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SETTING OF THE S TUDY

NATIONAL DEFENCE C O LLEGE

(NDC 54)

ECONO MY, SCIENCE AND TECHNOLOGY STUDY – 2014

S TUDY No. 2

S DS (CS)

SETTING OF THE S TUDY

Appendices : A Basic Economic Concepts

B 12th Five Year Plan – An Over View

CHAPTER 1

INTRODUCTION

Development of Indian Economy - an Overall Perspective

1. Gen e ral India’s economy - vibrant and robust till the nineteenth century underwent a major transformation with the arrival of the British as the colonial rulers. Much like other lesser colonial economies elsewhere, Indian economy was reduced to a subservient entity in the colonial arrangement. Predominantly agrarian and though endowed with large raw material resources, it yet remained at the bottom of the industrial production chain as a provider of raw materials to the burgeoning industrial sector in Britain and in turn recipient of finished or manufactured goods. This arrangement destroyed the indigenous industry and forced the farmers to turn to cash crops from food grains with grim consequences of a food deficit and a dependent economy. The peculiar subservient nature of economic relationship with UK resulting in unproductive consumption of social surplus / savings by the State and intermediaries, including unilateral transfer of the surplus to UK (5-10% of GNP every year) and, lack of protection of local production through iniquitous tax structure and unproductive use of state revenues (from 1890-1947 nearly 50% was spent on defence), eroded the capital base and consequently an impoverished economy was inherited at independence.

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2. Though the growth of modern Indian industry began in the second half of

the 119th century, its growth was so stunted and paltry that the employment generated was not sufficient to absorb surplus labour from the sudden collapse by Indian handicraft and artisan-based industry from the uninhibited competition by cheaper imported goods from Britain. The industrial development was mainly confined to cotton, jute and tea in the 19th century and to sugar, cement and paper in the 1930s. The iron and steel industry which began post-1907 remained small and, even in 1946, cotton and jute textiles accounted for a third of factory work force and more than half of value addition in the manufacturing sector. In 1947, the share of modern industry was a mere 7.5% of the GNP. Foreign capital, pre- dominantly British, dominated the industrial and financial fields and controlled foreign trade and also part of the internal trade that fed the exports. British firms dominated coal-mine, jute industry, shipping, banking and insurance and tea and coffee plantations either directly or through their managing agencies, thus controlling majority of Indian-owned companies. Yet there were positives, such as developments in the surface communication infrastructure. The connection of the hinterland with ports, through roads and railways led to paved roads (65,000 miles) and railway tracks (42,000 miles) as also an efficient and modern postal and telegraph system. The other important feature was a small but Indian-owned industrial base

3. The trained human resource too was limited to a core of scientific and technical manpower. In 1939 there were a mere seven engineering colleges with 2217 students and 10 medical colleges turning out 700 graduates every year. Most managerial and technical personnel in industry were non-Indian. Yet the Indian economy, at the time of independence, had an indigenous capitalist class with an independent economic and financial base which was more dynamic than the foreign capital. The Indian capital controlled 60% of large industrial units, while the small scale industrial sector, which generated more national income than the large scale sector, was almost entirely based on Indian capital. Indian joint stock banks held 64% of all bank deposits. Indian-owned life insurance companies controlled nearly 75% business and, the bulk of internal trade and part of foreign trade was also in Indian hands though the economy was still small and the industrial revolution yet to take off. In the final analysis, India at independence, stood out as a poor, under developed, agrarian society seeped in gross poverty, illiteracy, s t a r k social inequality with minimal infrastructure and not much to flaunt in the industrial sector. This then, was the state of the India at large, from where it began its journey through numerous iterations, with experiences happy, and not so happy, along the way till the present when it is poised to emerge as one of the leading nations in the world with a sound economic, scientific and technological base of considerable reckoning.

4. P o st Independ e nce – The B e ginnin g . The aspirations of the national leadership were to create a vibrant national economy on the socialistic-democratic pattern. The State was the primary instrument of change, providing economic structures to bring about development. In absence of a strong private sector and an inadequate capital base, the State took upon itself the task of accelerating capital creation and became an entrepreneur particularly of heavy as well as basic

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industries. The industrial policy of 1948 therefore emphasized on continuous increase in production and its equitable distribution. It laid down that arms and ammunition, atomic energy and railway transport would be the monopoly of the Central Government . The State would also be exclusively r e spons ib l e f o r establishing new undertakings in six basic industries viz. iron and steel, coal, aircraft manufacture, ship building, mineral oils and telecommunications. The rest of the industrial sector was left open to private enterprise with a proviso that the State would progressively par t ic ipate in these sectors also. The policy resolution thus, envisaged a ‘Mixed Economy’ as a suitable basis for future development of the country.

5. This historical perspective is essential to understand the present day Indian economy. There have been many downturns and high points as the Indian economy moved across a sinusoidal growth trajectory. For purposes of this study, the period since independence has been divided into two distinct phases of economy viz., 1950-1990, a forty year period and the period thereafter, since1991-92 were the watershed years in the history of Indian economy.

