1
SETTING OF THE STUDY
NATIONAL DEFENCE COLLEGE
(NDC 54)
ECONOMY, SCIENCE AND TECHNOLOGY STUDY – 2014
STUDY No. 2
SDS (CS)
SETTING OF THE STUDY
Appendices :
A
Basic Economic Concepts
B
12th Five Year Plan – An Over View
CHAPTER 1
INTRODUCTION
Development of Indian Economy - an Overall Perspective
1.
General
India’s economy - vibrant and robust till the nineteenth
century underwent a major transformation with the arrival of the British as the
colonial rulers. Much like other lesser colonial economies elsewhere, Indian
economy was reduced to a subservient entity in the colonial arrangement.
Predominantly agrarian and though endowed with large raw material resources, it yet
remained at the bottom of the industrial production chain as a provider of raw
materials to the burgeoning industrial sector in Britain and in turn recipient of
finished or manufactured goods. This arrangement destroyed the indigenous industry
and forced the farmers to turn to cash crops from food grains with grim consequences
of a food deficit and a dependent economy. The peculiar subservient nature of
economic relationship with UK resulting in unproductive consumption of social
surplus / savings by the State and intermediaries, including unilateral transfer of the
surplus to UK (5-10% of GNP every year) and, lack of protection of local production
through iniquitous tax structure and unproductive use of state revenues (from 18901947 nearly 50% was spent on defence), eroded the capital base and consequently
an impoverished economy was inherited at independence.
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2.
Though the growth of modern Indian industry began in the second half of
the 119th century, its growth was so stunted and paltry that the employment
generated was not sufficient to absorb surplus labour from the sudden collapse by
Indian handicraft and artisan-based industry from the uninhibited competition by
cheaper imported goods from Britain. The industrial development was mainly
confined to cotton, jute and tea in the 19th century and to sugar, cement and paper in
the 1930s. The iron and steel industry which began post-1907 remained small and,
even in 1946, cotton and jute textiles accounted for a third of factory work force and
more than half of value addition in the manufacturing sector. In 1947, the share of
modern industry was a mere 7.5% of the GNP. Foreign capital, pre- dominantly
British, dominated the industrial and financial fields and controlled foreign trade and
also part of the internal trade that fed the exports. British firms dominated coal-mine,
jute industry, shipping, banking and insurance and tea and coffee plantations either
directly or through their managing agencies, thus controlling majority of
Indian-owned companies. Yet there were positives, such as developments in the
surface communication infrastructure. The connection of the hinterland with ports,
through roads and railways led to paved roads (65,000 miles) and railway tracks
(42,000 miles) as also an efficient and modern postal and telegraph system. The
other important feature was a small but Indian-owned industrial base
3.
The trained human resource too was limited to a core of scientific and
technical manpower. In 1939 there were a mere seven engineering colleges with
2217 students and 10 medical colleges turning out 700 graduates every year.
Most managerial and technical personnel in industry were non-Indian. Yet the
Indian economy, at the time of independence, had an indigenous capitalist class with
an independent economic and financial base which was more dynamic than the
foreign capital. The Indian capital controlled 60% of large industrial units, while the
small scale industrial sector, which generated more national income than the
large scale sector, was almost entirely based on Indian capital. Indian joint stock
banks held 64% of all bank deposits. Indian-owned life insurance companies
controlled nearly 75% business and, the bulk of internal trade and part of foreign
trade was also in Indian hands though the economy was still small and the industrial
revolution yet to take off. In the final analysis, India at independence, stood out as a
poor, under developed, agrarian society seeped in gross poverty, illiteracy, s t a r k
social inequality with minimal infrastructure and not much to flaunt in the industrial
sector. This then, was the state of the India at large, from where it began its journey
through numerous iterations, with experiences happy, and not so happy, along the
way till the present when it is poised to emerge as one of the leading nations in
the world with a sound economic, scientific and technological base of considerable
reckoning.
4.
Post Independence – The Beginning. The aspirations of the national
leadership were to create a vibrant national economy on the socialistic-democratic
pattern. The State was the primary instrument of change, providing economic
structures to bring about development. In absence of a strong private sector and an
inadequate capital base, the State took upon itself the task of accelerating
capital creation and became an entrepreneur particularly of heavy as well as basic
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industries. The industrial policy of 1948 therefore emphasized on continuous
increase in production and its equitable distribution. It laid down that arms and
ammunition, atomic energy and railway transport would be the monopoly of the
Central G o v e r n m e n t . The St at e w o u l d a l s o be exclusively r e s p o n s i b l e
f o r establishing new undertakings in six basic industries viz. iron and steel, coal,
aircraft manufacture, ship building, mineral oils and telecommunications.
The
rest of the industrial sector was left open to private enterprise with a proviso that the
State would progressively p a r t i c i p a t e in these sectors also. The policy
resolution thus, envisaged a ‘Mixed Economy’ as a suitable basis for future
development of the country.
5.
This historical perspective is essential to understand the present day Indian
economy.
There have been many downturns and high points as the Indian
economy moved across a sinusoidal growth trajectory.
For purposes of this
study, the period since independence has been divided into two distinct phases of
economy viz., 1950-1990, a forty year period and the period thereafter,
since1991-92 were the watershed years in the history of Indian economy.
AIM
6.
The aim of the study is to arrive at a general understanding of state of
India’s economy, its scientific and technological prowess and to analyse associated
policies through economic, scientific and technological indicators.
CHAPTER 2
INDIAN ECONOMY IN THE CURRENT PERSPECTIVE
7.
India’s Growth Story
India’s growth story attracted the attention of the world when the economy
grew at an average of 8.5 per cent per annum during the period, 2004-05 to 2010-11.
This was achieved despite the strong negative spill-over effects of the global financial
crisis in 2008. With a view to minimize the impact of global financial crisis, the
Government announced stimulus measures in December 2008, January and February
2009 which were both sector specific and macro-economic in nature. These measures
in the area of easing of liquidity and credit expansion were being supplemented by
fiscal measures designed to stimulate the economy. In recognition of the need for a
fiscal stimulus, the government had consciously allowed the fiscal deficit to expand
beyond the originally targeted level because of the loan waivers, issue of oil and
fertilizer bonds and higher levels of food subsidy. Subsequently, while suggestions
were received for the continuance of the stimulus package from various stakeholders
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during the process of Budget formulation, some others wanted a roll back of the
measures on the strength of the recovery in growth in 2009-10 and the need to return
to the path of fiscal consolidation. Accordingly, after a careful consideration of the
current economic situation and acting on the recommendations of the Thirteenth
Finance Commission for shaping the fiscal policy for 2010-11, it was decided on
adopting a calibrated exit strategy from the expansionary fiscal stance. As a result of
these policy measures, India took the world by surprise by rebounding quickly from
the slower growth of 6.7 per cent in the year 2007-08 to record rates of growth of 8.6
per cent in 2009-10 and 9.3 per cent in 2010-11.
8.
However, there was a further downturn in the global economy in 2011 on
account of the sovereign debt crisis in Europe and the subsequent slump in the World
economy. As a result, India has been facing multiple economic challenges since the
year, 2011-12. The global slowdown has posed challenges for India in managing a
volatile external situation, aggravated by domestic constraints including bottlenecks in
the implementation of large projects, elevated levels of inflation and the tight
monetary policy pursued by the Reserve Bank of India. Uncertainties have been
exacerbated by an unsteady recovery in the advanced economies. The global crisis of
2008 and the subsequent sovereign debt crisis and recession in the Euro area reduced
the average growth rate of the global economy to less than 3 per cent during the period
2008-2012 as compared to greater than 5 per cent growth witnessed during the 20052007. Several emerging market economies, prominently China and India, rebounded
strongly in the immediate aftermath of the crisis. The uncertainty following sovereign
debt crisis in the Euro area hampered sustained recovery in advanced economies with
subsequent challenges in macro management in emerging market economies. With the
intensification of the sovereign debt crisis, the decline in real GDP growth rates
starting 2011 has been witnessed across advanced and emerging market economies.
9.
According to the World Economic Outlook (WEO, October 2013) published
by the International Monetary Fund, the growth rate of world output is projected to
slow from 3.2 per cent in 2012 to 2.9 per cent in 2013, prior to a revival in 2014.
Some growth revival is evident in advanced economies, especially in the US, though
significant downside risks remain. On the other hand, slower growth within a subdued
global milieu, presents newer macroeconomic challenges for many emerging
economies, including India.
10. FISCAL POSITION. Slowdown in growth, particularly in manufacturing, and
subdued sentiments in financial markets in first half of 2013-14 put pressure on the
fiscal front, especially on tax collections and disinvestment receipts. As per the data
on Union Government Finances released by the Controller General of Accounts for
April-November 2013, significant shortfall in growth in revenue receipts vis-à-vis the
growth envisaged in the Union Budget 2013-14 is observed. On the expenditure front,
as against the implied year-on-year growth of 16.4 per cent envisaged by BE 2013-14
over RE 2012-13, growth in total expenditure during April-November 2013 has been
17.7 per cent.
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The fiscal deficit for the year 2012-13 was contained at 4.9 per cent of GDP
vis-a-vis a target of 5.1 per cent of GDP in BE. As a proportion of BE, fiscal deficit is
placed at 93.9 per cent in April-November 2013. Recent steps introduced for fiscal
consolidation including reforms in administered prices would bolster the fiscal
outlook.
11.
Price Situation.
Overall WPI food inflation comprising primary food
articles and manufactured food products averaged 10.54 per cent in 2013-14 (AprilDecember) as compared to 9.03 per cent in the corresponding period of the previous
year. In December 2013, food inflation was 9.47 per cent as compared to 9.96 per cent
in December 2012 and 13.81 per cent in November 2013, indicating some easing of
inflationary pressures in food. While food inflation remained elevated, its drivers have
been changing over time. In 2012-13, inflation remained elevated across the board for
all major subgroups of food including cereals, pulses, vegetables, egg, meat & fish,
sugar and edible oils etc. However, in the current year, the primary contributors
include cereals, vegetables and egg, meat & fish.
12.
Inflation measured in terms of consumer price indices remained at higher
levels than WPI in the current year. Inflation for food items, which have a relatively
higher weight in consumer price indices, kept CPI inflation at a relatively higher level.
All India general inflation for Consumer Price Index- New Series (CPI-NS) averaged
9.87 per cent in 2013-14 (April-December) as against 10.04 per cent in the same
period last year. On the positive side, the inflation as per CPI-NS has come down from
11.16 per cent in November 2013 to 9.87 per cent in December 2013. The inflation
measured in terms of Consumer Price Index for Industrial Workers (CPI-IW)
averaged 10.86 per cent in 2013-14 (April-November) as compared to 9.85 per cent in
the same period last year. Inflation based on other group specific CPIs (CPI for
Agricultural Labourers and CPI for Rural Labourers) also remained in double digits.
13.
The Government and the Reserve Bank of India (RBI) monitor the price
situation regularly, as price stability remains high on the policy agenda. Various fiscal,
monetary and administrative measures have been taken to reduce inflation. Some of
the specific measures already in place include: reducing import duties for wheat,
onion, pulses and refined edible oils; banning export of edible oils and pulses;
imposing stock limits from time to time in the case of select essential commodities;
maintaining the Central Issue Price (CIP) for rice (at Rs 5.65 per kg for BPL and Rs.3
per kg for AAY) and wheat (at Rs 4.15 per kg for BPL and Rs 2 per kg for AAY)
since 2002; suspending futures trading in rice, urad and tur; fixing the Minimum
Export Price (MEP) of onion at USD 1150 per MT and allocating 195000 tonnes of
rice and 327000 tonnes of wheat for distribution to retail consumers under Open
Market Sales Scheme (Domestic) for the period up to March, 2014. As per Second
Quarter Review (October 29, 2013) of the RBI, the policy stance and measures are
intended to curb mounting inflationary pressures and manage inflation.
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14.
Agricultural Recovery. The moderate turnaround in growth during Q2
2013-14 has been helped by a revival in agriculture. As per the 4th Advance Estimates
released by Ministry of Agriculture, driven by increase in rice and wheat production,
food production is estimated at 255.36 million tonnes in 2012-13 vis-à-vis 259.29
million tonnes in 2011-12 (final estimates). As per the 1st Advance Estimates
(covering only kharif crops) released on 24.09.2013, production of food grains during
2013-14 is placed at 129.32 million tonnes (rice at 92.32 million tonnes and cotton at
35.30 million bales of 170 Kg each).
15. Industrial Production. The index of industrial production (IIP) [base: 200405] is the leading indicator of industrial performance. As per the latest IIP data,
industrial output growth rate was (-) 0.2 per cent during April-November 2013 as
compared to 0.9 per cent during the same period of the previous year. Combination of
global and domestic factors has led to deceleration in the industrial output during the
current year. The contraction in the growth was largely due to decline in mining sector
and manufacturing sector. Because of structural constraints, mining sector continued
to drag the overall industrial growth with its growth contracting by 2.2 per cent during
April-November 2013 as compared to 1.6 per cent contraction in the corresponding
period of the previous year. During April-November natural gas and crude oil
production has contracted by 15.1 per cent and 0.9 per cent. Coal production has
increased by 1.5 per cent. Manufacturing, which is the dominant sector in industry,
also witnessed contraction in its growth to 0.6 per cent during April-November, 2013
as compared to 0.9 per cent growth in the corresponding period of the last year.
Manufacturing sector contraction has been mainly due to poor performance of capital
goods and consumer durable goods segments. Auto sector and gems and jewellery
segments have contracted owing to lower demand. Sugar production has been
negative so far due to delayed crushing.
16.
The reasons for sluggishness in the manufacturing sector are multiple. The
rise in the policy rates coupled with the bottlenecks facing large projects took its toll
on the investments. Further, Indian manufacturing sector has not moved up the value
chain overtime. Due to low level of investment in R & D, India has not seized the
growing opportunities available in high and medium technology sectors in the global
market such as chemicals, machinery & equipment, electrical machinery, electronic
goods, etc. The capital goods output, which is the main driver of manufacturing
sector growth contracted by 0.1 per cent during April-November, 2013 as compared to
the contraction of 11.3 per cent during the corresponding period of the previous year,
which indicates that deceleration in this sector may have begun to bottom out.
17. Steps Taken to Revive Manufacturing Growth. The National Manufacturing
Policy (NMP) announced in 2011 aims at enhancing the share of manufacturing in
GDP to 25 per cent (from around 15 per cent at present) within a decade and creating
100 million jobs. Keeping this in view and the overall macro-economic situation, a
number of steps have been taken by the Government over the last one year for
promoting manufacturing sector growth, such as improving the efficiency of issuance
of clearances for large infrastructure projects, liberalizing FDI norms, resolution of tax
issues concerning industry, starting construction of dedicated freight corridors,
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improving the policy regime across a number of sectors like sugar, urea, gas, etc.
Some of the specific steps taken by the Government, inter alia, include the following:
(i) The Union Budget 2013-14 outlined several initiatives to boost investment,
especially in rural and urban infrastructure. This, inter alia,
included
encouragement to Infrastructure Debt Funds and enhancement of credit to
infrastructure companies, raising the corpus of Rural Infrastructure
Development Fund, and introduction of investment allowance for new high
value investments.
(ii) Allowing the private sector to mine coal in the capacity of Mine Developer
cum Operator (MDO) and deregulation of the sugar sector. Prices of certain
petroleum products have been raised and phased deregulation of diesel has
been initiated to contain the subsidy bill.
With a view to address important issues like delays in regulatory approvals,
problems in land acquisition & rehabilitation, environmental clearances, etc. the
Government has inter-alia, set up the Cabinet Committee on Investments(CCI) to
expedite decisions on approvals/ clearances for implementation of the projects. This
will improve the investment environment by bringing transparency, efficiency and
accountability in accordance with various approvals & sanctions.
The CCI has initiated action to remove the bottlenecks of stalled projects in the
sectors, such as power, petroleum & natural gas, mines, coal, shipping, etc. As per the
available information, the Project Monitoring Group (PMG) constituted to track large
investment projects has resolved implementation issues pertaining to 93 projects with
total estimated cost of Rs. 3,53,725 crore.
The Government is also promoting Public Private Partnership (PPP) as an
effective tool for bringing private-sector efficiencies for delivery of quality public
services. On account of the several policy initiatives taken by the Government in
recent years, India has emerged as one of the leading country implementing this
model. Since its constitution in January 2006, the Public-Private Partnership Appraisal
Committee(PPPAC) has approved 272 Central Sector Projects with TPC of
Rs.2,96,579.6 crore.
Also from the infrastructure financing perspective, the Government has taken
several important steps to promote the flow of long-term funds in infrastructure sector
like setting up of the Infrastructure Debt Fund (IDF), raising the Foreign Institutional
Investors (FII) limits and liberalising the External Commercial Borrowings (ECB)
regime in order to facilitate off shore fund flows to infrastructure.
With a focus on non-debt creating flow, the Government has amended the
sectoral caps and entry routes for foreign direct investment in a number of sectors,
including petroleum & natural gas, commodity exchanges, power exchanges, stock
exchanges, depositories and clearing corporations, asset reconstruction companies,
8
credit information companies, single brand product retail trading, telecom and courier
services and defence.
18.
DELHI MUMBAI INDUSTRIAL CORRIDOR.
Industrial corridor
projects have been taken up for promoting industrial growth through creation of
backward and forward linkages among the regions falling within the ambit of such
corridors. The Delhi Mumbai Industrial Corridor will entail an investment of USD 90
billion. Together with the dedicated western freight corridor being built by the
Railways, it will link Delhi to Mumbai’s ports. It will cover a length of 1483 kms and
pass through six States. There will be nine mega industrial zones of about 200-250 sq.
kms each, high speed freight lines, and a six-lane intersection-free expressway
connecting India’s political capital to its commercial capital. Along the corridor, there
will be three ports, six airports, a 4000 MW power plant, and a plug-and-play
environment to promote manufacturing industries.
Other corridors that are in the pipeline are the Chennai Bengaluru Industrial
Corridor, the Bengaluru Mumbai Economic Corridor and the Amritsar-Delhi-Kolkata
Industrial Corridor.
19. Infrastructure Sector.
Growth of the economy in general and manufacturing
sector in particular is also largely dependent on creation of suitable infrastructure in
the country. Accordingly, the policy focus in India has been on infrastructure
investment which has increased manifold over time with increased private sector
participation. The Twelfth Five Year Plan has also laid special emphasis on
development of the infrastructure sector as the availability of quality infrastructure is
important not only for sustaining high growth but also ensuring that the growth is
inclusive. Important issues like delays in regulatory approvals, problems in land
acquisition & rehabilitation, environmental clearances, etc. are already on the radar
of the policy planners and as mentioned above, the Government has inter-alia, set up
the Cabinet Committee on Investments(CCI) to expedite decisions on approvals/
clearances for implementation of the projects. This will improve the investment
environment by bringing transparency, efficiency and accountability in accordance
with various approvals & sanctions. The Government is also promoting Public
Private Partnership (PPP) as an effective tool for bringing private-sector efficiencies
for delivery of quality public services. The quality of infrastructure needs to be
improved as it is the backbone for the proper growth of industry and services in any
country. There is an urgent need to focus on timely completion of big infrastructure
which are in the pipeline, such as mega power projects, industrial corridors, etc. to
ensure the much needed electricity supply and logistics for the overall growth of
manufacturing and services sector in the country.
20.
Also from the infrastructure financing perspective, the Government has taken
several important steps to promote the flow of long-term funds in infrastructure sector
like setting up of the Infrastructure Debt Fund (IDF), raising the Foreign Institutional
Investors (FII) limits and liberalising the External Commercial Borrowings (ECB)
regime in order to facilitate off shore fund flows to infrastructure. The Government
has also amended the sectoral caps and entry routes for foreign direct investment in a
9
number of sectors including petroleum & natural gas, commodity exchanges, power
exchanges, stock exchanges, depositories and clearing corporations, asset
reconstruction companies, credit information companies, single brand product retail
trading, telecom and courier services and defence. FDI up to 100 per cent is allowed,
under the automatic route, in most of the sectors/activities.
21.
In spite of all the steps taken to promote the development of Infrastructure
sector as mentioned above, of late, especially over the past two years it has been
observed that the pace of investment flows to this sector has slowed down
considerably. While the development of infrastructure has always been a top priority
for the policy planners, keeping in view the current global scenario and decline in the
domestic growth rate, the development of this sector is being looked upon as one of
the trigger point for reviving the momentum in the economy. And to achieve this
objective, facilitating availability of funds is being increasingly recognised as one of
the critical component in the entire chain of actionable points for accelerating the pace
of infrastructure growth in the country.
22.
The need for long-term finance for infrastructure projects is one of the issues
that need to be looked into in the context of the limitation of banks to finance such
projects. Issues like less room for banks to fund infrastructure projects due to problem
of asset liability mis-match, channelization of one third of India’s savings are in
physical assets and there are limited saving options available to the investors in the
form of long-term pension and insurance products, non-availability of products for
hedging foreign exchange risks, especially long tenor loans as well as high cost of
hedging such exposures, absence of a robust and a well-developed bond market
putting additional burden on Banks to meet the funding requirements of this sector
are some of the issues which needs to be suitably addressed in the medium to longterm horizon. In the context of financing infrastructure thorough Infrastructure Debt
Funds (IDF) route, willingness of banks to trade-off between a good credit-risk
projects vis-à-vis a greenfield projects with a much higher risk will be another area
requiring due attention.
23.
In the background of unconventional monetary policies being adopted by
developed countries and volatile capital flows, another challenge for EMEs is to also
look out for innovative ways by way of devising unconventional development
financing products with active support from multilateral development banks as well as
international financial institutions to meet the funding requirements their respective
infrastructure sector. The objective should be to devise mechanism which could
ensure flow of funds, especially if the investments from the conventional sources are
not adequate to meet the requirement of infrastructure sector. In this regard the
successful launch of issuance of the first tranche of the USD 1 billion off-shore bond
program by International Finance Corporation (IFC) at a very competitive spread is
one such step in this direction which has opened up a new channel for mobilising
funds for the various development needs of the country, including the infrastructure.
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24. Trade, Balance of Payments and the Exchange Rate. The rate of growth of
India’s exports declined from 21.8 per cent in 2011-12 to (-) 1.8 per cent in 2012-13.
However, during 2013-14 (April-December), exports valued at US$ 230.3 billion
registered a growth of 5.9 per cent over the level of US$ 217.4 billion in 2012-13
(April-December). Value of imports during this period at US$ 340.4 billion registered
a decline of 6.6 per cent vis-à-vis the level of US$ 364.2 billion in the corresponding
period of 2012-13.
Of the total imports, POL imports amounting to US$ 125.0 billion (36.7 per
cent of total imports) in April-December 2013 were 2.6 per cent higher than the level
of US$ 121.8 billion in 2012-13 (April-December). Non-POL imports during 2013-14
(April-December) valued at US$ 215.4 billion, were 11.1 per cent lower than the level
of US$ 242.4 billion in 2012-13 (April-December). Consequently, the trade deficit (on
customs basis) for 2013-14 (April-December) declined by 25.1 per cent to US$ 110.0
billion from US$ 146.8 billion in 2012-13 (April-December). Lower non-POL imports
in the recent period also reflect the slowdown in the economy.
25.
While data on merchandise trade are available for the period April-December
2013, most information pertaining to balance of payments is available only for the
first half (H1) of 2013-14. Contraction in the trade deficit coupled with a rise in net
invisibles receipts resulted in a reduction of the current account deficit (CAD) to US$
27.0 billion in the first half (H1) of 2013-14 vis-à-vis US$ 38.2 billion in H1 of 201213. However, net inflows under the capital and financial account declined to US$ 15.1
billion in H1 2013-14 compared to US$ 37.3 billion in H1 2012-13 owing to net
outflows of portfolio investment. Thus, despite a lower CAD during H1 2013-14,
there was a drawdown of foreign exchange reserve to the tune of US$ 10.7 billion as
against an accretion of US$ 0.4 billion in H1 2012-13.
The RBI and the Government have undertaken measures including enhancing
all-in-cost ceiling for external commercial borrowings between 3-5 year maturity,
higher interest rate ceiling for foreign currency Non-resident deposits, deregulation of
interest rates on rupee denominated NRI deposits, administrative steps to curb
currency speculation, etc. that would facilitate capital inflow. The RBI has been
closely monitoring the conditions in the foreign exchange market. Recognizing the
need to restore stability to the foreign exchange market, several monetary measures
were announced by the Reserve Bank on July 15, 2013. On July 23, 2013, the
liquidity tightening measures were further modified. The Government has taken
several measures to increase exports, contain imports and attract foreign investment in
order to reduce the current account deficit and improve the outlook of the external
sector. Some of these measures include raising the rate of interest subvention from 2
to 3 per cent that will benefit exporters of small and medium enterprises, hike in
import duty on gold, liberalization of FDI norms, etc. With further improvement in the
external front, foreign exchange reserves stood at US$ 293.9 billion at the end of
December 2013, indicating an increase of US$ 1.9 billion over the level of US$ 292
billion at end-March 2013.
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26.
In recent months, one of the most significant developments in the external
sector has been the movement in the exchange rate. During April - December 2013,
the monthly average exchange rate of rupee (RBI’s reference rate) was in the range of
54–64 per US dollar. The daily exchange rate of the rupee breached the level of
68 per US dollar in August 2013 ( 68.36 per US dollar on August 28, 2013).
However it recovered to 61.16 per US$ on October 11, 2013, reflecting the impact
of the steps taken by the Government and the RBI to moderate the CAD and boost
capital flows, and greater clarity on US Federal Reserve taper. On month-to-month
basis, the rupee depreciated by 12.1 per cent from 54.40 per US dollar in March
2013 to 61.91 per US dollar in December 2013. The RBI’s reference rate stood at
61.63 per US$ on January 20, 2014.
27. Inclusive Growth.
An important agenda of the Government has been to
ensure wider participation and greater inclusion in the growth process. The focus on
inclusive growth, with a large number of programmes and projects, including the
programme for employment guarantee and asset creation in the rural areas, will be
reinforced by the implementation of the Food Security Act. Planning Commission has
updated the poverty lines and poverty ratios for the year 2011-12 on the basis of
recommendations of Tendulkar Committee using NSS 68th round data of Household
Consumer Expenditure Survey 2011-12. Accordingly, poverty line at all India level is
estimated as monthly per capita expenditure (MPCE) of ₹ 816 for rural areas and ₹
1000 for urban areas in 2011-12. As per these estimates, the poverty ratio in the
country declined from 37.2 per cent in 2004-05 to 21.9 per cent in 2011-12. In
absolute terms, the number of poor declined from 407.1 million in 2004-05 to 269.3
million in 2011-12. Between 2004-05 and 2011-12, the average annual decline of the
poverty ratios was 2.2 percentage points per year which is around three times higher
than the rate of decline in the poverty ratio during the period 1993-94 to 2004-05.
28. Outlook. The latest IMF assessment (WEO October 2013) highlights that
changing global growth dynamics have exacerbated the risks for emerging market
economies. Reduced monetary policy accommodation in the US, combined with
domestic vulnerabilities in emerging market economies, may lead to continued market
stress. Emerging market and developing countries are expected to grow at 4.5 per cent
in 2013. Slowdown in growth witnessed in China will impact other emerging market
and developing economies. Nonetheless, the IMF projects that the global output
growth will accelerate to 3.6 per cent in 2014, with advanced economies projected to
grow at 2 per cent and emerging economies at above 5 per cent. From 2014 onwards,
global growth prospects are projected to improve over the medium term at a gradual
pace.
29.
