1. General Review

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n Review of Developments
Macroeconomic Overview for 2001-2002
          Trends in GDP
          Demand Factors
          Supply Factors : Production
          Fiscal Developments

          Fiscal Policies
          Fiscal and Budgetary Developments in 2001-02
          Money Supply
          Financial Developments
          Capital and Money Markets
          External Sector
          Balance of Payments
          Capital account

n Issues and Priorities
Policy Reforms For Growth
                       Fiscal Issues
Urban Development
Financial Sector and Capital Market
Summing Up





Review of Developments

Macroeconomic Overview for 2001-2002

The Indian economy is passing through a difficult phase caused by several unfavourable domestic and external developments.  Domestic output and demand conditions were adversely affected by poor performance in agriculture in the previous two years. The global economy experienced an overall deceleration and is estimated to record an output growth of 2.4 per cent during the past year. These tendencies were exacerbated in the aftermath of the terrorist attacks in United States in September 2001.  Consequently export growth has suffered and industrial profitability has also been affected by the prevailing low commodity and product prices  globally. Despite these constraints, growth in real GDP in 2001-02 is expected to be 5.4 per cent as estimated by the Central Statistical Organisation. This growth rate marks some recovery over the low growth of 4 per cent in 2000-01.  It will also be one of the highest growth rates in the world in the current year. 

1.2  The average annual growth rate during the Ninth Five Year Plan (1997-2002) is now estimated at 5.4 per cent which is lower than the plan target of 6.5 per cent.  Although this raises new challenges for reinvigorating growth in the Tenth Five Year Plan, the Indian growth record is one of the highest among the major economies in the world in recent years.  The Indian economy has been resilient in the face of several external shocks during this period such as the East Asian crisis of 1997-98, the oil price increase of 2000-01, and the most recent world economic slowdown.  Domestic shocks in the shape of an adverse security environment, natural disasters like the Orissa cyclone and Gujarat earthquake, and two consecutive years of poor agricultural performance, have also been faced successfully by the economy. The behavioural trends of the key macro-economic parameters in recent years and for the last decade are provided in Tables 1.1 and 1.2 respectively.

1.3  The overall growth of 5.4 percent in 2001-02 is supported by a growth rate of 5.7 percent in agriculture and allied sectors, 3.3 percent in industry and 6.5 percent in services. The acceleration of the overall GDP growth rate is basically due to a significant improvement in  value added in the agriculture and allied sectors  from a negative growth rate of (-) 0.2 percent in 2000-01 to 5.7 per cent in 2001-2002. There has been significant deceleration in the growth rate of industry.However, the performance of the services sector has improved moderately.

1.4  Real GDP growth rate from mining and quarrying is estimated to have declined from 3.3 per cent in 2000-01 to 1.4 per cent in 2001-02. The growth of manufacturing has reduced from 6.7 to 3.3 per cent, while that of electricity, gas and water supply has fallen from 6.2 to 5.2 per cent and that of construction from 6.8 to 2.9 per cent over the same period. The deceleration in industrial growth may be attributable to various factors such as normal business and investment cycles, inherent adjustment lags of corporate restructuring and lack of both consumer and investment demand. Continued high real interest rates, infrastructure constraints in power and transport and delays in establishing credible institutional and regulatory framework for private participation in some key sectors might have also dampened private investment and industrial production.

1.5  Prospects of agricultural production in 2001-02 are considered to be bright as a result of normal monsoon and relatively favourable distribution of rainfall over time and regions. Overall agricultural output is estimated to increase by nearly 7 per cent in 2001-02. Foodgrains production is expected to rise to 209 million tonnes compared with 196 million tonnes in 2000-01.

1.6  Financial and other services are doing well in the current year. However, performance of certain service sectors like transport (other than railways), tourism, business and social services have been adversely affected by slowdown in both domestic and external demand. 

1.7  The average annual rate of inflation in terms of the Wholesale Price Index (WPI) increased significantly from 3.3 per cent in 1999-2000 to 7.1 per cent in 2000-01 due to a substantial rise in administered prices of petroleum products. During 2001-02, the inflation rate declined in terms of the WPI. The 52 week average inflation rate declined from 7 per cent at the beginning of 2001-02 to 4.7 per cent for the week ended January 19, 2002. The point-to-point inflation rate reached a low of 1.3  per cent by the end of  January,  2002  which was the lowest in over two decades.

1.8  The inflation rate in terms of the Consumer Price Index for Industrial Workers (CPI-IW) remained below 4 per cent until July 2001 and increased to 5.2 per cent in August 2001. The Index displayed a downward trend during September-October, 2001. However, it  increased again to 4.9 per cent in November and further to 5.2 per cent in December 2001.

1.9     The Union Budget envisaged a reduction of gross fiscal deficit as a proportion of GDP from 5.1 per cent in 2000-01 (RE) to 4.7 per cent in 2001-02 (BE). With the availability of quick estimates of national income and provisional accounts for 2000-01 and advance estimates of national income for 2001-02,  revised estimates of fiscal deficit for 2000-01 and budget estimates for 2001-02 have undergone change. The gross fiscal deficit as a proportion of GDP is now estimated at 5.5 per cent for 2000-01 and 5.1 per cent for 2001-02. As regards revenues, there are significant shortfalls in indirect taxes due to slowdown in industrial production and significant deceleration of both oil and non-oil imports. Direct tax collections  are likely to be below target for the current year. There is also a shortfall in revenues from disinvestment. Disinvestment proceeds are now expected to pick up in the coming months due to a much smoother working of the disinvestment process. Various economy measures taken by the government for reducing non-plan and non-capital expenditure have helped to keep the overall expenditure under control. Despite these measures, the gross fiscal deficit of the Central government at the end of the year is likely to exceed the budgeted target.

1.10  India’s balance of payments remained reasonably comfortable in both 2000-01 and 2001-02. The current account deficit as a percentage of GDP declined from 1.1 per cent in 1999-2000 to about 0.5 per cent in 2000-01 due to a dynamic export performance and sustained buoyancy in invisible receipts. However, in the current year, exports have been almost stagnant and have recorded a growth of only 0.6 per cent in April-December 2001. An assessment of the Balance of Payments (BOP) outlook conducted jointly by the Reserve Bank of India (RBI) and the Ministry of Finance for the current year indicates that the current account deficit as percentage of GDP may widen to some extent, though it will remain within 1 per cent of GDP which is quite manageable.

1.11  The exchange rate of the rupee in terms of the major currencies of the world remained reasonably stable during the year, despite occasional fluctuations caused by normal market forces of supply and demand. Foreign exchange reserves (including gold and SDR) reached a record level of nearly US$50 billion at the end of January 2002, which is equivalent to almost 10 months of estimated imports for the current year.

1.12  India’s external debt situation has improved significantly in recent years as a result of effective external debt management by the Government. The external debt-GDP ratio decreased from 28.7 per cent at the end of March 1991 to 22.3 per cent at end-March 2001 and further to 21 per cent at the end of September 2001. The debt service ratio declined from a peak level of 35.3 per cent of current receipts in 1990-91 to 16.3 per cent in 2000-01. It is particularly noteworthy that for the first time, the World Bank has classified India as a less-indebted country.


Trends in GDP

1.13  According to the Quick Estimates of National income for 2000-01 provided by the Central Statistical Organisation  on  January 31, 2002, the overall GDP growth rate decelerated significantly from 6.1 per cent in 1999-2000 to 4 per cent in 2000-01. The gross value added in agriculture and allied sectors declined by 0.2 per cent in 2000-01 compared with an increase of 1.3 per cent in 1999-2000 (Table 1.3).

1.14  The GDP from agriculture alone declined by 0.4 per cent in 2000-01 compared with an increase of 1 per cent in 1999-2000. The negative growth rate of agriculture in 2000-01 was primarily due to a decline in rice production by 5.4 per cent, wheat by 10 per cent, pulses by 20.4 per cent, oilseeds by 11.2 per cent and cotton by 16.3 per cent. However, livestock, which accounts for over 26 per cent of the total value of agriculture sector, increased by 3.5 per cent and coarse cereals  by 4.2 per cent in 2000-2001.

1.15  Within the industry sector, while construction showed a lower growth in 2000-01, there was marked improvement in the growth rates of manufacturing (from 4.2 per cent in 1999-00 to 6.7 per cent in 2000-01) and mining and quarrying (from 2 per cent to 3.3 per cent during the same period). The growth rate of electricity, gas and water supply remained almost invariant at around 6.2 per cent for both 1999-2000 and 2000-01.

1.16  Growth rates of services sector decelerated significantly in 2000-01. In particular, the growth rate of trade, hotels and restaurants reduced considerably from 7.3 per cent in 1999-2000 to 3.8 per cent in 2000-01, while the growth of transport, storage and communications remained almost unchanged at around 8.2 per cent during 1999-00 and 2000-01. Financial, real estate and business services performed poorly with growth rate of only 2.9 per cent in 2000-01 compared with a growth rate of 10.6 per cent in 1999-00. The unsatisfactory performance of the financial and real estate sector was due to a negative growth rate of (-) 2.2 per cent in banking and insurance, which was in turn due to decline in the output of the non-banking financial institutions. Community, social and personal services also grew at a much lower rate of 6 per cent in 2000-01 compared with 11.6 per cent achieved in 1999-2000.

1.17  The advance estimates of GDP for 2001-02, made available by the CSO, indicate a higher GDP growth rate of 5.4 per cent in the current year. The higher growth in 2001-02 is attributable to significant improvement of growth rates in agriculture and allied, and financial, real estate and business services sectors. However the core industry and infrastructure sectors are expected to record much lower growth than in the previous year.


Demand Factors

Consumption, savings and investment

1.18  On the demand side, real consumption growth declined from 6.5 per cent in 1999-2000 to 2.9 per cent in 2000-01. In real terms, the growth rate of private consumption reduced from 5.5 per cent in 1999-2000 to 2.2 per cent in 2000-01, that of government consumption expenditure fell from 12 per cent to 6.5 per cent during the same period. In recent years growth in real gross domestic capital formation (GDCF) has shown instability. The growth rate of real GDCF recorded a significant deceleration from 15.7 per cent in 1999-2000 to 2.0 per cent in 2000-01 (Table 1.4). This to a large extent reflects volatility in the behaviour of stocks/inventories. Growth in real gross fixed capital formation (GFCF) has been more stable, but it also slackened from 8.6 per cent in 1999-2000 to 4.7 per cent in 2000-01 (Table 1.6). The change in stocks measured as percentage of GDP at 1993-94 prices fell from 1.8 per cent in 1999-2000 to 1.1 per cent in 2000-01.

1.19  The saving and investment rates in India are high as judged by the country's level of economic development. Gross domestic savings improved marginally from 23.2 per cent of GDP in 1999-2000 to 23.4 per cent of GDP in 2000-2001 as a result of better performance by household savings and private corporate savings. However, there was a steep fall in public sector savings due to an increase in the dis-savings of government administrative departments. In fact, public sector savings were negative in 1998-99, 1999-2000 and 2000-01. As a percentage of GDP, public sector savings declined from (-) 0.9 per cent in 1999-2000 to (-) 1.7 per cent in 2000-01 (Table 1.5).

1.20  Gross domestic investment at current prices declined marginally from 24.3 per cent of GDP in 1999-2000 to 24 per cent of GDP in 2000-01 mainly due to a fall in private sector investment.The rate of gross capital formation in real terms also declined from 26.7 per cent of GDP in 1999-2000 to 26.3 per cent of GDP in 2000-01 due to deceleration in the growth rates of real gross domestic capital formation in both public and private sectors. While the real gross fixed capital formation by the public sector increased by 10.9 per cent in 2000-01, that by the private sector increased by only 2.4 per cent in the same year (Table 1.6).

1.21  The change in stocks of inventories decreased substantially in 2000-01 indicating better management of supply and demand for output. As in earlier years, the rates of domestic investment were higher than the rates of domestic savings in both 1999-2000 and 2000-01. The investment-savings gap was financed by the positive net capital inflow from abroad, which amounted to 1.1 per cent and 0.6 per cent of GDP respectively in 1999-2000 and 2000-01.