AIM

6. The aim of the study is to arrive at a general understanding of state of India’s economy, its scientific and technological prowess and to analyse associated policies through economic, scientific and technological indicators.

CHAPTER 2

INDIAN ECONOMY IN THE CURRENT PERSPECTIVE

7. India’s Growth Story

India’s growth story attracted the attention of the world when the economy grew at an average of 8.5 per cent per annum during the period, 2004-05 to 2010-11. This was achieved despite the strong negative spill-over effects of the global financial crisis in 2008. With a view to minimize the impact of global financial crisis, the Government announced stimulus measures in December 2008, January and February 2009 which were both sector specific and macro-economic in nature. These measures in the area of easing of liquidity and credit expansion were being supplemented by fiscal measures designed to stimulate the economy. In recognition of the need for a fiscal stimulus, the government had consciously allowed the fiscal deficit to expand beyond the originally targeted level because of the loan waivers, issue of oil and fertilizer bonds and higher levels of food subsidy. Subsequently, while suggestions were received for the continuance of the stimulus package from various stakeholders

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during the process of Budget formulation, some others wanted a roll back of the measures on the strength of the recovery in growth in 2009-10 and the need to return to the path of fiscal consolidation. Accordingly, after a careful consideration of the current economic situation and acting on the recommendations of the Thirteenth Finance Commission for shaping the fiscal policy for 2010-11, it was decided on adopting a calibrated exit strategy from the expansionary fiscal stance. As a result of these policy measures, India took the world by surprise by rebounding quickly from the slower growth of 6.7 per cent in the year 2007-08 to record rates of growth of 8.6 per cent in 2009-10 and 9.3 per cent in 2010-11.

8. However, there was a further downturn in the global economy in 2011 on account of the sovereign debt crisis in Europe and the subsequent slump in the World economy. As a result, India has been facing multiple economic challenges since the year, 2011-12. The global slowdown has posed challenges for India in managing a volatile external situation, aggravated by domestic constraints including bottlenecks in the implementation of large projects, elevated levels of inflation and the tight monetary policy pursued by the Reserve Bank of India. Uncertainties have been exacerbated by an unsteady recovery in the advanced economies. The global crisis of 2008 and the subsequent sovereign debt crisis and recession in the Euro area reduced the average growth rate of the global economy to less than 3 per cent during the period 2008-2012 as compared to greater than 5 per cent growth witnessed during the 2005-2007. Several emerging market economies, prominently China and India, rebounded strongly in the immediate aftermath of the crisis. The uncertainty following sovereign debt crisis in the Euro area hampered sustained recovery in advanced economies with subsequent challenges in macro management in emerging market economies. With the intensification of the sovereign debt crisis, the decline in real GDP growth rates starting 2011 has been witnessed across advanced and emerging market economies.

9. According to the World Economic Outlook (WEO, October 2013) published by the International Monetary Fund, the growth rate of world output is projected to slow from 3.2 per cent in 2012 to 2.9 per cent in 2013, prior to a revival in 2014. Some growth revival is evident in advanced economies, especially in the US, though significant downside risks remain. On the other hand, slower growth within a subdued global milieu, presents newer macroeconomic challenges for many emerging economies, including India.

10. FISCAL POSITION. Slowdown in growth, particularly in manufacturing, and subdued sentiments in financial markets in first half of 2013-14 put pressure on the fiscal front, especially on tax collections and disinvestment receipts. As per the data on Union Government Finances released by the Controller General of Accounts for April-November 2013, significant shortfall in growth in revenue receipts vis-à-vis the growth envisaged in the Union Budget 2013-14 is observed. On the expenditure front, as against the implied year-on-year growth of 16.4 per cent envisaged by BE 2013-14 over RE 2012-13, growth in total expenditure during April-November 2013 has been 17.7 per cent.

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The fiscal deficit for the year 2012-13 was contained at 4.9 per cent of GDP vis-a-vis a target of 5.1 per cent of GDP in BE. As a proportion of BE, fiscal deficit is placed at 93.9 per cent in April-November 2013. Recent steps introduced for fiscal consolidation including reforms in administered prices would bolster the fiscal outlook.

11. Price Situation. Overall WPI food inflation comprising primary food articles and manufactured food products averaged 10.54 per cent in 2013-14 (April-December) as compared to 9.03 per cent in the corresponding period of the previous year. In December 2013, food inflation was 9.47 per cent as compared to 9.96 per cent in December 2012 and 13.81 per cent in November 2013, indicating some easing of inflationary pressures in food. While food inflation remained elevated, its drivers have been changing over time. In 2012-13, inflation remained elevated across the board for all major subgroups of food including cereals, pulses, vegetables, egg, meat & fish, sugar and edible oils etc. However, in the current year, the primary contributors include cereals, vegetables and egg, meat & fish.