The Government has taken several steps to revive growth in the economy that,
inter alia, include measures to speed up project implementation via the creation of the
Cabinet Committee on Investment (CCI); boost to infrastructure financing by
encouraging Infrastructure Debt Funds and enhancement of credit to infrastructure
companies; provision of greater support to micro, small and medium enterprises;
strengthening of financial and banking sectors, etc. Initiatives by the Government also
include liberalization of FDI norms in several sectors including telecom; deregulation
12
of the sugar sector; decision to launch inflation indexed bonds to incentivize
households to save in financial instruments; steps to boost manufacturing growth;
fiscal consolidation through reforms viz. reduction in the subsidy of diesel and cap on
the number of subsidized LPG cylinders; new gas pricing guidelines; measures to
control the current account deficit and depreciation of the rupee, etc.
30.
These steps have started to yield results. There has been a modest turnaround
in manufacturing during Q2 2013-14 while electricity and construction sectors have
performed significantly better vis-à-vis Q1 2013-14. On the demand side, pick-up in
private consumption and significant turnaround in exports have revived aggregate
demand in Q2 2013-14. An encouraging sign in the second quarter has been the
moderate revival in fixed investment, vis-à-vis a decline in Q1 2013-14. With the
Cabinet Committee on Investment (CCI) clearing several projects, the effect on
investment is expected to be fully realized in the coming quarters.
31.
In this backdrop, the monetary policy stance of the RBI has been influenced
by the priorities of containing inflation and supporting growth while managing a
volatile external situation characterized by a large current account deficit, rupee
depreciation and potential volatility in capital flows. With moderation in overall
headline WPI inflation during 2012-13 and further during the first two quarters of
2013-14, there was a reduction in the repo rate by 25 basis points in May, 2013.
Continuance of inflationary pressures made RBI revise the repo rate upwards. The rate
under the Marginal Standing Facility (MSF) has been reduced subsequently. However,
on the face of growing uncertainties in global financial conditions and awaiting a
sustained moderation in inflation, policy easing was paused in June 2013. With
significant improvement in the external situation, and some moderation in headline
WPI inflation witnessed in December 2013, the room for RBI to undertake growth
supportive monetary policy action has increased.
32. Challenges Ahead.
are the following:
The challenges for the Indian economy, over the short run,
 Fiscal consolidation and steps to control inflation further (in order to
reduce WPI inflation below the level of 6 per cent) remain crucial in order
to provide necessary leeway to the RBI to support an economic recovery.
 While manufacturing growth remains sluggish, the Government has
undertaken various measures to boost growth in that sector, which need to
be pursued further.
 With savings and investment rate in India witnessing a decline in 2011-12
(the latest year for which data are available) vis-à-vis 2010-11, restarting
the investment cycle entails expeditious implementation of large projects
and keeping inflation under control.
The challenge, of encountering the fallout(s) of tapering by the US Federal
Reserve, as and when it happens, remains. However, India is now better placed to
cope with such uncertainties.
13
CHAPTER – 3
ECONOMIC GROWTH, STABILITY AND DEVELOPMENT
THROUGH PLANNING PROCESS IN INDIA SINCE
INDEPENDANCE
Nehruvian Model
33.
Model of Planned Economic Growth & the First Three Plans
(1951-66).
On 15 March 1950, the Planning Commission was established with
Prime Minister as its Chairperson. The First Five Year Plan (1951-56) essentially
tried to complete projects at hand and to meet the crisis immediately following the end
of the 2nd World War and the massive demographic and economic dislocation caused
by the Partition. The planned economy model was applied with the 2nd Five Year
Plan (1956-61) and continued with the 3rd Five Year Plan (1961-66). The basic
element of this strategy was the rapid development of heavy and capital goods
industries in India, mainly in the public sector. Three steel plants were set up in the
public sector within the 3rd Plan period. Import substitution in heavy goods sector was
seen as an imperative not only because it was seen as critical for self-reliance but also
because it was assumed that Indian goods could not grow fast enough to enable the
import of necessary capital goods and machinery. Although, some foreign aid and
investment was considered essential in the initial phase, the objective was
considered to be to dispense with it by rapidly increasing domestic savings. The
shift in favour of heavy industry was to be combined with promoting labour-intensive
small and cottage industries for the production of consumer goods. This, as well as,
labour-absorbing and capital- creating community projects in agriculture, promoted by
community development programmes and agricultural cooperatives were seen as
immediate solution to the escalating problem of unemployment without the state
having to make large investments. Another critical element in the strategy behind
the 2nd and 3rd Five Year Plans was emphasis on growth with equity. It was assumed
that higher growth enabled higher levels of equity, i.e., ‘rising tide lifts all
boats’. The state intervention in economic development led to an elaborate system of
controls and industrial licensing which was first elaborated in the Industries
Development and Regulation Act (IDRA) of 1951. A balance of payment crisis and
acute shortage of foreign exchange in 1956-57, i.e., at the very start of the 2nd Plan,
also contributed to the creation of this system of industrial licensing.
34.
Results. The results of this bold approach were evident at that time. The
overall economy performed impressively compared to the colonial period when,
during the first half of the 20th century, its growth rate was flat or negative. During
1951-64, the GNP grew at an average rate of about 4% except the last year of the
3rd Plan, i.e., 1965-66 which witnessed a war and an unprecedented drought.
According to the draft 4th Plan document, the rates of domestic savings and
investments were 10.5% and 14% respectively in 1965-66 as compared to 5.5%
of GNP in 1950-51. The gap between domestic savings and investments in later
years were met by liquidating the foreign exchange reserves (the ‘sterling balances’
owed by UK to India in 1947 because of forced credit extracted to finance the 2 n d
14
World War) and through foreign borrowing and aid. The total investment in 196566 was nearly five times the 1951-52 level in nominal terms and more than three
times in real terms.
(a) In agriculture, the comprehensive land reform measures, initiated
soon after independence, the setting up of a massive network for
agricultural extension and community development work at the village
level, the large infrastructural investment in irrigation, power, agricultural
research, and so on, had created conditions for considerable agricultural
growth in this period. During the first three Plans, leaving out 1965-66,
Indian agriculture grew at an annual rate of over 3%, a growth rate 7.5
times higher than the first half of the 20th century. Although the
agricultural growth rate during this period could be compared favourably
to other countries in comparable situation, e.g., China or Japan (growth
rate of less than 2.5% between 1878-1912 and lower till 1937), it could
not meet the increasing demand for agricultural produce which necessitated
import of food-grains throughout the first three Plans. It was only during
the Green Revolution in the late 60s when the food dependence
was overcome but the physical and institutional infrastructure was critical in
the success of the Green Revolution.
(b) Industry, during the first three Plans, grew even more rapidly.
Between 1951 and 1965, it grew at a compound rate of 7.1% per annum.
The industrial growth was based on rapid import substitution-initially, of
consumer goods and particularly, since the 2nd, of capital goods and
intermediate goods. The emphasis on the later was reflected in the fact that
70% of planned expenditure on industry went to metal, machinery and
Chemical industries in the 2nd Plan and 80% in the 3rd Plan. Consequently,
the three-fold increase in aggregate index of industrial production between
1951 and 1969 was the result of 70% increase in consumer goods industries,
a quadrupling of the intermediate goods production and a ten-fold increase in
the output of capital goods. As a result of the import-substitution strategy,
the share of imported equipment in the total fixed investment in the for of
equipment in India came down to 43% in 1960 and 9% in 1974 whereas the
value of fixed investment in India increased by about two and a half times
during this period. In 1950, India met 89.8% of its needs even for machine
tools through imports. By mid-70s India could meet indigenously more than
90% of equipment requirements by maintaining the rate of investment.
This capacity, combined later with the Green Revolution, contributed to
India’s ability to retain its autonomy of action and decision-making both
internally and externally. The rate of public sector, in the overall
economy, increased rapidly and captured the “commanding heights” of the
economy; unlike Latin America, Indian public sector did not grow in
collaboration with foreign private capital or multi-national c o r p o r a t i o n s .
The total paid-up capital in government companies as a proportion of
the total paid-up capital in the entire corporate sector rose from 3.4% in
1951 to 30% in 1961 (and to 75% in 1978).
15
(c) The planning process, during this period, covered the development
of infrastructure, including education and health. During the first three
Plans, an average of 26% of the total planned expenditure, in each Plan,
was allocated to transport and communication whilst the social/community
services and power received 19.9% and 10.6% respectively. These
investments proved critical in improving productivity of the economy as a
whole. Between 1950-51 and 1965-66, installed capacity of electricity was
4.5 times higher, number of towns and villages electrified was 14 times
higher, hospital beds 2.5 times higher, school enrolment was slightly less
than 3 times higher and, very importantly for us today, the admission
capacity in technical education (engineering and technology) at the degree
and diploma levels was higher by 6 and 8.5 times, respectively. During this
period, though the population had increased only by a little over 1/3rd.
(d) Conscious o f I n d i a ’ s b a c k w a r d n e s s i n s c i e n c e a n d technology
during the colonial period, Prime Minister Nehru and the early Indian planners
made strenuous efforts to overcome this shortcoming. Nehru’s ‘temples of
modern India’ consisted not only of factories and power plants, irrigation
dams, etc., but also the institutions of higher learning, particularly in scientific
field. During the first Plan itself, high power national laboratories and
institutes were set up by the Council of Scientific and Industrial Research
(CSIR) for conducting fundamental and applied research in each of the
following areas: physics, chemistry, fuel, glass and ceramics, food technology,
drugs, electro-chemistry, roads, leather and building. In 1948, the Atomic
Energy Commission was set up, laying the foundation of the creditable
advances India was to make in the sphere of nuclear science and relative
areas. This was in addition to the unprecedented increase in the
educational opportunities in science and technology in the universities
and institutes.
Due to government allocations, between 1949 and 1977,
India’s scientific and technical manpower increased more than 12 times from
190, 000 to 2,320,000. These investments in the knowledge infrastructure
make India the third country in the world today in terms of the absolute size of
scientific and technical manpower.
35.
Significance of the Nehruvian Model. The growth of India’s economic
and technological strength during the first three Five Year Plans is not fully
appreciated by contemporary writers who consider the Nehruvian development model
as somewhat wasteful of a poor country’s limited resources. However, it needs to
be remembered that, during this period, the solid foundations, both in physical
and institutional infrastructure, were laid on which further progress became possible
without any dislocations – be it 1965 or 1991 (during the processes of re-orientation
of country’s national economic policies to adjust to changing internal and
international economic environment). Re- orientation of the Indian bureaucracy to
the hitherto unfamiliar development tasks and the “mixed economy’s” inherent
flexibility and resilience were a significant achievement of this period. The rate of
growth achieved, during this period, compares favourably with the rates achieved
16
by advanced countries at their comparable economic growth stages and the process
of capital formation was carried out in a far more democratic framework than
these countries. Prof.Sukhmoy C hakravarty noted, in his book ‘Development
Planning : The Indian Experience’ (Oxford, 1987), “Dominant ideas of
contemporary development economics influenced the logic of India’s plans and,
correspondingly, development theory was for a while greatly influenced by the
Indian case.”
Challenge to The Nehruvian Model and Economic Growth in the 70s
36.
Crisis of 1965-66 & the Annual Plans (1966-69). The Nehruvian economic
model (1951-65) met its major challenge with the failure of monsoons successively
in 1965 and 1966. Agricultural sector experienced stagnation with the fall in
agricultural output by 17% and food-grain output by 20%; India’s image
changed from that of a model developing country to a “basket case” with some
foreign observers expressing doubt about India’s ability to survive as a country.
Rate of inflation, which till 1963 did not exceed 2% per annum, shot to 12%
between 1965 and 1968 and food prices rose nearly at the rate of 20% per
annum. The inflation was partly due to the droughts and partly due to heavy
defence expenditure on account of the two wars of 1962 and 1965. The fiscal
deficit (state and centre) peaked in 1966-67 at 7.3% of GDP. The balance of
payments position, fragile since 1956-57, deteriorated sharply with foreign exchange
reserves (excluding gold) averaging about US$ 340 million between 1964-65 and
1966-67, enough to cover less than two months of imports. The dependence on
foreign aid, which had been rising over the first three Plans, now increased sharply
due to food shortages as well as the weakness of balance of payments. Utilisation of
external assistance, which was 0.86% of Net National Product (NNP) at factor
cost in 1951-52 increased to 3.8% in 1965-66 and the debt service ratio
(amortisation and interest payments as percentage of exports) rose from 0.8 in
1956 to 27.8 in 1966-67. Given the overall situation, the long- term planning had to
be temporarily abandoned and there were three annual plans between 1966 to 1969
before the 4th Five Year Plan could commence in April 1969. India also came
under strong US pressure when, by refusing to renew the PL-480 (wheat loan)
agreement on a long-term basis in the wake of the 1965 India-Pakistan War, it
wanted to, in President Johnson’s words, keep India “on a short leash”.
37.
Handling of the Crisis. The US, the World Bank and the IMF wanted
India to liberalise its trade and industrial controls, devalue the Indian rupee and to
adopt a new agricultural strategy. The rupee was devalued in June 1966 by
36.5% nominally although effectively the devaluation was of a lesser degree. The
then Prime Minister, Smt. Indira Gandhi, also took measures to liberalise trade.
The effect of these measures was questionable as far as the recession in the
industry; inflation and the poor export performance are concerned. The reasons
for the questionable effect of these measures are external factors like the drought of
1966-67 and their inadequate implementation.
17
38.
Left-ward Shift and Economic Growth in the 70s. The government’s
response was, perhaps, more ‘nationalistic’ and resentful of external pressure.
The immediate imperative was seen to be the restoration of the health of India’s
balance of payments, creation of sufficient foreign exchange reserves and removal
of dependence on food imports. To meet the balance of payments crisis and the
reduction of fiscal deficit, the government applied severe cuts in government
expenditure rather than resort to increasing the tax levels. However, the cuts were
felt on the capital expenditure which, in real terms, decreased by about 50%
between 1966-67 and 1970-71; consequently, the industrial growth rate came
down from an annual average of 7.8% between 1951 and 1966 to 4.99% between
1966 and 1974. Because of the domestic political circumstances a nd the
electoral verdict of March 1971, the government’s policies took a radical left
turn. The major p ri v at e c o m me r c i a l b a n k s were nationalised i n 1969; the
Monopoly and Restrictive Trade Practices (MRTP) Act, severely constraining the
large business houses, was passed in 1969; insurance was nationalised in 1972
and the coal industry was nationalised in 1973. Foreign Exchange Regulation Act
(FERA), passed in 1973 put severe constraints on foreign investments and on the
functioning of foreign companies. Nationalisation of wholesale trade was tried in
1973 but given up soon after disastrous results; and, the government also
followed a policy of taking over and running “sick” government companies, such as
textile mills, rather than allow them to close down.
39.
Aggravating Extraneous Factors.
The period from 1965 onwards
witnessed dramatic
changes and economic challenges internally and
internationally. Apart from the two wars of 1962 and 1965, there was genocide in
1971 in East Pakistan resulting in the influx of over 10 million refugees into India,
1971 war with Pakistan, two droughts of 1972 and 1974, a major oil shock of 1973
(leading to quadrupling of international oil prices), the oil shock of 1979 (leading to
doubling of oil prices) and the disastrous harvest of 1979-80.
The country was
able to weather these challenges without getting into a debt crisis and
recessionary spin as happened in the case of a number of developing countries,
especially in Latin America in the 80s, and without serious famine conditions. The
challenges w e r e met because the government w a s able to improve the balance
of payments situation, create food stocks, introduce anti- poverty measures and
reduce dependence on imports for critical inputs like oil.
40.
Green Revolution. The Green Revolution in the agricultural sector is the
major achievement of this period. This was brought about through massive
investments in agriculture, in comparison to the heavy industry-oriented strategy of
the first three Plans, through adoption of high-yield variety (HYV) seeds,
fertilisers and other factor inputs like easy credit and marketing infrastructure.
Between 1967-68 and 1970-71, food-grain production rose by 35%; net food
imports fell from 10.3 million tons in 1966 to 3.6 million in 1970 whilst food
availability increased from 73.5 million tons to 89.5 million tons over the same
period increasing to 128.8 million tons in 1984. As a result of the Green
Revolution, the economy could absorb the negative impact of massive successive
droughts of 1987-88 without undue pressure on prices of food or imports unlike
18
the crisis of 1965-66. In fact, for the first time in Indian history, rural poverty
index continued to show a decline in these crisis years as rural employment and
incomes were maintained through government programmes using surplus food
stocks.
41.
Resilience of the Economy. The growing food self-sufficiency combined with
reduction in fiscal deficit from 7.3% of GDP in 1966-67 to 3.8% in 1969 -70,
improvement of balance of payments situation and surge in remittances
from the Indian workers from the oil-boom rich Middle-East led to healthy foreign
exchange reserves of US$ 7.3 billion (including gold and SDRs) in 1978-79, to
cover more than nine months of imports, compared to less than two months’
cover 1965-66. This t u r n -around in the economy gave the leadership greater
autonomy in decision making. Increasing self-reliance resulted in the government
reducing dependence on foreign aid consistent with the Nehruvian approach to
economic development. Net aid as a proportion of Net National Product (NNP) came
down to 0.35% in 1972-73 from the high of 4.22% during the 3rd Five Year Plan;
it rose only slightly after the 1973 oil crisis yet averaged not more than 1% of
NNP till 1977-78. The debt service ratio (annual outflow of interest and
repatriation of principal due to existing debt as a proportion of exports of goods
and services) fell to a low 10.2% in 1980-81 from an estimated 23% in 1970-71.
Another significant outcome, in India’s quest for self-reliance, was the reduction in
the share of imported equipment in the total fixed capital investment in India from
43% in 1960 to 9% in 1974. During this period, private foreign investment
continued to be very low in proportion to total investment unlike many Latin
American and some East Asian countries. In 1981-82, only about 10% of value
added in the factory sector of mining and manufacturing was accounted for by
foreign firms and in 1977-80, 86.5% of technology import agreements did not
involve any foreign equity. There was also negligible presence of foreign capital in
the financial sector.
42.
Role of the Banking Sector. During the left-oriented economic policy of
the government in late 60s and early 70s, the nationalised banking sector spread
to the rural areas. Between 1969 (the year of the bank nationalisation) and 1981, the
number of branches of all commercial banks in India rose from 8,262 to 35,707,
more than 60% of which were in rural areas not only for mopping up savings but
also for extending credit, especially to agriculture and, increasingly, to the poorer
households as part of the land reform and the ‘garibi hatao’ (“Quit Poverty”)
programme. At the same time, despite low volumes of foreign private investments
and aid, the average savings rates and the rate of Gross Domestic Capital Formation
or investment doubled to 21.22% and 20.68% respectively between 1975-76 and
1979-80 compared to 1 0 . 5 8 % and 11.84% respectively in the 50s.
19
Economic Resurgence of The 80s
43.
Growth in the 80s. By the mid-70s, the industrial growth rate also started
picking up from a low of about 3.4% between 1965-75 to about 5.1% between 1975
and 1985. If the crisis year of 1979-80 was omitted, then the industrial growth rate
during 1974-75 to 1978-79 and 1980-81 to 1984-85 was around 7.7% per annum. In
the 80s as a whole, the industrial growth rate maintained a healthy average of
about 8% per year. Again, it was in the 80s that the barrier of the low, the so-called
‘Hindu Rate of Growth’ of 3-3.5% over the previous two decades was broken and the
economy grew at over 5.5%. By one estimate, the average real GDP growth rate
between 1980 and 1989 was an impressive 6%.
44.
A new feature of the 80s was the phenomenal increase in the new stock
market issues with the stock market, thus, emerging as an important source of
funds for industry. It has been estimated that in 1981 the capital markets
accounted for only 1% of domestic savings whereas, by the end of the 80s, this
proportion had increased by about 7 times. The new stock issue in 1989
amounted to 7.25% of the Gross Domestic Savings of 1989-90. Another
significant development, in early 80s, was the highly successful breakthrough in
the import substitution programme for oil under the supervision of the ONGC
(Oil and Natural Gas Commission), a public sector organisation. The large loan
received from IMF during this period helped this effort considerably. In 1980-81,
domestic production of oil was 10.5 million tons and imports of 20.6 million tons
with the oil import bill taking up 75% of India’s export earnings. With the
operationalisation of the Bombay High oil fields by the end of the 6th Plan (198085), the oil import bill in 1984-85 was down to a third of export earnings.
1991 Crisis And The Launching Of The Liberalisation Process
45.
The 1991 Crisis & its Background. Despite these impressive strides in
India’s economic growth, long term structural weaknesses built up to a major
crisis in 1991 when the country was on the verge of default for a combination of
domestic circumstances. It is this crisis which brought home to the leadership the
immediate necessity of bringing about structural adjustment and economic
reform.
(a) The first set of structural problems was rooted in the importsubstitution-industrialisation strategy which, though necessary at the
time of independence to develop an industrial base, led to, inefficiency and
technological backwardness in Indian industry. The problem was
accentuated by the so-called ‘licence-quota’ raj and severe restrictions on
large industry through the MRTP Act. Second problem concerned the
large public sector, initially envisaged to occupy the “commanding
heights” of the economy, which emerged as a major source of inefficiency;
excessive political and bureaucratic control, e.g., electricity boards and
road transport corporations, ran at a loss and bred considerable government
corruption. At the time of their creation, the capital output ratio was not a
major consideration but some cases were quite egregious. A 1965 study
20
showed that the public sector Heavy Electricals Ltd in Bhopal was set up
with a capital output ratio of 12 : 14. Estimates for the economy as a whole
show that the capital used per unit of additional output or the Incremental
Capital Output Ratio (ICOR) kept rising, being a little over 2.0 during the
1st Plan and reaching 3.6 during 3rd Plan. According to one estimate, the
ICOR had touched a high of 5.76 between 1971 and 1976; this explains why,
despite substantial increases in the rate of investment, there was an actual
decrease in the overall growth rates of aggregate output or GDP b etween
the 50s and 70s. The ICOR started declining in the 80s though it
remained around 4 in the 90s. Even during the 80s, one estimate shows that
the (simple) average rate of financial return on employed capital in
public sector enterprises was as low as 2.5%. Actually, the rate of return was
much lower if the 14 petroleum enterprises were excluded as these accounted
for 77% of the profits in 1989-90.
(b)
The second set of constraints, becoming increasingly archaic in the
rapid transformation of the global economy in the late 60s, was rooted in
‘exportpessimism’ inherent in the first three Plans. The internationalisation
of production’ led to massive increase in not only the world output of
manufactures but, significantly, the world trade in manufactures increased at a
much faster pace than the output of manufactures which was taken advantage of
by the third world countries, especially the Far Eastern ones. The inwardlooking Indian model became more inward and protectionist during the foreign
exchange crisis of 1967 which was around the time when the East Asian
Miracle, encompassing countries like South Korea, Taiwan, Singapore, Hong
Kong, began. Though successful efforts were made to diversify exports, both in
terms of commodity composition (e.g. the rapid shift to manufactured
exports, it being 2/3rd of total exports in 1980-81 rising to ¾ in
1989-90), the Quantitative expansion of increase in volume lagged far behind
the other developing countries. The volume of India’s manufactured exports
in 1980-81 was half that of China, one-third of Brazil and a quarter of South
Korea. In 1980-89, China’s real GDP, by one estimate, grew at an average rate
of 9.4%, considerably faster than that of India.
(c) The next set of structural problems, primarily as a result of political
imperatives, was the diminution of fiscal prudence which characterised
the first 25 years of independence unlike many other developing countries.
This was evident in the huge subsidies to cater to various sectional
demands which were becoming increasingly vocal. Food subsidies doubled
between 1975-76 and 1976-77. The fertilizer subsidy multiplied ten times
from 1976-77 to 1979-80. Export subsidy multiplied 4-1/2 times from
1974-75 to 1978-79. This trend became stronger in subsequent years
causing the fiscal deficit to rise sharply from 4.1% of GDP in 1974-75 to
6.5% in 1979-80, 9.7% in 1984-85, peaking at 10.47% in 1991. Whilst the
government expenditure increased exponentially, the savings generated by
the government or the public sector kept falling with their growing losses.
The balance of payments surplus on current account of 1.4% of GDP in
21
1977-78 turned into a deficit of 1.8% in 1984-85 and of 3.5% in 1990.
During this period, however, there was no major external shock and, in
fact, the second half of the 80s saw an actual improvement in trade balance
with exports growing rapidly at an average of 14% per year in dollar terms
and high growth of the economy at an annual average of 5.5%, the industry
at over 7%, capital goods at 10% and consumer durables at 12%, etc. This
growth, however, was a result of over-borrowing and over-spending and
was, thus, debt-led. The total government (centre and state) domestic debt
rose from 31.8% of GDP in 1974-75 to 45.7% in 1984-85 and 54.6% in
1989-90. The debt service ratio rose from a manageable 10.2% in 1980-81
to 35% in 1990-91. It bears noting that there was very limited foreign
direct investment leading to heavy commercial short-term borrowing by
the government. The sharp decline in India’s foreign exchange reserves to
US$ 2.24 billion in 1990-91, enough for one month’s import cover, was
further aggravated by the Iraqi invasion of Kuwait in August 1990 leading
to increasing oil prices, fall in Indian exports to the Middle East and rapid
withdrawal of NRI deposits. In March 1991, the government was forced to
sell 20 tons of gold to the Indian Bank of Switzerland but by July 1991, the
foreign exchange could cover only two weeks’ imports despite loans from
the IMF.
46.
Beginning of Economic Reforms in 1991. The imminent default, faced
by the minority Narasimha Rao government in June 1991, was the trigger for
fundamental restructuring of the Indian economy when the present Prime
Minister was the Finance Minister. The case for economic liberalisation had long
been argued with the present Prime Minister stating, in the early 60s (‘India’s Export
Trends’, London, 1964), that India’s export pessimism was unjustified. During the
70s, the rupee was allowed to depreciate in response to market conditions not through
outright devaluation but by pegging it to a depreciating Pound Sterling. Indira
Gandhi, after her return to power in 1980, tried to deregulate industrial licensing
and reduction of restrictions on large ‘monopoly’ enterprises. Rajiv Gandhi, upon
assumption of office in 1984, attempted reform at a relatively quicker pace towards
industrial deregulation, exchange rate flexibility and partial lifting of import controls.
However, the major issue of emerging macro-economic imbalance was not
addressed. The pace of reforms, however, has been dependent on the extent of
political vulnerability of the leadership at a particular point of time, be it the
Punjab crisis during Indira Gandhi’s period, the Bofors issue during Rajiv
Gandhi’s period and the Babri structure’s demolition during Narasimha Rao’s
period. The impetus for economic reform has also been provided by occasions of
economic crises. Factors such as the political populism, resistance of entrenched
interests and ideological opposition, whether from the left or from the right, have
determined the pace and the direction of economic reforms in India unlike the process
of reforms in China or the former Soviet Union. In India, the replacement of the
Nehruvian consensus, rooted in the political mobilisation characterising the freedom
struggle, by a new consensus on economic reforms could only be a result of
India’s own political dynamic which has been inclusive, if slow, and quite
different from decision-making in a non-democratic or totalitarian society.
22
47.
Process of Reforms. The process of reforms in 1991 encompassed several
steps. An immediate fiscal correction; making the exchange rate more realistically
linked to the market (rupee underwent nearly 20% devaluation at the very outset);
liberalisation of trade and industrial controls like freer access to imports; a
considerable dismantling of the industrial licensing system and the abolition of
MRTP; reform of the public sector including gradual privatisation; reform of the
capital markets and the financial sector; removing a large number of restrictions on
multi-national corporations and foreign investment and welcoming them,
particularly foreign direct investment and so on. The process had two dimensions,
i.e. lifting of internal controls and equipping the economy to participate in the
globalisation process to its advantage.
48.
Decline in Poverty Levels.