1.22  Due to unavailability of data on investment  for the year 2001-02, the investment trends have to be assessed by analysing the trends in various leading indicators of investment and growth. These trends present a mixed picture. Both domestic production and imports of capital goods have declined considerably in the current year. Sanctions and disbursements made by the All India Financial Institutions (AIFIs) have also reduced significantly. On the other hand, foreign investment inflows have recorded distinct improvement in the current year. But, most of these inflows are possibly yet to be absorbed as fresh investments due to a build up of record level of foreign exchange reserves. The available trends, therefore, may not indicate any significant recovery of investment in 2001-02.

1.23  Sustained high economic growth would require considerable improvement in investment. Given the country's limited domestic resources, it is essential to enhance further the inflows of foreign direct and portfolio investment. Enhancement of domestic investment would  depend upon structural reduction in inflationary expectations and real interest rates, reduction in the fiscal deficit and further liberalisation of the domestic debt and capital markets.

1.24  India’s private savings rate (comprising household and private corporate savings) is more or less comparable to those achieved by the high performing East Asian economies. However, its public savings is very low and is a major constraint on domestic resource mobilisation. Government is restructuring public expenditure to foster domestic savings, release resources for physical and social infrastructure development and to reduce crowding out effect on private investment.

1.25  Major fiscal reforms have been undertaken for broadening the income tax base and streamlining the excise and customs duty structures. There have also been enabling reforms in the spheres of trade and foreign investment. Reforms in public sector enterprises are underway to reduce pressures on public finances, increase the efficiency of public sector and reduce the incremental capital output ratio (ICOR). Legal, institutional and regulatory frameworks in insurance, banking, capital markets, power, ports and telecommunications, are also being strengthened to induce private investment in infrastructure. The Central Government Budgets for 2000-01 and 2001-02 announced various measures for further deepening of the capital markets and the financial sector and allowing private entry in insurance.  The major reforms undertaken during 2001-02 are provided in Box 1.1. It is expected that these measures would enhance both the savings and investment rates for the economy.


Supply Factors : Production

Agriculture and allied sectors

1.26  After near stagnation in 1999-2000 and negative growth of 0.2 percent in 2000-01, the agriculture sector is likely to attain a growth rate of nearly 6 percent in 2001-02. One of the reasons for this is that spatial distribution of the monsoon rainfall in 2001 was one of the best in recent years. This is reflected in the adequate rainfall received by seventeen districts belonging to the states of Madhya Pradesh, Rajasthan, Gujarat, Uttar Pradesh, Haryana, Kerala, Orissa, Punjab, Tamil Nadu, Chhatisgarh and Himachal Pradesh, which had suffered from deficient rainfall in the previous two years.

1.27  The foodgrains output in 2001-02 is likely to be 209.2 million tonnes, an increase of more than 13 million tonnes over the previous year.  Late winter rainfall in the North-West India in February together with a long cold spell may help raise foodgrains production even to 212 million tonnes in the current year.

1.28  The downtrend in oilseeds, particularly groundnut during the preceding two years has been reversed this year and the country is likely to harvest over 21 million tonnes of oilseeds - higher by over 2 million tonnes compared with the previous year. Cotton production is expected to be higher by over 2 million bales and production of jute and mesta at 10.7 million bales is also likely to be higher than the previous year.

1.29  With early estimate of foodgrains growth at 6.8 per cent, together with commercial crops exhibiting an improved performance and other sub-sectors of agriculture like animal husbandry, fisheries etc. maintaining steady rates of growth, the overall growth rate for agriculture production in the current year is likely to be close to 6 per cent.

Management of the Food Economy

1.30  During 2001-02, procurement of wheat shot up to the record level of 20.63 million tonnes, despite a decline in wheat production to 68.46 million tonnes (a drop of 7 million tonnes) in 2000-01. Rice procurement also reached a record high of 19.10 million tonnes during the current marketing year (October-September 2000-01). Fresh procurement for the marketing year 2001-02 has so far fetched about 13.33 million tonnes of rice (till January 29, 2002).

1.31  The unusually high procurement of rice and wheat during the last two years has led to accumulation of huge surplus stocks much above the minimum buffer stock norms. As compared with the minimum norm of 8.4 million tonnes of wheat on January 1, the country had a stock of 32.4 million tonnes on January 1, 2002. Similarly, as compared with the minimum buffer norm of 8.4 million tonnes for January 1, the rice stock on January 1, 2002 was estimated at 25.6 million tonnes, with fresh procurement of 13.33 million tonnes up to January adding further to the existing stock. In January 2002, the FCI was holding 58.1 million tonnes of rice and wheat stock, against the minimum buffer norm of 16.8 million tonnes for January.

1.32  The primary reason behind the heavy increase in procurement volumes can be traced to the sharp increase in Minimum Support Prices (MSP) in recent years. While there has been excessive procurement of rice and wheat, offtake of foodgrains under the public distribution system has been low, essentially due to the narrowing differential between the Above Poverty Line (APL) issue prices for PDS and the open market prices. Excess procurement by the FCI due to higher MSP, mounting stocks of foodgrains much above the levels required for food security and declining share of procurement by private traders, have led to higher commitments for Government subsidy. The food subsidy bill increased from Rs.2,850 crore in 1991-92 to Rs.12,010 crore in 2000-01. For 2001-02, the food subsidy is estimated at Rs.13,670 crore, out of which Rs.5,680 crore accounts for buffer stock subsidy or the carrying cost of the public stock of foodgrains.

1.33  Some steps to liquidate excess stocks with FCI like open market sale of foodgrains at prices much below the economic cost, export of foodgrains at prices below economic cost, increased BPL allocation of foodgrains under the Targeted Public Distribution System (TPDS) and lowering of issue prices under the TPDS for APL families, have been taken on Government account in an attempt to reduce the carrying cost of surplus stocks. One of the long-term measures for reducing the food subsidy bill and the carrying cost of public stocks, taken up by some states, is decentralised procurement of foodgrains and encouraging greater role by private traders. The system has been introduced in the states of Uttar Pradesh, Madhya Pradesh and West Bengal while other states are being encouraged to take it up.


1.34  The significant slowdown of industrial growth witnessed in 2000-01, as measured by the Index of Industrial Production (IIP), continued with greater intensity in 2001-02. There was a distinct deceleration in growth of manufactured exports and slowdown in growth rates of core and infrastructure industries. The overall industrial growth in terms of the IIP during April-December 2001-02 was only 2.3 per cent compared to 5.8 per cent during the corresponding period of the previous year. In fact, the industrial growth during the first nine months of the current year is the lowest recorded during the last ten years. The sharp deceleration in overall industrial growth is due to a number of structural and cyclical factors such as normal business and investment cycles and lack of both domestic and external demand. Continued high real interest rates, infrastructure constraints, and lack of reforms in land and labour markets, might have also dampened private investment and industrial production.

1.35  Industrial slowdown has been observed across all major sectors. The manufacturing sector grew by only 2.4 percent during April-December 2001, much lower than the 6.0 percent growth registered during the same period in 2000. Similarly, electricity generation grew by only 2.7 percent during April-December 2001 (compared with 4.8 percent in April-December 2000) and mining and quarrying posted a growth of only 1.1 percent during April-December 2001 (compared with 4.4 percent in April-December 2000) (Table 1.7).

1.36  The broad-based nature of the industrial slowdown is also evident from the disaggregated sub-sectoral growth rates as reflected in the use-based classification of industrial production. Capital goods are suffering an absolute decline in production (-4.8 per cent growth in April-December 2001). Basic, intermediate, and consumer goods also have had much lower growth rates in the current year than in the previous year. The only silver lining lies in the performance of consumer durables, which are growing at a double-digit rate (12.5 per cent in April-December 2001), despite having a lower growth than the previous year (17.8 per cent in April-December 2000).

1.37  During the current year, the Government announced several fiscal and other policy incentives for engineering a revival in the industrial sector. The major fiscal measures included rationalisation of excise duty structureto a single rate of 16 per cent CENVAT; reduction of peak level of customs duty to 35 per cent; reduction of customs duties on specified products used for information technology, telecommunications and entertainment industry; and abolition of surcharges on personal and corporate income tax rates. Other fiscal incentives included exemption of goods imported by 100 per cent EOUs and units in FTZs and SEZs from anti-dumping and safeguard duties; extension of Five-year Tax holiday facility to enterprises engaged in integrated handling, transportation and storage of food-grains; and an increase of development allowance for tea from 40 per cent to 20 per cent.

1.38  Several far-reaching structural reform initiatives were also announced during the year. As part of the on-going process of dereservation in the small-scale sector, fourteen more items were dereserved from the list of items reserved for exclusive manufacture by the small-scale sector. A Bill for abolition of the Sick Industrial Companies (Special Provision) Act was introduced in Parliament. The Union Budget (2001-02) proposed amendments in the Industrial Disputes Act and Contract Labour Act for removing the existing structural rigidities in the labour market. The Budget also proposed setting up of a National Companies Law Tribunal by amending the Companies Act. The Bill in this regard has been introduced in Parliament.


1.39  The unsatisfactory performance of the infrastructure industries during the current year is reflective of the overall slowdown prevailing in the economy. Six core and infrastructure industries viz. electricity, crude oil, petroleum refinery products, coal, steel and cement, having a weight of 26.7 per cent in overall Index of Industrial Production (IIP) achieved an average growth rate of only 2 per cent during the first three quarters of the current year (i.e. April-December 2001) compared with 6.8 per cent during the corresponding period of the previous year. Crude oil and steel exhibited absolute decline in growth rate, while growth rates of other industries except cement, decelerated significantly during the current year. Among other infrastructure sectors, goods traffic  on railways, cargo handled at major ports and new telephone connections had positive, but comparatively lower growths in the current year. (Table 1.8).

1.40  Several fiscal incentives were announced during the year for boosting  investment in infrastructure  projects. Ten-year tax holiday offered to projects in core sectors like roads, highways, water-ways, water supply, sanitation and solid waste management systems can now be availed of during the initial twenty years. Projects in airports, ports, inland ports, industrial parks and generation and distribution of power can now avail of ten-year tax holidays during the initial fifteen years. The facility of five-year tax holiday available to the telecommunication sector till  March 31,  2000 was reintroduced for units commencing their operations on or before March 31,  2003. The concessions were extended to internet service providers and broadband networks. Tax incentives were made available to investors providing long-term finance to enterprises engaged in infrastructure. The Electricity Bill 2001 and the Communication Convergence Bill 2001 were introduced in  Parliament. Budgetary allocation was enhanced for the Pradhan Mantri Gram Sadak Yojana (PMGSY) and the scheme was extended to cover rural electrification. A Special Railway Safety Fund was created to be funded by surcharge on passenger fares and budgetary support for supporting safety related investment of Rs. 17, 000 crore over six years. An amount of Rs. 1,000 crore as contribution from General Revenues was allotted to the Special Railway Safety Fund during the year. An additional amount of Rs. 898 crore was also allotted during the current year for completion of "last mile" projects of the Railways.


1.41  During 1993-94 to 1999-2000 the service sector had achieved consistently high growth rates in the range of 7.1 per cent to 10.5 per cent. But for the first time in 2000-01, the growth rate of the service sector declined to 4.8 per cent due to poor performance by financial sector, trade hotels & restaurants, and community and social services.

1.42  The share of the services sector in overall GDP has increased over the years. It may be mentioned here that although the service sector presently accounts for 49 per cent of GDP, there is no regular reporting system for the growth rate of the services sector because of lack of reliable data and methodology for measuring production of most of the services sectors. The Ministry of Finance in association with the Central Statistical Organisation have initiated steps to improve the data base for the services sectors and to proceed towards construction of an Index of Services Production on the pattern of the Index of Industrial Production (IIP).

1.43  One of the key services that has assumed considerable significance in recent times is insurance. The Insurance Regulatory and Development Authority (IRDA), which was constituted on April 19, 2000, has granted certificates of registration to ten life insurance companies and six general insurance companies, in addition to the existing public sector Life Insurance Corporation and general insurance companies. The IRDA has also introduced solvency margin requirements on line with the Insurance Regulatory and Development Authority (Assets, Liabilities and Solvency Margins of Insurers) Regulations, 2000. 