12. Inflation measured in terms of consumer price indices remained at higher levels than WPI in the current year. Inflation for food items, which have a relatively higher weight in consumer price indices, kept CPI inflation at a relatively higher level. All India general inflation for Consumer Price Index- New Series (CPI-NS) averaged 9.87 per cent in 2013-14 (April-December) as against 10.04 per cent in the same period last year. On the positive side, the inflation as per CPI-NS has come down from 11.16 per cent in November 2013 to 9.87 per cent in December 2013. The inflation measured in terms of Consumer Price Index for Industrial Workers (CPI-IW) averaged 10.86 per cent in 2013-14 (April-November) as compared to 9.85 per cent in the same period last year. Inflation based on other group specific CPIs (CPI for Agricultural Labourers and CPI for Rural Labourers) also remained in double digits.

13. The Government and the Reserve Bank of India (RBI) monitor the price situation regularly, as price stability remains high on the policy agenda. Various fiscal, monetary and administrative measures have been taken to reduce inflation. Some of the specific measures already in place include: reducing import duties for wheat, onion, pulses and refined edible oils; banning export of edible oils and pulses; imposing stock limits from time to time in the case of select essential commodities; maintaining the Central Issue Price (CIP) for rice (at Rs 5.65 per kg for BPL and Rs.3 per kg for AAY) and wheat (at Rs 4.15 per kg for BPL and Rs 2 per kg for AAY) since 2002; suspending futures trading in rice, urad and tur; fixing the Minimum Export Price (MEP) of onion at USD 1150 per MT and allocating 195000 tonnes of rice and 327000 tonnes of wheat for distribution to retail consumers under Open Market Sales Scheme (Domestic) for the period up to March, 2014. As per Second Quarter Review (October 29, 2013) of the RBI, the policy stance and measures are intended to curb mounting inflationary pressures and manage inflation.

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14. Agricultural Recovery. The moderate turnaround in growth during Q2 2013-14 has been helped by a revival in agriculture. As per the 4th Advance Estimates released by Ministry of Agriculture, driven by increase in rice and wheat production, food production is estimated at 255.36 million tonnes in 2012-13 vis-à-vis 259.29 million tonnes in 2011-12 (final estimates). As per the 1st Advance Estimates (covering only kharif crops) released on 24.09.2013, production of food grains during 2013-14 is placed at 129.32 million tonnes (rice at 92.32 million tonnes and cotton at 35.30 million bales of 170 Kg each).

15. Industrial Production. The index of industrial production (IIP) [base: 2004-05] is the leading indicator of industrial performance. As per the latest IIP data, industrial output growth rate was (-) 0.2 per cent during April-November 2013 as compared to 0.9 per cent during the same period of the previous year. Combination of global and domestic factors has led to deceleration in the industrial output during the current year. The contraction in the growth was largely due to decline in mining sector and manufacturing sector. Because of structural constraints, mining sector continued to drag the overall industrial growth with its growth contracting by 2.2 per cent during April-November 2013 as compared to 1.6 per cent contraction in the corresponding period of the previous year. During April-November natural gas and crude oil production has contracted by 15.1 per cent and 0.9 per cent. Coal production has increased by 1.5 per cent. Manufacturing, which is the dominant sector in industry, also witnessed contraction in its growth to 0.6 per cent during April-November, 2013 as compared to 0.9 per cent growth in the corresponding period of the last year. Manufacturing sector contraction has been mainly due to poor performance of capital goods and consumer durable goods segments. Auto sector and gems and jewellery segments have contracted owing to lower demand. Sugar production has been negative so far due to delayed crushing.

16. The reasons for sluggishness in the manufacturing sector are multiple. The rise in the policy rates coupled with the bottlenecks facing large projects took its toll on the investments. Further, Indian manufacturing sector has not moved up the value chain overtime. Due to low level of investment in R & D, India has not seized the growing opportunities available in high and medium technology sectors in the global market such as chemicals, machinery & equipment, electrical machinery, electronic goods, etc. The capital goods output, which is the main driver of manufacturing sector growth contracted by 0.1 per cent during April-November, 2013 as compared to the contraction of 11.3 per cent during the corresponding period of the previous year, which indicates that deceleration in this sector may have begun to bottom out.

17. Steps Taken to Revive Manufacturing Growth. The National Manufacturing Policy (NMP) announced in 2011 aims at enhancing the share of manufacturing in GDP to 25 per cent (from around 15 per cent at present) within a decade and creating 100 million jobs. Keeping this in view and the overall macro-economic situation, a number of steps have been taken by the Government over the last one year for promoting manufacturing sector growth, such as improving the efficiency of issuance of clearances for large infrastructure projects, liberalizing FDI norms, resolution of tax issues concerning industry, starting construction of dedicated freight corridors,

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improving the policy regime across a number of sectors like sugar, urea, gas, etc. Some of the specific steps taken by the Government, inter alia, include the following:

(i) The Union Budget 2013-14 outlined several initiatives to boost investment, especially in rural and urban infrastructure. This, inter alia, included encouragement to Infrastructure Debt Funds and enhancement of credit to infrastructure companies, raising the corpus of Rural Infrastructure Development Fund, and introduction of investment allowance for new high value investments.

