the Buffer stock 8.91 The stock of foodgrains in the Central Pool at 15.7 million tonnes as on April 1, 2006 was marginally lower than the minimum buffer norm of 16.2 million tonnes. This increased to 17.9 million tonnes on April 1, 2007. The stock position as on April 1, 2008 was 19.6 million tonnes. The stock position of foodgrains as on April 1, 2009 was 35.0 million tonnes comprising 21.6 million tonnes of rice and 13.4 million tonnes of wheat against the buffer norm of 12.2 million tonnes and 4.0 million tonnes respectively. The stock position of foodgrains as on January 2010 is 47.4 million tonnes comprising 24.3 million tonnes of rice and 23.1 million tonnes of Table 8.24 : Procurement of wheat in DCP States (in lakh tonnes) State Uttar Pradesh Madhya Pradesh Uttarakhand Gujarat Total RMS 2002-03 21.1 4.3 1.8 0.0 27.2 RMS 2003-04 12.1 1.9 0.7 0.0 14.7 RMS 2004-05 17.4 3.5 0.6 0.0 21.5 RMS 2005-06 5.6 4.8 0.4 0.0 10.8 RMS 2006-07 0.5 Neg. Neg. 0.0 0.5 RMS 2007-08 5.5 0.6 Neg. 0.0 6.1 RMS 2008-09 31.37 24.09 0.85 4.15 60.46 RMS 2009-10 38.82 19.68 1.45 0.57 60.52 Source: Department of Food & Public Distribution. Neg. : below 500 tonnes. 202 Economic Survey 2009-10 Table 8.25 : Stock position of wheat and rice in the Central pool vis-à-vis minimum buffer norms (in lakh tonnes) WHEAT AS ON Minimum buffer norms Actual stock RICE Minimum buffer norms Actual stock TO TA L Minimum buffer norms Actual stock January April July October January April July October January April July October January April July October January April July October January April July October January 2004 2005 2006 2007 2008 2009 2010 84 40 143 116 84 40 171 110 82 40 171 110 82 40 171 110 82 40 171 110 82 40 171 110 82 126.87 69.31 191.52 142.23 89.31 40.66 144.54 102.90 61.88 20.09 82.07 64 .12 54.28 47.03 129.26 101.21 77.12 58.03 249.12 220.25 182.12 134.29 329.22 284.57 230.92 84 118 100 65 84 122 98 52 118 122 98 52 118 122 98 52 118 122 98 52 118 122 98 52 118 117.27 130.69 107.63 60.92 127.63 133.41 100.71 48.49 126.41 136.75 111.43 59.70 119.77 131.72 109.77 54.89 114.75 138.35 112.49 78.63 175.76 216.04 196.16 153.49 243.53 168 158 243 181 168 162 269 162 200 162 269 162 200 162 269 162 200 162 269 162 200 162 269 162 200 244.14 200.00 299.15 203.15 216.94 174.07 245.25 151.39 188.29 156 .84 193.50 123.82 174.05 178.75 239.04 156.10 191.87 196.38 361.61 298.88 357.88 350.33 525.38 438.06 474.45 Source: Department of Food & Public Distribution. economic costs, which have a direct bearing on market prices. Further, expenditure incurred by the FCI on payment of Dami/Arthia charges, as per statutory notifications issued by some States, notably Punjab, Haryana, Uttar Pradesh and Rajasthan, also gets reflected in the economic costs. the last five years and has gone up from 29.7 million tonnes in 2004-05 to 34.8 million tonnes in 2008-09. Food subsidy 8.94 Provision of minimum nutritional support to the poor through subsidized foodgrains and ensuring price stability in different States are the twin objectives of the food security system. In fulfilling its obligation towards distributive justice, the Government incurs food subsidy. While the economic cost of wheat and rice has gone up continuously, the issue price has been kept unchanged since July 1, 2002. The Government, therefore, continues to provide large amount of subsidy on foodgrains for distribution under the TPDS, other nutrition-based welfare schemes and open market operations (Tables 8.27 and 8.28). Offtake of foodgrains from the Central Pool 8.93 The offtake of foodgrains is primarily under the TPDS and other welfare schemes of Government of India. Under the TPDS, allocation is made on a scale of issue which is 35 kg per family for BPL and AAY(Antayodaya Anna Yojana) categories and the allocation is variable based on foodgrains availability for the above poverty line (APL) category. Offtake of foodgrains under the TPDS has been increasing in Agriculture and Food Management Table 8.26 : Economic cost of rice and wheat 203 (Rs/quintal) Year Rice Procurement Incidentals Distribution Cost Economic Cost$ 2002-03 2003-04 61.67 157.72 30.68 214.52 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 58.48 256.51 21.25 281.37 193.66 289.58 191.81 331.81 268.02 294.67 289.00 245.66 1,165.03 1,236.09 1,303.59 1,350.67 1,391.18 1,563.70 1,789.78 1,893.71 Per Cent Increase over Previous Year Procurement Incidentals Distribution Cost Economic Cost Wheat Procurement Incidentals Distribution Cost Economic Cost $$ -7.69 31.85 6.14 137.63 145.51 884.00 -50.25 36.01 6.10 90.61 19.57 5.46 -63.66 9.69 3.61 163.67 226.96 * 6.83 4.51 180.15 269.36 9.30 9.39 11.32 163.47 282.76 2.06 5.16 8.12 198.87 228.54 7.83 -16.63 5.81 212.84 182.95 138.20 182.74 169.69 222.80 918.69 1,019.01 1,031.51 1,177.78 1,353.24 1,392.68 1,402.51 Per Cent Increase over Previous Year Procurement Incidentals Distribution Cost Economic Cost Notes: $ $$ * 2.19 14.88 3.64 0.41 16.63 3.92 32.23 31.30 10.92 -10.44 1.87 1.23 9.60 23.45 17.73 -1.98 1.28 11.06 16.40 3.25 8.17 7.02 -19.94 0.70 Weighted average of common and grade ‘A’ rice taken together Due to increase in MSP from Rs1,000 per quintal to Rs1,080per quintal, the economic cost was revised to Rs1,504.39 per quintal. As per quick estimates made by FCI on May 18, 2009. For rice, from 2006-07, in the procurement incidentals weightage of levy rice incidentals is also being taken. Table 8.27 : Trends in MSP and CIP (Rs/quintal) Marketing season 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 CIP MSP Wheat Paddy 620 a 530 a 630 550 640 560 650 b 570 750 d 580 c 1,000 645 e 1,080 850 f 1,100 950 g APL 610 610 610 610 610 610 610 610 Wheat BPL 415 415 415 415 415 415 415 415 AAY 200 200 200 200 200 200 200 200 APL 795 795 795 795 795 795 795 795 Rice BPL 565 565 565 565 565 565 565 565 AAY 300 300 300 300 300 300 300 300 Source: Ministry of Agriculture. Notes: a One-time special drought relief of Rs20 per quintal was given in the case of paddy over and above the existing MSP and Rs10 per quintal for wheat. b An incentive bonus of Rs50 per quintal over the MSP given for wheat procured in RMS 2006-07 during the period 20.3.06 to 30.6.06. c An incentive bonus of Rs40 per quintal over the MSP allowed for paddy procured in KMS 2006-07 till 31.3.2007. Applicability of bonus was extended up to 30.9.2007 for the states of Andhra Pradesh, Tamil Nadu, Orissa, West Bengal and Chhattisgarh. For Bihar and Kerala, it was extended up to 31.5.2007. d An incentive bonus of Rs 100 per quintal over the MSP given for wheat procured in RMS 2007-08. e An incentive bonus of Rs 100 per quintal over the MSP allowed for paddy/rice procured in the entire KMS 2007-08. f An incentive bonus of Rs50 per quintal allowed over the MSP of paddy for KMS 2008-09. g An incentive bonus of Rs50 per quintal allowed over the MSP of paddy for KMS 2009-10. 204 Economic Survey 2009-10 Table 8.28 : Quantum of food subsidies released by Government Year Food subsidy* (Rs crore) 1999-2000 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 9,200.00 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 46,906.68 Annual growth (per cent) 5.75 30.54 45.66 38.20 4.07 2.33 -10.39 3.28 31.19 39.69 7.42 Sugar 8.97 Sugar production in India is cyclical in nature. High production of sugar in the 2006-07 and 200708 sugar seasons (October- September) was followed by low production in the 2008-09 sugar season. The production in the current sugar season 2009-10 is also expected to be low as compared to sugar seasons 2006-07 and 2007-08. The estimated production of sugar seasons 2006-07 and 2007-08 was 282 lakh tonnes and 263 lakh tonnes respectively, whereas the production of sugar in the 2008-09 sugar season is estimated at 146.8 lakh tonnes. Thus the production of sugar in the 2008-09 sugar season declined by about 116.2 lakh tonnes, which put pressure on prices. 8.98 The estimated sugarcane production as per the first advance estimates 2009-10 is 2,494.81 lakh tonnes against a production of 2,739.31 lakh tonnes as per the fourth advance estimates 2008-09. There is, therefore, decline in the production of sugarcane of about 9 per cent in the current year compared to last year. The production of sugar in the 2009-10 sugar season is estimated to be about 160 lakh tonnes. The Government has accordingly taken a number of measures to augment domestic stocks of sugar and also to moderate prices. This, inter alia, includes allowing sugar mills to import dutyfree raw sugar on ton to ton basis under the advance authorization scheme with effect from February 17, 2009, which effectively implies meeting their export obligation two-three years later; allowing import of raw sugar at zero duty under open general licence (OGL) by sugar mills up to December 31, 2010; allowing import of white/refined sugar by STC/MMTC/ PEC and NAFED up to 1 million tonnes under OGL at zero duty up to March 31,2010. Furthermore, the duty-free import of white/refined sugar under OGL has been opened to other Central/ State government agencies and to private trade in addition to existing designated agencies and levy obligation in respect of all imported raw sugar and white/ refined sugar has been removed. 8.99 Apart from measures taken to augment supplies, stockholding and turnover limits have been imposed in March 2009 in order to moderate prices of sugar. Further, even khandsari sugar units have been brought under the ambit of stockholding and turnover limits. Stockholding limits of not holding stocks exceeding fifteen days of the requirement on large consumers of sugar who are using or consuming more than 10 quintals of sugar per month have been * Figures up to December 29,2009. Department of Food & Public Distribution. Allocation under the TPDS 8.95 Allocations of foodgrains for BPL and AAY categories are made at the rate of 35 kg per family per month for all accepted 6.52 crore families in the country. The total BPL and AAY allocations made during 2009-10 were 276.77 lakh tonnes comprising 181.05 lakh tonnes of rice and 95.72 lakh tonnes of wheat. Allocations under the APL category are made depending upon the availability of stocks of foodgrains in the Central Pool and past offtake. Presently, these allocations range between 10 kg and 35 kg per family per month in different States/UTs. During 2009-10, 197.17 lakh tonnes of foodgrains has been allocated to States/UTs under the APL category as against 112 lakh tonnes during 2008-09. Open Market Sale Scheme 8.96 In order to check inflationary trends in the food economy, the Government took a decision in August 2008 to release wheat into the open market under the Open Market Sales Scheme (Domestic). These releases have been made through (a) allocation to State/UT Governments for distribution to retail consumers; and (b) sale to bulk consumers by the FCI through open tenders. The release of wheat under the OMSS has helped stabilize wholesale prices of wheat. Agriculture and Food Management imposed. Futures trade in sugar in domestic exchanges has also been suspended in May 2009 till September 2010. 8.100 The concept of satutory minimum price in the case of sugarcane has been replaced by fair and remunerative price (FRP) which is to be uniformly applicable to all States to provide reasonable margins to sugarcane farmers on account of “risk” and “profit”. The amendments to the Sugarcane (Control) Order 1966, have come into force from October 22, 2009. For the 2009-10 sugar season, the Central Government has fixed an FRP of Rs129.84 per quintal linked to a basic recovery rate of 9.5 per cent subject to a premium of Rs1.37 for every 0.1 percentage increase in recovery above that level. 205 per kg on imported oil up to 10 lakh tonnes and has been extended till October 31, 2010. COMMODITY FUTURES MARKET Commodity futures market 8.102 Commodities traded on the commodity futures market during 2009 included a variety of agricultural commodities, bullion, crude oil, energy and metal products. Several new commodities were introduced for futures trading in 2009, such as almond, imported thermal coal, carbon credits and platinum. The commodity futures market facilitates the price discovery process and provides price risk management. Its effectiveness depends on the wider participation of all the stakeholders. The average daily value of trades in the commodity exchanges improved from Rs 16,400 crore during 2008 to Rs 23,200 crore in 2009. Agricultural commodities, bullion and energy accounted for a large share of the commodities traded in the commodities futures market. The total value of trades in the commodity futures market rose from Rs 50.34 lakh crore in 2008 to Rs 70.90 lakh crore during 2009. The Multi Commodity Exchange, Mumbai, recorded the highest turnover in terms of value of trade during 2009, followed by the National Commodity & Derivatives Exchange Ltd. (NCDEX) and National Multi Commodity Exchange of India Ltd. (NMCE) respectively (Table 8.30). 8.103 During the year 2009-10(up to December 2009), value of trade in agricultural commodities was about 16.33 per cent. Agricultural commodities, however, accounted for 38 per cent of the total volume of trade. In value terms, bullion accounted for the maximum share of commodity groups followed by energy and metals (Table 8.31). Edible Oils 8.101 Estimated production of oilseeds and net availability of edible oils from all domestic sources are given in Table 8.29. In order to increase the availability and control prices of edible oils, Government has reduced the custom duties on crude and refined edible oils to “nil” and 7.5 per cent respectively since April1, 2008. It has been decided that this duty structure would continue till September 30, 2010. Export of all major edible oils from the country has been banned since March 17, 2008 up to 30.9.2010 (except coconut oil through Cochin Port and certain oils with minor forest origins). The tariff values on edible oils have been frozen in 2006. The Government had 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 oils were distributed through State Governments/UTs at the rate of 1 kg per ration card per month. The scheme continues in the current year (2009-10) with a subsidy of Rs 15 Table 8.29 : Production of oilseeds and net availability of edible oils (in lakh tonnes) Oil year (Nov.-Oct.) Production of Oilseeds* Net availability of edible oils from all domestic sources** 86.54 85.98 82.00 Import of edible oils Total availability/ consumption of edible oils (from domestic & imports sources) 135.57 153.18 183.00 Total estimated requirement/ demand for edible oil 127.57 132.80 138.18 2007-08 2008-09 2009-10 (Estimated) 297.56 281.57 255.09 49.03# 67.20# 101.00** Source : * Ministry of Agriculture; ** Directorate of Vanaspati, Vegetable Oils & Fat (Nov.-Oct.); # DGCI&S, Kolkata (Financial Year). 206 Economic Survey 2009-10 with commodity exchanges to promote participation of farmers. The FMC also undertook several regulatory initiatives to prevent market manipulation and ensure market integrity, financial integrity and customer protection. Major policy developments initiated by the FMC included the issuance of guidelines for bringing members of the commodity exchanges under the purview of the Money Laundering Act and guidelines for divestment of the equity by the existing national exchanges after five years of their operation. A price dissemination project was initiated by the FMC, under which spot and future prices of agricultural commodities would be made available to farmers on real-time basis on electronic price ticker boards placed at Agriculture Produce Marketing Committee. Table 8.30 : Turnover on commodity futures markets (Rs crore) Name of the exchange Multi Commodity Exchange, Mumbai National Commodity and Derivatives Exchange, Mumbai National Multi Commodity Exchange Ahmedabad Others Total Calendar year 2007 2008 2009 27,30,415 42,84,653 59,56,656 7,74,965 6,28,074 8,05,720 25,056 37,272 1,95,907 1,24,051 83,885 1,32,173 36,54,487 50,33,884 70,90,456 8.104 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 broad-base the market. The participation of physical market participants, especially farmers, as hedgers, to counterbalance the speculative element in price discovery and increasing the awareness level of farmers and other market participants was emphasized. The Commission undertook various regulatory measures to facilitate hedgers’ participation and promote delivery in agricultural commodities, such as introduction of Exchange of Futures for Physicals (EFP) and Alternate Futures Settlement Mechanism, allowing higher position limits to NAFED to facilitate hedging and delivery by them and introduction of early delivery system in select commodities. In addition, efforts were made to develop an “aggregation” model in collaboration Restoration of futures trade – chana, soy oil, rubber, potato and wheat 8.105 The year 2009 began on an optimistic note for the commodity futures market with the revocation of suspension of futures trading in four of the eight commodities, namely chana, soy oil, rubber and potato, in December 2008. This was followed by the revocation of suspension of trading in wheat in May 2009. However, futures trading in sugar has been suspended till September 30, 2010. Agriculture commodity futures staged a remarkable recovery after steady decline over the last two years, recording a trading value of Rs 10.88 lakh crore in 2009, signifying growth of 48 per cent over the previous year. During the year, a new National Commodity Exchange called Indian Commodity Exchange (ICEX) became operational. Besides, a scheme of upgradation of Ahmedabad Commodity Exchange to National Commodity Exchange status has been approved. Table 8.31 : Trade in commodity futures market (volume in lakh tonnes and value in Rs crore) 2007-08 Name of the commodity Volume Value 2008-09 Volume Value 2009-10 Volume Value Agricultural Commodities Bullion Metals Energy Other Total 3,139.03 9,41,283.33 2,309.35 4.19 436.17 3,938.17 175.62 6,863.49 6,27,303.14 29,73,674.60 6,18,775.61 10,26,442.05 2,760.78 52,48,956.18 2,910.05 9,02,209.31 3.46 17,25,952.45 448.46 1,976.22 6.25 8,97,714.34 5,00,942.14 97.22 3.36 22,10,133.08 644.89 11,78,237.54 4,088.36 12,32,612.60 2.12 3,103.36 5,573.41 40,65,989.47 7,648.79 55,26,295.90 Agriculture and Food Management 207 DEVELOPMENT EXCHANGES OF ELECTRONIC SPOT 8.106 The Government has allowed the National Commodity Exchanges to set up three spot exchanges in the country, namely the National Spot Exchange Ltd. (NSEL), NCDEX spot Exchange Ltd. (NSPOT) and National Agriculture Produce Marketing Company of India Ltd. (NAPMC). During 2009, there was significant expansion of spot exchanges’ trading facilities in India. These spot exchanges have created an avenue for direct market linkage among farmers, processors, exporters and end users with a view to reducing the cost of intermediation and enhancing price realization by farmers. They will also provide the most efficient spot price inputs to the futures exchanges. The spot exchanges will encompass the entire spectrum of commodities across the country and will bring home the advantages of an electronic spot trading platform to all market participants in the agricultural and nonagricultural segments. On the agricultural side, the exchanges would 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. These Spot Exchanges will also provide a platform for trading of Warehouse Receipts. ensure that productivity levels are increased in the shortest time possible. Special attention may be required for States with relatively low productivity. 8.109 Production and productivity in pulses and oilseeds are of growing concern. A sizeable proportion of these items is met through imports. The scope for import of pulses is limited due to the limited number of countries producing it. Due to this supplydemand gap domestic prices fluctuate with availability and prices in the international market apart from the impact of domestic production trends. 8.110 Consistent decline in the share of privatesector investment in the agriculture sector is a matter of concern. This trend needs to be reversed through creation of a favourable policy environment and availability of credit at reasonable rates on time for the private sector to invest in agriculture. 8.111 There has been substantial increase in MSPs of various crops over the last few years. This is considered necessary to incentivize the 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 agricultural producers and consumers simultaneously poses a challenge. Further, inability of a large number of small and marginal farmers to directly access the agrimarket puts a question mark on increases in MSP actually benefiting such farmers. 8.112 Record procurement of rice and wheat in the last few years has helped to 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. This puts a lot of stress on the fiscal system. The issue of efficient food stocks management and offloading of stocks in time needs urgent attention. 8.113 Studies indicate adverse impact of climate change on agriculture. Crop improvement and research to develop drought-resistant, high-yielding varieties of seeds assumes importance with a view to combating adverse impact of drought on food production and to ensure food security. 8.114 To sum up, we need to address the challenges of the agriculture sector through comprehensive and coordinated efforts. Renewed attention needs to be paid to improving farm production and productivity, better utilization of agricultural inputs, proper marketing infrastructure and support, stepping up investment in agriculture with due emphasis on environmental concerns and efficient food management. CHALLENGES AND OUTLOOK 8.107 The country has been able to manage one of the most deficient monsoons with concerted efforts of the State Governments and the Centre. Several incentives and concessions allowed to farmers by the States and the Central Government resulted in minimizing the loss in kharif production and maximizing rabi production. Part of the loss in kharif production is expected to be made up in the rabi season. The sector, however, faces various challenges which need to be addressed sooner than later. 8.108 Although the yield per hectare of foodgrains has shown some improvement in recent years it is not significant enough to cater to the needs of the rising population particularly when income levels are also rising. Since farm productivity is not showing desirable growth there is urgent need to focus on research as well as better agricultural practices to Industry ndustry, especially manufacturing, was one of the key drivers of the transformation in the growth trajectory of the Indian economy witnessed during the post-2000 period. However, a cyclical slowdown began in the industrial sector in 2007-08 and was compounded by the twin global shocks in 2008-09. The effects lingered on briefly in the current fiscal, but growth rebound is now amply evident. Gross domestic product (GDP) growth has clearly revived in the second quarter of the current year and the industrial sector has emerged as one of the prime movers of the process. CHAPTER 9 I 9.2 The recovery in the industrial sector is clearly discernible as corroborated by both the data on national accounts and the index of industrial production (IIP). The downward trend observed in the rate of growth of the IIP that spanned almost eight quarters (beginning the first quarter of 200708 and continuing through to the last quarter of 200809) stands reversed as gleaned from the latest data for the current fiscal. After reaching a trough of 0.6 per cent during the second half of 2008-09, growth in the IIP revived to a level of 7.7 per cent during April-November 2009-10. 9.3 The broad-based nature of the recovery was evident in the pick-up in growth of almost all major components of the IIP (Table 9.1). With the exception Table 9.1 : Growth in the IIP and its major components (per cent) Period 2006-07 Q1 2007-08 Q2 2007-08 Q3 2007-08 Q4 2007-08 Q1 2008-09 Q2 2008-09 Q3 2008-09 Q4 2008-09 Q1 2009-10 Q2 2009-10 Oct-Nov. 09 Mining 5.4 2.7 7.4 5.5 5.2 4.0 3.8 2.0 0.9 6.8 9.0 9.5 Manufacturing 12.5 11.1 8.9 8.9 7.3 5.8 4.9 0.5 0.3 3.4 9.3 11.9 Electricity 7.2 8.3 7.1 4.6 5.5 2.0 3.2 2.9 3.0 6.0 7.5 4.0 IIP 11.6 10.3 8.7 8.3 7.0 5.3 4.7 0.8 0.5 3.8 9.1 11.0 Source : Central Statistical Organisation (CSO). Industry Figure 9.1 25 21.7 20 15 209 Growth (per cent) in the IIP and its major components Growth in Apr-Nov 08 Per cent 11.4 10 5 0 -0.7 -5 Mining Manufacturing Electricity Basic goods Capital goods Intermediates Durables Non-durables IIP 8.3 3.4 4.2 2.8 7.7 6.1 3.6 6.1 8.4 7.0 5.1 1.1 7.3 4.1 7.6 Growth in Apr-Nov 09 of consumer non-durables, while all the use-based industrial groups subsumed under the IIP have recovered from slump, it was the consistently increasing growth in consumer durables and intermediate goods that drove the industrial revival (Figure 9.1). 9.4 The continuing downward movement in capital goods and consumer non-durables, and to an extent basic goods, suggests that their current rate of growth is significantly below the pre-2007-08 levels and that fuller recovery requires a broader anchor (Figure 9.2). Figure 9.2A 12 10 Growth in IIP and its use-based categories (in per cent): Basic goods Growth in basic goods Trend line Per cent 8 6 4 2 0 Oct-Nov Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2006-07 2007-08 2008-09 2009-10 Year Figure 9.2B 30 25 Growth in IIP and its use-based categories (in per cent): Capital goods Growth in capital goods Trend line Per cent 20 15 10 5 0 Oct-Nov Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2006-07 2007-08 2008-09 2009-10 Year 210 Economic Survey 2009-10 Figure 9.2C 20 15 Growth in IIP and its use-based categories (in per cent): Intermediate goods Growth in intermediate goods Trend line Per cent 10 5 0 -5 -10 Oct-Nov Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2006-07 2007-08 2008-09 2009-10 Year Figure 9.2D 30 25 20 Growth in IIP and its use-based categories (in per cent): Durables Growth in durables Per cent 15 10 5 0 -5 -10 Oct-Nov Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Trend line 2006-07 2007-08 2008-09 2009-10 Year Figure 9.2E 20 15 Growth in IIP and its use-based categories (in per cent): Non-durables Growth in nondurables Trend line Per cent 10 5 0 -5 -10 Oct-Nov Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2006-07 2007-08 2008-09 2009-10 Year Figure 9.2F 14 12 10 Growth in IIP and its use-based categories (in per cent): IIP Growth in IIP Per cent 8 6 4 2 0 Oct-Nov Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Trend line 2006-07 2007-08 2008-09 2009-10 Year Industry 211 DEVELOPMENTS THAT IMPACTED THE SLOWDOWN AND RECOVERY The slowdown 9.5 A brief recap of the process of slowdown in the IIP since 2007-08 would be useful in appreciating the current process of recovery. The decline in industrial growth, as measured by the IIP, started in the first quarter of 2007-08 and continued through the first half of 2008-09 at a gradual pace. Persistent rise in the price of crude during January 2006-July 2008 and the rise in price of other intermediates (global commodity price shock), particularly metals and ores, from the latter half of 2006-07 to the second half of 2008-09, had their effect on the cost side of the manufacturing sector. A comparison of the major components of expenditure for a sample of manufacturing companies suggests that even by the second half of 2007-08, the cost structure had worsened. This got accentuated in the first two quarters of 2008-09 (Table 9.2). 9.6 The deepening of the global financial crisis immediately following the commodity price shock made it increasingly difficult for companies to raise resources in 2008-09. On the external front, there was a sharp decline in the flow of funds from American/ global depository receipts (ADRs/GDRs) and external commercial borrowings; but the inflows of foreign direct investment (FDI) continued. Domestically, the mobilization of resources by the private sector through the capital market, especially the equity route, saw a precipitous decline during 2008-09. However, bank credit to the industrial sector recorded impressive growth during 2008-09 and in some ways filled the gap due to the sudden shrinkage of other sources. 9.7 The drying up of trade credit, especially of foreign banks, since mid-September 2008 and the sharp depreciation in the nominal exchange rate of the rupee within a short span of time made it difficult for manufacturers to hedge their positions and finance their ongoing operations. The shrinkage in export demand that started from September 2008 further affected the export-intensive industries. The sharp reversal in commodity prices from the third quarter of 2008 adversely affected such units in terms of build-up of inventories. The decline in construction and real estate activities affected the segments of manufacturing linked to them. These developments ultimately impacted the growth of profits of the manufacturing sector. From the abridged results of Table 9.2 : Year-on-Year Growth in Sales and Expenditure of listed public limited manufacturing companies in the private sector Items Q1 No. of Companies 1,811 2007-08 Q2 1,716 Q3 1,780 Q4 1,803 Q1 1,926 Q2 1,837 2008-09 Q3 1,849 Q4 1,901 Q1 2009-10 Q2 Q3(P) 1857 1,752 1,752 Growth rates (in per cent) Sales Change in Stock-in-trade Expenditure Raw Material Staff Cost Power & Fuel Interest Costs Profit after tax (PAT) 17.0 -18.2 16.0 17.9 19.0 9.6 7.8 27.6 12.7 -13.2 12.0 10.1 16.8 6.6 15.1 19.1 15.4 -0.8 15.9 15.3 18.3 13.7 35.6 30.2 18.7 151.6 21.0 20.3 16.6 25.8 30.8 15.7 30.1 131.9 34.3 38.1 19.3 28.8 52.0 6.9 32.1 230.1 38.8 44.0 17.0 37.8 69.9 -4.2 6.3 @ 9.3 4.0 12.4 21.7 60.5 -66.4 0.1 @ -2.9 -9.6 7.9 3.1 43.3 -28.3 -2.9 -70.0 -6.6 -14.5 10.1 -1.4 10.1 2.7 -0.3 -1.3 -3.3 -4.7 9.4 -5.4 -1.2 16.9 28.7 $ 26.6 35.5 12.0 1.6 -4.8 177.7 Ratios (in per cent) PAT to Sales 10.5 10.6 11.4 9.5 8.7 7.6 3.6 6.7 9.4 9.0 8.0 Source : Reserve Bank of India Studies on Corporate Performance based on a abridged results of select companies in the private corporate sector. Note: P : Data for Q3 : 2009-10 is provisional; @ Numerator is negative; $ : Denominator is negative 212 Economic Survey 2009-10 Table 9.3 : Inflation (in per cent) in use-based industrial groups (WPI based; year-on-year) 2006-07 Basic Goods Capital Goods Intermediate Goods Durables Non-durables 5.8 8.8 5.5 2.0 3.7 2007-08 2.7 8.6 3.3 4.3 1.9 2008-09 9.0 5.2 10.3 3.2 7.2 2008 (April-Dec.) 11.9 6.4 14.0 3.5 7.2 2009 (April-Dec.) -6.0 -2.3 -4.7 1.6 9.8 Source : Department of Industrial Policy & Promotion. a sample of manufacturing companies, it is seen that while profitability (PAT / sales) was under strain since the fourth quarter of 2007-08, it came down sharply in the third quarter of 2008-09 accompanied by a sharp dip in growth in sales (Table 9.2). The recovery 9.8 Reflecting the continuance of the developments, the manufacturing sector remained subdued in the first two months of the current fiscal, which reduced the level of growth of the IIP in the first quarter to 3.8 per cent. However, there were visible signs of the reversal of the downward trend in growth in IIP growth for the month of June 2009. Thereafter, the IIP marched ahead, registering growth close to 10 per cent during July - November 2009 (Table 9.1). 9.9 The growth in sales revenues of companies, which remained quite impressive at around 30 per cent during the first half (H1) of 2008-09, slowed down during H1 2009-10 largely due to lower price realisation (Table 9.2). Though year-on-year nominal sales growth remained subdued between quarters ending March 2009 and September 2009, the growth in sales and stock in trade adjusted for prices reflected improvement in production which was also coroborated by the rise in IIP. The momentum in demand was also reflected in the sequential growth in sales revenues. The latest quarter ended December 2009 witnessed noticeable acceleration in sales, mostly driven by increase in volumes; supported also by low base of corresponding quarter last year. Increase in sales revenue together with significantly lower input costs, lower rise in interest outflow, lower foreign exchange-related losses and good growth in non-core other income boosted net profits (Table 9.2). Expenditure on raw materials that fell during first two quarters of 2009-10 mainly on account of lower commodity prices showed noticeable increase as prices, firmed up again in the third quarter. The measure of inflation in usebased industrial groups (a ‘rough’ measure because of lack of one-to-one correspondence between the IIP and wholesale price index [WPI]) showed that the prices of items that are employed at different stages of manufacturing have declined during AprilDecember 2009 (Table 9.3). In contrast, the prices of non-durable items of consumption remained firm during the period. 9.10 Stocks in trade that were accumulated during the first half of 2008-09 were depleted during the latter half indicating adjustments of inventory levels to changes in business demand. Stock in trade picked up slowly in the current period indicating revival in the cycle (Table 9.2). 9.11 Mobilization of investible resources became easier during H1 2009-10. Despite significant deceleration in bank credit in the current year, buoyant sources like rights and public issues, qualified institutional placements, private placement of corporate debt, mutual funds and commercial papers as well as a steady flow of external funds through FDI, ADRs/GDRs and external commercial borrowings indicate that mobilizing resources for managing the recovery may not be an issue. Growth in major industrial groups 9.12 The major industrial groups like automobiles, rubber and plastic products, wool and silk textiles, wood products, chemicals and miscellaneous manufacturing staged a strong recovery during AprilNovember 2009, while machinery and textile products reinforced their growth (Table 9.4). Led by cement, non-metallic mineral products also staged a recovery, albeit a modest one. After posting a growth of around 14 per cent annually in the eight-year period ending 2008-09, beverages and tobacco products experienced a slump in the current year. Product groups like paper, leather, food and jute textiles did not evince any visible recovery. Cotton textiles and metal products have also been experiencing lacklustre growth since 2007-08. Overall, the picture is a mixed one in the analysis of major industrial groups. Industry Table 9.4 : Growth by industrial groups (Figures in per cent based on the IIP; 1993-94=100) 2007-08 Overall Manufacturing Transport Equipment Rubber, Petroleum & Plastic Wool, Silk & Man-made Textiles Miscellaneous Manufacturing Machinery & Equipment Wood Products Chemicals Textile Products Non-metallic Mineral Products Basic Metals Metal Products Cotton Textiles Paper Products Leather Products Beverages, Tobacco Food Products Jute Textiles Source : CSO. 9.0 2.9 8.9 4.8 19.8 10.4 40.5 10.6 3.7 5.7 12.1 -5.6 4.3 2.7 11.7 12.0 7.0 33.1 2008-09 2.8 2.5 -1.5 0.0 0.4 8.8 -9.6 4.1 5.8 1.2 4.0 -4.0 -1.9 1.8 -6.9 16.2 -9.7 -10.0 H1 2008-09 5.3 12.2 -4.0 -0.9 -1.1 10.1 -6.1 6.1 5.2 0.6 6.7 1.9 0.1 4.6 -1.8 20.3 -1.0 -5.4 H2 2008-09 0.4 -6.1 0.9 0.9 1.7 7.6 -13.2 2.1 6.3 1.8 1.4 -9.4 -3.9 -0.8 -11.8 12.3 -15.1 -14.6 213 2009-10 (April-Nov.) 7.7 13.9 13.5 13.0 12.3 12.1 10.5 10.0 9.9 6.4 4.8 4.0 3.2 2.1 0.9 -2.2 -7.2 -16.2 High growth in 2009-10 (April-November) Lower growth in 2009-10 (April-November) Decline in 2009-10 (April-November) 9.13 The chemical group and machinery and equipment (with high weights) together contributed 53 per cent of the manufacturing growth in AprilNovember 2009 (Figure 9.3). These two product groups, together with transport equipment and rubber, plastic, petroleum and coal products, explained more than three-fourths of the manufacturing growth during the period (contribution of a particular group to total manufacturing growth is determined by the weight Figure 9.3 40 35 30 25 of the group in manufacturing, the accumulated index of production and current growth). The distinct changes from the previous to current year (AprilNovember) are the sharp decline in growth contribution of the beverages and tobacco group and the significant improvement in contribution of rubber, plastic, petroleum and coal products. 9.14 An analysis of the trends in the use-based industrial groups (Figure 9.1) and sectoral categories Contributions of product groups to manufacturing growth (in per cent) Apr-Nov 2008 Per cent 20 15 10 5 0 -5 -10 Rubber, plastic, petro & coal wool, silk, etc textiles Machinery & equipment Cotton textiles Non-met min products Beverages, tobacco Textile products Transport equipment Jute textiles Miscellaneous Leather products Metal products Basic metals Food Products Paper products Wood products Chemicals Apr-Nov 2009 214 Economic Survey 2009-10 consumer non-durables indicates that the scenario is not as bleak as exhibited by the group as a whole. The strong contractionary movement in some important items like sugar, milk powder, beverages and some pharmaceuticals has had exaggerated impact, leading to negative growth in consumer nondurables during H1 2009-10; otherwise, the majority of the non-durable items of consumption have shown positive growth during the period. subsumed under the National Industrial Classification (Table 9.4) in tandem makes the industrial scenario somewhat clearer. Among the use-based industrial groups, basic goods (with a weight of 35.6 per cent in the IIP) are composed mainly of basic chemicals, basic metals, cement, electricity and minerals. Electricity and mining account for about 58 per cent of the weight of basic goods captured by the IIP and the growth of basic goods during April-December 2009 largely reflected the growth in the two sectors. While other important basic goods like cement and fertilizers recorded reasonable growth, different components of the iron and steel industry showed a mixed picture. 9.15 The strong growth in the machinery and equipment group fed into the growth in capital goods, while some automobile components like commercial vehicles exhibited slack in growth. Despite the lacklustre production performance of petroleum products (except natural gas) and textile intermediates, intermediate goods registered robust growth in H1 2009-10, aided by the strong growth in important items like PVC pipes, commercial plywood, chemical intermediates like paints, granite and stone chips filament yarn, polyster fibre, viscose staple fibre and a wide range of other items. 9.16 Growth in consumer durables has been broadbased, the robust production performance of automobiles being quite significant. On the other hand, the low growth in food products, beverages and tobacco products and cloth and footwear acted as a dampener on the growth in consumer nondurables. Paradoxically, disaggregated growth in INDUSTRIAL GROWTH BY SECTORS Food products 9.17 As per the IIP, food products experienced a decline in production of 7.2 per cent in AprilNovember 2009 on an year-on-year basis. This came on the back of negligible growth during the same period in the previous year. The main growth dampener in food products was sugar production, which declined by 59.6 per cent in the current year (April-November), following an already significant decline during 2008-09. The other important items that slowed down growth included milk powder, malted food and chocolates and sugar confectionary. Among the important items that exhibited double-digit growth were wheat flour/maida, salt, and edible oils like coconut, rice bran, cotton seed, and mustard/ rapeseed. Production of sunflower oil, soya bean oil, edible hydrogenated oil and groundnut oil declined. Beverages and tobacco products 9.18 Beverages and tobacco products declined by about 2.0 per cent during April-November 2009, as per the IIP data. This group had grown by 17.7 per Figure 9.4 600 500 Movement in the index of production of food products and beverages and tobacco products (Index 1993-94=100) 578.5 498.0 562.4 Food products Index 1993-94=100 400 400.3 300 287.6 200 100 0 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 200.4 154.5 224.8 152.0 168.7 167.9 167.3 170.6 345.9 312.1 444.5 Beverages & tobacco products 185.2 198.2 178.9 139.0 2006-07 2007-08 2008-09 Year Apr-Nov 2009 Industry cent during the corresponding period in the previous year. While food products showed slow growth in the post-2000 period (compound annual growth of 1.8 per cent during 2001-02 to 2008-09), the beverages and tobacco product group achieved rapid growth (compound annual growth of 14.2 per cent during 2001-02 to 2008-09). Hence the slowdown shown by these two groups in April-November 2009, compared to the same period in 2008, needs to be viewed differently (Figure 9.4). 9.19 Production of rectified spirit and country liquor declined while that of beer grew by 14 per cent in 2009-10 (April-November). The growth in Indian-made country liquor was only 3.1 per cent during the period. Cigarette production has not shown any significant growth since 2007-08. Table 9.5 : Production of fabrics/cloth (million sq. m) Sector 2006-07 215 Mill Handloom Power Loom Hosiery Others* Total Cloth Production 1,746 (5.4) 6,536 (7.0) 32,879 (7.4) 11,504 (10.4) 724 (-5.9) 53,389 (7.7) 2007-08 2008-09 2009-10 (P) (Apr.-Nov.) (P) 1,781 1,796 1,192 (2.0) (0.8) (-0.1) 6,947 6,677 4,513 (6.3) (-3.9) (1.7) 34,725 33,648 25,157 (5.6) (-3.1) (12.5) 11,804 12,077 9,047 (2.6) (2.3) (12.8) 768 768 320 (6.1) (0.0) (0.0) 56,025 (4.9) 54,966 (-1.9) 40,229 (10.8) Textiles 9.20 As per the IIP data, the textile group consisting of cotton, wool, silk and man-made and jute textiles and textile products, grew by 7.5 per cent during April-November 2009, compared to 1.0 per cent during April-November 2008. While wool, silk and man-made textiles grew by 13 per cent during 200910 (April-November) shrugging off the weak performance in the corresponding period last year, cotton textiles barely managed a recovery with 3.2 per cent growth. Textile products achieved growth close to 6.0 per cent in 2008-09 and topped it with 9.9 per cent growth during April-November 2009. However, jute textiles which had slid by 3.9 per cent in 2008-09, declined again by 16.2 per cent in 200910 (April-November). Table 9.6 : Export of textiles Source : O/o Textile Commissioner, Mumbai. Notes : (P) Provisional; * Production up to August 2009; Figures in parentheses are growth in per cent, yearon-year 9.21 Overall, the production of textile fabrics increased by 10.7 per cent during April-November 2009-10 (provisional). The highest growth was observed in the hosiery sector (12.8 per cent) followed by power looms (12.5 per cent), while the handloom and mill sectors could not revive from the previous year’s slump (Table 9.5). The share of the powerlooms sector in total fabric production stood at 62.5 per cent during April-November 2009—with its share gradually increasing over the years, the production of fabric is increasingly driven by power looms. (US$ million) Items 2006-07 2007-08 2008-09 (P) 10,242.8 4,741.6 478.2 3,280.5 675.5 1,074.0 148.0 299.1 0.0 20,939.8 Apr.-Sept. 2009 (P) 4,528.8 1,788.9 240.6 1,889.8 280.7 401.8 78.3 109.9 112.3 9,431.1 Growth Apr.