1.44  The insurance sector continues to extend social security cover to deserving groups in the economy. The Janshree Bima Yojana scheme was launched by the LIC in June 2000 for providing social security to groups largely  comprising of persons below the poverty line.   Till the end of January 2002, 763,436 lives have been covered under the programme. The LIC has also launched a new scheme called Krishi Shramik Samajik Suraksha Yojana on July 1, 2001 for the benefit of landless agricultural labourers in the age group of 18-50 years. The Scheme has covered 24,936  beneficiaries in 16 districts between July 1, 2001 to February 7, 2002. The public sector general insurance companies launched a new policy, Ashray Bima Yojana, on October 10, 2001, for extending social security coverage to workers retrenched due to implementation of economic restructuring measures. The public sector general insurance companies have also introduced a scheme of personal accident insurance coverage for the Kisan Credit Card (KCC) holders.

1.45 Public sector banks have decided to introduce the Laghu Udhyami Credit Card (LUCC) scheme to provide simplifed and borrower friendly credit facilities to small borrowers. This scheme would provide hassle- free credit facility to small businessmen, retail traders, artisans, professionals, self-employed persons and small industrial units. Interest under  the scheme will be charged at the Prime Lending Rate of the banks.

1.46  Software and IT enabled services have emerged as a niche sector for India in the global context. The software industry was one of the fastest growing sectors in the last decade with a  compound annual growth rate exceeding 50 per cent. Software service exports increased from US $ 4.02 billion in 1999-2000 to US $ 6.3 billion in 2000-01, thereby registering a growth of 57 per cent. India’s success in the software sector can be largely attributed to the industry’s ability to cultivate superior knowledge through intensive R&D efforts and the expertise in applying the knowledge in commercially viable technologies.

Social sector

1.47  Development of the country's vast  human resource potential is essential for sustaining higher levels of economic growth and ensuring better living conditions for people. The Central support for human resource and social sector development in the country has progressively increased throughout the 1990s. The Central Government expenditure (plan and non-plan) on education, health, family welfare, nutrition, sanitation, rural development, housing, social welfare etc. has increased from Rs 9,608 crore in 1992-93 to Rs 40,205 crore in 2001-02 (BE). As a proportion of total expenditure, the combined plan and non-plan Central expenditure on these areas increased from 8.1 per cent in 1992-93 to 10.7 per cent in 2001-02 (BE). Similarly, as a proportion of GDP at current market prices, the Central Government expenditure on social services increased from 1.3 per cent in 1992-93 to 1.8 per cent in 2001-02 (BE).

Population : Census 2001

1.48  India accounts for 2.4 per cent of the world surface area but it supports 16.7 per cent of the world population. According to the provisional results of Census of India 2001, the population of India as on March 1, 2001 crossed one billion and was enumerated at 1.027 billion. The decadal growth of population at 21.34 per cent between 1991-2001 was the sharpest decline in the rate of growth of population witnessed since independence, with the average exponential growth rate declining from 2.14 per cent per annum during the previous decade to 1.93 per cent per annum. The declining trends indicate that the country is entering a phase of rapidly declining fertility in its process of demographic transition. The National Population Policy (NPP) 2000 outlines the long-term objective of achieving a stable population by 2045, at a level consistent with the requirements of sustainable economic growth and development.

1.49  The percentage decadal growth of population in rural and urban areas in the decade ending 2001 was 17.9 per cent and 31.2 per cent respectively. Urban population constitutes 27.8 per cent of the total population of the country, which is higher by 2.1 percentage points as compared to the situation in 1991. The density of population has increased steadily from 117 persons per sq. km. in 1951 to 324 persons per sq. km. in 2001. The sex ratio for the country as a whole has improved from 927 females per 1000 males in 1991 to 933 females per 1000 males in 2001.


1.50  According to the Planning Commission, overall employment is estimated to have grown by about 1 per cent per annum during the period 1993-94 to 1999-2000, compared with a growth of 2.43 per cent per annum during the period 1987-88 to 1993-94. The decline in employment growth is associated with  the lower growth of population (1.93 per cent per annum during 1993-94 to 1999-2000 as compared with  2.10 per cent per annum during 1987-88 to 1993-94) and labour force (1.03 per cent per annum during 1993-94 to 1999-2000 as compared with 2.29 per cent per annum during 1987-88 to 1993-94) witnessed during this period. Organised sector (both public and private) employment grew by 0.53 per cent per annum during 1993-94 to 1999-2000. While public sector employment experienced an absolute decline of 0.03 per cent during 1994-2000, employment in the private sector grew by 1.87 per cent during the period. The decline in the rate of growth of   public sector employment can be attributed to the on-going process of restructuring in various public sector enterprises, as well as the ban on recruitment being implemented by various state departments/organisations for reducing non-plan Government expenditure.

1.51 In the younger age groups, the decline in labour force participation rates is a part of a longer term trend reflecting a shift in activity status towards education. Employment in the agricultural sector also witnessed a slow growth with the absolute number of persons employed in agriculture showing a decline for the first time. However, employment in sectors like trade, construction, financial services, and transport, storage and communication had growth rates between 5-7 per cent per annum during 1994-2000, which were much higher than the average rate of growth of total employment during the period. Thus, employment generation in the 1990s  can be said to have undergone a structural transformation with jobs being increasingly generated in the non-government sector.

Employment generation and poverty alleviation programmes

1.52  The Government has continued its emphasis upon specifically designed programmes in rural and urban areas for employment generation and poverty alleviation. In the year 2001-02 (BE), a budgetary outlay of Rs. 9,765 crore was provided under Plan provisions for Ministry of Rural Development for rural development, rural employment and poverty alleviation programmes, compared to Rs. 9,270 crore in 2000-01(RE) (excluding Pradhan Mantri Gram Sadak Yojana for which Rs. 2,500 crore was separately allotted in 2000-01 and 2001-02). The Food for Work programme was launched in February 2001 for five months and was further extended. The programme aims at augmenting food security through wage employment in drought affected rural areas in selected states. A quantity of 3.01  million tonnes of foodgrains (1.90 million tonnes of rice and 1.11 million tonnes of wheat) have been allotted to 11 States under the Food for Work Programme upto December 5, 2001. The offtake of foodgrains upto November 23, 2001 has been 2.25 million tonnes. In addition to the various on-going self-employment programmes, the Sampoorna Grameen Rozgar Yojana (SGRY) was launched in September 2001 for providing food security and wage employment in rural areas. The scheme is being implemented on a 75:25 cost-sharing basis by the Centre and the States. The Shiksha Sahyog Yojana has been finalised for providing educational allowance of Rs 100 per month to the children of BPL families for obtaining education from the 9th-12th standard.The Pradhan Mantri Gramodaya Yojana (PMGY) launched in 2000-01 is a major initiative, which focuses on village level development in five critical areas i.e. health, primary education, drinking water, housing, and rural roads, with the objective of improving the quality of life of people living in rural areas. The Pradhan Mantri Gram Sadak Yojana (PMGSY) was launched in December 2000 for providing road connectivity through good all-weather roads to rural habitations with a population of more than 1000 persons by 2003 and those with a population of more than 500 persons by 2007.


1.53  The total Central Plan allocation for education has been increased to Rs. 5,920 crore in 2001-02 (BE) from Rs. 5,450 crore in 2000-01 (BE). Elementary education has received the highest outlay of Rs. 3,800 crore in 2001-02 (BE). The Gross Enrolment Ratio (GER) in the country at primary level has improved significantly from 42.6 per cent (1950-51) to 94.90 per cent (1999-2000) and that for upper primary level from 12.7 per cent (1950-51) to 58.79 per cent (1999-2000). As per the Census 2001, overall literacy rate in the country has increased to 65 per cent from 52 per cent in 1991. There have been appreciable improvements in both male and female literacy in rural as well as urban areas.  


1.54  The Plan Outlay for the Central Health Sector Schemes during 2001-02 was Rs. 1,450 crore. This constituted an increase of 11.5 per cent over the outlay of Rs. 1,300 crore in 2000-01. About 54 per cent of the Central Plan Outlay is devoted to centrally sponsored disease control programmes for control of malaria, tuberculosis, leprosy, aids, blindness etc. Substantial external assistance has also been mobilised from various bilateral and multilateral agencies for disease control programmes.For both the health and education sectors, an element  of cost recovery through imposition of user charges and attaining improvement in the mechanism of service delivery, are  prime concerns.

Rural water supply

1.55  The Central allocation for the Accelerated Rural Water Supply Programme (ARWSP) was enhanced from Rs. 1,960 crore in 2000-01 to Rs. 1,975 crore in 2001-02. Till end January 2002, Rs 1,637 crore has been released by the Centre and Rs 1,496 crore by the States. A total of 26,803 habitations have been covered under the programme so far, involving a population of 10.5 million. The Pradhan Mantri Gramodaya Yojana (Rural Drinking Water Project)  is another initiative for achievement of sustainable human development at the village level.


Fiscal Developments

1.56  The lower real GDP growth of 4.0 per cent in 2000-01 led to the shortfall in revenue collection during 2000-01. As per the provisional accounts released by the Controller General of Accounts (CGA), actual tax receipts (net to Centre) for 2000-01 at Rs.1,35,193 crore, were lower by Rs.9,210 crore compared with the revised estimate of Rs.1,44,403 crore. Non-tax receipts at Rs.55,795 crore for 2000-01 also fell short of the revised estimates by Rs.5,968 crore. The savings realised on the expenditure front however, considerably cushioned the impact of lower revenue realisation. Consequently, actual gross fiscal deficit for 2000-01 at Rs.1,14,369 crore exceeded the revised estimate by Rs.2,397 crore. Gross fiscal deficit, as a proportion of GDP at current market prices for 2000-01 placed at 5.1 per cent in the revised estimates, is now estimated to be 5.5 per cent on the basis of provisional unaudited figures. Similarly, revenue deficit as a proportion of GDP estimated at 3.6 per cent in the revised estimates, is now estimated to be  3.9 per cent of GDP for 2000-01. For 2001-02, the Centre’s gross fiscal deficit and revenue deficit budgeted at 4.7 per cent and 3.2 per cent of GDP respectively, are now estimated at 5.1 per cent and 3.4 per cent of GDP respectively as per revised GDP estimates.


Fiscal Policies

Direct Taxes

1.57 The basic principles guiding the tax proposals in the Union Budget 2001-02 were the need for revenue buoyancy, further simplification of the tax regime and more effective tax compliance. In the area of direct taxes, the emphasis was on retention of stability in tax rates, widening of the tax base and rationalisation and simplification of the tax structure. All surcharges were abolished except the Gujarat earthquake surcharge of 2 per cent leviable on all non-corporate and corporate assesses except foreign companies.

1.58  Fiscal incentives in the form of tax holidays for development of infrastructure were rationalized and enlarged for core sectors like roads, highways, railway systems, water treatment and supply, irrigation, sanitation and solid waste management system, airports, ports, inland ports and waterways, industrial parks and generation and distribution of power. Besides, concessions by way of 10-year tax holiday were made available for infrastructure activities for developers in Special Economic Zones. Fiscal incentives by way of tax holiday for five years and 30 per cent deduction of profits for the next five years were provided to enterprises engaged in the integrated business of handling, transportation and storage of foodgrains. Income earned by way of interest, dividends and long-term capital gains from investments in infrastructure was made fully tax exempt and the exemption was extended to cover guarantee commission and credit enhancement fees earned from this sector.

1.59  For providing stimulus to the growth of the capital market, the tax payable on the distribution of dividends of domestic companies and income in respect of units of Mutual Funds and UTI was reduced from 20 per cent to 10 per cent. Further measures to widen the tax base and enlarge the scope of deduction at source included making income tax at source deductible at the rate of 10 per cent for income earned through commission or brokerage exceeding Rs.2,500 (barring transaction relating to shares and securities). Besides, income tax at the rate of 30 per cent is to be deducted at source  from winnings from games. The One-by-Six scheme for identifying potential taxpayers was extended to all urban areas in the country as defined by the 1991 census.