(ii) Allowing the private sector to mine coal in the capacity of Mine Developer cum Operator (MDO) and deregulation of the sugar sector. Prices of certain petroleum products have been raised and phased deregulation of diesel has been initiated to contain the subsidy bill.

With a view to address important issues like delays in regulatory approvals, problems in land acquisition & rehabilitation, environmental clearances, etc. the Government has inter-alia, set up the Cabinet Committee on Investments(CCI) to expedite decisions on approvals/ clearances for implementation of the projects. This will improve the investment environment by bringing transparency, efficiency and accountability in accordance with various approvals & sanctions.

The CCI has initiated action to remove the bottlenecks of stalled projects in the sectors, such as power, petroleum & natural gas, mines, coal, shipping, etc. As per the available information, the Project Monitoring Group (PMG) constituted to track large investment projects has resolved implementation issues pertaining to 93 projects with total estimated cost of Rs. 3,53,725 crore.

The Government is also promoting Public Private Partnership (PPP) as an effective tool for bringing private-sector efficiencies for delivery of quality public services. On account of the several policy initiatives taken by the Government in recent years, India has emerged as one of the leading country implementing this model. Since its constitution in January 2006, the Public-Private Partnership Appraisal Committee(PPPAC) has approved 272 Central Sector Projects with TPC of Rs.2,96,579.6 crore.

Also from the infrastructure financing perspective, the Government has taken several important steps to promote the flow of long-term funds in infrastructure sector like setting up of the Infrastructure Debt Fund (IDF), raising the Foreign Institutional Investors (FII) limits and liberalising the External Commercial Borrowings (ECB) regime in order to facilitate off shore fund flows to infrastructure.

With a focus on non-debt creating flow, the Government has amended the sectoral caps and entry routes for foreign direct investment in a number of sectors, including petroleum & natural gas, commodity exchanges, power exchanges, stock exchanges, depositories and clearing corporations, asset reconstruction companies,

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credit information companies, single brand product retail trading, telecom and courier services and defence.

18. DELHI MUMBAI INDUSTRIAL CORRIDOR. Industrial corridor projects have been taken up for promoting industrial growth through creation of backward and forward linkages among the regions falling within the ambit of such corridors. The Delhi Mumbai Industrial Corridor will entail an investment of USD 90 billion. Together with the dedicated western freight corridor being built by the Railways, it will link Delhi to Mumbai’s ports. It will cover a length of 1483 kms and pass through six States. There will be nine mega industrial zones of about 200-250 sq. kms each, high speed freight lines, and a six-lane intersection-free expressway connecting India’s political capital to its commercial capital. Along the corridor, there will be three ports, six airports, a 4000 MW power plant, and a plug-and-play environment to promote manufacturing industries.

Other corridors that are in the pipeline are the Chennai Bengaluru Industrial Corridor, the Bengaluru Mumbai Economic Corridor and the Amritsar-Delhi-Kolkata Industrial Corridor.

19. Infrastructure Sector. Growth of the economy in general and manufacturing sector in particular is also largely dependent on creation of suitable infrastructure in the country. Accordingly, the policy focus in India has been on infrastructure investment which has increased manifold over time with increased private sector participation. The Twelfth Five Year Plan has also laid special emphasis on development of the infrastructure sector as the availability of quality infrastructure is important not only for sustaining high growth but also ensuring that the growth is inclusive. Important issues like delays in regulatory approvals, problems in land acquisition & rehabilitation, environmental clearances, etc. are already on the radar of the policy planners and as mentioned above, the Government has inter-alia, set up the Cabinet Committee on Investments(CCI) to expedite decisions on approvals/ clearances for implementation of the projects. This will improve the investment environment by bringing transparency, efficiency and accountability in accordance with various approvals & sanctions. The Government is also promoting Public Private Partnership (PPP) as an effective tool for bringing private-sector efficiencies for delivery of quality public services. The quality of infrastructure needs to be improved as it is the backbone for the proper growth of industry and services in any country. There is an urgent need to focus on timely completion of big infrastructure which are in the pipeline, such as mega power projects, industrial corridors, etc. to ensure the much needed electricity supply and logistics for the overall growth of manufacturing and services sector in the country.

20. Also from the infrastructure financing perspective, the Government has taken several important steps to promote the flow of long-term funds in infrastructure sector like setting up of the Infrastructure Debt Fund (IDF), raising the Foreign Institutional Investors (FII) limits and liberalising the External Commercial Borrowings (ECB) regime in order to facilitate off shore fund flows to infrastructure. The Government has also amended the sectoral caps and entry routes for foreign direct investment in a

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number of sectors including petroleum & natural gas, commodity exchanges, power exchanges, stock exchanges, depositories and clearing corporations, asset reconstruction companies, credit information companies, single brand product retail trading, telecom and courier services and defence. FDI up to 100 per cent is allowed, under the automatic route, in most of the sectors/activities.

