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1. General Review |
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Macroeconomic
Overview for 2001-2002 The Indian economy is passing
through a difficult phase caused by several unfavourable domestic
and external developments. Domestic output and demand conditions
were adversely affected by poor performance in agriculture in the
previous two years. The global economy experienced an overall deceleration
and is estimated to record an output growth of 2.4 per cent during
the past year. These tendencies were exacerbated in the aftermath
of the terrorist attacks in United States in September 2001. Consequently export growth has suffered
and industrial profitability has also been affected by the prevailing
low commodity and product prices globally. Despite these constraints, growth in real GDP in
2001-02 is expected to be 5.4 per cent as estimated by the Central
Statistical Organisation. This growth rate marks some recovery over
the low growth of 4 per cent in 2000-01.
It will also be one of the highest growth rates in the world
in the current year. 1.2 The average annual growth rate during the Ninth Five Year
Plan (1997-2002) is now estimated at 5.4 per cent which is lower than
the plan target of 6.5 per cent.
Although this raises new challenges for reinvigorating growth
in the Tenth Five Year Plan, the Indian growth record is one of the
highest among the major economies in the world in recent years.
The Indian economy has been resilient in the face of several
external shocks during this period such as the East Asian crisis of
1997-98, the oil price increase of 2000-01, and the most recent world
economic slowdown. Domestic shocks in the shape of an adverse security environment,
natural disasters like the Orissa cyclone and Gujarat earthquake,
and two consecutive years of poor agricultural performance, have also
been faced successfully by the economy. The behavioural trends of
the key macro-economic parameters in recent years and for the last
decade are provided in Tables 1.1 and 1.2 respectively. 1.3 The overall
growth of 5.4 percent in 2001-02 is supported by a growth rate of
5.7 percent in agriculture and allied sectors, 3.3 percent in industry
and 6.5 percent in services. The acceleration of the overall GDP growth
rate is basically due to a significant improvement in value added in the agriculture and
allied sectors from a negative growth rate of (-)
0.2 percent in 2000-01 to 5.7 per cent in 2001-2002. There has been
significant deceleration in the growth rate of industry.However, the
performance of the services sector has improved moderately. 1.4 Real GDP growth rate from mining
and quarrying is estimated to have declined from 3.3 per cent in 2000-01
to 1.4 per cent in 2001-02. The growth of manufacturing has reduced
from 6.7 to 3.3 per cent, while that of electricity, gas and water
supply has fallen from 6.2 to 5.2 per cent and that of construction
from 6.8 to 2.9 per cent over the same period. The deceleration in
industrial growth may be attributable to various factors such as normal
business and investment cycles, inherent adjustment lags of corporate
restructuring and lack of both consumer and investment demand. Continued
high real interest rates, infrastructure constraints in power and
transport and delays in establishing credible institutional and regulatory
framework for private participation in some key sectors might have
also dampened private investment and industrial production.
1.5 Prospects of agricultural production in 2001-02 are considered
to be bright as a result of normal monsoon and relatively favourable
distribution of rainfall over time and regions. Overall agricultural output
is estimated to increase by nearly 7 per cent in 2001-02. Foodgrains
production is expected to rise to 209 million tonnes compared with
196 million tonnes in 2000-01. 1.6 Financial and other services are doing well in the current
year. However, performance of certain service sectors like transport
(other than railways), tourism, business and social services have
been adversely affected by slowdown in both domestic and external
demand. 1.7 The average annual rate of inflation in terms of the Wholesale
Price Index (WPI) increased significantly from 3.3 per cent in 1999-2000
to 7.1 per cent in 2000-01 due to a substantial rise in administered
prices of petroleum products. During 2001-02, the inflation rate declined
in terms of the WPI. The 52 week average inflation rate declined from
7 per cent at the beginning of 2001-02 to 4.7 per cent for the week
ended January 19, 2002. The point-to-point inflation rate reached
a low of 1.3 per cent
by the end of January,
2002 which was
the lowest in over two decades. 1.8 The inflation
rate in terms of the Consumer Price Index for Industrial Workers (CPI-IW)
remained below 4 per cent until July 2001 and increased to 5.2 per
cent in August 2001. The Index displayed a downward trend during September-October,
2001. However, it increased
again to 4.9 per cent in November and further to 5.2 per cent in December
2001. 1.9 The
Union Budget envisaged a reduction of gross fiscal deficit as a proportion
of GDP from 5.1 per cent in 2000-01 (RE) to 4.7 per cent in 2001-02
(BE). With the availability of quick estimates of national income
and provisional accounts for 2000-01 and advance estimates of national
income for 2001-02, revised estimates of fiscal deficit for 2000-01 and budget
estimates for 2001-02 have undergone change. The gross fiscal deficit
as a proportion of GDP is now estimated at 5.5 per cent for 2000-01
and 5.1 per cent for 2001-02. As regards revenues, there are significant
shortfalls in indirect taxes due to slowdown in industrial production
and significant deceleration of both oil and non-oil imports. Direct
tax collections are likely to be below target for the current year. There is
also a shortfall in revenues from disinvestment. Disinvestment proceeds
are now expected to pick up in the coming months due to a much smoother
working of the disinvestment process. Various economy measures taken
by the government for reducing non-plan and non-capital expenditure
have helped to keep the overall expenditure under control. Despite
these measures, the gross fiscal deficit of the Central government
at the end of the year is likely to exceed the budgeted target. 1.10 India’s balance of payments remained reasonably
comfortable in both 2000-01 and 2001-02. The current account deficit
as a percentage of GDP declined from 1.1 per cent in 1999-2000 to
about 0.5 per cent in 2000-01 due to a dynamic export performance
and sustained buoyancy in invisible receipts. However, in the current
year, exports have been almost stagnant and have recorded a growth
of only 0.6 per cent in April-December 2001. An assessment of the
Balance of Payments (BOP) outlook conducted jointly by the Reserve
Bank of India (RBI) and the Ministry of Finance for the current year
indicates that the current account deficit as percentage of GDP may
widen to some extent, though it will remain within 1 per cent of GDP
which is quite manageable. 1.11 The exchange
rate of the rupee in terms of the major currencies of the world remained
reasonably stable during the year, despite occasional fluctuations
caused by normal market forces of supply and demand. Foreign exchange
reserves (including gold and SDR) reached a record level of nearly
US$50 billion at the end of January 2002, which is equivalent to almost
10 months of estimated imports for the current year. 1.12 India’s external debt situation has improved significantly
in recent years as a result of effective external debt management
by the Government. The external debt-GDP ratio decreased from 28.7
per cent at the end of March 1991 to 22.3 per cent at end-March 2001
and further to 21 per cent at the end of September 2001. The debt
service ratio declined from a peak level of 35.3 per cent of current
receipts in 1990-91 to 16.3 per cent in 2000-01. It is particularly
noteworthy that for the first time, the World Bank has classified
India as a less-indebted country. 1.13 According to the Quick Estimates of National income for
2000-01 provided by the Central Statistical Organisation on
January 31, 2002, the overall GDP growth rate decelerated significantly
from 6.1 per cent in 1999-2000 to 4 per cent in 2000-01. The gross
value added in agriculture and allied sectors declined by 0.2 per
cent in 2000-01 compared with an increase of 1.3 per cent in 1999-2000
(Table 1.3). 1.14 The GDP from
agriculture alone declined by 0.4 per cent in 2000-01 compared with
an increase of 1 per cent in 1999-2000. The negative growth rate of
agriculture in 2000-01 was primarily due to a decline in rice production
by 5.4 per cent, wheat by 10 per cent, pulses by 20.4 per cent, oilseeds
by 11.2 per cent and cotton by 16.3 per cent. However, livestock,
which accounts for over 26 per cent of the total value of agriculture
sector, increased by 3.5 per cent and coarse cereals
by 4.2 per cent in 2000-2001. 1.15 Within the industry sector, while construction showed
a lower growth in 2000-01, there was marked improvement in the growth
rates of manufacturing (from 4.2 per cent in 1999-00 to 6.7 per cent
in 2000-01) and mining and quarrying (from 2 per cent to 3.3 per cent
during the same period). The growth rate of electricity, gas and water
supply remained almost invariant at around 6.2 per cent for both 1999-2000
and 2000-01. 1.16 Growth rates of services sector decelerated significantly
in 2000-01. In particular, the growth rate of trade, hotels and restaurants
reduced considerably from 7.3 per cent in 1999-2000 to 3.8 per cent
in 2000-01, while the growth of transport, storage and communications
remained almost unchanged at around 8.2 per cent during 1999-00 and
2000-01. Financial, real estate and business services performed poorly
with growth rate of only 2.9 per cent in 2000-01 compared with a growth
rate of 10.6 per cent in 1999-00. The unsatisfactory performance of
the financial and real estate sector was due to a negative growth
rate of (-) 2.2 per cent in banking and insurance, which was in turn
due to decline in the output of the non-banking financial institutions.
Community, social and personal services also grew at a much lower
rate of 6 per cent in 2000-01 compared with 11.6 per cent achieved
in 1999-2000. 1.17 The advance estimates of GDP for 2001-02, made available
by the CSO, indicate a higher GDP growth rate of 5.4 per cent in the
current year. The higher growth in 2001-02 is attributable to significant
improvement of growth rates in agriculture and allied, and financial,
real estate and business services sectors. However the core industry
and infrastructure sectors are expected to record much lower growth
than in the previous year. Consumption, savings
and investment 1.18 On the demand side, real consumption growth declined
from 6.5 per cent in 1999-2000 to 2.9 per cent in 2000-01. In real
terms, the growth rate of private consumption reduced from 5.5 per
cent in 1999-2000 to 2.2 per cent in 2000-01, that of government consumption
expenditure fell from 12 per cent to 6.5 per cent during the same
period. In recent years growth in real gross domestic capital formation
(GDCF) has shown instability. The growth rate of real GDCF recorded
a significant deceleration from 15.7 per cent in 1999-2000 to 2.0
per cent in 2000-01 (Table 1.4). This to a large extent
reflects volatility in the behaviour of stocks/inventories. Growth
in real gross fixed capital formation (GFCF) has been more stable,
but it also slackened from 8.6 per cent in 1999-2000 to 4.7 per cent
in 2000-01 (Table 1.6).
The change in stocks measured as percentage of GDP at 1993-94 prices
fell from 1.8 per cent in 1999-2000 to 1.1 per cent in 2000-01. 1.19 The saving and investment rates in India are high as
judged by the country's level of economic development. Gross domestic
savings improved marginally from 23.2 per cent of GDP in 1999-2000
to 23.4 per cent of GDP in 2000-2001 as a result of better performance
by household savings and private corporate savings. However, there
was a steep fall in public sector savings due to an increase in the
dis-savings of government administrative departments. In fact, public
sector savings were negative in 1998-99, 1999-2000 and 2000-01. As
a percentage of GDP, public sector savings declined from (-) 0.9
per cent in 1999-2000 to (-) 1.7 per cent in 2000-01 (Table
1.5). 1.20 Gross domestic investment at current prices declined
marginally from 24.3 per cent of GDP in 1999-2000 to 24 per cent of
GDP in 2000-01 mainly due to a fall in private sector investment.The
rate of gross capital formation in real terms also declined from 26.7
per cent of GDP in 1999-2000 to 26.3 per cent of GDP in 2000-01 due
to deceleration in the growth rates of real gross domestic capital
formation in both public and private sectors. While the real gross
fixed capital formation by the public sector increased by 10.9 per
cent in 2000-01, that by the private sector increased by only 2.4
per cent in the same year (Table 1.6). 1.21 The change in stocks of inventories decreased substantially
in 2000-01 indicating better management of supply and demand for output.
As in earlier years, the rates of domestic investment were higher
than the rates of domestic savings in both 1999-2000 and 2000-01.
The investment-savings gap was financed by the positive net capital
inflow from abroad, which amounted to 1.1 per cent and 0.6 per cent
of GDP respectively in 1999-2000 and 2000-01. 1.22 Due to unavailability of data on investment
for the year 2001-02, the investment trends have to be assessed
by analysing the trends in various leading indicators of investment
and growth. These trends present a mixed picture. Both domestic production
and imports of capital goods have declined considerably in the current
year. Sanctions and disbursements made by the All India Financial
Institutions (AIFIs) have also reduced significantly. On the other
hand, foreign investment inflows have recorded distinct improvement
in the current year. But, most of these inflows are possibly yet to
be absorbed as fresh investments due to a build up of record level
of foreign exchange reserves. The available trends, therefore, may
not indicate any significant recovery of investment in 2001-02. 1.23 Sustained high
economic growth would require considerable improvement in investment.