Indirect Taxes

1.60  The ongoing process of reducing rates, rationalising the tax regime, and simplifying procedures, was carried forward in the sphere of indirect taxes. The important initiatives adopted during the year are mentioned below:

Customs Duties

1.61  The peak level of customs tariff was reduced to 35 per cent with abolition of the 10 per cent surcharge. The Union Budget reiterated the Government’s resolve to move progressively within three years to reduce the number of rates to the minimum with a peak rate of 20 per cent. Customs duties were reduced on imported inputs for information technology and telecom sectors. Basic customs duty was raised to 70 per cent on tea, coffee, copra and coconut, and to 75 and 85 per cent on crude edible oils and refined oils respectively. With the abolition of quantitative restrictions on imports, the customs duty on import of used cars, multi-utility vehicles and two wheelers was raised to 105 per cent. In a move intended to discourage gold smuggling, customs duty for gold was scaled down from Rs.400 per ten grams to Rs.250 per ten grams.

Excise Duties

1.62  The excise duty structure which was rationalised to a single rate of 16 per cent CENVAT (Central Value Added tax) in 2000-01 was further improved by replacing the three special excise duty rates of 8 per cent, 16 per cent and 24 per cent by a single rate of 16 per cent. An additional levy (National Calamity Contingency Duty) was imposed on cigarettes, pan masala, biris etc. to garner resources for the National Calamity Contingency Fund. Food preparations based on fruits and vegetables were completely exempted from excise duty, while duty on aerated soft drink was reduced to 32 per cent. Compressed natural gas, hitherto exempted from excise, was brought under the purview of excise at the rate of 8 per cent. Excise Duty on petrol was raised from 16 per cent to 32 per cent and on high-speed diesel oil from 12 per cent to 16 per cent. Further, the duties on petrol and diesel were increased  to 90 per cent and 20 per cent respectively from the midnight of  January 11/12, 2002 (the new rates of excise duty will not remain in force beyond March 31, 2002). The coverage of service tax at the rate of 5 per cent on the value of taxable service was expanded by including fifteen new services.   

1.63  Inadequate fiscal adjustment continues to remain a major problem for the Indian economy. The Central Government’s fiscal situation has become more constrained in recent years due to growing interest payments, increasing level of subsidies and long term impact of Fifth Pay Commission recommendations, including surge in pension payments. All these have manifested in mounting revenue deficit and erosion in public sector savings thereby severely restraining the Government’s ability to invest in infrastructure and social sectors.


Fiscal and Budgetary Developments in 2001-02

1.64  The fiscal deficit as a proportion of GDP budgeted at 4.7 per cent in 2001-2002, now stands at 5.1 per cent of GDP due to revision in  the GDP estimates, compared with 5.5 per cent in 2000-01 (on the basis of provisional unaudited figures). The revenue deficit, which reflects the excess of current expenditure over current receipts, budgeted at 3.2 percent of GDP in 2001-02, is now re-estimated at 3.4 per cent of GDP, compared with 3.9 per cent in 2000-01. The primary deficit, (i.e. fiscal deficit net of interest payments), is budgeted at 0.2 per cent of GDP in 2001-02 as against 0.8 per cent in 2000-01.

Revenue Performance

1.65  The data for gross collections of major direct and indirect taxes for the first nine months (April-December 2001) of the current year show an unsatisfactory performance. In case of direct taxes, collections from personal income tax and corporation tax at Rs.44,021 crore were lower by 1.2 per cent, compared with the robust increase of 30.8 per cent in the corresponding period of the previous year. Collections from excise and custom duties at Rs.77,224 crore during April–December 2001 posted a decline of 3.6 per cent compared with an increase of  4.9 per cent in April-December 2000.

1.66  The fiscal parameters for the first three quarters of the current year (i.e. April-December 2001) reveal that there has been lower growth in revenue receipts and higher growth in expenditure as compared to the corresponding period of the previous year. Revenue receipts (net to the centre) is almost at the same level of Rs.1,32,690 crore compared with Rs.1,32,691 crore in the corresponding period of last year. Other receipts (mainly disinvestment receipts),  estimated at Rs.280 crore against the full year budgeted target of Rs.12,000 crore, are expected to improve significantly during the remaining months of the current year due to smoother working of the disinvestment process. Borrowings and other liabilities at Rs.89,014 crore indicate an increase of 37.7 per cent over Rs.64,628 crore in the comparable period of the previous year. Aggregate expenditure at Rs.2,33,718 crore reflects an increase of about 14 per cent over the corresponding period of the previous year. However, on account of the general slowdown in the economy and the deceleration in industrial growth in particular, the tax revenue (net to Centre) had declined by about 7 per cent during April-December2001. (Table 1.9)

Expenditure Management

1.67  The Union Budget (2001-02) announced specific proposals for bringing about changes in the composition of the Central Government’s expenditure and for effecting economy in non-plan expenditure. The Budget announced revision of user charges for certain services provided by the Government and its agencies, moderate revision of postal rates for containing the rising postal deficit, scrutiny of recruitment requirements with a view to limit  fresh recruitment to 1 per cent of total civilian staff strength, enhancement of license fee for various categories of Central Government residential accommodation, temporary suspension of LTC facility for Central Government employees and greater use of information technology in Government’s activities involving large public interface for promoting efficiency. The Budget also announced that all existing schemes would be subjected to zero-based budgeting and only those schemes that were found demonstrably efficient and essential, would be retained. Besides, centrally sponsored schemes that could be transferred to States would be identified and the resource flows will be sought to be linked to their performance.




Wholesale Price Index (WPI)

1.68  The point to point inflation rate according to the Wholesale Price Index (WPI) for the week ending January 19, 2002 was 1.3 per cent, which was the lowest in the last two decades. The 52-week average inflation rate declined from 7.0 per cent at the beginning of the year to 4.7 per cent for the week ending January 19, 2002.

1.69  The price situation remained under control during 2001-02. The impact of the fuel price increases announced first during 1999-2000, and subsequently twice during 2000-01, bottomed out during the current year, reducing inflation to below 5 per cent by September 2001. The deceleration in prices continued through the months of October and November 2001. Inflation was recorded at 2.21 per cent at the beginning of December 2001 (the lowest since December 1999) and reduced further to 1.3 at the end of January 2002.

1.70  Prices for the primary products group, comprising of essential commodities for daily use, remained moderate for much of the year and are presently estimated to have risen by 3.0 percent for the week ending January 19, 2002. The manufactured products group registered negligible price rise during 2001-02 reflecting the subdued demand for manufactured products. The fuel, power, light & lubricants subgroup, comprising mainly of energy products much of which are imported, had experienced sharp increase in prices last year on account of the successive hikes in administered energy prices. In contrast, during the current year, inflation for the group remained stable and is presently 3.2 percent, as against 31.0 percent in the previous year.

Consumer Price Index-Industrial Workers (CPI-IW)

1.71  The inflation rate, as estimated by the CPI (IW), ranged between moderate to low during the current year. The Index remained below 4 per cent till July 2001 and rose thereafter to 5.2 per cent in August 2001. It decelerated further during September and October and was estimated at 4.9 per cent during November 2001. The year 2001 ended with a marginally higher inflation of 5.2 per cent in December 2001.


Money Supply

1.72  The year-on-year growth in broad money (M3) as on January 11, 2002 was 14.4 per cent compared with 16.6 per cent a year ago. The sharp decline in money supply since November 16, 2001 reflects the sudden expansion in volume of broad money resulting from India Millenium Deposits with effect from the corresponding date in the previous year. Among the various components of money supply, only currency with the public registered a higher rate of growth in the current year (till January 11, 2002) compared to the corresponding period of the previous year. As far as sources of broad money are concerned, growth in bank’s investment in Government securities and the expansion in net foreign exchange assets of RBI contributed significantly to the broad money growth in the current year. The current financial year witnessed a deceleration in the growth of net domestic assets of RBI as compared to the corresponding previous period. This was partly offset by the pronounced acceleration in the growth of net foreign exchange assets of RBI. Reserve money registered a growth of 2.6 per cent during the current financial year (till January 11, 2002) as compared with 5 per cent during the corresponding previous period.


Financial Developments

1.73  The process of financial sector reforms has been carried forward in the current year with particular focus on banking and financial institutions. The specific reforms undertaken include allowing banks to lend at interest rates below their respective PLRs, permission to formulate fixed rate deposit schemes offering higher interest rates to senior citizens, flexibility in the composition of working capital between cash credit and loan components, reduction in exposure limits for borrowers, revised guidelines for exposure of banks to capital market and guidelines for investment in non-SLR securities through the private placement route.  The initiatives specially aimed at strengthening the operational efficiency of banks relate to the Voluntary Retirement Scheme, abolition of the Banking Service Recruitment Boards and enlargement of the reach and scope of the electronic funds transfer facility (EFT). The measures pertaining to financial institutions included operational and regulatory issues concerning transition to universal banking, a transparent mechanism for corporate debt restructuring, coordination between banks and financial institutions, amended guidelines for Asset-Liability Management and classification and valuation of investments. As regards the non-banking financial companies (NBFCs), the major policy initiative related to reduction in the maximum interest rates on public deposits from 14 per cent to 12.5 per cent.

1.74  The current year has been characterised by measures designed to move towards a flexible interest rate regime. The reduction in the administered interest rates on contractual savings has made the interest rate regime more flexible. Reduction in the Bank Rate to 6.5 per cent (the lowest since May 1973) has been supplemented by reduction in the Cash Reserve Ratio to 5.5 per cent, which has further improved liquidity in the banking system. The PLRs of five major public sector banks softened from 12.00 - 12.50 per cent in December 2000 to 11.00 - 12.00 per cent by December 2001. Interest rates charged by SCBs on pre-shipment and post-shipment rupee export credit were reduced by 1.0 percentage point for six months ending on March 31, 2002. The short-term interest rate represented by the yield on 91-day Treasury Bills declined by 125 basis points to 7.25 per cent between April and December 2001. At the long end of the yield curve, the secondary market yields on Government paper in the range of 10-12 years have declined from 10.05-10.41 per cent to 8.15-8.35 per cent during this period.

1.75  Bank credit, comprising food credit and non-food credit, increased at a lower rate of 10.6 per cent till January 11, 2002 compared to 14.3 per cent in the corresponding period of the previous year. Recent years have witnessed strong growth of food credit in response to the increase in the quantum as well as price of food grains procured in support of the twin objectives of food security and price support. The deceleration in the growth of non-food credit to 8.7 per cent till January 11, 2002 from 12.1 per cent during the corresponding period in the previous year mirrored the weak demand for commercial credit owing to economic slowdown, which has been aggravated by the global downturn in economic activity.

1.76  During April-December 2001, sanctions by All-India Financial Institutions (AIFIs) declined by 32.1 per cent compared to an increase of 18.3 per cent in the corresponding period of the previous year. Disbursements by AIFIs also declined by 16.9 per cent during the same period in contrast to an increase of 16.1 per cent last year. An analysis of financial performance of public sector banks on the basis of key parameters shows wide inter-bank variations. For nationalised banks, the return on assets varied from zero in the case of Dena Bank and Indian Bank to 1.55 per cent for Corporation Bank. It was more than 0.5 per cent for six other nationalised banks. The ratio of net NPAs to net advances ranged from 1.98 per cent for Corporation Bank to 18.37 per cent for Dena Bank. Excluding Indian Bank with negative Capital to risk weighted asset ratio (CRAR), the CRAR ranged from 7.73 per cent for Dena Bank to 13.40 per cent for Andhra Bank. As regards the SBI Group, return on assets was 0.50 per cent or more for all the banks except the State Bank of Saurashtra and the State Bank of Mysore with return on assets at 0.18 per cent and 0.27 per cent respectively.

1.77  The RBI had introduced the One Time Settlement Scheme in July, 2000 for all sectors, including the small scale sector, for providing a simplified, non-discretionary and non-discriminatory mechanism for recovery of NPAs with outstanding balances of up to Rs. 5 crore. The scheme expired on June 30, 2001. Under the revised guidelines, 27 public sector banks recovered Rs. 2,600 crore from 365,000 accounts.

1.78  A total of 20.4 million Kisan Credit Cards (KCCs) have been issued till the end of November 2001 involving a sanctioned amount of Rs.43,390 crore. Cooperative banks accounted for the maximum share in the cumulative issue of KCCs (66.2 per cent), followed by SCBs (27.0 per cent) and RRBs (6.8 per cent). 


Capital and Money Markets

1.79  The developments in the stock market on the eve of the current financial year brought to the fore the need for further measures aimed at promoting safety, transparency and efficiency of the capital market. Accordingly, the following measures were announced in March 2001:

         Intention to corporatise stock exchanges involving segregation of ownership, management and trading membership from each other.