21. In spite of all the steps taken to promote the development of Infrastructure sector as mentioned above, of late, especially over the past two years it has been observed that the pace of investment flows to this sector has slowed down considerably. While the development of infrastructure has always been a top priority for the policy planners, keeping in view the current global scenario and decline in the domestic growth rate, the development of this sector is being looked upon as one of the trigger point for reviving the momentum in the economy. And to achieve this objective, facilitating availability of funds is being increasingly recognised as one of the critical component in the entire chain of actionable points for accelerating the pace of infrastructure growth in the country.

22. The need for long-term finance for infrastructure projects is one of the issues that need to be looked into in the context of the limitation of banks to finance such projects. Issues like less room for banks to fund infrastructure projects due to problem of asset liability mis-match, channelization of one third of India’s savings are in physical assets and there are limited saving options available to the investors in the form of long-term pension and insurance products, non-availability of products for hedging foreign exchange risks, especially long tenor loans as well as high cost of hedging such exposures, absence of a robust and a well-developed bond market putting additional burden on Banks to meet the funding requirements of this sector are some of the issues which needs to be suitably addressed in the medium to long-term horizon. In the context of financing infrastructure thorough Infrastructure Debt Funds (IDF) route, willingness of banks to trade-off between a good credit-risk projects vis-à-vis a greenfield projects with a much higher risk will be another area requiring due attention.

23. In the background of unconventional monetary policies being adopted by developed countries and volatile capital flows, another challenge for EMEs is to also look out for innovative ways by way of devising unconventional development financing products with active support from multilateral development banks as well as international financial institutions to meet the funding requirements their respective infrastructure sector. The objective should be to devise mechanism which could ensure flow of funds, especially if the investments from the conventional sources are not adequate to meet the requirement of infrastructure sector. In this regard the successful launch of issuance of the first tranche of the USD 1 billion off-shore bond program by International Finance Corporation (IFC) at a very competitive spread is one such step in this direction which has opened up a new channel for mobilising funds for the various development needs of the country, including the infrastructure.

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24. Trade, Balance of Payments and the Exchange Rate. The rate of growth of India’s exports declined from 21.8 per cent in 2011-12 to (-) 1.8 per cent in 2012-13. However, during 2013-14 (April-December), exports valued at US$ 230.3 billion registered a growth of 5.9 per cent over the level of US$ 217.4 billion in 2012-13 (April-December). Value of imports during this period at US$ 340.4 billion registered a decline of 6.6 per cent vis-à-vis the level of US$ 364.2 billion in the corresponding period of 2012-13.

Of the total imports, POL imports amounting to US$ 125.0 billion (36.7 per cent of total imports) in April-December 2013 were 2.6 per cent higher than the level of US$ 121.8 billion in 2012-13 (April-December). Non-POL imports during 2013-14 (April-December) valued at US$ 215.4 billion, were 11.1 per cent lower than the level of US$ 242.4 billion in 2012-13 (April-December). Consequently, the trade deficit (on customs basis) for 2013-14 (April-December) declined by 25.1 per cent to US$ 110.0 billion from US$ 146.8 billion in 2012-13 (April-December). Lower non-POL imports in the recent period also reflect the slowdown in the economy.

25. While data on merchandise trade are available for the period April-December 2013, most information pertaining to balance of payments is available only for the first half (H1) of 2013-14. Contraction in the trade deficit coupled with a rise in net invisibles receipts resulted in a reduction of the current account deficit (CAD) to US$ 27.0 billion in the first half (H1) of 2013-14 vis-à-vis US$ 38.2 billion in H1 of 2012-13. However, net inflows under the capital and financial account declined to US$ 15.1 billion in H1 2013-14 compared to US$ 37.3 billion in H1 2012-13 owing to net outflows of portfolio investment. Thus, despite a lower CAD during H1 2013-14, there was a drawdown of foreign exchange reserve to the tune of US$ 10.7 billion as against an accretion of US$ 0.4 billion in H1 2012-13.

The RBI and the Government have undertaken measures including enhancing all-in-cost ceiling for external commercial borrowings between 3-5 year maturity, higher interest rate ceiling for foreign currency Non-resident deposits, deregulation of interest rates on rupee denominated NRI deposits, administrative steps to curb currency speculation, etc. that would facilitate capital inflow. The RBI has been closely monitoring the conditions in the foreign exchange market. Recognizing the need to restore stability to the foreign exchange market, several monetary measures were announced by the Reserve Bank on July 15, 2013. On July 23, 2013, the liquidity tightening measures were further modified. The Government has taken several measures to increase exports, contain imports and attract foreign investment in order to reduce the current account deficit and improve the outlook of the external sector. Some of these measures include raising the rate of interest subvention from 2 to 3 per cent that will benefit exporters of small and medium enterprises, hike in import duty on gold, liberalization of FDI norms, etc. With further improvement in the external front, foreign exchange reserves stood at US$ 293.9 billion at the end of December 2013, indicating an increase of US$ 1.9 billion over the level of US$ 292 billion at end-March 2013.