Given the country's limited domestic resources, it is essential to
enhance further the inflows of foreign direct and portfolio investment.
Enhancement of domestic investment would depend upon structural reduction in
inflationary expectations and real interest rates, reduction in the
fiscal deficit and further liberalisation of the domestic debt and
capital markets. 1.24 India’s
private savings rate (comprising household and private corporate savings)
is more or less comparable to those achieved by the high performing
East Asian economies. However, its public savings is very low and
is a major constraint on domestic resource mobilisation. Government
is restructuring public expenditure to foster domestic savings, release
resources for physical and social infrastructure development and to
reduce crowding out effect on private investment. 1.25 Major fiscal
reforms have been undertaken for broadening the income tax base and
streamlining the excise and customs duty structures. There have also
been enabling reforms in the spheres of trade and foreign investment.
Reforms in public sector enterprises are underway to reduce pressures
on public finances, increase the efficiency of public sector and reduce
the incremental capital output ratio (ICOR). Legal, institutional
and regulatory frameworks in insurance, banking, capital markets,
power, ports and telecommunications, are also being strengthened to
induce private investment in infrastructure. The Central Government
Budgets for 2000-01 and 2001-02 announced various measures for further
deepening of the capital markets and the financial sector and allowing
private entry in insurance. The major reforms undertaken during
2001-02 are provided in Box
1.1. It is expected that these measures would enhance
both the savings and investment rates for the economy. Agriculture and allied sectors 1.26 After
near stagnation in 1999-2000 and negative growth of 0.2 percent in
2000-01, the agriculture sector is likely to attain a growth rate
of nearly 6 percent in 2001-02. One of the reasons for this is that
spatial distribution of the monsoon rainfall in 2001 was one of the
best in recent years. This is reflected in the adequate rainfall received
by seventeen districts belonging to the states of Madhya Pradesh,
Rajasthan, Gujarat, Uttar Pradesh, Haryana, Kerala, Orissa, Punjab,
Tamil Nadu, Chhatisgarh and Himachal Pradesh, which had suffered from
deficient rainfall in the previous two years.
1.27 The foodgrains output in 2001-02 is likely to be 209.2
million tonnes, an increase of more than 13 million tonnes over the
previous year. Late winter
rainfall in the North-West India in February together with a long
cold spell may help raise foodgrains production even to 212 million
tonnes in the current year. 1.28 The downtrend
in oilseeds, particularly groundnut during the preceding two years
has been reversed this year and the country is likely to harvest over
21 million tonnes of oilseeds - higher by over 2 million tonnes compared
with the previous year. Cotton production is expected to be higher
by over 2 million bales and production of jute and mesta at 10.7 million
bales is also likely to be higher than the previous year. Management of the
Food Economy 1.30 During 2001-02,
procurement of wheat shot up to the record level of 20.63 million
tonnes, despite a decline in wheat production to 68.46 million tonnes
(a drop of 7 million tonnes) in 2000-01. Rice procurement also reached
a record high of 19.10 million tonnes during the current marketing
year (October-September 2000-01). Fresh procurement for the marketing
year 2001-02 has so far fetched about 13.33 million tonnes of rice
(till January 29, 2002). 1.31 The unusually
high procurement of rice and wheat during the last two years has led
to accumulation of huge surplus stocks much above the minimum buffer
stock norms. As compared with the minimum norm of 8.4 million tonnes
of wheat on January 1, the country had a stock of 32.4 million tonnes
on January 1, 2002. Similarly, as compared with the minimum buffer
norm of 8.4 million tonnes for January 1, the rice stock on January
1, 2002 was estimated at 25.6 million tonnes, with fresh procurement
of 13.33 million tonnes up to January adding further to the existing
stock. In January 2002, the FCI was holding 58.1 million tonnes of
rice and wheat stock, against the minimum buffer norm of 16.8 million
tonnes for January. 1.32 The primary
reason behind the heavy increase in procurement volumes can be traced
to the sharp increase in Minimum Support Prices (MSP) in recent years.
While there has been excessive procurement of rice and wheat, offtake
of foodgrains under the public distribution system has been low, essentially
due to the narrowing differential between the Above Poverty Line (APL)
issue prices for PDS and the open market prices. Excess procurement
by the FCI due to higher MSP, mounting stocks of foodgrains much above
the levels required for food security and declining share of procurement
by private traders, have led to higher commitments for Government
subsidy. The food subsidy bill increased from Rs.2,850 crore in 1991-92
to Rs.12,010 crore in 2000-01. For 2001-02, the food subsidy is estimated
at Rs.13,670 crore, out of which Rs.5,680 crore accounts for buffer
stock subsidy or the carrying cost of the public stock of foodgrains.
1.33 Some steps
to liquidate excess stocks with FCI like open market sale of foodgrains
at prices much below the economic cost, export of foodgrains at prices
below economic cost, increased BPL allocation of foodgrains under
the Targeted Public Distribution System (TPDS) and lowering of issue
prices under the TPDS for APL families, have been taken on Government
account in an attempt to reduce the carrying cost of surplus stocks.
One of the long-term measures for reducing the food subsidy bill and
the carrying cost of public stocks, taken up by some states, is decentralised
procurement of foodgrains and encouraging greater role by private
traders. The system has been introduced in the states of Uttar Pradesh,
Madhya Pradesh and West Bengal while other states are being encouraged
to take it up. Industry 1.34 The
significant slowdown of industrial growth witnessed in 2000-01, as
measured by the Index of Industrial Production (IIP), continued with
greater intensity in 2001-02. There was a distinct deceleration in
growth of manufactured exports and slowdown in growth rates of core
and infrastructure industries. The overall industrial growth in terms
of the IIP during April-December 2001-02 was only 2.3 per cent compared
to 5.8 per cent during the corresponding period of the previous year.
In fact, the industrial growth during the first nine months of the
current year is the lowest recorded during the last ten years. The
sharp deceleration in overall industrial growth is due to a number
of structural and cyclical factors such as normal business and investment
cycles and lack of both domestic and external demand. Continued high
real interest rates, infrastructure constraints, and lack of reforms
in land and labour markets, might have also dampened private investment
and industrial production. 1.35 Industrial slowdown has been observed across all major
sectors. The manufacturing sector grew by only 2.4 percent during
April-December 2001, much lower than the 6.0 percent growth registered
during the same period in 2000. Similarly, electricity generation
grew by only 2.7 percent during April-December 2001 (compared with
4.8 percent in April-December 2000) and mining and quarrying posted
a growth of only 1.1 percent during April-December 2001 (compared
with 4.4 percent in April-December 2000) (Table
1.7). 1.36 The broad-based nature of the industrial slowdown is
also evident from the disaggregated sub-sectoral growth rates as reflected
in the use-based classification of industrial production. Capital
goods are suffering an absolute decline in production (-4.8 per cent
growth in April-December 2001). Basic, intermediate, and consumer
goods also have had much lower growth rates in the current year than
in the previous year. The only silver lining lies in the performance
of consumer durables, which are growing at a double-digit rate (12.5
per cent in April-December 2001), despite having a lower growth than
the previous year (17.8 per cent in April-December 2000). 1.37 During the current year, the Government announced several fiscal and other policy incentives for engineering a revival in the industrial sector. The major fiscal measures included rationalisation of excise duty structureto a single rate of 16 per cent CENVAT; reduction of peak level of customs duty to 35 per cent; reduction of customs duties on specified products used for information technology, telecommunications and entertainment industry; and abolition of surcharges on personal and corporate income tax rates. Other fiscal incentives included exemption of goods imported by 100 per cent EOUs and units in FTZs and SEZs from anti-dumping and safeguard duties; extension of Five-year Tax holiday facility to enterprises engaged in integrated handling, transportation and storage of food-grains; and an increase of development allowance for tea from 40 per cent to 20 per cent. 1.38 Several far-reaching structural reform
initiatives were also announced during the year. As part of the on-going
process of dereservation in the small-scale sector, fourteen more
items were dereserved from the list of items reserved for exclusive
manufacture by the small-scale sector. A Bill for abolition of the
Sick Industrial Companies (Special Provision) Act was introduced in
Parliament. The Union Budget (2001-02) proposed amendments in the
Industrial Disputes Act and Contract Labour Act for removing the existing
structural rigidities in the labour market. The Budget also proposed
setting up of a National Companies Law Tribunal by amending the Companies
Act. The Bill in this regard has been introduced in Parliament. Infrastructure 1.39 The unsatisfactory performance of the infrastructure industries during the current year is reflective of the overall slowdown prevailing in the economy. Six core and infrastructure industries viz. electricity, crude oil, petroleum refinery products, coal, steel and cement, having a weight of 26.7 per cent in overall Index of Industrial Production (IIP) achieved an average growth rate of only 2 per cent during the first three quarters of the current year (i.e. April-December 2001) compared with 6.8 per cent during the corresponding period of the previous year. Crude oil and steel exhibited absolute decline in growth rate, while growth rates of other industries except cement, decelerated significantly during the current year. Among other infrastructure sectors, goods traffic on railways, cargo handled at major ports and new telephone connections had positive, but comparatively lower growths in the current year. (Table 1.8). 1.40 Several fiscal incentives were announced during the year
for boosting investment in infrastructure projects. Ten-year
tax holiday offered to projects in core sectors like roads, highways,
water-ways, water supply, sanitation and solid waste management systems
can now be availed of during the initial twenty years. Projects in
airports, ports, inland ports, industrial parks and generation and
distribution of power can now avail of ten-year tax holidays during
the initial fifteen years. The facility of five-year tax holiday available
to the telecommunication sector till March 31, 2000
was reintroduced for units commencing their operations on or before
March 31, 2003. The concessions were extended to
internet service providers and broadband networks. Tax incentives
were made available to investors providing long-term finance to enterprises
engaged in infrastructure. The Electricity Bill 2001 and the Communication
Convergence Bill 2001 were introduced in Parliament. Budgetary
allocation was enhanced for the Pradhan Mantri Gram Sadak Yojana (PMGSY)
and the scheme was extended to cover rural electrification. A Special
Railway Safety Fund was created to be funded by surcharge on passenger
fares and budgetary support for supporting safety related investment
of Rs. 17, 000 crore over six years. An amount of Rs. 1,000 crore
as contribution from General Revenues was allotted to the Special
Railway Safety Fund during the year. An additional amount of Rs. 898
crore was also allotted during the current year for completion of
"last mile" projects of the Railways. Services 1.41 During 1993-94 to 1999-2000 the service sector had achieved
consistently high growth rates in the range of 7.1 per cent to 10.5
per cent. But for the first time in 2000-01, the growth rate of the
service sector declined to 4.8 per cent due to poor performance by
financial sector, trade hotels & restaurants, and community and
social services. 1.42 The share of the services sector in overall GDP has increased
over the years. It may be mentioned here that although the service
sector presently accounts for 49 per cent of GDP, there is no regular
reporting system for the growth rate of the services sector because
of lack of reliable data and methodology for measuring production
of most of the services sectors. The Ministry of Finance in association
with the Central Statistical Organisation have initiated steps to
improve the data base for the services sectors and to proceed towards
construction of an Index of Services Production on the pattern of
the Index of Industrial Production (IIP). 1.43 One of the
key services that has assumed considerable significance in recent
times is insurance. The Insurance Regulatory and Development Authority
(IRDA), which was constituted on April 19, 2000, has granted certificates
of registration to ten life insurance companies and six general insurance
companies, in addition to the existing public sector Life Insurance
Corporation and general insurance companies. The IRDA has also introduced
solvency margin requirements on line with the Insurance Regulatory
and Development Authority (Assets, Liabilities and Solvency Margins
of Insurers) Regulations, 2000.
1.44 The insurance
sector continues to extend social security cover to deserving groups
in the economy. The Janshree Bima Yojana scheme was launched by the
LIC in June 2000 for providing social security to groups largely
comprising of persons below the poverty line.
Till the end of January 2002, 763,436 lives have been covered
under the programme. The LIC has also launched a new scheme called
Krishi Shramik Samajik Suraksha Yojana on July 1, 2001 for the benefit
of landless agricultural labourers in the age group of 18-50 years.
The Scheme has covered 24,936 beneficiaries in 16 districts between
July 1, 2001 to February 7, 2002. The public sector general insurance
companies launched a new policy, Ashray Bima Yojana, on October 10, 2001, for extending social security
coverage to workers retrenched due to implementation of economic restructuring
measures. The public sector general insurance companies have also
introduced a scheme of personal accident insurance coverage for the
Kisan Credit Card (KCC) holders. 1.45 Public sector banks have decided
to introduce the Laghu Udhyami Credit Card (LUCC) scheme to provide
simplifed and borrower friendly credit facilities to small borrowers.