-Sept. 2009 (per cent) -10.3 -35.1 -8.7 -2.4 -24.7 -33.6 -2.7 -40.8 0.0 -15.5 Ready-made Garments Cotton Textiles Wool & Woollen Textiles Man-made Textiles Silk Handicrafts* Coir & Coir Manufactures Jute Goods Handloom Products Grand Total 8,282.3 5,564.2 423.8 2,398.9 706.0 1,364.9 145.8 260.2 0.0 19,146.1 9,069.8 6,858.6 443.1 3,177.1 657.7 1,452.3 160.3 327.9 0.0 22,146.8 Source : Directorate General of Commercial Intelligence and Statistics (DGCI&S) Kolkata. Notes : * include only textile-based handicrafts such as, handmade carpets excluding silk; silk carpets; handicrafts excluding handmade carpets); P : Provisional 216 Economic Survey 2009-10 particle board grew by 7.1 per cent, while commercial plywood grew by 46.3 per cent during the period. Wood and wood products experienced wide-ranging annual fluctuations in production during the post2000 period and managed only a compound annual growth of 1.3 per cent during 2001-02 to 2008-09 (Fig 9.5). 9.22 Though the textile sector seemed to have gathered momentum consequent on the termination of the quota regime in December 2004, the performance of Indian textiles continues to lag substantially behind that of China in terms of rate of growth of exports and share in world textile exports. In US dollar terms, textile exports grew by 15.7 per cent during 2007-08 but declined by 5.5 per cent during 2008-09. During April-September 2009, exports of textiles and clothing were at US$ 9.43 billion, recording an 15.5 per cent decline in growth vis-à-vis exports of US$ 11.15 billion in AprilSeptember 2008 (Table 9.6). 9.23 The Technology Upgradation Fund Scheme (TUFS) and Scheme for Integrated Textile Parks (SITP) are two flagship schemes of the Ministry of Textiles. TUFS, implemented with a view to facilitating modernization and upgradation of the textile industry by providing credit at reduced rates, has been fine-tuned to induce investments in targeted segments. Under the scheme, Rs 78,307 crore was sanctioned against the project cost of Rs 1,79,856 crore and loans worth Rs 66,284 crore were disbursed to 25,777 applicants up to June 30, 2009 (provisional). Under the SITP, 40 integrated textiles parks of international standards, covering the weaving, knitting, processing and garmenting sectors with project proposals worth Rs 4,141.39 crore (of which assistance from the Government is Rs 1,422.43 crore), have been sanctioned. So far, five textile parks have been inaugurated. Paper and paper products 9.25 Paper and paper products grew by only 2.1 per cent during April-November 2009, as per the IIP data. This followed indifferent growth during 2007-08 as well as 2008-09. While paper and paper board and corrugated boxes/cartons achieved reasonable growth during the current year, bleached newsprint and rayon-grade pulp declined by more than 10 per cent. Leather and leather products 9.26 As per the IIP data, leather products, which include finished leather, leather footwear, shoe uppers, leather garments and other leather goods, showed only 0.9 per cent growth in production during April-November 2009, following a 5 per cent decline during the same period in the previous year. Production of leather and fur products almost stagnated during the post-2000 period (compound annual growth of 0.5 per cent during 2001-02 to 200809) with the exception of 2007-08, while overall manufacturing grew at a much faster rate (compound annual growth of 7.3 per cent during 2001-02 to 200809) (Fig 9.6). 9.27 Finished leather declined by about 13 per cent, causing much of the slowdown in the sector during April-November 2009. While footwear items showed a mixed picture, leather garments grew by 5.7 per cent during the period. Wood and wood products 9.24 Wood and wood products, as per the IIP data, showed 10.5 per cent growth in production during April-November 2009, compared to a 6 per cent decline during the same period in the previous year. Among the two components (included in the IIP), Figure 9.5 140 Movement in the index of production of wood products (Index 1993-94=100) 127.9 104.3 92.8 76.5 81.7 91.0 74.8 70.5 132.2 115.6 Wood & wood products Index 1993-94=100 120 100 80 60 40 20 0 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Year Apr-Nov 2009 Industry Figure 9.6 350 217 Movement in the index of production of leather and fur products and the index of overall manufacturing (Index 1993-94=100) Leather & fur products Manufacturing Index 1993-94=100 300 250 200 150 100 50 0 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Apr-Nov 2009 Year Chemicals, petrochemicals, pharmaceuticals and fertilizers 9.28 The sector includes basic chemicals and its products, petrochemicals, fertilizers, paints, gases and pharmaceuticals. Major chemicals registered a compounded annual growth of 3.1 per cent during 2002-03 to 2007-08. In the wake of the recent economic slowdown, production declined by 5.2 per cent in 2008-09. The growth in major chemicals stood at (-) 0.91 per cent during April-December 2009 (Table 9.7). 9.29 Petrochemicals mainly comprise synthetic fibres, polymers, elastomers, synthetic detergents, intermediates and performance plastics, apart from their intermediates such as synthetic fibre intermediates, olefins and aromatics. Polymers accounted for almost 62 per cent of the total production of major petrochemicals during 2008-09. The production of petrochemicals grew at 5.8 per cent annually during 2002-03 to 2007-08. Registering the impact of the global meltdown, it declined by 5.5 per cent in 2008-09. During April-December 2009, major petrochemicals except polymers recorded Table 9.7 : Production of major chemicals (in 000’ MT) Years Alkali chemicals Other Orinor- ganic ganic chemchemiicals cals Pest- Dyes icides & (Tech.) stuffs Total major chemicals 2006-07 5,269 2007-08 5,443 2008-09 5,442 2009-10 4,133 (Apr.-Dec.) Growth -0.72 (per cent) 602 609 513 382 -5.53 1,545 1,552 1,254 920 -5.55 85 83 85 58 33 44 32 30 7,534 7,731 7,326 5,523 -0.91 -13.19 21.51 Source : Department of Chemicals & Petrochemcials. positive growth of 0.76 per cent; performance plastics and synthetic fibres registered impressive growth (Table 9.8). 9.30 The share of chemicals and petrochemicals in total national exports diminished from 11.6 per cent to 9.3 per cent during 2003-04 to 2008-09. Likewise, imports of this group in total national imports declined from 9.2 per cent to 7.2 per cent during 2003-04 to 2008-09 (Table 9.9). Table 9.8 : Production of major petrochemicals (000’ MT) Years Synthetic fibers Polymers Elastomers Synthetic detergent intermediates 555 556 585 552 461 9.57 Performance plastics 127 133 157 141 129 26.51 Total major petrochemicals 7,466 8,223 8,675 8,192 6,166 0.76 2005-06 2006-07 2007-08 2008-09 2009-10 (Apr.-Dec.) Growth (per cent) 1,906 2,250 2,524 2,343 1,948 13.23 4,768 5,183 5,304 5,060 3,549 -6.71 110 101 105 96 79 9.45 Source : Department of Chemicals & Petro-chemcials. 218 Economic Survey 2009-10 industry’s growth has been fuelled by exports which registered a growth of 25 per cent in 2008-09 (Figure 9.7). Exports of pharmaceuticals have consistently outstripped imports. India currently exports drug intermediates, active pharmaceutical ingredients (APIs), finished dosage formulations, bio– pharmaceuticals and clinical services. The top five destinations of Indian pharmaceutical products are the USA, Germany, Russia, the UK and China. The domestic pharma sector has also expanded in recent years. 9.32 There are five pharmaceutical Central publicsector/joint-sector undertakings under the Department of Pharmaceuticals which manufacture critical bulk drugs/ formulations. These are Indian Drugs & Pharmaceuticals Limited, Hindustan Antibiotics Limited, Bengal Chemicals & Pharmaceuticals Limited, Rajasthan Drugs and Pharmaceuticals Ltd and Karnataka Antibiotics & Pharmaceuticals Ltd. The value of their production increased from Rs 340.2 crore in 2006-07 to Rs 641.8 crore in 2008-09 and is projected to reach Rs 875 crore in 2009-10. Table 9.9 : Exports and imports–Chemicals and petrochemicals (Rs crore) Items Exports: (a) Chemicals (b) Petrochemicals (c) Sub-Total (a+b) Imports: (a) Chemicals (b) Petrochemicals (c) Sub-Total (a+b) 47,914 16,339 64,253 54,422 18,677 73,099 74,857 24,020 98,877 39,351 21,801 61,152 43,482 22,199 65,681 53,738 24,226 77,964 2006-07 2007-08 2008-09 Source : Department of Chemicals & Petro-chemcials. Pharmaceuticals 9.31 The Indian pharmaceutical industry has grown from a humble Rs 1,500 crore turnover in 1980 to approximately Rs 1,00,611 crore in 2009-10 (September 2009). The country now ranks third in terms of volume of production (10 per cent of global share) and 14th by value. The Indian pharma Figure 9.7 90000 80000 70000 60000 50000 40000 30000 20000 10000 0 Indian Pharmaceutical Market (Rs crore) Exports Imports Total market size Domestic market Rs crore 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Year Table 9.10 : Production and import of fertilizers ( lakh MT) Production Year Urea DAP Complex Fertilizers MOP 2007-08 198.6 42.1 58.5 Nil 2008-09 199.2 29.9 68.5 Nil 2009-10* 212.4 43.0 79.2 Nil 44.2 56.7 42.3 2007-08 69.3 29.9 Imports 2008-09 56.7 61.9 2009-10** 44.9 55.6 Source : Department of Fertilizers Notes : * estimated; **April-December 2009-10 Industry 219 Fertilizers 9.33 The availability of raw materials and intermediates has been a major bottleneck in the domestic production of fertilizers. As there is no domestic production of muriate of potash (MOP), its requirement is met fully by import (Table 9.10). About 85 per cent of raw materials in Di ammonium phosphate (DAP) or finished DAP and complexes are also being imported. Steel 9.36 India ranked as the fifth largest producer of crude steel in the world during January -November 2009 (World Steel Association). Domestic crude steel production grew at a compounded annual rate of 7.1 per cent during 2004-05 to 2008-09. The increase in production came on the back of capacity expansion, mainly in private-sector plants, and higher utilization rates. During 2008-09, India added nearly 5.5 million tonnes of capacity in steel production. 9.37 In 2008-09, the Indian iron and steel industry was hit hard by the spiralling cost of imported coking coal/metcoke. The first half of 2008-09 witnessed rapid rise in production, consumption and prices, in keeping with international trends. In the latter half, however, the domestic demand for steel was adversely impacted by economic slowdown and, in particular, by slackening demand in some of its leading end-user segments. Domestic steel prices started declining from September 2008 and the pace of growth of production slowed down considerably (Table 9.11). Table 9.12 : Growth in finished steel (alloy + carbon) (per cent) 2009-10* Real Production consumfor sale ption Imports Exports Rubber and plastic products 9.34 Rubber and plastic products grew by an appreciable 25 per cent during April-November 2009 as per IIP data. The factor that overwhelmingly contributed to this growth was the 54.5 per cent growth in PVC pipes and tubes during the period, in contrast to a 17 per cent decline during AprilNovember 2008. With the automobile sector recording strong growth in the current year so far, the tyre sector (except bicycle tyres) too performed well on the whole. Non-metallic mineral products 9.35 As per the IIP, this product group grew by 6.4 per cent during April-November 2009, as against negligible growth during the corresponding period in the previous year. Cement led the group with a close to 11 per cent growth. This, along with strong growth in polished granite/stone chips, points towards improving construction activity. Among important items, bottles and bottle glasswares continued the decline shown in 2008-09. Production of railway/ concrete sleepers stepped up while that of graphite electrodes and anodes declined steeply during the current year. April-June April–September April-December 3.4 3.3 3.8 5.2 7.0 7.7 -1.3 1.2 16.6 -38 -43 -36 Source : Joint Plant Committee. Note : * provisional. Table 9.11 : Production, consumption, import and export of total finished steel and pig iron (million tonnes) Item Production for Sale Import Export Real Consumption1 TFS PI TFS PI TFS PI TFS PI 2005-06 46.56 4.69 4.31 0.03 4.80 0.44 41.43 4.13 2006-07 52.53 4.93 4.93 0.03 5.24 0.71 46.78 4.33 PI= Pig iron 2007-08 56.07 5.284 7.03 0.11 5.08 0.56 52.12 4.62 2008-09 Change (per cent) over 2007-08 57.16 6.21 5.84 0.08 4.44 0.35 52.35 5.87 1.9 17.52 -16.9 -27.3 -12.6 -37.5 0.4 27.1 Source : Joint Plant Committee. Notes : TFS= total finished steel, both alloy and carbon; 1= adjusted for stock variation and double counting. 220 Economic Survey 2009-10 coming years. The growth in machinery and equipment has consistently been above the 10 per cent mark since 2003-04 and it achieved a compound growth of 14.4 per cent during the quinquennium ending 2007-08, compared to a corresponding rate of 8.7 per cent in the overall IIP. The index of production of machinery and equipment galloped ahead of the overall IIP after the year 2002-03 (Figure 9.8). 9.42 Though it fell below the 10 per cent mark in 2008-09, growth in the group remained one of the highest at 8.8 per cent. During 2009-10 (AprilNovember), this segment gained further strength with a 12.1 per cent growth. Important items like industrial machinery, tractors, ball and roller bearings, power transformers, insulated cables and wires, boilers, electric generators, turbines, electric motors, power-driven pumps, material-handling equipment, cutting tools, conductors, electric fans, washing machines and TV receivers and picture tubes buoyed growth in this manufacturing group during 2009-10 (April-November). On the other hand, products like diesel engines, telephone instruments and telecom-munication cables, protection systems, control panels, cranes, lifts, hydraulic machines and cylinders, dumpers, furnaces, valves, cooling towers, refrigerators and air conditioning plants, air and gas compressors and computer systems dampened its growth. 9.38 However, recovery gathered strength during 2009-10 and the Indian steel industry appears to have successfully overcome the effects of the global economic slowdown (Table 9.12). India and China are the only countries to have registered a positive growth during January-November 2009 (World Steel Association). 9.39 The strong growth in the GDP in the second quarter of the current fiscal and in the IIP during AprilNovember 2009 suggests that the demand side of the steel industry is back on stable footing. Indian steel outlook for 2010 continues to be positive, since Indian steel consumption is expected to be rising at 6-9 per cent during the current year, on account of higher demand from the real estate, construction and automobile sectors. Metal products (except machinery) 9.40 The production of this group declined during 2007-08 and 2008-09. During April-November 2009, production grew by 4 per cent. Important items like well/offshore platforms, tin metal containers, agricultural implements and bolts and nuts continued their declining trend during the current year. Metallic utensils including pressure cookers, LPG cylinders and drums and barrels registered robust growth during April-November 2009. Machinery and equipment 9.41 Growth of the machinery and equipment group has been at the core of the growth in capital goods, as it constitutes around 65 per cent of the total weight of capital goods in the IIP. Growth in this group is critical for growth in the overall IIP for the Electronics and Information Technology 9.43 The economic recession in leading export destinations adversely impacted the performance of Indian IT companies. Figure 9.8 500 450 400 350 300 250 200 150 100 50 0 Movement in the index of production of machinery and equipment and the overall IIP (Index 1993-94=100) Machinery & equipment IIP Index 1993-94=100 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Year Apr-Nov 2009 Industry Table 9.13 : Growth in IT-ITeS industries (US$ billion) Item IT-IT-enabled Services Revenue (including Hardware) Software & Services Industry (excluding hardware) Total Software and Services Exports (including ITeS-BPO) IT BPO Revenue from the Domestic Market IT Software and Services Employment (million) 2006-07 47.8 2007-08 64.1 (34.1) 52.1 (32.6) 40.4 (28.9) 2008-09 70.5 (9.9) 58.7 (12.7) 46.3 (14.6) 2006-07 2007-08 2008-09 2009-10 Source : RBI & NASSCOM. 221 Table 9.14 : Software & services exports Year Growth (per cent) (first half) (second half) 37.21 26.27 35.35 -11.5 27.56 32.94 -1.87 39.3 31.1 8.2 11.7 (42.7) 2.01 12.4 (5.9) 2.20 9.45 During 2008, electronics hardware production in India constituted around 1.5 per cent of global electronics production. The production of electronics hardware in the country stood at Rs 94,690 crore in 2008-09 (Table 9.15), registering a growth of 12.1 per cent, compared to a growth of 27.8 per cent in 2007-08; the decline is attributable to the global economic slowdown. 1.62 Source : Department of Information Technology (DIT); Note: Figures in parentheses represent change in per cent. Micro, small and medium enterprises (MSMEs) 9.46 MSMEs contribute about 8 per cent of the GDP of the country, about 45 per cent of manufactured output and about 40 per cent of exports. This, coupled with a high labour to capital ratio, high growth and high dispersion makes them crucial for achieving the objective of inclusive growth. As per the Quick Results of the 4th All India Census of MSMEs (2006-07), there were 26 million MSMEs in the country, which provided employment to about 60 million persons. Of the total, 28 per cent were in 9.44 The increase of 14.6 per cent in software and services exports in 2008-09 (Table 9.13) was the net effect of a growth of 35.3 per cent in the first six months and a decline of 1.9 per cent in the next six months (Table 9.14). The decline continued in the first half of 2009-10 as well. Table 9.15 : Electronics & IT production (Rs crore) Items 1. Consumer Electronics 2. Industrial Electronics 3. Computers 4. Comm. & Broadcasting Equipment 5. Strategic Electronics 6. Components Subtotal 7. Software for Exports 8. Domestic Software Total Electronics & IT exports 1. Electronics Hardware 2. Computer Software Total Source : DIT Annual Report, 2008-09. Note : * Estimated 2005-06 18,000 8,800 10,800 7,000 3,200 8,800 56,600 1,04,100 29,600 1,90,300 9,625 1,04,100 1,13,725 2006-07 20,000 10,400 12,800 9,500 4,500 8,800 66,000 1,41,000 37,000 2,44,000 12,500 1,41,000 1,53,500 2007-08 22,600 11,910 15,870 18,700 5,700 9,630 84,410 1,64,400 47,010 2,95,820 13,200 1,64,400 1,77,600 2008-09* 25,990 12,740 13,490 26,000 6,840 9,630 94,690 2,16,300 57,230 3,68,220 19,000 2,16,300 2,35,300 222 Economic Survey 2009-10 Table 9.16 : Performance of CPSEs during 2008-09 (Rs crore) Sl. Particulars No. Investment(long-term loan + equity) Capital Employed (net fixed assets + working capital) 3. Total Turnover 4. Profits of Profit-making CPSEs 5. Losses of Loss-making CPSEs 6. Net Worth 7. Dividend Declared 8. Corporate Tax 9. Interest Paid 10. Contribution to Central Exchequer 11. Foreign Exchange Earnings 11.1 Oil Companies 11.2 Other Companies 12. Foreign Exchange Outgo 12.1 Oil Companies 12.2 Other Companies Source : Department of Public Enterprises. 2008-09 2007-08 Per cent change over previous year 16.2 9.6 15.4 7.7 40.6 12.6 -9.2 -8.6 25.2 -8.6 9.6 5.1 19.1 16.5 8.3 35.6 1. 2. 5,28,951 7,93,096 12,63,405 98,652 14,424 5,84,072 25,493 1,51,728 40,330 1,51,728 74,184 48,422 25,762 4,28,821 2,78,989 1,49,832 4,55,367 7,23,719 10,94,484 91,571 10,257 5,18,530 28,081 1,65,994 32,200 1,65,994 67,678 46,051 21,627 3,68,228 2,57,723 1,10,505 the manufacturing sector and 72 per cent in the service sector. This is the first Census after the enactment of the MSMED Act 2006 and includes, for the first time, medium enterprises. Tourism 9.49 The global financial crisis affected growth in tourism in 2008-09. The Ministry of Tourism made concerted efforts including a series of promotional initiatives to counter the impact of the slowdown. Foreign tourist arrivals and foreign exchange earnings have so far registered positive growth in the year 2009-10 (Table 9.17). 9.50 Initiatives have been taken to develop world class tourism infrastructure through Central financial Table 9.17 : Number of foreign and domestic tourists Year Foreign tourist arrivals (lakh) 46.7 (13.8) 51.7 (10.7) 50.7 (-1.9) 37.2 (1.1) *Foreign *Domestic exchange tourist earnings visits (million (lakh)** US$) 9,123 ( 16.2) 11,666 (27.9) 10,543 (-9.6) 8,663 (10.9) 4,623.1 5,265.6 5,629.2 NA Central Public-sector Enterprises (CPSEs) 9.47 There were altogether 246 CPSEs under the administrative control of various ministries/ departments as on March 31, 2009. The cumulative investment (paid-up capital plus long-term loans) in all the CPSEs together stood at Rs 5,28,951 crore as in end-March 2009 (Table 9.16). The largest share in this investment belonged to the service sector (46.1 per cent) followed by electricity (26.2 per cent), manufacturing (18.1 per cent) and mining (8.8 per cent). A great deal of investment in CPSEs is being made through internal resources rather than through investment from outside. 9.48 Of the total, 158 CPSEs made net profit and 54 net loss in 2008-09. The year witnessed severe financial under-recoveries by public-sector Oil Marketing Companies (OMCs) as they had to keep the prices low on sale of petroleum products in the domestic market. The foreign exchange outgo exceeded the foreign exchange earnings of CPSEs during 2008-09 (Table 9.16). 2006-07 2007-08 2008-09 2009-10 (April-Dec.) Source : Ministry of Tourism. Note : * Figures in parenthesis are growth rates (per cent). ** Domestic tourist visits for calendar years. Industry assistance to States/Union Territories for identified circuits and destinations. These include mega projects, human resource development, augmenting accommodation infrastructure, positioning Indian tourism products in domestic and overseas markets and promoting India as a round-the-year tourism destination through an integrated media strategy under the “Incredible India” brand. The new initiatives include development of heliports, cruise, caravan, wellness and MICE (meetings, incentives, conferences and exhibitions) tourism. In order to ensure environmental sustainability and create employment opportunities, “responsible tourism” is being pursued by enhancing stakeholder orientation in rural, eco-adventure, wildlife and wellness tourism. 9.51 The Ministry of Tourism continued its efforts to reinforce its brand through Incredible India campaigns. Print media and advertising campaigns have been undertaken in overseas locations. The Ministry has also launched the “Visit India 2009” scheme whereby attractive incentives are being offered to foreign tourists. Market development assistance (MDA) being given to tourism service providers for sales-cum-study tours, participation in fairs and exhibitions and publicity through printed materials, has been liberalized. Through social awareness campaigns, attempt was made to 223 sensitize stakeholders to the importance of tourism and protection of heritage sites and through generic campaigns, awareness about various destinations/ sub-tourism products was generated. For identified destinations/circuits covered by the Jawaharlal Nehru Urban Renewal Mission (JNURM) convergence of resources is being ensured so that tourism-related infrastructure and urban civic infrastructure complement each other. Financing and investment 9.52 Gross capital formation (GCF) in manufacturing grew at a compound annual rate of 26.2 per cent during 2003-04 to 2007-08. As the National Accounts data on capital formation are available only till 2007-08, it is not possible to analyse the trends beyond that year. However, the increase in the investment demand is evident from the strong growth in capital goods recorded during JuneNovember 2009. In the absence of hard data on capital formation and capacity addition in industry for the current period, information on the mobilization of investible resources by the sector from different sources would be instructive. 9.53 In recent years, especially from 2004-05, the Indian private corporate sector has started to raise external capital (i.e. other than internal resources) Table 9.18 : Flow of financial resources to commercial sector Item 2007-08 2008-09 April-November* 2008-09 2009-10 Domestic Sources (in Rs crore) Public Issues and Rights issues (except Banks/FIs) Qualified Institutional Placements (QIPs) Gross Private Placements by NFIs Net Issuance of CPs Subscribed by Non-banks Bank Credit to Industry (incl. Infra) Systemically Important Non-deposit taking NBFCs (net of Bank Credit) Mutual Funds Investments in Debt (Non-Gilt) LIC’s Gross Investment in Corporate Debt, Infrastructure and Social Sector 56,074 25,525 68,249 10,660 1,69,536 36,460 88,457 24,275 16,220 189 77,891 5,590 1,87,515 76,828 -32,168 65,815 12,686 75 44151 22,187 1,43,300 37,744 19,896 10,686 19,496 34,167 81617# 51,012# 99,332 17,990 ^ 1,01,956# 18,027 ^ Foreign sources (in US $ million) FDI ADR/GDR issues (excluding Banks & FIs) External Commercial Borrowings / FCCB Source : RBI/SEBI. Note : * Comparable period for respective items. # Data pertain to April-September. Data for 2006-09 and 2009-10 are provisional. 34,835 6,645 30,293 35,180 1,162 15,244 24,693 1,142 6,332 26,506$ 3,152$ 5,168 ^ Data pertain to April-August. $ Data pertain to April-December 224 Economic Survey 2009-10 comparable with higher flows from ADRs/GDRs and FDI. mainly to fund its investment and this includes foreign institutional sources. Data on sources and uses of funds for a sample of non-financial public limited companies available till 2006-07 (in a study by the RBI) shows that the share of external finance was as much as 64.1 per cent of the total sources. Some of the predominant sources, other than banks and financial institutions, include resource mobilization through the issue of equities and bonds, private placement, private equity and commercial papers, and foreign sources like FDI, ADRs/GDRs and external commercial borrowings (Table 9.18). It is difficult to compare quantities as sources of exclusively financing the industrial sector (including infrastructure), as most of these quantities combine the total commercial mobilization of resources, of which industry forms only a part. 9.54 Given the caveat, three tentative conclusions seem contextually relevant for the current year so far. First, the growth in bank financing of the industrial sector decelerated significantly during AprilNovember 2009-10. Second, the mobilization of financial resources from the domestic non-bank sector, including the capital market, has been significantly higher during the period compared to the corresponding period in 2008-09. Third, the inflow of investible resources from external sources was Industrial credit 9.55 The growth in credit to industry declined steeply from 37.0 per cent in November 2008 to 14.2 per cent in November 2009, on an year-on-year basis (Table 9.19). The sectoral composition of the gross deployment of bank credit to industry, including infrastructure, shows widely varying patterns. It is the infrastructure sector that kept growth in industrial credit at the level of 14.2 per cent during November 2009 (Table 9.19). Net of infrastructure, the growth in industrial credit was significantly lower, that is 4.6 per cent in November 2009, compared to 36.5 per cent during the corresponding period of the previous year. 9.56 With the organized sector having access to varieties of financial instruments to raise resources, the implications of a deceleration in credit growth for smaller-scale enterprises can be more pronounced. Industrial credit to micro and small enterprises (including service-sector enterprises) grew at a higher rate (19.3 per cent) in November 2009 compared to the credit growth in the overall industrial sector. Further, industrial credit to micro and small enterprises in the manufacturing sector also grew at Table 9.19 : Industry-wise deployment of gross bank credit Sector % Growth (y-o-y) Nov. 2008 Mining and Quarrying (incl. Coal) Food Processing Beverage & Tobacco Products Textiles Leather & Leather Products Wood and Wood Products Paper & Paper Products Petroleum, Coal Products and Nuclear Fuels Chemicals and Chemical Products Rubber, Plastic & their Products Cement and Cement Products Basic Metals and Metal Products All Engineering Transport Equipment Construction Infrastructure Industry Total (Small, Medium & Large) Industry Total minus Infrastructure 53.0 23.2 45.2 21.2 12.5 47.2 29.7 149.2 39.2 33.4 80.5 27.0 26.5 42.5 59.9 38.6 37.0 36.5 Nov. 2009 2.6 5.9 49.2 7.4 -0.5 4.1 11.0 -22.0 1.0 6.5 18.3 18.3 4.7 -2.9 8.9 47.2 14.2 4.6 Share in outstanding credit to industry(%) Nov. 2008 1.5 5.0 0.7 10.0 0.6 0.4 1.5 8.6 7.5 1.3 1.8 12.3 6.2 3.7 3.4 22.5 100.0 77.5 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 Source : RBI. Notes : Data are provisional and relate only to select banks. Industry Table 9.20 : Sectors attracting highest FDI flows 225 (Rs crore) Sector 2007-08 Services Sector Telecommunications Housing & Real Estate Construction Agriculture Services Power Automobile Industry Computer Software & Hardware Electrical Equipment Hotel & Tourism Information & Broadcasting (including Print Media) Trading Metallurgical Industries Consultancy Services Sea Transport Petroleum & Natural Gas Chemicals (other than Fertilizers) Grand Total of All FDI Flows 9,121 3,963 5,161 3,593 426 208 1,191 4,217 2,432 830 747 2,108 1,909 606 363 234 731 April-November 2008-09 1,5919 9,231 8,353 7,490 16 3,420 3,401 6,670 900 1,427 1,711 2,427 3,420 825 127 947 1,991 2009-10 16,566 10,811 10,565 8,380 6,327 5,994 4,499 2,763 2,724 2,246 2,015 1,982 1,485 1,341 1,293 1,084 1,000 Growth (per cent) in 2009-10 4.06 17.12 26.48 11.88 39,443.8 75.26 32.28 -58.58 202.67 57.39 17.77 -18.34 -56.58 62.55 918.11 14.47 -49.77 Source : Department of Industrial Policy and Promotion. 19.0 per cent. The corresponding figures during November 2008 stood at 20.0 per cent and 21.5 per cent respectively. POLICY DEVELOPMENTS AND PROGRAMMES FDI 9.57 FDI inflows to India, which remained robust in 2008-09 despite the slump in global financial flows, have also continued to flow smoothly during the current year so far. During April-November 2009-10, total FDI equity inflows stood at Rs 93,354 crore (US$ 19,379 million) as against Rs 85,700 crore (US$ 19,791 million) during the corresponding period in 2008-09, signifying a growth of 9 per cent in rupee terms and a decline of 2 per cent in US dollar terms; the divergent patterns in growth rates being attributable to exchange rate changes during the period. During 2008-09, total FDI equity inflows stood at Rs1,22,919 crore (US$ 27,309 million) as against Rs 98,664 crore (US$ 24,579 million) during 200708, signifying a growth of 25 per cent in rupee terms and 11 per cent in US dollar terms (Table 9.20). 9.58 The sectoral shares of FDI inflows have fluctuated significantly in recent years. Sectors like agricultural services, sea transport and electrical equipment have shown a quantum jump in FDI inflows during 2009-10. 9.59 The developments in terms of policy responses during 2008-09 were to an extent shaped by the effects of the global financial crisis on Indian industry. Measures taken specifically for the industrial sector included fiscal measures and measures to ensure availability of credit. Broadly, the effort in this regard was to mitigate the sharp impact of the global recession on industry, especially the export-oriented sectors that were the most directly affected. Apart from the general stimulus measures announced by the Government and the RBI for the industrial sector, the following sector-specific measures and programmes have been undertaken. Textiles 9.60 Stimulus measures announced on December 7, 2008 that benefited the textile sector included general reduction of 4 per cent in Central value added tax (CENVAT ) rates; abolition of 4 per cent optional CENVAT on cotton textiles; extension of the benefit of service tax refund to service provided by clearing and forwarding agents to exporters; increase in the threshold limit of refund of service tax paid by exporters on foreign commission agent service; 226 Economic Survey 2009-10 scrips such as the VKGUY, Focus Product and Focus Market; and extension of the export obligation period against advance authorizations up to 36 months. 9.64 On March 4, 2009, the Government announced the facility of refund of service tax paid on all input services to special economic zone (SEZ) units and developers (which was earlier restricted to services that were consumed within the zone). 9.65 The incentives introduced under the Foreign Trade Policy 2009–2014 included extension of incentive schemes by addition of new products and markets; addition of 26 new markets under the Focus Market Scheme (FMS); raising the incentive available under the FMS from 2.5 per cent to 3.0 per cent; raising the incentive available under the FPS from 1.25 per cent to 2.0 per cent; expansion of the Market Linked Focus Product Scheme (MLFPS); extension of MLFPS benefits to export to additional markets for certain products; providing higher allocation for the MDA and MAI schemes; introduction of the EPCG scheme at zero duty for apparels and textiles among others; extension of the DEPB scheme till December 31, 2010; and removal of the requirement of ‘Handloom Mark’ for availing of benefits under the FPS. making available drawback benefit simultaneously with refund of service tax paid for exports; making pre- and post-shipment export credit for certain specific sectors including textiles belonging to the small and medium sector more attractive with interest subvention; additional allocation of Rs 1,400 crore to clear the entire backlog in TUFS; inclusion of all handicrafts items under the Vishesh Krishi & Gram Udyog Yojana (VKGUY); and boost to collateral-free lending. 9.61 The stimulus scheme announced on January 2, 2009 included extension of the Duty Entitlement Passbook Scheme (DEPB) scheme till December 31, 2009 and restoration of the rates to those prevailing prior to November 5, 2008 and increase in the duty drawback rates on certain knitted fabrics and specified categories of yarn with retrospective effect from September 1, 2008. 9.62 The Interim Budget 2009-10 announced measures like reduction in general rate of Central excise duty from 10 per cent to 8 per cent, which benefited textile machinery and reduction in rate of service tax on taxable services from 12 per cent to 10 per cent. 9.63 Highlights of the Trade Facilitation Measures announced under the Foreign Trade Policy (on February 26, 2009), inter alia, included provision of Rs 325 crore under promotional schemes for leather, textiles, etc., for exports made with effect from April 1, 2009; notification of the benefit of 5 per cent duty credit script on free on board value of exports under the Focus Product Scheme (FPS) for exports of handmade carpets, in lieu of the 3.5 per cent benefit allowed earlier under the VKGUY; inclusion of technical textiles under the High-Tech Products Export Promotion Scheme; announcement of Bhilwara in Rajasthan as the Town of Export Excellence for Textiles; enabling recognized association of units to access funds under the Market Access Initiative (MAI) scheme for creating focused technological services; reduction in the threshold limit for recognition as a premier trading house to Rs 7500 crore from Rs 10,000 crore; proportionate reduction of the export obligation of a product under the Export Promotion Capital Goods (EPCG) scheme, in case of decline in exports of that product by more than 5 per cent; extension of DEPB/duty credit script utilization for payment of duty on import of restricted items; simplification of procedure for claiming duty drawback refund and refund of terminal excise duty; allowing re-credit of 4 per cent special additional duty, in case of payment of duty by incentive scheme Chemicals and Petrochemicals 9.66 The Assam Gas Cracker Project, approved by the Government in April 2006 at a fixed cost of Rs.5,461 crore, with GAIL (India) Ltd. as the main promoter, is expected to generate substantial employment and investments in downstream plasticprocessing industries. The project is scheduled for commissioning in April 2012. The financial closure of the project has been successfully completed in October 2009. The capital subsidy for the project is being released by the Government in the years from 2007-08 to 2012-13. Of the Rs 429.1 crore cumulative expenditure on the project till October 2009, Rs 208 crore has been released in 2009-10 (till October 2009). 9.67 India, a signatory to the Chemical Weapons Convention (CWC), has a fairly large chemical industry which falls under the ambit of the CWC. The Department of Chemicals and Petrochemicals has so far successfully hosted 73 OPCW (Organization for the Prohibition of Chemical Weapons) inspections including 13 in 2009-10. Help desks have been set up at Vadodara, Mumbai and Chennai for facilitating compliance with CWC obligations. A sector-specific investment region, Industry ‘Petroleum, Chemicals and Petrochemicals Investment Region’ (PCPIR) has been set up to ensure adoption of a holistic approach to promote the petroleum, chemicals and petrochemicals sectors in an integrated and environment -friendly manner. The PCPIR region would be a combination of production projects, public utilities, logistics, environmental protection, residential areas and administrative services. Proposals have been received from the Governments of Andhra Pradesh, Gujarat, Karnataka, Orissa, Tamil Nadu and West Bengal. The Andhra Pradesh, Gujarat and West Bengal proposals have been approved in February 2009 and Memoranda of Agreement (MoA) signed between the Central Government and the three State Governments . 227 world class pharma infrastructure in India through public-private partnership (PPP) and providing impetus for manufacturing of new medical devices and pharma machinery. Fertilizers 9.72 The government has decided to examine the feasibility of revival of the 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 recommended the revenue-sharing model (RSM) with an upfront fee for the revival of each unit through the Build Own and Operate (BOO) mode. Action is being taken by the respective companies for finalization of a fully tied up revival proposal for each unit. Revival of Madras Fertilizers Ltd (MFL), Fertilizers & Chemicals Travancore Ltd (FACT) and Brahmaputra Valley Fertilizer Corporation Ltd (BVFCL) is also under consideration. 9.73 The New Pricing Scheme-III (NPS-III) for indigenous urea seeks to rationalize distribution and movement of urea and to lay down a definite plan for conversion of all non-gas-based urea units to gas. The Government has announced a new investment policy for urea units to attract investment in the fertilizer sector that is based on import parity price benchmarking. Besides, a policy for encouraging production and availability of fortified and coated fertilizers was notified. 9.74 To ensure easy availability of fertilizers in all parts of the country, a uniform freight subsidy policy was announced under which rail freight will be paid on actuals and road freight on a normative average district lead. 9.75 The Revised Concession Scheme for decontrolled phosphatic and potassic fertilizers was announced, under which final rates for concession, to be worked out on a monthly basis, for indigenous DAP would be the same as those for imported DAP. Further, mono ammonium phosphate, triple super phosphate and ammonium sulphate have been included in the concession scheme. The maximum retail price has been left open to be decided by the manufactures with effect from October 1, 2009. An amount of Rs 2,000/MT has been allowed as concession on Single Super Phosphate (SSP). 9.76 Possibilities for setting up of joint venture ammonia/urea projects in countries abroad where Pharmaceuticals 9.68 In pursuit of excellence in pharmaceutical education and research, six new National Institutes of Pharmaceutical Education & Research (NIPERs) have been set up, in addition to the existing one at Mohali. These NIPERs will award masters and doctoral degrees and encourage R&D activities. The NIPERs have been set up in collaboration with mentor institutes so that advanced curricula and pedagogical methodologies are brought into practice for high-end teaching. Some of the new R&D initiatives in the sector include the launching of an education programme for drug regulators and industry and preparation of a Venture Finance and Incubation Fund for innovative R&D. 9.69 An Environmental Cell has been created in the Department of Pharmaceuticals to collect and disseminate information on pharma-related environmental matters, identify issues and solutions, create awareness on environmental issues and coordinate with other stakeholders. 9.70 The Department of Pharmaceuticals in collaboration with the Ministry of MSME has introduced a Scheme for Schedule ‘M’ Compliance by small-scale industrial (SSI) units in the pharma sector under the overall umbrella of the Credit Linked Subsidy Scheme (CLCSS). Under the scheme, pharma SSI units are eligible for 15 per cent upfront capital subsidy on institutional finance up to Rs1.00 crore availed of by them for adoption of improved technology to make themselves Schedule ‘M’ Compliant. 9.71 Other new initiatives that have been taken / are being contemplated by the Department include the launching of the access to affordable medicine Jan Aushadhi Campaign, measures for setting up 228 Economic Survey 2009-10 laboratories, hospitals and agricultural institutions across the country), a core backbone consisting of 15 Points of Presence (PoPs) has been established with 2.5 Gbp capacity. Fifty-seven institutions of higher learning and advanced research have been connected to the network and six virtual classrooms have been set up at six IITs. Under the National Skill Development Policy, a target has been laid down to skill 10 million people by the year 2022 in the area of IT. The Information Technology Research Academy programme has been conceived for advancing capacity and capability building in the area of information and communication technology and electronics. 9.80 Through the Nanotechnology Programme, R&D capacity and infrastructure is being built up at the Indian Institute of Science Bangalore and IIT Bombay. Application-oriented projects for specific users/ industries with technology demonstration and technology transfers are mostly carried out by R&D societies of the Department of Information Technology like the Centre for Development of Advanced Computing (CDAC) and Society for Applied Microwave Electronic Engineering and Research (SAMEER) with active collaboration from academics. C-DAC commissioned a high performance computing system called PARAM “Yuva”. The “PARAM Sheersh” Supercomputing Facility at the North Eastern Hill University (NEHU), Shillong conducts scientific and engineering research in strategic areas in the North-East region. The nationwide grid-computing initiative, Garuda, aggregates supercomputing and storage resources nationwide, provides a problem-solving environment, and enables collaborative R&D for research and user community. Garuda connects 45 premier institutions across 17 cities. 