On the broader economic canvas, India
witnessed a significant fall in poverty levels with relatively faster economic
growth of the 80s. The proportion of population below the poverty line (“poverty
ratio”) fell from 51.3% in 1977-78 to 38.9% in 1987-88. China and Indonesia
maintaining a faster economic growth were able to reduce their poverty ratio
more dramatically from 59.5% (China) and 64.3% (Indonesia) in 1975 to 22.2%
(China) and 11.4% (Indonesia) in 1995 whilst in India’s case, the figures
respectively, were 54.9% in 1973-74 and 36% in 1993-94. At the same time, it
needs to be mentioned that the Indian society has been more egalitarian, as expressed
in terms of the Gini co-efficient, as compared to China, South-East Asia a n d
even a developed country like the US. Whilst India’s initial stabilisation programme
after the 1991 crisis has been extraordinarily successful causing remarkably “little
suffering” in comparison to most other countries, a larger issue for the economic
planners and the national leadership is the nature of impact on poverty during the
transition to a higher growth path. There was a significant rise in poverty,
especially rural poverty, in 1992-93 and its causation was linked mainly to a drought
and fall in food-grains output in 1991-92, leading to a rise in food prices and, very
weakly, to the stabilisation programme. Even so, the government’s failure in not
anticipating the situation and maintaining expenditure on rural employment
programme and its not refraining from cuts in the anti-poverty Social Services and
Rural Development (SSRD) expenditure in 1991-92 to achieve fiscal stabilisation
has been criticised even by the supporters of reform. However, all poverty
indicators showed that poverty levels, both rural and urban, fell by nearly 6
percentage point in 1993-94 within one year. The improvement in the poverty
situation was helped by the fact that the government increased the overall
expenditure on SSRD since 1993-94 – from 7.8% of total central government
expenditure in 1992-93 to an average of nearly 10% between 1993 and 1998. Real
agricultural wages, which had decreased by 6.2% in 1991-92, grew in the next
two years at over 5% per year and by 1993-94 surpassed the pre- reform level. After
the low of 1991-92, additional employment generated in the total economy rose to
7.2 million in 1994-95, averaging about 6.3 million jobs every year between 1992-93
and 1994-95, considerably higher than the average annual increase of 4.8 million in
the 80s. Moreover, inflation, which hurts the poor the most, was kept under
control: from 17% in August 1991, the annual rate of inflation was brought down to
below 5% in February 1996.
23
49.
Constraints on Growth & the Crisis of 1997-98. Political compulsions
seem to have hindered sustained efforts to increase public savings and reduce
government expenditure and the problem of high fiscal deficits continued. The
public saving-investment gap remained at an average of 7.1% of GDP in 1992-96.
Subsidies f or food-grains, f e r t i l i s e r s , d ie se l , kero sene an d cooking gas
remained high. According to the noted economist Hanumantha Rao, the annual
subsidy on fertiliser alone amounted to nearly as much as the annual outlay on
agriculture by the centre and the states put together. The oil-pool deficit (dues
owed to oil companies by government which partly enabled the huge subsidy for
diesel, kerosene and cooking gas) amounted to more than 50% of the cumulative
deficit in 1996-97. Diversion of huge resources seriousl y inh ibited critical
investment in sectors which support the very same segment of the population
which is the supposed beneficiary of these subsidies. The reform of the public
sector had also been cosmetic and services like electricity, transport and irrigation
continued at economically unviable costs. Failure to move forward on this front also
impeded greater economic efficiency of production and hindered the growth of the
economy due to infrastructure bottlenecks. The reform in the labour sector,
especially the exit policy for loss-making enterprises, had also been ineffective. The
GDP growth rate decelerated to 5% in 1997-98 from 7.8% in 1996-97. Exports,
growing since liberalisation, at 20% were negative in 1998-99. Industrial growth
decelerated to half the rate achieved in 1995-96. In 1998-99 (April-December), the
FDI and portfolio investment declined sharply and turned negative. The other
negative development was the high fiscal deficit where the primary deficit, brought
down to 0.6% of GDP in 1996-97, rose to 2.4%, both for centre and the states, in
1997-98. One factor contributing to this was the selective acceptance of the 5th Pay
Commission recommendations in 1997 for higher government salaries without
corresponding savings suggested by the Pay Commission.
Economic Growth From 1997 Onwards And Future Projections
50.
9th Five Year Plan (1997-2002). The a v e r a g e a n n u a l G D P g r o w t h
during the 9th Five Year Plan period (1997-2002) was 5.5% with agriculture,
industry & services registering growth rates of 2%, 4.6% and 8.1% respectively. The
Gross Domestic Savings (percentage of GDP at market prices) were 23.1%, Gross
Domestic Investment (percentage of GDP at market prices) were 23.8% and Current
Account Balance (percentage of GDP at market prices) was (-) 0.7%. Combined
Fiscal Deficit of centre and states (percentage of GDP at market prices) was 8.8%
and the rate of inflation (based on Wholesale Price Index) was 4.9%. There are
several factors explaining the macro-economic indicators for this period.
The
productivity of agriculture had been declining throughout the 90s, especially in
1999-2001 with poor monsoons around that time.
The other factors were
adverse impact on the global economy in the immediate aftermath of the ‘9/11’
terrorist attack in US.
The world economy, including India’s, was also
affected by the oil price increase of 2000-01. In India, the other adverse factors
were the negative security environment during ‘Op Parakram’ – 2002 against
Pakistan, natural disasters like the Orissa cyclone and Gujarat earthquake.
Consequently, the average growth rate during the 9th Plan at 5.6% was lower than
24
the Plan target of 6.5% and the annual average of nearly 7% during the 8th Plan
(1992-97).
51.
10th Five Year Plan (2002-2007). The macro-economic indicators for
the 10th Five Year Plan (2002-2007) were stronger because of sound macroeconomic fundamentals, the turn-around in US economy post-‘9/11’ and good
monsoon in India. As a result, the annual average growth rate was 7% with
agriculture, industry and services, registering growth rates of 1.8%, 8% and 8.9%
respectively. The figures for Gross Domestic Savings, Gross Market Investment,
Current Account Balance, Combined Fiscal Deficit of centre and states and the
rate of inflation were 28.2%, 27.5%, (+) 0.7%, 8.4% and 4.8% respectively.
Significantly, the combined fiscal deficit of the centre and state governments
declined and the inflation remained moderate despite the sharp hike in
international oil prices. The foreign exchange reserves remained very comfortable.
11th Five Year Plan (2007-12)
12th Five year Plan (2012-17)
52.
Impact of Reforms. Although there is, now, a broad consensus in favour
of economic reforms as to the consideration of FDI and FII inflows as a major driver
for economic growth, the content of the reform itself is subject to political climate
prevailing at a particular point of time. Whilst the consensual character of the
reform process ensures its stability and irreversibility, the structure of politics
also makes it slow and, at times, unpredictable as to its direction. However,
the old mind-set of uncertainty and, even, of lack of self- assurance about India’s
ability to find a place in the global economy have been almost totally discarded.
This enables the country to take the optimum advantage of the globalisation process
world-wide; conscious of the fact that it will face many more competitors from
different parts of the world. India has emerged as one of the most attractive capital
markets (42% compound annual growth of the Sensex in the last four years)
which, however, are still lacking in depth and remain highly vulnerable to a few
big players, especially FIIs, and to fluctuations in global markets. With corporate
profitability annually growing at 25% since 2003, equities are drawing greater
investment than fixed return instruments like Public Provident Fund (PPF) and
National Savings Certificates (NSCs). Currently, Indian manufacturers are
drawing money from profit growth rather than sales growth, are able to export to
the western markets due to both quality and cost advantages and have acquired the
credibility for raising funds for foreign acquisitions. They are however showing no
growth in contribution to technology and processing. However, Indian exports are
coming from skill-intensive manufacturing as against the largely volume-driven
unremarkable Chinese exports. In agriculture, a crisis needs to be addressed
with productivity levels going down in the 90s, due to lack of public
investment in important crops, including rice and wheat, even though dairy farming,
poultry and fisheries can be counted as success stories. The agriculture work-force
comprises nearly 50% labourers today as compared to 25% in 1951. The
transformation of the Services sector has meant that cost and quality of services are
getting better for the consumers, e.g. telephone, travel, etc. It has also
25
meant
that
increased participation of foreign multinationals, due to better
efficiency, own large-even controlling, shares in key sectors like banking, insurance
and telecom. In infrastructure, telecom is a success story of economic reforms but it,
still, covers only 42% of the population; the power offers a contrasting example with
national average for access being 56% (44% in rural areas) and loss in
transmission at 33% is higher than Cameroon and Nicaragua. The aviation sector
has succeeded in achieving low fares but the reform process has not, yet, settled the
issue of supportive infrastructure; and, the impact of reforms process on railways,
ports and highways is minimal at best despite their projected investment
requirement of US$ 320 billion. Although a strong NGO movement, local
community action and judicial activism have made a difference to the quality of
environment and forest resources. Sustainability of economic growth, especially in
terms of the deteriorating water resources, remains a major challenge to the polity
and to the mechanisms of service delivery in urban and rural areas. Putting
governance at the heart of the development process, an UNDP report says that
India’s economic growth would jump 1.5% and FDI by 12% if corruption
came down to the Scandinavian levels.
53. India and the International Trade Environment. With the end of the Cold
War, the old system of multi-lateral trading, General Agreement on Tariffs and
Trade (GATT), evolved into the World Trade Organisation (WTO) in January 1995.
Following the conclusion of the Uruguay Round negotiations; the multi-lateral rules
and disciplines were extended to trade in services, trade in knowledge (intellectual
property rights) and a separate agreement was concluded on agricultural products.
As a founder member of WTO, India expects to benefit from non-discrimination in
the form of national treatment and the Most Favoured Nation (MFN) treatment to
India’s exports in the markets of other WTO member- countries. A Dispute
Settlement Mechanism (DSM) in WTO ensures that due benefits accrue under the
WTO rules to a member country or, alternately, to allow it to legitimately resort
to anti-dumping or countervailing duty measures, if vindicated in the DSM process.
Successive conferences have enlarged the trade and d e v e l o p m e n t a g e n d a f o r
the member countries .
Whilst the Singapore Ministerial Conference (9-13
December, 1996) addressed issues such as information technology agreement and
trade and investment, the Doha Ministerial (9-14 November, 2001) addressed issues
relating to agriculture, services and intellectual property rights. The issues having
direct implications for India’s economic growth and trade are TRIPS (Trade Related
Aspects of Intellectual Property Rights) and public health, implementation issues,
elimination of export subsidies in developed countries and differential treatment in
agricultural subsidies in developing countries including food security and rural
development, services (especially the issue of movement of natural persons),
market access for non-agricultural products (reduction/elimination of tariff peaks,
high tariffs and tariff escalation on products of export interest to developing
countries), implementation and procedural aspects of anti dumping and subsidies’
agreement for elimination of arbitrary
use
of anti-dumping mechanisms,
clarifications on disput e settlement understanding, trade environment issues (effect of
environmental measures on market access and TRIPS issues), the Singapore
issues on trade and investment and the WTO and core labour standards. These
26
negotiations have entailed constructive participation by India and other key
developing countries for liberalisation of international trade regime and protection
of the interests of developing countries. At the Cancun (10-14 September, 2003)
and the Hong Kong (13-18 December, 2005) Ministerial, no agreement could be
concluded due to the reluctance of the developed countries to reduce their
agricultural subsidies. It is significant that, during the course of the negotiations
from 1995 onwards, India and other key developing countries have been able to
successfully resist the attempt of the developed countries to front-load their agenda
at the cost of the interests of the developing c o u n t r i e s . Although, the international
trade regime has become somewhat liberal in the 90s as evident in the
expansion of global trade, significant advances need to be made for a more
equitable and trade-facilitating international regime.
54.
Whilst continuing its efforts in bringing the Doha Round to a successful
conclusion, India has been, simultaneously, engaged with its major trade partners for
beneficial regional and bilateral trade arrangements. On 1 July, 2006, the South
Asian Free Trade Area Agreement (SAFTA) was launched following its ratification
by the SAARC member-countries. Although there has been slow progress in the
development of a regional market, not least as a result of Pakistan not granting India
the MFN status, SAFTA is expected to benefit all regional economies and to pave
the way for a prospective economic union; India’s exports to the member countries
were at US$ 4.15 billion in 2003-04 registering an increase of 52.29% over the
previous year and its imports from them were US$ 671 million in the same year
registering an increase of 30.64% over the previous year. Trade liberalisation has
also been attempted in the region through bilateral Free Trade Agreements (FTAs)
such as between India-Sri Lanka, besides India- Bhutan and India-Nepal. Several
new bilateral FTAs between other South Asian countries and South East Asian
countries are being progressed.
55. Alternate Scenarios of India’s Future. A
World E c o n o m i c ForumConfederation of Indian Industry joint study, ‘India and the World: Scenarios to
2025,’ (2005), based on series of workshops in India, London and Davos, on
alternate scenarios of India’s future, identified six drivers for economic growth: a)
favourable demographics, b) a large pool of low cost, skilled labour, c)
entrepreneurial, indigenous companies, d) continuing economic reforms and global
integration, e) a stable political regime and democracy, and f) a record of high,
sustained growth rates. Investment focus on poverty alleviation, agriculture and rural
development, healthcare, access to education, overcoming infrastructure constraints
and on effective governance would lead to, according to Oxford Economic
Forecasting, close to 10% annual growth by 2020 which would be the highest in the
world. An export-led growth is to be followed by well-developed domestic market to
withstand the negative effects of a global slowdown around 2015. A less favourable
scenario envisages unbalanced growth – strong performance in a few select sectors
but weak rural economy – leading to the slowdown of the growth rate by 2020 to
around 7%. The worst case scenario is a variant of the less favourable one which is
compounded by a lack-lustre world economy leading to a growth rate of 5% and
declining further. Clearly, the key factors are the performance of the drivers
identified above.
27
CHAPTER – 4
ENERGY SECURITY AND PROSPECTS – A CRITICAL ANALYSIS
56. India's energy security has come under an alarming pressure from rising
dependence on imported oil, regulatory uncertainty and opaque gas pricing policies.
Supply issue
57. “Small pool of skilled manpower and poorly developed upstream infrastructure
and dependence on fossil fuels are other factors impacting energy security,” says a
report by FICCI and Ernst & Young. There is a dire need to address the supply issue
through a slew of policy reforms, as well as to launch a massive awareness campaign
on the demand side management, and the pricing of products, so as to incentivise
investments for raising domestic production.
Oil price hike
58. According to the Integrated Energy Policy of the Government, the country's
requirement of primary commercial energy is projected to increase from 551 million
tonne of oil equivalent in current financial year to 1,823 mt of oil equivalent in
2031-32.
59. The increase in oil price by $10 a barrel could potentially slow the GDP growth
by 0.2 per cent and may inflate the current account deficit by 0.4 per cent.
Gas demand
60. The recent depreciation of the rupee has raised the crude oil imports costs,
impacting trade deficit and domestic inflation. Notably, the import of crude oil and oil
products rose from $50.3 billion in 2005-06 to $115.9 billion in 2010-11.
61. In the current financial year (till October 2012), oil imports touched $75 billion.
Around 32 per cent of demand for gas in the country is unmet. Most of the gas
production and liquefied natural gas (LNG) terminals were located in the western part
of the country, adversely impacting the availability of gas in the rest of the country.
62. Over the next few years, the availability of gas is likely to increase on the back
of incremental supplies from the KG-D6 block, as well as from the new gas fields of
ONGC and Gujarat State Petroleum, coal-bed methane (CBM) and new LNG
facilities. In spite of the increase in supplies, shortages are likely to persist due to
significant latent demand and overall growth in demand for gas in the country.
Further notes are available in the Approach Paper on 12th Five Year Plan
at Appendix –II.
28
CHAPTER – 5
FOREIGN DIRECT INVESTMENT (FDI) AND
ECONOMIC DEVELOPMENT
63. The last two decades of the twentieth century witnessed a dramatic flow of
foreign investment into developing economies, indicating that encouragement of
foreign investment has become an integral part of the economic reforms process of
these economies. As against a highly suspicious attitude of these countries towards
inward foreign direct investment (FDI) in the past, most countries now regard FDI as
beneficial for their development efforts and compete with each other to attract it. The
explanation for this shift in attitude lies in the changes in political and economic
systems that have occurred during the closing years of the 20th century. Developing
countries now compete with each other to attract FDI as they see it as a strategic
instrument of development policy. FDI is believed to play an important role in the
long-term economic development of a country by augmenting availability of capital,
enhancing competitiveness of domestic economy through transfer of technology,
strengthening infrastructure, raising productivity, boosting exports and generating new
employment opportunities. FDI flows are usually preferred over other forms of
external finance because they are non-debt creating and less volatile.
64. In the wake of economic liberalization policy initiated in 1991, the Government
of India has taken several measures to encourage FDI in almost all sectors of the
economy. In particular, the emphasis has been on FDI inflows in the development of
infrastructure, technological upgradation of Indian industry and projects having the
potential for generating employment on a large scale. The Government has put in
place a liberal and transparent foreign investment regime where most activities are
opened to foreign investment on an automatic route.
65. Over the past few years, India has become an attractive destination for foreign
investment owing to its large and rapidly growing consumer market, a developed
commercial banking network, a vast reservoir of skilled and low-cost manpower, and
a package of fiscal incentives for foreign investors. Despite the fact that India has
strong macroeconomic fundamentals, a liberal FDI regime amongst developing
economies and a strategic location with access to a vast domestic and South Asian
market, its share in world’s total flow of FDI to developing countries is dismally low.
Countries such as China, Singapore, Indonesia and Thailand attract greater amounts of
FDI than India. Many of these countries have a more business-friendly environment as
compared to India. Some of the deterrents to FDI inflows in India include bureaucratic
controls and procedures, infrastructural bottlenecks, outmoded labour laws and a less
business-oriented image. Consequently, India is not able to attract a sizeable
proportion of FDI flowing to the developing nations. Infrastructure and exports, the
key drivers of productivity enhancement and economic growth, face serious
investment constraints. More open and liberal policies for investment in these sectors
can attract foreign investors who have easier access to capital resources and global
expertise. Other measures that can be taken for FDI promotion include simplification
29
and modernization of laws, rules and regulations, introduction of modern and
professional regulatory systems and improving India’s image as a successful FDI
destination.
66. In their efforts to remove impediments to FDI, the Government has also taken
several measures to ensure that its tax system is internationally competitive. To
stimulate economic growth and encourage investment for industrial development, the
Indian government has offered several tax concessions to foreign investors from time
to time such as tax holidays for 100 per cent export oriented undertakings, tax
concessions in backward areas and those relating to research and development. While
considerable steps have been taken to make the tax environment conducive, still a lot
needs to be done in terms of making our tax system competitive with other developing
nations.
67. Apart from the above policy changes, an attitudinal change towards FDI is
required. Although India’s presence has improved significantly in the international
investors’ radar screen in recent years, there is still a long way to go. This is especially
true in respect of a number of sectors in which India’s requirements may be at
variance with international investor perceptions. The need of the hour is to improve
investment climate in general.
68. Concluding Observations on India’s Development Experience. The
enterprise of nation-building that India has been engaged in is truly unique for the
values under-pinning its political mobilisation before independence, which provided
the sinews to the post-independence political and administrative institutions to
successfully cope with the challenges of a cataclysmic partition and of the
transformation of a colonised economy into a modern one; and, this has
implications for our study of India’s likely future in the new Millennium. Unlike
many developing countries, the Indian polity has demonstrated the capacity for
handling the transitions to successive stages of developmental challenges and radical
changes in international circumstances without destabilising internal disruptions.
Besides the partition, one can mention, amongst these challenges, the Green
Revolution, the computer revolution in the mid-80s (which prepared the ground
for the IT revolution of the 90s) and economic restructuring in the era of
globalisation. In the last instance, India is re- writing the script of globalisation far
beyond the imagination of its original articulators. This betokens a high institutional
maturity, capacity and resilience. Equally significantly, starting as a highly unequal,
colonised society at independence, India has been able to bridge its socioeconomic disparities in a large measure so much so that the World Bank has
described India as less unequal in 2005, as measured by the Gini co-efficient, than
China, Brazil and the US. According to some other statistics, it is also less unequal
than the ASEAN, African and Latin American countries.
69.
At the same time, some other conclusions, based on our post-independence
development also seem inescapable. Our major transformational endeavours have
been driven by a preceding crisis. The Green Revolution was carried out in rather
dramatic circumstances created by severe drought and an economic crisis; the
30
launching of the 1991 reform process was preceded by financial bankruptcy. This
is indicative of an institutional reflex which appears unable to implement sustained
policy packages calibrated to early intimations of developing imbalances but is
reactive to a crisis which simply gets out of hand. Further, various internal crises
have also interrupted the economic reform process in the country, be it the Punjab
crisis during Smt. Gandhi’s time, the Bofors controversy, the Babri structure
demolition crisis or, even, the second half of various governments’ tenures when the
elections loom on the horizon. Could our past policy vacillations have been
minimized to spare the society the attendant human costs? This touches the heart of
the process of governance practices and politics, our policy formulation capabilities
and the delivery mechanisms for the policy packages at the grass-roots where it
matters most.
70.
These issues would come into sharper focus as we argue and live the
liberalisation debate in the country. Even though considerable synergies have
been generated, the current economic growth is largely driven by FDI. The role of
FDI as a key driver in our economic growth is dependent on several
extraneous factors
such as global macro-economic
balances,
investment
environment in India vis-à-vis other competing countries and its over-all
volatility. Is the current surge in FDI leading to overheating and over-valuation of
stocks? Of late, the volatility of the stocks has increased due to extraneous stimuli
even though the Sensex is going through the roof. Apart from the macro- economic
imbalances, the performance of other economies will impact on us more directly
than hitherto. If the Chinese economy crash lands, it would have direct impact
on the Indian economy. As the Indian economy globalises, the issues of
systemic ability, as it obtains today, to manage widening socio- economic
inequality in our diverse country would get even more hotly debated – not to
mention the effects of the environmental costs. How easy or difficult would be
the issue of recourse to regulatory authorities to manage our economic modernisation
and of the regulation of regulatory authorities? How would globalisation help in
creating an economy making the optimal and cost-efficient use of our assets given
the cyclical nature of global economic dynamics of which we are, increasingly and
rapidly, becoming a part? Finding socially harmonious answers by the political and
bureaucratic leaderships to these issues would be critical to the survival of our
nation’s economy.
CHAPTER - 6
POWER SECTOR IN INDIA
Introduction
Power Sector in India is at a crucial juncture of its evolution from a controlled
environment to a competitive, market driven regime which endeavours to provide
affordable, reliable and quality power at reasonable prices to all sectors of the
economy. The Gross Domestic Product (GDP) of our country has been growing at the
31
rate of about 8 per cent for the last several years. The liberalization and globalization
of the economy is leading to an increased tempo in industrial and commercial
activities and this, coupled with penetration of technology and I.T. in the day-to-day
life of the common man, is expected to result in a high growth in power demand. It is
accordingly essential that development of the Power Sector shall be commensurate
with the overall economic growth of the nation.
71.
The Indian power sector is one of the most diversified in the world. Sources
for power generation range from commercial sources like coal, lignite, natural gas, oil,
hydro and nuclear power to other viable non-conventional sources like wind, solar and
agriculture and domestic waste. The demand for electricity in the country has been
growing at a rapid rate and is expected to grow further in the years to come. In order
to meet the increasing requirement of electricity, massive addition to the installed
generating capacity in the country is required. While planning the capacity addition
programme, the overall objective of sustainable development has been kept in mind.
Since its structured growth post-independence, Indian power sector has made
substantial progress both in terms of enhancing power generation and in making
available power to widely distributed geographical boundaries.
72.
Over the past 60 years or so, India has taken rapid strides in the
development of the power sector both in terms of enhancing power generation as well
as in making power available to widely distributed geographical boundaries. In order
to meet the increasing demand for electricity, to fuel the economic growth of the
country, large additions to the installed generating capacity and development of
associated transmission and distribution network are required. However this
developmental process has to be within the realms of sustainable development and
environmental concerns.
73 .
During the past, the power sector was perceived to be riddled with some
fundamental weaknesses, which necessitated initiation of the reform process in the
sector. Even though a number of policy initiatives have been put in place, the task of
transforming the power sector is yet to be achieved. Our endeavour is to realise the
stipulations of the electricity act 2003 as well as various policies of the government
and to ensure fructification of their intended benefits. Further, lifeline energy needs of
all households must be met. therefore, it has been the vision and the constant effort of
the government, to not only increase the generation of power in the country but also to
ensure that power reaches all people with particular attention to the poor and
vulnerable sections of the society.
74.
The mission of the government is to provide quality power to all at reasonable
rates. The enactment of the electricity act in June 2003 was a major milestone, which
paved the way for development of the power sector within a competitive and liberal
framework while protecting the interests of the consumers, as well as creating
conducive environment for attracting investments in the sector. The national
electricity policy and the national tariff policy were finalized by the government to
steer the evolution of the power sector within the ambit of the act. However, while
traversing the developmental path, need has been felt to review certain aspects of the
32
electricity act and the government’s policies. This is essential in order to make the
government’s objectives achievable in accordance with the stipulated intentions,
within the boundaries of the institutional and financial viability. The power sector
cannot deliver on its social commitments unless it is commercially and financially
viable. To improve the financial health of the distribution utilities, measures are
required to strengthen governance standards of DISCOMS, tariff rationalization and
optimising the procurement cost of power.
75.
As a responsible nation, a two pronged strategy has been adopted whereby on
one hand, continuous efforts are being made to augment the supply of clean and green
power, and on the other, emphasizing the need for demand side management and
energy efficiency measures. Energy efficiency and demand side management has
assumed great importance in view of the need to conserve depleting energy resources
as well as to minimize the carbon footprint of the power sector.
Indian power sector in the current perspective
76.
Currently, India has the fifth largest power system in the world, with an
installed electricity capacity of over 2,29,251 mw as on 31.10.2013. Electricity
generation is mainly comprised of thermal, hydro, renewable and nuclear source.
India’s electricity mix comprises of 68 per cent thermal, 18 per cent hydro, 12 per cent
renewable & 2 per cent nuclear energy.
Plan-wise Growth in Generation Capacity
33
77.
Plan-wise Growth in Generation Capacity vs Targets
Five Year Plan
1300
1100
Installed
capacity
(MW)
2886
nd
3500
2250
4653
45.9
rd
1040
4520
9027
73.9
th
9264
4519
16664
126.2
th
12499
10202
26680
171.6
th
19666
14226
42585
228.7
th
22245
21401
63636
329.2
th
30533
16423
85795
464.6
th
40245
19015
105046
559.2
th
41110
21130
132329
671.9
th
78000
54964
199877
884
1s (1951-56)
2 (1956-61)
3 (1961-66)
4 (1969-74)
5 (1974-79)
6 (1980-85)
7 (1985-90)
8 (1992-97)
9 (1997-02)
10 (2002-07)
11 (2007-12)
Target (MW)
Achievement
(MW)
Per Capita
Consumption
(KWH)
30.9
T&D Loss – World Scenario
*Source: CEA report - growth of electricity sector in India from 1947-2012
34
Cost of Supply vs Revenue Realised
Critical Issues
78.
In view of the emerging developments, some of the critical issues / risk
factors pertaining to the sector are as follows :
 Issues pertaining to thermal projects
 Availability of power equipment / epc players : there are constraints pertaining
to availability of power equipment as also the availability of quality epc
players to cater to the requirements of increasing number of thermal power
generation projects. Despite the ongoing thrust on domestic capacity addition
be the domestic power equipment industry, the reliance on equipment imports
is likely to continue in the medium term. Thus the development in domestic
power equipment industry and availability of quality epc players will remain
crucial for the timely implementation of power projects while meeting the
quality and servicing / spare part requirements.