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26. In recent months, one of the most significant developments in the external sector has been the movement in the exchange rate. During April - December 2013, the monthly average exchange rate of rupee (RBI’s reference rate) was in the range of 54–64 per US dollar. The daily exchange rate of the rupee breached the level of 68

per US dollar in August 2013 ( 68.36 per US dollar on August 28, 2013). However it recovered to 61.16 per US$ on October 11, 2013, reflecting the impact of the steps taken by the Government and the RBI to moderate the CAD and boost capital flows, and greater clarity on US Federal Reserve taper. On month-to-month basis, the rupee depreciated by 12.1 per cent from 54.40 per US dollar in March 2013 to 61.91 per US dollar in December 2013. The RBI’s reference rate stood at 61.63 per US$ on January 20, 2014.

27. Inclusive Growth. An important agenda of the Government has been to ensure wider participation and greater inclusion in the growth process. The focus on inclusive growth, with a large number of programmes and projects, including the programme for employment guarantee and asset creation in the rural areas, will be reinforced by the implementation of the Food Security Act. Planning Commission has updated the poverty lines and poverty ratios for the year 2011-12 on the basis of recommendations of Tendulkar Committee using NSS 68th round data of Household Consumer Expenditure Survey 2011-12. Accordingly, poverty line at all India level is estimated as monthly per capita expenditure (MPCE) of ₹ 816 for rural areas and ₹ 1000 for urban areas in 2011-12. As per these estimates, the poverty ratio in the country declined from 37.2 per cent in 2004-05 to 21.9 per cent in 2011-12. In absolute terms, the number of poor declined from 407.1 million in 2004-05 to 269.3 million in 2011-12. Between 2004-05 and 2011-12, the average annual decline of the poverty ratios was 2.2 percentage points per year which is around three times higher than the rate of decline in the poverty ratio during the period 1993-94 to 2004-05.

28. Outlook. The latest IMF assessment (WEO October 2013) highlights that changing global growth dynamics have exacerbated the risks for emerging market economies. Reduced monetary policy accommodation in the US, combined with domestic vulnerabilities in emerging market economies, may lead to continued market stress. Emerging market and developing countries are expected to grow at 4.5 per cent in 2013. Slowdown in growth witnessed in China will impact other emerging market and developing economies. Nonetheless, the IMF projects that the global output growth will accelerate to 3.6 per cent in 2014, with advanced economies projected to grow at 2 per cent and emerging economies at above 5 per cent. From 2014 onwards, global growth prospects are projected to improve over the medium term at a gradual pace.

29. The Government has taken several steps to revive growth in the economy that, inter alia, include measures to speed up project implementation via the creation of the Cabinet Committee on Investment (CCI); boost to infrastructure financing by encouraging Infrastructure Debt Funds and enhancement of credit to infrastructure companies; provision of greater support to micro, small and medium enterprises; strengthening of financial and banking sectors, etc. Initiatives by the Government also include liberalization of FDI norms in several sectors including telecom; deregulation

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of the sugar sector; decision to launch inflation indexed bonds to incentivize households to save in financial instruments; steps to boost manufacturing growth; fiscal consolidation through reforms viz. reduction in the subsidy of diesel and cap on the number of subsidized LPG cylinders; new gas pricing guidelines; measures to control the current account deficit and depreciation of the rupee, etc.

30. These steps have started to yield results. There has been a modest turnaround in manufacturing during Q2 2013-14 while electricity and construction sectors have performed significantly better vis-à-vis Q1 2013-14. On the demand side, pick-up in private consumption and significant turnaround in exports have revived aggregate demand in Q2 2013-14. An encouraging sign in the second quarter has been the moderate revival in fixed investment, vis-à-vis a decline in Q1 2013-14. With the Cabinet Committee on Investment (CCI) clearing several projects, the effect on investment is expected to be fully realized in the coming quarters.

31. In this backdrop, the monetary policy stance of the RBI has been influenced by the priorities of containing inflation and supporting growth while managing a volatile external situation characterized by a large current account deficit, rupee depreciation and potential volatility in capital flows. With moderation in overall headline WPI inflation during 2012-13 and further during the first two quarters of 2013-14, there was a reduction in the repo rate by 25 basis points in May, 2013. Continuance of inflationary pressures made RBI revise the repo rate upwards. The rate under the Marginal Standing Facility (MSF) has been reduced subsequently. However, on the face of growing uncertainties in global financial conditions and awaiting a sustained moderation in inflation, policy easing was paused in June 2013. With significant improvement in the external situation, and some moderation in headline WPI inflation witnessed in December 2013, the room for RBI to undertake growth supportive monetary policy action has increased.

32. Challenges Ahead. The challenges for the Indian economy, over the short run, are the following:

Fiscal consolidation and steps to control inflation further (in order to reduce WPI inflation below the level of 6 per cent) remain crucial in order to provide necessary leeway to the RBI to support an economic recovery.