9.81 The Information Technology (Amendment) Act 2008 has been enforced and rules of important sections have been notified in October 2009 addressing the needs of national cyber security. The Act has, inter alia, added provisions to deal with new forms of cyber crimes like publishing sexually explicit material in electronic form, video voyeurism and breach of confidentiality. The Indian Computer Emergency Response Team (CERT-In) has been designated as the nodal agency for coordinating matters related to cyber security and emergency response. CERT-In has published a crisis management plan for countering cyber attacks and cyber terrorism. It has also created a panel of IT adequate gas is available, are being explored. Indian entities are in dialogue for joint ventures in the field of phosphatic and potassic fertilizers in countries such as Jordan, Moracco, Tunisia, Australia, Syria and Canada. Steel 9.77 Responding to the changed scenario, the Government of India removed the export duty on all steel items, reintroduced import duty of 5 per cent on steel, restored DEPB benefits, reduced excise duty to 8 per cent, placed imports of hot-rolled coils on the “restricted list”, making them available to direct users only and withdrew the exemption from countervailing duty on import of thermo-mechanically treated (TMT)bars and structurals. In recent times, to ensure adequate domestic availability, export duty on iron lumps has been increased from 5 per cent to 10 per cent and a 5 per cent export duty has been imposed on iron ore fines to regulate exports of the material. Moreover, an Inter-Ministerial Group (IMG) has been set up to facilitate interaction between investors and the various agencies in matters of acquisition of land, mining rights, power and transportation including the rail, road and port sectors. Electronics and information technology 9.78 Approved in May 2006, there are 27 Mission Mode Projects (MMPs) under the National eGovernance Plan (NeGP) consisting of 9 Central MMPs, 11 State MMPs and 7 integrated MMPs (including 8 programme support components) which, inter alia, achieved the following by December 2009. Out of the 100,000 broadband Internet-enabled Common Service Centres (CSCs) planned to be rolled out in rural areas on PPP basis, 58,954 have been rolled out. Eleven States/ Union Territories have completed implementation of the State Wide Area Networks (SWANs) scheme which is envisaged to provide secured network from State headquarters up to block level with a minimum bandwidth capacity of 2 Mbps. Proposals of State Data Centres (SDC) for 31 States/ Union Territories have been approved with a total outlay of Rs 1,378.50 crore. Twenty States/ Union Territories have completed the institutional framework for State-level strategic decision making including setting up of State e-Governance Mission Teams (SeMT) and deployed SeMT personnel. 9.79 Under the initial phase of the National Knowledge Network (with scalable multi-gigabit capabilities to connect 1,000 nodes covering all universities, research institutions, libraries, Industry security auditors. The Certifying Authorities (CAs) licensed by the CCA have issued more than 14,00,000 Digital Signature Certificates. These are being used in applications such as Real Time Gross Settlement System & Electronic Fund Transfer, email, e-procurement, share trading and issue of import/export licences and filing of company returns. 229 diagnostic study, soft interventions and setting up of CFCs under the programme. 9.86 Under the Credit Guarantee Fund Scheme for Micro and Small Enterprises, over 1 lakh MSE proposals for an amount of Rs 4,465 crore have been approved for extending loans without collateral/thirdparty guarantee during April-December 2009, registering substantial growth over the previous year’s levels. Cumulatively, about 2.50 lakh MSE proposals for loans amounting to Rs9,200 crore have been approved under the scheme till December 2009. 9.87 Under the Credit Linked Capital Subsidy Scheme (CLCSS), which aims at facilitating technology upgradation of the MSE sector, 1,403 MSEs have been assisted and subsidy amounting to Rs 81.53 crore has been sanctioned during AprilNovember 2009. Cumulatively, 7,910 MSEs have been assisted and subsidy amounting to Rs 344.84 crore sanctioned till November 2009. 9.88 A loan agreement for $ 150 million was signed between the Government of India and the Asian Development Bank in December 2009 for implementing the comprehensive Khadi Reform Programme, under which the khadi and village industries (KVI) sector is proposed to be revitalized with enhanced sustainability, income, employment and artisan welfare. 9.89 Under the Prime Minister’s Employment Generation Programme (PMEGP) launched in August 2008, cumulatively 4.56 lakh applications have been received by various implementing agencies up to November 2009, of which 1.63 lakh have been recommended to banks. A total of 50,207 projects involving margin money of Rs 833.86 crore have been sanctioned by the banks up to November 2009. 9.90 A new scheme, namely Strengthening of Infrastructure of Existing Weak Khadi Institutions and Assistance for Marketing Infrastructure, has been introduced, envisaging renovation of 30 selected khadi sales outlets and providing assistance for strengthening of infrastructure of 100 existing weak institutions. 9.91 The recent global economic slowdown has had an adverse impact on the Indian economy, including the MSME sector. In this context, the representatives of 19 prominent MSME Associations met the Prime Minister on August 26, 2009 to highlight various concerns and issues. The Prime Minister announced the setting up of a Task Force MSMEs 9.82 In accordance with the provisions of the MSMED Act 2006, the MSMED (Furnishing of Information) Rules, 2009 were notified in October 2009. These provide for furnishing of information relating to investment in plant and machinery or equipment by enterprises. Further, the Advisory Committee, as provided in the MSMED Act has been reconstituted in September 2009. 9.83 The National Manufacturing Competitiveness Programme (NMCP) has ten components targeted at enhancing the entire value chain of the MSME sector. Of these, five were already under operation, which included Quality Management Standards (QMS) and Quality Technology Tools (QTT), building awareness on Intellectual Property Rights for MSMEs, Support for Entrepreneurial and Managerial Development of SMEs through Incubators, Marketing Support Assistance to MSMEs and Mini-Tool Rooms. During 2009-10, two more components have been made operational, namely, the Lean Manufacturing Competitiveness Scheme for MSMEs and the Design Clinic Scheme. Of the remaining three schemes, two–Technology and Quality Upgradation Support to MSMEs and the Marketing Assistance and Technology Upgradation Scheme for MSMEs–have been approved. 9.84 Skill development has been accorded high priority in line with the overall target set by the Prime Minister’s National Council on Skill Development. The agencies under the Ministry of MSME will conduct skill development programmes for about 3.62 lakh trainees during 2009-10. 9.85 The cluster approach has been adopted as a key strategy for enhancing the productivity, competitiveness and capacity building of MSEs and their collectives. Under the MSE Cluster Development Programme, 27 new clusters were taken up for diagnostic study, 27 for soft interventions and 8 were approved for setting up of common facility centres (CFCs) during 2009-10. Cumulatively, 441 clusters in 28 States and 7 UTs have so far been taken up for 230 Economic Survey 2009-10 March 31, 2008. The average per capita emoluments in CPSEs stood at about Rs 5,45,500 per annum. to reflect on the issues and formulate an agenda for action within a period of three months after discussions with all stakeholders. Accordingly, a Task Force under the chairmanship of the Principal Secretary to the Prime Minister has been constituted to address the issues of MSME sector. The Task Force classified the common issues into following major thematic areas (namely credit, marketing, labour, rehabilitation and exit policy, infrastructure, technology and skill development and taxation) and constituted separate Sub-Groups for detailed examination. A separate Sub-Group was constituted to look into the development of MSMEs in the NorthEast and Jammu & Kashmir. The Task Force submitted its report to Hon'ble Prime Minister on January 30, 2010. The recommendations of the Task Force have been made with a view to not only help the MSMEs in meeting the challenges of global economic slowdown but will also facilitate their growth and development. SOME CRITICAL DIMENSIONS OF INDUSTRIAL DEVELOPMENT Industrial pollution and environment 9.95 Industries, large, medium and small scale, have been a significant source of air and water pollution. Out of 2,715 industries identified under the 17 categories of highly polluting industries, 1,940 have installed pollution control devices to comply with standards, 479 have been closed and legal action has been taken against 296 defaulting units. Necessary measures – both preventive and promotional – have been taken for control of industrial pollution. These, inter alia, include notification and enforcement of emission and effluent standards; setting up of clean technology mechanisms and effluent treatment plants; establishment of waste minimization circles in clusters of small-scale industries; regulation of location of industries; implementation of the charter on Corporate Responsibility for Environmental Protection (CREP) in the 17 highly polluting categories; introduction of the voluntary Eco Mark scheme; implementation of an auto fuel policy that controls vehicular pollution; use of economic instruments to internalize cost of pollution; and fiscal incentives for pollution control equipments. 9.96 Air quality data (annual average) of designated cities/towns reveal that the levels of sulphur dioxide were within the National Ambient Air Quality Standards (NAAQS). The NAAQS of nitrogen oxide was violated at 14 per cent of monitoring stations in industrial areas. High levels of respirable suspended particulate matter were the more prevalent air pollutant. Similarly, 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. 9.97 Prior environmental clearance of development projects based on impact assessment is mandatory for designated sectors/projects. Table 9.21 gives figures for projects appraised in various sectors during April-November 2009. 9.98 The recent policy initiatives that have been taken by the Government to mitigate the impact of environmental pollution include the following. CPSEs 9.92 The Government has been delegating enhanced financial and operational powers to the Navratna, Miniratna and other profit-making CPSEs. There are 18 Navratna enterprises. Six more CPSEs, namely the Airport Authority of India Limited, Ennore Port Ltd, Tehri Hydro Development Corporation, Security Printing and Minting Corporation Ltd, Satluj Jal Vidut Nigam Ltd and Indian Railway Catering and Tourism Corporation Ltd. were granted Miniratna status during the year, raising the total number of Miniratna CPSEs to 62. 9.93 Besides endeavouring to professionalize the Boards of Directors of these enterprises, the Government has issued guidelines on corporate governance of CPSEs. The Board for Reconstruction of Public Sector Enterprises (BRPSE), established to advise the Government, inter alia, on revival / restructuring of sick and loss-making CPSEs, made recommendations on 58 cases until December 31, 2009. The Government has approved proposals for the revival of 37 CPSEs and closure of two. The total assistance approved in this regard up to March 31, 2009 was Rs 15,275 crore, which comprised Rs 2,935 crore as cash assistance and Rs 12,340 crore as non-cash assistance. 9.94 Nearly one-fourth of the employees in CPSEs are in the managerial and supervisory cadres. The total number of employees in all CPSEs came down to 15.35 lakh (excluding casual and contract labour) as on March 31, 2009 compared to 15.66 lakh as on Industry Table 9.21 : Projects appraised during April-November 2009 Nature of Project Cleared EC 1. Industry 2. Thermal Power 3. River Valley and Hydroelectric 4. Mining (Coal & Non-coal) 5. Infrastructure and Miscellaneous 6. Construction & Industrial Estates Total 296 26 09 97 68 46 542 TOR 284 50 28 171 35 04 572 Pending EC 67 29 09 85 47 17 254 TOR 144 37 13 68 05 03 270 231 Rejected/ Returned/ withdrawn EC TOR 28 12 02 71 02 01 116 Source : Ministry of Environment and Forests EC – Environmental clearance; TOR - Terms of Reference The Government has recently revised the NAAQS and limits for 12 pollutants have been notified. Area classification based on land use has been done away with so that there are uniform ambient air quality norms for residential and industrial areas. The revised standards are based on global best practices and local Indian conditions. Towards a revamped river conservation strategy, the Government has accorded the Ganga the status of a “national river” and has constituted a National Ganga River Basin Authority (NGRBA) to ensure effective abatement of pollution and conservation of the river. The NGRBA has resolved that by the year 2020, no untreated municipal sewage or industrial effluent will flow into the Ganga. The Environment Impact Assessment (EIA) Notification 2006 has been amended in December 2009. The amendments made inter alia include decision of the State Level Environment Impact Assessment Authority (SEIAA) to be taken by majority; coal-mine projects with lease area up to 150 ha to be appraised by the SEIAA; biomass-based power plants up to 15 MW and power plants based on non-hazardous municipal solid wastes have been exempted from EIA notification; and information regarding grant of environmental clearance to be put in the public domain for Category ‘A’ projects. A National Green Tribunal has been proposed for expeditious 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. The proposal to set up a National Environment Protection Authority to strengthen compliance and enforcement of environmental statutes and to improve environmental planning and management is in a conceptual stage. Labour relations 9.99 The current year, reckoned by the number of man days lost because of strikes and lockouts, has so far been a good year. The number of man days lost because of lockouts has continuously been on the decline (Table 9.22). In regard to the spatial dispersion of the incidences of strikes and lockouts, it is observed that Gujarat, Andhra Pradesh, Kerala and Rajasthan are the most affected States. Among sectors, financial intermediaries (excluding insurance & pension funds) recorded the maximum number of strikes and lockouts. Table 9.22 : Strikes and lockouts (Man-days lost, in million) Year Strikes Number Mandays lost 4.83 10.81 5.32 15.06 7.02 2.05 Lockouts Number Mandays lost 19.04 18.86 15.01 12.11 10.46 0.84 2004 2005 2006 2007 2008 (P) 2009(P) (Jan-Nov.) 236 227 243 210 250 91 241 229 187 179 182 31 Source : Labour Bureau, Shimla Note : P - Provisional 232 Economic Survey 2009-10 jute and cotton textiles and metal products (to an extent), are labour intensive. Ensuring balanced and sustained growth of the Indian economy is predicated, to a great extent, on the ability of manufacturing to absorb the vast surplus labour in the farm sector. Apart from the need for sustaining the high growth in labour-intensive sectors with the vast pool of talent available within the country, another critical challenge in this respect would be to erase the skill deficit with a multi-faceted programme for skill upgradation. 9.103 Manufacturing inflation, especially of prices of industrial inputs, remained mild in the current year. It has predominantly remained an inflation story of food products, which may have partly spilled over from the slowdown in the farm sector. The improvement in the cost structure of manufacturing companies seems to have catalysed the process of recovery. However, indications are that despite the price levels of food products remaining firm, their contribution to manufacturing inflation has been coming down, suggesting a slightly more decentralized movement in manufacturing prices. While higher prices are an incentive to the producer, they also have implications for the cost structure and the demand for manufactured products. This trade-off needs to be carefully managed. 9.104 Capacity addition in some of the key infrastructure sectors like power and roads is lagging; however, it is expected that with the completion of the large number of projects in progress, the targets would be achieved. One of the biggest challenges to sustaining and stepping up industrial growth lies in removing the infrastructural impediments. Growth in infrastructure not only alleviates the supply-side constraints in industrial production, but also stimulates additional domestic demand required for industrial growth. CHALLENGES AND OUTLOOK 9.100 The cyclical slowdown in the industrial sector that began in 2007-08 got compounded by the twin global shocks in 2008-09. The effects lingered on briefly in the current fiscal; but growth rebound is amply evident. Given the size of the Indian market and the unmet demand for industrial products, coupled with the fact that the overall GDP has started to exhibit growth momentum, there is reasonable hope that demand would not by itself be a constraining factor. Besides, despite the significant step-up in the Government borrowing programme, domestic financial market and external resource flows have given the impression that raising investible resources would not be a major problem. All these factors, combined with the inherent strength of industrial corporates exemplified by the resilience shown by them against adversities in the recent past brighten the industrial outlook in the medium term. 9.101 The emerging investment picture is yet to become clear. Growth in the production of capital goods is improving, but different components of the “capital goods” group have shown a mixed picture during the current year so far. In any case, growth in the indigenous production of capital goods cannot by itself be used to comment on investment and capacity expansion, because, there has, of late, been significant growth in imported capacity addition. 9.102 Industry-agriculture linkages are well known in the Indian context. It appears that there is already some spill over of the slowdown in the agriculture sector affecting some segments of industry. While the ongoing industrial recovery is observed to be broad-based, it should also be noted that some of the sectors that failed to revive in the current year, like food products, paper products, leather products, Energy, Infrastructure and Communications I n tandem with the pick-up in overall industrial growth, core industries and infrastructure services have also evinced signs of recovery with easing of supply bottlenecks in certain sectors and demand recovery in others. The robust growth momentum in telecommunications, particularly the wireless segment, continues with monthly additions exceeding 17.6 million connections. In the midst of the worstever slowdown in the history of world civil aviation, even the modest levels of growth in India are indicative of resilience. Core industries like power, coal and other infrastructure like ports and roads are also reviving. Available evidence points to a steady revival of flows of investible resources. However, the levels of broadband penetration, capacity creation in some crucial infrastructure sectors and the state of development of markets for longterm finance remain causes for concern. There is need to develop infrastructure to complement and sustain the economic growth momentum. Efforts—legislative, administrative and executive—are on to minimize the infrastructure deficit, ameliorate bottlenecks in completion of projects and nurture core industrial intermediates and infrastructure services. 10 CHAPTER 10.2 The stimulus measures announced by the national authorities worldwide to combat the economic slowdown contained infrastructure buildup plans. In line with the rest of the world, the Union Budget for 2009-10 substantially stepped up allocation for many infrastructure sectors over the Budget estimates for the previous year, especially for the National Highways Development Programme (NHDP), Jawaharlal Nehru National Urban Renewal Mission (JNNURM) and Accelerated Power Development and Reform Programmes (APDRP). 2009 has been about 1,490 km (Table 10.1). Against the target of awarding projects for a length of about 9,800 km under the NHDP during 2009-10, projects have been awarded for about 1,285 km up to November 2009. Capacity creation in the power sector seems to have gone up in the current year; however, the actual capacity addition during AprilDecember 2009 was only 43.9 per cent of the target of 14,507 mega watt (MW) for the current fiscal, with the corresponding achievements by the Central, State and private sectors being at 29.4 per cent, 40.5 per cent and 54.8 per cent respectively. OVERVIEW OF PERFORMANCE 10.3 Construction of rural roads under the Prime Minister’s Gram Sadak Yojana (PMGSY) proceeded apace and remained on course to achieving the Eleventh Five Year Plan targets for expenditure on rural roads. As against the target of developing about 3,165 km length of national highways under the NHDP in 2009-10, the achievement till November 10.4 The Department of Programme Implementation monitors the progress in Centralsector projects costing Rs100 crore and above, on a monthly basis. The Progress Report for October 2009 indicated that projects such as roads, power, railways, petroleum, telecom, coal and steel constituted about 94 per cent of the total number of 234 Item Economic Survey 2009-10 Table 10.1 : Indicators of infrastructure capacity creation 2006-07 6,853 5.1 636 1,686 30,710 361 82 250 386 1,082 48.5 9,603 2007-08 9,263 16.5 1,683 1,897 41,231 502 234 156 426 1,549 27.3 7,159 2008-09 April-Dec.2009 3,454 29.0 2,203 2,226 52,405 787 88 357 363 563 42.7 14,393 7,105* 189* 6,375 Nil 1,486* 1,294* 36,273 Power Capacity Addition (MW) Addition to Refinery Capacity- Petroleum Road Length Upgraded -NHAI (km). Road Length Upgraded NIH (O) & BRDB- km. Road Works Completed under PMGSY (km) Route km RKMs electrified–Railways Additional Locations with Computerized Passenger Reservation–Railways New Lines (km)–Railways Doubling of Lines (km)–Railways Gauge Conversion (km)–Railways Addition to Port Capacity (MTPA) Net Addition to Switch Capacity–Telecom (000 lines) Sources : Ministry of Power, Ministry of Petroleum & Natural Gas, Ministry of Statistics and Programme Implementation (MoSPI), National Rural Roads Development Agency & Ministry of Railways. * April-November. 591 monitored projects. Over time, project delays have been creeping up (Fig 10.1) 10.5 In the current year, core industries and infrastructure services, in general, seem to have come out of the slump witnessed amidst the general slowdown of the economy in the previous fiscal. In the current fiscal, electricity generation emerged from the lacklustre growth witnessed in the previous year and equalled its performance in 2007-08. That this was achieved despite constraints imposed by the inadequate availability of coal and dismal hydel generation owing to the failure of monsoons, attests to its potential. This improved performance was facilitated by the improved availability of gas for the power sector. The coal sector grew at a reasonable rate during the current year (Table 10.2); but the fact that the power sector as a major consumer felt acute shortage of domestic coal availability, raised questions about the required growth in coal production. Rail freight traffic grew at 7.4 per cent, year-on-year, mainly on account of the buoyant growth in traffic in coal, pig iron and finished steel, cement and container services, pointing towards renewed economic activity (Table 10.2). In airways, the situation improved visibly in both cargo and passenger traffic from that obtained in the second half of the previous year; the passenger traffic in the domestic terminals seems to have revived. The rising trend in wireless phone connectivity, which remained unaffected amidst the general slowdown during the Figure 10.1 60 50 Progress in Central - sector projects (Rs 100 crore and above) Ahead of schedule Ontime Delayed Per cent 40 30 20 10 0 Jul May May Oct Oct Mar Mar Nov Dec Dec Nov Jun Jun Jan Feb Aug Aug Sep Sep Jan Feb Apr Apr Oct Jul 2007 2008 2009 Year Source: MoSPI Energy, Infrastructure and Communications Table 10.2 : Growth in core industries and infrastructure services (in per cent) 2007-08 Power Coal Finished Steel Railway Revenue-earning Freight Traffic Cargo Handled at Major Ports Telephone Connections Cell Phone Connections Fertilizers Cement Crude Oil Refinery Natural Gas Air Export Cargo Air Import Cargo Passengers at International Terminals Passengers at Domestic Terminals Source : MoSPI 235 2008-09 H1 2008-09 H2 2008-09 2.7 8.1 0.6 4.9 2.1 10.1 44.8 -2.5 7.5 -1.8 3.0 1.4 3.4 -5.7 3.8 -12.1 2.6 7.9 4.3 8.5 7.2 31.3 25.9 -1.2 6.0 -0.8 4.5 4.8 8.0 5.9 7.2 -7.5 2.9 8.3 -2.7 1.8 -2.4 -4.9 60.3 -3.9 9.0 -2.7 1.5 -1.9 -1.2 -16.9 0.7 -16.4 April-Nov. 2009 6.3 9.3 1.5 7.4 4.7 52.4 11.1 10.5 -1.4 -1.2 32.7 5.6 -4.5 2.8 10.7 6.3 6.0 6.8 9.0 12.0 83.7 38.3 -8.6 7.8 0.4 6.5 2.1 7.5 19.7 11.9 20.6 previous year, continues at a robust pace during the current year too. POWER Generation 10.6 Electricity generation by power utilities during 2009-10 has been targeted to go up by 9.1 per cent to 789.5 billion KWh. The growth of power generation during April–December 2009 was about 6.0 per cent (Table 10.3) as compared to about 2.7 per cent during April-December 2008. Decline in hydroelectric power generation was mainly due to poor monsoons. Coalbased generation of power constituted around 80 per cent of thermal generation and around 66 per cent of the total generation of power (Table 10.4). The power sector is a major consumer of coal using 74 per cent of the coal production. Coal- based power generation was constrained by the shortage in domestic supply of coal and the non-materialization of planned imports during April-December 2009. The total consumption of coal by the power sector during the period was 271.0 million tonnes. About 16.7 million tonnes of coal was imported. Apart from bridging the demand-supply gap, blending of imported high quality coal with high ash domestic coal helps thermal power stations adhere to environmental stipulations of using coal with less than 34 per cent ash content. Table 10.3 : Power Generation by Utilities (Billion KWh) Category Power Generation* i) Hydroelectric ii) Thermal iii) Nuclear iv) Bhutan Import Source : Ministry of Power * Excludes generation from captive and non-conventional power plants and thermal power plants below 20 MW units and hydro power plants below 2 MW. 2007-08 704.5 123.4 559.0 16.8 5.3 2008-09 723.8 113.0 590.0 14.8 5.9 April-December 2008-09 2009-10 540.0 92.4 430.7 11.3 5.6 572.5 85.4 468.5 13.4 5.1 Growth (per cent) 6.0 (-) 7.4 8.8 18.6 (-) 8.3 236 Economic Survey 2009-10 indicates the continuity and change over time and regional variation (Fig 10.2). 10.8 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 basin since April 2009 has improved gas availability for electricity generation (Table 10.5). 10.7 The availability of gas from the KG (Krishna Godavari) basin (D6) and utilization of surplus gas available on fallback basis resulted in better utilization of capacity and higher plant load factor (PLF) as also high growth in electricity generated from gas-based plants. The overall PLF also improved during April-December 2009 (Table 10.4). A sectorwise and region-wise break-up of PLF, a measure of efficiency, from 2007-08 to 2009-10 (April–December) Power deficit Table 10.4 : Thermal power generation during April-December 2009 Components Generation Growth (MUs) PLF (in per cent) Apr.Apr.Dec. Dec. 2008 2009 Coal Lignite Gas Turbine Multi-fuel Diesel Thermal Total 376.6 18.0 70.3 0.4 3.2 468.5 5.5 17.1 30.9 -56.5 -9.0 8.8 75.9 62.7 58.0 53.0 75.2 76.5 74.5 65.9 23.1 76.2 Source: Ministry of Power. 10.9 The deficit in power supply in terms of peak availability and total energy availability rose continuously from 2003-04 to 2007-08, a period characterized by 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 2009, the peak and total energy deficits came down considerably to 12.6 per cent and 9.8 per cent respectively from 13.8 per cent and 10.9 per cent during the corresponding period in the previous year (Figure 10.3). This happened mainly on account of the increase in growth of electricity generation. Figure 10.2A 100 90 80 70 Pe r c e n t Plant load factor of thermal power stations (Sector wise) Figure 10.2B 100 90 2007-08 Pe r c e n t Plant load factor of thermal power stations (Region wise) 80 70 60 50 40 30 20 10 0 2007-08 60 50 40 30 20 10 0 State Central Private All India 2008-09 Apr-Dec 2009 2008-09 Apr-Dec 2009 Northern Western Southern Central North Eastern Table 10.5 : Coal and gas input for the power sector Year Coal (in million tonnes) Consumption 2006-07 2007-08 2008-09 Apr-Dec 2009 ** 302.5 329.6 358.0 271.0 Imports 9.7 10.2 16.1 16.7 Required at 90 per cent PLF 61.2 65.7 66.6 76.5 26.1 27.5 29.2 24.3 Gas (in MMSCMD)* Shortfall Generation loss (BUs) 26.3 31.2 33.7 18.2 Source : Ministry of Power. *Based on normative gas requirements; ** Figures for gas refer to April-November 2009; BU–billion units; MMSCMD–million metric standard cubic metre per day. Energy, Infrastructure and Communications Figure 10.3 20 18 16 14 237 Power supply position: All India Peak deficit Energy deficit Per cent 12 10 8 6 4 2 0 Apr-Dec 2008 Year Capacity addition 10.10 The Eleventh Five Year Plan envisaged a capacity addition of 78,700 MW, of which 19.9 per cent was hydel, 75.8 per cent thermal and the rest nuclear. Projects under execution in various sectors for the Eleventh Five Year Plan have made steady progress (Table 10.6). Table 10.6 : Capacity addition during the Eleventh Five Year Plan (with high level of certainty) (MW) Status Plan Target Commissioned (as on 31.12.2009) Central 4,990 State Private 9,112 Total 36,874 26,783 15,043 78,700 4,990 19,092 definition of commissioning of thermal projects, the capacity addition target for the year 2008-09 was revised as 7,530 MW, against which a capacity of 3,454 MW was added up to March 31, 2009. In the current fiscal, the hydel and nuclear segments made little progress and the progress in the thermal segment was uneven across the three sectors (Table 10.7). 10.12 The main reasons for underachievement of capacity addition targets during 2007-08 and 200809 were delayed and non-sequential supply of material by suppliers, shortage of skilled manpower for construction and commissioning of projects, contractual disputes between project authorities, contractors and their sub-vendors, delay in readiness of balance of plants by the executing agencies, design problems in CFBC boiler and shortage of fuel. 10.13 The Ministry of Power has adopted a monitoring system of capacity addition at different levels: the Central Electricity Authority (CEA), Ministry of Power, Power Project Monitoring Panel and Advisory Group. The CEA and Ministry of Power hold review meetings periodically with developers and other stakeholders. Under Construction 16,232 12,243 14,807 43,282 Source : Ministry of Power. 10.11 The target for 2007-08, the first year of the Eleventh Plan, was initially fixed at 16,335 MW and subsequently reduced to 12,039 MW. Against this revised target, a capacity addition of 9,263 MW was achieved during the year. A capacity addition target of 11,061 MW comprising 9,304 MW thermal, 1,097 MW hydro and 660 MW nuclear was originally planned for 2008-09. On account of revision in the Table 10.7 : Capacity addition target (original) and achievement during April-December 2009 (in MW) Sector Central State Private Total Thermal Target Actual 2,490 4,679 5,833 13,002 1,000 1,979 3,357 6,336 Hydro Target Actual 252 301 292 845 Nil 39 Nil 39 Nuclear Target Actual 660 Nil Nil 660 Nil Nil Nil Nil Total Target 3,402 4,980 6,125 14,507 Actual 1,000 2,018 3,357 6,375 Source : Ministry of Power. Apr-Dec 2009 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 238 Economic Survey 2009-10 case of cost plus projects of public-sector undertakings (PSUs) will continue. However, the price preference will not apply to tariffbased competitively bid projects of PSUs. (iv) Developers of mega power projects will not be required to undertake international competitive bidding for procurement of equipment for the mega power project if the requisite quantum of power has been tied up through tariff-based competitive bidding or the project has been awarded through tariff-based competitive bidding. (v) All benefits, except a basic custom duty of 2.5 per cent only, available under the Mega Power Policy would be extended to expansion unit(s) of existing mega power projects even if the total capacity of expansion unit(s) is less than the thresholdqualifying capacity, provided the size of the unit(s) is not less than that provided in the earlier phase of the project. All other conditions for grant of mega power status shall remain the same. (vi) Mega power projects may sell power outside long-term power purchase agreements (PPAs) in accordance with the National Electricity Policy 2005 and Tariff Policy 2006. Ultra Mega Power Projects (UMPPs) 10.14 Nine UMPPs of 4,000 MW each have originally been identified for development under the international competitive bidding route. Four UMPPs, namely Sasan in MP, Mundra in Gujarat, Krishnapatnam in Andhra Pradesh and Tilaiya in Jharkhand have already been awarded. One unit of 660 MW of the Sasan UMPP and two units of 800 MW each of the Mundra UMPP are expected to be commissioned in the Eleventh Five Year Plan. In respect of the UMPP at Sarguja district in Chhattisgarh, all the pre-Request for Qualification (RfQ) activities have been completed. For the UMPP in Sundergarh district, Orissa, most of the prerequisites for issuing the RfQ are already in place, except issuance of Section 4 Notification. With respect to the UMPP in Tamil Nadu, the site has been finalized at Cheyyur, along with the captive port which is under finalization. For the second UMPP in Andhra Pradesh, the site at Nayunipalli, Prakasam District has been finalized by CEA/PFC in consultation with State Government. For UMPPs to be located in Karnataka and Maharashtra, second UMPP in Gujarat and two additional UMPPs in Orissa, requisite inputs regarding land availability and water linkage are being examined. Mega Power Policy 10.15 Guidelines under the Mega Power Policy, introduced in 1995, were modified in 1998 and 2002 and further amended in April 2006 to encourage power development in Jammu & Kashmir and the northeastern region. In the wake of the important statutory and policy- level changes, some of the provisions of the present Mega Power Policy were revisited, bringing them in line with the National Electricity Policy 2005 and Tariff Policy 2006. With a view to rationalize the procedure for grant of mega certificate and facilitate quicker capacity addition, following modifications to the Mega Policy have been made. (i) The existing condition requiring privatization of distribution by power-purchasing states will be replaced by the condition that they shall undertake to carry out distribution reforms as laid down by the Ministry of Power. (ii) The condition requiring inter-State sale of power for getting mega power status will be removed. (iii) The present dispensation of 15 per cent price preference available to domestic bidders in Induction of supercritical technology through bulk ordering 10.16 The Government approved proposals for the induction of supercritical technology through bulk ordering of 11 units of 660 MW (totalling 7,260 MW) by the National Thermal Power Corporation (NTPC) Ltd. for itself and on behalf of its joint venture (JV) companies and on behalf of the Damodar Valley Corporation (DVC). Following this, NITs for bulk tender of Steam Generator Packages and Steam Turbine Generator Packages were issued by the NTPC on October 16, 2009. The award process is likely to be completed by July 2010. Development of hydro power 10.17 Forty-six hydro projects with an aggregate capacity of 13,675 MW are under construction in the country. The main reasons for their slow development include difficult and inaccessible potential sites, difficulties in land acquisition, rehabilitation, environmental and forest –related issues, inter-State issues, geological surprises and Energy, Infrastructure and Communications contractual issues. Private-sector participation in hydel power projects has been increasing; there are 14 schemes with an installed capacity of 4,383 MW under construction in the private sector. Private developers have been allotted 129 schemes with an installed capacity 36,123 MW by States which are yet to be taken up for construction. The bulk of the potential which is in the Himalayan region is yet to be tapped. Out of the 162 projects for which preliminary feasibility reports were prepared under the 50,000 MW Hydro Electric Initiative, 77 (33,951 MW) have been taken up for detailed survey and investigation and preparation of detailed project reports (DPRs)/implementation. So far, DPRs for 21 schemes have been prepared. 10.18 Some of the features of the new hydro policy include making available the dispensation for project development allowed for PSUs to the private sector for a period of five years; better relief and rehabilitation packages for affected families; risk mitigation for developers and facilitation of early financial closure. A Task Force under the Chairmanship of the Minister of Power has been constituted to look into all issues relating to the development of hydro power. Another Task Force constituted to develop the model contract documents for hydro power projects has since prepared them. 239 Regulatory Commissions have powers to grant interState and intra-State trading licences respectively. The Central Electricity Regulatory Commission (CERC) has so far granted 44 inter-State trading licences, of which 40 are in existence as on July 31, 2009. Electricity trading by licensed inter-State traders is picking up (Table 10.8). Inter-State trading margin regulations 2010 10.21 The CERC has issued new regulations fixing trading margins for inter-State trading in electricity. The main features of the new regulations are: i) the trading margin shall apply only to short-term buy – short–term sell contracts for inter-State trading. ii) the Trading margin shall not exceed 4 paise per unit if the sell price of electricity is less than or equal to Rs.3 per unit. The ceiling of trading margin shall be 7 paise per unit in case the sell price of electricity exceeds Rs 3 per unit. iii) if more than one trading licensee is involved in a chain of transactions, the ceiling on the trading margin shall include the trading margins charged by all the traders put together. In other words, traders cannot circumvent the ceiling by routing the electricity through multiple transactions. iv) long-term agreements have been exempted from trading margins to facilitate innovative products and contracts for new capacity addition which involve higher risk in transactions. Transmission, Trading, Access and Exchange 10.19 An integrated power transmission grid helps to even out supply-demand mismatches. The existing inter-regional transmission capacity is about 20,800 MW. This has enabled inter-regional energy exchanges of about 36,815 MUs during AprilDecember 2009. Open access 10.22 The regulations on open access in inter-State transmission and those on inter-State trading are issued by the CERC while the responsibility for introducing open access at distribution level rests with State Electricity Regulatory Commissions (SERCs). States have been asked to take steps to ring fence the State Load Dispatch Centres (SLDCs) so that they are not be under any pressure from utilities to counter open access. 10.23 Open access in inter-State transmission is fully operational. To boost open access, the CERC Trading of Electricity 10.20 Power trading facilitates disposal of surplus power with distribution utilities and meeting the shortterm peak demand. The Central and State Electricity Table 10.8 : Electricity trading Period Volume of electricity traded (MUs) 14,188.8 15,022.7 20,964.8 21,916.9 15,551.7 Weighted average purchase price (Rs./kWh) 3.14 4.47 4.48 7.25 5.32 Weighted average sale price (Rs./kWh) 3.23 4.51 4.52 7.29 5.36 Trading margin (Rs./kWh) 0.09 0.04 0.04 0.04 0.04 2005-06 2006-07 2007-08 2008-09 April-Oct. 2009 Source : Ministry of Power. 240 Economic Survey 2009-10 Table 10.9 : Status of applications received for open access in distribution (November 30,2009) States No. Andhra Pradesh Chhattisgarh Gujarat Madhya Pradesh Maharashtra Rajasthan Tamil Nadu Other States (*) Total 11 16 44 30 64 31 16 56 268 Received MW. 1,055.8 404.3 5,534.0 60.2 14,452.0 277.6 1,752.0 2,195.1 25,731.0 Approved No. 4 6 40 30 57 29 1 45 212 MW. Implemented No. MW. 4 5 40 30 7 29 0 38 153 51.3 53.0 5,523.2 60.2 163.0 264.3 0.0 1,357.3 7,472.4 51.3 66.0 5,523.2 60.2 14,310.5 264.3 18.0 1,457.2 21,750.8 Source: Forum of Regulators. * Other States include Haryana, Himachal Pradesh, Jharkhand, Kerala, Orissa, Punjab, Uttar Pradesh, West Bengal and Karnataka. has recently notified a regulation on Connectivity, Long-term Access and Medium-term Open Access in inter-State Transmission. The regulation has introduced medium-term open access to the interState grid. A transmission corridor can now be availed of for a period ranging from three months to three years. Provisions have also been made for seeking connectivity to grid. The new dispensation has abolished the discrimination between public-sector and private-sector generators in the matter of connectivity to grid. Also, now any 100 MW and above consumer can be connected directly to the Central Transmission Utility grid without having to go to SLDCs. 10.24 The volume of approved open access transactions (in energy terms) in inter-State transmission has increased over the period. The energy approved for open access through the bilateral route involving trade through electricity traders or directly between distribution licencees was 16,441 MUs in 2004-05, 27,756 MUs in 2008-09 and 24,443 MUs in 2009-10 (up to Dec 2009). With the introduction of power exchanges in 2008, open access is approved separately for collective transactions in the exchanges. The approved energy for open access through such collective transactions was 2,765 MUs in 2008-09 and 4,831 MUs in 200910 (up to December 2009). There has been migration of the volume of energy approved from bilateral to collective transactions. The total volume of energy approved for open access in inter-State open access (including bilateral and collective transactions) was 30,521 MUs in 2008-09 and 29,274 MUs in 2009-10 (up to December 2009). 