         Extension of rolling settlement to two hundred “A” category stocks in Modified Carry Forward Scheme (MCFS), Automated Lending and Borrowing Mechanism (ALBM) and Borrowing and Lending Securities Scheme (BLESS) by July 2, 2001.

         The formulation of legislative changes aimed at further strengthening the provisions in the SEBI  Act, 1992 for ensuring  investor protection.

1.80  The SEBI subsequently extended rolling settlement to all scrips included in the ALBM/BLESS/or MCFS in any stock exchange or in the BSE 200 list with effect from July 2, 2001. From December 31, 2001, all stocks are under rolling settlement in all stock exchanges. This constitutes one of the most far-reaching reforms in the history of India’s capital market. Equally important were the widening of the spectrum of equity derivatives to trading in options on both indices and stocks, and to stock futures, which can perform hedging functions hitherto performed by the deferral products.

1.81  The Union Budget (2001-02) emphasised the need for further development of the debt market and spelt out the main measures for this purpose, which related to setting up of the Clearing Corporation of India Ltd (CCIL) and the Negotiated Dealing System (NDS). Other related initiatives included extension of uniform price auction to the auction of selected dated Central Government securities and reintroduction of floating rate Government bonds. Measures were also announced for moving closer to a pure inter-bank call money market by gradually phasing out non-bank participation.

1.82  Reforms in the insurance sector commenced with the enactment of the Insurance Regulatory and Development Authority Act 1999, which facilitated the entry of private insurance companies into the Indian insurance market. The Insurance Regulatory and Development Authority (IRDA) was set up on April 19, 2000 to protect the interest of the holders of insurance policies, and to regulate, promote and ensure orderly growth of the insurance industry. Ten life insurance companies and six general insurance companies have been granted certificate of registration, out of which 12 companies have commenced business. 

1.83  The pronounced bearish sentiments in the stock market saw the Sensex falling to 3184 on April 12, 2001, which implied a cumulative fall of 36.3 per cent from 5001 at the end of March 2000. The National Stock Exchange (NSE) Index (S&P CNX Nifty) also suffered a similar slump during this period. The decline in equity prices in leading stock markets abroad following the terrorist attacks on the USA on September 11,  2001 led to further squeezing of the stock indices at home.  The Sensex dropped to 2600 on September 21, 2001, registering a fall of more than one thousand points from 3604 on the eve of the current financial year. The measures taken by both the Government and the regulatory authorities in the wake of the September 11 crisis, backed by improvement in investor sentiment abroad, facilitated significant recovery in the stock market. The Sensex regained more than 800 points to close at 3443 on December10, 2001. However, the market again came under selling pressure, precipitated by developments following the terrorist attack on the Indian Parliament (December 13, 2001) and the Sensex lost around 180 points by the end of December, 2001. Stock market prospects improved in the new year (2002)and the Sensex regained 232 points to close at 3494 on February 8, 2002.

1.84  The adverse sentiments in the secondary market also affected the mobilisation of resources from the primary market. The amount raised through public and rights issues during the first nine months of the current year (Rs.3,777 crore), constituted around 90 per cent of the relatively modest amount of Rs 4,240 crore raised during the corresponding period of the previous year. Resource mobilisation through IPOs (Rs. 208 crore) accounted for only 5.5 per cent of the total resource mobilisation during this period, compared to about 56.7 per cent in the corresponding period of the previous year. The low level of resource mobilisation may be attributed to the prevailing economic slowdown and preference for private placement. The performance of UTI was badly affected by the downtrend in stock market. During April-December 2001, the outflow of funds from UTI exceeded inflows by Rs 5,151 crore whereas during the corresponding period of the previous year, inflows exceeded outflows by Rs. 480 crore. During April-December 2001, gross purchase of equity by mutual funds amounted to Rs.7,489 crore, while gross sales amounted to Rs.8,762 crore thereby making net equity investment negative.

1.85  Except for September 2001, the net FII investment was positive during the first ten months of the current year. Net FII investment amounted to US$1,295 million during April 2001-January 2002 compared to US$1,379 million during the corresponding previous period. The uncertainty and panic resulting from the terrorist attacks on the USA led to sudden increase in sales, which exceeded purchases by about 16 per cent. As a result net investment by FIIs declined by US$113 million in September 2001.


External Sector

International economic environment

1.86  The year 2001 experienced the deepening and reinforcing of the global economic slowdown that had begun to set in from the end of 2000. The latest projections made by the World Economic Outlook of the International Monetary Fund point to a mere 2.4 per cent growth in world output during 2001, compared to 4.7 per cent during 2000. The growth in world trade volume is projected to decline sharply to 1 per cent during 2001, as against 12.4 per cent in 2000. Absolute declines are projected for both energy and non-fuel prices in 2001 with the decline in energy prices expected to aggravate further in 2002.

1.87  The prevailing global slowdown was accentuated further by the terrorist attacks in the United States on September 11, 2001. The attacks resulted in further downward growth projections for almost all major economic regions of the world. Growth rates for the US economy have been pegged down to 1 per cent and 0.7 per cent for 2001 and 2002 respectively. Japan is likely to encounter its fourth economic recession in a decade, while economic activity is showing little signs of recovery in the Euro area. The broad-based nature of the global slowdown, the most marked in recent times, has worsened the outlook for emerging market economies, in terms of reduced capital inflows and restricted access to funds from international capital markets. Among the economies of developing Asia however, China and India are expected to remain relatively insulated from the global slowdown due to the relatively less significance of the external sector in their overall GDP.


Balance of Payments

Current account

1.88  India’s Balance of Payments (BOP) remained reasonably comfortable in 2000-01 and the external sector marked distinct improvements. The first half of the year witnessed some pressures on the BOP due to significant hardening of international oil prices, sharp downturn in international equity prices and successive increases in interest rates in the United States and Europe. However, the situation eased with the mobilisation of funds under the India Millennium Deposits, which reversed the declining trend in foreign exchange reserves.  As a result, the BOP situation marked a turnaround during the second half of 2000-01.  Overall, the current account deficit in 2000-01 narrowed to about 0.5 per cent of GDP from 1.1 per cent of GDP in 1999-00. The improvement in the current account was largely due to a more dynamic export performance, sustained buoyancy in invisible receipts reflecting sharp increases in software service exports and private transfers and the subdued non-oil import demand (Table 1.10).

Trade deficit

1.89  Exports, on the BOP basis, grew by 19.6 per cent in US dollar terms in 2000-01, accelerating sharply from the 9.5 percent growth in the previous year. Total imports recorded a moderate growth of 7.0 per cent during 2000-01, much lower than the sharp increase of 16.5 per cent in 1999-2000. The moderate growth in imports during 2000-01 was essentially attributable to a 24.1 per cent increase in the oil import bill. Non-oil import growth, on BOP basis, remained subdued at only 2.0 per cent. 

1.90  Reflecting the trends in exports and imports, the deficit on the trade account of BOP narrowed to US $14.37 billion or 3.1 per cent of GDP in 2000-01 from US $17.84 billion (4.0 per cent of GDP) in 1999-2000. Net inflow of invisibles earnings at US $11.79 billion covered about 82 per cent of the deficit on the trade account in 2000-01, leaving a financing gap of US $2.58 billion on the current account. This deficit on the current account represented about 0.5 per cent of GDP, compared with the deficit of 1.1 per cent of GDP (US $4.70 billion) in 1999-2000.

Capital account

1.91  The recovery in capital flows witnessed in 1999-2000, after the setback in 1998-99 caused by the East-Asian crisis and the economic sanctions imposed upon India, was broadly maintained during 2000-01. Net capital inflows  (excluding IMF) in the BOP account amounted to US $9.02 billion in 2000-01, which were lower than similar inflows of US $10.44 billion in the previous year. The reduction in net capital inflows was mainly due to the bunching of repayments of commercial borrowings and significant net outflows under banking capital. At the same time, capital inflows were bolstered by the mobilisation of US $5.51 billion under the India Millennium Deposits (IMD) Scheme in October- November 2000.  Fresh inflow of funds for portfolio investments in India by FIIs in 2000-01 amounted to about US $1.85 billion, which was only slightly lower than the US $2.14 billion in 1999-2000.  Net accretions to non-resident deposits during 2000-01 rose by over 50 per cent to US $2.32 billion. Gross disbursement of external assistance at US $2.94 billion was comparable with the normal trends in recent years. Gross borrowing on commercial terms (excluding IMD) at US $3.81 billion in 2000-01 was higher than such normal borrowings of US $3.19 billion in the previous year.

Foreign exchange reserves

1.92  The sharp reduction in current account deficit and the funds raised under the IMD Scheme resulted in large accumulation of official foreign exchange reserves for the fifth year in succession during 2000-01. On BOP basis, the reserves increased by a substantial US $5.83 billion. This was on top of an increase of US $6.14 billion in 1999-2000 and an increase of US $4.51 billion per year, on an average, during the previous three years, i.e.1996-97 to 1998-99.

BOP Projections for 2001-02

1.93  Official BOP statistics, as compiled by the RBI for the year 2001-02, are available only for the first half of the current year. A tentative assessment of the BOP outlook for the current year indicates that though the current account deficit in 2001-02 might widen to some extent,  it is expected to remain within 1 per cent of GDP. The widening of the current account deficit is mainly due to poor export performance. Merchandise exports (in US dollar terms) remained almost stagnant with export growth of only 0.6 per cent recorded by the DGCI&S data for the first nine months of 2001-02. On the other hand, the pressure on trade account eased significantly due to moderation in oil import bill following softening of international oil prices after September 2001.

1.94  Net inflow of invisibles, despite larger outflows on account of interest and dividend payments, is expected to remain broadly at last year’s level, supported by the continued buoyancy in software service exports and private transfers. The widening of the current account deficit will, however, be more than matched by the expected net capital inflows from normal sources, resulting in large accretions to reserves.

1.95  During the current financial year (2001-02) so far, the foreign currency assets of the RBI have increased by about US $7.01 billion from US $39.55 billion at end-March 2001 to US $46.56 billion at end January, 2002. Total foreign exchange reserves (including gold and SDRs) at end January,  2002 amounted to US $49.48 billion, providing cover for about 10 months of estimated imports in 2001-02.

Exchange rate developments

1.96  The exchange rate of the rupee against the US dollar continued to be broadly market determined. During 1999-2000, the exchange rate market displayed reasonable stability, with the rupee depreciating by about 2.9 per cent from the annual average of Rs.42.07 per US dollar in 1998-99 to Rs.43.33 in 1999-2000.  In contrast, the year 2000-01 witnessed significant downward pressure on the rupee-dollar rate from middle of May 2000. The foreign exchange markets were affected by considerable uncertainty with the rupee depreciating by 6.7 per cent between end-April and end-October 2000 from Rs. 43.655 per US dollar to Rs. 46.775. Since November 2000, the situation showed large improvements with the forex markets becoming relatively stable.  Overall, the rupee depreciated against the US dollar by 5.15 per cent to Rs. 45.68 per US dollar during 2000-01.

1.97  The world economy experienced one of its worst shocks in recent times in the aftermath of the September 11, 2001 events in the United States. Foreign exchange markets in India also became volatile with the rupee depreciating by 1.3 per cent vis-a-vis the US dollar during September 10-20, 2001. Adverse external developments after September 11, 2001 and their effect on India’s financial markets, necessitated quick response for injecting liquidity and providing overall comfort to the markets. The RBI announced several measures for stabilizing domestic financial markets during the period September 15-25, 2001. These measures had the desired effect of moderating possible panic reactions and reducing volatility in financial markets, particularly in money, foreign exchange and Government securities markets.  As at the end of January  2002, the exchange rate of the rupee was Rs.48.58 per US dollar, showing a depreciation of 4.0 per cent, compared with the rate of Rs.46.64 at the end of March 2001.

Reform initiatives in the external sector

1.98  Several measures were announced during the year as part of the on-going reform process in the external sector.



Removal of Quantitative Restrictions (QRs)

1.99  The EXIM Policy announced in March 2001 has completed the process of removal of QRs on BOP grounds by dismantling restrictions on the remaining 715 items. Out of these 715 items, 342 are textile products, 147 are agricultural products including alcoholic beverages and 226 are other manufactured products including automobiles. The Policy has, however, put in place necessary mechanisms to provide a level playing field to domestic players vis--vis imports. These mechanisms include shifting of imports of certain products under the state trading category, making imports subject to various existing domestic regulations on health and hygiene and environment, and need for bio-security and sanitary & phyto-sanitary permit for imports of primary products of plant and animal origin.The policy has also established a monitoring mechanism to monitor imports of 300 sensitive items on a regular basis.