 Coal shortages and environmental issues power generation companies have
been procuring coal under coal linkages / fuel supply agreements with coal
india ltd, captive mine blocks and through imports. However, domestic coal
based generation plants have been experiencing coal supply constraints and
have lost generation due to coal shortages on account of factors such as
constrained supplies by coal india limited (which accounts for 85% of
domestic coal supplies) and lack of progress in captive coal mining. Thus the
country’s dependence on coal imports has been rising in the recent past.
 Gas supply constraints: based on demand supply analysis, while the domestic
gas supplies are projected to increase, the country is expected to remain
dependent on lng imports to meet the growing demand by end user industries.
Gas prices in the future are expected to witness an upward trend due to
increase in exploration costs from difficult fields in the country as also
35
increase in the proportion of costly lng imports. For the 12th plan period, in
view of the expected substantial supply constraints expected, domestic gas
would be allocated to meet only 60% of the total gas requirements of all power
projects. The gas for the balance capacity would have to be tied through
imports or retail contracts.
 Competitively bid generation projects : the inherent risk profile of competitive
bid projects exceed those of cost plus tariff structure. The levellised cost of
competitive bid projects is essentially a function of the risks pertaining to
market, technology, construction, fuel and regulatory factors faced by each
option (technology / fuel) for generating electricity. The ability of the
generating companies to pass through the fluctuation in fuel prices depends on
whether such fuel price fluctuations are captured by the relevant index in
levellised tariff formulae as quoted during bidding vis –a – vis the escalation
rates as notified by central electricity regulatory commission (cerc) from time
to time. In case fuel costs are not pass through (where the bidder quoted firm
tariff for every year during the contract), the returns from the project may
fluctuate considerably depending on the portion of the power being sold in the
short – term market. Thus the returns would depend on the bidding strategy
adopted by the ipp and the ability to keep the costs (both operating and capital)
within the bid levels.
 Challenges in hydro power projects : hydro power projects are expected to face
risks on account of factors such as environmental delay / cancellation of
environmental clearances, delays in land acquisition, poor infrastructure,
tunnelling delays, geological surprises, contractual and procurement issues,
shortage of skilled man power, difficulties in evacuation of power, etc. Hydro
power projects are also increasingly becoming prone to hydrology risks.
 Evacuation Issues : in recent times, there have been problems pertaining to
evacuation of power in case of generation projects who are unable to identify
beneficiaries / tie up transmission through bulk power transmission agreements
(BPTAs) leading to uncertainty in planning / investment in transmission line
augmentation (associated transmission system) by transmission utilities /
licensees. Also, there have been difficulties for evacuating power in case of
small-hydro / renewable energy projects which are often located in remote /
difficult state regulatory commissions on the issue of interconnection of
renewable/non-firm power to the grid). Going forward, interstate transmission
planning and evacuation is expected to happened in a planned/coordinated and
scientific manner which, however, may witness difficulties at intra-state level
due to lack of upgradation of transmission/distribution network/infrastructure in
the respective states. While larges interstate projects may comfortably connect to
the nearest interstate interconnection point, small and renewable energy projects
which rely on respective state transmission utilities for evacuation may face
difficulties due to different policies in respective states.
36
 Distribution Issues: Aggregate Technical & Commercial (AT&C) losses are
likely to remain a source of concern for the state sector distribution companies,
thus leading to continued dependence on subsidies / grant from the respective
state governments, as also resulting in frequent hikes in retail tariffs. Financial
health of state DISCOMS will continue to remain fragile with continued reliance
on growing subsidies and likely shift of lucrative consumers through open
access. Thirteenth finance commission (TFC) has in its recommendation to the
GoI, pointed out that even better performing states need a minimum of 7%
increase in tariff on an annual basis (at 2007-08 subsidy levels), to bridge the gap
between actual receipts and government subsidy. TFC has pointed out that
requirement to hike the tariff in poorly performing state could be as high as 19%
per annum which could be difficult to achieve. TFC, in its projection has pointed
out that net losses of state transmission and distribution utilities are expected to
rise from Rs. 68, 643 crore in fy 2011 to rs. 1,16,089 crore in 2014-15 if
immediate steps are not taken to reform the utilities.
Outlook
79.
The power sector is endeavouring to meet the challenge of providing adequate
power needed to fuel the growing economy of the country. However, this growth of
the power sector has to be within the realms of the principles of sustainable
development. A low carbon growth strategy has been adopted in the planning process
and highest priority is accorded to development of generation based on renewable
energy sources. Thrust is also accorded to maximizing efficiency in the entire
electricity chain, which has the duel advantage of conserving scarce resources and
minimizing the effect on the environment. Draft amendments to the electricity act,
2003 is being expedited to enable further improvement in grid security, efficiency of
distribution sector through separation of carriage and content, rationalization of tariff
etc.
80.
Despite the efforts being made to ramp up the generation capacity, the country
may witness slippages in capacity addition on account of various emerging challenges
leading to continued deficit scenario in the medium term (according to estimates by
CEA / ICRA, the peak and energy deficit are projected to the 12 per cent and 6 per
cent respectively by the end of twelfth plan period, while Crisil has projected a
reduction in peak deficit to a level of 4 per cent by fy2015). While the importance of
renewable energy projects is expected to increase, minimization of AT & C losses and
effective demand management will remain critical for sustainable growth of the
sector. While the externalities and constraints in transmission / distribution
components particularly at state level would continue to persist, the ongoing
regulatory developments is expected to create an hybrid power market (comprising of
long term contracted power and short term market) in the medium term.
37
CHAPTER- 7
URBANISATION IN INDIA: TRENDS, ISSUES AND CHALLENGES
“Urbanisation is a process of switch from spread out patterns of human settlements
to one of concentration in urban centres. It is a finite process ... a cycle through
which nations pass as they evolve from agrarian to industrial society”
– Kingsley Davis
Introduction
81.
Urbanization and Economic Growth. Urbanisation is an increase in
population and economic activities in the urban areas which leads to further
development of towns and urban agglomerations to contain this rising population. It is
a cause and effect relationship of heightened economic progress in a region. Though
migration is the key factor, other aspects such as the demand for economic
employment, better educational opportunities, health facilities and higher standard of
living act as major propellants contributing to the upward trend in urbanisation.
Census data shows that India’s urban population has grown from 290 million in
2001 to 377 million in 2011, which accounts for over 30 percent of the country’s
population. The number of urban cities and towns has also increased from 5,161 in
2001 to 7,935 in 2011. The number of 1 million plus cities has grown from 35 in 2001
to 53 in 2011.
Report of the High Power Executive Committee (2011) estimated that by 2031,
India will have more than 87 metropolitan areas and the country’s urban population is
likely to soar to over 600 million, adding about 225 million people to present urban
population. This pace and scale of urbanization is unprecedented for India and will be
the fastest in the world outside of China.
The population growth of urban India is mainly organic, together with
reclassification of rural areas and expansion of city boundaries. According to the High
Powered Expert Committee 2011, direct migration to urban areas accounts for 20 to
25 percent of the increase in urban population.
82.
This transition will place cities and towns at the centre of India’s development
trajectory. In the coming decades, the urban sector will play a critical role in the
structural transformation of the Indian economy and in sustaining the higher rate of
economic growth. Ensuring high quality public services for the population in the cities
and towns of India is an end in itself, but it will also facilitate the full realization of
India’s economic potential.
Urbanization has shown significant positive linkages for economic growth.
Urban India accounted for 62 to 63 percent of the country’s GDP in 2009–10. This
growth in urban areas also creates opportunities for the rural economy and helps
improve its productivity, especially in rural areas adjacent to urban centres.
38
83.
While the true scale of urbanization is yet to unfold, Indian cities are
struggling at the current levels. Quality of life in our cities is poor as the majority of
citizens find it difficult to avail the sustainable livelihood opportunities and basic
services. For example 24 percent of the urban population lives in slums and many
slum dwellers do not have access to basic sanitation facilities and potable water. The
share of public transport in India is only 22 percent and share of buses was only 1.1
percent of total registered vehicles in 2001. Unfortunately, the lack of suitable
livelihood opportunities further deteriorates the quality of life for many, including the
physically challenged, e.g. 26 percent of the urban population lived below the monthly
consumption of Rs. 539 in 2004–05.
84.
Definition of Urbanization varies from person to person and region to region,
however, the true essence of urbanization is the rapid growth of population in the
urban areas and economic activities which bring about more development of towns.
Migration from rural to urban areas is an important factor for urbanization. Usually,
there are better facilities for health, education, employment and higher standard of
living in the urban areas in comparison with rural areas and this is another impact in
the urbanization.
85.
Trends and patterns of urbanization in India. Urbanization is measured
by two ways: First, level and growth of urban share of total population and its
distribution by size classes of cities and towns. This is called demographic approach.
Second, changes in number and growth of urban centres and an expansion of
geographical boundaries of existing urban areas. This is called geographical
approach.
Demographic approach
Table 1 shows that the annual exponential growth rate of urban population has
increased from 3.23 percent during 1961-71 to 3.79 percent during 1971-81, but
declined to 2.75 percent during 1991-2001. The decline in growth rate was slightly
reversed back during 2001-2011. During the same period, the share of urban
population in the total increased from 17.97 percent in 1961 to 31.16 percent in 2011.
This indicates that an increasing trend of India’s urbanization over the decades.
Table 1: Trends in India’s urbanization: 1961-2011
Note: As the 1981 Census was not conducted in Assam, and the 1991 Census was
not held in Jammu and Kashmir, the population of India includes projected figures
for these states in those periods. Source: Bhagat (2011).
39
As per the World Urbanization Prospects: 2011 Revision, the percentage of
total urban population in India is 30.9 in 2010, which is lower than the developed
countries like the United States of America (82.1 per cent) and Japan (90.5 percent)
during the same year. It is also lower than in other fast growing developing countries,
such as, China (49.2 per cent), Brazil (84.3), and Russian Federation (73.7 per cent) in
2010.
Figure 1 illustrates that India’s urban population is mainly concentrated in and
around class I cities. The percentage share of urban population in class I cities has
increased from 51.42 in 1961 to 68.7 in 2001. On the other hand, classes II to VI cities
have registered a decreasing rate of urban population growth (percentage). For
instance, the percentage share of urban population in class IV cities decreased from
12.77 in 1961 to 6.84 in 2001.
86.
Geographic Approach.
Table 2 shows that the number of Census towns
increased from 1362 in 2001 to 3894 in 2011 – an increase of about 186 percent. On
the other hand, the number of statutory towns registered a marginal increase of about
6.37 percent during 2001-2011. The number of urban agglomerations has increased
from 384 in 2001 to 475 in 2011, an increase of about 23.7 percent. The results
indicate an increasing trend of number of urban agglomerations (UAs) /towns and out
growths (OGs) from 2001 to 2011.
Table 2: Number of UAs/Towns and out growths
Notes: The following definitions are based on Census of India 2011.
1. All places within a municipality, corporation, cantonment board or notified town
area committee, etc. are reckoned as Statutory Towns).
2. All other places which satisfied the following criteria (known as Census Town):
2.1 A minimum population of 5,000
2.2 At least 75 per cent of the male main workers engaged in nonagricultural pursuits; and
2.3 A density of population of at least 400 per sq. km.
3. An urban agglomeration is a continuous urban spread constituting a town and its
adjoining outgrowths (OGs), or two or more physically contiguous towns together
with or without outgrowths of such towns.
40
4. An outgrowth is a viable unit such as a village or a hamlet or an enumeration
block made up of such village or hamlet and clearly identifiable in terms of its
boundaries and location.
87.
The total area of All Classes of cities and towns increased from 38509.28
square kilometers in 1961 to 78199.66 square kilometers in 2001. On the other hand,
total area of Class I cities increased from 8174.29 square kilometers in 1961 to
30984.69 square kilometers in 2001. The table also highlights some interesting trends
of CAGR of urban area, and shows that the total area of cities and towns of All
Classes increased from 1.19 percent during 1961-1971 to 2.05 percent during 19912001. On the contrary, though CAGR of total area of Class I cities increased from
3.64 percent during 1961-71 to 3.92 percent during 1971-81, it declined to 2.58
percent during 1991-2001. The results show an increasing trend of India’s urban
growth over the decades.
88.
According to 2001 census, the net addition was 546 new towns i.e., an
increase of 11.83 percent during 1991-2001. The highest increase is evident in class
III towns, where the number of towns increased from 517 to 1387 during 1961-2001.
The number of cities (or class I towns) has risen from 105 in 1961 to 441 in 2001. The
number of towns in class I to class V has been steadily rising since 1961. The total
number of metropolitan cities (population 1 million and above) in India has increased
from 23 in 1991 to 35 in 2001 and on to 53 by 2011. In addition, the number of towns
has increased from 2657 in 1961 to 7935 in 2011. The results indicate an increasing
trend in the addition of new cities/ towns in India.
CHAPTER – 8
CAPITAL MARKET AND ECONOMIC DEVELOPMENT
Historical Background
89. The history of evolution of Indian capital market dates back to nineteenth
century when the stock exchange as an institution started evolving in India. At the
time of independence (1947) India had 7 stock exchanges and 1,119 listed companies.
Based on the equity market capitalization as on December, 2011 Bombay stock
exchange is the 6th largest stock exchange in Asia and 14th in the world. As on the
same date with same criteria national stock exchange, the other major stock exchange
in India is the raked 16th largest stock exchange in the world. The fact that the number
of listed companies on Bombay stock exchange has gone up from 1,119 at the time of
independence to 5133 in December, 2011 with the number of stock exchange also
going up from 6 to 19 during the corresponding period shows that Indian securities
market has covered a long journey since independence. Presence of SEBI registered
market intermediaries like
8922 brokers
(cash-segment), 823 depositories
participants, 199 merchant bankers, 74 registrars to an issue and share transfer agents,
51 mutual funds and 1767 foreign institutional investors (fii), etc. During the period
between April, 2011 and December, 2011 further shows the level of depth achieved
by the Indian securities market over time.
41
Role of capital market
90. The transition from being a private company to a public one is one of the most
important decisions to be taken by the management in the life of a firm. It is also of
particular interest for all class of investors, including institutional investors, qualified
institutional borrowers (QIBs) and retail investors and the transition is facilitated
through capital market. The capital market provides a fresh source of capital that is
critical to the growth of a company and provides the founder/promoters and other
shareholders, a liquid market for their share. From an investor’s perspective,
participation in capital market through various instruments offered in the primary
market segment [initial public offerings (IPOs), right issues and further public offerings
(FPOs)] and secondary market trading of listed shares on stock exchanges provide an
opportunity to share in the rewards of the growth of firm. It is, therefore, important that
the quality of the market in terms of its efficiency, enhanced transparency, price
discovery process, etc., is brought at par with the international standards so as to
inculcate a fair degree of confidence among the investors in the market.
91. In 1980s and 1990s, there was an increasing realisation on the part of the policy
planners in India that an efficient and well developed capital market is essential for
sustained growth in an emerging market economy like India. The capital market fosters
economic growth by promoting channelisation of real savings for capital formation and
raises productivity of investment by improving allocation of investable funds. However,
it is quality of the market which determines effectiveness of this mechanism for capital
flow. Accordingly, with the view to improve the quality of the market in terms of
market efficiency, transparency, price discovery process, preventive unfair trade
practices etc., and bringing the market up to the international standards, a package of
reforms comprising of measures to liberalise, regulate and develop the Indian capital
market are being implemented since early 1990s.
92. Extensive reforms have since been taken in the Indian capital market, inter alia
covering reforms in the legislative framework, trading mechanisms, institutional
support, etc. These reforms were all the more desirable because the Indian market was
plagued by relative inefficiency in the trading mechanisms and regulatory gaps. In
particular, the Indian capital market was characterised by excessive government
control inefficient trading mechanisms through open out-cry, settlement of
transactions by physical movement of papers, instances of manipulation on the
secondary market price of the shares of the target company and non-existence of
derivative market for hedging and speculation. Some of the major milestone in the
history of capital markets reforms in India, inter-alia, include repeal of capital issues
(control) act, 1947, establishment of securities market regulator i.e. Securities and
exchange board of India (SEBI), introducing disclosure & investor protection (dip)
guidelines moving the market from merit based to disclosure based regulation, screen
based trading, etc. Some of the initiative taken for effectively managing market risk
and for protecting its integrity, inter-alia, included introduction of t+2 settlement
cycle, dematerialisation of shares, enactment of depositories act, 1996, amendment to
the securities contracts (regulation) act to expand the definition of “securities” to
include derivatives and to provide legal framework for trading of securitised debt,
42
setting up of clearing corporations for assuming counter-party risk, setting up of trade
and settlement guarantee funds, introduction of grading of IPOs to help retail
investors assessing the fundamentals of the company, etc.
Trends in the Primary Market
93. As a result of the reforms initiated by the government of India, primary market1
(including IPOs) started emerging as one of the major source of funds for Indian
companies as well as an important avenue for retail investors to channelise their
savings for higher return as indicated in the table below:
Primary market trends (in ` crore)
Year /
Category wise
month
Total
Public
Issue type
Rights
Listed
Ipos
No. Amount No. of Amount No. of Amount No. of Amount No. of Amount
of
issues
issues
issues
issues
issues
1
2002-03
26
4070
14
3639
12
432
20
3032
6
1039
2003-04
57
23272
35
22265
22
1007
36
19838
21
3434
2004-05
60
28256
34
24640
26
3616
37
14507
23
13749
2005-06 139 27382
103
23294
36
4088
60
16446
79
10936
2006-07 124 33508
85
29797
39
3710
47
5002
77
28504
2007-08 124 87029
92
54,511
32
32,518
39
44434
85
42,595
2008-09
47
16220
22
3583
25
12638
26
14138
21
2082
2009-10
76
57555
47
49236
29
8319
37
32859
39
24696
2010-11
91
67609
68
58105
23
9503
38
32049
53
35559
2011-12
71
48480
55
46105
16
2375
37
42576
34
5903
Primary market in India includes public issues as well as right issues. Public issues cover both IPOs and listed
issues.
43
It is observed from the above table that Indian market exhibited a rising trend up to
2007-08. Thereafter, the market started declining on account of global economic crises.
The effect of global economic prices is reflected in terms of decline in the ipo activities
during 2008-09 and 2009-10. Then, there was a recovery period of one year when the
number of IPO issues as well as amount went up in 2010-11. However, the subdued
IPO market of 2011-12 can be regarded as the fall-out of impact of euro zone crises on
the India growth story.
94. The details of the share of different categories of issues (IPOs, FPOs, and rights)
in the total resources mobilised since 2001-02 is provided in the figure below. It is
observed from the figure that the share of IPOs which was 15.9% in 2001-02 went
upto 48.7% in 2004-05 and then declined marginally to 39.9% before reaching the
peak of 85.1% in 2006-07. Thereafter, it exhibited a sharp decline in the next two
90
80
70
60
50
40
30
IPOs
FPOs
Rights
20
10
0
years and then 09-10 before reaching to the level of 50.3% in 2010-11.
Figure :
share of different category of issues in resources mobilised through primary
market
95. From the above details, it is observed that during the last decade the IPO
segment of the primary market has emerged as an important source of funds for the
Indian companies and also an avenue for the small and retail investors for
productively channelising their savings. Strong macroeconomic fundamentals,
sustained growth, active institutional support, sound business outlook has further
provided boost to this segment of market. Although, there are fluctuating trends in the
IPO market, both in terms of issues and amount raised as detailed above, keeping in
view the requirements of Indian corporates and the available sources of funding, this
trend is going to continue except for the temporary phases of cyclical downturn due to
domestic and international factors.
44
Trends in the Secondary Market
96. The Indian stock market is one of the best performing markets in the world in
2012. Relative to its level on the last trading day in 2011, the Sensex gained 3050
points (19.7 per cent) and Nifty gained 995 points (21.5 per cent) as on 31 October,
2012. As compared to growth in some of the global indices over the same period, like
DAX, Germany (23.1 per cent growth), Hang Seng, Hong Kong (17.4 per cent ), S&P
500, USA (12.3 per cent), the Indian market may be regarded as exhibiting a relatively
better performance in the recent times. However, in the current financial year, Sensex
gained 1101 points (or 6.3 per cent) whereas, nifty gained 324 points (or 6.1 per cent).
Market capitalisation is around 0.73 times the GDP of 2011-12. Subdued FII inflows,
depreciation of Indian rupees, Euro zone crisis, etc., could be some of the possible
reasons for the subdued performance of the Indian market.
Outlook
97. Accordingly, from a long term perspective of making the Indian capital market
sustainable, it is important that the behaviour of the market and its participants is
constantly observed and appropriate regulatory measures are put in place to protect the
integrity of the market and the interests of the investors. But more importantly, there is
also a need to constantly innovate new market products and better price discovery
process, if the policy makers really want to sustain the momentum of the Indian
capital market without compromising the integrity & transparency of the market.
Against this background and in the overall context of the evolving macro-economic
situation, it is therefore necessary that, the government in close collaboration with
market regulator should take initiatives as a continuous process to meet the growing
capital needs of the Indian economy.
CHAPTER – 9
EXPERIENCES & CHALLENGES IN PUBLIC – PRIVATE
PARTNERSHIP IN INDIA
98. Public-Private Partnership (PPP) describes a government service or private
business venture which is funded and operated through a partnership of government
and one or more private sector companies. These schemes are sometimes referred to as
PPP, p3 or p3.
99.
PPP involves a contract between a public sector authority and a private party,
in which the private party provides a public service or project and assumes substantial
financial, technical and operational risk in the project. In some types of PPP, the cost
of using the service is borne exclusively by the user of the service and not by the
taxpayer. In other types (notably the private finance initiative), capital investment is
made by the private sector on the basis of a contract with government to provide
45
agreed services and the cost of providing the service is borne wholly or in part by the
government. Government contributions to a PPP may also be in kind (notably the
transfer of existing assets). In projects that are aimed at creating public goods like in
the infrastructure sector, the government may provide a capital subsidy in the form of
a one-time grant, so as to make it more attractive to the private investors. In some
other cases, the government may support the project by providing revenue subsidies,
including tax breaks or by removing guaranteed annual revenues for a fixed time
period.
100. Typically, a public sector consortium forms a special company called a “special
purpose vehicle” (SPV) to develop, build, maintain and operate the asset for the
contracted period. In cases where the government has invested in the project, it is
typically (but not always) allotted an equity share in the SPV. The consortium is
usually made up of a building contractor, a maintenance company and bank lender(s).
It is the SPV that signs the contract with the government and with subcontractors to
build the facility and then maintain it. In the infrastructure sector, complex
arrangements and contracts that guarantee and secure the cash flows make PPP
projects prime candidates for project financing. A typical PPP example would be a
hospital building finances and constructed by a private developer and then leased to
the hospital authority. The private developer then acts as landlord, providing
housekeeping and other non-medical services while the hospital itself provides
medical services.
101. PPP is a young, rapidly evolving area. Certain basics are as follows : PPPs should be limited to projects delivering greater Value for Money (VFM)
than other forms of procurement.
 The contractibility of the quality of service,
 The transfer of a significant share of risks to the private sector,
 The presence of competition or incentive-based regulations,
 A sound institutional and legal framework,
 A sufficient level of technical expertise in the government, and, last but not
least,
 The proper disclosure of PPP commitments, along with government guarantees,
in government financial statements (and in debt-sustainability-analysis).
102. Govt of India defines a PPP as “a partnership between a public sector entity
(sponsoring authority) and a private sector entity (a legal entity with 51% equity with
private partners) for the creation and / or management of infrastructure for public
purpose for a specified period of time (concession period), on commercial terms and in
which the private partner has been procured through a transparent and open
procurement system.
46
103. Most of the PPP projects are located in Maharashtra, Karnataka, MP, Gujarat, AP
and Haryana. 60% of the projects are road projects followed by ports, power, water
and airports. About 320 billion rupees has been invested in India in PPP projects.
CHAPTER – 10
ECONOMIC CRIMES AND PARALLEL ECONOMY
104. Black money is income on which tax is evaded. It represents a large part of
bustling economy where transactions have been carried out in cash circumventing
banking channels. Various agencies have been working to estimate the size of India’s
black economy since 1985. Three think tanks namely National Council for Applied
Economic Research, National Institute of Public Finance and Policy and National
Institute of Financial Management has estimated the size of India’s black economy at
about 30% of GDP which is about Rs. 25 lakh crore. About 1/3 of India’s black
money transactions are believed to be in real estate followed by manufacturing, gold
and consumer goods. Property deals bullion and jewellery purchases, financial market
transactions, rigging of markets through foreign entities, using instruments such as
participatory notes, manipulations through entities claimed to be constituted for nonprofit motives, differing tax rates in differing tax jurisdictions under invoicing and
money laundering using the hawala or informal banking route are among the common
methods used for generating black money. Under-invoicing is the common
accounting trick used by firms to evade taxes. Investments in hundreds of unlisted
companies is another source for funnelling hundreds of crore of black money into the
legitimate financial system. The instruments used are convertible debentures.
Convertible debentures are instruments through which an investor exchanges the
funds, which he had lent, into equity at a later date, thus making them legitimate share
holders of the company. For example, a person ‘A’ lends Rs.50 crore in cash to a real
estate company through a convertible debenture. The real estate firm uses the money
to pay vendors for the ongoing projects. Under the deal, person ‘A’ converts Rs. 50
crore into equity shares at a later date and becomes the legitimate shareholder of the
real estate firm. Since these are unlisted companies they do not come under the
stringent norm of Security Exchange Board of India (SEBI).
105. It is learnt that the Government has tracked undisclosed income of more than
50,000 crore over the last 3 years. Tax evasion was more Rs. 1000 crore has been
detected from inputs from foreign countries. The Government has introduced
compulsory reporting in case assets are held abroad. In certain cases, tax is being
collected at source in case of purchases in cash of gold and jewellery. The estimate of
Rs. 25 lakh crore is staggering compared to India’s total annual welfare spending of
only about Rs. 3 lakh crore. It is imperative to develop systems to plug the loopholes
in India’s bustling cash economy that remain a major area in the proliferation of black
money. This will require keeping fairly high transaction limits and exempting those
with a reasonable audit trail at both ends of transactions. Payments by debit and credit
cards should be encouraged. System of e-banking should be strengthened to
47
encourage payments in these modes which will reduce the cash economy. The
government can also give tax incentives for use of financial instruments as practiced
in countries like Korea.
106. If it is true that the black money component in India is Rs. 25 lakh crore, if
disclosed and taxed at 30%, it would generate tax revenue of Rs. 8.5 lakh crore. This
amount of money could offer as zero tax year for all individuals in the country and
still have surplus for funding planned and non planned expenditure. It is therefore
imperative that earnest steps are taken to curb the menace of India’s Black Money.
CHAPTER – 11
UID, AADHAAR BASED DIRECT CASH TRANSFER OF SUBSIDY AND ITS
IMPACT ON POVERTY ALLEVIATION
107.
Direct benefit transfer is a program launched by Government of India on 01
January 2013. This program aims to transfer cash or subsidies directly to the target
beneficiaries.
108.
Cash transfer are programs that transfer cash directly, to beneficiaries, with or
without conditions to provided a monetary benefit for specific purpose or use such as
for education through a scholarship, for health care through a medical assistance
program, etc. The purpose could also include direct income support such as old age
income support through a pension, unemployment benefits, etc. Cash transfers could
also be made to provide direct subsidy for specific products such as for food, fuel,
fertilizers, electricity etc.
109.
Direct cash transfer is being used in as many as 29 countries in the world. The
best known examples are in Latin American Countries namely, Oportunidades in
Maxico, Socio Protection Network in Nicaragua and Bolsa Familia in Brazil.