This scheme would provide hassle- free credit facility to small businessmen,
retail traders, artisans, professionals, self-employed persons and
small industrial units. Interest under the scheme will be charged at the
Prime Lending Rate of the banks. 1.46 Software and IT enabled services have
emerged as a niche sector for India in the global context. The software
industry was one of the fastest growing sectors in the last decade
with a compound annual growth rate exceeding 50 per cent. Software
service exports increased from US $ 4.02 billion in 1999-2000 to US
$ 6.3 billion in 2000-01, thereby registering a growth of 57 per cent.
India’s success in the software sector can be largely attributed
to the industry’s ability to cultivate superior knowledge through
intensive R&D efforts and the expertise in applying the knowledge
in commercially viable technologies. Social sector 1.47 Development
of the country's vast human resource potential is essential
for sustaining higher levels of economic growth and ensuring better
living conditions for people. The Central support for human resource
and social sector development in the country has progressively increased
throughout the 1990s. The Central Government expenditure (plan and
non-plan) on education, health, family welfare, nutrition, sanitation,
rural development, housing, social welfare etc. has increased from
Rs 9,608 crore in 1992-93 to Rs 40,205 crore in 2001-02 (BE). As a
proportion of total expenditure, the combined plan and non-plan Central
expenditure on these areas increased from 8.1 per cent in 1992-93
to 10.7 per cent in 2001-02 (BE). Similarly, as a proportion of GDP
at current market prices, the Central Government expenditure on social
services increased from 1.3 per cent in 1992-93 to 1.8 per cent in
2001-02 (BE). Population : Census 2001 1.48 India accounts
for 2.4 per cent of the world surface area but it supports 16.7 per
cent of the world population. According to the provisional results
of Census of India 2001, the population of India as on March 1, 2001
crossed one billion and was enumerated at 1.027 billion. The decadal
growth of population at 21.34 per cent between 1991-2001 was the sharpest
decline in the rate of growth of population witnessed since independence,
with the average exponential growth rate declining from 2.14 per cent
per annum during the previous decade to 1.93 per cent per annum. The
declining trends indicate that the country is entering a phase of
rapidly declining fertility in its process of demographic transition.
The National Population Policy (NPP) 2000 outlines the long-term objective
of achieving a stable population by 2045, at a level consistent with
the requirements of sustainable economic growth and development. 1.49 The percentage
decadal growth of population in rural and urban areas in the decade
ending 2001 was 17.9 per cent and 31.2 per cent respectively. Urban
population constitutes 27.8 per cent of the total population of the
country, which is higher by 2.1 percentage points as compared to the
situation in 1991. The density of population has increased steadily
from 117 persons per sq. km. in 1951 to 324 persons per sq. km. in
2001. The sex ratio for the country as a whole has improved from 927
females per 1000 males in 1991 to 933 females per 1000 males in 2001. Employment 1.50 According to the Planning Commission,
overall employment is estimated to have grown by about 1 per cent
per annum during the period 1993-94 to 1999-2000, compared with a
growth of 2.43 per cent per annum during the period 1987-88 to 1993-94.
The decline in employment growth is associated with the lower growth of population (1.93
per cent per annum during 1993-94 to 1999-2000 as compared with
2.10 per cent per annum during 1987-88 to 1993-94) and labour
force (1.03 per cent per annum during 1993-94 to 1999-2000 as compared
with 2.29 per cent per annum during 1987-88 to 1993-94) witnessed
during this period. Organised sector (both public and private) employment
grew by 0.53 per cent per annum during 1993-94 to 1999-2000. While
public sector employment experienced an absolute decline of 0.03 per
cent during 1994-2000, employment in the private sector grew by 1.87
per cent during the period. The decline in the rate of growth of
public sector employment can be attributed to the on-going
process of restructuring in various public sector enterprises, as
well as the ban on recruitment being implemented by various state
departments/organisations for reducing non-plan Government expenditure.
1.51 In the younger age groups, the decline in labour
force participation rates is a part of a longer term trend reflecting
a shift in activity status towards education. Employment in the agricultural
sector also witnessed a slow growth with the absolute number of persons
employed in agriculture showing a decline for the first time. However,
employment in sectors like trade, construction, financial services,
and transport, storage and communication had growth rates between
5-7 per cent per annum during 1994-2000, which were much higher than
the average rate
of growth of total employment during the period. Thus, employment
generation in the 1990s can be said to have undergone a structural
transformation with jobs being increasingly generated in the non-government
sector. Employment generation and
poverty alleviation programmes 1.52 The Government has continued its emphasis upon specifically
designed programmes in rural and urban areas for employment generation
and poverty alleviation. In the year 2001-02 (BE), a budgetary outlay
of Rs. 9,765 crore was provided under Plan provisions for Ministry
of Rural Development for rural development, rural employment and poverty
alleviation programmes, compared to Rs. 9,270 crore in 2000-01(RE)
(excluding Pradhan Mantri Gram Sadak Yojana for which Rs. 2,500 crore
was separately allotted in 2000-01 and 2001-02). The Food for Work programme was launched
in February 2001 for five months and was further extended. The programme
aims at augmenting food security through wage employment in drought
affected rural areas in selected states.
A quantity of 3.01 million
tonnes of foodgrains (1.90 million tonnes of rice and 1.11 million
tonnes of wheat) have been allotted to 11 States under the Food for
Work Programme upto December 5, 2001. The offtake of foodgrains upto
November 23, 2001 has been 2.25 million tonnes. In addition to the
various on-going self-employment programmes, the Sampoorna
Grameen Rozgar Yojana (SGRY) was launched in September 2001 for
providing food security and wage employment in rural areas. The scheme
is being implemented on a 75:25 cost-sharing basis by the Centre and
the States. The Shiksha Sahyog
Yojana has been finalised for providing educational allowance
of Rs 100 per month to the children of BPL families for obtaining
education from the 9th-12th standard.The Pradhan Mantri Gramodaya
Yojana (PMGY) launched in 2000-01 is a major initiative, which focuses
on village level development in five critical areas i.e. health, primary
education, drinking water, housing, and rural roads, with the objective
of improving the quality of life of people living in rural areas.
The Pradhan Mantri Gram Sadak Yojana (PMGSY) was launched in December
2000 for providing road connectivity through good all-weather roads
to rural habitations with a population of more than 1000 persons by
2003 and those with a population of more than 500 persons by 2007. Education 1.53 The total Central
Plan allocation for education has been increased to Rs. 5,920 crore
in 2001-02 (BE) from Rs. 5,450 crore in 2000-01 (BE). Elementary education
has received the highest outlay of Rs. 3,800 crore in 2001-02 (BE).
The Gross Enrolment Ratio (GER) in the country at primary level has
improved significantly from 42.6 per cent (1950-51) to 94.90 per cent
(1999-2000) and that for upper primary level from 12.7 per cent (1950-51)
to 58.79 per cent (1999-2000). As per the Census 2001, overall literacy
rate in the country has increased to 65 per cent from 52 per cent
in 1991. There have been appreciable improvements in both male and
female literacy in rural as well as urban areas. Health 1.54 The Plan Outlay
for the Central Health Sector Schemes during 2001-02 was Rs. 1,450
crore. This constituted an increase of 11.5 per cent over the outlay
of Rs. 1,300 crore in 2000-01. About 54 per cent of the Central Plan
Outlay is devoted to centrally sponsored disease control programmes
for control of malaria, tuberculosis, leprosy, aids, blindness etc.
Substantial external assistance has also been mobilised from various
bilateral and multilateral agencies for disease control programmes.For
both the health and education sectors, an element of cost recovery
through imposition of user charges and attaining improvement in the
mechanism of service delivery, are prime concerns. Rural water supply 1.55 The Central
allocation for the Accelerated Rural Water Supply Programme (ARWSP)
was enhanced from Rs. 1,960 crore in 2000-01 to Rs. 1,975 crore in
2001-02. Till end January 2002, Rs 1,637 crore has been released by
the Centre and Rs 1,496 crore by the States. A total of 26,803 habitations
have been covered under the programme so far, involving a population
of 10.5 million. The Pradhan Mantri Gramodaya Yojana (Rural Drinking
Water Project) is another initiative for achievement of sustainable
human development at the village level. 1.56 The lower real GDP growth of 4.0 per cent in 2000-01
led to the shortfall in revenue collection during 2000-01. As per
the provisional accounts released by the Controller General of Accounts
(CGA), actual tax receipts (net to Centre) for 2000-01 at Rs.1,35,193
crore, were lower by Rs.9,210 crore compared with the revised estimate
of Rs.1,44,403 crore. Non-tax receipts at Rs.55,795 crore for 2000-01
also fell short of the revised estimates by Rs.5,968 crore. The savings
realised on the expenditure front however, considerably cushioned
the impact of lower revenue realisation. Consequently, actual gross
fiscal deficit for 2000-01 at Rs.1,14,369 crore exceeded the revised
estimate by Rs.2,397 crore. Gross fiscal deficit, as a proportion
of GDP at current market prices for 2000-01 placed at 5.1 per cent
in the revised estimates, is now estimated to be 5.5 per cent on the
basis of provisional unaudited figures. Similarly, revenue deficit
as a proportion of GDP estimated at 3.6 per cent in the revised estimates,
is now estimated to be 3.9 per cent of GDP for 2000-01.
For 2001-02, the Centre’s gross fiscal deficit and revenue deficit
budgeted at 4.7 per cent and 3.2 per cent of GDP respectively, are
now estimated at 5.1 per cent and 3.4 per cent of GDP respectively
as per revised GDP estimates. Direct Taxes 1.57
The basic principles guiding the tax proposals in the Union
Budget 2001-02 were the need for revenue buoyancy, further simplification
of the tax regime and more effective tax compliance. In the area of
direct taxes, the emphasis was on retention of stability in tax rates,
widening of the tax base and rationalisation and simplification of
the tax structure. All surcharges were abolished except the Gujarat
earthquake surcharge of 2 per cent leviable on all non-corporate and
corporate assesses except foreign companies. 1.58 Fiscal incentives
in the form of tax holidays for development of infrastructure were
rationalized and enlarged for core sectors like roads, highways, railway
systems, water treatment and supply, irrigation, sanitation and solid
waste management system, airports, ports, inland ports and waterways,
industrial parks and generation and distribution of power. Besides,
concessions by way of 10-year tax holiday were made available for
infrastructure activities for developers in Special Economic Zones.
Fiscal incentives by way of tax holiday for five years and 30 per
cent deduction of profits for the next five years were provided to
enterprises engaged in the integrated business of handling, transportation
and storage of foodgrains. Income earned by way of interest, dividends
and long-term capital gains from investments in infrastructure was
made fully tax exempt and the exemption was extended to cover guarantee
commission and credit enhancement fees earned from this sector. 1.59 For providing
stimulus to the growth of the capital market, the tax payable on the
distribution of dividends of domestic companies and income in respect
of units of Mutual Funds and UTI was reduced from 20 per cent to 10
per cent. Further measures to widen the tax base and enlarge the scope
of deduction at source included making income tax at source deductible
at the rate of 10 per cent for income earned through commission or
brokerage exceeding Rs.2,500 (barring transaction relating to shares
and securities). Besides, income tax at the rate of 30 per cent is
to be deducted at source from
winnings from games. The One-by-Six
scheme for identifying potential taxpayers was extended to all urban
areas in the country as defined by the 1991 census. Indirect Taxes 1.60 The ongoing
process of reducing rates, rationalising the tax regime, and simplifying
procedures, was carried forward in the sphere of indirect taxes. The
important initiatives adopted during the year are mentioned below: Customs Duties 1.61 The peak level
of customs tariff was reduced to 35 per cent with abolition of the
10 per cent surcharge. The Union Budget reiterated the Government’s
resolve to move progressively within three years to reduce the number
of rates to the minimum with a peak rate of 20 per cent. Customs duties
were reduced on imported inputs for information technology and telecom
sectors. Basic customs duty was raised to 70 per cent on tea, coffee,
copra and coconut, and to 75 and 85 per cent on crude edible oils
and refined oils respectively. With the abolition of quantitative
restrictions on imports, the customs duty on import of used cars,
multi-utility vehicles and two wheelers was raised to 105 per cent.
In a move intended to discourage gold smuggling, customs duty for
gold was scaled down from Rs.400 per ten grams to Rs.250 per ten grams.