10.25 Status of applications received for open access in distribution varies across select States (Table 10.9). The open access charges vary widely across States. Power exchange 10.26 The CERC has issued power market regulations which focus on creating an overall power market structure and role of power exchanges and traders and provide for market oversight and surveillance. The two power exchanges, namely the Indian Energy Exchange Ltd. (IEX), New Delhi, and the Power Exchange India Ltd. (PXIL), Mumbai, have been in operation from June 27, 2008 and October 22, 2008 respectively. Increasing volumes of electricity transacted through power exchanges would indicate the progress in this regard (Table 10.10). Table 10.10 : Volume of electricity transacted by power exchanges during April-October 2009 (in MUs) Day-Ahead Market Term-Ahead Market * IEX PXIL IEX PXIL 3,047.5 384.7 17.5 2.2 Source : Ministry of Power. * Term-Ahead Contracts introduced at the two power exchanges from September 15, 2009. Promotion of green power 10.27 The CERC has notified tariff regulations for electricity generated from renewable energy (RE) sources (Box10.1).These regulations assume Energy, Infrastructure and Communications 241 Box 10.1 : Terms and conditions for tariff determination from Resources The CERC has notified tariff regulations for electricity generated from RE sources. Salient features of the regulations are as under: Control Period of three years, except for solar projects for which capital cost shall be reviewed every year in view of technological advancement; Tariff Period is 13 years for RE technologies; excluding SHP below 5 MW (35 years), Solar Photovoltaic (PV) and Solar Thermal (25 years) as these technologies need handholding support for a longer time; Thirteen Years tariff period covers the debt repayment obligation; beyond the tariff period, RE project is to compete. Provision for generic levellized tariff based on suo motu petition for RE technology such as wind energy, small hydro power, biomass power (based on rankine cycle technology), non-fossil fuel cogeneration; and solar PV and solar thermal. Provision for project-specific tariff for municipal solid waste projects, solar PV and solar thermal power projects, (if the developer so opts), hybrid solar thermal power plants and biomass projects other than those based on rankine cycle technology application with water cooled condenser. taken up in two parts in towns and cities with population more than 30,000 (10,000 in case of special category States). Part A 10.30 Part A shall include projects for establishment of baseline data and information technology (IT) applications for energy accounting/ auditing and IT-based consumer service centres. Preparation of baseline data covering consumer indexing, GIS 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 the 11Kv transformers and adoption of IT applications for meter reading, billing and collection, energy accounting and auditing, redressal of consumer grievances and establishment of IT-enabled consumer service centres. The baseline data shall be verified by an independent agency appointed by the Ministry of Power. 10.31 A steering committee has been constituted under the Secretary (Power) in order to sanction projects, monitor and review implementation, approve guidelines for operationalizing the components of the scheme, approve and sanction activities to be taken up under Part C of the scheme, appoint agencies for verifying and validating baseline data systems andfor verifying fulfilment of programme conditions by utilities, and approve conversion of loan into grant upon fulfillment of necessary conditions. The steering committee has approved 1,344 projects for 22 states under Part A at the cost of Rs 4,859.60 crore. The budget allocation for 2009-10 is Rs 1,730 crore (Rs 1,650 crore as loan and Rs 80 crore as grant). Six States, namely West Bengal, Madhya Pradesh, Rajasthan, Karnataka, Uttarakhand and Gujarat have awarded the work for implementation of projects approved under Part A of the RAPDRP to the IT Implementing Agency. special importance in view of the National Action Plan on Climate Change which stipulated that minimum renewable purchase standards be set at 5 per cent of the total power purchases in year 2010 and increase thereafter by 1 per cent every year for ten years. The Commission has issued generic tariff for various RE technologies for 2009-10. 10.28 The Forum of Regulators has evolved a Renewable Energy Certificate (REC) mechanism at national level to facilitate inter-state transaction of RE sources. The CERC has notified the REC Regulation for implementing an REC framework. This is a market-based instrument to promote renewable energy and facilitate compliance with renewable purchase obligations under inter-State transactions of RE generation. The REC mechanism is aimed at addressing the mismatch between availability of RE resources in a State and the requirement of the obligated entities to meet the renewable purchase obligation. Part B 10.32 Part B shall include regular distributionstrengthening projects. These include renovation, modernization and strengthening of 11 Kv- level substations, transformers/transformer centres, reconductoring lines at 11Kv level and below, load bifurcation, load balancing, high voltage distribution system (HVDS) and installation of capacitor banks and mobile service centres. In exceptional cases, where sub-transmission system is weak, AT&C losses and Restructured APDRP 10.29 The focus of the Restructured Accelerated Power Development Reforms Programme (RAPDRP) is on actual, demonstrable performance in terms of reduction in aggregate technical and commercial (AT&C) losses. Projects under the scheme will be 242 Economic Survey 2009-10 carrying out consumer attitude survey to assess the impact of the measures taken. strengthening at 33 Kv or 66 Kv level may also be considered. 10.33 Expected investment in Part A is Rs 10,000 crore and that in Part B Rs 40,000 crore. Initially 100 per cent funds for Part A and 25 per cent (90 per cent for special category States) for Part B projects shall be provided through loan from the Government of India. The balance funds for Part B projects shall be raised from financial institutions. The entire amount of loan for Part A projects shall be converted into a grant once the establishment of the required baseline data system is achieved. 10.34 Up to 50 per cent (90 per cent for special category States) of the cost of Part B projects shall be converted into a grant in five equal tranches on achieving the 15 per cent AT&C losses in the project area on a sustainable basis for a period of five years. In addition, utility level loss reduction (AT&C losses) @ 3 per cent per annum for utilities with baseline loss levels exceeding 30 per cent and @ 1.5 per cent for utilities with baseline loss levels less than 30 per cent have to be achieved. Part D 10.36 Under Part D of the scheme, there is provision for incentive for utility staff in towns where AT&C loss levels are brought below the baseline. An amount equivalent to 2 per cent of the grant for part B projects is proposed as incentive for utility staff in project areas where AT&C loss levels are brought below 15 per cent. Rural electrification 10.37 Under the Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY), 69,963 villages have been electrified and connections have been released to 88.8 lakh BPL households up to January 15, 2010. Under Tenth Plan, 235 projects covering 68,763 villages and 83.10 lakh BPL connections were sanctioned at a cost of Rs. 9732.90 crore. In PhaseI of the Eleventh Five Year Plan period 332 projects have been sanctioned for implementation at a cost of Rs 16,506 crore for electrification of 49,736 unelectrified villages and release of electricity connections to 162.96 lakh BPL households. Till January 15, 2010, 328 projects have been awarded. Franchisees are in place in 1,02,255 villages in 16 States as on January 15,2010. Part C 10.35 Part C is an enabling component for implementation of the APDRP. A provision of Rs 1,177 crore through Gross Budgetary Support has been made in the scheme. This part is to be implemented by the Ministry of Power/nodal agency. The Power Finance Corporation has been appointed as the nodal agency for operationalizing the programme. The activities under Part C include: Preparation of template for system requirement specifications for subdivision automation and customer relations management module, as well as for automated baseline data collection systems; validation of the baseline data to be done by independent agencies; appointment of project advisors and project management consultants to assist in monitoring, to validate project proposals submitted by distribution companies (project advisers) and to assist distribution companies in formulating detailed project reports (DPRs), in standardizing bidding/contract documents, managing the bid process, etc. (project management consultants); project evaluation for which a panel of evaluators will be finalized through a bidding process; capacity building and development of franchisees in the distribution sector; and Energy Conservation and efficiency 10.38 Several measures have been taken by the Ministry of Power and the Bureau of Energy Efficiency to promote energy conservation and its efficient use targeting 5 per cent reduction in demand during the Eleventh Five Year Plan through schemes being implemented by the Bureau of Energy Efficiency ( Table 10.11). 10.39 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. The National Mission for Enhanced Energy Efficiency is one of the eight missions under the National Action Plan on Climate Change. The scheme has been approved and its implementation will commence in 2010-11. The objective of the Mission is to achieve growth with ecological sustainability by devising cost-effective strategies for end-use demand side management. Energy, Infrastructure and Communications Table 10.11 : Measures for energy conservation & efficiency Initiative Components Achievements/developments 243 Bachat Lamp Yojna Provides high-quality compact fluorescent lamps to consumers at rate comparable to that of incandescent bulbs The pilot scheme was approved by the CDM (Clean Development Mechanism) Executive Board of the UNFCCC (United Nations Framework Convention on Climate Change) in 2008-09. Avoided capacity generation of 104 MW achieved. Labelling of ACs, refrigerators, TFLs and transformers made mandatory from January 7, 2010. Labelling of geysers, motors, pumps, colour TVs, LPG stoves, ceiling fans introduced on a voluntary basis. About 1,744.84 MW of avoided capacity generation achieved. Forty-four architects have been empanelled. Investment grade audits have been initiated in 35 Central Government buildings and 400 buildings in States. Thirty-five ESCOs have been empanelled and accredited. Avoided capacity generation of 7 MW achieved. Standards & Labelling Scheme Lays down minimum energy performance standards for high energy equipment and appliances. Energy Conservation, Building Code (ECBC) in existing buildings ECBC sets performance standards for new commercial buildings with connected load of more than 500 KW or 600 KVA of electricity consumption, energy conservation measures in existing buildings proposed through Energy Service Companies (ESCOs) under performance contracting. DSM in agriculture municipalities & Demand Side Management (DSM) Approval for implementing the scheme was received in the last quarter of 2008-09 and it is now operational. Action plans for 28 states are under implementation. Avoided capacity generation of 787 MW achieved. Avoided capacity generation of 834 MW achieved. Approval for the scheme was received in the last quarter of 2008-09. Now operational. Approval for the scheme was recently obtained. Strengthening statedesignated agencies Financial assistance to SDAs for strengthening institutional capacities For specified sectors, large, medium and small industries, SDAs and municipalities For small enterprises and medium National Energy Conservation Awards Energy efficiency enterprises in State Energy Conservation Fund Central Government to contribute to the State Conservation Fund once it is set up by the respective State for energy conservation on activities. Source : Ministry of Power. PETROLEUM Oil and gas production 10.40 With around 75 per cent of total oil consumption in the country being met through imports, the dependence on imports for petroleum and petroleum products continued to be high. The domestic supply of crude oil remained around 34 million metric tonnes (MMT) and natural gas at about 32 billion cubic metric tonnes (BCM) during the past five years. With 15 new oil and gas discoveries during the current financial year, domestic availability is expected to improve. During 2009-10, the projected production for crude oil is 36.7 MMT, which is about 11 per cent higher than the actual crude oil production of 33.5 MMT in 2008-09. This is primarily due to increase in crude oil production from Rajasthan (2.4 MMT) and the KG deepwater (0.8 MMT). The 244 Economic Survey 2009-10 projected production for natural gas (including coal bed methane [CBM]) for 2009-10 is 50.2 BCM which is 52.8 per cent higher than the actual production of 32.8 BCM in 2008-09. The increase in natural gas production is primarily from the KG deepwater block. Gas Production from KG-D6 Basin 10.45 Gas production from KG-D6 began on April1, 2009. It is expected that production would be ramped up to 80 MMSCMD by the end of 2009-10. An Empowered Group of Ministers (EGOM) constituted to decide commercial utilization of gas under the NELP has allocated 61.611 MMSCMD of gas produced from KG-D6 on firm basis and 30 MMSCMD on fall-back basis to various priority sectors. Progress of the New Exploration and Licensing Policy (NELP) and Coal Bed Methane Policy 10.41 Of the estimated sedimentary area of 3.14 million sq. km, at present 1.17 million sq. km is held under petroleum exploration licences. Since operationalization of the NELP in January 1999, 72 oil and gas discoveries have been made by private/ joint venture (JV) companies in 21 blocks. Under the NELP, more than 600 MMT of oil equivalent hydrocarbon reserves has been added. 10.42 As on April 1, 2009, investment made by Indian and foreign companies was of the order of US $ 11.9 billion. After concluding seven rounds of NELP, 203 production-sharing contracts (PSCs) have been signed. The area awarded under the NELP for exploration was 46 per cent of the Indian sedimentary basin. The eighth round of the NELP was launched in April 2009 offering the highest number of exploration blocks ever, that is 70 blocks covering a sedimentary area of about 1,63,535 sq. km. The offered blocks included 24 deepwater blocks, 28 shallow water blocks, 8 on-land blocks and 10 TypeS blocks. As part of the CBM policy approved in July 1997, 26 CBM blocks have been awarded in the first three rounds. As part of CBM IV, the Government offered 10 blocks covering an area of about 5,000 sq. km. spread over seven states, namely Assam, Jharkhand, Orissa, Madhya Pradesh, Chhattisgarh, Maharashtra and Tamil Nadu. 10.43 The Government has received 76 bids for 36 blocks out of 70 blocks offered under NELPVIII and 26 bids for 8 blocks out of 10 blocks offered under CBMIV by the bid-closing date, that is October 12, 2009. In respect of 16 deep water blocks, 15 shallow water blocks and 3 on-land blocks, no bids were received. A total of 62 companies comprising 10 foreign and 52 Indian companies have made bids. Crude oil production from Rajasthan 10.46 Crude oil production by the Rajasthan Cairn Energy India Pty. Ltd. has started in block RJ-ON90/1 with effect from August 29, 2009 at the initial production rate of 3,500 barrels per day. Production from this block, which is of very high quality, is likely to increase during 2009 through 2011. The Government has designated IOC, MRPL and HPCL for lifting part of the crude oil production from this block after ascertaining the capacity of receiving refineries of the nominees. The production expected from this block during 2009-10 is 2.4 MMT. Improved oil recovery/enhanced oil recovery (IOR/EOR) 10.47 Work programmes have been undertaken primarily by the Oil and Natural Gas Corporation (ONGC) for IOR/EOR in its 15 largest fields, which account for 80 per cent of its reserves and production. Eighteen IOR/EOR schemes of have already been approved to increase the recovery factor from 14 ageing oil & gas fields of the ONGC at an estimated cost of about Rs14,510 crore. Development of marginal fields 10.48 Concerted efforts have been made to put new and marginal fields in production through in-house resources as well as through service contract. Out of a total of 165 marginal fields, ONGC has already monetized 56. Of the remaining 109 fields, 68 are being monetized in-house by ONGC, 20 through service contracts and 21 are likely to be offered. The marginal field policy is being finalized. Underground coal gasification (UCG) 10.49 ONGC entered into an Agreement of Collaboration with the National Mining Research Centre-Skochinsky Institute of Mining in Russia. In the selected Vastan mine block, a seismic survey was carried out and 18 boreholes were drilled for detailed UCG site characterization. Vastan in Gujarat and Hodu Sindri in Rajasthan have been found suitable for UCG stations. Pilot production of UCG at Vastan by the ONGC would commence in 2010. Domestic reserves and production 10.44 Balance recoverable crude oil and natural gas reserves in the country are 736.45 MMT and 1,119.55 BCM respectively. New oil and gas reserves found by private/JV companies in the KG deepwater and Rajasthan are in production. Energy, Infrastructure and Communications 245 Gas hydrate 10.50 India is a pioneer in the field of gas hydrate. In accordance with the roadmap for the National Gas Hydrate Programme (NGHP), India has already acquired core samples with the help of the US drill ship JOIDES Resolution. In December 2008, a memorandum of understanding (MOU) was signed between the Directorate General of Hydrocarbons and the U S Geological Survey for cooperation on exchange of scientific knowledge and technical personnel in the field of gas hydrate and research. The second NGHP expedition has been planned in 2010 to map the prospects of gas hydrate in Krishna Godavari and Mahanadi deepwater areas. The LPG customer base is targeted to increase from 10.6 crore as on April 1, 2009 to 16.0 crore by the year 2015. The focus would be on States and regions where coverage is below the national average. A new low-cost LPG distributor scheme, the RGGLVY was launched on October 16, 2009 with a view to releasing LPG connections in rural areas where operations with the present norms are economically unviable. The scheme has been launched at locations having potential of up to 600 refills per month. Advertisements inviting applications for distributorship have been released in eight States covering 1,215 locations. Equity oil & gas from abroad 10.51 The Government is encouraging national oil companies to aggressively pursue equity oil and gas opportunities overseas. The Oil & Natural Gas Corporation Videsh Limited (OVL) produced about 8.75 MMT of oil and equivalent gas in 2008-09 from its assets abroad in Sudan, Vietnam, Venezuela, Russia, Syria and Colombia. In 2008-09, OVL has acquired seven blocks in five countries comprising two blocks each in Brazil and Columbia and one each in Myanmar, Venezuela and Trinidad & Tobago. The largest ever acquisition of a foreign company, Imperial Energy Plc. UK. (IEC) by an oil PSU, OVL has taken place. OIL-IOC alliance has also acquired one block in Timor Leste and two blocks in Egypt. BPCL along with Videocon has acquired participating interest in 10 blocks in Brazil. Public grievances redressal system in Oil Marketing Companies (OMCs) 10.54 In order to streamline the public grievances redressal system, OMCs have started unique tollfree telephone numbers that are provided to register complaints and follow up. Customer contact with senior company officials is fixed on prescribed days of the month. For booking refill cylinders 24x7, SMS and interactive voice response system (IVRS) facilities have been introduced. Special efforts towards energy (oil & gas) conservation 10.55 The Petroleum Conservation Research Association (PCRA) is mandated to formulate and spread awareness on energy / petroleum conservation. This is carried out through field- level activities like energy audit, fuel oil diagnostic studies, service to small-scale industries, institutional training programmes, seminars, exhibitions, painting competitions and workshops. During 2009-10, 3,572 activities have so far been conducted. The PCRA has carried out technical/R&D interventions aimed at reducing energy intensity in the small and medium enterprises. A Technology Conservation Centre has been set up at the PCRA, New Delhi, for effective information dissemination on energy-efficient products and technologies for the general public. The Centre has been attracting a large number of visitors including international visitors. 10.56 The PCRA media campaign “Save Fuel Yanni Save Money” was adopted to develop a strong motivation for attitudinal change in favour of fuelefficient measures in petroleum-intensive sectors. An impact assessment survey showed that the PCRA campaign was very successful and resulted in significant fuel saving. Refining & pipeline capacity 10.52 The total installed capacity of refineries increased to 177.97 MMTPA as on April 1, 2009. The new refineries at Bhatinda, Paradip and Bina will further augment domestic refinery capacity. By the end of the Eleventh Five Year Plan, refinery capacity is expected to reach 240.96 MMTPA. The country has a network of 24 product pipelines with a length of 10,514 km and capacity of 62.91 MMT; 3 LPG pipelines of 2,197 km length and 4.50 MMT capacity; 6 crude oil pipelines of 5,795 km length and 52.75 MMT capacity. Rajiv Gandhi Gramin LPG Vitrak Yojana (RGGLVY) 10.53 The Ministry of Petroleum & Natural Gas has formulated a vision for the year 2015 ‘Customers Satisfaction & Beyond’ wherein it is targeted to cover 75 per cent of the population with LPG by that year. 246 Economic Survey 2009-10 stakeholders especially captive blocks and large PSUs like Coal India Ltd. (CIL) and Singareni Collieries Company Ltd (SCCL). During 2008-09, the import and export of coal was about 59 million tonnes and 1.66 million tonnes respectively. The corresponding figures stood at 18.85 million tonnes and 0.39 million tonnes during April-June 2009. 10.58 Under the e-auction scheme, SCCL and CIL have started e-auction of coal. During 2008-09, SCCL sold 3.63 million tonnes of coal through e-auction (Table 10.12). 10.59 The Government has approved formation of a Special Purpose Vehicle (SPV) , namely International Coal Ventures Limited (ICVL ) for securing metallurgical coal and thermal coal assets overseas by PSUs including CIL. Aspects like the functioning of ICVL and strength of personnel are being finalized. The Empowered Committee of Secretaries constituted for considering the proposals of ICVL for acquiring coal properties abroad will also consider CIL’s proposals for investing in coal assets abroad which are more than Rs 1,000 crore. 10.60 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 million tonnes per annum with an estimated capital investment of about Rs 2,500 crore. These include seven coking coal washeries and 13 non-coking coal washeries. 10.61 For increasing production from underground mines, initiatives like identification of high capacity underground mines for development with latest technology, restart of mining in abandoned mines forming joint ventures with reputed mining companies, introduction of continuous miners and PSLW as a mass production technology in more mines, introduction of high wall mining and upgradation of equipment size are being taken. 10.62 As of now, 213 coal blocks with geological reserves of about 49.07 billion tonnes have been allocated to public/private companies. However, the Box 10.2 : Major Initiatives in the petroleum sector at a glance In the eighth round of the NELP (NELP-VIII), 1.62 sq. km area will be covered comprising 70 blocks. Out of 70 blocks, 36 have been awarded under NELP-VIII. In CBM-IV, out of 10 new blocks 8 have been awarded. During 2009-10, crude oil production is projected to increase by 11 per cent and natural gas production by 53 per cent. Crude oil production commenced in block RJ-ON90/1 in August 2009. Eighteen new IOR/EOR schemes have been approved to increase the recovery factor from 14 ageing oil & gas fields of the ONGC at a cost of Rs 14,510 crore. The first natural gas production from block D6 of the KG Basin, undertaken by Reliance Industries Limited (RIL) and NIKO Resources Limited, commenced in April 2009. The Empowered Group of Ministers has decided to allocate 61.6 MMSCMD of gas produced from KGD6 on firm basis and 30 MMSCMD on fall-back basis to various priority sectors. The RGGLVY has been launched in October 2009 to increase rural penetration of LPG. Vision-2015 for LPG to focus on providing 5.5 crore new connections till 2015 to raise population coverage from 50 per cent to 75 per cent. COAL 10.57 More than 92 per cent of the coal production in India is of non-coking coal. Raw coal production during April-November 2009 was 325.87 million tonnes as against 289.69 million tonnes in the same period of the previous year, registering a growth of 12.5 per cent. Coking coal production for the period was 25.60 million tonnes against 18.85 million tonnes of the same period in the previous year. The growth rate in the production of raw coal increased from 6 per cent during 2003-04 to 2007-08 to 8.4 per cent in 2008-09, due to enhanced production by all the Table 10.12 : E-auction by CIL & SCCL during April-December 2009 (million tonnes) Company Offered Quantity up toDec.2009 Sold Quantity up to Dec.2009 Per cent Increase on notified price up to Dec. 2009 60.3 45.0 CIL SCCL Source: Ministry of Coal. 37.13 1.29 30.66 1.07 Energy, Infrastructure and Communications effective allocation is only of 208 coal blocks. Out of the 208 coal blocks allocated, 95 with geological reserves of about 27,388 million tonnes have been allocated to public-sector companies and the rest to private-sector companies. Out of the total allocated blocks, 25 have commenced production. The production from these coal blocks during AprilNovember 2009 was 23.66 million tonnes (provisional). 10.63 The Government granted Miniratna Status (Category-II) to Central Mine Planning & Design Institute Limited (CMPDIL), Ranchi, in May 2008. 247 segment accounts for about 70 per cent of revenue. Within the freight segment, bulk traffic accounts for nearly 84 per cent of revenue-earning freight traffic (in physical terms), of which about 44 per cent is coal (Table 10.13). Rationalization of freight rates and passenger fares 10.65 There has been no across-the-board increase in freight rates in recent years. Railways has taken a number of steps to attract additional traffic, one of which is the dynamic pricing policy through which differential tariff is charged to take care of skewed demand during different periods of the year and between different regions. Besides, a slew of freight incentives schemes have been launched, particularly in the traditional empty-flow direction and during lean season. The procedure for availing of the benefits has been simplified. The freight for export of iron ore has been reviewed and the rate brought down significantly. RAILWAYS 10.64 Indian Railways is the third largest rail network in the world under a single management. Better resource management, through increased wagon load, faster turnaround time and a more rational pricing policy led to a perceptible improvement in the performance of the Railways. Out of freight and passenger traffic, the freight Table 10.13 : Performance of the Indian Railways Change (per cent) Particulars 1. Revenue-earning Freight Traffic (million tonnes) i) Coal ii) Raw material for Steel Plants (excl. Iron Ore) iii) Pig Iron & Finished Steel (a) from Steel Plants (b) from Other Points iv) Iron Ore for Export (a) for Export (b) for Steel Plants (c) for Other Domestic Users v) Cement vi) Foodgrains vii) Fertilizers viii) Petroleum Oil Lubricants ix) Container Service (a) Domestic Container (b) Export-Import Container x) Balance (Other Goods) 2. Net Tonne km (billion) 3. Net tonne km/wagon/day (BG) e 4. Passenger Traffic Orig. (million) 5. Passenger km(billion) 2007-08* 793.9 336.8 11.2 25.8 20.8 5.0 136.7 53.7 43.6 39.3 79.0 38.2 35.8 35.9 21.1 3.7 17.4 73.3 521.4 3,539@ 6,524.0 770.0 2008-09* (P) 833.4 369.6 10.9 28.2 22.0 6.2 130.6 45.8 42.9 41.9 86.3 35.6 41.3 38.1 27.8 6.5 21.3 65.0 551.4 8,762$ 6,920.0 838.0 Apr.-Nov. 2008-09 2009 (P)* 573.5 252.8 7.8 20.0 15.6 4.5 88.6 30.1 29.7 28.7 59.6 22.7 30.1 26.2 22.6 5.5 17.1 43.2 378.4 8,958# 4,849.8 612.0 5.0 9.7 -3.0 9.4 6.0 23.4 -4.5 -14.9 -1.6 6.6 9.2 -6.8 15.4 6.1 31.7 74.6 22.4 -11.4 5.8 — 6.1 8.8 Apr.-Nov. 2009 7.4 8.4 5.6 15.7 16.8 11.8 3.7 6.7 1.4 3.2 9.1 4.0 5.3 2.2 16.9 49.5 9.2 6.7 9.6 3.7 4.7 7.8 Source : Ministry of Railways. Notes: P - Provisional ; e excluding Metro Kolkata; * excluding Konkan Railway Loading; $ calculated in terms of 8 wheelers; @ calculated in terms of 4 wheelers; 248 Economic Survey 2009-10 10.66 Similarly, passenger fares have also been rationalized. With effect from April 1, 2009, the existing basic fares up to Rs 50 per passenger for non-suburban mail/express including super-fast trains and non-suburban ordinary passenger trains were reduced by giving a discount of Re 1. Fares beyond Rs 50 per passenger were reduced by giving a discount of 2 per cent. Upgradation of passenger amenities Adarsh Stations 10.72 Indian Railways has decided that 17 more railway stations would be added to the existing list of 358 Adarsh Stations. Railways will develop Adarsh Stations with basic facilities such as drinking water, adequate toilets, catering services, waiting rooms and dormitories especially for lady passengers and better signage. The work has started at various stations. Launch of new trains 10.67 Indian Railways has launched a new class of passenger-carrying Duronto trains in September 2009. Seven Duronto trains have already been introduced. Duronto is a non-stop super fast passenger-carrying train, ensuring better speed, comfort and security for passengers. 10.68 The first-ever Yuva trains which are targeted mainly at unemployed youth have been introduced between Howrah and Delhi and Hazrat Nizamuddin and Bandra. These Yuva trains are being introduced to ensure that youth of low-income groups can travel at low rates between major cities. The Yuva fares are applicable to unemployed persons between the age group 15 and 45 and 60 per cent of the seats are reserved for them. The total chargeable fare for Yuva passengers inclusive of all other charges like Reservation Fee, super fast train charge and development charge will not exceed Rs 299 up to a distance of 1,500 km and Rs 399 for distance more than1,500 and up to 2500 km. 10.69 Indian Railways has introduced the Izzat scheme of uniformly priced monthly seasons tickets (MSTs) at Rs 25 inclusive of all surcharges which will be issued for a distance up to 100 km to persons working in the unorganized sector with monthly income not exceeding Rs 1,500. These MSTs are being issued for journeys with effect from August 1, 2009. 10.70 Indian Railways introduced only ladies Matrabhumi train services in Delhi, Chennai and Kolkata suburban on the pattern of Mumbai suburban as working women face considerable difficulties in travelling to work. These services will run during office hours. 10.71 To attract high-value and transit-sensitive nonbulk parcel traffic, Indian Railways introduced DelhiHowrah-Delhi, Delhi-Ahmedabad/ Vapi-Howrah faster parcel services/premium parcel express trains named Tejshree Parcel Sewa as a pilot project. This is envisaged as a time-tabled service from dedicated terminals with guaranteed transit time. Quality food in trains 10.73 Indian Railways Catering and Tourism Corporation Limited (IRCTC), a PSU of the Ministry of Railways, has started a centralized 24x7 toll-free telephone No. 1800-111-139 for railway users to make suggestions on catering services on Indian Railways. For meeting the catering requirements of common passengers, Janta meals priced at Rs 10 has been revamped. On an average 1.1 lakh Janata meals are sold every day on Indian Railways. Besides, Railways has plans to open Janahaar cafeterias exclusively to sell economy meals and Janta meals. Six Janahaar cafeterias have been commissioned at Howrah, Bangalore, Secunderabad, Chennai, Lucknow and Gorakhpur railway stations and five more will be set up shortly at Sealdah, Patna, Kharagpur, New Jalpaiguri and Mysore. Catering services similar to Rajdhani/Shatabdi express are provided in Duronto Trains. All sleeper-class passengers of Duronto trains are also provided meals onboard. Multifunctional complexes 10.74 Multifunctional complexes are being developed at 50 railway stations serving places of pilgrimage, industry and tourist interest in different parts of the country this year. Multifunctional complexes in station premises will provide rail users facilities like shopping, food stalls and restaurants, book stalls, PCO/STD/ISD/fax booths, medicine and variety stores, budget hotels and underground parking. 10.75 The authorized enquiry for Indian Railways, 139 – Rail Sampark, has recently introduced SMS facility, which is a premium service. The users can obtain information regarding PNR status, fare, seat availability and arrival/departure by sending SMSs in the specified syntax to 139. Energy, Infrastructure and Communications 249 Train information 10.76 Real-time train running information to passengers is proposed to be provided through Online Coach Indication Display Boards and Train Arrival/Departure Display Boards. The trial of one of the pilot projects, Satellite Imaging for Rail Navigation (SIMRAN) using real-time train tracking through GPS and mobile (GSM) technologies has been successfully carried out by the Research Design and Standards Organisation (RDSO), Lucknow, in coordination with IIT/Kanpur. to 102, compared to the corresponding period of the previous year. Accidents per million train kilometers, an important index of rail safety, also came down from 0.55 in 2001-02 to 0.20 in 2008-09. Improving communication system on Railways 10.81 RailTel was set up for creating optical fibre cable (OFC)-based communication infrastructure for modernizing the communication system for train control, operations and safety and to generate revenue through commercial exploitation of surplus capacity. RailTel has set up an OFC network of 37,000 route kilometres, of which 26,650 is of high bandwidth capacity. Till date, 231 important stations and about 3,276 other stations have been connected on the OFC network. Computerization of passenger and freight services Passenger reservation system (PRS) 10.77 The computerized PRS of Indian Railways is the largest passenger reservation network in the world, available at 1,910 locations with more than 7,245 terminals. On an average, 3.5 crore passengers per month are booked through the PRS with an average earning of Rs 1,410.8 crore per month. Further, Railways has tied up with India Post for operation of PRSs through post offices. Unreserved ticketing system (UTS) 10.78 The computerized 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 2,911 locations with approximately 6,239 counters provided till November 2009. Automatic ticket-vending machines have been installed at 375 locations. Freight operations information system (FOIS) 10.79 The FOIS gives an account of all demands, number of loads/rakes/trains and their pipeline, freight locos, stock at aggregate level, etc. FOIS Phase I (Rake Management System – RMS) module, implemented at 243 locations, covers all major yards/ lobbies and control offices at divisions and zones. FOIS Phase II (Terminal Management System – TMS) has been commissioned at 523 locations. Modernization of signalling system 10.82 Improvements and modernization of the signalling system carried out to increase efficiency and safety include provision of an electrical/electronic interlocking system replacing the overaged mechanical/multi cabin signalling system at 198 stations during April-November 2009; replacement of outdated filament-type signals with long life, highly durable LED signals at 561 stations, improvement of the reliability and visibility of signals; introduction of a centralized online monitoring/diagnostic system with provision of Data Loggers at 337 stations; provision of automatic block signalling to increase line capacity on 52route km; commissioning of the On-board Train Protection System at ChennaiGummiddipundi suburban section (50 route km) as a pilot project to prevent “Signal Passing at Danger” cases and enforce speed restrictions (a second pilot project of the Train Protection Warning System on a main line—Delhi-Agra section of Northern/North Central Railways—is under way); provision of automatic clearance of block section at 276 sections through use of axle counters reducing dependence on the human element and enhancing safety; interlocking of 260 level-crossing gates; and provision of track circuiting for enhancing safety by reducing human dependence at 656 locations. Investment in capacity 10.83 The Railways is setting up new production units–Rail Coach Factory at Rae Bareilly, Coach Factory at Kanchrapara, Diesel Locomotive Factory at Marhowra, Electric Locomotive Factory at Madhepura and Rail Wheel Factory at Chhapra. It is also setting up two ancillary units at Dankuni to manufacture components and sub-assemblies for electric and diesel locomotives. Rail Safety Reduction in accidents 10.80 As a result of continuing steps to prevent accidents, the number of consequential train accidents came down from 415 in 2001-02 to 177 in 2008-09. April to November 2009, the number of consequential train accidents decreased from 117 250 Economic Survey 2009-10 Table 10.14 : Diesel (HSD) oil consumption (in million litres) Year 2004-05 2005-06 2006-07 2007-08 2008-09 Traction 2,080.6 2,111.2 2,211.5 2,284.1 2,312.0 Non-traction 34.2 39.1 39.9 43.7 46.2 10.84 The Dedicated Freight Corridor (DFC) project envisaging a Western DFC (1,483 km) from Mumbai to Dadri/Tughlakabad catering largely to the container transport requirement and an Eastern DFC (1,806 km) from Ludhiana to Dankuni largely serving coal and steel traffic, is being implemented by the Dedicated Freight Corridor Corporation of India Ltd. (DFCCIL). The project is funded through a debt to equity ratio of 2:1. Along the Western DFC alignment, the Delhi-Mumbai Industrial Corridor is also coming up. Considering the need for DFCs on other important routes, feasibility studies have been completed on North-South, East-West, East-South and Southern Corridors and traffic projections, cost and viability are under examination. 10.85 Railways have set up the Rail Land Development Authority for commercial development of vacant Railway land and air space which is not immediately required by the Railways. Railways also plans to utilize its vacant land, wherever feasible, for setting up infrastructural projects through innovative financing to earn revenue, create additional infrastructure and generate employment. Consultation with State Governments is undertaken wherever required. 10.86 During the Eleventh Five Year Plan period, electrification of 3,500 route km is planned with an outlay of Rs3,000 crore, taking the percentage of electrified network to 33.4 per cent. In the first two years of the Five Year Plan, 1,299 route km has been electrified. 10.87 Following the opening of railway lines from Anantnag to Mazhom (66 km) and Mazhom to Baramulla (35 km), the newly constructed 18 kmlong rail line between Anantnag and Quazigund, the last stretch of railway line in the Kashmir Valley, was commissioned in October 2009, making the entire 119 km-long rail line from Baramulla to Quazigund operational. Source : Ministry of Railways Railway land has been taken up in a significant way. Railways is going to set up four esterification plants for converting Jatropha curcas oil into bio-diesel. Railways also plans to introduce the use of compressed natural gas (CNG) in diesel multiple unit (DMU) commuter trains. One DMU power car has been converted to run on dual fuel mode using CNG and diesel. The operating cost of CNG-based DMUs is expected to be 25 per cent less than that of diesel-based DMUs with salutary effect on carbon dioxide emission as well. ROADS 10.90 Road transport accounted for around 87 per cent of passenger movement and 60 per cent of freight movement in 2005-06. The country’s road network consists of national highways (NHs), state highways, major district roads, other district roads and village roads. National Highways Development Project (NHDP) 10.91 About 27 per cent of the total length of national highways is single-lane/intermediate lane, about 54 per cent is two-lane standard and the balance 19 per cent is four-lane standard or more. In 2009-10, as against the stipulated target of developing about 3,165 km length of NHs under various phases of the NHDP, the achievement up to November 2009 has been about 1,490 km. Against the target of awarding projects for a total length of about 9,800 km under various phases of the NHDP during 2009-10, projects have been awarded for a total length of about 1,285 km up to November 2009 (Table 10.15). 10.92 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 Use of bio-fuel in Railways 10.88 Indian Railways is the largest single consumer of high-speed diesel (HSD) oil in the country (Table 10.14). There is huge potential for using bio-diesel in lieu of HSD. Indian Railways has tested various bio-fuels up to B10 blend on diesel locomotives and found that B10 blend, that is 10 per cent bio-diesel in HSD oil, can be used inthe existing diesel engines without any modification. 10.89 As part of the bio-diesel initiative of Indian Railways, plantation of Jatropha curcas on vacant Energy, Infrastructure and Communications Table 10.15 : National highways development projects (as in November 2009) 251 (length in km) NHDP Component GQ NS-EW Port Connectivity Other NHs NHDP Phase-III NHDP Phase-V NHDP Phase-VII Total Total length 5,846 7,142 380 965 12,109 6,500 700 33,642 Completed 4 lane 5,743 4,439 244 868 1,089 148 — 12,531 Under implementation 103 2,066 130 77 2,714 886 19 5,995 Balance for award of civil works — 637 6 20 8,306 5,466 681 15,116 Source: Ministry of Road Transport and Highways. Notes: GQ= Golden Quadrilateral(connecting Delhi, Mumbai, Chennai and Kolkata); NS-EW=North-South & EastWest corridor (Srinagar to Kanyakumari). the Cabinet Secretary to address inter-ministerial and Centre-State issues such as land acquisition, utility shifting, environment approvals and clearance of ROBs, simplification of the procedure of issue of land acquisition (LA) notifications and posting of Railways officer to the National Highways Authority of India (NHAI) to coordinate with the Ministry of Railways in expediting the construction of ROBs. Decision to not allow non-performing contractors to bid for future projects unless they improve performance in existing contracts and steps to improve cash flow problems of contractors by granting interest-bearing discretionary advance, release of retention money against bank guarantee of equal amount, deferment of recovery of advances (on interest basis) and relaxation in minimum IPC amount were some of the other steps taken. 10.93 Reasons for delay in the award of projects under the NHDP included new procedure for approval of PPP projects, modifications in the model concession agreements (MCA), new request for qualification (RFQ) process and new MCA conditions, cap on maximum number of pre-qualified bidders, and time involved in evaluation of voluminous information. Besides shortage of financial consultants due to conflict of interest clause, need for evaluation of request for proposal (RFP) documents for individual packages and factors that affected the bankability of projects like lenders’ perception of high risk due to provision relating to premature termination of concessions, lingering doubts of lenders on interpretation of many provisions of the new MCAs and inadequate availability of longterm debt funds were the other reasons. 