Doha Conference

1.100  The fourth WTO Ministerial Conference was held at Doha, Qatar from 9-14 November, 2001 to decide upon the future work programme of the WTO. While there were strong pressures to launch a comprehensive round of negotiations including multilateral regimes on investment, competition policy, trade facilitation, government procurement and environment, India was opposed to overburdening of the multilateral trading system with non-trade or new issues in the agenda. It felt that WTO already had a sufficiently large agenda consisting of mandated negotiations and mandated reviews and, therefore, India underlined the need for resolving the implementation issues, arising from the current agreements in a time bound manner before addressing new issues for negotiations. 

1.101  India played a proactive role in the deliberations at the fourth Ministerial Conference at Doha. It wanted a genuine resolution of implementation related concerns, increased market access in agriculture, sufficient flexibility and clarity under TRIPS for public health policies and was strongly opposed to introduction of non-trade issues like labour in the agenda. It was able to ensure adoption of an agenda that emphasised not only trade but also the developmental goals and priorities of developing countries. The outcome of the Conference takes into account a number of concerns expressed by India. With the Doha Declaration laying down the agenda for the forthcoming trade talks, the focus will now shift to the work programme in WTO. India, along with other developing countries, would work to ensure that their interests and concerns are adequately taken care of in the work programme.

Tariff and EXIM Policy

1.102  The existing 10 per cent surcharge on customs duties was taken off thereby bringing down the peak level of customs duties to 35 per cent. Exporters were allowed partial backloading of withdrawal of tax benefits under Section 80-HHC of the Income Tax Act. Concessions available for infrastructure by way of 10-year tax holiday were extended to the developers of Special Economic Zones (SEZs). Specific thrust was put on agricultural exports by announcing establishment of Agri-Economic Zones. A Market Access Initiative (MAI) scheme was introduced for boosting exports, under which the Government would assist the industry in research & development, market research, specific market and product studies, warehousing and retail marketing infrastructure in select countries and direct market promotion activities through media advertising and buyer- seller meets. Interest rates on export credit were rationalised by indicating them as PLR linked ceiling rates (as against specific rates).   To boost exports, duty drawback rates were revised upwards and value caps under DEPB abolished for a number of export products. A special financial package was also announced for large value exports (annual exports of over Rs 100 crore) of selected products.  Besides these short term measures Government also unveiled a medium term export strategy to achieve a quantum jump in exports over the next five years.


Capital account

1.103  As indicated in Box 1.1 a host of measures were undertaken for further liberalising the FDI regime. The defence industry has been permitted FDI up to 26 per cent, subject to licensing. The dividend balancing condition for 22 consumer items was withdrawn, as was the cap on foreign investment in the power sector. International Financial Institutions like ADB, IFC, CDC etc. were allowed to invest in domestic companies through the automatic route, subject to SEBI/RBI guidelines and sector specific caps on FDI.

1.104  The Non-Banking Financial Companies (NBFCs) have been permitted to hold foreign equity up to 100 per cent in holding companies. Foreign investors have been allowed to set up 100 per cent operating subsidiaries (without any restriction on number of subsidiaries) without the condition of disinvesting a minimum of 25 per cent equity to Indian entities, subject to specified investment obligations. Joint venture NBFCs having 75 per cent, or less than75 per cent foreign investment, have also been permitted to set up subsidiaries for undertaking other NBFC activities. The automatic route has been made available to  the information technology sector, even when the applicant company has a previous joint venture or technology transfer agreement in the same field. Offshore venture capital funds/companies have been allowed to invest in domestic venture capital undertakings as well as other companies through the automatic route, subject to SEBI regulations and sector specific caps on FDI. Payment of royalty upto 2 per cent on exports and 1 per cent on domestic sales have been allowed under the automatic route on use of trademarks and brand name of the foreign collaborator without technology transfer.

External Debt

1.105  The external debt-GDP ratio has been declining continuously over the years. The ratio improved from 38.7 per cent at end-March 1992 to 22.3 per cent at end-march 2001 and further to 21 per cent at the end of September 2001. The absolute level of external debt rose marginally from US $ 99.61 billion at end March, 2001 to US $ 100.38 billion at end September 2001.  The share of short-term debt to total debt declined from 10.2 per cent at end March 1991 to 2.8 per cent at end September 2001. The debt service ratio declined from a peak level of 35.3 per cent of current receipts in 1990-91 to 16.3 per cent in 2000-01. The improvement has been the result of concerted and continued efforts of prudent external debt management strategy undertaken by the Government. It is particularly noteworthy that for the first time, the World Bank has classified India as a less-indebted country.



Issues and Priorities

1.106  India has now gone through more than a decade of economic  reforms.  Beginning in 1991, the thrust of reforms was fiscal stabilisation and the initiation of major structural reforms aimed at de-regulation of the economy to induce accelerated investment, growth, employment, and hence reduction in poverty. A good number of these original objectives have been realised.  GDP growth in the 1990s, after the initial year of reforms in 1991-92, was higher than that obtained in the 1980s. The external sector has been brought into balance with a comfortable balance of payments that is sustainable; foreign currency assets have risen from less than US $1 billion in 1991 to over US $45 billion today; and debt service has been brought to very comfortable levels, so that India is now internationally regarded as a “less indebted” country.  Average inflation has been brought down from 10.6 per cent in 1990-91 to 1995-96 to 5 per cent in the last five years.  Poverty has fallen from 36 per cent in 1993-94 to 23 to 26 per cent in 1999-2000 according to alternative estimates; and literacy has risen substantially from 52 per cent in 1991 to 65 per cent in 2001.  Despite all these achievements, however, there are major challenges with respect to the sustenance of high economic growth in the years to come.

1.107 After the initial exuberance of GDP growth in the initial period of the reform process there has been an unmistakable slow down in subsequent years. Growth in industrial value added averaged 8.5 per cent per year from 1993-94 to 1996-97. This has fallen to about 4.8 per cent per year in the last four years, 1997-98 to 2000-01. Similarly, annual growth in value added in agriculture and allied sector from 1993-94 to 1996-97 averaged 4.5 per cent whereas the annual growth in the last four years has averaged only 1.2 per cent. The agricultural slowdown has taken place at least partly because of irregular and unevenly distributed monsoons during the latter period. Growth in infrastructure has also been slow, particularly in the power sector.  Hence the key problem facing the economy today is the reinvigoration of economic growth in the current decade.  The momentum achieved in the 1990s must not be lost.  Policy initiatives and deepening of reforms are needed in each of these areas to unleash competitive forces and stimulate growth.

1.108 The slow down in economic growth has been exacerbated by the intractability of high fiscal deficits.  Despite the efforts made to curtail expenditure and increase revenues, it has proved difficult to reduce the fiscal deficit below 5 per cent of GDP.  The deleterious impact of such a high deficit on the economy has been made worse by similar levels of deficits being recorded by State Governments, resulting in total fiscal deficit of the central and state Governments amounting to around 10 per cent of GDP, a situation not dissimilar to that prevailing in the early 1990s.  The persistence of such high fiscal deficits and the ever increasing debt service payments constrain the ability of Government at any level to undertake the necessary expenditures for productive investment for the provision of essential public services and also crowd out the more efficient private sector.  Furthermore, the pressure of market borrowing by the Government has served to increase real interest rates in the economy at the cost of all other economic actors.  The restoration of high economic growth would be difficult to achieve without a significant and sustained reduction in the fiscal deficit.

1.109 The Indian financial sector and capital market has served the economy well over the last few decades.  While spread of banking in the country was helped greatly by the nationalisation of banks in 1969, it also stifled the competitive forces in the sector.  Similarly, safe insurance products have been available to the public since the nationalisation of insurance but the deepening of the sector was slowed down. These arrangements functioned well in the controlled economy of the 1970s and the 1980s.  The financial sector reforms of the 1990s, the deregulation of interest rates and the tightening of prudential regulation of banks and financial institutions have done much to impart efficiency, transparency and competition on the banking industry.  The introduction of new private sector banks and insurance companies has injected a degree of competition and new dynamism into the financial sector.  The time is now ripe for carrying forward further financial sector reforms so that the real economy can benefit from a modernised financial sector that exhibits high productivity levels, greater diversification of the financial sector and provides a greater variety of instruments that serve more efficiently the emerging needs of the economy and the real sector for investment and production.

1.110 The key disappointment of the 1990s has been inadequate employment generation. Employment growth has slowed significantly in the 1990s relative to that in the previous decade.  However, this has been accompanied by a similar slowdown in the growth of the labour force. This has resulted from the increase in the average years of schooling of new labour force  entrants over the years. With the containment of expansion of the Government and the public sector as a whole, growth in organised public sector employment has been expectedly low.  Higher private sector growth has indeed resulted in higher organised private sector employment growth also, but this has not been adequate in volume to compensate for the slowdown in public sector employment.  A significant structural change in the Indian economy is indicated by the absolute fall in agricultural employment that has occurred for the first time. Non-farm employment growth has, however, not compensated adequately for the lack of growth in agriculture.

1.111 The recent slowdown in agricultural growth has  led to a new policy focus, which places greater emphasis on agricultural diversification through various reforms like  removal of licensing, stock limits and movement restrictions. This would  provide a fresh impetus for value addition in agricultural products and generate additional demand for agricultural workers. A key issue for focus therefore, is the achievement of a higher growth path, which would be employment-intensive, particularly in the rural areas.   


Policy Reforms For Growth

Fiscal Issues

Revenue Enhancement

1.112   The Economic Survey has laid stress on the issue of fiscal stabilisation and reforms for many years. This continues to remain the most difficult of the problems facing economic management in the country. In recognition of this problem the Government introduced the Fiscal Responsibility and Budget Management Bill in Parliament in December 2000.  The Bill mandates the Government to reduce its fiscal and revenue deficits over the next 5 years to specified sustainable levels.

1.113  The combined fiscal deficit of the Central and State Governments amounted to 9.6 per cent of GDP in 2000-01, causing the combined public debt of general Government to reach 85 per cent of GDP in 2001.  Considerable progress has been made over the past 10 years in the reform of the Indian tax system in all its aspects, but tax revenue receipts have remained below 10 per cent of GDP throughout the period. 

1.114  As might be expected, collections from custom duties have fallen significantly as a result of the ongoing tariff reform aimed at bringing customs tariffs in line with ASEAN levels.  Excise duty receipts have also not increased with the extension of the MODVAT/CENVAT system to more and more sectors, along with the slowdown in industrial growth in the past five years.  Recovery in industrial growth would inject some buoyancy into excise receipts. The other source of buoyancy in excise could be the removal of exemptions that still continue and the curbing of leakages arising from the exemptions extended to small-scale industries.  Thus the potential for increase in tax/GDP ratio from indirect taxes is limited. Indirect taxes in the country are excessively dependent on the industrial sector.  As the growth of the industrial sector has slowed, so has the collection of indirect taxes.  With structural change in the economy resulting in greater growth in the tertiary sector the importance of extending indirect taxes through the service tax to this sector assumes great importance. The state level Value Added Tax (VAT) is now to be introduced in April 2003. The much needed policy reform to extend service tax to all tertiary sector activities can then be taken up.  An inter linked full scale VAT system can then be thought of.  With the increasing weight of the tertiary sector in GDP its effective taxation is essential to improving the tax/GDP ratio.

1.115  Direct taxes have indeed increased over the decade from about 1.9 per cent of GDP in 1990-91 to about 3.3 per cent of GDP in 2000-01, so that their share in gross tax revenue has increased from 19 per cent to 36 per cent over the same period.  The main potential for improvement in the tax/GDP ratio continues to be in the area of direct taxes, particularly that in personal income tax.  An examination of the available data on income distribution in the country suggests that despite the substantial reduction in income tax rates that has taken place, compliance among non-salaried income tax payers remains low.  The key tax policy and governance issue therefore relates to the enforcement of greater compliance in the personal income tax area.  The introduction of the One-by-Six scheme has done much to bring increasing numbers of people with taxable incomes into the tax net.  But better systems are needed to ensure improved compliance of higher income tax payers. The probability of improving the fiscal health of the country depends crucially on much greater acceleration in the collection of direct taxes. 