India has more than one third of the world’s poor, but many of its anti poverty
programs end up nourishing rich more than the deprived. The public services in India
are frequently failing to reach the poor. A new Direct Benefit s Transfer (DBT)
program hopes to change that. The government of India has embarked upon an
ambitious scheme to provide a unique identification, ‘Aadhaar’, to every resident of
India.
110.
Aadhaar has been envisioned as a means for residents of easily and effectively
establish their identity, to any agency, anywhere in the country, without having to
frequently produce identity documentation to agencies. Aadhaar would thus ensure
that residents across India- including the poorest and the most marginalized can access
the benefits and service that are meant for them. Aadhaar would thus be critical to the
Government in achieving its goal of social justice and financial inclusion in the
coming years.
48
111.
In India, subsidies are justified as tools to induce higher consumption and
production, offset market imperfection and achieve socio policy objectives including
redistribution of income. Total subsidy payable in 2011-12 was estimated at Rs
2,16.297 crore against Rs 26,949 crore in 2001-02. According to the Budget propels
for 2013-14 fiscal, the government’s subsidy bill on food, petroleum and fertilizers is
estimate at Rs 2,20,971.50 crore as against Rs 2,47,854 crore in the revised estimate
for the 2012-13 fiscal. Interestingly, the RE for 2012-13 are higher by 38 percent
compared to BE of Rs 1,79,554 crore. The food and fuel subsidy for 2012-13 (RE) is
estimated at 90,000 crore and 96,880 crore respectively. Subsidy is best when it is
transparent, well targeted, and implementable.
112.
One of the priorities that have emerged in recent years is the need to improve
the delivery mechanism of the poverty alleviation programs. This is to ensure that
vulnerable groups can withstand unpredicted shocks to income and continue to access
basic goods and services at affordable prices. The budget 2013-14 has recommended
Direct Benefits Transfer (DBT) to improve the efficiency and reach of welfare
programs for the marginalized and underprivileged.
India spent nearly 2.4 percent of its GDP on subsidies. But the delivery system is
poorly managed and woefully inefficient. For example, a planning Commission’s
study (2005) had estimate that 58 percent of subsidized PDS food grain is diverted.
Over 36 percent of the budget subsidies in food are siphoned off the supply chain and
another 21 percent reaches the APL household. According to the study, for one rupee
wroth of income transfer to the poor, the government spend Rs 3.65, indicating that
one rupee of subsidy is worth only paisa to the poor. Therefore, there is a need for a
more effective, efficient and transparent delivery system. A big part of the inefficiency
in government service delivery is due to the inability to authenticate the identity of
individuals. This was, for long, held responsible for the poor not getting their ration
and banks not being interested in deepening their presence among the poor, especially
in rural areas. Aadhaar projects aims to provide unique ID number to all resident. In a
bid to control expenditure and eliminate wasteful expenses, the Economic Survey
(2012-13) has also laid emphasis on initiatives like DBT for better targeting and
improved delivery.
113.
43 districts were identified for roll during Phase I. However, the DBT was
rolled out in 7 schemes in 20 districts on 1 January 2013. The roll out plan was highly
scaled down from original proposal of 43 districts and 26 schemes. Most of the
schemes which were covered were already cash transferred. Number of estimated
beneficiaries was more over 2 lakh. From 1 Feb 2013, the DBT was launched in 11
more districts with a target to cover all 26 schemes. From 1 March 2013, DBT was
rolled out in remaining 12 of the 43 identified districts. It was further decided to keep
the major subsidies. - 3Fs i.e., Food, Fertilizer and Fuel outside the ambit of the DBT
due to complex issue of entitlements involved with them. On 1 July 2013, the Central
Government expanded the DBT scheme to cover 78 more districts, altogether 121
districts, covering nearly one fifth of the country. Three pension schemes for old age
person, widows and personal with disabilities were added making a total of 28
schemes in Phase II.
49
114.
DBT for LPG Consumers (DBTL) scheme was launched on 01 June 2013 in
20 identified high Aadhaar districts. Under the scheme, all Aadhaar – linked domestic
LPG consumers get an advance of 435 rupees an LPG cylinder in their bank account
as soon as they book the first subsidies unit before delivery. When the first subsidized
cylinder delivered to such consumers, the next subsidized cylinder at the market rate.
A maximum of nine subsidized LPG cylinders are provided by the Government to
household in a year. The scheme hit 4 million transactions within 10 weeks of its
launching. The Government extended DBTL to 35 more districts from 1 September
2013. Later it was decided to go for a massive roll out of the scheme in 269 districts
by 1 January 2014.
115.
In order to roll out the implementation of Aadhaar based DBT to
beneficiaries, the Governments constitute several committee on DCt is chaired by the
Prime Minister. This committee is assisted by the Executive Committee on DCT,
chaired by the Principal Secretary, PMO and convened by Secretary, Planning
Commission. Mission Mode Committee, namely, financial Inclusion Committee,
Technology Committee and implementation of DBT replacing Secretary, planning
Commission. In July 2013, the Mission along with its staff was shifted to the Minister
of Finance.
There are many obstacles to success rollout of the DBT. A major stumbling block is
opening bank accounts in “difficult pockets”. The post office banking network is still
not ready to take a part of the load as core banking in post offices is behind schedule.
Progress in issuing Aadhaar and National Population Registration is not providing
much comfort either. For instance, in 242 of the 650 districts penetration varies
between zero and 10%. Only 160 districts have Aadhaar coverage of over 50%. Eight
months down the line, it has emerged that a little over half of the population identified
for 25 schemes in 121 districts, where pilots are being run, had bank accounts. While a
quarter had both bank accounts and Aadhaar, there were less than 10% who had them
linked. So, till bank accounts and Aadhaar, tere were less than 10% of population in
the test cases had actually experienced the benefits of direct transfer. During the first
eight months, the government had allocated about Rs 250 crore on various welfare
programs and made around 32 lakh transactions through Aadhaar Payment Bridge
(APB) across 121 selected districts. This is too limited in scope when one is looking at
an annual subsidy transfers of Rs 3.25 lakh crore through Aadhaar enabled DBT. But
a good beginning has been made. India needs to consolidate the gains of pilot Phase
and move ahead as DBT will make her delivery systems more accountable and
transparent. Fixing leakage through DBT would annually save upto Rs 25,000 crore
and India could spend saving in enhancing its internal and external security which are
so essential to her.
50
CHAPTER – 12
INDIA’S FISCAL POLICY
Objectives of Fiscal Policy in India
116. Fiscal Policy in India always had to major objectives, namely improving the
growth performance of the economy and ensuring social justice to the people. Growth
Performance of the Economy.
117. Fiscal policy influences growth performance of an economy mainly in two ways.
In the first place, it affects growth by influencing the mobilisation of resources for
development. Secondly, it exercises its influence by improving the efficiency of
resource allocation.
118. Fiscal Policy and Resource Mobilisation. India has done well in terms of tax
effort. In 1950-51, when the planning process was initiated, the tax GDP ratio was as
low as 6.3 %. Since then, it rose steadily for four decades and stood at 15.8 per cent in
1991-92. During the liberalisation phase of 1990s the tax GDP ratio has risen again
and was 17.6 per cent in 1998-99 due to sharp reduction in tax rate. However, during
the last few years, tax-GDP in 2007-08 though it declined to 16.1 per cent of GDP in
2010-11. For a poor country like India, which started its development effort with a
very low per capita income and has recorded an extremely modest rate of growth for a
considerable period of planning, this record in mobilising tax revenue is not bad by
any standard. In India, all the major direct taxes, such as personal income tax and
corporation tax have recorded buoyancy greater than unity. However, in recent years
buoyancy of Union exercise duty and customs duty has been low. Obviously this has
not enabled as much mobilisation of resources through taxation as one would normally
expect in the conditions prevailing in India. It has to be admitted that there remains
some scope for raising additional tax revenue in the country.
119. Apart from tax revenue other important aspects of resource mobilisation are
generation of non-tax revenues, restricting of current government expenditure and
raising of surpluses of public sector enterprises. Each of these needs careful analysis
for assessing the government’s effort in respect of resource mobilisation.
120. In India, fiscal policy has been used for providing both special incentives for
private savings and encouraging investment in specified areas like housing. As a
result of these policies in case of the last three Five Year |Plans, the actual private
savings rate has exceeded the Plan target.
121. The failure of the fiscal policy in India is perhaps the most conspicuous in its
inability to prevent the growth of black economy. The studies which have attempted
to quantify the size of the black economy indicate that in the recent years the
government has suffered heavy losses on account of tax evasion. This revenue loss to
the government has reduced the built-in-elasticity of the tax system. The black
economy has also constrained the resource mobilisation effort through large scale
51
leakages of funds from development projects and other programmes. This black
income has a general tendency to lower down the savings propensity as its common
outlet is consumption expenditure on “luxury services”. The use of black income for
accumulation of real or financial assets is often avoided because it carries far greater
risks of detection and penalty.
122. Fiscal policy and allocation efficiency. Fiscal policy also influences growth
performance of an economy thorough its effects on the allocation of resources. An
efficient and rational allocation of resources will obviously be helpful in raising the
rate of economic growth. Therefore, if fiscal policy favourably affects the efficiency
of resource allocation, then in the process, growth performance of the economy is
bound to improve. An indifferent fiscal policy adversely affecting the efficiency of
resource allocation on the country retards the productive activity and thereby results in
lower rate of economic growth.
123. Among the various instruments of fiscal policy, perhaps tax policy is the most
important determinant of the efficiency of resource use. During the first found
decades of economic planning, the reliance on commodity taxation had increased and
it accounted for around 84 per cent of the tax revenue of the Central Government in
1990-91. However, during the period of economic reforms, the trend was reversed and
the ratio of indirect tax revenue to total tax revenue declined to 44.2 per cent
in
20910-11.
124. Upto the mid 1980s fiscal imbalance was seen in terms of the overall budget
deficit measured by the gap between the expenditure and the receipts under the
revenue and capital accounts taken together. This gap was sought to be filled by deficit
financing which in India is defined as borrowings from the Reserve Bank of India
against the issue of Treasury Bills and running down of accumulated cash balances.
When government borrows from the Reserve Bank of India who, on the basis of these
securities, issues more notes and puts them into circulation on behalf of the
government. This amounts to creation of money.
Rationale for Deficit Financing
125. In a developing economy when the government fails to mobilise adequate
resources for the public sector plan from domestic as well as external sources, recourse
to deficit financing becomes necessary. Alternatively the government can cut the size
of the plan itself and that in turn will slash the demand for investible funds. It will,
however, have serious repercussions on growth. Therefore, a developing country often
has to make a difficult choice between two regrettable necessities, viz., a lower growth
rate and an inflationary price rise. Obviously, of the two, price rise is a lesser evil and
is thus to be preferred to a lower growth rate. According to the planners, over the
years India has been facing precisely this problem. Pramit Chaudhuri rejects this
contention. He assets that the government did not make adequate efforts to mobilise
resources from domestic sources even at a time when there was an excess supply of
saving from within the private sector. In fact, the failure of the government to raise
adequate resources is largely on account of its inability to use its powers of taxation
systematically.
52
126. The need for deficit financing in this country arises on the one hand from the
failure of the government to mobilise the desired volume of surplus for the public
sector plans and on the other, from its rapidly growing expenditures (mostly on
unproductive non-developmental activities).
Consequences of Deficit Financing
127. Deficit financing can play a useful role during the phase of depression in a
developed economy. During this phase, the level of expenditure falls down to a very
low level and the banks and the general public are in no mood to undertake the risk of
investment. They prefer to accumulate idle cash balances instead. The machinery and
capital equipment are all there, what lacks is the incentive to produce due to deficiency
in aggregate demand. If the government pumps in additional purchasing power in the
economy (though deficit financing), the level of effective demand is likely to increase.
To meet this demand, the machinery and capital equipment lying hitherto unused will
be pressed into operation. The level of production will accordingly, increase. If this
increase is able to match the increase in the aggregate spending level, inflationary
tendencies will not be generated.
128. Conditions in underdeveloped countries are different. This is on account of the
fact that in these countries, the capital equipment does not exist but has to be built up.
Thus, while newly created money (as a result of deficit financing) leads to an
immediate increase in the purchasing power in the hands of the people, the production
of goods does not increase simultaneously. In fact, there is likely to be a considerable
time lag in the generation of extra purchasing power and the availability of additional
consumer goods. In the meantime, the level of prices increases. According to Meier
and Baldwin, capital accumulation in developing countries through deficit financing is
likely to generate inflation because in these countries “the propensity to consume is
high, there are many market imperfections, there is little excess capacity in plant and
equipment, and the elasticities of food supplies are low.”
Themes of the New Fiscal Policy
129. In the broad framework of the economic liberalisation approach of the recent
years, the major themes of the fiscal policy have been concretised in this country.
There is broad agreement on these themes and they can be summarised as follows: a systematic effort to simplify both the tax structure and the tax laws;
 a deliberate shift to a regime of reasonable direct tax rates, combined with
better administration and enforcement, to improve compliance and raise
revenues;
 the fostering of a stable and predictable tax policy environment;
 greater recognition and weight given to the resources allocation and equity
consequences of taxation;
53
 more reliance on non-discretionary fiscal and financial instruments in managing
the economy, as compared to ad hoc, discretionary physical controls;
 concerted efforts to improve tax administration and reduce the scope for
arbitrary harassment;
 growing appreciation of the links between fiscal and monetary policy;
 fresh initiative to strengthen methods of expenditure control.
CHAPTER – 13
ECONOMIC OUTLOOK FOR INDIA
130. Global economy is passing through a difficult phase. Most serious threat to
global stability is uncertainty due to euro-zone crisis, as no definitive solution still in
sight. This has impacted investment and growth around the world, including India the
immediate fallout has been sharp deceleration in global economic growth. As per the
IMF world economic outlook, October, 2012 the world output is expected to grow by
3.3 per cent in 2012, down from 5.1 per cent in 2010 and 3.8 per cent in 2011.
Advanced countries as a group is expected to grow only by 1.3 per cent, down from
3.0 per cent in 2010 and 1.6 per cent in 2011. Emerging market and developing
economy are expected to grow by 5.3 per cent, as against 7.4 per cent in 2010 and 6.2
per cent in 2011.
131. The Indian economy has also been affected by these developments. India’s GDP
growth that was 8.4 per cent in 2009-10 and 2010-11 growth decelerated to 6.5 per
cent last year and may be only around 6 per cent in the current year. The slowdown is
attributable both to the domestic as well as global factors. The global slowdown due to
unfolding of euro zone sovereign debt crisis has, inter-alia, impacted the Indian
economy through deceleration in exports, widening of trade and current account
deficit, decline in capital flows, fall in the value of Indian rupee, stock market
volatility and ultimately resulted in lower economic growth.
132. The reasons external sector vulnerabilities are affecting the Indian economy is
rapid globalisation of the economy. This can be gauged from the fact that the export of
goods and services that was 22.9 per cent of GDP in 1990s increased to 55.7 per cent
of GDP in 2011-12. Similarly capital account payments and receipts that was at 15.1
per cent of GDP in 1990s, increased to 48.2 per cent in 2011-12. As a result, global
developments have increasingly larger impact on the economy through the trade and
capital account channels. Besides, in the global environment of uncertainty and low
investment, impact is also transmitted through the confidence channel.
54
133. While the global economic slowdown had affected the export dependent sectors,
depressed sentiments, high interest rates, moderation in credit growth and a
deceleration in growth of investment also contributed to the overall moderation in
growth. Sustained high level of inflation has also been a major policy concern for over
the last two year.
134. The growth rate of industry sector declined from 7.2 per cent in 2010-11 to 3.4
per cent in 2011-12. The deceleration in the industrial sector was sharper during the
first half of the current financial year in comparison to that in the same period of the
previous year. During April-September 2012-13, iip growth was 0.1 per cent as
compared to 5.1 per cent in April-September 2011-12. The combination of factors that
affected industrial production during 2011-12, continued to be a drag on industrial
output even during the current financial year. However, major cause of manufacturing
sluggishness in this financial year has been the drop in investment as reflected in the
slow pace in disbursement of bank credit and lower investment in new projects. The
cycle of adverse business sentiment leading to lower investment and slowdown of
aggregate demand has delayed the industrial recovery. Further, infrastructure
bottlenecks also impinged on the performance of the mining and electricity sectors.
135. Keeping in view the above background, the Government has taken several steps
keeping in mind the following objectives:
a) To stabilize government finances and make the fiscal deficit more manageable,
so that higher growth is possible and sustainable;
b) To make this growth process socially and regionally more inclusive and
equitable. The key pillars of inclusive growth are new employment
opportunities and a lower rate of inflation;
c) To step up public investment as well as public-private partnerships, especially
in infrastructure;
d) To tap into available capital and technology from around the world that seeks
investment opportunities in India;
136. Monetary policy has an important role to play in keeping inflation under control
while also supporting growth. The Reserve Bank of India has sought to support a
revival of growth by reducing the CRR successively over two quarters. Central banks
have to balance the compulsions of stimulating growth and controlling inflation. Both
are important. But we must recognize that lower inflation is good both for growth and
for making growth more socially inclusive.
137. Bringing the fiscal deficit under control is an essential element in restoring
investor confidence. The roadmap to reduce the fiscal deficit from a projected 5.3 per
cent this year to 3 per cent by 2016-17 has been announced. The action taken recently
to reduce fuel subsidies must be seen in this perspective. However the Government is
also mindful of the effects such steps have on the poor and vulnerable and all possible
measures are being taken to protect their “lifeline” needs.
55
138. A large number of infrastructure projects are stuck because of the delay in
granting various clearances and the non-transparency in determining the conditions
under which clearances can be given. The Government is looking at ways to speed up
clearance processes and making them more transparent. Ramping up of investment in
infrastructure is critical for reviving the growth momentum. The 12th plan has a target
of investing almost a trillion dollars in infrastructure. Investment in infrastructure has
to be in the vanguard of public investment for many years to come and we are
working in that direction. However, about 50 percent of the investment needed in
infrastructure has to come from the private sector and this will require up-scaling of
private sector participation on a sustainable basis.
139. Deceleration in global economic growth has affected the external sector as
reflected in terms of trade deficit of 10.3 per cent and current account deficit of 4.2 per
cent of GDP in 2011-12. This is because while the export growth slowed
considerably, imports continued to remain high due to high international oil prices and
gold imports. It is difficult to reduce the deficit in the short run because exports may
not grow very rapidly whereas efforts to raise the investment rate will mean higher
imports. FDI is perhaps the best source of external financing to finance the deficit. It
is more stable than other forms of inflows and it brings in many externalities such as
know-how and access to global supply and marketing chains. Keeping this in view,
the Government has recently liberalized FDI in retail, aviation, insurance, power
exchanges and broadcasting.
140. The pursuit of inclusive growth depends critically on making banking facilities
accessible to millions of our countrymen. The Unique ID program providing Aadhaar
numbers for all residents is going to be the basis of the biggest transformation that is
going to take place in the way transactions are conducted. The government intends to
roll out Aadhaar based services rapidly so that benefits like scholarships, pensions,
health benefits, MNREGA wages and many other benefits are transferred directly into
bank accounts using Aadhaar as a bridge. This will bring in crores of people into an
automated financial transaction system. It will eliminate middlemen, cut down
leakages and target beneficiaries better. It will also enable an expanded programme of
cash transfers in lieu of physical distribution of subsidized commodities. The proposed
Goods and Services Tax is another major reform in the pipeline. Every possible effort
is being made to build a consensus for an early rollout of GST.
141. There is also a need to ensure capitalization on the demographic dividend that is
expected. Skill Development, expansion of secondary and higher education and better
healthcare facilities will all contribute to a more skilled workforce which can then
look forward to gainful employment opportunities.
56
CHAPTER – 14
BANKING SECTOR AND ITS INFLUENCE ON
INDIA’S DEVELOPMENT
142. At the end June 2011, scheduled commercial banks in India comprised 26 public
sector banks (State Bank of India and its 5 associate banks, 19 nationalised banks and
IDBI), 36 foreign banks, 14 old private sector banks and 36 foreign banks. In terms of
business, the public sector banks now have a dominant position. They accounted for
54.9 per cent of assets (fixed and other assets), 77.9 per cent of investment s of all
scheduled commercial banks as at end-March 2011. Amongst the public sector banks,
the State Bank of India and Associates had 17,976 branches as on June 30, 2011. The
nationalised banks and IDBI had 44,862 offices all over the country. In recent years
in order to meet the credit requirements of the weaker sections, small and marginal
farmers, landless labourers, artisans and small entrepreneurs, the regional rural banks
have been set up in different parts of the country. On June 30, 2011, their branches
numbered 15777. In terms of business they however, remain very much less
important than the traditional commercial banks. The foreign scheduled banks operate
mostly in big cities and their number of branches in the whole country is just 318.
Other scheduled commercial banks are private sector banks and their branches
numbered 11,842 as on June 30, 2011. As a whole, India now has a far more
developed and integrated banking system than that at the time of independence.
However, in a highly regulated system not only the service to customers, both a
depositors and borrowers, has suffered but many irregularities also developed in the
banking system which surfaced in 1992. Under financial sector reforms, an attempt is
being made to overcome these weaknesses of the banking system. It is nevertheless
true that certain neo-liberal reforms have eroded the achievements of bank
nationalisation.
Bank Lending
143. Of all the functions of commercial banks lending of funds is certainly the most
important function. While performing this function banks provide working capital to
commerce and industry. In India, only after the nationalisation of 14 major banks
substantial amounts of loans have been given for agricultural operations.
Evaluation of banking since Nationalisation
144. The period since bank nationalisation is of great importance from the point of
view of banking development as the size and the reach of the banking system
registered spectacular progress in this period. Aggregate bank deposits have risen
from 11 per cent of GDP to 67.2 per cent in 2010-11 and the total number of branches
from 8262 to 90830. Of these, 37.2 per cent are now in rural areas as against less than
22.5 per cent at the time of nationalisation of major banks in 1969. Opening of rural
branches has improved mobilisation of savings in the rural sector. Presently rural
57
deposits account for about 15 per cent of total deposits. Since bank nationalisation in
this country priority sector credit has increased from 14.6 per cent of non food gross
bank credit to 33.8 per cent. Over the years development of banking has been faster in
relatively less development of banking has been faster relatively less developed
regions of the country, and as a result regional disparities have declined and the
concentration of banking business is now less.
145. The performance of the banking system in India since the nationalisation of 14
banks is definitely impressive. The achievements of the banking sector as stated
above are, however, nowhere near meeting the needs of the economy. Since
development oriented policy of the banks eroded their profitability, it was used by the
Narasimhan Committee to criticise directed credit programmes. The Committee
argued that the directed investment and directed credit programmes. The Committee
argued that the directed investment and directed credit programmes together with
mounting expenditures completely eroded the profitability of the banks. The fact is
that in the later post-nationalisation phase, overall profitability of the banks was either
low or even negative and their non performing loans both as a percentage of total
advances and as a percentage of assets were fairly high and their financial position
was extremely weak.
146. Commercial banks during the post nationalisation phase had a societal purpose
and thus directed credit programme was pursued, though it eroded profitability of the
commercial banks. Banks were not regarded as profit maximising institutions.
Hence, it is wrong to assess their performance in their terms of their profitability.
Nevertheless in the process of ignoring profitability considerations, many commercial
banks lost their financial viability and by the end of 1980s, it had become clear that
further neglect of profitability considerations could ultimately send banking
institutions to their bankruptcy.
Banking Sector Reforms
147. Some recommendations were made by the Chakravarty Committee in 1985 for
improving the performance of the banking sector. However, the government lacking
initiative did not carry out reform measures earnestly. In 1991, the country was
caught into a deep economic crisis. The government at this juncture decided to
introduce comprehensive economic reforms. The banking sector reforms were part of
this package. The government appointed a Committee on the financial system under
the Chairmanship of M. Narasimham in August 1991 which delivered its report within
three months. The government also appointed the Committee on Banking Sector
Reforms under the Chairmanship of M. Narasimham which submitted its report in
April 1998. These reports are landmark documents and have influenced greatly the
banking sector reforms during the past few years.
148. Financial markets need supervision to prevent criminal fraud as well as financial
panic. Supervision and regulations are essential for healthy growth of banking
system. It is necessary that banks must be subject to rules concerning income
recognitions provisioning and portfolio concentration.
58
149. The decades of the 1980s and 1990s and the first decade of the present century
have witnessed several financial crisis around the world. The crises were sometimes
country specific, often regional, and in the case of the current crisis, global in scope.
In such case, the banking sector became a drag on the real economy, jeopardised
public finances and hurt economic growth. It is noteworthy that while other countries
and regions went through banking upheavals, the Indian banking remained safe. This
was both due to cautious and prudent regulation exercised by the Reserve Bank, on
the one hand, and the relatively lower globalisation of our banking sector. The Indian
banks have, in recent times, registered higher credit growth, deposit growth, better
return on assets, sound capital to risk weighted assets ratio and an improvement in
gross non-performing assets ratio.
150. However, certain concern needs to be addressed. The Indian banking system
must ensure financial inclusion, improved credit to rural areas, confirm to the priority
sector lending, must finance infrastructure projects, plan for better risk management
and improve their efficiency and delivery system.
CHAPTER – 15
INDUSTRIAL SECTOR IN INDIA
Phase I (1951-65) Building up of Strong Industrial Base
151. As noted above, phase I laid the basis for industrial development in the future.
The Second Plan, based on Mahalanobis model, emphasises the development of
capital goods industries and basic industries. Accordingly, huge investments were
made in industries like iron and steel heavy engineering, and machine building
industries. The same pattern of investment was continued in the Third Plan as well.
As a result, there occurred a noticeable acceleration in the compound (annual) growth
rate of industrial production over the first three Plan periods upto 1965 from 5.7 per
cent in the First Plan to 7.2 per cent in the Second Plan and further to 9.0 per cent in
the Third Plan.
Phase II (1965-80) Industrial Deceleration and Structural Retrogression.
152. The period 1965 to 1976 was marked by a sharp deceleration in industrial
growth. The rate of growth fell steeply from 9.0 per cent per annum during the Third
Plan to a mere 4.1 per cent per annum during the period 1965 to 1976. It is also
important to point out that even this meagre rate of industrial growth does not express
the true situation as there was a sharp increase of 10.6 per cent in industrial production
in the year 1976-77. If this year is left out then the rate of industrial growth over the
eleven year period 1965 to 1976 declines further to a meagre 3.7 per cent per annum.
In a similar way, the rate of growth of 6.1 per cent per annum during the Fifth Plan
59
owes considerably to the 10.6 per cent increase recorded in the year 1976-77. If this
year is left out, the rate of industrial growth for the remaining four years comes down
considerably. The last year of Phase II i.e. 1979-80, recorded a negative rate of
growth of industrial production of -1.6 per cent over the preceding year.
Phase III (1981 to 1991): The period of Industrial Recovery.
153. The period of 1980s can broadly be termed as a period of industrial recovery.
This is clearly brought out by a study of the revised Index of Industrial Production
(base 1980-81).
154. The rate of industrial growth was 6.4 per cent per annum during the year 198195, 8.5 per cent per annum during the Seventh Plan and 8.3 per cent in 1990-91. As
noted by Vijay Kelkar and Rajiv Kumar, “This is a marked upturn from growth rates
of around 4 per cent achieved during the latter half of 1960s and the 1970s. This
performance is also an improvement upon the growth rates achieved during the First
and Second Plan periods.
155. Similar trends of industrial recovery in 1980s are noted by some other
economists we well. In her study spanning the period 1959-60 to 1985-86, Isher
Judge Ahluwalia notes that the period 1980-81 to 1985-86 (i.e. the first half of the
1980s) was marked by significant acceleration in the growth of value added in the
manufacturing sector and all its use based sectors. The value added in the
manufacturing sector grew at the rate of 7.5 per cent per annum in the first half of
1980s as against only 4.7 to 5 per cent per annum in the period 1966-67 to 1979-80.