10.94 Recent initiatives taken included restructuring of projects to reduce total project cost (TPC) to make them financially viable, increase of up to 20 per cent in TPC case-of-project costs based on old DPRs, release of entire viability gap funding (VGF) (maximum up to 40 per cent) during the construction period, removal of provision in RFQs limiting the maximum numbers of pre-qualified bidders, urging lenders to resolve issues inhibiting financial closure, expeditious land acquisitions and shifting of utilities. These are expected to increase the pace of award under the NHDP. Revised Strategy for Implementation of the NHDP 10.95 With a view to expediting the progress of the NHDP, the Ministry of Road Transport & Highways has set a target of completion of 20 km of NHs per day, which translates to 35,000 km at the rate of 7,000 km per year during the next five years (2009-14). The NHAI formulated Work Plans (Work Plan I & II) for awarding 12,000 km each during the years 2009-10 and 2010-11. These Plans lay down a specific timeframe for various activities and are being monitored very closely at various levels. Work Plan I (2009-10) covers balance stretches of NHDPPhasesII, III & V. So far, 14 projects for a length of about 1,300 km have already been awarded, bids for 20 projects covering a length of about 2,000 km have been received and are under process and another 23 projects for a length of about 1,700 km are presently on offer. After the last review of the road sector by the Prime Minister, a Committee (under Shri B.K. Chaturvedi, Member, Planning Commission) was set up. Based on the 252 Economic Survey 2009-10 recommendations of the Committee, appropriate changes in RFQs, RFPs and MCAs are being considered by the NHAI. 10.96 The NHAI is setting up 192 Special Land Acquisition Units (SLAU) in various States for expediting the LA process, which is identified as major bottleneck in the implementation of the projects. Seventy-two such units have already been set up. The NHAI has also decided to set up six zonal offices headed by Executive Directors to coordinate with State Governments in regard to LA and other pre-construction activities. Further, the NHAI has set up 10 regional offices to be headed by Chief General Managers for improvement in liaison with State Governments and for expediting preconstruction activities. Besides, Chief Ministers have been requested to set up High Level Coordination Committees under Chief Secretaries to sort out issues involving coordination between departments. It has also been decided to take up some mega projects of about 400 km to 500 km each costing up to US $ 1 billion to attract investment by international companies. Two mega projects would be put up for bidding in the current financial year. Special Accelerated Road Development Programme in the North-eastern Region (SARDP-NE) 10.98 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 5,184 km of National Highways and two-laning / improvement of about 4,756 km of State roads. This will ensure connectivity of 85 district headquarters in the northeastern States to 2 National Highways/ two-lane State roads. The programme has been divided into Phase ‘A’, Phase ‘B’ and the Arunachal Pradesh Package of Roads & Highways. 10.99 Phase A consists of improvement of 2,796 km of roads consisting of 2,039 kmof NHs and 757 km of State roads at an estimated cost of Rs 17,749 crore. Out of the 2,796 km, the Border Roads Organization (BRO) and State Public Works Departments (PWDs) have been assigned the development of 1,580 km. (The remaining length of 1,216 kmwill be built by the NHAI, Ministry/Arunachal Pradesh PWD and BRO.) Out of the 1,580 km, projects covering a length of 1,158 km have been approved till November 2009 and work is in different stages of progress. Phase B, involving two- laning of 1,673 km of NHs and two-laning / improvements of 3,152 km of State roads, is approved only for preparation of DPRs. Till November 2009, a DPR was prepared for 900 km. 10.100 The Arunachal Package covering a 2,319 km stretch of road was approved by the Government as part of the SARDP-NE on January 9, 2009. Out of this, 776 km has been approved for execution on build-own-transfer (BOT) (annuity) basis and the remnant for tendering on Engineering Procurement and Construction (EPC) basis. An RFQ have been invited for the stretch to be taken up on BOT (Annuity) basis and an RFP in respect of 748 km has been issued. For the other stretches to be taken up on EPC basis, DPRs are under preparation. Financing of the NHDP 10.97 A part of the fuel cess is allocated to the NHAI to fund the implementation of the NHDP (Table 10.16). The fund allocated from the cess is leveraged to borrow additional funds from the domestic market. The Government of India has also taken loans for financing various projects under the NHDP from the World Bank (US$ 1,965 million), Asian Development Bank(ADB) (US$ 1,605 million) and Japan Bank for International Cooperation (32,060 million yen), which are passed on to the NHAI partly in the form of grant and partly as loan. The NHAI has also negotiated a direct loan of US $165 million from the ADB for one of its projects. Table 10.16 : Financial structure of NHAI (amount in Rs. crore) Year Cess Funds 3,269.7 6,407.5 6,541.5 6,972.5 8,578.5 External Assistance Grant Loan 2,400.0 1,582.5 1,788.8 1,515.0 272.0 500.0 395.5 447.2 379.0 68.0 Borro- Budgewings tary Support 1,289.0 1,500.0 305.2 1,096.3 492.4 700.0 110.0 265.0 159.0 200.0 Initiatives for development of the entire NH network to minimum acceptable standard of two lanes 10.101 Initiatives have been taken to develop NHs having less than two lanes to minimum acceptable 2-lane standards by December 2014 by proposing a World Bank Loan and also through budgetary allocations. Proposals have been invited from the consultants for preparation of a DPR for the about 3,800 km length proposed to be developed under 2005-06 2006-07 2007-08 2008-09 2009-10 Source : Department of Road Transport & Highways. Energy, Infrastructure and Communications World Bank assistance. The Ministry of Road Transport and Highways has also initiated action for improvement of the remaining 2,500 km of single / intermediate lane NHs through budgetary resources. In order to make a visible impact, the corridor development approach is being adopted whereby apart from widening to two lanes, strengthening of the existing two lanes in these corridors as also removal of other deficiencies are being covered. 253 issues, the Chaturvedi Committee has been further requested to suggest measures in its second report. The proposal for setting up an Expressway Authority of India (EAI) is under active consideration. An Expressways Division has already been set up in the NHAI. Further action has been initiated to prepare a legislative framework for the EAI. Keeping in view the developments in the road transport sector it has been decided to review the Motor Vehicles Act 1988 (MVA) comprehensively vis-à-vis similar laws applicable in leading Asian countries such as China and Japan so as to meet the modern-day requirement of regulation of vehicular traffic. A committee has been constituted to carry out this exercise. The Government proposes to provide financial assistance to States for implementation of IT such as GPS, electronic ticket-vending machines and a computerized reservation system, subject to certain reforms to be undertaken by the State Governments. A scheme in this regard has been approved by the Planning Commission and the Expenditure Finance Committee. About 84 per cent of the Regional Transport Offices across the country have so far been computerized. Keeping in view the lack of proper infrastructure for enforcement of a strict inspection and maintenance regime for motor vehicles to check their roadworthiness, the Central Government proposes to assist the States to set up model Inspection and Certification (I&C) Centres. A scheme in this regard has been approved by the Planning Commission and the Expenditure Finance Committee. Development of roads in Left Wing Extremism (LWE)-affected areas 10.102 The project covering 1,202 km of NHs and 4,362 km of State roads in LWE-affected areas is spread over 33 districts in eight States, that is Andhra Pradesh, Bihar, Chhattisgarh, Jharkhand, Madhya Pradesh, Maharashtra, Orissa and Uttar Pradesh. An allocation of Rs 500 crore has been made from the gross budgetary support (GBS) under Annual Plan 2009-10 for the programme. As against the target of approval of projects for a total length of about 1,600 km at an estimated cost of Rs 1,900 crore under the LWE scheme up to December 2009, projects have been sanctioned / processed for a total length of 1,584 km at an estimated cost of Rs 1,784 crore till end-November 2009. Other new initiatives A Joint Task Force of the Confederation of Indian Industry (CII) and Ministry of Road Transport and Highways has been constituted to serve as an institutionalized framework for constant industry – Government interaction on issues related to development of NHs. The Ministry had awarded a consultancy service in December 2008 with the objective of preparing a Master Plan for a National Expressway Network. The Final Report submitted by the consultants in November 2009, inter-alia, recommended a total Expressway Network of about 18,637 km for completion in a prioritized manner in three phases up to the years 2012, 2017 and 2022. The Report has been accepted by the Government. The current numbering of NHs is not being done on a scientific basis. The Committee set up in this regard finalized its report in August 2009, duly considering the best global practices. Initiatives have been taken for publishing notification in this regard. In order to further address the dispute redressal mechanism of the NHAI, restructuring and strengthening of the NHAI and other tax-related Construction of rural roads under the Prime Minister ’s Grameen Sadak Yojana (PMGSY) 10.103 The Eleventh Five Year Plan has projected an investment requirement of Rs 41,347 crore (at 2006-07 prices) for rural roads. During the first three years of the Eleventh Five Year Plan, the flow of expenditure under the PMGSY seems to be on course for meeting the Plan target (Table 10.17). In addition to the PMGSY there are roads built by PWDs and Panchayati Raj institutions in rural areas, the data on which are available only with a lag. 10.104 It may be seen that among the States, 57.3 per cent of the expenditure incurred under the 254 Year Economic Survey 2009-10 the steep rise in fuel cost coupled with the impact of global economic slowdown. Signs of recovery became visible in the second past of 2009. The scheduled domestic passenger traffic has increased from 40.8 million in 2008 to 43.3 million in 2009, while scheduled cargo traffic showed almost no growth. Table 10.17 : Progress under the PMGSY Length of road works completed (km) 22,891 30,710 41,231 52,405 36,273 Expenditure (Rs. crore) 4,100.4 7,304.3 10,618.7 15,162.0 12,993.1 2005-06 2006-07 2007-08 2008-09 Apr.-Dec. 2009 Fleet Size 10.106 There are 15 scheduled operator’s permit holders including two regional ones and two in the cargo category, with 419 aircraft endorsed on their permits. The number of non-scheduled operator’s permit holders in different categories, namely passenger, cargo and charter, has gone up to 118, with 332 aircraft endorsed on their permit. The number of non-scheduled flight clearances granted to foreign non-scheduled operators in 2009 was 11,183. During 2009, a total of 1,18,064 tourists visited the country by 557 Inclusive Tourist Package (ITP) tourist charter flights. Source : National Rural Roads Development Agency. PMGSY and 62.5 per cent of the road works completed during 2005-06 to April-December 2009 were in six States, namely Rajasthan, Madhya Pradesh, Uttar Pradesh, Chhattisgarh, Maharashtra and Orissa (Figure 10.4). Efforts are made to persuade the State Governments to increase their absorptive capacity through institutional and organizational development. Shortage of contractors to undertake rural works on a large scale is a critical constraint in certain States though need-based relaxation in the bidding capacity and packaging of works has helped marginally in overcoming the problem. The constraint of inadequate availability of trained human resources has been sought to be overcome through need-based training programmes and more than 19,600 engineering personnel have so far been trained. Airport Development 10.107 Development of airports at Delhi and Mumbai has been taken up under PPP mode. It is planned to fund the capital expenditure through private equity, borrowings and internal resources of joint venture companies. The development work is likely to be completed by 2010 at Delhi airport and 2012 in Mumbai at a total cost of Rs 20,000 crore. Development of Kolkata and Chennai international airports has been taken up by the Airports Authority of India (AAI) at the approved cost of Rs 1,942 crore and Rs 1,808 crore respectively. The work is in progress and is scheduled to be completed by May CIVIL AVIATION 10.105 The civil aviation sector had shown signs of slowdown in passenger traffic during 2008 due to Figure 10.4 20 18 16 14 Share (in per cent) in length and expenditure under the PMGSY during 2005-06 to 2009-10 (Apr-Dec) Share in length Share in expenditure Per cent 12 10 8 6 4 2 0 Himachal Pradesh Madhya Pradesh Uttar Pradesh Chhattisgarh West Bengal Maharashtra Andhra Pradesh Note: Other states include Gujarat, Tamil Nadu, Haryana, Punjab, Jharkhand, Uttaranchal, Manipur, Arunachal Pradesh, Bihar (REO), Nagaland, Jammu & Kashmir, Sikkim, Mizoram, Tripura, Kerala, Meghalaya and Goa. Other states Rajasthan Bihar (NEA) Karnataka Orissa Assam Energy, Infrastructure and Communications 2010 and January 2011 respectively. Bangalore and Hyderabad international airports have been developed on PPP mode as greenfield airports. These two airports have been put in operation. 255 Economies of scale: These have been achieved in the procurement of goods and services by combining procurement and thereby availing of ‘volume discount’ in areas such as fuel in-flight service items, aviation and non aviation insurance. Progressive integration of network/ schedules: The NACIL has been progressively reducing the overlaps between routes operated by the erstwhile companies. All overlaps between schedules of erstwhile AI and IA except Del/DXB (Delhi/Dubai) and BOM/DXB (Mumbai/Dubai) have been eliminated. The overlaps between routes of full service carriers (AI, IA code) and low cost carriers (Air India Express) are progressively being reduced. Progressive cross-utilization of aircraft fleet: Fleet planning is now done across the entire NACIL fleet leading to more optimal fleet deployment. Opportunity to join Star Alliance: The NACIL has the opportunity to become part of the ‘Star Alliance’ network and is investing in and upgrading its products and facilities to satisfy the minimum requirements of Star Alliance. 10.112 Out of the combined acquisition of 111 aircraft, most of the new aircraft have been inducted as scheduled, but the B787 deliveries have been delayed. Boeing has revised the delivery schedule with the first aircraft to be delivered in April 2011 and the induction of 27 units to be completed by the second quarter of 2014. Greenfield Airports in the North-eastern region 10.108 The AAI plans to construct of greenfield airports in the north-eastern region with budgetary support. Construction work has already commenced at Pekyong Airport in Sikkim at a cost of Rs 309.46 crore and is likely to be completed by January 2012. Approval is being obtained for construction of greenfield airports at Cheitu (Nagaland) and Itanagar (Arunachal Pradesh). Development of 35 Non-metro Airports 10.109 The AAI has taken up the development of 35 non-metro airports at an estimated cost of Rs 4,662 crore. Of them, 9 have been completed and put in operation. The other projects are in progress and likely to be completed by 2010-11. The Committee of Infrastructure has identified 24 of the 35 non-metro airports for city-side development through PPP. It has been decided that in the first instance city-side development of 10 selected airports, namely Ahmedabad, Kolkata, Jaipur, Lucknow, Amritsar, Indore, Vishakapatnam, Hyderabad, Guwahati and Bhubaneswar, should be undertaken. It has been proposed to carve out the surplus land available with the AAI on the city side of the selected airports and lease out the same through open tenders. Financial Surveillance of Air Operators Creation of Heliport 10.110 Pawan Hans Helicopters Ltd. proposes to construct a heliport in New Delhi to provide connectivity to tourists and the business community, especially during the Commonwealth Games 2010, and for emergency/disaster management. Possession has been taken of the land allotted by the Delhi Development authority (DDA) at Rohini and M/s RITES Ltd has been engaged for preparation of a feasibility study. 10.113 The Air Transport Directorate in the Office of the Director General of Civil Aviation (DGCA) has started an evaluation of the financial health of the scheduled airlines. A one-time comprehensive audit of NACIL (I), Kingfisher and Jet Airways has also been carried out. Transparency in Air Fare Advertising 10.114 In order to have transparency in airfare advertising, Rule 135 of Aircraft Rules 1937 has been amended wherein airlines shall display tariff in a conspicuous manner to show the total amount payable by a passenger and complete break-up of the total amount, indicating the fare, tax, fees or any other charge, if any, separately. Scheduled domestic airlines have complied with the provisions of Rule 135. Progress made by the National Aviation Company of India Ltd (NACIL) 10.111 Post amalgamation of Air India (AI) with Indian Airlines (IA), the NACIL has made progress in some of the key areas identified as part of the merger plan. 256 Economic Survey 2009-10 Table 10.18 : Traffic at major ports (million tonnes) Commodity 200607 154.3 80.6 14.1 5.0 60.0 3.6 10.9 73.4 61.9 463.8 200708 168.7 91.8 16.6 2.2 64.9 3.8 12.8 92.3 66.2 519.3 2008- Growth% 09 over 2007-08 176.1 94.0 18.2 1.8 70.4 4.8 11.9 93.1 60.2 530.5 4.4 2.4 9.6 -18.2 8.5 26.3 -7.0 0.9 -9.1 2.1 Tariff Monitoring 10.115 The DGCA has started monitoring tariffs of scheduled domestic airlines. A group has been constituted comprising tariff analysis experts who carry out the analysis of fares on major routes on daily basis. PoL Iron Ore Fert. & raw materials Foodgrains Coal Vegetable Oil Other Liquids Containerized Cargo Others Total India-EU Civil Aviation Cooperation Programme 10.116 Under the Joint Action Plan, a Civil Aviation Cooperation Project-II has been agreedupon. Its terms of reference (TOR) have been finalized. The project called “Institutional Capacity Building in the Civil Aviation Section in India” is likely to commence during 2010. India-USA Aviation Programme (ACP) Cooperation 10.117 The India-US ACP was signed in June 2007 with the objective of promoting safety, operational efficiency and system capacity and facilitating and coordinating aviation industry training and technical ties between the US and India. The first phase of the ACP was completed in 2008 and its second phase is under way. Source : Department of Shipping. tonnes per annum in 2007-08 to 574.77 million tonnes per annum in 2008-09. The average turnaround time decreased from 3.93 days to 3.87 days. 10.121 The average output per ship berth-day improved from 10,071 tonnes in 2007-08 to 10,473 tonnes in 2008-09. The pre-berthing waiting time at major ports on port account decreased from 11.40 hours in 2007-08 to 9.55 hours in 2008-09. Significant inter-port variations in pre-berthing waiting time persisted (Table 10.19). 10.122 Despite adequate capacity and modern handling facilities, the average turnaround time of major Indian ports was 3.87 days in 2008-09, compared to 10 hours in Hong Kong. This undermines the competitiveness of Indian ports. Since ports are not adequately linked to the hinterland, the evacuation of cargo is slow, leading to congestion. To this end, all port trusts have set up groups with representatives from the NHAI, Railways and State Governments to prepare comprehensive plans aimed at improving road-rail connectivity of ports. The NHAI has taken up port connectivity as major component of the NHDP. 10.123 Traditionally, most ports in the world are owned by the public sector. But privatization of port facilities and services has now gathered momentum. An enabling policy framework has been put in place by the Government. Depending on the nature of facility/service, private operators can enter into a service contract, a management contract, a PORTS 10.118 India has 12 major ports and 200 non-major ones. Of the non-major ports, about 66 are handling traffic. The total traffic carried by both the major and non-major ports during 2007-08 was estimated at around 723 million tonnes. The 12 major ports carry about three-fourths of the total traffic, with Visakhapatnam as the top traffic handler in each of the last seven years. Traffic growth 10.119 In 2008-09, the cargo handled by major ports registered a growth of 2.1 per cent against 12.0 per cent in 2007-08. About 80 per cent of the total volume of traffic handled was in the form of dry and liquid bulk, with the residual consisting of general cargo, including containerized cargo (Table10.18). There was an impressive growth of 11.05 per cent per annum in container traffic during the five years ending 200809. Half of the world’s traded goods are containerized, and this proportion is expected to increase further. Capacity addition 10.120 The annual aggregate cargo-handling capacity of major ports increased from 532.07 million Energy, Infrastructure and Communications Table 10.19 : Inter-port variations at Indian ports Name of port Average pre-berthing waiting time (hours) (on port A/c) 2006-07 Kolkata Haldia Dock Mumbai JNPT Chennai Cochin Visakhapatnam Kandla Mormugao Paradip New Mangalore Tuticorin Ennore All Major Ports 0.13 26.05 5.22 5.45 0.80 0.29 4.78 35.28 19.34 1.41 1.87 3.22 0.31 10.05 2007-08 0.24 33.44 5.07 10.20 1.00 1.21 5.10 32.64 18.35 1.48 1.92 4.32 0.75 11.40 2008-09 1.27 24.45 7.37 9.50 0.90 1.31 4.35 28.08 11.48 1.30 0.90 3.36 0.74 9.55 2006-07 3.89 3.97 4.63 1.67 3.40 2.19 3.65 5.46 4.46 3.54 3.14 3.67 1.89 3.62 Average turnaround time (days) 2007-08 4.87 4.26 4.44 1.85 4.60 1.99 3.91 5.13 4.03 5.54 3.21 3.80 2.08 3.93 257 2008-09 4.60 4.21 4.95 1.97 4.20 2.08 3.93 5.20 3.61 4.78 3.00 3.66 2.35 3.87 Source : Department of Shipping concession agreement or a divestiture to operate port services. Areas that have been opened up to the private sector on BOT basis include construction of cargo-handling berths and dry docks, container terminals and warehousing facilities and ship-repair facilities. TELECOMMUNICATIONS Growth 10.124 The opening of the telecom sector has not only led to rapid growth in subscriber base but also helped a great deal towards maximization of consumer benefits, particularly in terms of price discovery following the forbearance approach in Figure 10.5 600 500 400 300 200 100 0 Mar 2006 Mar 2007 Mar 2008 tariffs. From only 54.6 million telephone subscribers in 2003, the number increased to 429.7 million at the end of March 2009 and further to 562 million as on October 31, 2009 showing addition of 2.49 million during the period from March to December 2009. Figure 10.5 shows that this increase has been entirely due to the spectacular increase in wireless connections at a compound annual growth rate (CAGR) of 60 per cent per annum since 2004. With 525.1 million wireless connections, Indian telecom has become the second largest wireless network in the world. Approximately 85 per cent of the Eleventh Five Year Plan target of 600 million connections has already been achieved at the halfway point. Wire line connections, however, declined in recent years (Figure 10.5). Growth of telephones over years (in million) Fixed lines Wireless Gross total Million Year Mar 2009 Dec 2009 258 Economic Survey 2009-10 10.129 Mobile Number Portability (MNP) : MNP allows any subscriber to change his service provider without changing his mobile phone number. With the announcement of guidelines for MNP, telecom service provider will be forced to improve quality of service to avoid losing subscribers. 10.130 Value added Services (VASs): Mobile VASs include, text or SMS, menu-based services, downloading of music or ring tones, mobile TV, videos, streaming, and sophisticated m-commerce applications. Prior to 2008, a majority of VAS revenues were attributable to SMS. With greater penetration of new services, availability of relatively inexpensive, feature-rich handsets and consumer education, VASs other than SMS are gaining importance. It is expected that over the next few years, non-SMS services would become a dominant contributor to VAS revenue. 10.131 Manufacturing: The Indian telecom industry manufactures a vast range of telecom equipment using state-of-the-art technology. The last five years saw many renowned telecom companies setting up manufacturing bases in India. The production of telecom equipment in value terms increased from Rs 41,270 crore (2007-08) to Rs 48,800 crore during 2008-09 and is further expected to increase to Rs 57,584 crore during 2009-10. Favourable factors such as facilitative policies, large talent pool in R&D and low labour cost can provide an impetus to the telecom manufacturing industry in the country. Exports increased from Rs 402 crore in 2002-03 to Rs 1,10,00 crore in 2008-09 accounting for 21 per cent of the equipment produced in the country. Major trends 10.125 The share of the private sector in total telephone connections has increased to 82.3 per cent in December 2009 as against a meagre 5 per cent in 1999. Teledensity, an important indicator of telecom penetration, increased from 12.7 per cent in March 2006 to 37.0 per cent in March 2009 and 47.9 per cent in December 2009. Rural teledensity, which was above 1.2 per cent in March 2002, increased to 9.5 per cent in March 2008 and further to 15.1 per cent in March 2009 and 21.2 per cent at the end of December 2009. Urban teledensity increased from 66.4 per cent in March 2008 to 88.8 per cent in March 2009 and stands at 110.7 per cent in end- December 2009. 10.126 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 123.5 million in March 2009 and further to 174.6 million in December 2009. Their share in total telephone connections has steadily increased from around 14 per cent in 2005 to 31 per cent as on December 31, 2009. During 2008-09, the growth rate of rural telephones was 61.5 per cent as against a 36.7 per cent growth of urban telephones. The private sector has contributed crucially to the growth of rural telephones by providing about 81.5 per cent of rural telephones as on December 31, 2009. 10.127 Internet / Broadband : With supportive policies, broadband subscribers grew from 0.2 million in 2005 to 6.2 million by end-April 2009 and about to 7.98 million by end-December 2009. India faces technological and commercial challenges in broadband penetration, the most important of which are low PC penetration and affordability issues due to high cost. The government has issued guidelines for Broadband Wireless Access (BWA) Services; the introduction of which will enhance broadband penetration. Wi-Max has been making headway in wireless broadband connectivity. MAJOR POLICY INITIATIVES 10.132 No cap on the number of access providers in any service area. In 2008, 122 new Unified Access Service (UAS) licences were granted to 17 companies in 22 service areas of the country. Permission for use of dual technology spectrum under the same UAS/Cable Modern Termination System (CMTS) licence was granted to eight companies including Bharat Sanchar Nigam Limited (BSNL) and Mahanagar Telephone Nigam Limited (MTNL). BSNL and MTNL were exempted from the prescribed fee for such usages. On July 11, 2008, provision of mobile service within 500 meters of the international boarder within Indian territory has been permitted. New Horizons for Growth 10.128 3G Telecom services : The explosive growth of the telecom industry has kindled the urge to move towards better technology. One of the key frontiers is the launch of 3G technology. The government has recently announced guidelines for penetration of 3G telecom services. This will provide existing operators a good opportunity as also foreign players to make an entry into the Indian market and bring in new technology and innovations. Energy, Infrastructure and Communications With a view to regulating unsolicited calls from telemarketers, a regulation has been implemented whereby a National Do Not Call Registry (NDNC) has been put in place. With this, there has been substantial reduction in the number of unsolicited calls. It has been decided to introduce the National Integrated Directory Service (NIDQS). This facility would be useful to subscribers/users. Revised subscriberbased criteria for allocation of Global System for Mobile Communications (GSM) and Code Division Multiple Access (CDMA). spectra were issued in January 2008. Committees have been constituted for allocation of spectrum to access service providers and spectrum pricing. Foreign direct investment (FDI) ceilings have been raised from 49 per cent to 74 per cent. In the area of telecom equipment manufacturing and provision of IT-enabled services, 100 per cent FDI is permitted. This has made telecom one of major sectors attracting FDI inflows. Allocation of spectrum for 3G and BWA services to be through a controlled, simultaneous, ascending e-auction process. The Department of Telecom has taken the pioneering decision of launching of 3G services by BSNL and MTNL and initiation of process for auction of spectrum for 3G and BWA services to private operators. 259 Another important activity under the USOF relates to replacement of Multi Access Radio Relay (MARR) technology VPTs installed before April 2002. Out of a total of 1,85,121 MARR based VPTs, 1,84,521 have been replaced till December 31, 2009. Support from the USOF is being given for provision of rural direct exchange lines (RDELs) in all the 1,685 net cost positive short distance charging areas. As on December 31, 2009, about 70.5 lakh RDELs have been provided. To provide infrastructure support for mobile services, a scheme has been launched to provide support for setting up and managing 7,436 infrastructure sites spread over 500 districts in 27 states. As on December 31, 2009, about 6,956 towers have been set up under this scheme. Utilizing the infrastructure so created, BTSs are being commissioned and mobile services started by universal service providers in a phased manner. In order to provide broadband connectivity to rural areas under the purview of the USOF, 95,011 broadband connections out of the proposed 8,88,832 wire-line broadband connections and four kiosks have been provided till December 2009. 10.134 It is proposed to achieve rural tele-density of 25 per cent by means of 200 million rural connections by the end of the Eleventh Five Year Plan. Recognizing the potential importance of broadband services, the Eleventh Five Year Plan targets providing broadband to all secondary and higher secondary schools, Public Health Care Centers and Gram Panchayats. It is also envisaged that internet and broadband subscribers will increase to 40 million and 20 million respectively by 2010. Activities under Universal Service Obligation (USO) Fund 10.133 The USO Fund (Table 10.20) continues to be used to subsidize telecom development in rural areas in the following ways; Operation and maintenance of village public telephones (VPT) in the revenue villages identified as per Census 1991 and installation of VPTs in every revenue village as per Census 2001. About 5.7 lakh VPTs are currently eligible for financial support for operation and maintenance. Agreements were signed with BSNL to provide subsidy support for provision of VPTs in 62,302 uncovered villages. As on December 31, 2009, 61,186 VPTs have been provided by BSNL. Provision of additional rural community phones (RCPs) is another important activity under the USOF. Out of the target of 40,705 RCPs, 40,694 have been provided till December. Table 10.20 : USO Fund: Collections and disbursements (Rs crore) Year 2005-06 2006-07 2007-08 2008-09 2009-10* Allocation 1,766.9 1,500.0 1,290.0 1,600.0 2,400.0 Disbursements 1,766.9 1,500.0 1,290.0 1,600.0 1,846.9 Source : Department of Telecommunications. Note : * As on December 31,2009. 260 POST Economic Survey 2009-10 Leveraging of the postal network 10.139 National Rural Employment Guarantee Scheme (NREGS): The Department of Posts has been given the responsibility of disbursing wages to NREGS beneficiaries through Post Office Savings Bank accounts. Starting with Andhra Pradesh Postal Circle in 2006, the payment of wages under the NREGS is currently operational in 19 Postal Circles comprising 21 States. The scheme is operational through 90,000 post offices. Nearly 4 crore NREGS accounts have been opened up to November 2009, and the amount disbursed in this financial year (AprilNov 2009) amounts to more than Rs 5,600 crore. 10.140 Tie-up with the State Bank of India (SBI): India Post has tied up with the SBI to sell its assets and liability products through identified post offices. Initially started in five States, the scheme was later extended to 23 States and Union Territories. The total liability products and total asset products sold so far amount to Rs 37 crore and Rs 12.98 crore respectively. 10.141 Tie-up with NABARD: The Department of Posts in collaboration with NABARD is providing micro-credit facility to Self-Help Groups (SHGs) through identified post offices on agency basis. The corpus fund for implementing this project is given by NABARD. The pilot is in operation in five districts involving seven divisions of Tamil Nadu Circle. So far, 800 SHGs have been provided with a loan of more than Rs 1.9 crore. 10.142 Sale of Gold Coins: In a tie-up with Reliance Money Limited, sale of gold coins was launched in October 2008 in selected post offices. The scheme is available in 468 post offices in 16 circles. 10.143 Old age pension: Old age pension is being paid through 20 lakh Post Office Savings accounts in Bihar, Delhi, Jharkhand and the north-east, and through money order in Jammu & Kashmir, Karnataka, Himachal Pradesh, Gujarat, Rajasthan and Tamil Nadu. 10.144 Online Acceptance of Right to Information (RTI) Applications: The Department of Posts has been assisting other public authorities under the Central Government in implementing the RTI Act by providing the services of its designated Central Assistant Public Information Officers (CAPIOs). Sub Post Masters at Tehsil level act as CAPIOs for accepting RTI requests and appeals. The Department has designated 4,000 post offices as points for receiving RTI applications and forwarding to public authorities. An RTI software has been developed to deal with such applications. 10.135 New mail paradigm: The mail profile in India Post has changed substantially with increase in volume of mail in Business-to-Customer and Business-to-Business segments. In line with this, India Post has leased three dedicated freighter aircraft for carriage of mail, parcel and logistics to and from the North-Eastern region operating six days a week on the Kolkata-Guwahati-Imphal-AgartalaKolkata route and the metro cities such as Delhi, Mumbai, Chennai, Kolkata and Bangalore with Nagpur serving as the mail exchange hub. India Post has also set up 162 Mail Business Centres and plans to set up Automatic Mail Processing System at Delhi, Kolkata, Hyderabad and Bengaluru and upgrade the existing ones at Mumbai and Chennai. 10.136 IT induction: Out of a total of 25,531 departmental post offices, 12,604 have been computerized. So far 1,304 post offices have been networked through leased lines with the National Data Centre. Further, 5,170 post offices have been networked through broadband. The strong IT base has enabled Indian Post to offer a range of e-enabled services such as electronic Money Order (eMO), epayment and instant Money Order (iMO) to customers. India Post is planning to computerize and network all its post offices in the next two years. 10.137 Banking and insurance services: India Post is pursuing the objective of financial inclusion through its 39,173 post offices in rural areas and 15,862 post offices in urban areas. The total number of accounts with post offices has increased from 14.23 crore in 2003-04 to 20.50 crore in 2008-09. The outstanding balance in Post Office Savings Bank accounts in 2008-09 was Rs 5,47,904 crore. India Post has already computerized its savings bank operations in 8,000 post offices. The post offices also provide insurance services to Government and semigovernment employees and to the rural populace under the banners of postal life insurance (PLI) and rural Postal Life Insurance (RPLI). The number of Rural Postal Life Insurance policies has increased from 26.66 lakh in 2003-04 to more than 70 lakh in 2008-09. 10.138 Premium services: The revenue from premium products such as Speed Post, Bill Mail Service and Business Post has consistently been growing. From Rs 425.74 crore revenue booked in 2003-04, these services achieved Rs 1,435 crore in 2008-09. One of the premium products, Speed Post, which covers more than 1,200 towns has a market share of 27 per cent in the courier segment. Energy, Infrastructure and Communications 10.145 Railway Ticket Reservation: The scheme for sale of railway tickets through post offices is presently operative at 78 locations and will be extended to rural areas also. 10.146 Collection of Rural Price Index Data: The Ministry of Statistics and Programme Implementation (MoSPI) has entrusted the collection of statistics for ascertaining the Rural Price Index to 1,183 post offices across the country with effect from October 2009. The data so collected would be electronically transmitted to MoSPI. 261 Committee on the service conditions of Gramin Dak Sewaks (GDS), which include enhancement of emoluments of all categories of GDS and enhancement of certain allowances. Urban Infrastructure 10.153 As per the 2001 Census, about 27.8 per cent of the population lives in urban areas. Further, the Registrar General of India estimated in 2006 that 67 per cent of the population growth in the next 25 years is expected to take place in urban areas alone. Hence improving urban infrastructure including basic civic services assumes critical importance. Municipal institutions responsible for providing these civic services are facing acute shortage of capacity and resources. International relations 10.147 To improve quality of international mail processing, all Foreign Post Offices and Sub Foreign Post Offices have been computerized. International Parcel Post Hubs have also been established at Delhi, Mumbai and Kochi for specialized handling of parcels. 10.148 International Electronic Money Order Service: Indian Post is in the process of replacing its paper-based international money order service with the Electronic International Money Order Service through Universal Postal Union software. As per the agreement signed between India and the UAE for exchange of Electronic International Money Orders, the service was launched in April 2008. Initially, the service is being offered from the UAE to India through all head post offices in Delhi, Mumbai, Chennai, Kolkata, and the State of Kerala covering 97 head post offices. 10.149 Launch of World Net Express: A bilateral agreement has been signed between Indian Post and Deutsche Post AG on November 27, 2008 for providing new services to domestic and international customers. Under this, articles will be booked by selected post offices for delivery in about 200 countries around the world using the DHL network. 10.150 Launch eMO Videsh: With the launch of the new international remittance service eMO Videsh in October 2009, Indian Post now offers its customers an opportunity to send money in cash to a recipient abroad payable in cash or in his account. This service is in tie-up with the EURO GIRO for both outward and inward international remittance. 10.151 Global Business Division: A Global Business Division has been set up in the Department of Posts to provide focus to its international operations. 10.152 Indian Post has implemented certain recommendations of the R.S. Nataraja Murthy Jawaharlal Nehru Urban Renewal Mission (JNNURM) 10.154 The JNNURM was launched in December 2005. In order to provide reforms-linked Central assistance to State Governments for the development of urban infrastructure, a Mission Mode approach was adopted in 63 selected cities, which include cities with 4 million plus population (7), cities with 1 million plus but less than 4 million population (28 cities) and other selected cities like State capitals and cities of religious/historic and tourist importance (28). During 2009, two more cities, that is Tirupati and Porbandar were included as Mission Cities, taking the total number to 65. The Mission has two components, Urban Infrastructure and Governance (UIG) and Basic Services for the Urban Poor (BSUP). UIG Sub-component addresses the needs of Urban Infrastructure. 10.155 During 2008-09, the seven-year allocation for additional Central assistance (ACA) for the UIG component was increased from Rs 25,500 crore to Rs 31,500 crore. Since inception and till December 2009, as many as 515 projects across 31 States at a cost of Rs 58,038 crore were sanctioned under the UIG, comprising interalia 147 water supply projects, 108 sewerage projects, 70 drainage/ storm water drainage projects, 41 solid waste management projects, 85 roads /flyovers projects and 34 urban transport projects. So far, the committed ACA under the UIG for approved projects is Rs 27,040.3 crore, against which Rs 10,261.7 has been released till December 2009. 10.156 The Mission has achieved significant progress in triggering reforms in the urban sector. So far, 38 per cent of State-level reforms, 55 per 262 Economic Survey 2009-10 cent of urban local bodies (ULB)-level reforms and 54 per cent of optional level reforms–all three committed up to the fourth year–have been achieved. Maharashtra, Gujarat, Tamil Nadu and Andhra Pradesh have shown good progress. Some of the achievements are that 29 cities have migrated to a double-entry accrual-based accounting system, 15 cities have achieved 85 per cent coverage in property tax collection, 45 cities have internal earmarking of funds for services to urban poor and 20 States have taken steps to establish District Planning Committees. Five cities have achieved 100 per cent cost recovery in water supply. Stamp duty has been reduced to 5 per cent in 8 States including Union Territories and enhanced community participation in development programmes has been realized by enacting the Community Participation Law in 5 States and Public Disclosure Law in 11 States. 