Excise
Duties 1.62 The excise duty structure which was rationalised to a
single rate of 16 per cent CENVAT (Central Value Added tax) in 2000-01
was further improved by replacing the three special excise duty rates
of 8 per cent, 16 per cent and 24 per cent by a single rate of 16
per cent. An additional levy (National Calamity Contingency Duty)
was imposed on cigarettes, pan masala, biris etc. to garner resources
for the National Calamity Contingency Fund. Food preparations based
on fruits and vegetables were completely exempted from excise duty,
while duty on aerated soft drink was reduced to 32 per cent. Compressed
natural gas, hitherto exempted from excise, was brought under the
purview of excise at the rate of 8 per cent. Excise Duty on petrol
was raised from 16 per cent to 32 per cent and on high-speed diesel
oil from 12 per cent to 16 per cent. Further, the duties on petrol
and diesel were increased to 90 per cent and 20 per cent respectively
from the midnight of January
11/12, 2002 (the new rates of excise duty will not remain in force
beyond March 31, 2002). The coverage of service tax at the rate of
5 per cent on the value of taxable service was expanded by including
fifteen new services.
1.63 Inadequate
fiscal adjustment continues to remain a major problem for the Indian
economy. The Central Government’s fiscal situation has become
more constrained in recent years due to growing interest payments,
increasing level of subsidies and long term impact of Fifth Pay Commission
recommendations, including surge in pension payments. All these have
manifested in mounting revenue deficit and erosion in public sector
savings thereby severely restraining the Government’s ability
to invest in infrastructure and social sectors. Fiscal and Budgetary Developments
in 2001-02 1.64 The fiscal deficit as a proportion of GDP budgeted at
4.7 per cent in 2001-2002, now stands at 5.1 per cent of GDP due to
revision in the GDP estimates,
compared with 5.5 per cent in 2000-01 (on the basis of provisional
unaudited figures). The revenue deficit, which reflects the excess
of current expenditure over current receipts, budgeted at 3.2 percent
of GDP in 2001-02, is now re-estimated at 3.4 per cent of GDP, compared
with 3.9 per cent in 2000-01. The primary deficit, (i.e. fiscal deficit
net of interest payments), is budgeted at 0.2 per cent of GDP in 2001-02
as against 0.8 per cent in 2000-01. Revenue Performance
1.65 The data for gross collections of major direct and indirect
taxes for the first nine months (April-December 2001) of the current
year show an unsatisfactory performance. In case of direct taxes,
collections from personal income tax and corporation tax at Rs.44,021
crore were lower by 1.2 per cent, compared with the robust increase
of 30.8 per cent in the corresponding period of the previous year.
Collections from excise and custom duties at Rs.77,224 crore during
April–December 2001 posted a decline of 3.6 per cent compared
with an increase of 4.9
per cent in April-December 2000. 1.66 The fiscal parameters for the first three quarters of
the current year (i.e. April-December 2001) reveal that there has
been lower growth in revenue receipts and higher growth in expenditure
as compared to the corresponding period of the previous year. Revenue
receipts (net to the centre) is almost at the same level of Rs.1,32,690
crore compared with Rs.1,32,691 crore in the corresponding period
of last year. Other receipts (mainly disinvestment receipts), estimated at Rs.280 crore against
the full year budgeted target of Rs.12,000 crore, are expected to
improve significantly during the remaining months of the current year
due to smoother working of the disinvestment process. Borrowings and
other liabilities at Rs.89,014 crore indicate an increase of 37.7
per cent over Rs.64,628 crore in the comparable period of the previous
year. Aggregate expenditure at Rs.2,33,718 crore reflects an increase
of about 14 per cent over the corresponding period of the previous
year. However, on account of the general slowdown in the economy and
the deceleration in industrial growth in particular, the tax revenue
(net to Centre) had declined by about 7 per cent during April-December2001.
(Table 1.9) Expenditure Management 1.67 The Union Budget (2001-02) announced
specific proposals for bringing about changes in the composition of
the Central Government’s expenditure and for effecting economy
in non-plan expenditure. The Budget announced revision of user charges
for certain services provided by the Government and its agencies,
moderate revision of postal rates for containing the rising postal
deficit, scrutiny of recruitment requirements with a view to limit
fresh recruitment to 1 per cent of total civilian staff strength,
enhancement of license fee for various categories of Central Government
residential accommodation, temporary suspension of LTC facility for
Central Government employees and greater use of information technology
in Government’s activities involving large public interface for
promoting efficiency. The Budget also announced that all existing
schemes would be subjected to zero-based budgeting and only those
schemes that were found demonstrably efficient and essential, would
be retained. Besides, centrally sponsored schemes that could be transferred
to States would be identified and the resource flows will be sought
to be linked to their performance.
Wholesale Price Index (WPI) 1.68 The point to point inflation rate according to the Wholesale
Price Index (WPI) for the week ending January 19, 2002 was 1.3 per
cent, which was the lowest in the last two decades. The 52-week average
inflation rate declined from 7.0 per cent at the beginning of the
year to 4.7 per cent for the week ending January 19, 2002. 1.69 The price situation
remained under control during 2001-02. The impact of the fuel price
increases announced first during 1999-2000, and subsequently twice
during 2000-01, bottomed out during the current year, reducing inflation
to below 5 per cent by September 2001. The deceleration in prices
continued through the months of October and November 2001. Inflation
was recorded at 2.21 per cent at the beginning of December 2001 (the
lowest since December 1999) and reduced further to 1.3 at the end
of January 2002. 1.70 Prices for
the primary products group, comprising of essential commodities for
daily use, remained moderate for much of the year and are presently
estimated to have risen by 3.0 percent for the week ending January
19, 2002. The manufactured products group registered negligible price
rise during 2001-02 reflecting the subdued demand for manufactured
products. The fuel, power, light & lubricants subgroup, comprising
mainly of energy products much of which are imported, had experienced
sharp increase in prices last year on account of the successive hikes
in administered energy prices. In contrast, during the current year,
inflation for the group remained stable and is presently 3.2 percent,
as against 31.0 percent in the previous year. Consumer Price Index-Industrial
Workers (CPI-IW) 1.71 The inflation
rate, as estimated by the CPI (IW), ranged between moderate to low
during the current year. The Index remained below 4 per cent till
July 2001 and rose thereafter to 5.2 per cent in August 2001. It decelerated
further during September and October and was estimated at 4.9 per
cent during November 2001. The year 2001 ended with a marginally higher
inflation of 5.2 per cent in December 2001. 1.72 The year-on-year growth in broad money (M3) as on January
11, 2002 was 14.4 per cent compared with 16.6 per cent a year ago.
The sharp decline in money supply since November 16, 2001 reflects
the sudden expansion in volume of broad money resulting from India
Millenium Deposits with effect from the corresponding date in the
previous year. Among the various components of money supply, only
currency with the public registered a higher rate of growth in the
current year (till January 11, 2002) compared to the corresponding
period of the previous year. As far as sources of broad money are
concerned, growth in bank’s investment in Government securities
and the expansion in net foreign exchange assets of RBI contributed
significantly to the broad money growth in the current year. The current
financial year witnessed a deceleration in the growth of net domestic
assets of RBI as compared to the corresponding previous period. This
was partly offset by the pronounced acceleration in the growth of
net foreign exchange assets of RBI. Reserve money registered a growth
of 2.6 per cent during the current financial year (till January 11,
2002) as compared with 5 per cent during the corresponding previous
period. 1.73 The process of financial sector reforms has been carried
forward in the current year with particular focus on banking and financial
institutions. The specific reforms undertaken include allowing banks
to lend at interest rates below their respective PLRs, permission
to formulate fixed rate deposit schemes offering higher interest rates
to senior citizens, flexibility in the composition of working capital
between cash credit and loan components, reduction in exposure limits
for borrowers, revised guidelines for exposure of banks to capital
market and guidelines for investment in non-SLR securities through
the private placement route. The initiatives specially aimed at strengthening the operational
efficiency of banks relate to the Voluntary Retirement Scheme, abolition
of the Banking Service Recruitment Boards and enlargement of the reach
and scope of the electronic funds transfer facility (EFT). The measures
pertaining to financial institutions included operational and regulatory
issues concerning transition to universal banking, a transparent mechanism
for corporate debt restructuring, coordination between banks and financial
institutions, amended guidelines for Asset-Liability Management and
classification and valuation of investments. As regards the non-banking
financial companies (NBFCs), the major policy initiative related to
reduction in the maximum interest rates on public deposits from 14
per cent to 12.5 per cent. 1.74 The current
year has been characterised by measures designed to move towards a
flexible interest rate regime. The reduction in the administered interest
rates on contractual savings has made the interest rate regime more
flexible. Reduction in the Bank Rate to 6.5 per cent (the lowest since
May 1973) has been supplemented by reduction in the Cash Reserve Ratio
to 5.5 per cent, which has further improved liquidity in the banking
system. The PLRs of five major public sector banks softened from 12.00
- 12.50 per cent in December 2000 to 11.00 - 12.00 per cent by December
2001. Interest rates charged by SCBs on pre-shipment and post-shipment
rupee export credit were reduced by 1.0 percentage point for six months
ending on March 31, 2002. The short-term interest rate represented
by the yield on 91-day Treasury Bills declined by 125 basis points
to 7.25 per cent between April and December 2001. At the long end
of the yield curve, the secondary market yields on Government paper
in the range of 10-12 years have declined from 10.05-10.41 per cent
to 8.15-8.35 per cent during this period. 1.75 Bank credit,
comprising food credit and non-food credit, increased at a lower rate
of 10.6 per cent till January 11, 2002 compared to 14.3 per cent in
the corresponding period of the previous year. Recent years have witnessed
strong growth of food credit in response to the increase in the quantum
as well as price of food grains procured in support of the twin objectives
of food security and price support. The deceleration in the growth
of non-food credit to 8.7 per cent till January 11, 2002 from 12.1
per cent during the corresponding period in the previous year mirrored
the weak demand for commercial credit owing to economic slowdown,
which has been aggravated by the global downturn in economic activity.
1.76 During April-December
2001, sanctions by All-India Financial Institutions (AIFIs) declined
by 32.1 per cent compared to an increase of 18.3 per cent in the corresponding
period of the previous year. Disbursements by AIFIs also declined
by 16.9 per cent during the same period in contrast to an increase
of 16.1 per cent last year. An analysis of financial performance of
public sector banks on the basis of key parameters shows wide inter-bank
variations. For nationalised banks, the return on assets varied from
zero in the case of Dena Bank and Indian Bank to 1.55 per cent for
Corporation Bank. It was more than 0.5 per cent for six other nationalised
banks. The ratio of net NPAs to net advances ranged from 1.98 per
cent for Corporation Bank to 18.37 per cent for Dena Bank. Excluding
Indian Bank with negative Capital to risk weighted asset ratio (CRAR),
the CRAR ranged from 7.73 per cent for Dena Bank to 13.40 per cent
for Andhra Bank. As regards the SBI Group, return on assets was 0.50
per cent or more for all the banks except the State Bank of Saurashtra
and the State Bank of Mysore with return on assets at 0.18 per cent
and 0.27 per cent respectively. 1.77 The
RBI had introduced the One Time Settlement Scheme in July, 2000 for
all sectors, including the small scale sector, for providing a simplified,
non-discretionary and non-discriminatory mechanism for recovery of
NPAs with outstanding balances of up to Rs. 5 crore. The scheme expired
on June 30, 2001. Under the revised guidelines, 27 public sector banks
recovered Rs. 2,600 crore from 365,000 accounts. 1.78 A total of 20.4 million Kisan Credit
Cards (KCCs) have been issued till the end of November 2001 involving
a sanctioned amount of Rs.43,390 crore. Cooperative banks accounted
for the maximum share in the cumulative issue of KCCs (66.2 per cent),
followed by SCBs (27.0 per cent) and RRBs (6.8 per cent). 1.79 The developments in the stock market on the eve of the
current financial year brought to the fore the need for further measures
aimed at promoting safety, transparency and efficiency of the capital
market. Accordingly, the following measures were announced in March
2001:
§
Intention to corporatise stock exchanges
involving segregation of ownership, management and trading membership
from each other.
§
Extension of rolling settlement
to two hundred “A” category stocks in Modified Carry Forward
Scheme (MCFS), Automated Lending and Borrowing Mechanism (ALBM) and
Borrowing and Lending Securities Scheme (BLESS) by July 2, 2001.