According to Ahluwalia, a very important aspect of the growth revival during the first
half of the 1980s was that it was not associated with an acceleration in the growth of
factor inputs but was, rather, based on better productivity performance. Thus, total
factor productivity which registered a negative and negligible growth of -0.2 to -0.3
per cent per annum in the period 1966-67 to 1979-80 showed a marked improvement
in the first half of the 1980s when it registered a growth of 3.4 per cent per annum.
New Industrial Policy and Liberal Fiscal Regime.
156. According to some economists, one of the main causes of industrial recovery
during the 1980s was the liberalisation of industrial and trade policies by the
government. According to Ahluwalia, “The most important changes have related to
reducing the domestic barriers to entry and expansion to inject a measure of
competition in domestic industry, simplifying the procedures and providing easier
access to better technology and intermediate material imports as well as more
flexibility in the use of installed capacity with a view to enabling easier supply
responses to changing demand conditions. These factors operating from the supply
side were helped by the pursuit of what may be termed as a liberal fiscal regime. The
important features of liberal fiscal regime were (i) maintenance of high budgetary
deficits year after year; (ii) the encouragement of dissaving. All these aspects of
liberal fiscal regime helped to expand the demand for manufactured goods in the
economy.
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157. The above discussion shows that while liberal fiscal regime helped in generating
demand for manufactured goods, liberal industrial and trade policies ensured that an
adequate supply response was forthcoming.
Phase IV (The period 1991-92 onwards)
158. The year 1991 ushered in a new era of economic liberalisation. Major
liberalisation measures designed to affect the performance of the industrial sector
were – wide scale reduction in the scope of industrial licensing, simplification of
procedural rules and regulations, reductions of areas exclusively reserved for the
public sector, disinvestment of equity of selected public sector undertakings,
enhancing the limits of foreign equity participation in domestic industrial
undertakings, liberalisation of trade and exchange rate policies, rationalisation and
reduction of customs and excise duties and personal and corporate income tax etc. A
question that has engaged the attention of the economists in recent times is: what has
been the effect of these liberalisation measures on the performance of the industrial
sector in the post reform period?
159. The post reform period witnessed revival of industrial growth which rose upto
11.5% by the Tenth Plan period. The Index of Industrial Production (IIP) shows that
growth was however volatile and not smooth. While different sectors had different
volatility spectrum capital goods and intermediates were the most volatile. High
volatility in industrial growth creates distortion; uncertainty increases the inflationary
pressure on economy.
160. Scarcity of resources has been recognised as a limiting factor for the process of
economic growth. The scope for output expansion, based on increased use of
resources or inputs, is restricted beyond a certain point due to non-availability and/or
diminishing returns. Therefore, efficiency or productivity of resources becomes a
crucial factor in the process of growth.
161. An overall view of India’s industrial development shows an increase in the share
of industrial sector in GDP. There is also a growth of infrastructure industries, capital
goods industries, a well diversified industrial structure, rapid growth of consumer
durables, emphasis on chemical and petro chemical industries and emergence of a
strong public sector.
162. However, certain problem needs to be addressed like a gap between target and
achievement, underutilisation of capacities, infrastructural constraints, growth of
regional imbalances and industrial sickness.
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CHAPTER – 15
TAX REFORMS IN INDIA
163. Since beginning of 90’s India has adopted the structural adjustment programme
with reforms in each major sector of the economy. Reforms were attempted in public
expenditure, followed by disinvestment of the public sector undertakings. The
objective was to increase operational efficiency through transfer of ownership to
private sector and improving management practices.
164. The structural adjustment programme was backed up with the reforms in the
overall tax system since nineties. Efforts were made to attain a higher tax-GDP ratio
by lowering tax rates, broadening tax base, and rationalizing tax exemptions and
incentives. Reforms were attempted, though at a later stage, at the States’ level too.
Fiscal Significance
165. In terms of revenue the existing tax system yields approximately 17% of the
GDP. In developed countries, however, this proportion is more than 30%. This is due
to the fact that major proportion of population in India is dependent on agriculture and
this sector is practically un-taxed. Also, service sector which has a significant
contribution in GDP is not fully taxed.
166. Due to tax reforms initiated in the nineties, the growth in revenue of the Union
Government from indirect taxes (such as customs duty and union excise duty) slowed
down while the revenue from direct taxes (like personal income tax and corporation
tax) showed an accelerated growth. Consequently, the direct tax to GDP ratio of the
Centre has recorded an upward trend (increased from 1.94 in 1990-91 to 6.31 in 200708) while the indirect tax-GDP ratio has fallen over time (declined from 8.17 in 199091 to 5.68 in 2007-08). At the same time, the tax-GDP ratio of the States has shown a
marginal increase.
167. In the late nineties and the period following the year 2000, the revenue from the
States’ indirect taxes relative to GDP has recorded an upward trend. Taxes on
commodities and services have contributed 58.9% to the total tax revenue of the
Centre and the States in 2008-09. The revenue from the direct taxes has shown a
moderately high growth rate (18.3%) during the period 1991-92 to 2008-09.
168. At the Central level, higher service tax and customs duty collections neutralized
the lower collections from income taxes and excise duties resulting in the overall
growth of gross tax revenue.
169. Sales tax has been the main source of revenue for the State Governments. It has
contributed more than 60% of the States’ own tax revenue. A major achievement at
the States’ level has been the replacing of the sales tax by State VAT to have a
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transparent and efficient tax system. However, the direct taxes such as land revenue,
agricultural income tax and profession tax have remained insignificant sources of
revenue for the States due to both political and structural reasons.
Taxes of the Union Government
170. The Union Government levies buoyant, broad-based having all-India coverage
taxes on income and property as also on commodities and services. In addition, the
Union Government levies taxes on imports and exports of commodities.
Taxes on International trade
171. The Union List authorizes the Central Government to levy tax on international
trade which takes the form of ‘customs duty’. The customs duty comprises export duty
and import duty.
172. With the increasing volume of imports and exports, the customs duty occupies
an important place in the overall tax revenue, with an annual growth rate of 8.69%.
However, with the opening up of the economy and the reduction of the effective rate
of customs duty, its share has declined over time.
173.
Export duty is levied on exports of specified commodities to mop up
windfall export profits. The rate of duty and the possibility of levy of this tax depend
upon the elasticity of demand for our products in the international market. It is levied
on FOB (free on board) value. In addition to export duty, export cess is leviable on
specified articles on their export under various enactments passed by the Government.
174.
Import duty is levied as a wedge between the domestic prices and prices of
imported goods to guard against cheap imports and to provide a level playing field for
the domestic producers. It is imposed on almost all commodities imported into the
country. The statutory rates of import duties, called tariff rates, are fixed by the
Parliament. However, the Union Government has the power, under the law, to provide
full or partial duty exemption.
175. Basic Customs Duty is levied on almost all commodities. The standard rate-of
basic customs duty is ad valorem and applicable to all goods. Prior to 1991-92, the
maximum rate of duty was 300% which was reduced to 110% in 1992-93, 50% in
1995-96 and 10% in 2008-09.
176. Current peak rate of duty is 10% on non-agricultural items (except for natural
rubber sheets, fish and cars). The average industrial tariff is about 9.4%. Reduction in
duty rates has been accompanied by reduction in dispersal of duty rates. The tax base
for customs duty is primarily the c.i.f. (cost, insurance and freight) value of goods
imported. Rates in general are higher for consumer goods, finished goods and
industrial products as compared to capital goods, inputs and agriculture goods. The
changes in the rate structure of customs duty have been introduced after the opening
up of the economy.
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177. Besides basic customs duty, there are other forms of duties that are levied along
with the basic duty. These are additional duty of custom or countervailing duty; special
countervailing duty; national calamity contingent duty on mobile phones, two-wheelers,
motor cars and multi-utility vehicles; education cess; secondary and higher education
cess, anti-dumping duty and safeguard duty.
178. Apart from the general principles of commodity classification, rates are also
determined on the basis of a number of Regional Trade Agreements that India has
signed with various countries. Preferential duty rates and duty concessions are
extended via these agreements to participating countries. With the adoption of the
policy of liberalization and open economy customs duty rates are now comparable to
the structure prevailing in other countries.
179. Central Board of Excise and Customs (CBEC) is the apex organization for policy
formulation and administration with regard to customs duty.
Central Taxes on Income and Property
180. The important taxes on income and property levied by the Union Government
include corporation tax and personal income tax. The other taxes in this category
include wealth tax, gift tax and estate duty.
(a) Corporation Tax
 The corporation tax is a tax on the corporate profits. It is the most important
source of revenue for the Central government and is also the most buoyant tax
among the direct taxes assigned to the Centre with annual growth rate of 21%.
 Prior to 1994-95, distinction was made between widely held and closely held
companies and between domestic and foreign companies. From 1994-95, this
tax is levied only on the basis of origin of company, i.e. whether a company is
domestic or foreign company.
 In 1993-94, the tax rate varied from 45% to 50% for domestic companies and
65% for foreign companies. Over the years, the range of rates has come down.
Presently, the rate of corporation tax is 30% for domestic companies and 40%
for foreign companies.
 In addition to the tax on corporate income, there is a surcharge on the
corporation tax. Currently, the rate of surcharge is 5% and 2.5% on domestic
and foreign companies, respectively.
 Since 2007-08 an additional cess of 1% is levied on the amount of corporation
tax and surcharge termed as “secondary and higher education cess”.
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 Notwithstanding the above statutory rates, the effective rates of corporation tax
are much lower than the nominal (statutory) rates due to exemptions,
concessions and incentives given for depreciation and investment allowance
etc. In fact, certain tax incentives have been incorporated in the income tax
structure to promote investment and capital formation in the economy. These
include incentive for industrial development, for promoting investment in
infrastructure, for environmental protection and incentive for development of
social sectors.
 Given all these concessions and incentives, some companies were able to
reduce their tax-liability to zero by working in backward areas, in infrastructure
or power sectors and in export processing zones or as export oriented units
(EOU).
 However, to mobilize some resources from such zero tax companies, a
minimum alternate tax (MAT) was introduced on their book profit in 1996-97.
The effective rate of MAT at the time of its introduction (i.e. in 1996-97) was
12.9% of book profit. It was gradually reduced to 7.5% in 2001-02 and again
gradually increased to 15% by 2009-10. The rate of MAT was further increased
to 18.5% through the Union Budget of 2011-12.
 Dividend income from company shares were taxed in the hands of the recipient
until 1997. However, through the Finance Act, 1997, this was replaced by a
dividend distribution tax (DDT), levied on domestic companies on the profits
distributed as dividends. It was levied at the rate of 10% on distributed profits
of the companies. It was abolished in 2002, but was reintroduced in 2003 at a
higher rate of 12.5%.
(b) Personal Income Tax
 Personal income tax is a composite tax on individual’s aggregate income from
all sources such as salary, income from property, interest income, business
income, income from shares etc. However, agriculture income being a state
subject is exempt from the tax.
 With the overall growth of the economy and the consequent increase in per
capita income. the yield from this tax has steadily increased over the years with
an annual growth rate of 16.8% and buoyancy value of 1.3% during 1991-92 to
2008-09.
 In early seventies personal income tax had a marginal rate of 85% with large
number of tax slabs. In addition, there was 15% surcharge resulting in the
effective marginal tax rate to be 97.75%. This was gradually reduced to bring it
down to 50% by 1985-86. On the recommendation of Tax Reforms Committee
the marginal tax rate was further brought down to 30% by 1997-98.
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 Currently, the general category of individual tax payers are subjected to a rate
schedule comprising three slabs: 10, 20 and 30 % with an initial exemption
limit of Rs. 1.6 lakh. Higher exemption limits of Rs. 1.9 lakh is applicable to
women assessees and of Rs. 2.40 lakh to senior citizens. The budget 2011-12
has further enhanced the exemption limit of individual tax payers to Rs. 1.8
lakh and for the senior citizens to Rs. 2.5 lakh. Also, the qualifying age for
senior citizens is reduced from 65 to 60 years. A new category of ‘very senior
citizens’ with eighty years and above, has been created in the recent budget
who are eligible for a higher exemption limit of Rs. 5 lakh.
 To encourage investment in the desired sectors of the economy, the Income
Tax Act offers a variety of exemptions and concessions under various clauses
of Section 10 of the Income Tax Act, 1961. In addition, some provisions have
been incorporated in the income tax structure to promote savings and make
investments more attractive. These include exemptions of income from
specified financial assets subject to certain monetary limits; deductions from
income, on a netting principle, of the whole of the funds invested in the
national saving scheme, certain schemes of Life Insurance Corporation of India
and the equity linked saving scheme of mutual funds; rebate in tax payable as a
percentage of the funds invested in specified financial assets or construction of
house property.
(c) Capital Gains Tax
 Capital gains tax is levied on profits made while selling/transferring a capital
asset, i.e. a house, an apartment, office space, factory, godown, or a plot of land
or investments such as shares and bonds. The tax is levied on the difference
between purchase price and the sale price of the financial and tangible assets.
 Since capital gains are not annual accruals from a given source but represent
appreciation in the market value of assets over a period of time, they are treated
on a different footing and categorized as short term and long term capital gains,
depending on the time period for which the investment has been under
possession. Short-term capital gains are taxed at the normal income tax rates.
But, capital gains arising on the transfer of equity shares or units of mutual
funds are taxed at a flat rate of 15%. In case of long term capital gains, assets
other than equity shares or equity mutual funds, the rate of tax is 20%. It is
10% in the case of debt mutual funds, if the cost of acquisition is not indexed
and 20% if the cost of acquisition is indexed. Long-term capital gains from sale
of equity shares or units of mutual funds are exempt from tax. Also the long
term capital gains are fully exempt if the proceeds are invested in specified
savings plan/ schemes.
(d) Wealth Tax and Gift Tax
 Other Union taxes on income and property such as wealth tax and gift tax do
not contribute significant revenue to the Central kitty.
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 Wealth tax is levied on net wealth. Currently it is levied at a flat rate of 1%
with a basic exemption of Rs. 30 lakh. No cess and surcharge is levied on
wealth tax.
 Gift tax is levied on gifts received by individuals and Hindu Undivided
Families (HUFs). Prior to 1987-88, the rate structure of gift tax was highly
progressive, ranging from 5% on the value of taxable gifts not exceeding Rs.
20,000 to 75% on the value of taxable gifts in excess of Rs. 20 lakh. The basic
exemption limit was Rs. 5,000. However, from the assessment year 1987-88, a
flat rate of 30% is applicable on the gifts over and above the exemption limits.
From 1st October, 2009, individuals and HUFs receiving shares or jewellery,
valuable artifacts, valuable drawings, paintings or sculptures or even property
valued over Rs 50,000 as gifts from non-relatives, have to pay the tax.
(e) Administration of Taxes on Income and Property
 The administration of taxes on income and property is entrusted to Central
Board of Direct Taxes (CBDT) which provides essential inputs for policy and
planning of direct taxes in India and deals with administration of direct tax
laws through the Income Tax Department.
(f) Central Domestic Trade Taxes
 In addition to taxes on international trade, the Union Government has the
authority to levy taxes on manufacture and services. These are known as union
excise duty and service tax, respectively.
(g) Union Excise Duty (Cen VAT)
o Union excise duty (UED) is levied on all goods manufactured or
produced. Set-off is given for the tax paid on inputs used in the
manufacturing of final product. UED is called Central Value Added Tax
(CenVAT) since 2001. In addition to CenVAT, there are some variants
of it that have been levied to fulfil different objectives. These include
Additional Duties of Excise (ADE), Additional duty on Tea and Tea
waste, Additional Duty on motor spirit, High Speed Diesel oil,
Additional Duty of Excise on pan masala and certain tobacco products
and on textile and textile articles, and cesses and surcharges.
 UED is one of the significant revenue provider. It contributed 17.94% to the
total tax revenue of the Central Government in 2008-09 recording an annual
growth rate of 9.69% and buoyancy of 0.76 during 1991-92 to 2008-09.
 Revenue collected from cesses, surcharges and some specified levies are
earmarked for certain pre-determined purposes, viz. education or upliftment of
the workers engaged in a particular industry etc. Cesses and surcharges do not
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form part of the CenVAT chain and therefore, no credit can be availed of on
these.
 Prior to initiating reform in the tax system, the structure of UED was complex
and highly distortionary. Tax-structure was mix of specific and ad valorem
rates, varied from 2% to 100%. In effect the then prevailing UED was a
manufacturer’s sales tax administered at factory gate. This was a cascading
type tax as it was levied on inputs, capital goods and final goods.
 Various Committees including the Indirect Tax Enquiry Committee (Jha
Committee) suggested incorporation of VAT procedures in UED. Based on the
recommendations of all such Committees, VAT procedures were first
introduced in 1986 in the form of MODVAT and the rates were gradually
unified. Later, as recommended by Tax Reforms Committee, rates were
gradually unified. In 1999-2000 almost 11 tax rates were merged into one rate
of 16% and MODVAT was converted as CenVAT. For few goods Special
Additional Excises were levied with 8, 16, and 24% rates. Under CenVAT
input credit was provided for all inputs-- capital as well non-capital goods. In
2008-09, the standard rate of excise duty was reduced from 16% to 14 %.
Currently, while there are a large number of rates of CenVAT, the standard rate
is 10%.
 While the standard rate is 10%, several commodities are charged excise duty at
the lower rates of 4%, and 8% which creates distortions. Similarly, existence of
a number of exemptions and lack of effective monitoring mechanism leads to
confusion and disputes. In this context to make the system more effective, a
meaningful review of the existing tax system is required without affecting the
growth momentum of the economy and moving forward on the road to a goods
and service tax.
 The excise duty structure is replete with exemptions of different kinds. The
most important ones relate to small scale industries (the exemption is
applicable to units whose clearances of excisable goods for home consumption
are below Rs. 4.5 crore in the preceding financial year) and to some specific
areas like North Eastern States, Jammu and Kashmir, Uttarakhand, Himachal
Pradesh and Sikkim. The exemption was provided to specified goods
manufactured by an eligible unit in the specified State and/or located in a
specified Industrial Growth Centre, Industrial Infrastructure Development
Centre or Export Promotion Industrial Park or Industrial Estate.
h. Service Tax
 Apart from the levy of UED on manufactured commodities, the Central
Government also levies a tax on services. Except a few specified services
which were assigned to States (viz. entertainment tax, passenger and goods tax
and electricity duty) services were left to the Concurrent List.
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 Drawing the powers from the Concurrent List, the Union Government initially
levied service tax on three services, viz. general insurance, telephone service
and service provided by stock brokers from July, 1994 at the rate of 5%. Since
then the scope has been considerably enhanced and at present 114 services are
taxed at the rate of 10%. The Union Budget 2011-12 has expanded the tax base
by bringing two new services (hotel accommodation if the rent of the hotel
exceeds Rs. 1000 per day and air conditioned restaurants having licensed to
serve liquor) in to the tax net and expanding the scope of existing service
categories. The Union Budget 2012-13 has made a major breakthrough by
bringing in the concept of negative list for taxing all the services.
 Among all the indirect taxes collected by the Union, service tax has proved to
be the most buoyant source of revenue contributing 10.07% to the total tax
revenue of the Centre in 2008-09.
 Input tax credit (ITC) is available for taxes paid on goods and services used as
inputs in providing services.
i. Taxes of the State Governments
 The State Governments levy taxes on income and property as also on
commodities and services generally having regional coverage. That is, the
States are assigned those taxes that could be better administered at the State
level allowing for regional variations.
j. State Taxes on Commodities and Services
 The important taxes on commodities and services levied by the State
Governments include sales tax (state VAT), motor vehicles and passengers &
Goods Tax, state excise duty, electricity duty and entertainment tax.
k. Sales Tax/State VAT
 Sales Tax is one of the most important sources of revenue for the States. It
yields approximately 60% of States’ own tax revenue with a high annual
growth rate of 13.9% during 1991-92 to 2008-09.
 Of late, it has been replaced by State VAT, which has a three rate structure.
The zero-rated items i.e. exempt items include natural and unprocessed
products, goods which are legally barred from taxation and goods which have
social implications. Another category consists of basic necessities such as
medicines and drugs, declared goods (such as iron & steel, hides & skins etc.),
agricultural products and food items. These are taxed at 4%. The standard rate
of State VAT is 12.5%. In addition, there is a special rate of 1% on bullion and
silver and 20% and above on petroleum products and liquor. Although, the lists
of goods have been specified to be taxed under the three rate categories for the
States, there exist some variations in the items lists from State to State. Efforts
are being made by the Empowered Committee of State Finance Ministers to
ensure that there is complete uniformity in the rates.
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 While State-VAT is a State subject, taxation of inter-State sales is included
under the Union List. To ensure an equal treatment for commodities entering
into inter-State trade and on those locally produced, the Parliament levies
central sales tax (CST) on the inter-state transaction. The current rate of CST is
2% on inter-State sales to registered dealers. In spite of the low rate of CST on
registered dealers, the levy of CST on the basis of 'origin' goes against the
principle of a unified market. CST levied on inputs cascades and results in
higher prices. Due to these reasons the CST is being phased out and would be
brought down to “zero” percent by the time GST will be introduced in India.
 Since VAT has replaced the prevailing sales tax in the States, the organization
for tax administration prevalent under sales tax has been adapted for VAT, with
the necessary changes to suit the system of VAT. It is suggested that to
implement VAT successfully the States should attempt reengineering of the tax
department. Also, efforts are afoot to introduce a goods and services tax (GST)
to replace the existing State VAT.
l. Further Reforms
o The analysis of the Indian tax system at the Centre, States and Local
Governments indicates that reforms have been introduced in almost all
the taxes during the last two decades. Introduction of VAT to replace the
complex, cascade type commodity taxes both at the Centre and at the
States’ level, has been the most remarkable achievement. It was in fact a
paradigm shift in the overall tax system.
 While the Report of the Taxation Enquiry Commission of 1953-54 (Matthai
Commission) was a major study of the overall tax system highlighting plethora
of problems and suggesting solutions for them, the Indirect Taxes Enquiry
Committee of 1978 (Jha Committee) highlighted the urgent need to reform the
indirect tax system of the country both at the Central and State levels. The Tax
Reforms Committee of 1991-93 (Chelliah Committee) was an important study
recommending path-breaking reforms in both direct and indirect taxes at the
Central level. Also, its recommendations were directed towards bringing the
Indian tax system in tune with the structural adjustments to have open economy
and to have Indian tax system at par with the tax systems of the other countries
of the world.
 A path breaking reform in the indirect tax system, supported by the
recommendations of the above Committees, viz. Jha Committee and Chelliah
Committee, was to move towards introduction of a value added tax to replace
the excise (of Centre) and sales tax (of States) system in the country.
 However, due to the dichotomy in distribution of tax powers between the
Centre and the States not only the switchover to VAT regime was rather slow
but this made India to adopt a system of dual VAT: Central VAT (CenVAT) at
the Central level and State-VAT at the State level.
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 Keeping steps with the technological revolution, path-breaking
recommendations for a modern tax administration and for the introduction of a
Goods and Services Tax (GST) were given by the Reports of the Task Forces
on Direct2 and Indirect Taxes (2002)3.
 It was felt that while the new system of VAT was a definite improvement over
the earlier system of excises and sales tax, yet it is fraught with certain
weaknesses. First, due to the separate taxation of goods and services the value
of transaction needs to be split into the value of goods and the value of services
for the purpose of taxation. This leads to greater complexities, and higher
administrative and compliance costs. Second, due to further globalization of the
Indian economy, a number of Free Trade Agreements have been signed in the
recent years. This allows ‘duty free’ or ‘low duty imports’ into India. Hence,
there is need to have a nation-wide simple and transparent system of taxation to
enable the Indian industry to compete not only internationally but also in the
domestic market. Third, the CenVAT is levied up to the manufacturing level
only. This causes cascading beyond manufacturing level and also creates lack
of transparency in the tax burden. It is, therefore, imperative to introduce GST
to remove all these weaknesses. The system of GST 4 would, therefore, be a
step forward in the reforms at the national as well as the sub-national level.
 The introduction of GST in the indirect tax system of the Union and the State
Governments and the DTC in the direct taxes of the Union Government would
establish an economically efficient, cost effective and transparent tax system. It
would make the Indian taxpayer competitive at home as well as in the
international market. However, the other taxes at the State level need to be
further reformed. Special care need to be taken to reform the State taxes, viz.
state excise, motor vehicles tax, passengers and goods tax and stamp duty and
registration fee on the lines recommended in this study. That would make the
Indian tax system suitable for taking the country to new horizon of growth and
prosperity.
2
government of india (2002), report of the task force on direct taxes, ministry of finance, new delhi.
3
government of india (2002), report of the task force on indirect taxes, ministry of finance, new delhi.
4
GST is a multipoint sales tax with set-off for both goods and services. It is tax on consumption. Its final and
total burden is fully and exclusively borne by the domestic consumer of goods and services;. NO GST is
charged on goods or services exported.
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CHAPTER – 16
ECONOMIC POTENTIAL OF INDIA’S MARITIME DOMAIN
181. In order to assess the potential of India’s maritime environment, one need to first
imbibe the correct geostrategic perspective that India presents to the world. That
perspective comes from looking at our peninsular configuration, the way it dominates
the Indian Ocean and the way it acts as a focal point of trade routes. This ocean is the
smallest of the three navigable ones, does not possess wide, unobstructed gateways
and yet happens to be the most important water body for all trade routes between the
other two. And yet, the world cannot but use this ocean for nearly 50% of its energy
trade, 1/3rd of its bulk commodities and 50% of its containers. The most important of
these routes pass close to Indian shores. While this places a large responsibility on
India in terms of security of global sea lines of communication, there is also a resident
opportunity in this challenge, that of catering to the potential of business at ports and
earning revenue through bunkering and maintenance facilities in our transit ports. The
advantage that accrues to India because of her geographical location is enormous.
If the West coast of India has an expanse that remains shallow for miles beyond the
shore, it is not assumed as a disadvantage by anyone except port authorities and the
shipping industry. Fishing communities thrive on surface Tuna and other shallow
water varieties including shrimp that multiply in these waters; oil exploration and
production companies find it inexpensive to carry out exploration and extraction;
tourism finds safe and attractive habitat on beaches and inshore waters. Fish catch
from waters off coastal Gujarat and Maharashtra alone, account for 68% of the entire
country’s marine harvest. Thus, shallows are not a handicap for us.
182. On the other hand, the East coast has a very steep gradient. And the fish that are
harvested in the East, add up to only 30% of all India catch. That is not because there
is less fish in deep waters, but because we do not sufficiently invest in deep water
fishing. Maritime nations crave for deep waters as they offer abundant benefits in
terms deep water ports, transhipment hubs, oil and gas nodes offshore, and, to
establish shipbuilding industry along deep water shores. India’s East coast is ripe
territory for all these activities with untold potential for economic activity.
183. We also need to understand that the sub-continental terrain everyone talks about,
is not a positive asset to India’s existence. To all intents and purposes, India should be
considered an island nation. With negligible volumes of trade possible across land
borders, our economic engagement with the world is almost entirely dependent upon
the sea. Hence the importance of India’s peninsular configuration. This aspect needs
to be taken as a positive property because maritime nations are considered as “haves”
as against land-locked ones.
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184. So what does 7516 km of India’s coastline offer? Beautiful beaches, a huge EEZ
and offshore assets – not just for tourism, but also for oil and gas within the Exclusive
Economic Zone which at the moment extends to 200 NM but is set to become 350
NM in the near future. In that event India’s EEZ would become 2.54 million square
km instead of 2.02 million square km. And that means we are multiplying the offshore
estate that is available for extracting fish, minerals, gas, oil - whatever one wants.
There is abundance of fish and mineral resources that need to be tapped to generate
higher volumes of economy.