10.157 The Mission cities have agreed to include promotion of PPP through appropriate policies and projects. States such as Andhra Pradesh, Assam, Bihar, Gujarat, Jharkhand, Karnataka, Kerala, Maharashtra, Orissa, Rajasthan, West Bengal, has adopted a PPP policy. PPP initiatives have been taken by Indore, Vadodara, Pune and Ahmedabad for establishing city bus services. 10.158 The Urban Infrastructure Development Scheme for Small and Medium Towns (UIDSSMT) is a sub-component of the JNNURM for development of infrastructural facilities in all towns and cities (other than the Mission cities). The UIDSSMT subsumed the erstwhile Integrated Development of Small and Medium Towns (IDMT) and Accelerated Urban Water Supply Programme (AUWSP) schemes. For obtaining assistance under the UIDSSMT, States and urban local bodies (ULBs) need to sign a memorandum, committing to reforms. During 200809, the seven-year allocation for the UIDSSMT was raised from Rs 6,400 crore to Rs 11,400 crore to enable the Centre to consider the "backlog" of projects which State Governments had recommended to the Central Government. From its inception till December 2009, as many as 753 projects across 636 towns and cities at a cost of Rs 12,824.6 crore were sanctioned under the UIDSSMT, comprising inter alia 416 water supply projects, 97 sewerage projects, 65 storm water drainage projects, 51 solid waste management projects, and 103 road projects. So far, the committed ACA under the UIDSSMT for approved projects is Rs 10,340.5 crore, against which Rs 5,862.1 crore had been released till December 2009. Initiatives under the JNNURM 10.159 A National Mission Mode Project under the National e-Governance Plan is being implemented in 35 JNNURM mission cities with more than one million population across 15 States on a pilot basis. The services covered for e-Governance reforms at State/ULB level under the scheme include registration and issue of building plan approvals, eprocurements and monitoring of projects, health, licences, solid waste management, accounting systems and personal information systems. 10.160 The Peer Experience and Reflective Learning (PEARL) programme was launched to foster knowledge sharing through networking among the Mission cities. The Mission supported formation of groups/networks amongst Mission cities having similar socio-economic profile and urban issues, along with natural affinity to peer pair. The National Institute of Urban Affairs (NIUA) has been appointed as National Coordinator for the PEARL programme. Under the programme, the network of heritage cities has organized knowledge-sharing workshops. A website has been made operational providing tools to support networking and knowledge sharing and the NIUA has brought out a newsletter called PEARL Update. 10.161 Other innovations for better implementation and monitoring of projects under the JNNURM inter alia include supporting a professionally manned programme management unit at State level and programme implementation unit at ULB level; third party monitoring through appointment of independent review and monitoring agencies; capacity building and communication activities for slow performing cities through rapid training programmes and the Community Participation Fund (CPF) for enhancing engagement of citizens in urban management. Other Urban Infrastructure Schemes and initiatives in Urban Governance 10.162 A new pilot scheme for infrastructure development (water supply, solid waste management and sewerage) in "satellite towns" around seven megacities (which exclude those towns and cities that have taken up projects under the UIDSSMT) has been launched. The selection of the cities/towns has been done in consultation with State Governments, subject to their commitment to implement reforms. These are Vikarabad (Andhra Pradesh), Vasai Virar (Maharashtra), Sri Perumbudur (Tamil Nadu), New Town (West Bengal), Hoskote Energy, Infrastructure and Communications (Karnataka), Sanand(Gujarat) Sonepat (Haryana) and Pilkhua (Uttar Pradesh). 10.163 To assist the north-eastern States in meeting their development challenges in the urban sector, the ADB-assisted North Eastern Region Urban Development Programme (NERUDP) has been launched. Phase I of the project covers five capital cities, Agartala, Aizawl, Gangtok, Kohima and Shillong. Arunachal Pradesh, Assam and Manipur will be covered in Phase II. While 30 per cent of the cost will be borne by the Central Government and the balance given by the ADB as loan, 90 per cent of the project cost in the hands of the States will be a grant, and only 10 per cent will be a loan. 10.164 The Ministry of Urban Development prescribed service-level benchmarks for water supply and sewerage services in 2008. A pilot project on implementation of municipal service- level benchmarks in the urban water and sanitation sector has been initiated in 28 cities and the first stage, that is establishment of baseline levels of performance has been completed. During 2009, service-level benchmarks have been laid down also for e-governance of key municipal services. Under the Capacity Building in Urban Local Bodies (CBULB) project, nine Centres of Excellence with focus on identified aspects of urban development have been set up across reputed institutions. Under the National Urban Sanitation Policy 2008, three important initiatives have recently been launched, namely rating of cities on sanitation, communication campaign and formulation of state sanitation strategies and city sanitation plans. 10.165 Under the Pooled Finance Development Fund (PFDF) Scheme, which provides credit enhancement to ULBs to access market borrowings through a state-level pooled finance mechanism, eight states have set up their "State Pooled Finance Entity". The first proposal for issue of a tax-free Pooled Finance Development Bond worth Rs 45.0 crore by the Water and Sanitation Pooled Fund of Tamil Nadu was notified and appropriate releases towards the Fund and project development cost were made in February 2008. However, only Rs 6.7 crore was subscribed. In the present economic scenario, the progress of the scheme has generally been slow. 10.166 The Constitution (112th Amendment) Bill 2009 to provide for 50 per cent reservation of women in ULBs was introduced in the Lok Sabha on November 24, 2009. The Bill seeks to increase the representation of women from the present level of 263 one-third to 50 per cent which would also include enhancement of reservation for women up to 50 per cent in seats reserved for Scheduled Castes, Scheduled Tribes, and 50 per cent reservations for women in the posts of Chairperson. Urban Transport 10.167 With the objective of guiding and facilitating implementation of the National Urban Transport Policy 2006 right from the planning stage, Central financial assistance to the extent of 80 per cent of the cost of studies in the area of urban transport is being provided under a revamped scheme, with 50 per cent of such assistance being admissible for preparation of detailed project reports. 10.168 Four Centres of Excellence have been set up for urban transport, one each at IIT Delhi and Chennai, the National Institute of Technology Warangal and CEPT University, Ahmedabad. Urban Bus Specifications were circulated to all States and Union Territories, JNNURM Mission cities and State Road Transport Corporations. Service-level benchmarks for urban transport have recently been laid down. 10.169 To provide better public transport and ease congestion, proposals for Bus Rapid Transit Systems (BRTS) have been approved for Ahmedabad, Bhopal, Indore, Jaipur, Pune, Rajkot, Surat, Vijaywada and Vishakhapatnam under the JNNURM covering a length of more than 422 km with total estimated cost of approximately Rs 4,770 crore, out of which Central assistance is around Rs 2,195 crore. A number of other cities are also coming up with BRTS proposals to be funded under the JNNURM. 10.170 As part of the stimulus package, purchase of buses for public transport in a time-bound manner was permitted under the JNNURM for the Mission cities. So far, a total of 15,260 buses have been approved for 61 Mission cities at a cost of about Rs 5,000 crore, out of which total admissible Central assistance would be Rs 2,100 crore. The financing is meant exclusively for city bus services and BRTS. Till January 2010, delivery of 4,883 modern ITSenabled buses has taken place. This has transformed the bus transport scenario in those cities. As a result of the scheme, 34 cities in India would be getting organized city bus services for the first time. Metro Rail Projects 10.171 Delhi and Kolkata have introduced Metro Rail systems in their cities. Delhi Metro is a joint venture company of the Government of India and 264 Economic Survey 2009-10 Table 10.21 : Metro rail projects approved by the Government of India Project Length (km) Commissioning schedule range Cost ( Rs crore) National Capital Region Delhi MRTS Phase I Delhi MRTS Phase II Extension of Delhi Metro to Gurgaon Extension of Delhi Metro to NOIDA Central Secretariat to Badarpur Metro Link (Dwarka Sector-9 to Sector-21) Airport Metro Express Link Total for Delhi & NCR 65.1 54.7 14.5 7.0 20.2 2.8 22.7 186.8 Metro rail projects other than National Capital Region Bangalore Metro Kolkata East-West Metro Corridor Chennai Metro Mumbai Metro Line-1 Mumbai Metro Line-2 Total outside NCT Grand total (NCT+ outside NCT) Source: Ministry of Urban Development. 3/2004 to 11/2006 6/2008 to 6/2010 3/2010 11/2009 9/2010 9/2010 9/2010 10,571 11,691 15,89 827 4,012 356 3,869 32,916 42.3 14.7 45.0 11.1 31.9 145.0 331.8 9/2012 1/2015 2014-15 10/2010 8,158 4,875 14,600 2,356 7,660 37,649 70,564 Government of the National Capital Territory of Delhi. While the existing Kolkata Metro is presently under the direct control of the Ministry of Railways, the East-West Metro Corridor Project for Kolkata is on the Delhi model and is being implemented through a joint venture company of the Government of India and Government of West Bengal. The Delhi Metro Railways (Amendment) Act 2009 came into effect in September 2009, providing an umbrella "statutory" safety cover for metro 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 October 16, 2009. The details of metro rail projects approved by the Government of India are presented in Table 10.21. Table 10.22 : Increment Flow of Bank Credit to Infrastructure (Rs. crore) Net bank Infrastructure (Total) 30,122 61,745 64,852 21,918 64,321 Power Telecom Roads & Ports 5,246 9,546 Other Infrastructure 11,226 11,692 10,680 8,042 7,326 2006-07 2007-08 2008-09 2008 (April-Nov) 2009 (April-Nov) 12,659 991 21,909 18,597 29,380 12,283 12,530 13,107 37,806 -3,823 761 4,593 18,408 FINANCING OF INFRASTRUCTURE Source : Reserve Bank of India (RBI). Note : Data relate to select banks. Debt financing 10.172 Net bank credit to infrastructure in 200809, defined as the difference between outstanding gross deployment of bank credit to infrastructure in March 2008 and March 2009, increased substantially in the current fiscal (Table 10.22). Considering that there has been a steep decline in total industrial credit during the current year, this is particularly important. 10.173 In the stock of infrastructure investment made by insurance companies in end-2007-08 ( Rs 93,924.2 crore), public-sector companies had a share of 94.3 per cent. Private-sector investment share increased from 2.5 per cent 2004-05 to 5.7 per cent in 2007-08. In 2006-07, public-sector companies significantly stepped up in their infrastructure investment, but could not sustain the momentum in Energy, Infrastructure and Communications Table 10.23 : Investment by insurance companies in infrastructure (Rs. crore)* 2005-06 2006-07 2007-08 Public-sector Companies Private-sector Companies Total 3,933.7 27,656.7 775.3 1,249.3 8,309.0 2,090.8 2008-09 11,353.5 1,735.1 265 Table 10.25 : Funds through private placement (only debt) in infrastructure (Rs. crore) Sector Power generation & supply Roads & Highways Shipping Telecommunications Total 200708 2008- Apr.-Dec. 09 2009* 7,674.6 1,185.0 2,250.0 1,092.0 3,468.0 12,670.7 388.1 Nil Nil 1,551.9 436.0 4,350.0 4,709.0 28,906.0 10,399.8 13,088.6 Source : Insurance Regulatory Authority of India. 3,856.1 19,008.6 12,201.6 Note: *provisional. 2007-08 (Table 10.23). With public-sector companies achieving a 36.6 per cent growth in infrastructure investment, the year 2008-09 witnessed a modest recovery, but private-sector insurance companies are yet to make large-scale investments in the infrastructure sector. 10.174 Flow of resources to the infrastructure sectors through external commercial borrowings (ECBs) had quadrupled from 2005-06 to 2007-08 but went down drastically during 2008-09 (Table 10.24). The picture that emerged during the first half of the current fiscal does not lend support to any recovery in ECB flows to the infrastructure sectors on the whole, from the decline seen in the previous year. 10.175 Infrastructure industries have started deriving significant amounts of resources through private placement of debt. (While private placement has equity and debt components, the sector-specific Source: PRIME Database. information on equity components is not available.) It may be seen that all infrastructure sectors raised substantially higher resources during 2008-09 through private placement of their debt, compared to earlier years (Table 10.25). The flow of debt private placement to infrastructure sectors has so far remained stable during the current year. Equity financing of infrastructure 10.176 Corresponding to the steep decline in the total capital raised through public and rights issues observed in 2008-09, there was a considerable downtrend in the capital raised through public and rights issues in infrastructure also. However, as the primary markets revived in the current year, equity financing of the infrastructure sector also seems to have gathered momentum (Table 10.26). Table 10.24 : Flow of external commercial borrowings to infrastructure (US$ million) Sector Air Transport Telecommunications Power Shipping Railways Other Infrastructure Sectors Source: RBI. Notes: Figures are revised figures; Other infrastructure sectors included maritime transport, energy, port development, roads & bridges and other infrastructure projects . 2007-08 4,739.9 3,022.2 863.5 664.7 1.4 864.6 2008-09 H1 2008-09 H2 2008-09 1,650.2 1,678.2 719.2 791.5 100.0 285.4 650.7 587.1 241.0 310.7 0.0 220.1 999.6 1,091.1 478.2 480.7 100.0 65.4 H12009-10 1,003.8 558.5 521.1 125.9 450.1 77.2 Table 10.26 : Capital raised through public and rights issues (Rs crore) (April-Nov.) Sector Power Telecommunication 2006-07 30 2,994 2007-08 13,709 1,000 2008-09 958 100 2008 959 100 2009 10,584 Nil Source: Securities and Exchange Board of India (SEBI). 266 Economic Survey 2009-10 Table 10.27 : FDI flows to infrastructure (US$ million) (April-Nov.) Sector Power Non-conventional energy Petroleum & natural gas Telecommunications Information & broadcasting * Air transport ** Sea transport Ports Railway related components Total (of above) 2006-07 157.5 2.1 89.4 477.7 43.6 92.1 72.5 0 25.8 960.7 2007-08 968 43.2 1,426.8 1,261.5 321.5 99.1 128.4 918.2 12.4 5178.8 2008-09 984.8 85.3 412.3 2,558.4 762.3 35.2 50.2 493.2 18.0 5,399.6 2008 594.2 31.8 211.9 2,052.1 400.3 35.1 29.5 484.7 15.0 3,854.6 2009 1237.8 67.0 218.7 2,223.3 420.1 14.1 274.2 65.4 25.1 4,545.8 Source: Department of Industrial Policy & Promotion. Notes: * Information & broadcasting including print media; ** Air transport including air freight 10.177 The total FDI flows during the first eight months of the previous and current fiscal years remained at comparable levels, but the FDI flows to the infrastructure sectors during April-November 2009 were distinctly higher than those during the corresponding period of the previous year. In recent years, a large chunk of these flows has been appropriated by the power and telecommunication sectors (Table 10.27). interests of users, especially the poor, and assures quality supply at reasonable cost. For this purpose, it is important that issues relating to the overarching PPP policy, incorporating inter alia the models to be used, contract documents to be adopted, procurement strategies and templates to be employed and mechanisms for financial structuring to be considered, are clearly outlined ab initio at the level of the sponsoring agencies, including State Governments. 10.180 The Government of India has identified a set of constraints in promoting PPPs, namely policy and regulatory gaps, inadequate long-term finance (debt and equity), inadequate shelf of bankable projects, inadequate capacity in the public and private sectors to manage PPP processes and projects and inadequate advocacy to create greater acceptance of PPPs by the stakeholders. To address these constraints, several initiatives have been taken by the Government of India to create an enabling framework for PPPs. The Government has established a streamlined system for clearance of PPP projects developed by Central agencies through setting up of the Public Private Partnership Appraisal Committee (PPPAC). Standardized bidding and contractual documents have been notified. The financing needs of projects are supported by providing Viability Gap Funding (VGF) to PPP projects and long tenor loans through India Infrastructure Finance Company (IIFC) Limited. IIFC (UK) Ltd., a subsidiary of IIFCL in London, has been established with the objective of borrowing funds from the RBI and lending to Indian companies implementing infrastructure INFRASTRUCTURE DEVELOPMENT AND PUBLIC PRIVATE PARTERSHIPS (PPPS) 10.178 The recent economic downturn reinforced the need for enhancing infrastructure investment for greater productivity and growth. This in turn underscored the importance of PPPs in effectively harnessing the required resources. PPPs offer a number of advantages in terms of leveraging public capital to attract private capital and undertake a larger number of infrastructure projects, introducing privatesector expertise and cost-reducing technologies as well as bringing in efficiencies in operation and maintenance. Hence, more than their fiscal implications, PPPs are tools to fulfill the basic obligations of Governments to provide better infrastructure services (with large externalities), by increasing the accountability of the private sector as a service provider. 10.179 Yet, attracting private capital through PPP is neither easy nor automatic. A key pre-requisite is to lay down a policy, legal and regulatory framework that assures a fair return for investors, protects the Energy, Infrastructure and Communications projects in India solely for meeting capital expenditure outside India. For providing financial support for quality project development activities to the States and the 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 loan. The projects, sponsored by State Governments and municipalities, represent various sectors where PPPs are increasingly being adopted, namely the urban sector, health and education, civil aviation and roads. A panel of Transaction Advisers for PPPs has been notified for use by the States and other entities who are undertaking PPP transactions. 10.181 The Department of Economic Affairs (DEA) Ministry of Finance, in collaboration with the ADB initiated the PPP Pilot Projects Initiatives where the process of structuring the PPP project is handheld 267 by the Central Government to develop demonstrable PPP projects in challenging sectors. Thirty projects in States, municipalities and Central Ministries have been identified and are thus being developed. A series of measures have been initiated to strengthen the capacities of PPP cells, established in Central Ministries and State Governments. The assistance/ expertise is being utilized by State Governments for better identification of PPP projects, oversight of the procurement process, contract management and oversight, development of database and repository of knowledge resource and best practices, capacity building and policy support. 10.182 To intensify capacity building of public functionaries and integrate a capacity-building programme on PPPs at State level, the DEA is developing a comprehensive capacity- building programme, in collaboration with the World Bank Table 10.28 : State-wise and sector-wise PPP projects Below Rs 250 crore States Andhra Pradesh Delhi Gujarat Karnataka Kerala Madhya Pradesh Maharashtra Orissa Pudducherry Punjab Rajasthan Sikkim Tamil Nadu Uttar Pradesh West Bengal Other States Inter-State Total 63 10 29 97 12 39 31 16 1 19 51 24 30 6 5 17 13 450 2,617 95 407 2,673 226 2,144 865 235 0 972 1,308 734 699 0 200 1,324 355 14,939 Sector Airports Energy Ports Roads Urban Development Other sectors 5 24 43 271 73 34 0 734 1,066 8,689 2,753 1,613 303 2,669 2,440 32,862 2,404 905 18,808 13,708 62,993 60,454 10,132 1,644 19,111 17,111 66,499 1,02,005 15,288 4,162 3,189 408 3,361 12,203 616 2,695 1,100 500 419 572 833 2,669 6,413 1,459 1,214 1,638 2,295 41,583 33,474 10,374 14,944 24,616 11,131 2,949 32,062 6,888 1,867 0 3,113 13,708 5,340 649 641 0 5,984 1,67,739 39,279 10,877 18,712 39,492 11,973 7,789 34,026 7,623 2,286 1,544 5,253 17,111 12,452 2,108 2,055 2,962 8,634 2,24,176 Between Rs 251 to 500 crore More than Rs 500 crore Value of contacts (in crore) State/sector Number 268 Economic Survey 2009-10 a Water Supply toolkit and Urban Transport toolkit were launched in January 2010. The toolkits act as a ready reference guide to all ULBs in the country and aim to ensure widespread access to infrastructure financing through the PPP framework. For the purpose of preparation of the toolkit, servicelevel assessment of 16 sample cities in the state of Maharashtra was undertaken. 10.185 The toolkit has been developed after a review of existing PPP documentation and draws experience from existing PPP projects such as the performance-based management contract in Latur, concession for water supply and sewerage in Salt Lake city and city bus transport in Indore. Term sheets have been drafted for each PPP structure based on the learning of the documentation review and the study of concession contracts. Each term sheet contains a brief reference guide for understanding the key clauses applicable under the specific PPP structure. The clauses presented in the term sheet aim at guiding a service provider in drafting a contract for the selected PPP structure for the identified projects in urban water supply/urban transport sectors. 10.186 The toolkit details the key processes such as steps involved in identification of suitable PPP structure and processes involved in implementation; preparatory work to be done for the identification of a PPP structure; viability assessment of projects identified on PPP basis; process a public entity should follow to decide whether it should opt for public funding or PPP; identification and allocation of risks amongst the public entity and private operator/ developer and selection of a suitable contract structure; and procurement process to be followed if the ULB decides to implement the project on a PPP basis. and KfW Development Bank, which would be delivered through the Lal Bahadur Shastri National Academy of Administration (LBSNAA), Mussoorie, State Administrative Training Institutes and Central Training Institutes. The programme components include training needs' assessment; development of course content; training of trainers (ToT); and rollout of the programme through a few demonstration modules for the initial handholding of Trainers. Two levels of training would be imparted through the training institutes, namely sensitization courses on PPPs and specialized modules on managing PPPs. PPP Toolkits for four sectors (highways, ports, solid waste management and urban transport), risk and contingent liability frameworks and communication strategy for PPPs are being developed. 10.183 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, Orissa, Assam, Goa and Madhya Pradesh. Other measures include development of sectoral policies for promoting PPPs, establishing nodal departments/ PPP cells, establishing VGFs(to supplement VGF provided by the Government of India), establishing Project Development Funds (to supplement Government of India grant under the India Infrastructure Project Development Fund (IIPDF) and 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. The measures have resulted in a robust pipeline of over 450 projects in diverse sectors with an estimated project cost of over Rs 2, 24, 175.8 crore (Table 10.28). CHALLENGES AND OUTLOOK Development of PPP toolkits 10.184 The Government of India has been developing several enabling tools to promote PPPs. These tools are vital to catalyze investments for building new infrastructure and improve the efficient operation and management of assets over their lifetime and ensure real focus on service delivery. With a view to supporting and guiding Urban Local Bodies (ULBs) in the development of PPP projects, 10.187 Infrastructure services that were affected by the slowdown in general economic activity during the previous year have gradually revived in the current fiscal with easing of supply bottlenecks in certain sectors and with demand recovery in others. However, considering the dimensions of the infrastructure deficit in the country, growth in infrastructure capacity and services will need to be accelerated on a big scale. 10.188 Raising the capacity creation in some critical infrastructure sectors to the desired level is a major challenge. Initiatives required are Energy, Infrastructure and Communications multifaceted, and include those promoting flow of domestic and global resources to infrastructure, facilitating formulation, approval, financial closure and award of projects and easing implementation hurdles in terms of disputes in land acquisition, rehabilitation, contractual issues, shortage of raw materials, capital goods and fuel, environmental disputes and inadequate availability of skilled manpower. The foregoing analysis indicates that efforts--legislative, administrative and executive--are on, with a view to ameliorating the bottlenecks in realization of infrastructure projects. The need of the hour is to expedite, synergize and consolidate these efforts so as to sufficiently and promptly meet the demands of increasing population and urban migration and faster economic growth. 269 10.189 The Planning Commission has estimated that as compared to 4.5 per cent in 2003-04, investment in infrastructure as a proportion of the gross domestic product (GDP) rose to 6 per cent in 2007-08. The collapse of markets worldwide and the dampening of equity markets acted as decelerators on the mobilization of resources by infrastructure sectors during the previous year. Available evidence points towards a steady revival of flows of investible resources to infrastructure sectors during the current year. However, reaching the target of an infrastructural investment of 9 per cent of the GDP fixed by the Eleventh Five Year Plan (2007-2012) would be an extremely challenging task. Efforts are required to channelize the long-term contractual savings to infrastructure sectors on a much larger scale. Human Development, Poverty and Public Programmes he ultimate objective of development planning is human development or increased social welfare and well-being of the people of a nation. This goal is also important because the sustainability of the development process hinges upon the quality of life enjoyed by the people. A healthy and educated population leads to increased productivity which, in turn, can contribute effectively to output growth. Development strategy, therefore, needs to continuously strive for broad-based improvement in standards of living. High growth is essential to generate resources for social spending. However, the fruits of growth need to be shared equitably among all sections of society. Especially, it needs to be ensured that the weaker and disadvantaged sections are not left out of the benefits of growth. The inclusive growth strategy being pursued in the Eleventh Plan has this very objective as it aims to ensure that higher growth of the economy helps overcome the problems of chronic poverty, ignorance and disease. 11 CHAPTER T 11.2 This chapter brings out the comparative international standing of India in terms of human development and the areas needing greater emphasis for better performance. It also studies the recent trends in social sector spending by Central and State Governments. Thereafter, it highlights the important issues concerning poverty and employment followed by the progress made in various public programmes in the social sector. These include rural infrastructure and development, education, health, women and child development, welfare and development of weaker sections of society, social security and related issues. This chapter also briefly reviews the status of international negotiations on climate change as well as India’s stand and the action being taken to address this important issue. (HDI) for India in 2007 was 0.612 on the basis of which India is ranked 134 out of 182 countries of the world placing it at the same rank as in 2006. The HDI is based on three indicators, namely GDP per capita (PPP US $), life expectancy at birth, and education as measured by adult literacy rate and gross enrolment ratio (combined for primary, secondary and tertiary education). The value of HDI for India gradually increased from 0.427 in 1980 to 0.556 in 2000 and went up to 0.612 in 2007. The movement of the index value in some of the comparable countries (Table 11.1) indicates that improvement in HDI in India in recent years has been better than in most of them. 11.4 This trend indicating improvement in the HDI powered by per capita income growth for India is heartening though there is no room for complacency as India is still in the Medium Human Development category with even countries like China, Sri Lanka and Indonesia having better ranking. India’s HDI rank is also lower than its per capita GDP (PPP US $) rank by six notches, indicating that our human development effort still needs to catch up with the HUMAN DEVELOPMENT GENDER SITUATION AND THE 11.3 As per the United Nations Development Programme (UNDP) Human Development Report 2009 (HDR 2009), the Human Development Index Human Development, Poverty and Public Programmes Table 11.1 : Human development index trends 271 Avg. annual growth rate Country Poland Brazil Russia Turkey Thailand China Sri Lanka Indonesia Vietnam Egypt India 1980 …. 0.685 …. 0.628 0.658 0.533 0.649 0.522 …. 0.496 0.427 1985 ….. 0.694 …. 0.674 0.684 0.556 0.670 0.562 0.561 0.552 0.453 1990 0.806 0.710 0.821 0.705 0.706 0.608 0.683 0.624 0.599 0.580 0.489 1995 0.823 0.734 0.777 0.730 0.727 0.657 0.696 0.658 0.647 0.631 0.511 2000 0.853 0.790 …. 0.758 0.753 0.719 0.729 0.673 0.690 0.665 0.556 2005 0.871 0.805 0.804 0.796 0.777 0.756 0.752 0.723 0.715 0.696 0.596 2006 0.876 0.808 0.811 0.802 0.780 0.763 0.755 0.729 0.720 0.700 0.604 2007 0.880 0.813 0.817 0.806 0.783 0.772 0.759 0.734 0.725 0.703 0.612 2000-07 0.45 0.41 ….. 0.87 0.57 1.00 0.57 1.25 0.71 0.81 1.36 Source: HDR 2009. progress made in GDP per capita. The existing gap between the health and education indicators of India and those in the developed world and even many developing countries needs to be bridged at a faster pace. According to the Report, life expectancy at birth in India was 63.4 years in 2007 as against 80.5 years in Norway, 81.4 years in Australia, 74.0 years in Srilanka and 72.9 years in China. Adult literacy rate (aged 15 and above) in 1999-2007 was 66.0 per cent in India as against near 100 per cent in many of the developed nations, 93.3 per cent in China and 92.0 per cent in Indonesia. Combined gross enrolment ratio in education in 2007 was 61 per cent in India as against 99.3 per cent in Canada, 98.6 per cent in Norway, 78.0 per cent in Thailand and 76.4 per cent in Egypt (Table 11.2). 11.5 In terms of the Gender Development Index (GDI), with an index value of 0.594, India ranks 114 out of 155 countries. When the HDI ranks used are recalculated for the countries with a GDI value, a zero count for HDI rank minus GDI rank is obtained for India which is indicative of the same status of world ranking in terms of gender development and human development. Therefore, continued efforts are called for in the area of gender development. Table 11.2: India’s global position in human development 2007 Country HDI GDP per capita (PPP US $) 2007 15,987 9,567 14,690 12,955 8,135 5,383 4,243 3,712 2,600 5,349 2,753 Life Expectancy at birth(yrs) 2007 75.5 72.2 66.2 71.7 68.7 72.9 74.0 70.5 74.3 69.9 63.4 Adult Literacy Rate (% aged 15 yrs & above) 1999-2007 99.3 90.0 99.5 88.7 94.1 93.3 90.8 92.0 90.3 66.4 66.0 Combined Gross Enrol. Ratio in education(%) 2007 87.7 87.2 81.9 71.1 78.0 68.7 68.7 68.2 62.3 76.4 61.0 2007 Poland Brazil Russia Turkey Thailand China Sri Lanka Indonesia Vietnam Egypt India 0.880(41) 0.813(75) 0.817(71) 0.806(79) 0.783(87) 0.772(92) 0.759(102) 0.734(111) 0.725(116) 0.703(123) 0.612(134) Source: HDR 2009. Figures in parentheses in col.2 give ranking among 182 countries. 272 Economic Survey 2009-10 per cent in 2004-05 to 21.6 per cent in 2006-07 and further to 23.8 per cent in 2009-10 (BE). Expenditure on education as a proportion of total expenditure has increased from 9.7 per cent in 2004-05 to 10.6 per cent in 2009-10 (BE). The share of health in total expenditure has also increased from 4.3 per cent in 2004-05 to 4.8 per cent in 2009-10 (BE). TRENDS IN INDIA’S SOCIAL-SECTOR EXPENDITURES 11.6 Central government expenditure on social services and rural development has gone up consistently over the years (Table 11.3). The share of Central Government expenditure on social services including rural development in total expenditure (Plan and non-Plan) has increased from 10.46 per cent in 2003-04 to 19.46 per cent in 200910 (BE). Central support for social programmes has continued to expand in various forms although most social-sector subjects fall within the purview of the States. Major programme specific funding is available to the States through centrally sponsored schemes. 11.7 Expenditure on social services which include education, sports, art and culture, medical and public health, family welfare, water supply and sanitation, housing, urban development; welfare of Scheduled Castes (SCs), Scheduled Tribes (STs) and other Backward Classes (OBCs), labour and labour welfare, social security and welfare, nutrition, relief for natural calamities, etc. by the General Government (Centre and States combined) has also shown increase in recent years (Table 11.4) reflecting higher priority to social services. Expenditure on social services as a proportion of total expenditure increased from 19.9 POVERTY AND INCLUSIVE GROWTH 11.8 The Planning Commission estimates the incidence of poverty on the basis of the large sample surveys on household consumer expenditure conducted by the National Sample Survey Organisation (NSSO) at an interval of approximately five years. The Uniform Recall Period (URP) consumption distribution data of the NSS 61st Round yields a poverty ratio of 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. The corresponding poverty ratios from the Mixed Recall Period (MRP) consumption distribution data are 21.8 per cent, 21.7 per cent and 21.8 per cent respectively. While the former consumption data uses a 30-day recall/ reference period for all items of consumption, the latter uses a 365-day recall/reference period for five infrequently purchased non-food items, namely clothing, footwear, durable goods, education and Table 11.3 : Central Government expenditure (Plan and non-Plan) on social services and rural development (as per cent of total expenditure) ITEM 1. Social services a. Education, Sports, Youth Affairs b. Health & Family Welfare c. Water Supply, Housing, etc. d. Information & Broadcasting e. Welfare of SCs/STs and OBCs f. Labour & Employment g. Social Welfare & Nutrition h. North-eastern Areas i. Other Social Services Total 2. Rural Development 3. I) Pradhan Mantri Gramodaya Yojana (PMGY) II) Pradhan Mantri Gram Sadak Yojana (PMGSY)* 4. Social Services, Rural Dev., PMGY and PMGSY 5. Total Central Government Expenditure 2003-04 2004-05 2005-06 Actual Actual Actual 2.32 1.53 1.67 0.28 0.24 0.18 0.50 0.00 0.15 6.86 2.59 0.51 0.49 10.46 100.00 2.81 1.64 1.81 0.26 0.27 0.20 0.52 0.00 0.34 7.85 1.91 0.56 0.49 10.81 100.00 3.71 1.89 2.08 0.30 0.33 0.25 0.84 0.00 0.40 9.79 3.12 0.00 0.83 13.75 100.00 2006-07 2007-08 2008- 2009Actual Actual 09(RE) 10(BE) 4.28 1.87 1.72 0.25 0.34 0.32 0.85 0.00 -0.17 9.47 2.84 0.00 1.08 13.38 100.00 4.24 2.08 2.06 0.22 0.38 0.27 0.84 0.00 1.29 11.39 2.56 0.00 1.54 15.48 4.07 1.86 2.34 0.21 0.35 0.27 0.73 1.58 1.79 13.19 4.55 0.00 1.70 19.44 4.37 1.99 1.99 0.24 0.42 0.23 0.70 1.60 1.82 13.35 4.30 0.00 1.81 19.46 100.00 100.00 100.00 been Source : Budget documents and Ministry of Rural Development. * Launched in 2000-01 as a new initiative for basic rural needs.However, the PMGY has discontinued from 2005-06. Human Development, Poverty and Public Programmes Table 11.4 : Trends in social services expenditure by Central Government (Central and State Governments combined) 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 2004-05 Actual 8,69,757 1,72,812 84,111 37,535 51,166 26.85 5.33 2005-06 Actual 9,59,855 2,02,672 2006-07 Actual 11,09,174 2,39,340 2007-08 Actual 12,95,903 2,88,500 1,27,547 60,869 1,00,084 26.19 5.83 2.58 1.23 2.02 2008-09 (RE) 16,59,109 3,98,828 1,67,981 76,489 1,54,358 29.76 7.15 3.01 1.37 2.77 273 (Rs. crore) 2009-10 (BE) 18,70,955 4,45,751 1,98,842 89,314 1,57,595 30.35 7.23 3.23 1.45 2.56 96,365 1,14,744 45,428 52,126 60,879 72,470 As per cent of GDP 25.90 25.89 5.47 5.59 2.60 2.60 2.68 1.16 1.23 1.22 1.58 1.64 1.69 As per cent of total expenditure 19.9 21.1 21.6 22.3 24.0 10.1 4.6 9.3 42.1 19.2 38.7 23.8 10.6 4.8 8.4 44.6 20.0 35.4 9.7 10.0 10.3 9.8 4.3 4.7 4.7 4.7 5.9 6.3 6.5 7.7 As per cent of social services expenditure 48.7 47.5 47.9 44.2 21.7 22.4 21.8 21.1 29.6 30.0 30.3 34.7 Source: RBI as obtained from Budget Documents of Union and State Governments. BE: budget estimates; RE: revised estimates. institutional medical expenses, and a 30-day recall/ reference period for remaining items. The percentage of poor in 2004-05 estimated from the URP consumption distribution of NSS 61st Round consumer expenditure data is comparable with the Table 11.5 : Poverty ratios by URP and MRP (per cent) Sl. No. 1 2. 3. Category By URP Method Rural Urban All India By MRP Method 4 5 6 Rural Urban All India 1999-2000 27.1 23.6 26.1 2004-05 21.8 21.7 21.8 37.3 32.4 36.0 28.3 25.7 27.5 1993-94 2004-05 poverty estimates of 1993-94(50th round), which was 36 per cent for the country as a whole. The percentage of poor in 2004-05 estimated from the MRP consumption distribution of NSS 61st Round consumer expenditure data is roughly comparable with the poverty estimates of 1999-2000 (55th round), which was 26.1 per cent for the country as a whole (Table 11.5). Methodology for estimation of poverty and BPL households 11.9 The official estimates of poverty and the number of BPL households have been criticized on various counts. Keeping this in view, two committees were constituted to look into these issues. Report of the Planning Commission Expert Group 11.10 The Planning Commission set up an expert group to examine the issue and suggest a new Source : Planning Commission 274 Economic Survey 2009-10 50 per cent though the calorie norm of 2,400 would require this to be 80 per cent. The Committee, based upon available studies, also observed, inter-alia, the following: At any given point of time, the calorie intake of the poorest quartile continues to be 30 to 50 per cent less than the calorie intake of the top quartile of the population, despite it needing more calories because of harder manual work. Calorie consumption of the bottom 50 per cent of the population has been consistently decreasing since 1987, which is a matter of concern. 11.12 Thus the recommendations of both committees suggest an increase in BPL families coverage. This in turn implies automatic expansion in the coverage of the public distribution system (PDS) and other Government schemes where beneficiaries are decided on BPL basis. The additional Government expenditure implications are also apparent. poverty line and estimates. The expert group has submitted its report (Box 11.1) which is being examined by the Government. Committee for the Estimation of BPL households in Rural areas 11.11 The committee constituted by the Ministry of Rural Development for suggesting a methodology for estimation of BPL households in rural areas observed that the national poverty line at Rs 356 per capita per month in rural areas and Rs 539 per capita per month in urban areas at 2004-05 prices permitted both rural and urban people to consume about 1,820 k calories as against the desired norm of 2,400/2,100 k calories. Hence, a large number of the rural poor got left out of the BPL status benefits as in order to consume the desired norm of 2,400/2,100 k calories, the cut-off line for determining BPL status should have been around Rs 700 in rural areas and Rs 1,000 in urban. The committee, therefore recommended that the percentage of people entitled to BPL status should be revised upwards to at least Box 11.1 : Important recommendations and estimates of the Planning Commission Expert Group (Tendulkar Committee) regarding poverty lines Poverty estimates to continue to be based on private household consumer expenditure of Indian households collected by the National Sample Survey Organization (NSSO). Need to move away from anchoring the poverty lines to a calorie intake norm. Since for canvassing household expenditure on a recall basis, the NSSO has decided to shift to an MRP-based estimates for all its consumption surveys in future, there is need to adopt the MRP-based estimates of consumption expenditure as the basis for future poverty lines as against the previous practice of using URP estimates. This change captures the household consumption expenditure of poor households on low- frequency items of purchase more satisfactorily. MRP equivalent of the urban poverty line basket (PLB) corresponding to 25.7 per cent urban headcount ratio as the new reference PLB to be provided to rural as well as urban population in all the states after suitable adjustments. The proposed reference PLB takes into account all items of consumption (except transport and conveyance) for construction of price indices. Separate allowance for private expenditure on transport and conveyance has been made in the recommended poverty lines. The proposed price indices are based on the household-level unit values (approximated price data) obtained from the 61st round (July 2004 to June 2005) of the NSS on household consumer expenditure for food, fuel and light, clothing and footwear at the most detailed level of disaggregation and hence much closer to the actual prices paid by consumers in rural and urban areas. Price indices for health and education were also obtained from unit-level data from related National Sample Surveys. The proposed price indices (Fisher Ideal indices in technical terms) incorporate both the observed all-India and state-level consumption patterns in the weighting structure of the price indices. For rent and conveyance, the actual expenditure share for these items was used to adjust the poverty line for each state. The new poverty lines seek to enable the rural as well as urban population in all the States to afford the recommended all-India urban PLB after taking due account of within-State rural-urban and inter-State differentials (rural and urban) incorporating observed consumer behaviour both at the all-India and State levels. The all-India rural headcount ratio and all-India combined headcount ratio using the recommended procedure is 41.8 per cent and 37.2 per cent in comparison with official estimates of 28.3 per cent and 27.5 per cent respectively. Poverty at all-India level in 1993-94 was 50.1 per cent in rural areas, 31.8 per cent in urban areas and 45.3 per cent in the country as a whole as compared to the 1993-94 official estimates of 37.2 per cent rural, 32.6 per cent urban and 36.0 per cent combined. Thus, even though the suggested new methodology gives a higher estimate of rural and combined ruralurban headcount ratio at the all-India level for 2004-05, the extent of poverty reduction in comparable percentage point decline between 1993-94 and 2004-05 is not very different from that inferred using the old methodology. Human Development, Poverty and Public Programmes 275 INEQUALITY 11.13 Inequality in India in comparison to other countries as reflected in the Gini Index, which is a measure of unequal distribution of income (or consumption) among individuals or households, is given in the HDR 2009. The lower (higher) the number, the more equal (unequal) is the distribution. At 36.8, India’s Gini index was more favourable than that of comparable countries like Brazil(55), Turkey(43.2), Thailand(42.5), China(41.5), Indonesia(39.4), Vietnam(37.8) and even the USA (40.8), Singapore(42.5), Hong Kong(43.4) and Portugal(38.5), which are otherwise ranked very high in human development. At 8.6, the ratio of the richest 10 per cent of population to the poorest 10 per cent was also lower than in these countries. 