1.116  With the essential components of tax reforms in place, the potential for increased tax revenues lies mainly in instituting more efficient tax collection methods in the country.  What is required is wholesale modernisation of the tax administration which relies more on improved systems to enforce compliance rather than the traditional police methods of search, seizure and the like.  This will become feasible as greater emphasis is placed on extensive use of information technology, data warehousing, data mining and analysis, and use of economic research. With the introduction of unique tax identification numbers, better coordination between different taxes would also help in enforcement.

Expenditure Management

1.117  The continuous attention that has been paid to expenditure management has kept total Central Government expenditure in the range of 14 to 15.8 per cent of GDP over the past decade. General Government expenditures have indeed been restrained though further reduction is possible through the implementation of the recommendations of the Expenditure Reforms Commission.  The main components of expenditure that have been increasing are interest payments, subsidies, and pensions (after the Fifth Pay Commission implementation). The fall in inflation unaccompanied by a compensating fall in nominal interest rates has also subjected the government to higher real interest rates along with the rest of the economy.  The cut of 1.5 per cent points in administered interest rates in the last budget redressed some of these imbalances.  However, the problem of high administered real interest rates remains with us. Making contractual savings subject to market related interest rates is therefore essential for containing the interest payments of the Government, as also for reducing interest rates for the economy.

1.118  Subsidies remain a continuing problem in the expenditure structure of the Central Government.  The elimination of export subsidies in 1991 has not been followed up by elimination of other existing subsidies.  The continuation of the food subsidy will always be essential for alleviating the needs of poor households.  It stands to reason, however, that with falling rates of poverty the magnitude of justifiable food subsidy should also fall proportionately on a continuous basis.  This has not happened because of the existing system of food management and public distribution in the country.  The continued high Minimum Support Prices (MSP) applied to wheat and rice and near monopoly procurement by FCI have led to an unsustainable situation where food stocks with FCI have risen to levels that have little probability of being used.  Despite the extension of low prices for people below the poverty line the offtake of PDS (Public Distribution System) food grains has not increased.  It is essential, therefore, to reform the existing food management system in a direction that ensures food security and availability of affordable foodgrains to the poor on the one hand, and more efficiency and greater investment of private trade on the other. Little purpose is served in carrying food stocks with Government beyond these requirements. The expenditure on food subsidy is effectively crowding out more effective expenditure on essential infrastructure and social needs.  Concurrently, Government guaranteed bank credit for food stocks also crowds out other bank lending. Hence it is now time to find more innovative ways of providing food subsidies to the poor, without affecting the whole food economy and marketing systems. Simpler systems like food stamps or their variants can be considered. 

1.119  The fertiliser subsidy has long been an area of concern and different high level committees have recommended possible courses of action.  As announced in the Budget Speech of 2001-02, the implementation of the report of the Expenditure Reforms Commission on reform of the retention price system in fertiliser along with fertiliser price revisions will help in gradually bringing down fertiliser subsidy over the next five years.  The existing retention price system in fertiliser provides no incentives for improvement in productivity of investment or for energy efficiency in fertiliser plants.  A substantial portion of the fertiliser subsidy actually goes to inefficient high cost production rather than farmers.  Accelerated implementation of fertiliser price reform is essential to reduce fertiliser subsidy to sustainable levels and also make the subsidy better targeted and more transparent.

1.120  The other key reason for the stubbornness of the fiscal deficit is the indirect effect on the exchequer of the levy of inadequate user charges for most public services in both the central and state levels.  Uneconomic and low user charges in sectors such as power, road transport, irrigation and the like at the state level impair state budgets. They impact on the central budget as well, through non-payment or inadequate payment to Central Government utilities. Similarly, unbalanced tariffs in central services such as the railways lead to financial losses which then have to be compensated for by the central budget. With the deteriorating financial condition of the railways they have not been able to make adequate dividend payments to the Central Government in the last two years.  Effectively, higher budgetary allocations have to be made than would otherwise be the case.  Most such subsidies are poorly directed and do not necessarily benefit the poor.  The levy of appropriate user charges on most services is essential for restoring fiscal health. As economic user charges are levied on such services, operational efficiency also has to be ensured through appropriate management reform so that prices are kept at affordable levels.

1.121   The high fiscal deficit is often felt to be of only academic interest. It is also argued that high revenue deficits are the cause for concern, and not fiscal deficits. This would be true if the non-revenue fiscal deficit would result in investment, which provides adequate returns commensurate with the cost of borrowing. This has so far not been the case, with the result that today’s fiscal deficit results in tomorrow’s revenue deficit.  Equal attention therefore has to be paid to containing both the revenue and fiscal deficits. Public borrowing for public investment is indeed justified, and should be undertaken. What is necessary is to ensure that investment is done effectively so that adequate returns are received by the Government. This can be done if appropriate user charges are levied on public services.

1.122    In summary, the problem of fiscal deficit has to be addressed both on the revenue side and the expenditure side. There has been a popular tendency to focus excessively on expenditure reduction, but this has proved difficult with the rigidity in the structure of Government expenditure. Revenue enhancement now lies more in enforcing compliance in direct taxes and in extending the service tax.



1.123  The current state of agriculture in the economy provides a contrasting picture of low growth amid plenty.  Despite the slowdown in the growth of foodgrain production and in productivity, foodgrain stocks at 60 million tonnes are now at unprecedented and unsustainable levels. Capital formation in agriculture has been slowing throughout the 1980s and 1990s with public investment showing a particular downtrend.  Public expenditure in agriculture has exhibited some substitution from investment to consumption expenditure in the form of increasing subsidies and in various transfer payments made through a variety of poverty alleviation schemes.

1.124  The response to the food crisis of the late 1960s was to promote the green revolution in rice and wheat through the provision of a package providing research and extension services, inputs like improved seeds, fertiliser, and irrigation and assured offtake through MSP based public procurement. This has been implemented successfully over the past 30 years. However, with mounting foodstocks this strategy for agricultural growth has now played itself out. The attainment of a high GDP growth rate in excess of 7 per cent will be difficult unless there is an accompanying acceleration in agricultural growth.  It has become increasingly evident that this calls for a paradigm shift in policy of the last 30 years which had mainly concentrated on improving the production of foodgrains to provide for essential food security to the economy.

1.125  The National Sample Surveys show that, as might be expected, with continuing income growth in both urban and rural areas over the last two decades, the proportion of household expenditure on items other than food has been increasing. Conversely, household expenditure on food has fallen as a proportion of their total expenditure from 60 per cent in 1977-78 to 48.1 per cent in 1999-2000 in urban areas, and from 64.3 per cent to 59.4 per cent in rural areas. With rising incomes, peoples’ diets are becoming more diversified. The share of cereals in their diet has been falling, being substituted by other foods as their food preferences have been changing. Expenditure on cereals in total household food expenditure has fallen from 40.8 per cent in 1977-78 to 31.8 per cent in 1999-2000 in urban areas, and from 58 per cent to 44.1 per cent in rural areas. Correspondingly, substantial increases have taken place in the proportion of food expenditure on other foods such as fruits, vegetables, meat, eggs, fish and milk. Hence, although it is essential to ensure food security through adequate production of foodgrains in the country, the thrust of agricultural policy now must shift to accelerating the growth of non-cereal food products in recognition of the changing diet composition and, to other non-food agricultural products. The growth experienced in the production and consumption of milk, poultry, fish and meat suggests that there is great potential for further growth in these products. Similarly, increasing incomes and urbanisation are also providing the demand stimulus for greater production and consumption of fruits and vegetables. As urbanisation proceeds there will be an accelerating need for basic processed foods as well.

1.126  Policies for stimulating production in non-cereals and non-food crops are inherently more complex than the policies required for accelerating foodgrains production.  This set of products is far more heterogeneous than foodgrains and policies therefore have to be much more responsive to the different requirements of different products and different regions. The procurement, preservation, transportation and marketing of these products are also much more complex than that of foodgrains.  Policy measures to tackle each of these problems would have to be much more decentralised.

1.127  The agriculture sector has continued to be constrained by a number of controls and regulations that impose limits on storage and restrict free movement of agricultural products. Most of these control orders have been issued by States under the provisions of the Essential Commodities Act (ECA). As announced in the Finance Minister’s Budget speech of 2001-2002, the provisions of the ECA have been reviewed and the provisions allowing the States to issue such orders have been withdrawn. Implementation of this and removal of other state control orders should help greatly in freeing up the storage and movement of agricultural products in the country. There are other legislations like Agriculture Produce Marketing Act that prohibit farmers from selling directly to buyers for food processing and which make contract farming difficult. There are other regulations such as the Milk and Milk Products Order (MMPO), which constrains the growth of milk processing by restricting the entry of large processors. The net effect of many of these regulations is to increase the distance between the farmers and the market and inhibit development of food processing on a large scale in the country. Consequently, the price realization by the farmers is a small fraction of the final retail price of agricultural products. The removal of such regulations would do much to promote higher growth in the production of marketable agricultural commodities, and in food processing. These are the activities that will induce much needed acceleration in employment growth in rural areas - both farm and non-farm - and in small and medium towns.

1.128  Bringing the farmer closer to the market requires much better rural infrastructure.  Accordingly, the Government has launched a focussed programme of investment in rural infrastructure concentrating particularly on improving the connectivity of all villages in the country through the provision of all weather roads, telecommunications and rural electrification.

1.129  The shift of farm production from cereals to other agricultural products is also being constrained by the availability of relatively high Minimum Support Prices for wheat and rice. A new focus on food management necessitates a review of the current MSP system, so that there are adequate signals to the farmers to shift to other activities that provide greater scope for improvement in income realisation through value addition.



1.130  The industrial sector has been the focus of much of the economic reforms carried out over the last decade.  The slowdown in industrial production over the past five years is therefore of particular concern.  The reforms of the 1990s, which had removed entry barriers to investments, opened trade, provided free access to foreign technology, opened up foreign direct investment, and removed barriers inhibiting access to capital markets were expected to result in sustained high growth in industrial production.  It was expected that, in keeping with the country’s comparative advantage, the structure of investment in industry would shift from more capital intensive industries to more labour intensive ones.  It was also expected that such a shift would provide for greater profitability and earnings growth, more export-oriented production and greater employment opportunities in industry.  However, progress in this direction has been limited after the initial growth episode.

1.131  With such far reaching economic reform and the changing international environment, Indian industry must be enabled to compete through the provision of an economic regulatory structure, which allows for restructuring on a continuous basis.  This requires efficient bankruptcy procedures, development of a market for distressed assets, provisions for easy transfer of assets from one owner to another, and a flexible labour market.  The Government has recognised the need for such flexibility. The Bill to establish National Company Law Tribunals to address issues of sickness and bankruptcy has been introduced in Parliament, along with that for the abolition of the Sick Industrial Companies Act (SICA) and the dissolution of the Board for Industrial and Financial Restructuring (BIFR). As these Bills get enacted the process of industrial restructuring should become easier and faster.  Similarly, Government has initiated the process for amending labour laws to provide for greater flexibility in employing labour, and for out sourcing of services so that labour use becomes more flexible and efficient. Progress in the implementation of these initiatives is essential to enable Indian industry to restructure itself to cope with the more competitive domestic and international environment, and to induce employment-generating industrialisation.

1.132  The key rigidity inhibiting Indian industry from investing in labour using activities that are export oriented is the continuation of small-scale industry reservations. With the removal of quantitative restrictions on almost all imports, this rigidity has become even more anomalous.  Whereas large foreign enterprises can produce all these products and now also export them to India, large Indian enterprises are not permitted to manufacture these products. A beginning has been made with the de-reservation of a number of items connected with garments, toys, shoes and leather goods.  It is essential now that this process be accelerated so that Indian industry can invest freely in these activities and compete with the rest of the world.  Greater investment in these areas will be a key ingredient of employment oriented policies that are essential for generating greater industrial employment in the country.  Available data suggest that organised sector industrial employment in India is less than a fifth of that in China. The rigidities in labour legislation and small-scale industry reservations have contributed to this huge imbalance.