185. For any offshore activity – particularly trade – to generate revenue, a country
needs access points, or ports. We have an inventory of 12 major and nearly 200
intermediate and minor ports. However, the largest of these by real estate measure –
major ports – are still set in the mould of archaic procedures. The result is a serious
lag between capacity and throughput, leading to loss of revenue and diversion of trade
to more attractive transhipment hubs in our neighbourhood. If we are to move on a
North-bound graph of economic growth, the first requirement is to set our
infrastructure in order. This can happen through modernisation and “true”
liberalisation.
186. After ports, the next asset to focus upon should be the Indian owned shipping
fleet. At under 9 Million Gross tons, with a fleet of just 700 vessels, we have barely
186 foreign going ships available under the Indian flag. This is an unhealthy sign for a
major maritime nation. For, it is always ownership of a large fleet and more
importantly, indigenous shipbuilding industry that guarantee economic growth even in
times of crises. India needs to encourage the private sector in establishing shipbuilding
yards with the aim of not only building a “home” fleet, but also competing with the
newly emerging giants in the East.
187. Another asset that our maritime domain offers is the natural network of inland
waters. Despite having established the Inland Waterways Authority of India in 1986,
we still transport an insignificant proportion of the total inland cargo, by water. The
primary reason is a lack of awareness amongst stakeholders and the public at large, of
the immense benefit that can accrue from using this medium where cost of
transportation is a fraction of the expenditure incurred by road. Same is the story of
coastal shipping. With nine coastal states and five coastal Union Territories – most of
them industrially developed – there is no reason why coastal shipping should not be
the preferred mode of bulk transportation! Once again, lack of awareness and a
misplaced conception that land transportation is faster, are responsible for neglect of
this avenue of an economical and environment-friendly mode of transportation.
188. More than any other asset on this planet it is the seas that produce variety in
weather. This variety contains untold energy which is waiting to be tapped. From solar
to wind to hydrological energy, the potential along the coasts is so huge that all our
domestic power needs can be met through these renewable sources alone. All that is
needed is a regime of public private partnership with targets to be met within a twodecade period.
73
189. Lastly, tourism. The Indian coastline is dotted with heritage sites dating from as
long ago as five millennia. Most developing countries have nurtured and multiplied
their tourism potential in order to create money, popularise their countries as business
and tourism destinations and generate employment opportunities for the grass-root
level. Most of our sites go a-begging in this respect.
190. The economic potential of India’s maritime domain is enormous. All that is
required is: a focused plan to capture this potential in a time-bound manner. The spin
offs from these avenues will be realised in a burgeoning downstream industry,
exponential generation of employment and “inclusive growth”.
CHAPTER-17
WTO : BALI AND BEYOND
191.
After more than a dozen years of negotiations in the Doha round trade talks –
and a final push during a high-level meeting in Bali – it seems the World Trade
Organisation (WTO) has achieved something: the organisation's 160 members
have reached an agreement. The implications for developing countries are huge.
192.
The Bali meeting's tense final moments came down to a standoff over food
security, an issue that had divided developing countries. On one side, India was
arguing that it should be allowed to pay its farmers above-market prices for the crops
that it buys for the government's domestic food stockpiles. In a country where more
than half of the workforce is employed in the agricultural sector, farming is very big
politics. With elections looming in the first half of next year, Indian officials didn't
want to look as though they were selling out Indian farmers on the world stage.
193.
On the other side, developing countries such as Thailand, Pakistan, and
Uruguay – all of which, like India, are major exporters of rice – contended that
overpaid farmers in India could undercut producers in their own countries. The US
was also a vocal opponent, arguing that India was asking for allowances that went
against the spirit of the free trade talks, which generally aim to reduce – not increase –
government intervention in the marketplace.
194.
After closed-door meetings that lasted well into the early hours in Bali, the
negotiators in Bali finally came to a provisional agreement. Countries agreed to a
four-year peace clause, meaning that they won't challenge India's food security
measures before December 2017. In return, India has vowed to ensure that its policies
"do not distort trade or adversely affect the food security of other [WTO] members",
among a few other conditions.
74
195.
By ironing out their differences on food security, negotiators paved the way
for deals on two other topics that will have big impacts in the developing world. The
first is trade facilitation, which could add $1tn to the global economy by cutting red
tape – which tends to be at its thickest in poor countries – at border crossings. The
second is a package of issues that are relevant to Least Developed Countries (LDCs);
these include allowing LDC exports easier access to rich-country markets. Although
the language in those texts has been diluted by years of bargaining, negotiators now
appear ready to finalise both agreements.
196.
But taking a step back from the nitty-gritty of the negotiations themselves, the
biggest news to emerge from Bali is the mere fact that trade officials managed to
agree on anything at all. For at least the past five years, as the global trade talks have
continued to stumble, the WTO has appeared to be on a slow but seemingly
inexorable slide toward total irrelevance. The organisation's Doha talks have barely
made any progress since 2001, even as regional and bilateral trade agreements –
which some see as more realistic alternatives to the global negotiations – have
flourished.
197.
But something changed in Bali. Negotiators proved that they could actually
get something done. The so-called Bali package represents just a tiny fraction of the
issues that negotiators set out to tackle in the Doha Round talks. But still, it's progress.
And who knows how many more breakthroughs Bali agreement might inspire. The
Bali package ends with a commitment for trade officials to develop a "clearly defined
work programme" to tackle the remaining issues in the Doha talks. In time, that work
could lead to progress on any number of issues that affect developing countries,
including deeper cuts to rich countries' farm subsidies and easier access for
developing country exports to foreign markets.
198.
The WTO has long come under fire from anti-globalisation protestors,
and such criticisms continue today, albeit to a lesser extent. But the WTO remains the
only international economic forum in which developing countries are on an equal
footing with their rich-country counterparts. Because all decisions at the WTO are
taken by consensus, every country that takes part in the global trade talks has the
opportunity to block a deal. The same cannot be said of the regional and bilateral
negotiations that have become so popular of late. So the WTO has lived to see
another day, and perhaps another decade. Developing countries certainly have their
work cut out for them in the negotiations that lie ahead. But progress, as we've seen, is
at least possible; it just might take a dozen years to achieve.
75
CHAPTER 18
INITIATIVES OF PRIVATE SECTOR IN INDIA’S DEFENCE PRODUCTION
199.
The Indian Armed forces are currently under- going a significant
modernisation drive. Nearly 70 per cent of these high technology acquisitions are
imported. This has made India the largest importer of defence equipment. Will this
modernisation drive result in creating a strong Defence Industrial Base (DIB)? The
answer may be a resounding ‘no’. It may lead to some happy global majors and they
may collaborate with. It is time we turned this ‘largest arms importer’ tag on its head.
200.
A strong DIB in India is needed, one that designs, develops, manufactures
cutting-edge equipment for domestic as well as the global market. China, which was
the largest arms importer of defence equipment as late in 2006, become the third
largest arms exporter in 2012! India can do better. The US and leading European
powers are advanced DIBs that export defence products across the world. Closer
home South Korea started its defence modernisation programme through imports but
currently has a thriving DIB that also caters to the export market. In these countries,
the private sector is seen by the government as an equal partner and supported in its
global forays. In India over-dependence on DPSUs and an unstated suspicion about
the private sector has discouraged Indian companies in making any substantive
investments. Although the Ministry of Defence (MoD) allowed 100% participation of
private sector since 2001, the industry faces regulatory, technological, operational and
financial hurdles. The Indian private sector is still treated as a supplier and vendor,
and not as a valued partner.
201.
The successful model adopted by ISRO, whose space programmes has an
active participation from the private sector, provides a good case study for MoD.
ISRO steered clear of the outdated ‘public versus private sector’ debate and has
catapulted India into the top 5 nations with its own cryogenic engine. This was
triggered by the denial technology to India due to international sanction, but has
become a blessing in disguise. In our quest to be a global power, we need to be
pragmatic. The current product range of Indian defence majors is restricted to
components of large defence equipment. We need to acquire deeper capabilities
through strategic partnership with global defence majors through the FDI route.
Global defence majors need to be incentivised to established production facilities here.
We want them to use India as part of their global supply chain and not restrict
themselves to their offset obligation.The global majors are facing challenges due to
the end of the Cold War and the cutback in defence budget in their home countries.
76
202.
India has a golden opportunity to leverage this situation and facilitate an FDIled DIB in India. The FDI cap of 26% is impractical. It is a myth that global OEMs
will pass on critical technologies- developed over decades of research, with billions of
dollars- to their Indian partner for a measly 26% equity stake. A decade later, the
number of actual FDI is in a few million dollars. The Mayaram panel’s
recommendation to raise FDI to 49% was shot down. It should be raised to 74%. The
increase in FDI can be complimented with an increase in the offset obligation to 70%.
This could encourage global OEMs to set up JVs with Indian companies, rather than
restricting themselves to just a few large Indian groups. There are many concerns
about FDI in defence. Some are legitimate and can be addressed through adequate
checks and balance. Most others are imaginary and motivated. There are concerns
that global OEMs’ facilities in India may create a security threat. There are ways to
address that. For instance, the US has stringent provision under its International
Traffic in Arms Regulation (ITAR). BEA, a UK company with manufacturing
facilities in the US, is one of the largest suppliers to the US armed forces. ITAR
restricts BAE USA from sharing any strategic information with its parent company in
the UK. All BEA USA employees are US citizens.
203.
There are fears that allowing global players in India will hamper growth of
Indian companies. On the country, in all sector that has been opened up, both global
and Indian players have flourished. Toyota sells here, so does Tata. HP sells here, so
does HCL. The Indian entities of the global majors will employ Indian staff, providing
them an opportunity to gain expertise. This will enrich India in the long run. MoD
needs to pressure DPSUs to perform or perish. DPSUs should be given swift
permission to create JVs with global and Indian partners for global defence orders.
MoD’s intentions to facilitate a DIB in India are highly welcome. India’s slowing
GDP growth, high current account deficit, depleting forex reserves and slow job
growth can be addressed partly by a robust DIB. Its multiplier effect would be felt
across adjacent sectors like automotive, aviation, IT, metals, bioscience, etc. The need
of the hour is fresh thinking, humbleness to accept mistakes, a new vision, complete
policy overhaul and a relentless focus on execution.
CHAPTER – 19
STATE OF NORTH EAST AND THEIR ECONOMY
204.
The member states of the North Eastern Region (NER) are predominantly
mountainous, interspersed with valleys and plains; the altitude varies from mean sea
level to over 7000 meter above the mean sea level. The region’s average rainfall –
even touching 10,000 mm and above – creates problems through flood and soil
degradation. Conversely, it has bestowed the region with unparalleled bio-diversity
and abundant natural resources.
77
205.
The North Eastern Region together with Sikkim covers an area of about
2,62,000 square km and the eight States together share over 5400 km of border with
neighbouring countries. The region is known for its ethnic, linguistic, cultural,
religious and physiographical diversities. The region can be broadly divided into two
sub regions, the North East Hills (NEH) sub-region comprising of Arunachal Pradesh,
Nagaland (except for the area adjoining Assam), Manipur (except for the Manipur
valley area), Mizoram, Tripura (except for the plains), Meghalaya, two hilly districts
of Assam and entire Sikkim and the North East Valley sub-region comprising of the
rest of the region.
206.
The population growth in the NER States as per 2011 Census is shown in the
Table-I below:Table-I
Sl.
No
States
1971
1981
1991
2001
2011
1
2
3
4
5
6
7
1
Arunachal
Pradesh
2
Assam
3
Manipur
1072753
1420953
1837149
2293896
2721756
4
Meghalaya
1011699
1335819
1774778
2318822
2964007
5
Mizoram
332390
493757
689756
88573
1091014
6
Nagaland
516449
774930
1209546
1990036
1980602
7
Sikkim
209843
316385
406457
540851
607688
8
Tripura
1556342
2053058
2757205
3199203
3671032
9
Total
19792139 25067989 31953771 38184877
45587982
467511
631839
864558
1097968
1382611
14625152 18041248 22414322 26655528
31169272
78
207.
The Table – I above reveals that a population growth in the NER States is
growing rapidly despite the low shares of Agriculture & Allied Sector in the total
GSDP as can be seen from Table-III below, this fact stressing the importance of
activities in the primary sector of the economy. The GSDP for Agriculture including
Livestock at constant (1999-2000) prices for 2009-10 is indicated in the Table-II
below.
Table-II
(Rs. in lakhs )
Sl.
No
1
State
Agriculture
Total SDP
% to the
Total
2
Arunachal Pradesh
3
1
65387
4
302827
5
2
Assam
1247811
5670231
22.01
3
Manipur
94082
489866
19.21
4
Meghalaya
112783
645901
17.46
5
Mizoram
35633
262033
11.60
6
Nagaland
139661
484992
28.80
7
Sikkim
29217
175562
16.64
8
Tripura
170569
834958
20.43
21.59
208.
The abundant natural resources of the region still remain to be tapped in full
measure. The tremendous hydro potential of the region could have not only brought
self sufficiency in energy needs to meet the present and future requirements of the
region but could have also contributed to alleviate the power shortages of the country
significantly. The region is considered as the potential powerhouse of the nation. The
tourism potential of the region is yet to be exploited to any worthwhile extent. Despite
various programmes taken up by the State and Central governments, self sufficiency
in food grains is an objective that remains unattainable in the foreseeable future. The
magnitude of allotment and offtake of rice and wheat as shown in the Table –IV & V
below reveals the fact that the demand for food grains by the population of the region
is high. The road networks are poor and inadequate. On the positive side, the literacy
rates in the region, both for males and females, are higher than the nation average.
79
Table-III
Commodity: Rice
(In ‘000 MTs)
Sl.
No
State
1
2009-10
2010-11
2011-12
Allotment
Offtake
Allotment
Offtake
Allotment
Offtake
2
3
4
5
6
7
8
1
Arunachal
Pradesh
114.93
91.60
117.34
86.49
122.27
93.34
2
Assam
1449.19
1258.56
1844.69
1557.90
2190.52
1707.63
3
Manipur
127.66
126.96
168.06
79.41
180.09
172.89
4
Meghalaya
160.12
144.25
199.89
162.58
224.73
195.75
5
Mizoram
187.34
145.38
198.91
146.19
208.31
150.99
6
Nagaland
129.95
122.45
151.78
151.27
163.15
149.14
7
Sikkim
48.00
45.11
54.22
46.94
59.55
54.32
8
Tripura
330.61
275.28
368.79
273.70
363.71
326.40
9
Total
2547.80
2209.59
3103.68
2504.48
3512.33
2850.46
Table-IV
Commodity: Wheat
Sl.
State
2009-10
2010-11
No
Allotment Off-take Allotment
Offtake
(In 000 MTs)
2011-12
Allotment
Offtake
1
2
3
4
5
6
7
8
1
Arunachal
Pradesh
20.08
8.99
15.26
12.62
12.25
9.35
2
Assam
565.58
336.83
746.48
460.94
723.97
503.50
3
Manipur
30.48
16.72
35.72
8.54
33.79
22.70
4
Meghalaya
28.54
21.90
38.88
24.50
35.19
27.30
5
Mizoram
12.66
9.50
19.97
10.40
15.43
12.00
6
Nagaland
66.79
47.77
61.43
44.79
54.36
48.41
7
Sikkim
7.47
7.09
6.74
5.07
7.15
5.40
8
Tripura
41.50
24.95
43.23
20.73
37.97
18.39
9
Total
773.10
473.75
967.71
587.59
920.11
647.05
80
209. Region’s basic Strengths & Weaknesses
The region’s basic strengths are:
 Large natural resources and potential for growth in the agro-forestry and
horticultural sectors including expansive and extensive bamboo plantation,
exotic flora.
 Large mineral deposits (particularly in Assam and Meghalaya)
 A vast bio-diversity hot spot.
 Vast water resources including tremendous hydel power potential.
 Great promise for tourism development.
 Proximity to one of world’s fastest – growing economies, those of the S.E.
Asia.
 A highly literate population.
 Rich heritage of handicrafts/handloom/tribal artefacts.
 Strong community spirit and traditional democratic system of local – selfgovernance.
North East’s weaknesses are:

Inadequate development of basic infrastructure.

Geographical isolation and difficult terrain that reduces mobility: high rainfall
and recurring flood in the Brahmaputra valley.

Lack of capital formation and proper enterprise-climate.

Slow spread of technology.

Absence of a supporting market structure and adequate institutional finance
structure.

Low level of private sector investment.

Lack of local agricultural surplus.

Insurgency problems.

Late start in the development process.
81
Turn in the wheel
210. The Government of India have all along been making determined and multidirectional efforts to make the region take long and rapid economic strides so that its
economy comes at par with the other fast-developing States of the country. Since, the
creation of the North Eastern Council (NEC as) an Advisory Body to aid and advise
the Union Government about development and security-related matters in the NER
vide the North Eastern Council Act, 1971, this effort took a new dimension. The NEC
gets the gross budgetary support from the Union Government directly. Subsequently,
it was also decided later on that all the Central Ministries (with few exceptions), as a
policy, would be required to spend 10% of their budget in the region. Any shortfall
out of the earmarked 10% accrues to the non-lapsable central pool of resources
(NLCPR). The NLCPR was initially administered by the Planning Commission and
was later transferred to the Department of Development of North Eastern Region
(DoNER) from 2001-02. The Department has been upgraded to a full-fledged
Ministry in 2004 (M/O DoNER) . The Ministry gets its budgetary support for its
flagship programme, administering the NLCPR, from the NLCPR accruals, a pool
account that is maintained by the Ministry of Finance, Government of India.
211. The NEC has been declared as the Regional Planning Body for the NER by an
Act of the Parliament in 2002. It was also considered essential to evolve a 15 years
perspective plan for development of the region. The NEC took up the responsibility
absolutely seriously. Experts from various fields and civil society members took an
active part in the process. Consultations with people also took place. Accordingly, the
NER Vision 2020 document was formulated which was
an essential exercise
undertaken to chalk out programmes for the development of the region. All
developmental Sectors of north east states are taking cue from this Vision document
for preparation of their plans and programmes.
212. The Eleventh Five year Plan has been a turning point in the planning process for
the development of this region due to inclusion of Sikkim as one of the Member States
and issuing of a set of guidelines for the development of NE States :
 Preparation of the Vision NER 2020 document and regional plans
expeditiously.
 Focus primarily with projects that benefit two or more States, with wide ranging
impact and areas of a critical nature and not spread its resources thin.
 Prepare of a shelf of important projects through consultations in order to avoid
overlap.
 Regional institutions should be transferred to line Ministries immediately. This
will ensure that additional resource, on account of avoided O & M expenditure,
become available to NEC. It will also help secure professional management
input. It was emphasized that the regional character should be maintained under
all circumstances and the line Ministries should make special efforts to allay
local apprehensions, if any.
82
 The Planning Commission would review umbrella and subsidy-oriented
schemes like SPINE, Sports and Youth Affairs, Agriculture, etc. with a view to
avoiding overlap with the schemes launched by the Central Government and
State Governments.
 Instructions would be issued (by the Ministry of DoNER) to the State
Governments to open separate accounts for NLCPR/NEC funds.
 There should be proper linkages and coordination between Planning
Commission, Ministry of DoNER and NEC.
 The line Ministries, while approving the programmes for NER should
invariably consult M/o DoNER and NEC in a time bound manner. They should
be guided by M/o DoNER to create schemes/projects that are in tune with the
priorities. Appropriate advisories could go out from the Cabinet Secretariat for
this purpose.
Promoting Industrialisation :
213. The Transport Subsidy Scheme (TSS) was introduced in July, 1971 for
promoting industrialization in hilly remote and inaccessible areas. The objective of the
Scheme was to provide subsidy to eligible industrial units ranging between 50 per cent
and 90 per cent on the transport cost incurred on the movement of raw material and
finished goods from the designated rail-heads/ports up to the location of the industrial
unit(s) and vice-versa for a period of five years from the date of commencement of
commercial production. The scheme is applicable to all industrial units (barring
plantation, refineries and power generating units) irrespective of their size, both in
private and public sector located in the eight States of North-Eastern Region along
with Himachal Pradesh, Jammu & Kashmir, Sikkim, Darjeeling District of West
Bengal, Union Territories of Andaman & Nicobar Islands and Lakshadweep, and the
hilly districts of Uttarakhand. The scheme has since been revised and notified as
Freight Subsidy Scheme (FSS), 2013,w.e.f. 22.01.2013. The salient features of this
Scheme are as follows:
 Definition of ‘manufacturing activity’ adopted from the union budget 2009-10;
 Subsidy on transportation of fly ash disallowed;
 Sunset clause introduced so that the scheme terminates after 5 years from its
date of notification;
 Provision for subsidy for an additional period of 5 years to MSME;
 Plantations, refineries, power generating units, coke (including calcined
petroleum coke) industry and the units producing tobacco and manufactured
tobacco substitutes, pan masala and plastic carry bags of less than 20 microns
are in the negative list.
83
North East Industrial and Investment Promotion Policy (NEIIPP), 2007 :
214. The NEIIPP, 2007 is the revamped version of erstwhile North East Industrial
Policy (NEIP), 1997. Announced on 1.4.2007 and to be implemented for a further
period of 10 years i.e. up to 2017, the Policy is for the accelerated industrial
development of the North Eastern Region (NER). NEIIPP aims at promoting
industrial development of the NER by subsidizing eligible industrial units on their
Capital Investment, Interest on working capital loan and Insurance Premium paid. All
new units as well as existing units which go for industrial expansion located anywhere
in North Eastern Region, which commence commercial production within 10 years
period from the date of notification of NEIIP, 2007 are eligible for incentives for a
period of 10 years from the date of commercial production. Industries considered
hazardous to public health and environment such as tobacco and its substitutes, Pan
Masala, Plastics carry bags, Refinery products etc. are not eligible for subsidy. In
addition to manufacturing sector, the benefits under NEIIPP, 2007 have for the first
time, been extended to service sector. (i.e. Hotels not below Two Star category,
adventure and leisure sports including ropeways, nursing homes with a minimum
capacity of 25 beds, old-age homes, vocational training institutes such as institutes for
hotel management, catering and food crafts, entrepreneurship development, nursing
and para-medical, civil aviation related training, fashion, design and industrial
training, Bio-technology industry’ and Power Generating Industries - up to 10 MW).
The subsidies given under NEIIPP 2007 are Capital Investment Subsidy, Interest
Subsidy and Comprehensive Insurance Subsidy.
 Under capital investment subsidy component, subsidy @ 30 per cent of the
value of plant and machinery is provided.
 Under the interest subsidy component, subsidy of 3 per cent of the working
capital loan is provided for a maximum period of 10 years from the date of
commencement of commercial production.
 Under insurance subsidy component, industrial units are eligible for
reimbursement of 100 per cent insurance premium paid for the insurance policy
of capital assets.
 Other incentives/concessions comprise excise duty exemption based on “value
addition” norms specified by the department of revenue and 100 per cent
income tax exemption.
215. The Scheme was earlier evaluated in 2010 by the Ministry of Development of
North East Region (DoNER). The study revealed that industrialization that started due
to the NEIP, 1997 has gained momentum after introduction of NEIIPP, 2007. The
observation of the evaluation was also that the industrialization in the NER is not
progressing at the same pace as in the rest of the country and steps need to be taken in
a more methodical and organized manner. At present, evaluation of the schemes under
NEIIPP, 2007 is being done an independent agency, whose report is awaited.
84
216. The Government t has focused its attention on three priority sectors: (i)
Transport & Communication, (ii) Health and (iii) Power. In fact, the Transport &
Communication Sector alone accounted for more than 61 per cent of allocation of
funds and these three sectors, taken together, accounted for around 78 per cent of
allocation of funds. It may be remembered that such a trend had emerged from the
historical and economic necessity of the development process of the NER and this
trend has, in the long run, benefited the economy of the region immensely. During the
12th FYP (2012-17) the focus would continue be on Transport & Communication,
Health and Power. There is also a need to ensure that more & more transparent flows
into the region so that it bear the fruits in terms of income generation for the masses.
However, it is important to note that, from the Eleventh FYP onwards, Agriculture &
Allied Sector (comprising Agriculture, Horticulture, Floriculture, Animal Husbandry,
Development of Medicinal & Aromatic Plants, Fisheries, Agricultural Storage &
Marketing, etc., and Livelihood Projects as sub-sectors) has gained in relative
importance as a sector, in view of the importance of primary sector activities in the
economy of the region. Human Resources Development & Employment is another
sector that, too, is gaining in relative importance from the Eleventh Five Year Plan
onwards. And, these trends are being followed both in the Twelfth FYP.
CHAPTER - 20
SCIENCE & TECHNOLOGY
217.
Popularizing science and the inculcation of scientific temper is vital for
any nation’s growth. The ability to cope with and to fully participate in the surge of
historical forces unlocked by the process of globalization can only be attained
through the creation of a broad-based knowledge technocracy and a skilled
population. The leadership of the Indian freedom movement was painfully conscious
of loss of India’s global position in the humanity’s scientific and technological
march and ascribed the loss of India’s freedom to colonialism to this fact. As
early as 1938, the National Planning Committee of the Indian National
Congress, under Jawaharlal Nehru’s inspiration, set up a working group on
‘scientific research’ and on becoming the first Prime Minister of India, he assumed
charge of the Ministry of Science and Cultural Affairs in 1949, perhaps the first
Minister of Science in the world.
218. Nehru’s Emphasis on Scientific Temper in Indian Society. Pandit
Nehru’s deep sense of history was reflected in the statement he made to
encourage, in the newly independent citizenry in India, a ‘scientific temper’: “it is an
inherent obligation of a great country like India, with its traditions of
scholarship and original thinking and its great cultural heritage to participate fully in
the march of science, which is probably mankind’s greatest enterprise today”. He
had been aware that, not only has India been widely famous for its
philosophy, mysticism, architecture, sculpture, performing arts and the like,
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India’s scientific contributions ranged from the decimal place value counting
system using nine digits and the zero to the highly developed holistic philosophy and
practice of medicine, Ayurveda, to major discoveries in astronomy,
chemistry, metallurgy, plant systems and to works on sophisticated aspects of
grammar, linguistics and logic. Famous for its fabled universities set up before
the Christian era, like Nalanda (in modern Bihar state) and Taxila (in modern Punjab
in Pakistan), over 10,000 books on science and technology, during just 600 years
from 12th to 18th century, have been identified with many of these translated into
Persian and Arabic.
219. Scientific Awakening before Independence. As a significant
manifestation of the nationalistic stirring during the freedom struggle, over three
quarters of a century before Indian independence, there was a major awakening of
Indian science as evident in the seminal contributions of scientists like J.C. Bose,
Srinivas Ramanujam, C.V. Raman (the first Indian to receive the Nobel prize in
physics in 1930), Meghnath Saha and S.N. Bose (whose collaboration with Einstein
led to certain particles, categorized by application of Bose-Einstein Statistics, being
called ‘Bosons’). One also cannot minimize the foundational role played by other
great scientists in India, some of whom like Homi Bhabha and Vikram Sarabhai
were already poised to lead the nascent Indian scientific community into building the
enormous knowledge infrastructure after Indian independence.
Historical Phases Of The Growth Of S&T Since Independence
220. First Phase of S&T Development After Independence. The independent
Indian leadership assumed the task of reorienting the modest existing scientific pool
towards the requirements of socio-economic transformation and to bring science
and education closer to the people, especially the poorest. In the first phase
lasting nearly 20 years, the emphasis was on building the infrastructure – in
education, science and technology and industries. This led to the creation of a
chain of universities and educational institutions, including the Indian Institutes of
Technology (IITs) and to the development of core indigenous competence in areas,
such as coal, steel and power. A significant aspect of this infrastructure was high
technology, in areas such as nuclear energy and space. Since this infrastructure,
given the legacy of colonialism, could only be developed by the government,
requiring massive infusion of funds and human resources, there was a certain
scepticism both in India and abroad as to its necessity in a country which was
poor and underdeveloped. This period also witnessed the phenomenon of “brain
drain” where a poor country like India was seen to be subsidizing the technological
growth in the developed countries.