While manufacturing growth remains sluggish, the Government has undertaken various measures to boost growth in that sector, which need to be pursued further.

With savings and investment rate in India witnessing a decline in 2011-12 (the latest year for which data are available) vis-à-vis 2010-11, restarting the investment cycle entails expeditious implementation of large projects and keeping inflation under control.

The challenge, of encountering the fallout(s) of tapering by the US Federal Reserve, as and when it happens, remains. However, India is now better placed to cope with such uncertainties.

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CHAPTER – 3

ECONOMIC GROWTH, STA B ILITY AND D E VEL O PMENT THROU G H P L ANNING PROC E S S I N INDIA SINCE

INDEPEN DANCE

Nehru vian Model

33. Model of Planned Economic Growth & the Fir s t Three P l ans (1951- 66 ) . On 15 March 1950, the Planning Commission was established with Prime Minister as its Chairperson. The First Five Year Plan (1951-56) essentially tried to complete projects at hand and to meet the crisis immediately following the end of the 2nd World War and the massive demographic and economic dislocation caused by the Partition. The planned economy model was applied with the 2nd Five Year

Plan (1956-61) and continued with the 3rd Five Year Plan (1961-66). The basic element of this strategy was the rapid development of heavy and capital goods industries in India, mainly in the public sector. Three steel plants were set up in the public sector within the 3rd Plan period. Import substitution in heavy goods sector was seen as an imperative not only because it was seen as critical for self-reliance but also because it was assumed that Indian goods could not grow fast enough to enable the import of necessary capital goods and machinery. Although, some foreign aid and investment was considered essential in the initial phase, the objective was considered to be to dispense with it by rapidly increasing domestic savings. The shift in favour of heavy industry was to be combined with promoting labour-intensive small and cottage industries for the production of consumer goods. This, as well as, labour-absorbing and capital- creating community projects in agriculture, promoted by community development programmes and agricultural cooperatives were seen as immediate solution to the escalating problem of unemployment without the state having to make large investments. Another critical element in the strategy behind

the 2nd and 3rd Five Year Plans was emphasis on growth with equity. It was assumed that higher growth enabled higher levels of equity, i.e., ‘rising tide lifts all boats’. The state intervention in economic development led to an elaborate system of controls and industrial licensing which was first elaborated in the Industries Development and Regulation Act (IDRA) of 1951. A balance of payment crisis and

acute shortage of foreign exchange in 1956-57, i.e., at the very start of the 2nd Plan, also contributed to the creation of this system of industrial licensing.

34. Resu l ts . The results of this bold approach were evident at that time. The overall economy performed impressively compared to the colonial period when,

during the first half of the 20th century, its growth rate was flat or negative. During 1951-64, the GNP grew at an average rate of about 4% except the last year of the

3rd Plan, i.e., 1965-66 which witnessed a war and an unprecedented drought. According to the draft 4th Plan document, the rates of domestic savings and investments were 10.5% and 14% respectively in 1965-66 as compared to 5.5% of GNP in 1950-51. The gap between domestic savings and investments in later

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years were met by liquidating the foreign exchange reserves (the ‘sterling balances’ owed by UK to India in 1947 because of forced credit extracted to finance the 2 n d

World War) and through foreign borrowing and aid. The total investment in 1965-66 was nearly five times the 1951-52 level in nominal terms and more than three times in real terms.

(a) In agriculture, the comprehensive land reform measures, initiated soon after independence, the setting up of a massive network for agricultural extension and community development work at the village level, the large infrastructural investment in irrigation, power, agricultural research, and so on, had created conditions for considerable agricultural growth in this period. During the first three Plans, leaving out 1965-66, Indian agriculture grew at an annual rate of over 3%, a growth rate 7.5 times higher than the first half of the 20th century. Although the agricultural growth rate during this period could be compared favourably to other countries in comparable situation, e.g., China or Japan (growth rate of less than 2.5% between 1878-1912 and lower till 1937), it could not meet the increasing demand for agricultural produce which necessitated import of food-grains throughout the first three Plans. It was only during the Green Revolution in the late 60s when the food dependence was overcome but the physical and institutional infrastructure was critical in the success of the Green Revolution.

(b) Industry, during the first three Plans, grew even more rapidly. Between 1951 and 1965, it grew at a compound rate of 7.1% per annum. The industrial growth was based on rapid import substitution-initially, of consumer goods and particularly, since the 2nd, of capital goods and intermediate goods. The emphasis on the later was reflected in the fact that 70% of planned expenditure on industry went to metal, machinery and Chemical industries in the 2nd Plan and 80% in the 3rd Plan. Consequently, the three-fold increase in aggregate index of industrial production between 1951 and 1969 was the result of 70% increase in consumer goods industries, a quadrupling of the intermediate goods production and a ten-fold increase in the output of capital goods. As a result of the import-substitution strategy, the share of imported equipment in the total fixed investment in the for of equipment in India came down to 43% in 1960 and 9% in 1974 whereas the value of fixed investment in India increased by about two and a half times during this period. In 1950, India met 89.8% of its needs even for machine tools through imports. By mid-70s India could meet indigenously more than 90% of equipment requirements by maintaining the rate of investment. This capacity, combined later with the Green Revolution, contributed to India’s ability to retain its autonomy of action and decision-making both internally and externally. The rate of public sector, in the overall economy, increased rapidly and captured the “commanding heights” of the economy; unlike Latin America, Indian public sector did not grow in collaboration with foreign private capital or multi-national c o r p o r a t i o n s . The total paid-up capital in government companies as a proportion of