1.133  High interest rates have persisted in the Indian economy throughout the last five years.  Studies suggest that the share of interest in costs of Indian industry is perhaps among the highest in comparable developing countries.  A particular problem faced by some industries is that heavy investments were made during the exuberant 1994 to 1997 period, when nominal interest rates were particularly high.  With the reduction in both inflation and nominal interest rates these legacy interest rates have now resulted in significant debt overhang for these industries. Proactive restructuring policy would also need to address this issue of corporate debt restructuring.  This, however, must be done carefully so that moral hazard issues do not arise. The write down in value of impaired assets would enable the take over of such industries by others who can then run them profitably.  This reiterates the need for a liquid market for impaired assets.  This requires various legislative actions to do with foreclosure and securitisation, which have already been announced.

1.134  In the presence of increased competition and some uncertainty in the international environment there is an even greater need to provide for stable and predictable tax policies.  Considerable progress has been made in this area over the last few years with the tremendous simplification and rationalisation that has been carried out in all areas of taxation: corporate tax, excise and customs. In the area of customs, the Government has announced the reduction of maximum custom duties from the current level of 35 per cent to 20 per cent in three years.  This should provide adequate advance information for industry to act accordingly.

1.135  All of these measures should help in reviving industrial investment and growth in the country, which is essential for the acceleration of overall GDP growth and for employment generation.



1.136  Infrastructure being among the most cited impediments to the achievement of higher growth, it has received the highest policy attention on a continuous basis since the early 1990s.  Considerable success has been achieved over these years in some sectors.  

1.137  After the imposition of the fuel cess of Re. 1 per litre on diesel and petrol, the financing of the National Highways Development Programme (NHDP) became feasible. Proceeds from the cess are also being used to provide financing for state and rural roads.  Implementation of the National Highways Development Programme for the golden quadrilateral is well underway and is expected to be implemented within the stipulated time period. The Golden Quadrilateral is expected to be largely completed by the end of 2003 and the North SouthEast West Highway by 2007. The rural roads programme has also taken off. The fuel cess, seen as a very effective user charge for the financing of roads, illustrates how it is quite possible to invest in infrastructure, as long as there is the levy of adequate user charges and financing is therefore assured. As progress in the implementation of the NHDP proceeds, the fuel cess can be leveraged further by the consistent application of affordable toll on all four-lane highways. The limited experiments with innovations such as annuity based projects can be extended effectively, particularly if they are leveraged further with levy of tolls.  This would help in providing for adequate finance for the completion of the NHDP and for maintenance and operation of the highways once they are in operation. 

1.138  The second sector in which relative success has been achieved is the telecommunications sector. Growth in telecommunications has been impressive right through the past decade with both the public and private sectors growing rapidly. Significant progress has been made through the Telecommunications Regulatory Authority of India (TRAI) in clearing up a number of regulatory hurdles in the opening up of all segments of the telecommunication sectors to competition.  The success of this programme is particularly indicated by falling prices in long distance and mobile services with the introduction of competition. Once again, the success achieved in the telecommunications sector also reflects the levy of adequate user charges for the financing of investments and for operation and maintenance.  On the regulatory side, greater attention needs to be given to all the issues that will arise as a result of increasing convergence between different kinds of services.  The Government has already introduced the Convergence Bill in Parliament in order to provide for an appropriate regulatory environment.

1.139  The port sector has also achieved some degree of success with new private investments coming in new container terminals and in new private minor ports. Corporatisation of port trusts has also begun.  The tariff regulatory mechanism has also performed relatively well under the Tariff Authority for Major Ports (TAMP). Although there is still some progress to be made in the regulatory structure for ports for the facilitation of greater private sector investment, here also the availability of adequate user charges has enabled appropriate new investments, which are remunerative.

1.140   The other infrastructure sectors such as railways, power, urban infrastructure and civil aviation need to see much greater reform before investments can be made for inducing further growth.  In each case the regulatory mechanism is still inadequate, as is the provision of user charges.  A great amount of effort has been made to reform the power sector and progress has been made in a number of states in the restructuring of State Electricity Boards and the formation of State Electricity Regulatory Commissions (SERCs). The key issue inhibiting investments in this sector is the presence of large transmission and distribution losses, a high proportion of which is essentially theft, and the levy of inadequate user charges on different consumer segments.  The net result of these inadequacies is an average loss of almost one rupee  for every unit of electricity generated in the country.  It is naturally difficult for any commercial investment to be made, unless the revenue generated is at least equal to the cost of supply.  Reform in this sector must therefore concentrate exclusively on the curbing of theft, and the restructuring of user charges, so that investment in this sector can again become viable in both the public and private sectors.  These measures must now be taken with some degree of urgency if adequate power investment is to take place in the next 5 years, in both the public and private sectors.  The Central Government will have to induce state level reforms with a combination of incentives and penalties.

1.141  Similarly, problems exist in the Railways which have suffered from non-remunerative investments over the past decade. With the implementation of the NHDP over the next 5 to 10 years the railways will face much greater competition from road transport.  In view of the higher fuel efficiency of railway transport and other positive externalities, it is of the utmost importance that a bold reform programme is launched with urgency so that appropriate investments are made for achieving higher growth through technological upgradation, modernisation, efficiency and commercial orientation in the railways in the years to come.    This will be helped greatly if the Indian Railways goes through a far reaching reform in orientation, making it more commercially oriented and customer focussed.


1.142  The benefit of introducing competition in domestic civil aviation has already been seen, through the upgradation of standards that came with the entry of new private airlines.  However, progress in the improvement of airports has been grossly inadequate. The upgradation of India’s international airports is essential to attract greater tourism interest in India, the growth in which has slowed down significantly.  The current structure of air traffic and forecasts indicates that unless the major international airports in Delhi and Mumbai are significantly upgraded, capacity constraints will inhibit the growth of air traffic in the near future and hence of tourism.  As these airports are privatised, the regulatory system will also need restructuring for overseeing monopoly airports and ensuring continued upgradation in air services.


Urban Development

1.143  The 2001 census shows that the level of urbanisation in India has increased from 25.7 per cent in 1990-91 to 27.8 per cent in 2001.  Some states such as Tamil Nadu and Maharashtra are now more than 40 per cent urban.  There are now 35 cities with a population of above 1 million, as compared with 23 in 1991.  As the proportion of the urban population continue to grow, investments in urban infrastructure for the provision of services such as roads, water supply and sewerage, urban transportation and the like will need to be much higher than they then have been in the past.  Recent studies also suggest that large productivity gains can be obtained, if regulatory impediments to land assembly, development and construction in urban areas are removed.  Among these, the Urban Land Ceiling Act has already been repealed by the Central Government, but most State Governments are still to follow.  Similarly most states have Rent Control Acts, which inhibit the construction and maintenance of rental housing.  Furthermore the municipal tax system and levy of user charges continues to be grossly inadequate to finance sustained infrastructure investments in a viable fashion.  New initiatives are essential at the city, state and central levels to introduce reforms in this area. The strengthening of municipal authorities in all their aspects is now an urgent need.

1.144  Much therefore remains to be done in the area of infrastructure.  That successes have been achieved in some sectors suggests that the problems that exist are amenable to solution.  The provision of efficient and affordable infrastructure is essential for inducing investment in competitive activities in all other sectors.


Financial Sector and Capital Market

1.145  Until late 1980s, the Indian financial system was dominated by the banking sector, with the then unsophisticated securities market playing a very small role. Ever since the bank nationalisation of 1969, the banking sector had been dominated by the public sector along with a high degree of financial repression characterized by administered interest rates and allocated credit. Regulatory standards had also not been developed adequately.

1.146  Each of these features has been the focus of substantial policy change over the last decade. The financial system has experienced tremendous growth in the sophistication and size of non-bank intermediation. Although the stock markets have undergone a number of shocks and irregularities over the past decade, they have over time developed sophisticated institutional mechanisms, harnessing modern computer technology and improving the incentives of the administrators of market infrastructure. The mutual fund and insurance industries have also been opened to new private sector entry: the private sector market share in the mutual fund industry is now 50 per cent.

1.147  Financial repression has eased substantially with the deregulation of interest rates and substantial removal of credit allocation except for the priority sector quota. The regulatory framework of banking has developed through improved regulations regarding asset classification, provisioning, income recognition and a quest for lower leverage. New competition in banking has been introduced through the limited entry of 8 new private banks.

1.148  As a result of the policy changes made during the 1990s, the private sector has made significant progress in finance. It has a dominant position in securities intermediation, a 50 per cent market share of mutual funds, just under 20 per cent market share in banking, and a new presence in the insurance market. However, the public sector continues to dominate the financial system through public sector banks and financial institutions.

1.149  With the considerable progress made over the last decade, the time is now ripe for further development of the Indian financial sector. The reduction of Government holding in public sector banks up to 33 per cent will become possible once the amendment to the Bank Nationalisation Act is passed in the Parliament. The dominance of public sector finance firms has important consequences for the allocative efficiency of the financial system and for corporate governance in the country. With the domination of public sector finance firms, a controlling interest in many listed companies is effectively held indirectly by the Government through Government owned or sponsored institutions. This inhibits the market for corporate control and the development of widely held, board managed, professionally run companies. The disinvestment and privatisation programme has also been inhibited by the lack of institutional investors in the private sector. The introduction of private sector insurance companies and pension funds will help in removing some of these difficulties in the capital market. The international trend in the past decade or two has been the convergence of different segments of the financial and capital markets to result in the emergence of financial conglomerates.  The Indian regulatory system also needs to evolve to enable the development of such conglomerates, which will be necessary for Indian institutions to be able to compete efficiently with the much larger international financial sector companies.

1.150  Difficulties in the enforcement of creditors rights has also been handicapping the industrial restructuring process. Industrial restructuring is a natural consequence of the changing economic policy environment of the kind experienced in India since 1991. The health of the financial institutions and banks who are creditors of impaired assets have difficulties in recovering their dues. Hence, the enforcement of foreclosure and other procedures for up holding the rights of creditors need to be put in place. Such a policy regime would make it easier for banks and financial institutions to extend credit for higher investment in order to generate growth in all sectors of the economy.

1.151  The securities markets have experienced a steady stream of episodes of market irregularities in the decade of the 1990s. Even though the market design on the stock markets has made major progress, there are continuing concerns about the speed and effectiveness with which fraudulent activities are detected and punished. This should be the major focus of the development of the stock markets. In contrast, on the fixed income market, the market design continues to exhibit important weaknesses. The stock market can be an important role model, and a source of vibrant institutions, using which the market design of the debt market can be improved. The transformation of the US-64 Scheme of the UTI into a NAV-based Scheme has been a welcome and long overdue step. This step needs to be carried forward for undertaking other needed reforms in UTI.

1.152  The equity derivatives market is an important new milestone - in offering a new set of vehicles for risk management and for speculation to all economic agents in the country. The rapid takeoff of liquidity on the equity derivatives market, by world standards, is a reminder of the vitality and sophistication of the financial sector. The successful market design can now be extended to other areas of the economy, ranging from interest rates and currencies to commodities and bullion.


Summing Up

1.153  The Indian economy responded to the economic reforms of the 1990s with a higher growth performance than in previous decades. The economy has, therefore, shown that it is capable of achieving high growth rates in response to the implementation of appropriate economic reform policies. Consequently, higher growth rates in the rest of the decade can indeed be achieved through further deepening of the economic reform process. Second generation reforms have been initiated already and, as their implementation proceeds, acceleration in economic growth can be expected in the coming years. However, the crucial issue of fiscal imbalance at both the Central and State levels needs to be addressed with some urgency in order to improve the overall health of the economy.


1.154  Economic reforms are a continuous process which need to be adjusted as the economic environment changes,both domestically and internationally.  The year 2001 has been a difficult year for almost all economies of the world.  World economic growth slowed down as did trade growth.  The current signals are that recovery is expected in 2002.  This should help in the expansion of international trade and in the rejuvenating of Indian export growth.  As the world economy picks up, the deflationary trend experienced in the prices of commodities and manufactured products would also begin to be reversed enabling improved profitability in the Indian manufacturing sector as well.  The continued implementation of reforms along with this upturn in the economic environment is likely to help in regeneration of economic activity in the months and years to come.




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