11.14 Inter-State inequality in India as reflected in the Lorenz ratio ( which like Gini Index is used as a measure of relative inequality) has been estimated by the NSSO based on household consumer expenditure for 2004-05. For rural India, the Lorenz ratio for total consumption expenditure was 0.30 while for urban India, it was 0.37 indicating, as expected, 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). Similiarly, lower inequality was seen in the 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). As expected, disparity in consumption of durable goods was much higher than in the consumption of cereals. from 7.31 per cent in 1999-2000 to 8.28 per cent in 2004-05. Unemployment 11.16 A comparison between the different estimates of unemployment (Table 11.6) indicates that the CDS estimate of unemployment rate being the broadest is the highest. The higher unemployment rates according to the CDS approach compared to the weekly status and usual status approaches indicates a high degree of intermittent unemployment. It 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 criterion of current weekly status. Table 11.6 : All-India rural & urban unemployment rates* for NSS 61st round: Different estimates 2004-05 Sl. No. 1 2 3 4 Estimate** UPS US(adj.) CWS CDS Rural 2.5 1.7 3.9 8.2 Urban 5.3 4.5 6.0 8.3 Source: NSS Report No. 515(part I). * as per cent of labour force **UPS–Usual Principal Status, US(adj.)–Usually unemployed excl. Subsidiary Status workers, CWS –Current Weekly Status and CDS–Current Daily Status. Employment in the Organized Sector 11.17 Employment growth in the organized sector, public and private combined, has declined during the period between 1994 and 2007. This has primarily happened due to the decline of employment in the public organized sector. Employment in establishments covered by the Employment Market Information System of the Ministry of Labour grew at 1.20 per cent per annum during 1983-94 but decelerated to -0.03 per cent per annum during 19942007. However, the latter decline was mainly due to a decrease in employment in public-sector establishments from 1.53 per cent in the earlier period to -0.57 per cent in the later period, whereas the private sector showed acceleration in the pace of growth in employment from 0.44 per cent to 1.30 per cent per annum (Table 11.7). EMPLOYMENT 11.15 As noted in Economic Surveys of previous years based on NSSO data, employment on a current daily status (CDS) basis during 1999-2000 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. 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 work force, unemployment rate also rose. The incidence of unemployment on CDS basis increased 276 Economic Survey 2009-10 the Indian economy, including employment, and several measures, financial and fiscal, were taken. The latest sample survey of the Labour Bureau indicates job gains in the sectors covered (Box 11.2). Table 11.7 : Rate of growth of employment in organized sector (per cent per annum) 1983-94 Public Sector Private Sector Total Organized 1.53 0.44 1.20 1994-2007 -0.57 1.30 -0.03 SOCIAL-SECTOR INITIATIVES Poverty-alleviation and employmentgeneration programmes 11.19 Several poverty-alleviation and employmentgeneration programmes are being implemented by the Government. The important among these are listed below. (i) The National Rural Employment Guarantee Scheme (NREGS), was launched in February 2006 in 200 most backward districts in the first phase and was expanded to 330 districts during 2007-08. The coverage was extended to all rural districts of the country in 2008-09. At present, 619 districts are covered under the NREGS. During the year 2008-09, more than 4.51 crore households were provided employment under the scheme. As against the Source: Eleventh Five Year Plan Document and Ministry of Labour and Employment Effect of global financial crisis and economic slowdown 11.18 Employment opportunities in the current financial year were affected by the global financial crisis and economic slowdown in India. While comprehensive employment data for the current financial year are not available, some sample surveys conducted by the Labour Bureau, Ministry of Labour and Employment, indicated employment losses in the wake of the global financial crisis and economic slowdown. The Government was concerned about the possible impact of the global financial crisis on Box 11.2 : Estimates of job losses/gains during the global economic crisis and recent recovery. The findings of the Report on Effect of Economic Slowdown on Employment in India(July-September 2009) based upon the fourth quarterly quick employment sample survey conducted by the Labour Bureau, Ministry of Labour and Employment, are: The fourth quarterly quick employment survey was launched in the third week of October 2009 and all the units covered in the previous survey were revisited. In the survey, information was collected from 2,873 units by covering 21 centres spread across 11 States/UTs. Eight sectors, namely textiles, leather, metals, automobiles, gems & jewellery, transport, IT/BPO and handloom/powerloom were covered. At overall level, employment has increased by about 5 lakh during July-September, 2009 over June 2009. During the previous quarter of April-June 2009 employment had declined by 1.31 lakh at overall level. All the seven sectors, except leather, have registered an increase in employment during the quarter July-September 2009 over June 2009. On the contrary, during April-June 2009 quarter all sectors, except leather, automobiles and handloom/powerloom, experienced a decrease in employment, probably due to seasonality. Employment during the July-September 2009 quarter has increased substantially in textiles (3.18 lakh) followed by metals (0.65 lakh) and gems & jewellery (0.58 lakh). However, the previous quarterly survey for the period April-June 2009 found that employment had declined in all three sectors by 1.54 lakh, 0.01 lakh and 0.20 lakh respectively. The previous quarterly survey results for the period April-June 2009 over March 2009 showed a substantial decline in the employment of direct category workers. As a departure from the April-June 2009 quarter wherein the employment of direct category of workers had declined, a significant increase was observed during the July-September 2009 quarter. About 80 per cent of the increase in employment that occurred during the July-September 2009 quarter was in direct category workers. Though increase in employment is more in non-exporting units, exporting units have also shown a significant recovery by registering an increase in employment to the extent of 2.04 lakh during July-September 2009 over June 2009. By comparing the results of the different quarters studied, it may be observed that employment declined by 4.91 lakh during the October-December 2008 quarter, increased by 2.76 lakh during January-March 2009, again declined by 1.31 lakh during April-June 2009; and then increased by 4.97 lakh during the July-September 2009 quarter. Thus, even on the basis of this small sample, estimated employment in the selected sectors has experienced a net addition of 1.51 lakh during the last one-year period from October 2008 to September 2009. Human Development, Poverty and Public Programmes budgeted outlay of Rs 39,100 crore for the year 2009-10, an amount of Rs 24,758.50 crore has been released to the States/UTs till December 2009. During the year 2009-10, 4.34 crore households have been provided employment under the scheme. Out of the 182.88 crore person days created under the scheme during this period, 29 per cent and 22 per cent were in favour of SC and ST population respectively and 50 per cent in favour of women. (ii) Swarnjayanti Gram Swarozgar Yojana (SGSY): The Swarnjayanti Gram Swarozgar Yojana (SGSY) was launched in April 1999 after restructuring of the Integrated Rural Development Programme (IRDP) and allied programmes. It is a self-employment programme for the rural poor. The objective of the SGSY is to bring the assisted swarozgaris above the poverty line by providing them income-generating assets through bank credit and Government subsidy. The scheme is being implemented on a cost-sharing basis between the Centre and States of 75:25 for non-northeastern states and 90:10 for north-eastern states. Up to December 2009, 36.78 lakh selfhelp groups (SHGs) had been formed and 132.81 lakh swarozgaris have been assisted with a total investment of Rs 30,896.08 crore. (iii) Swarna Jayanti Shahari Rozgar Yojana (SJSRY) : The Government has recently revamped the SJSRY with effect from April 1, 2009. The scheme provides gainful employment to the urban unemployed and underemployed poor, by encouraging the setting up of selfemployment ventures by the urban poor and also by providing wage employment and utilizing their labour for construction of socially and economically useful public assets. The revamped SJSRY has five components: (a) the Urban Self-Employment Programme (USEP) which targets individual urban poor for setting up of micro enterprises; (b) the Urban Women Self-help Programme (UWSP) which targets urban poor women self-help groups for setting up of group enterprises and providing them assistance through a revolving fund for thrift and credit activities; (c) Skill Training for Employment Promotion amongst Urban Poor (STEP-UP) which targets the urban poor for imparting quality training so as to enhance their employability for self-employment or better salaried employment; (d)the Urban Wage 277 Employment Programme (UWEP) which seeks to assist the urban poor by utilizing their labour for the construction of socially and economically useful public assets, in towns having population less than 5 lakh as per the 1991 census; and (e) the Urban Community Development Network (UCDN) which seeks to assist the urban poor in organizing themselves into self-managed community structures so as to gain collective strength to address the issues of poverty facing them and participate in effective implementation of urban poverty-alleviation programmes. Budget allocation for the SJSRY scheme for 2009-10 is Rs 515.00 crore of which Rs 363.12 crore had been utilized till December 31, 2009. During 2009-10, as reported by States/UTs, 28,613 urban poor have been assisted to set up individual enterprises, 13,453 urban poor women have been assisted in setting up group enterprises, 27,463 urban poor women have been assisted through a revolving fund for thrift and credit activities and 85,185 urban poor have been imparted skill training. Social Protection Programmes 11.20 In view of the predominance of informal-sector workers in the workforce, there is need for expansion in the scope and coverage of social security schemes for these unorganized workers so that they are assured of a minimum level of social protection. Many measures were taken by the Government of India along these lines (Box 11.3). Rural Infrastructure and Development 11.21 Substantial progress was made by the Central Government in creating rural infrastructure during the year. This was in accordance with the commitment to faster social-sector development to remove disparities under the Eleventh Five Year Plan. These include Bharat Nirman, the Total Sanitation Campaign (TSC) and the National Rural Health Mission. It is evident that the focus of these programmes is on providing better facilities and quality of life to rural population. Bharat Nirman 11.22 This programme, launched in 2005-06 for building infrastructure and basic amenities in rural 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 278 Economic Survey 2009-10 Box 11. 3 : Recent measures for social protection Aam Admi Bima Yojana (AABY): Under this scheme launched on October 2, 2007, insurance will be provided against natural as well as accidental death and partial/permanent disability to the head of the family of rural landless households in the country. Up to September 30, 2009, the Scheme had covered 81.99 lakh lives. Rashtriya Swasthya Bima Yojana (RSBY): The RSBY was launched on October 1, 2007 for BPL families (a unit of not more than five) in the unorganized sector. The total sum insured is Rs 30,000 per family per annum. The premium is shared on a 75:25 basis by the Centre and the State Government. In case of north-eastern States and Jammu & Kashmir, the premium is shared in a 90:10 ratio. The beneficiary is entitled to cashless transactions through a smart card. The RSBY became operational from April 1, 2008. Till January 12, 2010, 26 States/Union Territories have initiated the process of implementing the scheme. Out of these, 22 States/UTs, namely Assam. Rajasthan, Haryana, Punjab, NCT of Delhi, Gujarat, Bihar, Himachal Pradesh, Kerala, Maharashtra, Tamil Nadu, Uttar Pradesh, Jharkhand, Uttarakhand, West Bengal, Goa, Nagaland, Chattisgarh, Meghalaya, Tripura, Orissa and Chandigarh Administration, have started issuing smart cards and more than 97.19 lakh cards have been issued. The Unorganized Workers’ Social Security Act 2008: The Act has the objective of providing social security to unorganized workers. The Unorganised Workers’ Social Security Rules 2009 have also been framed. The Act has come into force w.e.f. May 16, 2009. It provides for constitution of a National Social Security Board and State Social Security Boards which will recommend social security schemes for these workers. The National Social Security Board has since been constituted and has met twice. The Board has made some recommendations regarding extension of social security schemes to certain additional segments of unorganized workers. Bilateral social security agreements: Bilateral social security agreements have been signed with Belgium, France, Germany, Switzerland, Luxemburg and Netherlands to protect the interests of expatriate workers and companies on a reciprocal basis. Negotiations for similar agreements with other countries like Czech Republic, Norway, Hungary, Denmark, Canada and Republic of Korea have been completed. Negotiations are in progress with several other countries. These agreements help workers by providing exemption from social security contribution in case of posting, totalisation of contribution periods and exportability of pension in case of relocation to the home country or any third country. areas and improving the quality of life of people in rural areas. The allocation in 2009-10 for Bharat Nirman was stepped up by 45 per cent over 200809(BE). Up to December 2009, a total length of about 2,50,554 km of roads has been completed under the PMGSY with a cumulative expenditure of Rs 59,800 crore. Under rural roads component of Bharat Nirman 33,812 habitations have been provided all weather road connectivity upto December, 2009 and projects for connecting 20,067 habitations are at different stages. Under phase I of the rural housing component of Bharat Nirman, 60 lakh houses were envisaged through the Indira Awaas Yojana all over the country during the four years from 2005-06 to 2008-09. Against this target, 71.76 lakh houses were constructed with an expenditure of Rs 21,720.39 crore. It has now been proposed to double this target and to construct 120 lakh houses during the next five-year period starting from the current year 200910. During the current financial year, as against the target of construction of 40.52 lakh houses, 18.57 lakh houses have been constructed so far. Under Bharat Nirman for rural water supply, Rs 4,098 crore in 2005-06, Rs 4,560 crore in 2006-07, Rs 6,441.69 crore in 2007-08 and Rs 7,276.29 crore in 2008-09 have been utilized. In 2009-10, a budgetary provision of Rs 8,000 crore has been made out of which Rs 5,669.88 crore has been utilized (Table 11.8). Table 11.8 : Bharat Nirman - Rural drinking water-cumulative achievements Component Uncovered habitations to be provided with potable water Slipped-back habitations to be provided with potable water Quality-affected habitations to be addressed with potable water Total a Target (at the begining of Bharat Nirman) 55,067 3,31,604 2,16,968 6,03,639 Cumulative achievements* 54,589 3,83,106a 3,15,132a 7,52,827 Higher achievement reported cumulatively as some states have reported coverage of habitations other than those included in Bharat Nirman Programme. * As on December 23, 2009. Human Development, Poverty and Public Programmes 11.23 In the case of quality-affected habitations, as reported by States, 52,428 habitations have been fully covered by safe water supply. Projects to cover 2,57,512 habitations have been given technical and administrative approval and are under execution. The goal is to cover all water quality-affected habitations with safe drinking water by the end of 2011. Sustainability of drinking water sources and systems has been accorded high priority. In order to enable the rural community to shoulder responsibility in management, operation and maintenance of water supply systems at village level, a decentralized, demand-driven, community-managed approach has been adopted. 11.24 To enable rural schools to provide safe and clean drinking water for children, the Jalmani programme was launched on November 14, 2008 and Rs 100 crore was provided to the States in 2008-09. Under the programme, 100 per cent financial assistance has been provided to States to instal standalone water purification systems in rural schools to allow children access to safe and clean water. During 2009-10, another Rs 100 crore has been made available and allocated to the States. 279 which an award is given to those PRIs that attain a 100 per cent open defecation-free environment. The NGP has been acclaimed internationally as a unique tool of social engineering and community mobilization. Skill Development 11.27 In the Eleventh Five Year Plan, a comprehensive skill development programme with wide coverage throughout the country has been initiated by the Government. The Coordinated Action Plan for Skill Development has a target of 500 million skilled persons by the year 2022. In this regard, a three-tier institutional structure consisting 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), has already been set up to take forward the skill development mission. The NSDCB has addressed to five core areas of skill development, namely (i) curriculum revision on a continuous basis, (ii) vocational education, (iii) apprenticeship training, (iv) accreditation and certification system and (v) skillgap mapping. The NSDC has been set up to promote private-sector action for skill development, an institutional arrangement in the form of a non-profit corporation in the Ministry of Finance. The Corporation was registered on July 31, 2008 under Section 25 of the Companies Act 1956. The National Skill Development Fund (NSDF) was incorporated as a Trust on January 7, 2009 as a receptacle for funds for the NSDC. A sum of Rs 995.10 crore was subsequently transferred to the Trust. An Investment Management Agreement was concluded between the NSDC and NSDF on March 27, 2009, and a sum of Rs 200 crore from the overall corpus of the Trust was transferred to the NSDC for implementation of its work programme. The NSDC has been mandated to train about 150 million persons by 2022 under the National Skill Development Policy which is now in place. The NSDC Board has received a large number of proposals for providing funding support for skill development and due diligence in respect of these proposals is under way. Rural Sanitation: Total Sanitation Campaign (TSC) 11.25 The annual budgetary support for the TSC was increased from Rs 202 crore in 2003-04 to Rs 1,200 crore in 2009-10. With the scaling up of the TSC, combined with higher resource allocation, programme implementation has improved substantially. Since 1999, over 6.01 crore toilets have been provided to rural households under the TSC. A significant achievement has also been the construction of 9.37 lakh school toilets and 2.95 lakh Anganwadi toilets. The number of households being provided with toilets annually has increased from only 6.21 lakh in 2002-03 to 115 lakh in 2008-09. In 200910 (up to December 22, 2009), more than 62 lakh toilets were provided to rural households. The cumulative coverage till now is 61 per cent as against only 21.9 per cent rural households having access to latrines as per Census 2001 data. 11.26 The TSC follows a community-led and peoplecentred approach. The components of the TSC include start-up activities, Individual household latrines, community sanitary complexes, school sanitation and hygiene education and Anganwadi toilets. To encourage Panchayati Raj institutions (PRIs) to take up sanitation promotion, there is the Nirmal Gram Puraskar (NGP) incentive scheme under Unique Identification Authority of India (UIDAI) 11.28 On June 25, 2009 the Cabinet approved the creation of the position of Chairperson, Unique Identification Authority of India (UIDAI). On July 30, 2009 the Prime Minister has also constituted a 280 Economic Survey 2009-10 information. This will ensure that the data collected is clean from the start of the programme. However, much of the poor and underserved population lacks identity documents, and the UID may be the first form of identification it has access to. The Authority will ensure that the Know Your Resident(KYR) standards don’t become a barrier for enrolling the poor, and will devise suitable procedures to ensure their inclusion without compromising on the integrity of the data. A partnership model: The UIDAI approach leverages the existing infrastructure of Government and private agencies across India. The UIDAI will be the regulatory authority managing a Central ID Data Repository (CIDR), which will issue UID numbers, update resident information and authenticate the identity of residents as required. Enrolment will not be mandated: The UIDAI approach will be a demand-driven one, where the benefits and services that are linked to the UID will ensure demand for the number. This will not, however, preclude Governments or Registrars from mandating enrolment. The UIDAI will issue a number, not a card: The Authority’s role is limited to issuing the number. This number may be printed on the document/card that is issued by the Registrar. Process to ensure no duplicates: Registrars will send the applicant’s data to the CIDR for de-duplication.The CIDR will perform a search on key demographic fields and on the biometrics for each new enrolment, to ensure that no duplicates exist. Timelines: The UIDAI will start issuing UIDs in 12-18 months, and it plans to cover 600 million people within four years from the start of the project. This can be accelerated if more Registrars partner with the Authority for both enrolment and authentication.The adoption of UIDs is expected to gain momentum with time, as the UID number establishes itself as the most accepted identity proof in the country. council under his chairmanship to advice the UIDAI and ensure coordination between the ministries, stakeholders and partners. The council will advice the UIDAI on programme, methodology and implementation to ensure coordination between ministries/departments, stakeholders and partners. It will also identify specific milestones for early completion of the project. Initiatives like setting up of the UIDAI have been taken to bring in efficiency in the implementation of Government programmes. Once fully operational, the scheme will, besides facilitating financial inclusion, ensure better governance and improved service delivery so that the targeted group of people is actually benefited by the schemes implemented by the Centre and States. Subsequently, the Government constituted a Cabinet Committee on UIDAI on October 22, 2009. The Committee, inter-alia, will look into all issues relating to the UIDAI including its organisation, plans, policies, programmes, funding and methodology to be adopted for achieving the objectives of the Authority. The main features of the UIDAI model as per the strategy paper prepared by the UIDAI and broadly endorsed by the Prime Minister’s council on the UIDAI are given below. The UID number will only provide identity: The UIDAI’s purview will be limited to the issue of unique identification numbers linked to a person’s demographic and biometric information. The UID number will only guarantee identity, not rights, benefits or entitlements. The UID will prove identity, not citizenship: All residents in the country can be issued a unique ID. The UID is proof of identity and does not confer citizenship. A pro-poor approach: The UIDAI envisions full enrolment of residents, with a focus on enrolling India’s poor and underprivileged communities. The Registrars that the Authority plans to partner with in its first phase – the NREGA, RSBY and PDS – will help bring large numbers of the poor and underprivileged into the UID system. The UID method of authentication will also improve service delivery for the poor. Enrolment of residents with proper verification: Existing identity databases in India are fraught with problems of fraud and duplicate/ ghost beneficiaries. To prevent this from seeping into the UIDAI database, the Authority plans to enrol residents into its database with proper verification of their demographic and biometric Education 11.29 The 86th Constitutional Amendment Act 2002 led to insertion of Article 21-A in Part III of the Constitution that made free and compulsory education for all children between 6 and 14 years of age, a fundamental right. The Right of Children to Human Development, Poverty and Public Programmes Free and Compulsory Education Act 2009 to provide for free and compulsory education for all children of the age 6 to 14 years, was published in the Gazette of India on August 27, 2009 and has the following salient features: Every child of the age 6-14 years shall have a right to free and compulsory education in a neighbourhood school till completion of elementary education ; The appropriate Government and the local authority shall establish, within such area or limits of neighbourhood, a school where it is not so established, within a period of three years; The Central and State Governments shall have concurrent responsibility for providing funds for carrying out the provisions of this Act; It shall be the duty of every parent or guardian to admit or cause to be admitted his or her child or ward to an elementary education in the neighbourhood school; No school or person shall, while admitting a child, collect any capitation fee and subject the child or his or her parents or guardians to any screening procedure; No teacher shall engage himself or herself in private tuition or private teaching activity; The Central Government shall constitute by notification a National Advisory Council, consisting of members to be appointed from amongst persons having knowledge and practical experience in the field of elementary education and child development for advising the Central Government on implementation of the provisions of the Act in an effective manner. 281 buildings, construction of 10,26,831 additional classrooms, 1,84,652 drinking water facilities, construction of 2,86,862 toilets, supply of free textbooks to 9.05 crore children, appointment of 10.11 lakh teachers and in-service training for 21.79 lakh teachers. There has been significant reduction in the number of out-of-school children on account of SSA interventions. Rashtriya Madhyamik Shiksha Abhiyan (RMSA): A new centrally sponsored scheme, the RMSA, to enhance access to secondary education and improve its quality was launched in March 2009. The objectives of the scheme are to achieve an enrolment ratio of 75 per cent for Classes IX-X within five years by providing a secondary school within reasonable distance of every habitation, to improve quality of education imparted at secondary level through making all secondary schools conform to prescribed norms, to remove gender, socio-economic and disability barriers, universal access to secondary level education by 2017, i.e. by the end of 12th Five Year Plan and universal retention by 2020. The Central Government shall bear 75 per cent and the State Governments 25 per cent of the project expenditure during the Eleventh Five Year Plan. The funding pattern will be 90:10 for the northeastern States. National Programme of Midday Meals in Schools: Under this programme, the Government has revised the food norm for upper primary children by increasing the quantity of pulses from 25 to 30 g, vegetables from 65 to 75 g and decreasing the quantity of oil and fat from 10 to 7.5 g. Upward revision of the cooking cost (excluding labour and administrative charges) for primary to Rs 2.50 and for upper primary to Rs 3.75 has also been made. The cooking cost now includes the cost of pulses, vegetables, oil and fats, salt and condiments and fuel. A separate provision for payment of an honorarium to a cook-cum-helper @ Rs 1000 per month has been made. Transportation assistance for 11 Special Category States— Assam, Arunachal Pradesh, Himachal Pradesh, Jammu & Kashmir, Manipur, Meghalaya, Nagaland, Sikkim, Uttarakhand and Tripura— has been revised to the rate prevalent under the Public Distribution System (PDS) in these States in place of the existing assistance at a flat rate of Rs 125 per quintal. The new rates are effective from December 1, 2009. Besides Elementary and Secondary Education Schemes 11.30 Universalization of elementary education of adequate quality to ensure satisfactory learning standards among children is an objective that needs to be pursued vigorously. Keeping this objective in view, the progress made in some of the important elementary and secondary education schemes is given below : Sarva Shiksha Abhiyan (SSA): The SSA is being implemented in partnership with the States to address the needs of children in the age group of 6-14 years. The achievements of the SSA till September end 2009 are opening of 2,88,155 new schools, construction of 2,40,888 school 282 Economic Survey 2009-10 the cost of construction of kitchen-cum-store has been revised. The cooking cost, honorarium and cost of construction of kitchen-cum-store will be shared between the Centre and the north-eastern States on a 90:10 basis and other States / UTs on a 75:25 basis. The Kasturba Gandhi Balika Vidyalaya (KGBV): The KGBV scheme was launched in July 2004 for setting up residential schools at upper primary level for girls belonging predominantly to the SC, ST, OBC and minority communities. There are 2573 KGBVs reported to have been sanctioned in the States and 1.96 lakh girls belonging to the SC,ST,OBC & minority communities enrolled in them. Model Schools: Under the centrally sponsored scheme to establish 6000 high-quality model schools at block level as benchmarks of excellence, the first phase of which was launched in November 2008, 419 schools in 12 States have been approved by the Grants-in-aid Committee (GIAC) during 2009. So far 167 schools in six states have been sanctioned. Girls Hostels In Educationally Backward Blocks: Under another centrally sponsored scheme to set up Girls Hostels with 100 seats in about 3,500 educationally backward blocks, launched in October 2008, 647 hostels in 14 States have been approved by the GIAC during 2009. So far 163 hostels in seven states have been sanctioned. Box 11.4 : Examination reforms Important decisions taken for reforming the examination system are as follows: There will be no Class X board examination with effect from 2011 in CBSE schools. The students of Classes IX and X will be assessed on the basis of CCE (Continuous and Comprehensive Evaluation) to be implemented at school level. CCE will be applicable to Class IX students from the session 2009-10. For students who wish to move out of their schools and for students in schools that have no higher secondary classes, on-demand examination will be offered by the CBSE from 2011 onwards. Though it is not required for students continuing in the same school in Class XI, they will have the option to appear for on-demand examination to get themselves assessed. It has been decided to replace the present system of awarding marks by grades in all subjects in the Class X board examination to be conducted by the CBSE in 2010. Such grading would be continued for on-demand examination of 2011 and beyond and also for CCE. Higher and Technical Education 11.33 Quality higher and technical education increases the employability of the youth and can help reap the benefits of India’s looming demographic dividend. Some recent steps (see also Box 11.6) in this direction are given below : Scheme of Sub-Mission on Polytechnics under Coordinated Action for Skill Development: During 2009, 175 districts have been covered for establishment of New polytechnics under the Scheme with financial support of Rs 425.00 crore. Community Development through Polytechnics: Under this revamped scheme, 703 polytechnics have been included for implementation of this scheme. Indian Institutes of Technology (IITs) : Two new IITs at Indore and Mandi started functioning from the academic session 2009-10. Indian Institutes of Management (IIMs): During the Eleventh Five Year Plan, one new IIM, namely the Rajiv Gandhi Indian Institute of Management (RGIIM), Shillong (Meghalaya), has been established and has commenced its first Examination Reform 11.31 Government policies have been focusing on providing quality education and upgrading skills as well as creating a more child-friendly educational environment. After wide consultations held by the Central Board of Secondary Education (CBSE) with various stakeholders including principals, teachers, parents, students, academics and the public, some important decisions were taken (see Box 11.4). 11.32 The Annual Status of Education Report (ASER) facilitated by Pratham, a non-governmental organization (NGO), is an annual survey of rural children conducted by the citizens of India every year since 2005. In 2009 which is its fifth year, the ASER was conducted in 575 districts, over 16,000 villages and 3,00,000 households, surveying almost 7,00,000 children. Over five years, the ASER has observed a clear rise in enrolment (Box 11.5). Human Development, Poverty and Public Programmes 283 Box: 11.5 Main findings of ASER 2009 In 2009, 96 per cent of children in the age group 6 to 14 in rural India are enrolled in school. Fewer girls in the age group 11-14 years were out of school In 2009 as in 2008, well over 50 per cent of 5 year olds enrolled in school. Learning levels have been improving in Std 1. Overall, the percentage of children in Std 1 who can recognize letters or more has increased from 65.1 per cent in 2008 to 68.8per cent in 2009. Similarly there is an increase in number recognition, with the percentage of children recognizing numbers or more increasing from 65.3 per cent in 2008 to 69.3 per cent in 2009. The all-India figure for the percentage of all rural children in Std 5 reading Std 2-level text shows a decline from 56.2 per cent in 2008 to 52.8 per cent in 2009. This means that well over 40 per cent of all rural children in Std 5 in India are at least three grade levels behind. In reading, for government school children in Std 5 in Tamil Nadu there is an 8 percentage point increase over 2008 levels. Karnataka and Punjab also show improvements over the last year. There is hardly any change in other states in reading as compared to 2008. In maths, for children in Std 5, for the country as a whole, the ability to do division problems has hardly improved. However , seven states show increases of 5 to 8 percentage points. These states are Himachal Pradesh, Punjab, Assam, West Bengal, Orissa, Andhra Pradesh and Karnataka. Nationally, between 2007 and 2009, the percentage of children taking paid tuition increased for every class, in both government and private schools. Only Kerala and Karnataka show a small but consistent decline in the incidence of tuition across government school children in most classes. There is an increase in useable toilets and improvements in availability of drinking water. All-India figures indicate that overall, the percentage of schools with no water or toilet provision is declining over time. Water is available in 75 per cent of government primary schools and 81 per cent of upper primary schools. Comparisons across the three years (2005, 2007 and 2009) indicate that children’s attendance in school, as observed on a random day in the school year, varies considerably across states. There are states like Bihar where less than 60 per cent of enrolled children were attending on the day of the visit compared to southern states where average attendance is well above 90 per cent. In addition, states like Rajasthan, Uttar Pradesh, Jharkhand, Orissa and Madhya Pradesh need to pay more attention to raising attendance in schools. In most states, on the day of the visit, close to 90 per cent of appointed teachers were present in the school. Source : ASER 2009 Press release dated January 15, 2010 as obtained from website http://asercentre.org/asersurvey/ aser09/pdfdta/...... Box 11.6 : Technical education reforms: Initiatives by the All-India Council for Technical Education (AICTE) In order to overcome imbalances in technical education, the AICTE has taken certain initiatives. In order to reduce the imbalance between engineering education and polytechnic education, the Council has permitted a second shift of polytechnic in an existing polytechnic institution and also a second shift of polytechnic in an existing engineering institution. Keeping in view the regional imbalance in student intake among various States of the country, the Council has allowed a second shift of engineering in existing colleges only in those States where the number of seats available in engineering colleges per lakh of population is less than the all-India average. For a balanced growth of various streams of education in engineering and technology, the Council has taken a policy decision to allow establishment of new engineering institutions with at least three conventional branches as a mandatory requirement in States where the number of seats available in engineering colleges per lakh of population is more than the all-India average, whereas in states where the number of seats available in engineering colleges per lakh of population is less than the all-India average, no such restriction is applicable. academic session from 2008-2009 and the remaining will be set up in Tamil Nadu, Jharkhand, Chhattisgarh, Haryana, Uttarakhand and Rajasthan. Establishment of New Central Universities : The Central Universities Ordinance 2009 was promulgated by the President on January 15, 2009 for the conversion of three State Universities in Madhya Pradesh, Chhattisgarh and Uttarakhand into Central Universities and establishment of a new Central University each in twelve States. The Ordinance was subsequently replaced by the Central Universities Act 2009. While the three States 284 Economic Survey 2009-10 A scheme to provide interest subsidy for a limited period on the educational loans for students belonging to economically weaker section for pursuing professional studies has been launched. Universities stood converted immediately on promulgation of the Ordinance, 11 new Central Universities have also been set up in Bihar, Gujarat, Haryana, Himachal Pradesh, Jharkhand, Karnataka, Kerala, Orissa, Punjab, Rajasthan and Tamil Nadu, which did not have a Central University. Most of them have already started their academic activities from temporary premises. The Central Universities (Amendment) Ordinance 2009 was promulgated on October 20, 2009 to rename the Central University of Jammu & Kashmir the Central University of Kashmir with territorial jurisdiction limited to Kashmir division and to establish a new university by the name of the Central University of Jammu having territorial jurisdiction extending over Jammu division. National Institute of Technology (NITs): The Government of India decided to set up 10 new NITs during the Eleventh Five Year Plan in the States/UTs which do not at present have NITs. Accordingly, the Government has approved setting up of 10 new NITs in Meghalaya, Manipur, Mizoram, Nagaland, Sikkim, Arunachal Pradesh, Goa (also catering to the needs of Daman & Diu, Dadra & Nagar Haveli and Lakshadweep), Puducherry (also catering to the needs of A&N Islands), Delhi (also catering to the needs of Chandigarh) and Uttarkhand. One Regional Centre of the Indira Gandhi National Tribal University (IGNTU) Amarkantak has been started in Manipur. Table 11.9 : India — Selected health indicators Sl. No. Parameter Health 11.34 An assessment of the performance of the country’s health-related indicators would suggest that significant gains have been made over the years (Table 11.9). However, despite the progress, India fares poorly in most of the indicators in comparison with a number of developing countries like China and Sri Lanka. In addition, the progress in health indicators has been quite uneven across regions (large-scale inter-State variations), gender (malefemale differences) as well as space (with significant rural-urban differences). 11.35 The country has a well-structured three-tier public health infrastructure, comprising Community Health Centres (CHCs), Primary Health Centres (PHCs) and sub-centres (SCs) spread across rural and semi-urban areas and tertiary medical care providing multi-speciality hospitals and medical colleges located almost exclusively in urban areas. Improvements in health indicators can be attributed in part to this network of health infrastructure. However, inadequacies in this infrastructure including shortage of personnel, resulted in glaring gaps in coverage and outreach of services, particularly in the rural areas. In order to bridge this gap and provide accessible, affordable, equitable health care, the Government has launched a large number of programmes and schemes. 