§
The formulation of legislative changes
aimed at further strengthening the provisions in the SEBI
Act, 1992 for ensuring
investor protection. 1.80 The SEBI subsequently
extended rolling settlement to all scrips included in the ALBM/BLESS/or
MCFS in any stock exchange or in the BSE 200 list with effect from
July 2, 2001. From December 31, 2001, all stocks are under rolling
settlement in all stock exchanges. This constitutes one of the most
far-reaching reforms in the history of India’s capital market.
Equally important were the widening of the spectrum of equity derivatives
to trading in options on both indices and stocks, and to stock futures,
which can perform hedging functions hitherto performed by the deferral
products. 1.81 The Union Budget
(2001-02) emphasised the need for further development of the debt
market and spelt out the main measures for this purpose, which related
to setting up of the Clearing Corporation of India Ltd (CCIL) and
the Negotiated Dealing System (NDS). Other related initiatives included
extension of uniform price auction to the auction of selected dated
Central Government securities and reintroduction of floating rate
Government bonds. Measures were also announced for moving closer to
a pure inter-bank call money market by gradually phasing out non-bank
participation. 1.82 Reforms in the insurance sector commenced with the enactment
of the Insurance Regulatory and Development Authority Act 1999, which
facilitated the entry of private insurance companies into the Indian
insurance market. The Insurance Regulatory and Development Authority
(IRDA) was set up on April 19, 2000 to protect the interest of the
holders of insurance policies, and to regulate, promote and ensure
orderly growth of the insurance industry. Ten life insurance companies
and six general insurance companies have been granted certificate
of registration, out of which 12 companies have commenced business. 1.83 The pronounced bearish sentiments in the stock market
saw the Sensex falling to 3184 on April 12, 2001, which implied a
cumulative fall of 36.3 per cent from 5001 at the end of March 2000.
The National Stock Exchange (NSE) Index (S&P CNX Nifty) also suffered
a similar slump during this period. The decline in equity prices in
leading stock markets abroad following the terrorist attacks on the
USA on September 11, 2001
led to further squeezing of the stock indices at home.
The Sensex dropped to 2600 on September 21, 2001, registering
a fall of more than one thousand points from 3604 on the eve of the
current financial year. The measures taken by both the Government
and the regulatory authorities in the wake of the September 11 crisis,
backed by improvement in investor sentiment abroad, facilitated significant
recovery in the stock market. The Sensex regained more than 800 points
to close at 3443 on December10, 2001. However, the market again came
under selling pressure, precipitated by developments following the
terrorist attack on the Indian Parliament (December 13, 2001) and
the Sensex lost around 180 points by the end of December, 2001. Stock
market prospects improved in the new year (2002)and the Sensex regained
232 points to close at 3494 on February 8, 2002. 1.84 The adverse
sentiments in the secondary market also affected the mobilisation
of resources from the primary market. The amount raised through public
and rights issues during the first nine months of the current year
(Rs.3,777 crore), constituted around 90 per cent of the relatively
modest amount of Rs 4,240 crore raised during the corresponding period
of the previous year. Resource mobilisation through IPOs (Rs. 208
crore) accounted for only 5.5 per cent of the total resource mobilisation
during this period, compared to about 56.7 per cent in the corresponding
period of the previous year. The low level of resource mobilisation
may be attributed to the prevailing economic slowdown and preference
for private placement. The performance of UTI was badly affected by
the downtrend in stock market. During April-December 2001, the outflow
of funds from UTI exceeded inflows by Rs 5,151 crore whereas during
the corresponding period of the previous year, inflows exceeded outflows
by Rs. 480 crore. During April-December 2001, gross purchase of equity
by mutual funds amounted to Rs.7,489 crore, while gross sales amounted
to Rs.8,762 crore thereby making net equity investment negative. 1.85 Except for
September 2001, the net FII investment was positive during the first
ten months of the current year. Net FII investment amounted to US$1,295
million during April 2001-January 2002 compared to US$1,379 million
during the corresponding previous period. The uncertainty and panic
resulting from the terrorist attacks on the USA led to sudden increase
in sales, which exceeded purchases by about 16 per cent. As a result
net investment by FIIs declined by US$113 million in September 2001.
International economic environment 1.86 The year 2001 experienced the deepening and reinforcing
of the global economic slowdown that had begun to set in from the
end of 2000. The latest projections made by the World Economic Outlook
of the International Monetary Fund point to a mere 2.4 per cent growth
in world output during 2001, compared to 4.7 per cent during 2000.
The growth in world trade volume is projected to decline sharply to
1 per cent during 2001, as against 12.4 per cent in 2000. Absolute
declines are projected for both energy and non-fuel prices in 2001
with the decline in energy prices expected to aggravate further in
2002. 1.87 The prevailing
global slowdown was accentuated further by the terrorist attacks in
the United States on September 11, 2001. The attacks resulted in further
downward growth projections for almost all major economic regions
of the world. Growth rates for the US economy have been pegged down
to 1 per cent and 0.7 per cent for 2001 and 2002 respectively. Japan
is likely to encounter its fourth economic recession in a decade,
while economic activity is showing little signs of recovery in the
Euro area. The broad-based nature of the global slowdown, the most
marked in recent times, has worsened the outlook for emerging market
economies, in terms of reduced capital inflows and restricted access
to funds from international capital markets. Among the economies of
developing Asia however, China and India are expected to remain relatively
insulated from the global slowdown due to the relatively less significance
of the external sector in their overall GDP. Current account 1.88 India’s
Balance of Payments (BOP) remained reasonably comfortable in 2000-01
and the external sector marked distinct improvements. The first half
of the year witnessed some pressures on the BOP due to significant
hardening of international oil prices, sharp downturn in international
equity prices and successive increases in interest rates in the United
States and Europe. However, the situation eased with the mobilisation
of funds under the India Millennium Deposits, which reversed the declining
trend in foreign exchange reserves. As a result, the BOP situation
marked a turnaround during the second half of 2000-01. Overall,
the current account deficit in 2000-01 narrowed to about 0.5 per cent
of GDP from 1.1 per cent of GDP in 1999-00. The improvement in the
current account was largely due to a more dynamic export performance,
sustained buoyancy in invisible receipts reflecting sharp increases
in software service exports and private transfers and the subdued
non-oil import demand (Table
1.10). Trade deficit 1.89 Exports, on
the BOP basis, grew by 19.6 per cent in US dollar terms in 2000-01,
accelerating sharply from the 9.5 percent growth in the previous year.
Total imports recorded a moderate growth of 7.0 per cent during 2000-01,
much lower than the sharp increase of 16.5 per cent in 1999-2000.
The moderate growth in imports during 2000-01 was essentially attributable
to a 24.1 per cent increase in the oil import bill. Non-oil import
growth, on BOP basis, remained subdued at only 2.0 per cent.
1.90 Reflecting
the trends in exports and imports, the deficit on the trade account
of BOP narrowed to US $14.37 billion or 3.1 per cent of GDP in 2000-01
from US $17.84 billion (4.0 per cent of GDP) in 1999-2000. Net inflow
of invisibles earnings at US $11.79 billion covered about 82 per cent
of the deficit on the trade account in 2000-01, leaving a financing
gap of US $2.58 billion on the current account. This deficit on the
current account represented about 0.5 per cent of GDP, compared with
the deficit of 1.1 per cent of GDP (US $4.70 billion) in 1999-2000. Capital account 1.91 The recovery
in capital flows witnessed in 1999-2000, after the setback in 1998-99
caused by the East-Asian crisis and the economic sanctions imposed
upon India, was broadly maintained during 2000-01. Net capital inflows
(excluding IMF) in the BOP account amounted to US $9.02 billion
in 2000-01, which were lower than similar inflows of US $10.44 billion
in the previous year. The reduction in net capital inflows was mainly
due to the bunching of repayments of commercial borrowings and significant
net outflows under banking capital. At the same time, capital inflows
were bolstered by the mobilisation of US $5.51 billion under the India
Millennium Deposits (IMD) Scheme in October- November 2000.
Fresh inflow of funds for portfolio investments in India by
FIIs in 2000-01 amounted to about US $1.85 billion, which was only
slightly lower than the US $2.14 billion in 1999-2000. Net accretions to non-resident deposits
during 2000-01 rose by over 50 per cent to US $2.32 billion. Gross
disbursement of external assistance at US $2.94 billion was comparable
with the normal trends in recent years. Gross borrowing on commercial
terms (excluding IMD) at US $3.81 billion in 2000-01 was higher than
such normal borrowings of US $3.19 billion in the previous year. Foreign
exchange reserves 1.92 The sharp reduction in current account deficit and the
funds raised under the IMD Scheme resulted in large accumulation of
official foreign exchange reserves for the fifth year in succession
during 2000-01. On BOP basis, the reserves increased by a substantial
US $5.83 billion. This was on top of an increase of US $6.14 billion
in 1999-2000 and an increase of US $4.51 billion per year, on an average,
during the previous three years, i.e.1996-97 to 1998-99. BOP
Projections for 2001-02 1.93 Official BOP
statistics, as compiled by the RBI for the year 2001-02, are available
only for the first half of the current year. A tentative assessment
of the BOP outlook for the current year indicates that though the
current account deficit in 2001-02 might widen to some extent,
it is expected to remain within 1 per cent of GDP. The widening of
the current account deficit is mainly due to poor export performance.
Merchandise exports (in US dollar terms) remained almost stagnant
with export growth of only 0.6 per cent recorded by the DGCI&S
data for the first nine months of 2001-02. On the other hand, the
pressure on trade account eased significantly due to moderation in
oil import bill following softening of international oil prices after
September 2001. 1.94 Net inflow
of invisibles, despite larger outflows on account of interest and
dividend payments, is expected to remain broadly at last year’s
level, supported by the continued buoyancy in software service exports
and private transfers. The widening of the current account deficit
will, however, be more than matched by the expected net capital inflows
from normal sources, resulting in large accretions to reserves. 1.95 During the
current financial year (2001-02) so far, the foreign currency assets
of the RBI have increased by about US $7.01 billion from US $39.55
billion at end-March 2001 to US $46.56 billion at end January, 2002.
Total foreign exchange reserves (including gold and SDRs) at end January,
2002 amounted to US $49.48 billion, providing cover for about 10 months
of estimated imports in 2001-02. Exchange rate developments 1.96 The exchange
rate of the rupee against the US dollar continued to be broadly market
determined. During 1999-2000, the exchange rate market displayed reasonable
stability, with the rupee depreciating by about 2.9 per cent from
the annual average of Rs.42.07 per US dollar in 1998-99 to Rs.43.33
in 1999-2000. In contrast, the year 2000-01 witnessed significant
downward pressure on the rupee-dollar rate from middle of May 2000.
The foreign exchange markets were affected by considerable uncertainty
with the rupee depreciating by 6.7 per cent between end-April and
end-October 2000 from Rs. 43.655 per US dollar to Rs. 46.775. Since
November 2000, the situation showed large improvements with the forex
markets becoming relatively stable. Overall, the rupee depreciated
against the US dollar by 5.15 per cent to Rs. 45.68 per US dollar
during 2000-01. 1.97 The world economy
experienced one of its worst shocks in recent times in the aftermath
of the September 11, 2001 events in the United States. Foreign exchange
markets in India also became volatile with the rupee depreciating
by 1.3 per cent vis-a-vis the US dollar during September 10-20, 2001.
Adverse external developments after September 11, 2001 and their effect
on India’s financial markets, necessitated quick response for
injecting liquidity and providing overall comfort to the markets.