221. Second Phase of S&T Development. The next phase, in the 70s, was built
upon the first one. India’s indigenous scientific capacity was deployed in carrying
out rapid socio-economic transformation as witnessed in the phenomenon of the
Green Revolution (essentially in wheat and, later, in rice) which could be carried
out through the combination of scientific capacity and administrative infrastructure to
deliver the requisite policy package to poor – and mostly illiterate – farmers. The
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effect of the Green Revolution was significant within the country as well as abroad
where the agricultural sector in developed countries came under competitive pressure
from India. Other remarkable example is the so-called ‘White Revolution’ which
made India the largest producer of milk in the world through milk and milkprocessing cooperatives organized by poor
farmers. During this
phase,
substitution
of imports
by products manufactured through reverse
engineering was also successfully carried out.
222. Third Phase of S&T Development.
The third phase began, during the
period of economic liberalization, in the 80s which established India as a globally
competitive economy. Considerable encouragement to technological assimilation
and advancement took place under the dynamic leadership of the young and
technology-minded Prime Minister, late Rajiv Gandhi. The computer revolution in
India which occurred as a result of government-private sector partnership, especially
involving medium size private companies, which prepared the ground for India’s IT
revolution. This was evident in the remarkable phenomenon of the mushrooming of
the “street corner” computer teaching shops throughout the country! There were
other major achievements at that time: one example is the C-Dot telephone exchange
which, developed indigenously at a fraction of the cost of imported exchanges,
which is used by more than half the telephone exchanges in the country. It stood up
very well against international telecommunication giants which even tried to
dislodge it from the Indian market. Sanctions placed upon India in areas such as
nuclear energy, space, missiles and computers, were turned into opportunities to
develop indigenous technological capabilities; India’s PARAM supercomputer, for
example, was developed in response to denial of such equipment by US under its
sanctions regime and was, subsequently, patented in US itself. This new sense of
confidence, in the country’s own science and technology capability, enabled India to
fully connect with the globalization process when the opportunity arose. In this
early phase, India emerged very strongly in the pharmaceutical industry and in
computer software.
Science & Technology Today Civil And Military
223. Current Phase of S&T in India.
India is currently spending 0.8% of
GNP on R&D of which government’s share is 74%. The aim of the science
policy is to be globally competitive but, at the same time, relate science to the
people, especially in the villages, which is exemplified in the strides in bringing
the IT revolution to the villages through government-private sector participation. The
current institutional structure shaping the growth of science and technology in
India consists of the central government, the provincial governments, higher
educational sector, public and private sector
industry and non-profit
institutions/associations. These institutional structures, with their research laboratories
are the main contributors to research and development. Notable among these are, the
Council of Scientific and Industrial Research (CSIR), Indian Council of Agricultural
Research (ICAR) and the Indian Council of Medical Research (ICMR). In addition,
there are many departmental laboratories of various Ministries, viz., Department of
Atomic Energy, Department of Electronics, department of Space, Department of
Ocean Development, Defence Research and Development Organization, Ministry of
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Environment and Forests, Ministry of Non-Conventional Energy Sources and the
Ministry of Science & Technology. Further, there are over 1200 in-house
research and development units in industrial undertakings. Many Indian universities
and the IITs also undertake substantial research and development work. The
Department of Science & Technology is, in particular, tasked with the responsibility
in fundamental research in different areas as well as with giving direction to this
activity through prioritization.
224. Undoubtedly, the Indian science output as reflected by publications and
international patents has picked up pace over the last decade and half. The rate of
growth of publications was about 5% in the decade of 1995 to 2005 but doubled to
over 10% during the five year period from 2000-2005. Also, the Indian share in
international publications has steadily increased over the period. Patent applications
have enhanced tenfold from less than 50 in 1998, the year recourse was made to
this route, to around 500 in 2004. A recent study of US patents granted from
Bangalore over the period 1995 to 2005 shows that nearly 500 patents were
granted, of which, however, less than 10% were owned by Indian entities,
demonstrating the scientific and technical talent in India which is, however, yet
to be fully tapped by the Indian private sector.
225. Defence R&D. Science and technology has always been an effective instrument
for growth and change. Innovation is the key to growth and success of the Nation. In
the present world, the innovation is primarily associated with the critical or high
technologies and matching infrastructure. It is evident from history that the major
innovations and inventions have emanated from Defence R&D efforts. Even, the
major progress in science and technologies was registered during the competitive
surge among the countries to develop better weapons and technologies during the 2nd
World War.
226. The Defence R&D started taking shape in India with the inception of Defence
R&D Organisation (DRDO) in 1958. This was the time when scientific/academic
infrastructure, industrial infrastructure and skill human resource were not enough in
the country and, rather, country was going through the process of evolution. That
time, DRDO took up the responsibility to design, develop and productionise defence
technologies and systems to meet the requirements of the Armed Forces. Over a
period of time, DRDO grew phenomenally. At present, DRDO is a conglomerate of
51 laboratories spread all over the country and involved in the design, development
and productionisation of state-of-the-art technologies and systems for Armed Forces.
These laboratories are aptly supported by several Technical and Corporate
Directorates at DRDO HQ. The major technologies and systems developed by DRDO
and inducted in the Armed Forces are Ballistic Missiles, Cruise Missiles, Ballistic
Missile Defence (BMD), Multi Barrel Rocket Launching System (MBRL), Under
Water Launch Missile, Advanced Naval Platform, Main Battle Tank (MBT), Radar
Systems, Sonars, Super Computers, Sensors, EW Systems, Advanced Light Helicopter
(ALH), Aeronautics, Unmanned Aerial Vehicles (UAV), Life Support Systems,
Armoured Systems, Precision ammunition, Small Arms, Robotics, Assault Bridging &
Engineering Systems, etc. Therefore, the indigenization efforts in defence technology
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area have brought higher sustainability of the advanced Defence Systems/technologies
at reduced cost. DRDO brought many academic institutions and industries together to
collaborate to develop these major technologies and systems. This consortium
approach developed a new scientific culture among the industries and promoted R&D
in the academic institutions. Many systems developed by DRDO were produced by
DPSUs /PSUs /private industries. This approach has strengthened the confidence of
academia to be more proactive to carryout applied research and also, enormous
confidence and equity were generated by industries to take up bigger technology
challenges. It goes long way in Nation building and to operate futuristic high
technology programmes. Apart from R&D laboratories, DRDO developed many
agencies such as ADA, GATEC, NFTDC, SITAR, etc with an aim to carry out
development of high precision systems/subsystems leading to production. A multipronged approach of DRDO has yielded into result-oriented R&D with special
emphasis on inclusive growth of R&D in academics and creating a bigger industrial
base in manufacturing sectors. This is an effort which has not only provided the best
technologies and Systems to the Armed Forces but also contributed immensely in the
Nation building.
227. In the current phase of S&T development, India can be counted amongst
the very few countries in the world to have developed an indigenous light combat
aircraft and advanced light helicopter. In nuclear and space technology, it has
developed fast breeder reactors and extensive satellite and launch vehicle technology.
Indian Space programme has matured and the country is now poised to send its
first ever manned mission to the moon. In the industrial R&D, India has
established a credible record. In the chemical industry sector, India has achieved
international recognition and has broken the monopoly of the multinationals. In
pharmaceuticals, an industry practically non-existent at the time of independence,
the country has emerged as one of the most competitive producers of therapeutics in
the world and a supplier of medicines at very affordable prices. A net exporter of
pharmaceuticals, it meets more than three quarters of the Indian requirements of bulk
drugs, almost all the requirements of formulations and is poised to enter the
international markets after the expiry of patents in US in the near future. Indian
leather industry is amongst its top five export earners. In the area of industrial
catalysis, India counts among the top few countries possessing world class
capability in this knowledge-based sector of catalyst
development
and
manufacture. In petroleum refining and petro- chemicals, the country has even
transferred technology to US and Europe. India is completely self-sufficient in
agro-chemicals for which it was predominantly dependent on imports in the 70s.
Apart from the new PARAM 1000 supercomputer, through the development of
other parallel computing-based efforts, such as ANUPAM, ANURAG, FLOWSOLVER, India has demonstrated its ability in supercomputing which are presently
available only with US, Europe and Japan. India is demonstrating its capability in
R&D and technical skills by attracting several major multinationals to set up
R&D base in India or partnerships with local collaborators. Several facilities
owned by the Council for Scientific
and Industrial Research, an autonomous
organization of the Government of India, the Indian Institutes of Technology and
other scientific institutions, are partnering with global leaders in diverse areas, such
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as software, bio-technology, food processing, chemical industries, pharmaceuticals,
petro- chemicals, aircraft equipment, telecom, etc., so that the cycle of product
development and its commercial exploitation can be further shortened in the
current milieu of intense international market competition. India’s collaboration in
space with other international scientific organizations, both for research and for
commercial purposes (launching of satellites on behalf of foreign countries and
firms) is already well established.
228. India’s S&T strengths are being recognized
in the current age of
globalization. About 150 MNCs of the ‘Fortune 500’ have set up research base in
India in different areas, like IT, pharmaceuticals, automotive sectors etc. General
Electric, for example, does cutting edge research in Bangalore on aircraft
components. A large number of SME firms are doing R&D work on outsourcing
basis on behalf of western firms. Reliance Life Sciences, going by the patents the
company has filed, is doing significant work on the stem cell lines it owns. Many of
the ubiquitous MP3 players are powered by software created at IITIAM Systems, a
small IT company based in Bangalore. A good part of Intel’s latest chip Intel
Core 2 Duo was designed out of Bangalore. The new versions of Yahoo’s
instant messenger were coded in India. Add to all of this the kind of work being
produced by Indian laboratories for dozens of companies like Microsoft, Intel,
Yahoo, Google, Amazon and IBM. According the Vice President of Nasdaq, R&D
in India costs 10% of what it costs in US.
229. Vision for S&T for Societal Transformation. In his book, ‘Envisioning
an Empowered Nation: Technology for Societal Transformation’, 2004, former
President of India, Dr. A.P.J. Abdul Kalam, has talked about technology as the prime
mover for a developed nation. He has identified areas, such as agriculture,
manufacturing, health, the strategic sector and knowledge sector for priority
development. According to him, the core areas for R&D are stem cell research,
interactive tele-education system (facilitated by the launch of EDUSAT, India’s
exclusive educational satellite), bio-fuel Jatropha plant), BRAHMOS (supersonic
cruise missile with speed upto Mach III), molecules to drugs (using nanotechnology), nano-technology applications (e.g. next generation computers, solar
energy, etc.) and prediction research in seismology. An autonomous body under the
Department of Science & Technology, Technology Information Forecasting and
Assessment Council (TIFAC) has mapped out a ‘Technology Vision for India up to
2020’ covering 17 sectors and bring out 25 volumes of reports. Whilst India is
getting rapidly connected with the ebbs and flows of globalization, the Indian
leadership is conscious that its own growing economy is placing heavy demands on
educational and vocational training systems and on R&D infrastructure. Given the
fact that services sector constitutes more than half the size of India’s current GDP
and that IT and IT-enabled services constitute an important segment of the services
sector, it is critical that India should aim for being a knowledge-driven society.
Vast potential exists in application of IT in fields such as bio-technology,
pharmaceuticals, designer-made material and others. Huge opportunities also
exist for R&D in the field of genomics, bio- informatics, DNA technologies,
clinical studies and genetically modified crops.
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230. Perspective on India’s S&T Capabilities.
The Indian scientific
community, both in the Government and the private sector, has much to be proud of
for its achievements since independence. It has created the sinews to give
India’s S&T a capability to support national objectives even in the face of
technology-denial regimes which have existed, in some form or the other, since
independence and has, now, enabled India to participate in the globalization
process with enormous confidence. India’s capacity to absorb and to indigenize
technology from different sources, from the west as well as from the former
Soviet Union, has been a major factor in creating the industrial and S&T base in
the country, both in the civilian and the defence sectors. Some industrialists, now,
even believe that India’s further industrialization would be technology-driven.
Our research base, until now buried in the red-tape of the departments and ministries,
is being quite keenly familiarized with by foreign multi-nationals for their
commercial applications. Indeed, our scientists are being sought out due to their
competence and relative ‘inexpensiveness’. An interest in science and technology
amongst the students endures unlike the developed countries, like US, where there is
serious concern about the lack of interest in the field in university entrants. A serious
attempt has been made, by our scientific establishment especially CSIR, to record
and disseminate traditional knowledge.
231. Still, major questions remain about adaptation of our existing S&T
capabilities to our economic liberalisation process, about optimal use of our existing
capabilities and about developing cross-spectrum institutional synergies. Since
literacy and general education form the base of the knowledge pyramid and the
continuous advancement of science and application of improved technology form its
middle-rung, India’s science and technology capabilities cannot develop until the
technical education, both vocational and professional, is significantly upgraded.
Equally and importantly, our education system needs to abandon the practice of
segregating students into different, mutually exclusive “streams” of science, ‘arts’
and commerce and to develop cross-“stream” academic culture. A handful of worldclass IITs cannot power India’s drive for knowledge society. A large number of the
country’s approximately 500 engineering colleges need to be significantly upgraded
in terms of their quality. Private sector initiative and investment, whether from
Indian corporate or NRIs or reputed foreign universities, need to be fully
encouraged. Close links need to be fostered between technical institutions and
industry. Although having the third largest pool of scientists and engineers
ahead of US, UK, France and Germany (Global Competitiveness Report,
2003-04), as a proportion of the total population India is at 1/100th of US levels and
1/50th of the Korean levels. China’s manpower base of scientists and engineers as a
percentage of its population exceeds ours by more than three times. In terms of
total investment in R&D, India’s expenditure is 1/60th of that of Korea, 1/250th
of that of US and 1/340th of that of Japan. More than 20% of the budgetary
allocations to the various scientific institutions are not being utilised. More
significantly, atomic energy, space and defence research account for 71% of all
central spending on science and technology which means that relatively little is left for
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investment in agriculture, energy, tele- communications and other crucial sectors. R&D
expenditure even in India’s fast growing IT sector has been averaging around 3%
of sales’ turn-over which is much lower as compared to the 14-15% expended
by international reputed software firms. Similarly, country’s ability to transfer
proven technologies from its vast network of scientific research institutions to
the factory is very inadequate. Despite India producing world class scientists and
engineers, the national research system rarely produces world class results.
Although, India’s recent experiment with the Science and Technology Entrepreneur
Parks (STEPs) has been quite successful, the missing link between scientists and the
practitioners in agriculture and industry remains a major obstacle to developing the
required synergies. Another obstacle is the lack of continuous flow of young talented
researchers in non-teaching research institutions in which an atmosphere of
bureaucratisation and lack of accountability prevails. ‘Grass-roots’ consultancy and
turn-key projects are increasingly in demand and need to be tapped. Finally, there is
need for fostering close ties between basic research and business.
CHAPTER – 21
SKILL DEVELOPMENT AS A STRATEGY TO REAP
DEMOGRAPHIC DIVIDEND
Introduction
232.
Fast growth, competitiveness and social stability depend on skill development.
India’s industrial growth is picking up at a time when industry’s ability to absorb unskilled
rural migrants has been lost in history. A few aspects stand out in any analysis of India’s
skill landscape:
a) To compete in the open domestic economy, leave alone the global market,
companies need to achieve standards that can be delivered only by trained
manpower working on sophisticated machines that run to precise algorithms.
Even in the service sector, workers need a whole lot of skills to become part of
the modern economy, even if it is confined to social graces and discipline.
Untrained, unemployable youth can easily turn to crime or be mobilised by
political parties that thrive on hatred of ‘the other.’ Skill development is a
national priority.
b) The phenomenon of educated unemployed in a fast-track economy is peculiar
to India. According to a 2005 NASSCOM-McKinsey World Institute study, over
75 percent of engineering and 85 percent of arts, science and commerce
graduates in India are unemployable. Neither is the education they are prescribed
up-to-date, nor are they taught marketable skills during their three-four years in
college.
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c) Sixty years after independent India adopted the centrally planned model of
economic development, the productivity of Indian industry and the labour force
in particular, is abysmally low, the inevitable outcome of continuous neglect of
vocational education and training. Consequently despite hosting the world’s
largest working age population and labour force, the Indian economy which for
the past decade has been averaging unprecedented annual GDP (gross domestic
product) growth rates of 8-9 percent, is experiencing the paradox of a massive —
and growing — shortage of skilled and sufficiently trained personnel in
agriculture, manufacturing and service industries. Confronted with the highest
in-service employee training costs worldwide, intensifying shortage of skilled
workers and rising wages which are jeopardising India Inc’s costcompetitiveness in world markets, alarm bells have begun to ring in somnolent
government offices and the councils of Indian industry.
d) In India very few young people enter the world of work with any type of
formal or informal vocational training. Indeed the proportion of formally trained
youth in our labour force is among the lowest in the world. Currently the VET
system has the capacity to train only 3 million youth against industry’s
requirement of 13 million annually.
233.
Taking cognizance of this challenge and opportunities, the Government of India
launched coordinated action for skill development which is envisioned to be a major
initiative for inclusive growth and development and it consists of a conglomeration of
programs and appropriate structures, of which National Skill Development Corporation
(NSDC) is an important part. Government and Indian industry bodies like CII, FICCI,
ASSOCHAM teamed together to set up NSDC. Indian Industry holds 51% stake and 49%
is held by Indian Govt. This Organisation (NSDC) has been mandated by Indian Govt. to
“catalyse” (advocate, create, fund, facilitate and incentivize) skill development in India. It
has Prime Minister’s mandate to skill 150 million people in India by 2022. NSD Cintends
to address these issues on two tracks. Firstly, for building capacity in the VET segment, it
is encouraging private sector investment and initiatives (in profit as well as non-profit
enterprises) in training and skill development in 20 high growth sectors and the huge
unorganized sector.. It has been provided a seed corpus of Rs.1, 000 cr. by Govt to start
the process. Secondly, NSDC is tasked with developing an enabling environment for skills
development, including support for (i) clarification of sector-specific competencies/skills
through promotion of Sector Skills Councils (SSCs), (ii) quality assurance such as
independent third-party accreditation of trainees’ skills acquisition; (iii) capacity
development for skills development institutions/ such as curriculum and standards, faculty
development, and so forth; (iv) trainee placement mechanisms, and (v) monitoring and
evaluation, supporting systematic collection and analysis of data about skills development,
including employer feedback regarding the quality of NSDC trainees. To ensure a strong
private sector training supply, NSDC will facilitate establishment and growth of private
“train the trainers” centres where instructors will be updated with the latest sector-specific
skills and competencies required, using current equipment and technology, and modern
training techniques.
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234.
Today, industry realises the criticality of skill development for every industry
vertical, and all Industry Forums evaluate how industry could participate in skill
development initiatives. The best option for industry sectors is to set up SSCs to
complement the existing vocational education system for the Industry Sector in meeting
the entire value chain’s requirements of appropriately trained manpower in quantity and
quality across all levels on a sustained and evolving basis. Sector Skill Councils are
national partnership organizations that bring together all the stakeholders – industry,
labour and the academia. The SSC will operate as autonomous body. It could be registered
as a Sec 25 Co, or Public Limited Co. Funding is initially done by the government. As it
grows, the SSCs become self funded, for-profit organizations.
235.
This initiative has been adopted by a few leading economies, such as Canada,
UK, Australia, New Zealand, Netherlands, South Africa, who have been successful in
addressing their country’s human resource development needs.
CHAPTER – 22
WATER SECURITY AND MANAGEMENT OF INDIA’S WATER
RESOURCES
236. India accounts for 16 per cent of the world’s population and 4 per cent of its water
resources. This population–water imbalance, widening over the years, is turning into a
full-blown water crisis. While the aggregate picture is not alarming, the situation is quite
precarious in some regions, especially the arid and semi-arid tracks. For instance,
groundwater exploitation in Rajasthan, which meets 80 per cent of its drinking water
requirement from ground water, has crossed 100 per cent during recent years. The
exploitation rates are as high as 150% in some districts. At aggregate level the total
utilisable water in India is estimated at 1120 cubic meters per capita per year, as against
the threshold level of 10000 cum requirement. Per capita availability of below 1000 cum
is regarded as a water scare situation. The estimated demand for water is about 750 cum
during the year 2000 and the projected demand for water would be 1050 by 2025. More
than 80% of water is used for irrigation with an irrigation potential of 90 million hectares.
But, a tenth of this potential remains un-utilised and a sixth of the irrigated are is afflicted
with water logging and salinity. The economic and environmental costs associated with
under-utilisation, water logging and salinity are far more serious than the generally
perceived demand-supply gap. The looming water scarcity crisis is much more than a
simple hydrological or physical phenomenon. Water crisis stem from pervasive gaps in the
economic and institutional dimensions, allocation, use and management of water
resources.
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237. Judicious management of water resources is among the critical policy issues across
continents. The need for action in this direction is growing by day, as countries and
communities across the globe are increasingly experiencing water stress in various
contexts. Water stress often leads to civil strife and conflict. Water resources development
and management assumes paramount importance in agrarian economies like India. In
these economies, irrigation consumes more than 70 per cent of water utilised and
continues to face shortage in quality as well as quantity terms. Water scarcity is resulting
in regional inequalities and political turmoil. In other words, water, especially irrigation,
has become the great divider across communities and regions. Through genuine natural or
environmental factors explain such a division, policy induced ill management of water is
at the core of the water stress and conflicts, In order to improve management practices,
various policy measures such as institutional approaches and market mechanisms are
suggested. Often, in the literature, either of these issues is emphasised to the neglect of the
other. Similarly, partial approaches in the case of resource management is common. While
the integrated water resource management (IWRM) is a right step in this direction,
approaches to water management are far from integrated.
238. In the absence of such an approach ‘water security’ would remain a distant dream.
Water security means that “people and communities have reliable and adequate access to
water to meet their different needs, present as well as in future, are able to take advantage
of the different opportunities that water resources present, are protected from water related
hazards and have fair resources where conflict over water arise”. Such water security
ensures equity and sustainability. In the context of scarcity, allocation of water should be
governed by optimality rather than productivity. For, optimality combines economic as
well as social benefits. Water security is indispensable for addressing inter and the intra
regional as well as inter household inequalities in growth and development and sustaining
the ecological balance. In fragile resource regions, environmental degradation is seen as a
cause of household food insecurity and as a consequence of water insecurity. That is, food
security is linked to water security through environmental degradation in these regions.
Water resource degradation is manifested in the lopsided or imbalanced development of
different sources of irrigation.
239. An important dimension 0f water resources that has not received due attention is its
quality aspects. While the magnitude of the problem is limited and spread over, the losses
due to its impact are quite substantial. The pervasive spill over effects between sectors that
are kept outside the domain of the market is one of the important constraints, which leads
to severe environmental degradation both in developed and developed countries. The
impact of industrial pollution on other sectors is one of the most classic examples of this
sort. The main reason behind this is market failure. One way to overcome the problems of
market failures is to enforce property rights. However, in many externality type situations,
the cost of enforcing property rights is found to be high and difficult to enforce. The
problem is acute, especially when it comes to environmental problems related to industrial
pollution. It means each individual/organisation has no incentive to take into consideration
the effects of his use on other individual/ organisations. In the case of negative effects of
industrial pollution, the social cost, which is equal to the sum of the costs to all
individuals, is greater than the private cost to the individual using air and water for waste
disposal. The implication of this is that decision on how much to dump in to the
environment.
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240. One of the main reasons for the poor performance of the water sector in India is the
philosophy of supply side management hitherto followed, to the neglect of demand
management structures. Unless demand regulation is given due importance in water
resource planning and management, it would be difficult to meet the demands of the
increasing population, either in terms of water or food, in the event of increasing water
shortages coupled with mounting financial constraints. Demand regulation includes
conservation of water, enhancing the productivity of water, etc. through following
appropriate price policies and adopting technologies fostered with suitable legislation and
institutions.
CHAPTER - 23
FOOD SECURITY IN INDIA IN THE 21ST CENTURY
Background
241. Food security is one of two major concerns for India; the other being inclusive
growth. As the country progresses towards these twin National objectives the ‘supply side’
constraints in food production, both in case of the durable and perishables, have come into
focus. A strategy for increasing agricultural production by ushering in a sustainable
second green revolution is a ‘work in progress’. Merely producing more is not enough; it
is equally important to save each grain produced by minimizing losses and reducing
wastages. This would not only improve farmers’ income and economic viability of
agricultural operation in the country but will increase the efficiency of the entire food
supply chain.
242. Food is lost or wasted throughout the supply chain, from initial agricultural
production down to final household consumption. In medium and high income countries
the wastage is mainly during the consumption stage and minimal during the production
stages. In India and other developing countries food losses occur mostly during the early
and middle stages of production which is in the form of Pre harvest and Post harvest
losses. Empirical evidence confirms that India losses 25% - 40% of its agricultural
production, per annum, to post harvest losses. When translated in to figures one realized
the enormity of the problem and its impact on the issue of food security. In 2009 out of the
estimated loss of Rs 76,500 crore, equivalent to the annual budget of three big Indian
states, Rs 52,4000 crore accounted for loss on account of perishable fruits, vegetables and
poultry which calls for augmenting infrastructure facilities and gearing up food processing
industry on a war footing.
243. Given that many small farmers in India live on the margins of food insecurity, a
reduction in food losses especially post harvest losses of this magnitude would have an
immediate impact on their livelihoods. Since these losses are attributable to financial,
managerial and technical limitations in harvesting/post harvesting techniques, storage &
cooling facilities, infrastructure , packing and marketing systems a well thoughout
strategy making profitable investments, both in public and private sector, in augmenting
Institutional and Infrastructural facilities is the way ahead.
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244. Undoubtedly investment in the food processing sector will be the most significant
component of this strategy; considering its potential in incentivising increase in
agricultural production, strengthening the food supply chain and ensuring better
remuneration to farmers. It will supplement India’s food security policy which has a
laudable objects of ensuring availability of food grains to the common people at an
affordable price and have access to food where none existed. The food processing sector
will also weed out the inefficiencies built in the post harvest operations thereby
substantially reducing food losses and increasing farm profitability & food availability. A
developed and mature food processing industry will have other linked spinoffs as well;
better markets access to farmers, value addition to farm produce, additional employment
opportunities as well as export earning leading to a better socio-economic condition for
millions of farm families and common people.
245. Every year 10 million tonnes of food is lost in India due to post harvest losses. In
financial terms these losses are estimated to be Rs 44,000 crore as confirmed by the
Agriculture Minister in the Parliament on 24th August 2013. This figure is quite disturbing
especially because 29.8% of our population lives below the poverty line and approx 4600
die of malnutrition every day. Though the GDP growth in the last one decade has been
better than most countries, it is in no way inclusive. The average annual earning of farmers
is Rs 22,000 which is much below the national average of Rs 54,000. At the same time
unemployment, especially in the rural areas, is also on the increase. These issues have
been agitating the minds of our policy makers because of which food security and
inclusive growth have emerged as the twin national objectives.
246. With reducing agri-productivity and growing population, the only solution for food
security lies in reducing post harvest losses. Similarly if inclusive growth has to be
achieved farmers’ income has to improve for which the supply side barriers in terms of
post harvest losses will have to be overcome. Thus for both these objectives an efficient
supply chain management in a robust Food processing sector is the only solution. It brings
remunerative advantage to the farmers and generates employment (both direct and
indirect) which is two and half times of the other sectors in India. With focus on the post
harvest losses will go a long way in addressing some of the most critical national issues
facing the country.