1981 33.9 12.5 4.5 NA 110 1991 29.5 9.8 3.6 NA 80 Current level 22.8 (2008) 7.4 (2008) 2.7 (2007) 254 (2004-06) 53 (2008) 52 55 1. Crude Birth Rate (CBR) (Per 1000 Population) 2. Crude Death Rate (CDR)(Per 1000 Population) 3. Total Fertility Rate (TFR)(Per women) 4. Maternal Mortality Rate (MMR) (Per 100,000 live births) 5. Infant Mortality Rate (IMR)(Per 1000 live births) Male Female 6. Child (0-4 years) Mortality Rate per 1000 children) 7. Life Expectancy at Birth: Total Male Female Source : Ministry of Health and Family Welfare / RGI 41.2 (1981-85) 55.5 55.4 55.7 26.5 (1989-93) 59.4 59.0 59.7 16.0 (2007) (2002-06) 63.5 62.6 64.2 Human Development, Poverty and Public Programmes 285 National Rural Health Mission (NRHM) 11.36 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 eight Empowered Action Group States (Bihar, Jharkhand, Madhya Pradesh, Chhattisgarh, Uttar Pradesh, Uttarakhand, Orissa and Rajasthan), the eight north-eastern States, Himachal Pradesh and Jammu & Kashmir. 11.37 Among major innovations of the NRHM are the creation of a cadre of Accredited Social Health Activists (ASHA) and improved hospital care, decentralization at district level to improve intra and inter-sectoral convergence and effective utilization of resources through PRIs, NGOs and the community in general. The NRHM further aims to provide an overarching umbrella to the existing programmes including the Reproductive Child Health Project (RCH-II), Integrated Disease Surveillance and other programmes for treatment of malaria, blindness, iodine deficiency, filaria, kala azar, TB and leprosy by strengthening the public health delivery system at all levels. The SCs, PHCs and CHCs are proposed to be revitalized through better human resource management, including provision of additional manpower, clear quality standards, revamping of existing medical infrastructure, better community support and untied funds to facilitate local planning and action so as to achieve the goals laid down in the National Population Policy 2000. Further, the Mission, in a sector-wide approach addressing sanitation and hygiene, nutrition and safe drinking water as basic determinants of good health seeks greater convergence among the related social-sector departments, i.e. AYUSH, Women and Child Development, Sanitation, Elementary Education, Panchayati Raj and Rural Development. The expected outcomes of the Mission include reduction of IMR to below 30 per1,000 live births, MMR to below 100 per1,00,000 live births and TFR to 2.1 by 2012. ( Box 11.7). 11.38 The NRHM has many achievements as stated above. The Comptroller and Auditor General (CAG) Report on the basis of a performance audit has also observed that the increased patient inflow at PHCs and CHCs and improved institutional deliveries and immunization were an indicator of the Mission’s positive impact on health care delivery. The innovative practice of engaging ASHAs has had a positive impact on taking health care to and enhancing awareness of the patient. However, as per the CAG report, the programme also suffers from certain Box 11.7 : Achievements under the NRHM ASHAs/Link Workers: So far 7.36 lakh ASHAs have been selected, 6.92 lakh trained at least in the first module and there are 4.95 lakh with drug kits in their respective villages. Addition of Human Resources: Under the NRHM, 2,474 specialists, 8,782 MBBS doctors, 26, 253 staff nurses, 46, 296 auxiliary nurse midwives (ANMs), 12,485 paramedics have been employed on contract . Conversion of Health Facilities into 24 X 7: A total of 14,716 Additional Primary Health Centres (APHCs), PHCs, CHCs and other sub- district facilities are functional 24 x 7. Janani Suraksha Yojana Beneficiaries: Over 2 crore women have so far been covered under the Janani Suraksha Yojana (JSY). Rogi Kalyan Samitis (RKSs): So far 573 district hospitals (DHs), 4,217 CHCs, 1,111 other than CHC hospitals and 16,568 PHCs have their own Rogi Kalyan Samitis (RKSs) with untied funds for improving quality of health services. Village Health and Sanitation Committees: So far 4.41 lakh villages (68 per cent) have their own Village Health & Sanitation Committees and each has been provided Rs 10, 000/- as untied grant per year. Village Health and Nutrition Days(VH&NDs): There have been 35 lakh VH&NDs in 2006-07, 49 lakh VH&NDs in 2007-08, 58 lakh VH&NDs in 2008-09 and 29 lakh VH&NDs so far in 2009-10 to reach basic health services. Mobile Medical Units (MMUs): 343 MMUs functional so far. Ayurveda, Yoga & Naturopathy, Unani, Siddha and Homeopathy (AYUSH) services have been co-located in 9,608 health facilities and 7,399 AYUSH doctors and 3,110 AYUSH paramedics have been added to the system. Programme Management Units: Under the NRHM, 580 District Programme Managers, 577 District Accounts Managers, 525 District Data Managers, 639 District Programme Management Units (DPMUs), 3004 Block Managers, 3691 Accountants, 2896 Block PMUs have been added. 286 Economic Survey 2009-10 The shortage of service providers at different levels existed. While contract workers have been engaged to fill vacancies, there are still shortages of specialist doctors at CHCs, adequate staff nurses at CHCs/PHCs and ANMs/ multi-purpose workers at SCs. In nine States, stocks of essential drugs, contraceptives and vaccines adequate for two months as required under norms were not available at any of the test-checked PHCs and CHCs. weaknesses which need to be addressed to make the NRHM more beneficial. These include the following: The NRHM initiated decentralized bottom-up planning. However, district-level annual plans were not prepared during 2005-08 in nine States and in 24 States/UTs, block- and village-level annual plans had not been prepared at all. Village-level health and sanitation committees were still to be constituted in nine States. The RKSs formed at many health centres, aiming to develop community ownership of the health care delivery system, were characterized by weak or absent grievance redressal mechanisms, outreach and awarenessgeneration efforts. Funds for local action through untied grants and annual maintenance grants to health centres remained mostly unspent. The NRHM adopted an inter-sectoral convergence approach to health care. However, the committee on inter-sectoral convergence did not meet frequently. Release of funds to State Health Societies (SHSs) and consequently to district and block levels required further streamlining to ensure prompt and effective utilization of funds. Funds advanced by the SHSs to lower- level formations continue to be treated as expenditure by the SHSs, regardless of whether these have actually been utilized. The Mission has developed the Indian Public Health Standards (IPHSs) to assist health centres improve their quality of health care and thus upgrade the capacity of the health delivery system. However, the ratio of population to health centres remained low with the targeted number of new health centres not being established. Basic facilities (proper buildings, hygienic environment, electricity and water supply, etc.) were still absent in many existing health centres with many PHCs and CHCs being unable to provide guaranteed services such as in-patient services, operation theatres, labour rooms, pathological tests, X-ray facilities and emergency care. Quick response MMUs, meant to take medical care to the patient’s doorstep in far-flung regions, had not been operationalized in many States even though substantial funds had been released for the purpose. Strengthening Primary Health Infrastructure and improving service delivery 11.39 There has been a steady increase in health care infrastructure available over the plan period (Table-11.10 ). However, there is still a shortage of 20,486 SCs, 4,477 PHCs and 2,337 CHCs as per the 2001 population norm. Further, almost 29 per cent of the existing health infrastructure is in rented buildings. Poor upkeep and maintenance and high absenteeism of manpower in rural areas are the main problems in the health delivery system in the public sector. The NRHM seeks to strengthen the public health delivery system at all levels. Table 11.10 : Health care infrastructure SC/PHC/CHC*(March 2007) Dispensaries and hospitals (all) (April 1, 2008)** Nursing personnel (2008)** Doctors (modern system) (2008)** 1,73,770 33,855 15,72,363 84,852 * RHS : Rural Health Statistics in India 2008. ** National Health Profile, 2008. Janani Suraksha Yojana( JSY) 11.40 This 100 per cent centrally sponsored scheme was launched with a focus on demand promotion for institutional deliveries in States and regions where these are low. It targeted lowering of the MMR by ensuring that deliveries were conducted by skilled birth attendants. The JSY scheme has shown rapid growth in the last three years. The increase in institutional deliveries, coupled with improvement in infrastructure, manpower and training has resulted in significant improvement of Institutional deliveries in all major States except Jharkhand as per the District Level Household and Facility Survey (DLHS) III data as compared with DLHS II including in the five major states of U P, Rajasthan, M P, Orissa and Human Development, Poverty and Public Programmes Bihar. A mid-term evaluation of the Reproductive and Child Health (RCH) II programme also confirmed the increase in the number of JSY beneficiaries. 287 Pradhan Mantri Swasthya Suraksha Yojana (PMSSY) 11.41 The PMSSY was launched with the objective of correcting regional imbalances in the availability of affordable/reliable tertiary health care services and to augment facilities for quality medical education in the country. The PMSSY has two components in its first phase: (i) Setting up of six All-India Institute of Medical Science (AIIMS)-like institutions—Under the first phase of the PMSSY, the Government has decided to set up six AIIMSlike institutions, one each in the States of Bihar (Patna), Chhattisgarh (Raipur), Madhya Pradesh (Bhopal), Orissa (Bhubaneshwar), Rajasthan (Jodhpur) and Uttranchal (Rishikesh). These States were identified on the basis of their socio-economic vulnerabilities. (ii) Upgradation of 13 existing Government medical colleges/ institutions in ten States. In most of the colleges, most of the work is expected to be completed this year, while in the rest, it would be completed in 2010-11. groups to 1,281,counselling and HIV testing 91.9 lakh persons including 38.8 lakh pregnant women and providing anti-retroviral treatment to around 2.88 lakh patients as of November 2009. New strategies initiated during the year include setting up of the District AIDS Prevention and Control Unit (DAPCU), scheme of link workers in rural areas of category A and B districts, collaboration with the NRHM and other National Health Programmes, preferred private provider scheme for management of sexually transmitted infections among high risk groups and setting up of link anti-retroviral (link ART) centres to facilitate ARV drug dispensing. 11.43 Other programmes like the Revised National Tuberculosis Control Programme (RNTCP), National Vector Borne Disease Control Programme (NVBDCP), National Programme for Control of Blindness (NPCB) and National Leprosy Eradication Programme have also been strengthened. 11.44 Mainstreaming of AYUSH under the NRHM received topmost priority during the year. AYUSH facilities were co-located with 1, 834 PHCs; 128 CHCs; and 29 District Hospitals. Keeping in view the strengths of the AYUSH systems, new public health campaigns including Control of Maternal Anaemia through Ayurveda, Yoga for Health and Unani for Skin Diseases have been launched. Further, a National Yoga School Programme has been launched in more than 100 schools in the country. The Government has also given priority to implementing the National Mission on Medicinal Plants. A National Campaign on Amala was launched recently. Eight States have been covered so far under this programme. The Government has also taken steps to accredit hospitals and educational institutions to improve their standards in collaboration with the Quality Council of India (QCI). To improve the quality, safety and efficacy of Ayurveda, Siddha and Unani drugs, a programme for voluntary certification was launched from October 1, 2009 in collaboration with the QCI. Around 5,000 AYUSH practitioners were reoriented and trained so far this year. Public-private partnership (PPP) has been promoted as an important strategy in the AYUSH sector. A number of new projects including tele-medicine projects in Homoeopathy in Tripura and Bihar have been taken up. In order to promote the AYUSH as well as provide employment opportunities to people, especially women, in rural areas of the country, ten AYUSH industrial clusters have been taken up at a proposed investment of Rs 100 crore in different parts of the country. The National AIDS Control Programme (NACP) 11.42 It was estimated that there were 2.31 million persons living with HIV/AIDS (PLHA) in India in 2007. While the prevalence of HIV in the general population is estimated to be 0.34 per cent (HIV Sentinel Surveillance 2007), it is much higher in high-risk groups like female sex workers, men having sex with men and injecting drug users, Single Male Migrants and Long Distance Truckers are also vulnerable to HIV/AIDS. In India, the major mode of HIV transmission is heterosexual which accounts for 85.6 per cent of cases followed by mother to child transmission (6 per cent) while injecting drug use, blood and blood products and homosexual route account for 1 to 1.4 per cent of HIV positive cases. Based on the Sentinel Surveillance, 156 districts have been identified as category A districts where prevalence of HIV amongst antenatal clinic attendees (proxy for general population) is greater than 1 per cent; and 39 districts are 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 NACP-III is being implemented for the period 2007-12 with an investment of Rs 11,585 crore.. Major achievements during 2009-10 include scaling up of targeted interventions for high-risk 288 Economic Survey 2009-10 11.47 The Rajiv Gandhi National Creche Scheme for Children of Working Mothers provides for supplementary nutrition, emergency medicines and contingencies to children in the age group 0 – 6 years. Up to March 31, 2009, 31,718 creches with approximately 7,92,950 beneficiaries had been sanctioned to the implementing agencies. . The financial norms have been enhanced from Rs 18,480 to Rs 42,384 per creche per annum. The honorarium to creche workers has been enhanced from Rs 800 to Rs 2000 per month for two creche workers. The supplementary nutrition component has been raised from Rs 1.05 to Rs 2.08 per child per day for 25 children for 26 days in a month. The Integrated Child Protection Scheme (ICPS) launched in 2009-10 provides a safe and secure 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 brings several existing child protection programmes under one umbrella with some new interventions. The scheme is now being implemented by the State Governments. The Central Government is providing funds in a pre-defined costsharing ratio to the State Governments for setting up and running the various programme components. The budget allocation for the scheme during the Eleventh Plan period is Rs 1,073 crore. A number of States have so far agreed to implement the scheme by signing memorandums of understanding (MOUs) with the Government of India. The Scheme for the Welfare of Working Children in Need of Care and Protection provides for non-formal education, vocational training, etc. to working children to facilitate their entry/re-entry into mainstream education. There are 121 projects currently being funded under the Scheme, covering 12,100 children. 11.48 A conditional cash transfer scheme, Dhanlakshmi, for the girl child was launched as a pilot project in March 2008. 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 schools up to Class VIII. The scheme is being implemented in 11 blocks across seven States. An amount of Rs 5.95 crore was released during 2008-09, which is expected to benefit 79,555 girl children in identified blocks of Andhra Pradesh, Chattisgarh, Orissa, Jharkhand and Punjab. At present, 56 ministries/departments have set up Gender Budget Cells and 28 ministries/ departments have reflected allocations for women Government has granted recognition to the Sowa Rigpa (Amachi) system practised in the subHimalayan regions of the country in order to help improve health care as well as the economic conditions of the people of the area. Women and Child Development 11.45 The Integrated Child Development Services (ICDS) Scheme, was launched in 1975 with 33 Projects and 489 Anganwadi centres (AWCs). It has been continuously expanded to uncovered areas and has now been universalized with the Government of India approving 7,076 projects and 14 lakh AWCs including a provision for 20,000 AWCs on demand. The Scheme has also been revised with respect to cost norms, feeding norms and the sharing pattern between States and the Government of India. Alongside gradual expansion of the Scheme, its budgetary allocation has increased. The Annual Plan outlay for 2009-10 for the ICDS was Rs 6,705 crore which was enhanced to Rs 8,162 crore (RE). During 2009-10, an amount of Rs 5,299.53 crore has been released under the ICDS to States/UTs up to January 14, 2010. Of the total number of 7,073 sanctioned ICDS projects, 6,196 were operational by September 30, 2009. Of 13,56,027 sanctioned AWCs/mini-AWCs, 10,78,973 were operational as on September 30, 2009. 11.46 Two schemes are being implemented for the development of adolescent girls, namely the Kishori Shakti Yojana (KSY) and the Nutrition Programme for Adolescent Girls (NPAG). The KSY is an intervention for adolescent girls and aims at addressing the self-development and nutrition and health status needs, literacy and numerical skills and vocational skills of adolescent girls in the age group 11-18 years. The scheme is currently operational in 6,118 ICDS projects. The NPAG is being implemented in 51 identified districts across the country to provide 6 kg of free foodgrains per beneficiary per month to undernourished adolescent girls (11-19 years) irrespective of financial status of their families. Both the schemes are currently being implemented through the ICDS infrastructure. They will now be subsumed within a new scheme for adolescent girls, namely the Rajiv Gandhi Scheme for Empowerment of Adolescent Girls also named SABLA. The new Scheme aims at empowering adolescent girls along with an improvement in their nutritional and health status and upgrading of various skills like home, life and vocational skills (for girls aged 16 and above). Human Development, Poverty and Public Programmes in the Gender Budget Statement of the Union Budget in 2009-10. 11.49 The Support to Training and Employment Programme for Women (STEP) seeks to provide updated skills and new knowledge to poor women in 10 traditional sectors for enhancing their productivity and income generation. During the year 2008-09, 31,865 women have benefited from the scheme. Up to December 31, 2009 11 new projects have been sanctioned and 12,866 beneficiaries covered under STEP in 2009-10. As of December 31, 2009, 318 Swadhar homes and 237 helplines are functioning across the country under the Swadhar Scheme which aims to provide the primary needs of shelter, food, clothing and care to marginalized women/ girls who are without any social and economic support. The Scheme also seeks to provide them emotional support and counselling and to rehabilitate them socially and economically through education, awareness, skill upgradation and personality development through behavioural training. Ujjawala, a comprehensive scheme for prevention of trafficking and for rescue, rehabilitation, re-integration and repatriation of victims of trafficking for commercial sexual exploitation, was launched in December 2007. During the current year, up to December 31, 2009, financial assistance was provided for 17 new projects to NGOs, taking the total number of approved projects to 96. The total number of rehabilitation centres under these projects went up to 58 as compared to 48 in 2008-09, creating capacity for care and rehabilitation of 2,900 victims of trafficking. 289 the physical target under the Scheme of Pre-Matric Scholarships was about 6.60 lakh beneficiaries/ students. Against an allocation of Rs 80 crore, an amount of Rs 60.99 crore was released to State Governments/UT Administrations for providing scholarships to SC students during the year upto December 31, 2009. The rates of scholarship, annual ad hoc grant, pattern of funding and eligibility criteria have been revised with effect from April 1, 2008. Under the Scheme of Post Matric Scholarships the physical target was 38 lakh beneficiaries during 2009-10. Rs728.91crore was released to State Governments/UT Administrations against a revised allocation of Rs 830 crore up to December 2009 during the financial year. The earlier centrally sponsored scheme of hostels for SC boys and girls was revised and renamed Babu Jagjivan Ram Chhatravas Yojna with effect from January 1, 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 2009-10, the physical target under the scheme was to construct 44 hostels for girls and 30 hostels for boys. Rs 5.98 crore was released under the scheme against an allocation of Rs 90 crore up to December 2009 during the financial year. During 2009-10, an amount of Rs. 80 crore was released by December 2009 as against the revised allocation of 105 crore under the Rajiv Gandhi National Fellowship for SC students for 1,333 new fellowships and 5,332 renewals for SC students pursuing M Phil and Ph D courses. 11.52 The Scheme of Top Class Education for Scheduled Castes(SCs) provides financial assistance for quality education to SC students up to degree/ post degree level without any burden on the pupil or his/her family. SC students who secure admission in the notified institutions are awarded scholarships. During 2009-10, the amount released up to December 2009 was Rs 2.83 crore to assist about 1,520 SC students studying in institutions like the IITs and IIMs as against a revised allocation of Rs 10 crore. The Scheme of National Overseas Scholarships for Scheduled Caste Candidates provides financial assistance to finally selected candidates pursuing master-level courses and Ph.Ds in engineering, technology and sciences abroad. Thirty awards are given per year. During 2009-10, the amount released was Rs 0.81 crore as against an allocation of Rs 5 crore up to December 2009. 11.53 Special Central assistance is given to the Scheduled Caste Sub-Plan, a major scheme for Welfare and Development of SCs, STs, OBCs and other weaker sections 11.50 Programmes for educational development, and economic and social empowerment of socially disadvantaged groups and marginalized sections of society are implemented through State Governments, UT Administrations, and NGOs. Public Private Partnership approach is also one of the strategies for attaining the objective of development of the targeted groups. Scheduled Castes (SCs) 11.51 The Government is committed towards the educational development of SCs. A number of schemes are being implemented to encourage SC students to continue their studies from school to higher education level. During the year 2009-10, 290 Economic Survey 2009-10 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 the 125 identified institutes. The family income of the beneficiary ST students from all sources should not exceed Rs 2.00 lakh per annum. Financial assistance is also provided to 15 eligible ST students for pursuing higher studies abroad in specified fields at Masters and Ph.D level under the National Overseas Scholarship scheme. 11.55 Economic empowerment of the STs by means of extension of financial support through the National Scheduled Tribes Finance and Development Corporation (NSTFDC) continued. Financial support is being 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. The responsibility for implementing the Scheduled Tribes and Other Traditional Forest Dwellers (Recognition of Forest Rights) Act vests with the State/UT Governments. As per information collected from the States till December 31, 2009, more than 26.63 lakh claims have been filed and more than 6.88 lakh titles have been distributed. Around 37, 000 titles are ready for distribution. There is great emphasis on the education of ST girls, especially in the low literacy areas and 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. economic advancement of SCs. During 2009-10, the physical target was to cover 6 lakh beneficiaries. An amount of Rs 381.60 crore was released to State Governments/UT Administrations against a revised allocation of Rs 480 crore up to December 2009. The National Scheduled Castes Finance & Development Corporation provides credit facilities to SC beneficiaries who are living below double the poverty line. During 2009-10, an amount of Rs 44 crore was released to the Corporation upto December 31, 2009 to enhance its equity to Rs 1,089 crore. The Corporation has the target of providing loans to about 29,453 beneficiaries during the year. The National Safai Karamcharis Finance & Development Corporation provides credit facilities to safai karamcharis, scavengers and their dependants for income-generating activities through State channelizing agencies. During 2009-10, Rs 30 crore was provided to enhance the equity of the Corporation to Rs 260 crore. The target of the Corporation is to benefit 23,270 persons during the year. Scheduled Tribes (STs) 11.54 For the welfare and development of the STs, an outlay of Rs 3,205 crore has been provided in the Annual Plan for 2009-10, which is 33.82 per cent higher than the outlay of Rs 2,121 crore for 2008-09. The 2009-10 outlay has a Rs 900.50 crore component provided as Special Central Assistance (SCA) to the Tribal-Sub Plan (TSP), which includes Rs 100 crore for development of forest villages. An Additional Central Assistance (ACA) of Rs 500 core was also provided during 2009-10 for a special initiative of providing residential education to tribal children in Schedule V and Naxal-affected areas. The SCA to the TSP is a 100 per cent grant extended to States as additional funding for family-oriented income-generating schemes, creation of incidental infrastructure, extending financial assistance to self-help groups for community-based activities, and development of forest villages. Grants-in-aid under Article 275 (1) are also being provided to States with an objective to promote the welfare of the STs and improve administration to bring them on par with the rest of the States, and to take up such special welfare and development programmes which are otherwise not included in the Plan programmes. Under the Scheme of Post-Matric Scholarships, 100 per cent financial assistance is provided to ST students whose family income is less than or equal to Rs 1.08 lakh per annum to pursue post-matric- Minorities 11.56 Five communities, namely 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 the total population. For the development of minorities, the Plan outlay was raised from Rs 1,000 crore in 2008-09 to Rs 1,740 crore in 2009-10. Three scholarship schemes have been launched exclusively for the minorities with a total provision of Rs 450 crore in 2009-10 as against Rs 305 crore in 2008-09. A multi-sectoral development programme Human Development, Poverty and Public Programmes to address the ‘development deficits’, especially in education, skill development, employment, sanitation, housing and drinking water, in 90 minority-concentration districts (MCDs) has been launched from 2008-09. The outlay for this programme was Rs 990 crore in 2009-10. The corpus of the Maulana Azad Education Foundation (MAEF) has been enhanced from Rs 100 crore in 2005-06 to Rs 425 crore in 2009-10 to expand its activities for implementation of educational schemes for educationally backward minorities. The authorized share capital of the National Minorities Development & Finance Corporation (NMDFC) has been raised from Rs 650 crore in 2006-07 to Rs 1,000 crore in 2009-10 for expanding its loan and micro-finance operations to promote selfemployment and other economic ventures among backward sections of the minority communities. Three new Plan schemes, namely (i) the Maulana Azad National Fellowship for Minority Students, (ii) Computerization of records of State Wakf Boards and (iii) Leadership Development of Minority Women have been launched during 2009-10. 291 businesses and transport services. During 200910, Rs 35 crore was provided as equity support to the Corporation enhancing its equity to Rs 765 crore. During the year, the Corporation aims to assist about 1.06 lakh persons. Persons with Disabilities 11.58 A large number of programmes are implemented through national and apex institutes dealing with various categories of disabilities. These institutes conduct short-term 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 200910, an amount of Rs 23.02 crore was released to implementing agencies up to December 2009 against a revised allocation of Rs 70 crore for providing assistive devices to persons with disabilities. The target is to cover 2 lakh persons with disabilities. Rs 6.79 crore has been released up to December 2009 against a revised allocation of Rs 92.99 crore during 2009-10 under the Deen Dayal Disabled Rehabilitation Scheme to voluntary organizations for running special schools for children with hearing, visual and mental disability, vocational rehabilitation centres for persons with various disabilities and manpower development in the field of mental retardation and cerebral palsy. 11.59 The Scheme of Incentives to Employers in the Private Sector for Providing Employment to Persons with Disabilities was launched with effect from April 1, 2008. Under the Scheme, the Government will have to make payment of the employer’s contribution to the Employees Provident Fund and Employees State Insurance for the first three years as an incentive for every employee with disabilities appointed on or after April 1, 2008 with monthly emoluments up to Rs 25,000. During 200910, an amount of Rs 1 crore was released up to December 2009 against a revised allocation of Rs 3 crore under the scheme. 11.60 The National Handicapped Finance & Development Corporation provides credit facilities for economic empowerment of persons with disabilities with family income not exceeding Rs 2 lakh in urban areas and Rs 1.6 lakh in rural areas. The Corporation provides loans at concessional rates of interest to about 5,000 persons with disabilities annually. During 2009-10, an amount of Rs 9 crore was released as equity support to the Other Backward Classes(OBCs) 11.57 The Government provides central assistance to State Governments/UT Administrations for educational development of OBCs. During 2009-10, under the Scheme of Pre-Matric Scholarships for OBCs, it was proposed to provide scholarship to 10.80 lakh OBC students. An amount of Rs19.32 crore was released against an allocation of Rs 30 crore to the State Governments/ UT Administrations up to December 2009 during the financial year. Under the Scheme of Post-Matric Scholarships for OBCs, it was proposed to provide scholarship to 9.35 lakh OBC students. An amount of Rs 124.48 crore was released against a revised allocation of Rs 180 crore to the State Governments/ UT Administrations up to December 2009 during the financial year. In order to provide hostel facilities to OBC students studying in middle and secondary schools, colleges and universities to enable them to pursue higher studies, during 2009-10 an amount of Rs 8.58 crore was released against a revised allocation of Rs 30 crore for construction of 160 hostels, out of which 53 are for girls. The National Backward Classes Finance & Development Corporation extends credit facilities to persons belonging to backward classes for undertaking various income-generating activities including agricultural and allied activities, artisanal and traditional occupations, technical trades, selfemployment, small-scale and tiny industry, small 292 Economic Survey 2009-10 Corporation. The target of the Corporation is to provide loans to 7,000 persons with disabilities and training to 555 persons with disabilities during the financial year. CLIMATE CHANGE Status of Climate Change Negotiations 11.63 Climate change has emerged as a highly debated and controversial subject in recent times. Climate change by affecting the livelihood and health of the people is intricately connected to human development and poverty issues.The United Nations Framework Convention on Climate Change (UNFCCC) 1992 and its Kyoto Protocol 1997 have laid down the existing international regime for addressing climate change. The UNFCCC requires the industrialized countries listed in Annex I of the Convention to reduce their emissions from 1990 levels. The Kyoto Protocol mandates Annex I countries to reduce their emissions by 5.6 per cent over 1990 levels by 2012. The UNFCCC also recognizes that the extent to which developing country parties will take action to mitigate emissions will depend on the effective implementation by developed country parties of their commitments relating to provision of financial resources and transfer of technology. 11.64 Despite the commitments made by developed countries as inscribed in the UNFCCC and its Kyoto Protocol, the available data show that emissions in most of the Annex I countries, except a few European countries, have been rising since 1990. In recognition of the fact that climate change is irreversible and that the developing countries are likely to be impacted most if it is not urgently addressed, the 13th Conference of Parties (CoP) to the UNFCCC held at Bali in December 2007 adopted the Bali Action Plan (BAP) to enhance the implementation of the Convention. The BAP expected the developed countries (including the Kyoto Protocol Parties and the US) to undertake commitments to reduce emissions and encouraged the developing countries to take nationally appropriate mitigation actions as supported and enabled in terms of finance and technology provided by the developed countries. The BAP had mandated the parties to reach an agreed outcome on all its elements at the CoP 15 at Copenhagen in December 2009 (Box 11.8). Social Defence Sector 11.61 Under the Scheme of Integrated Programme for Older Persons, grants- in-aid are given to NGOs for running old age homes (OAHs), day-care centres (DCCs) and mobile medical units (MMU). The scheme has been revised with effect from April 1, 2008. Besides an increase in the amount of financial assistance of existing projects, several new projects have been made eligible for financial assistance under the revised scheme. During 2009-10, Rs 8.80 crore was released upto December 2009 against the allocation of Rs 22.00 crore. The Scheme targets to provide support to 0.35 lakh beneficiries. 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 six UTs so far. Section 19 of this Act enjoins State Governments to establish at least one old age home for 150 indigent senior citizens per district. 11.62 Keeping in view the changes in the drug abuse scenario all over the world, the Scheme for Prevention of Alcoholism and Substance (Drugs) Abuse has been extensively revised and merged with the Scheme of Assistance to Voluntary Organisations for General Grants-in-aid in the Field of Social Defence. The new Central Sector Scheme of Assistance for Prevention of Alcoholism and Substance (Drugs) Abuse and for Social Defence Services has come into effect from October 1, 2008. One of the salient features of the Scheme is introduction of the provision of food in the Integrated Rehabilitation Centres for Addicts to persons below the poverty line. The honorarium to service providers has also been improved. During 2009-10, Rs 10.15 crore was released up to December 2009 against a revised allocation of Rs 25 crore during the financial year. The scheme targets benefiting 1.2 lakh persons. For effective implementation of social defence programmes, personnel engaged in delivery of services in this area are being trained under various training programmes being organized by the National Institute of Social Defence. During 2009-10, an amount of Rs 5 crore was released up to December 31, 2009 to the Institute against an allocation of Rs 6 crore. Actions taken by India on climate change 11.65 India’s total CO2 emissions are about 4 per cent of total global CO2 emissions. India’s per capita emissions, even with 8-9 per cent GDP growth every year for the next decade or two, are likely to be well below developed country averages. Its energy Human Development, Poverty and Public Programmes 293 Box 11.8 : CoP 15 at Copenhagen The Copenhagen conference on climate change was held from December 7-18, 2009 to discuss and reach an outcome on climate change issues. At the Copenhagen conference, the Danish Presidency of the CoP15 had invited some of the Parties for a discussion on the relevant aspects of climate change and presented the results to the CoP in the form of a “Copenhagen Accord”. The talks centred on issues relating to a shared vision for long-term cooperative action of the Parties including a long-term emission reduction goal to address climate change, mitigation actions of the Parties including specific measures needed to reduce deforestation in developing countries and support conservation and sustainable forestry management, sectoral approaches to mitigation actions including market and non-market based measures, adaptation to climate change, finance and technology required to address climate change, and the necessary mechanism needed to facilitate the flow of such support to the developing countries. An outcome could not be reached at Copenhagen. The CoP did not adopt the results of the discussion and only took note of the “Accord”. It has been decided to continue the negotiations with a view to concluding them at the next CoP scheduled in Mexico from November 29 to December 10, 2010. social, economic and technological measures for addressing climate change. NATCOM I was presented in 2004. The Government is engaged in preparing NATCOM II, which will be presented to the UNFCCC in 2011. An expert committee set up by the Government of India has studied the impact of anthropogenic climate change on India and has come out with its first set of findings and the research agenda that the ministries need to follow and implement in order to address India’s vulnerability to anthropogenic climate change impacts. 11.68 India has prepared a comprehensive National Action Plan on Climate Change (NAPCC) with a view to achieving sustainable development with co- benefit in terms of climate change. Eight national missions in the areas of solar energy, enhanced energy efficiency, sustainable agriculture, sustainable habitat, water, Himalayan eco-system, increasing the forest cover, and strategic knowledge for climate change form the core of the National Action Plan. Besides, there are several initiatives envisaged in the sectors pertaining to energy generation, transport, renewable energy, disaster management and capacity building that are to be integrated with the development plans of the ministries. The Prime Minister’s Council on Climate Change, set up in June 2007 monitors the preparation of the national Missions and coordination and implementation of climate change-related actions in India. 11.69 India’s Five Year Plans include a strategy for sustainable growth resulting in low-carbon sustainable development. The Eleventh Five Year Plan includes an indicative target of increasing energy efficiency by 20 per cent by 2016-17. The National Mission on Enhanced Energy Efficiency implemented by the Ministry of Power through the Bureau of Energy Efficiency seeks to pursue this goal. Planning Commission estimates suggest that India’s emission intensity has declined by 17.6 per cent between 1990 and 2005 and that a 20 to 25 per cent reduction in emission intensity between 2005 and 2020 is possible. This will require that necessary actions in specific sectors are undertaken to reduce emission intensity with necessary provisions of financial and technological resources including domestic and international support for achieving lowcarbon sustainable development. intensity of production has been falling with improvements in energy efficiency, autonomous technological changes and economical use of energy. Its climate modelling studies show that its per capita emissions will be around 2-2.5 tonnes of carbon dioxide equivalent by 2020 and around 3-3.5 tonnes of carbon dioxide equivalent by 2030, as compared to around 1-1.2 tonnes presently. India has conveyed that its per capita emission levels will never exceed the average levels of developed countries. 11.66 While engaging constructively with the international community on the issue, India has also pursued a strong domestic agenda for addressing climate change. It recognizes that a strategy for addressing climate change has to be based on sustainable development. This is reflected in many of the major programmes addressing climate variability concerns. Current Government expenditure in India on adaptation to climate variability exceeds 2.6 per cent of the GDP, with agriculture, water resources, health and sanitation, forests, coastal zone infrastructure and extreme events being specific areas of concern. 11.67 As part of its international obligations under the UNFCCC, India periodically prepares the National Communication (NATCOM) that gives an inventory of the greenhouse gases (GHG) emissions in India, and assesses the vulnerability and impacts and makes appropriate recommendations regarding CHALLENGES AND OUTLOOK 11.70 The Government strategy of inclusive growth in recent years is reflected in programmes like Bharat Nirman aimed at improving the quality of life of people 294 Economic Survey 2009-10 proof results in harassment and denial of services to the poor and marginalized. As a result, there are still leakages in the programmes/schemes and the benefits do not reach the intended target groups of individuals/people in full. Providing identity proof to the poor and the marginalized through the UIDAI will enhance their access to Government services, both at State and Central levels, and will enable smoother delivery of direct benefits to the poor and underserved. Specifically, it will improve the delivery of the flagship schemes of the Central Government. This will also prevent leakages as well as wastages in the implementation of these schemes. Success in reaching this objective can be further assured through involvement of local communities and PRIs. living in rural areas. Besides, schemes like the NREGS have ensured that the rural poor are left with sufficient purchasing power for their basic requirements, especially food, through guaranteed employment. The recent revamp of the SJSRY reflects the Government commitment towards alleviation of urban poverty also. However, the Government needs to look into further convergence of schemes. There is also need to reduce the overlap between schemes being implemented by different departments at the Centre and in the States as well as between those implemented by the Centre and States. 11.71 In spite of increased Government outlays in the social sector in recent years, lack of identity