The RBI announced several measures for stabilizing domestic financial
markets during the period September 15-25, 2001. These measures had
the desired effect of moderating possible panic reactions and reducing
volatility in financial markets, particularly in money, foreign exchange
and Government securities markets. As at the end of January
2002, the exchange rate of the rupee was Rs.48.58 per US dollar, showing
a depreciation of 4.0 per cent, compared with the rate of Rs.46.64
at the end of March 2001. Reform initiatives in the external sector
1.98 Several measures
were announced during the year as part of the on-going reform process
in the external sector. Removal of Quantitative Restrictions (QRs) 1.99 The EXIM Policy announced in March
2001 has completed the process of removal of QRs on BOP grounds by
dismantling restrictions on the remaining 715 items. Out of these
715 items, 342 are textile products, 147 are agricultural products
including alcoholic beverages and 226 are other manufactured products
including automobiles. The Policy has, however, put in place necessary
mechanisms to provide a level playing field to domestic players vis-à-vis
imports. These mechanisms include shifting of imports of certain products
under the state trading category, making imports subject to various
existing domestic regulations on health and hygiene and environment,
and need for bio-security and sanitary & phyto-sanitary permit
for imports of primary products of plant and animal origin.The policy
has also established a monitoring mechanism to monitor imports of
300 sensitive items on a regular basis. Doha Conference 1.100 The fourth WTO Ministerial Conference was held at Doha,
Qatar from 9-14 November, 2001 to decide upon the future work programme
of the WTO. While there were strong pressures to launch a comprehensive
round of negotiations including multilateral regimes on investment,
competition policy, trade facilitation, government procurement and
environment, India was opposed to overburdening of the multilateral
trading system with non-trade or new issues in the agenda. It felt
that WTO already had a sufficiently large agenda consisting of mandated
negotiations and mandated reviews and, therefore, India underlined
the need for resolving the implementation issues, arising from the
current agreements in a time bound manner before addressing new issues
for negotiations. 1.101 India played a proactive role in the deliberations at
the fourth Ministerial Conference at Doha. It wanted a genuine resolution
of implementation related concerns, increased market access in agriculture,
sufficient flexibility and clarity under TRIPS for public health policies
and was strongly opposed to introduction of non-trade issues like
labour in the agenda. It was able to ensure adoption of an agenda
that emphasised not only trade but also the developmental goals and
priorities of developing countries. The outcome of the Conference
takes into account a number of concerns expressed by India. With the
Doha Declaration laying down the agenda for the forthcoming trade
talks, the focus will now shift to the work programme in WTO. India,
along with other developing countries, would work to ensure that their
interests and concerns are adequately taken care of in the work programme.
Tariff
and EXIM Policy 1.102 The existing
10 per cent surcharge on customs duties was taken off thereby bringing
down the peak level of customs duties to 35 per cent. Exporters were
allowed partial backloading of withdrawal of tax benefits under Section
80-HHC of the Income Tax Act. Concessions available for infrastructure
by way of 10-year tax holiday were extended to the developers of Special
Economic Zones (SEZs). Specific thrust was put on agricultural exports
by announcing establishment of Agri-Economic Zones. A Market
Access Initiative (MAI)
scheme was introduced for boosting exports, under which the Government
would assist the industry in research & development, market research,
specific market and product studies, warehousing and retail marketing
infrastructure in select countries and direct market promotion activities
through media advertising and buyer- seller meets. Interest rates
on export credit were rationalised by indicating
them as PLR linked ceiling rates (as against specific rates).
To boost exports, duty drawback rates were revised upwards
and value caps under DEPB abolished for a number of export products.
A special financial package was also announced for large value exports
(annual exports of over Rs 100 crore) of selected products.
Besides these short term measures Government also unveiled
a medium term export strategy to achieve a quantum jump in exports
over the next five years. 1.103 As indicated in Box 1.1 a host of measures were undertaken
for further liberalising the FDI regime. The defence industry has
been permitted FDI up to 26 per cent, subject to licensing. The dividend
balancing condition for 22 consumer items was withdrawn, as was the
cap on foreign investment in the power sector. International Financial
Institutions like ADB, IFC, CDC etc. were allowed to invest in domestic
companies through the automatic route, subject to SEBI/RBI guidelines
and sector specific caps on FDI. 1.104 The Non-Banking
Financial Companies (NBFCs) have been permitted to hold foreign equity
up to 100 per cent in holding companies. Foreign investors have been
allowed to set up 100 per cent operating subsidiaries (without any
restriction on number of subsidiaries) without the condition of disinvesting
a minimum of 25 per cent equity to Indian entities, subject to specified
investment obligations. Joint venture NBFCs having 75 per cent, or
less than75 per cent foreign investment, have also been
permitted to set up subsidiaries for undertaking other NBFC activities.
The automatic route has been made available to
the information technology sector, even when the applicant
company has a previous joint venture or technology transfer agreement
in the same field. Offshore venture capital funds/companies have been
allowed to invest in domestic venture capital undertakings as well
as other companies through the automatic route, subject to SEBI regulations
and sector specific caps on FDI. Payment of royalty upto 2 per cent
on exports and 1 per cent on domestic sales have been allowed under
the automatic route on use of trademarks and brand name of the foreign
collaborator without technology transfer. External Debt 1.105 The external debt-GDP ratio has been declining continuously
over the years. The ratio improved from 38.7 per cent at end-March
1992 to 22.3 per cent at end-march 2001 and further to 21 per cent
at the end of September 2001. The absolute level of external debt
rose marginally from US $ 99.61 billion at end March, 2001 to US $
100.38 billion at end September 2001. The share of short-term debt to total
debt declined from 10.2 per cent at end March 1991 to 2.8 per cent
at end September 2001. The debt service ratio declined from a peak
level of 35.3 per cent of current receipts in 1990-91 to 16.3 per
cent in 2000-01. The improvement has been the result of concerted
and continued efforts of prudent external debt management strategy
undertaken by the Government. It is particularly noteworthy that for
the first time, the World Bank has classified India as a less-indebted
country.
1.106 India has now gone through more
than a decade of economic reforms. Beginning in 1991, the thrust of reforms
was fiscal stabilisation and the initiation of major structural reforms
aimed at de-regulation of the economy to induce accelerated investment,
growth, employment, and hence reduction in poverty. A good number
of these original objectives have been realised. GDP growth in the 1990s, after the
initial year of reforms in 1991-92, was higher than that obtained
in the 1980s. The external sector has been brought into balance with
a comfortable balance of payments that is sustainable; foreign currency
assets have risen from less than US $1 billion in 1991 to over US
$45 billion today; and debt service has been brought to very comfortable
levels, so that India is now internationally regarded as a “less
indebted” country.
Average inflation has been brought down from 10.6 per cent
in 1990-91 to 1995-96 to 5 per cent in the last five years.
Poverty has fallen from 36 per cent in 1993-94 to 23 to 26
per cent in 1999-2000 according to alternative estimates; and literacy
has risen substantially from 52 per cent in 1991 to 65 per cent in
2001. Despite all these achievements, however,
there are major challenges with respect to the sustenance of high
economic growth in the years to come. 1.107 After the initial exuberance of GDP growth in the initial period of
the reform process there has been an unmistakable slow down in subsequent
years. Growth in industrial value added averaged 8.5 per cent per
year from 1993-94 to 1996-97. This has fallen to about 4.8 per cent
per year in the last four years, 1997-98 to 2000-01. Similarly, annual
growth in value added in
agriculture and allied sector from 1993-94 to 1996-97 averaged 4.5
per cent whereas the annual growth in the last four years has averaged
only 1.2 per cent. The agricultural slowdown has taken place at least
partly because of irregular and unevenly distributed monsoons during
the latter period. Growth in infrastructure has also been slow, particularly
in the power sector. Hence
the key problem facing the economy today is the reinvigoration of
economic growth in the current decade. The momentum achieved in the 1990s
must not be lost. Policy
initiatives and deepening of reforms are needed in each of these areas
to unleash competitive forces and stimulate growth. 1.108 The slow down in economic growth has been exacerbated by the intractability
of high fiscal deficits. Despite
the efforts made to curtail expenditure and increase revenues, it
has proved difficult to reduce the fiscal deficit below 5 per cent
of GDP. The deleterious
impact of such a high deficit on the economy has been made worse by
similar levels of deficits being recorded by State Governments, resulting
in total fiscal deficit of the central and state Governments amounting
to around 10 per cent of GDP, a situation not dissimilar to that prevailing
in the early 1990s. The
persistence of such high fiscal deficits and the ever increasing debt
service payments constrain the ability of Government at any level
to undertake the necessary expenditures for productive
investment for the provision of essential public services and also
crowd out the more efficient private sector.
Furthermore, the pressure of market borrowing by the Government
has served to increase real interest rates in the economy at the cost
of all other economic actors.
The restoration of high economic growth would be difficult
to achieve without a significant and sustained reduction in the fiscal
deficit. 1.109 The Indian financial sector and capital market
has served the economy well over the last few decades.
While spread of banking in the country was helped greatly by
the nationalisation of banks in 1969, it also stifled the competitive
forces in the sector. Similarly,
safe insurance products have been available to the public since the
nationalisation of insurance but the deepening of the sector was slowed
down. These arrangements functioned well in the controlled economy
of the 1970s and the 1980s.
The financial sector reforms of the 1990s, the deregulation
of interest rates and the tightening of prudential regulation of banks
and financial institutions
have done much to impart efficiency, transparency and competition
on the banking industry. The introduction of new private sector
banks and insurance companies has injected a degree of competition
and new dynamism into the financial sector.
The time is now ripe for carrying forward further financial
sector reforms so that the real economy can benefit from a modernised
financial sector that exhibits high productivity levels, greater diversification
of the financial sector and provides a greater variety of instruments
that serve more efficiently the emerging needs of the economy and
the real sector for investment and production. 1.110 The key disappointment of the 1990s has been inadequate employment
generation. Employment growth has slowed significantly in the 1990s
relative to that in the previous decade. However, this has been accompanied
by a similar slowdown in the growth of the labour force. This has
resulted from the increase in the average years of schooling of new
labour force entrants
over the years. With the containment of expansion of the Government
and the public sector as a whole, growth in organised public sector
employment has been expectedly low. Higher private sector growth has indeed
resulted in higher organised private sector employment growth also,
but this has not been adequate in volume to compensate for the slowdown
in public sector employment. A significant structural change in
the Indian economy is indicated by the absolute fall in agricultural
employment that has occurred for the first time. Non-farm employment
growth has, however, not compensated adequately for the lack of growth
in agriculture. 1.111 The recent slowdown
in agricultural growth has led
to a new policy focus, which places greater emphasis on agricultural
diversification through various reforms like
removal of licensing, stock limits and movement restrictions.
This would provide a fresh impetus for value
addition in agricultural products and generate additional demand for
agricultural workers. A key issue for focus therefore, is the achievement
of a higher growth path, which would be employment-intensive, particularly
in the rural areas.
Revenue Enhancement 1.112 The Economic Survey has laid stress on the
issue of fiscal stabilisation and reforms for many years. This continues
to remain the most difficult of the problems facing economic management
in the country. In recognition of this problem the Government introduced
the Fiscal Responsibility and Budget Management Bill in Parliament
in December 2000. The
Bill mandates the Government to reduce its fiscal and revenue deficits
over the next 5 years to specified sustainable levels. 1.113 The combined fiscal deficit of the Central and State Governments
amounted to 9.6 per cent of GDP in 2000-01, causing the combined public
debt of general Government to reach 85 per cent of GDP in 2001.
Considerable progress has been made over the past 10 years
in the reform of the Indian tax system in all its aspects, but tax
revenue receipts have remained below 10 per cent of GDP throughout
the period. 1.114 As might be expected, collections from custom duties have
fallen significantly as a result of the ongoing tariff reform aimed
at bringing customs tariffs in line with ASEAN levels. Excise duty receipts have also not increased with the extension
of the MODVAT/CENVAT system to more and more sectors, along with the
slowdown in industrial growth in the past five years.
Recovery in industrial growth would inject some buoyancy into
excise receipts. The other source of buoyancy in excise could be the
removal of exemptions that still continue and the curbing of leakages
arising from the exemptions extended to small-scale industries.
Thus the potential for increase in tax/GDP ratio from indirect
taxes is limited. Indirect taxes in the country are excessively dependent
on the industrial sector. As
the growth of the industrial sector has slowed, so has the collection
of indirect taxes. With structural change in the economy
resulting in greater growth in the tertiary sector the importance
of extending indirect taxes through the service tax to this sector
assumes great importance. The state level Value Added Tax (VAT) is
now to be introduced in April 2003. The much needed policy reform
to extend service tax to all tertiary sector activities can then be
taken up. An inter linked full scale VAT system
can then be thought of. With
the increasing weight of the tertiary sector in GDP its effective
taxation is essential to improving the tax/GDP ratio. 1.115 Direct
taxes have indeed increased over the decade from about 1.9 per cent
of GDP in 1990-91 to about 3.3 per cent of GDP in 2000-01, so that
their share in gross tax revenue has increased from 19 per cent to
36 per cent over the same period. The main potential for improvement
in the tax/GDP ratio continues to be in the area of direct taxes,
particularly that in personal income tax.
An examination of the available data on income distribution
in the country suggests that despite the substantial reduction in
income tax rates that has taken place, compliance among non-salaried
income tax payers remains low. The key tax policy and governance issue therefore relates to
the enforcement of greater compliance in the personal income tax area.
The introduction of the One-by-Six scheme has done much to bring increasing numbers of people
with taxable incomes into the tax net. But better systems are needed to ensure
improved compliance of higher income tax payers. The probability of
improving the fiscal health of the country depends crucially on much
greater acceleration in the collection of direct taxes.
1.116 With the essential components of
tax reforms in place, the potential for increased tax revenues lies
mainly in instituting more efficient tax collection methods in the
country. What is required is wholesale modernisation
of the tax administration which relies more on improved systems to
enforce compliance rather than the traditional police methods of search,
seizure and the like. This will become feasible as greater
emphasis is placed on extensive use of information technology, data
warehousing, data mining and analysis, and use of economic research.
With the introduction of unique tax identification numbers, better
coordination between different taxes would also help in enforcement. Expenditure Management 1.117 The continuous attention that has been paid to expenditure
management has kept total Central Government expenditure in the range
of 14 to 15.8 per cent of GDP over the past decade. General Government
expenditures have indeed been restrained though further reduction
is possible through the implementation of the recommendations of the
Expenditure Reforms Commission.
The main components of expenditure that have been increasing
are interest payments, subsidies, and pensions (after the Fifth Pay
Commission implementation). The fall in inflation unaccompanied by
a compensating fall in nominal interest rates has also subjected the
government to higher real interest rates along with the rest of the
economy. The cut of 1.5
per cent points in administered interest rates in the last budget
redressed some of these imbalances.
However, the problem of high administered real interest rates
remains with us. Making contractual savings subject to market related
interest rates is therefore essential for containing the interest
payments of the Government, as also for reducing interest rates for
the economy. 1.118 Subsidies remain a continuing problem in the expenditure
structure of the Central Government. The elimination of export subsidies
in 1991 has not been followed
up by elimination of other existing subsidies. The continuation of the food subsidy
will always be essential for alleviating the needs of poor households.
It stands to reason, however, that with falling rates of poverty
the magnitude of justifiable food subsidy should also fall proportionately
on a continuous basis. This has not happened because of the
existing system of food management and public distribution in the
country. The continued high Minimum Support
Prices (MSP) applied to wheat and rice and near monopoly procurement
by FCI have led to an unsustainable situation where food stocks with
FCI have risen to levels that have little probability of being used.
Despite the extension of low prices for people below the poverty
line the offtake of PDS (Public Distribution System) food grains has
not increased. It is
essential, therefore, to reform the existing food management system
in a direction that ensures food security and availability of affordable
foodgrains to the poor on the one hand, and more efficiency and greater
investment of private trade on the other. Little purpose is served
in carrying food stocks with Government beyond these requirements.
The expenditure on food subsidy is effectively crowding out more effective
expenditure on essential infrastructure and social needs.
Concurrently, Government guaranteed bank credit for food stocks
also crowds out other bank lending. Hence it is now time to find more
innovative ways of providing food subsidies to the poor, without affecting
the whole food economy and marketing systems. Simpler systems like
food stamps or their variants can be considered. 1.119 The fertiliser subsidy has long been an area of concern
and different high level committees have recommended possible courses
of action. As announced
in the Budget Speech of 2001-02, the implementation of the report
of the Expenditure Reforms Commission on reform of the retention price
system in fertiliser along with fertiliser price revisions will help
in gradually bringing down fertiliser subsidy over the next five years.
The existing retention price system in fertiliser provides no incentives
for improvement in productivity of investment or for energy efficiency
in fertiliser plants. A
substantial portion of the fertiliser subsidy actually goes to inefficient
high cost production rather than farmers.
Accelerated implementation of fertiliser price reform is essential
to reduce fertiliser subsidy to sustainable levels and also make the
subsidy better targeted and more transparent. 1.120 The other key reason for the stubbornness
of the fiscal deficit is the indirect effect on the exchequer of the
levy of inadequate user charges for most public services in both the
central and state levels. Uneconomic
and low user charges in sectors such as power, road transport,
irrigation and the like at the state level impair state budgets. They
impact on the central budget as well, through non-payment or inadequate
payment to Central Government utilities. Similarly, unbalanced tariffs
in central services such as the railways lead to financial losses
which then have to be compensated for by the central budget. With
the deteriorating financial condition of the railways they have not
been able to make adequate dividend payments to the Central Government
in the last two years. Effectively,
higher budgetary allocations have to be made than would otherwise
be the case. Most such subsidies are poorly directed
and do not necessarily benefit the poor.
The levy of appropriate user charges on most services is essential
for restoring fiscal health. As economic user
charges are levied on such services, operational efficiency also has
to be ensured through appropriate management reform so that prices
are kept at affordable levels. 1.121 The high fiscal deficit is often felt to be
of only academic interest. It is also argued that high revenue deficits
are the cause for concern, and not fiscal deficits. This would be
true if the non-revenue fiscal deficit would result in investment,
which provides adequate returns commensurate with the cost of borrowing.
This has so far not been the case, with the result that today’s
fiscal deficit results in tomorrow’s revenue deficit.
Equal attention therefore has to be paid to containing both
the revenue and fiscal deficits. Public borrowing for public investment
is indeed justified, and should be undertaken. What is necessary is
to ensure that investment is done effectively so that adequate returns
are received by the Government. This can be done if appropriate user
charges are levied on public services. 1.122 In summary, the problem of fiscal deficit
has to be addressed both on the revenue side and the expenditure side.
There has been a popular tendency to focus excessively on expenditure
reduction, but this has proved difficult with the rigidity in the
structure of Government expenditure. Revenue enhancement now lies
more in enforcing compliance in direct taxes and in extending the
service tax. 1.123 The current state of agriculture
in the economy provides a contrasting picture of low growth amid plenty.
Despite the slowdown in the growth of foodgrain production
and in productivity, foodgrain stocks at 60 million tonnes are now
at unprecedented and unsustainable levels. Capital formation in agriculture
has been slowing throughout the 1980s and 1990s with public investment
showing a particular downtrend.
Public expenditure in agriculture has exhibited some substitution
from investment to consumption expenditure in the form of increasing
subsidies and in various transfer payments made through a variety of poverty alleviation
schemes. 1.124 The response to the food crisis of the late 1960s was to
promote the green revolution in rice and wheat through the provision
of a package providing research and extension services, inputs like
improved seeds, fertiliser, and irrigation and assured offtake through
MSP based public procurement. This has been implemented successfully
over the past 30 years. However, with mounting foodstocks this strategy
for agricultural growth has now played itself out. The attainment
of a high GDP growth rate in excess of 7 per cent will be difficult
unless there is an accompanying acceleration in agricultural growth. It has become increasingly evident
that this calls for a paradigm shift in policy of the last 30 years
which had mainly concentrated on improving the production of foodgrains
to provide for essential food security to the economy. 1.125 The National Sample Surveys show that, as might be expected,
with continuing income growth in both urban and rural areas over the
last two decades, the proportion of household expenditure on items other
than food has been increasing. Conversely, household expenditure on
food has fallen as a proportion of their total expenditure from 60
per cent in 1977-78 to 48.1 per cent in 1999-2000 in urban areas,
and from 64.3 per cent to 59.4 per cent in rural areas. With rising
incomes, peoples’ diets are becoming more diversified. The share
of cereals in their diet has been falling, being substituted by other
foods as their food preferences have been changing. Expenditure on
cereals in total household food expenditure has fallen from 40.8 per
cent in 1977-78 to 31.8 per cent in 1999-2000 in urban areas, and
from 58 per cent to 44.1 per cent in rural areas. Correspondingly,
substantial increases have taken place in the proportion of food expenditure
on other foods such as fruits, vegetables, meat, eggs, fish and milk.
Hence, although it is essential to ensure food security through adequate
production of foodgrains in the country, the thrust of agricultural
policy now must shift to accelerating the growth of non-cereal food
products in recognition of the changing
diet composition and, to other non-food agricultural products. The
growth experienced in the production and consumption of milk, poultry,
fish and meat suggests that there is great potential for further growth
in these products. Similarly, increasing incomes and urbanisation
are also providing the demand stimulus for greater production
and consumption of fruits and vegetables. As urbanisation proceeds
there will be an accelerating need for basic processed foods as well.
1.126 Policies for stimulating production
in non-cereals and non-food crops are inherently more complex than
the policies required for accelerating foodgrains production. This set of products is far more heterogeneous
than foodgrains and policies therefore have to be much more responsive
to the different requirements of different products and different
regions. The procurement, preservation, transportation and marketing
of these products are also much more complex than that of foodgrains.
Policy measures to tackle each of these problems would have
to be much more decentralised. 1.127 The agriculture sector has continued
to be constrained by a number of controls and regulations that impose
limits on storage and restrict free movement of agricultural products.
Most of these control orders have been issued by States under the
provisions of the Essential Commodities Act (ECA). As announced in
the Finance Minister’s Budget speech of 2001-2002, the provisions
of the ECA have been reviewed and
the provisions allowing the States to issue such orders have been
withdrawn. Implementation of this and removal of other state control
orders should help greatly in freeing up the storage and movement
of agricultural products in the country. There are other legislations
like Agriculture Produce Marketing Act that prohibit farmers from
selling directly to buyers for food processing and which make contract
farming difficult. There are other regulations such as the Milk and
Milk Products Order (MMPO), which constrains the growth of milk processing
by restricting the entry of large processors. The net effect of many
of these regulations is to increase the distance between the farmers
and the market and inhibit development of food processing on a large
scale in the country. Consequently, the price realization by the farmers
is a small fraction of the final retail price of agricultural products.
The removal of such regulations would do much to promote higher growth
in the production of marketable agricultural commodities, and in food
processing. These are the activities that will induce much needed
acceleration in employment growth in rural areas - both farm and non-farm
- and in small and medium towns. 1.128 Bringing the farmer closer to the market requires much
better rural infrastructure. Accordingly, the Government has launched
a focussed programme of investment in rural infrastructure concentrating
particularly on improving the connectivity of all villages in the
country through the provision of all weather roads, telecommunications
and rural electrification. 1.129 The shift of farm production from cereals to other agricultural
products is also being constrained by the availability of relatively
high Minimum Support Prices for wheat and rice. A new focus on food
management necessitates a review of the current MSP system, so that
there are adequate signals to the farmers to shift to other activities
that provide greater scope for improvement in income realisation through
value addition. 1.130 The industrial sector has been the focus of much of the
economic reforms carried out over the last decade. The slowdown in industrial production over the past five years
is therefore of particular concern. The reforms of the 1990s, which had
removed entry barriers to investments, opened trade, provided free
access to foreign technology, opened up foreign direct investment,
and removed barriers inhibiting access to capital markets were expected
to result in sustained high growth in industrial production. It was expected that, in keeping with
the country’s comparative advantage,
the structure of investment in industry would shift from more capital
intensive industries to more labour intensive ones.
It was also expected that such a shift would provide for greater
profitability and earnings growth, more export-oriented production
and greater employment opportunities in industry. However, progress in this direction
has been limited after the initial growth episode. 1.131 With such far reaching economic reform and the changing
international environment, Indian industry must be enabled to compete
through the provision of an economic regulatory structure, which allows
for restructuring on a continuous basis. This requires efficient bankruptcy
procedures, development of a market for distressed assets, provisions
for easy transfer of assets from one owner to another, and a flexible
labour market. The Government
has recognised the need for such flexibility. The Bill to establish
National Company Law Tribunals to address issues of sickness and bankruptcy
has been introduced in Parliament, along with that for the
abolition of the Sick Industrial Companies Act (SICA) and the dissolution
of the Board for Industrial and Financial Restructuring (BIFR). As
these Bills get enacted the process of industrial restructuring should
become easier and faster. Similarly,
Government has initiated the process for amending labour laws to provide
for greater flexibility in employing labour, and for out sourcing
of services so that labour use becomes more flexible and efficient.
Progress in the implementation of these initiatives is essential to
enable Indian industry to restructure itself to cope with the more
competitive domestic and international environment, and to induce
employment-generating industrialisation. 1.132 The key rigidity inhibiting Indian
industry from investing in labour using activities that are export
oriented is the continuation of small-scale industry reservations.
With the removal of quantitative restrictions on almost all imports,
this rigidity has become even more anomalous.
Whereas large foreign enterprises can produce all these products
and now also export them to India, large Indian enterprises are not
permitted to manufacture these products. A beginning has been made with the de-reservation of a number of items
connected with garments, toys, shoes and leather goods.
It is essential now that this process be accelerated so that
Indian industry can invest freely in these activities and compete
with the rest of the world.
Greater investment in these areas will be a key ingredient
of employment oriented policies that are essential for generating
greater industrial employment in the country. Available data suggest that organised
sector industrial employment in India is less than a fifth of that
in China. The rigidities in labour legislation and small-scale industry
reservations have contributed to this huge imbalance. 1.133 High interest rates have persisted in the Indian economy
throughout the last five years. Studies suggest that the share of
interest in costs of Indian industry is perhaps among the highest
in comparable developing countries. A particular problem faced by some industries is that heavy
investments were made during the exuberant 1994 to 1997 period, when
nominal interest rates were particularly high.
With the reduction in both inflation and nominal interest rates
these legacy interest rates have now resulted in significant debt
overhang for these industries. Proactive restructuring policy would
also need to address this issue of corporate debt restructuring.
This, however, must be done carefully so that moral hazard
issues do not arise. The write down in value of impaired assets would
enable the take over of such industries by others who can then run
them profitably. This
reiterates the need for a liquid market for impaired assets. This requires various legislative
actions to do with foreclosure and securitisation, which have already
been announced. 1.134 In the presence of increased competition and some uncertainty
in the international environment there is an even greater need to
provide for stable and predictable tax policies. Considerable progress has been made in this area over the last
few years with the tremendous simplification and rationalisation that
has been carried out in all areas of taxation: corporate tax, excise
and customs. In the area of customs, the Government has announced
the reduction of maximum custom duties from the current level of 35
per cent to 20 per cent in three years. This should provide adequate advance
information for industry to act accordingly. 1.135 All of these measures should help in reviving industrial
investment and growth in the country, which is essential for the acceleration
of overall GDP growth and for employment generation. 1.136 Infrastructure being among the most
cited impediments to the achievement of higher growth, it has received
the highest policy attention on a continuous basis since the early
1990s. Considerable success has been achieved
over these years in some sectors. 1.137 After the imposition of the fuel
cess of Re. 1 per litre on diesel and petrol, the financing of the
National Highways Development Programme (NHDP) became feasible. Proceeds
from the cess are also being used to provide financing for state and
rural roads. Implementation of the National Highways
Development Programme for the golden quadrilateral is well underway
and is expected to be implemented within the stipulated time period.
The Golden Quadrilateral is expected to be largely completed by the
end of 2003 and the North SouthEast West Highway by 2007. The rural
roads programme has also taken off. The fuel cess, seen as a very
effective user charge for the financing of roads, illustrates how
it is quite possible to invest in infrastructure, as long as there
is the levy of adequate user charges and financing is therefore assured.
As progress in the implementation of the NHDP proceeds, the fuel cess
can be leveraged further by the consistent application of affordable
toll on all four-lane highways. The limited experiments with innovations
such as annuity based projects can be extended effectively, particularly
if they are leveraged further with levy of tolls. This would help in providing for adequate
finance for the completion of the NHDP and for maintenance and operation
of the highways once they are in operation.
1.138 The second sector in which relative success has been achieved
is the telecommunications sector. Growth in telecommunications has
been impressive right through the past decade with both the public
and private sectors growing rapidly. Significant progress has been
made through the Telecommunications Regulatory Authority of India
(TRAI) in clearing up a number of regulatory hurdles in the opening
up of all segments of the telecommunication sectors to competition.
The success of this programme is particularly indicated by
falling prices in long distance and mobile services with the introduction
of competition. Once again, the success achieved in the telecommunications
sector also reflects the levy of adequate user charges for the financing
of investments and for operation and maintenance.
On the regulatory side, greater attention needs to be given
to all the issues that will arise as a result of increasing convergence
between different kinds of services. The Government has already introduced
the Convergence Bill in Parliament in order to provide for an appropriate
regulatory environment. 1.139 The port sector has also achieved some degree of success
with new private investments coming in new container terminals and
in new private minor ports. Corporatisation of port trusts has also
begun. The tariff regulatory
mechanism has
also performed relatively well under the Tariff Authority for Major
Ports (TAMP). Although there is still some progress to be made in
the regulatory structure for ports for the facilitation of greater
private sector investment, here also the availability of adequate
user charges has enabled appropriate new investments, which are remunerative. 1.140
The other infrastructure sectors such as railways, power, urban infrastructure
and civil aviation need to see much greater reform before investments
can be made for inducing further growth. In each case the regulatory
mechanism is still inadequate, as is the provision of user charges.
A great amount of effort has been made to reform the power sector
and progress has been made in a number of states in the restructuring
of State Electricity Boards and the formation of State
Electricity Regulatory Commissions (SERCs). The key issue inhibiting
investments in this sector is the presence of large transmission and
distribution losses, a high proportion of which is essentially theft,
and the levy of inadequate user charges on different consumer segments.
The
net result of these inadequacies is an average loss of almost one
rupee for every unit of electricity generated
in the country. It is naturally difficult for any commercial investment to
be made, unless the revenue generated is at least equal to the cost
of supply. Reform in
this sector must therefore concentrate exclusively on the curbing
of theft, and the restructuring of user charges, so that investment
in this sector can again become viable in both the public and private
sectors. These measures must now be taken with some degree of urgency
if adequate power investment is to take place in the next 5 years,
in both the public and private sectors.
The Central Government will have to induce state level
reforms with a combination of incentives and penalties. 1.141 Similarly,
problems exist in the Railways which have suffered from non-remunerative
investments
over the past decade. With the implementation of the NHDP over the
next 5 to 10 years the railways will face much greater competition
from road transport. In view of the higher fuel efficiency
of railway transport and other positive externalities, it is of the
utmost importance that a bold reform programme is launched with urgency
so that appropriate investments are made for achieving higher growth
through technological upgradation, modernisation, efficiency and commercial
orientation in the railways in the years to come. This will be helped greatly
if the Indian Railways goes through a far reaching reform in orientation,
making it more commercially oriented and customer focussed.
1.142 The benefit of introducing competition
in domestic civil aviation has already been seen, through the upgradation
of standards that came with the entry of new private airlines. However, progress in the improvement
of airports has been grossly inadequate. The upgradation of India’s
international airports is essential to attract greater tourism interest
in India, the growth in which has slowed down significantly.
The current structure of air traffic and forecasts indicates that
unless the major international airports in Delhi and Mumbai are significantly
upgraded, capacity constraints will inhibit the growth of air traffic
in the near future and hence of tourism. As these airports are
privatised, the regulatory system will also need restructuring for
overseeing monopoly airports and ensuring continued upgradation in
air services. 1.143 The 2001 census shows that the level of urbanisation in
India has increased from 25.7 per cent in 1990-91 to 27.8 per cent
in 2001. Some states
such as Tamil Nadu and Maharashtra are now more than 40 per cent urban. There are now 35 cities with a population of above 1 million,
as compared with 23 in 1991.
As the proportion of the urban population continue to grow,
investments in urban infrastructure for the provision of services
such as roads, water supply and sewerage, urban transportation and
the like will need to be much higher than they then have been in the
past. Recent studies
also suggest that large productivity gains can be obtained, if regulatory
impediments to land assembly, development and construction in urban
areas are removed. Among
these, the Urban Land Ceiling Act has already been repealed by the Central Government,
but most State Governments are still to follow.
Similarly most states have Rent Control Acts, which inhibit
the construction and maintenance of rental housing. Furthermore the municipal tax system
and levy of user charges continues to be grossly inadequate to finance
sustained infrastructure investments in a viable fashion. New initiatives are essential at the city, state and central
levels to introduce reforms in this area. The strengthening of municipal
authorities in all their aspects is now an urgent need. 1.144 Much therefore remains to be done in the area of infrastructure.
That successes have been achieved in some sectors suggests
that the problems that exist are amenable to solution.
The provision of efficient and affordable infrastructure is
essential for inducing investment in competitive activities in all
other sectors. Financial
Sector and Capital Market 1.145 Until late 1980s, the Indian financial system was dominated
by the banking sector, with the then unsophisticated securities market
playing a very small role. Ever since the bank nationalisation of
1969, the banking sector had been dominated by the public sector along
with a high degree of financial repression characterized by administered
interest rates and allocated credit. Regulatory standards had also
not been developed adequately. 1.146 Each of these features has been the focus of substantial
policy change over the last decade. The financial system has experienced
tremendous growth in the sophistication and size of non-bank intermediation.
Although the stock markets have undergone a number of shocks and irregularities
over the past decade, they have over time developed sophisticated
institutional mechanisms, harnessing modern computer technology and improving the incentives
of the administrators of market infrastructure. The mutual fund and
insurance industries have also been opened to new private sector entry:
the private sector market share in the mutual fund industry is now
50 per cent. 1.147 Financial repression has eased substantially
with the deregulation of interest rates and substantial removal of
credit allocation except for the priority sector quota. The regulatory
framework of banking has developed through improved regulations regarding
asset classification, provisioning, income recognition and a quest for lower leverage.
New competition in banking has been introduced through the limited
entry of 8 new private banks. 1.148 As a result of the policy changes
made during the 1990s, the private sector has made significant progress
in finance. It has a dominant position in securities intermediation,
a 50 per cent market share of mutual funds, just under 20 per cent
market share in banking, and a new presence in the insurance market.
However, the public
sector continues to dominate the financial system through public sector
banks and financial institutions. 1.149 With the considerable progress made over the last decade,
the time is now ripe for further development of the Indian financial
sector. The reduction of Government holding in public sector banks
up to 33 per cent will become possible once the amendment to the Bank
Nationalisation Act is passed in the Parliament. The dominance of
public sector finance firms has important consequences for the allocative
efficiency of the financial system and for corporate governance in
the country. With the domination of public sector finance firms, a
controlling interest in many listed companies is effectively held
indirectly by the Government through Government owned or sponsored
institutions. This inhibits the market for corporate control and the
development of widely held, board managed, professionally run companies.
The disinvestment and privatisation programme has also been inhibited
by the lack of institutional investors in the private sector. The
introduction of private sector insurance companies and pension funds
will help in removing some
of these difficulties in the capital market. The international trend
in the past decade or two has been the convergence of different segments
of the financial and capital markets to result in the emergence of
financial conglomerates. The Indian regulatory system also
needs to evolve to enable the development of such conglomerates, which
will be necessary for Indian institutions to be able to compete efficiently
with the much larger international financial sector companies. 1.150 Difficulties in the enforcement
of creditors rights has also been handicapping the industrial restructuring
process. Industrial restructuring is a natural consequence of the
changing economic policy environment of the kind experienced in India
since 1991. The health of the financial institutions and banks who
are creditors of impaired assets have difficulties in recovering their
dues. Hence, the enforcement of foreclosure and other procedures for
up holding the rights of creditors need to be put in place. Such a
policy regime would make it easier for banks and financial institutions
to extend credit for higher investment in order to generate growth
in all sectors of the economy. 1.151 The securities markets have experienced
a steady stream of episodes of market irregularities in the decade
of the 1990s. Even though the market design on the stock markets has
made major progress, there are continuing concerns about the speed
and effectiveness with which fraudulent activities are detected and
punished. This should be the major focus of the development of the
stock markets. In contrast, on the fixed income market, the market
design continues to exhibit important weaknesses. The stock market
can be an important role model, and a source of vibrant institutions,
using which the market design of the debt market can be improved.
The transformation of the US-64 Scheme of the UTI into a NAV-based
Scheme has been a welcome and long overdue step. This step needs to
be carried forward for undertaking other needed reforms in UTI. 1.152 The equity derivatives market is
an important new milestone - in offering a new set of vehicles for risk management
and for speculation to all economic agents in the country. The rapid
takeoff of liquidity on the equity derivatives market, by world standards,
is a reminder of the vitality and sophistication of the financial
sector. The successful market design can now be extended to other
areas of the economy, ranging from interest rates and currencies to
commodities and bullion. 1.153 The Indian economy responded to the economic reforms of
the 1990s with a higher growth performance than in previous decades.
The economy has, therefore, shown that it is capable of achieving
high growth rates in response to the implementation of appropriate
economic reform policies. Consequently, higher growth rates in the
rest of the decade can indeed be achieved through further deepening
of the economic reform process. Second generation reforms have been
initiated already and, as their implementation proceeds, acceleration
in economic growth can be expected in the coming years.
However, the crucial issue of fiscal imbalance at both the Central
and State levels needs to be addressed with some urgency in order
to improve the overall health of the economy.
1.154 Economic reforms
are a continuous process which need to be adjusted as the economic
environment changes,both domestically and internationally.
The year 2001 has been a difficult year for almost all economies
of the world. World economic growth slowed down
as did trade growth. The
current signals are that recovery is expected in 2002.
This should help in the expansion of international trade and
in the rejuvenating of Indian export growth. As the world economy picks up, the
deflationary trend experienced in the prices of commodities and
manufactured products would also begin to be reversed enabling improved
profitability in the Indian manufacturing sector as well.
The continued implementation of reforms along with this upturn
in the economic environment is likely to help in regeneration of economic
activity in the months and years to come.
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