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the total paid-up capital in the entire corporate sector rose from 3.4% in 1951 to 30% in 1961 (and to 75% in 1978).

(c) The planning process, during this period, covered the development of infrastructure, including education and health. During the first three Plans, an average of 26% of the total planned expenditure, in each Plan, was allocated to transport and communication whilst the social/community services and power received 19.9% and 10.6% respectively. These investments proved critical in improving productivity of the economy as a whole. Between 1950-51 and 1965-66, installed capacity of electricity was 4.5 times higher, number of towns and villages electrified was 14 times higher, hospital beds 2.5 times higher, school enrolment was slightly less than 3 times higher and, very importantly for us today, the admission capacity in technical education (engineering and technology) at the degree and diploma levels was higher by 6 and 8.5 times, respectively. During this period, though the population had increased only by a little over 1/3rd.

(d) Conscious o f Ind i a ’ s b a c k w a r d n e s s i n sc i ence a n d technology during the colonial period, Prime Minister Nehru and the early Indian planners made strenuous efforts to overcome this shortcoming. Nehru’s ‘temples of modern India’ consisted not only of factories and power plants, irrigation dams, etc., but also the institutions of higher learning, particularly in scientific field. During the first Plan itself, high power national laboratories and institutes were set up by the Council of Scientific and Industrial Research (CSIR) for conducting fundamental and applied research in each of the following areas: physics, chemistry, fuel, glass and ceramics, food technology, drugs, electro-chemistry, roads, leather and building. In 1948, the Atomic Energy Commission was set up, laying the foundation of the creditable advances India was to make in the sphere of nuclear science and relative areas. This was in addition to the unprecedented increase in the educational opportunities in science and technology in the universities and institutes. Due to government allocations, between 1949 and 1977, India’s scientific and technical manpower increased more than 12 times from 190, 000 to 2,320,000. These investments in the knowledge infrastructure make India the third country in the world today in terms of the absolute size of scientific and technical manpower.

35. Sign i ficance of t h e Nehru v ian Model . The growth of India’s economic and technological strength during the first three Five Year Plans is not fully appreciated by contemporary writers who consider the Nehruvian development model as somewhat wasteful of a poor country’s limited resources. However, it needs to be remembered that, during this period, the solid foundations, both in physical and institutional infrastructure, were laid on which further progress became possible without any dislocations – be it 1965 or 1991 (during the processes of re-orientation of country’s national economic policies to adjust to changing internal and international economic environment). Re- orientation of the Indian bureaucracy to the hitherto unfamiliar development tasks and the “mixed economy’s” inherent

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flexibility and resilience were a significant achievement of this period. The rate of growth achieved, during this period, compares favourably with the rates achieved by advanced countries at their comparable economic growth stages and the process of capital formation was carried out in a far more democratic framework than these countries. Prof.Sukhmoy C hakravarty noted, in his book ‘ D ev e l opment Planning : The Indian Expe r ienc e ’ (Oxford, 1987) , “Dominant ideas of contemporary development economics influenced the logic of India’s plans and, correspondingly, development theory was for a while greatly influenced by the Indian case.”

Challenge to The Nehruvian Model and Economic Growth i n th e 70s

36. C r i s is of 1965 - 66 & the Annual Plans (1966-69 ) . The Nehruvian economic model (1951-65) met its major challenge with the failure of monsoons successively in 1965 and 1966. Agricultural sector experienced stagnation with the fall in agricultural output by 17% and food-grain output by 20%; India’s image changed from that of a model developing country to a “basket case” with some foreign observers expressing doubt about India’s ability to survive as a country. Rate of inflation, which till 1963 did not exceed 2% per annum, shot to 12% between 1965 and 1968 and food prices rose nearly at the rate of 20% per annum. The inflation was partly due to the droughts and partly due to heavy defence expenditure on account of the two wars of 1962 and 1965. The fiscal deficit (state and centre) peaked in 1966-67 at 7.3% of GDP. The balance of payments position, fragile since 1956-57, deteriorated sharply with foreign exchange reserves (excluding gold) averaging about US$ 340 million between 1964-65 and 1966-67, enough to cover less than two months of imports. The dependence on foreign aid, which had been rising over the first three Plans, now increased sharply due to food shortages as well as the weakness of balance of payments. Utilisation of external assistance, which was 0.86% of Net National Product (NNP) at factor cost in 1951-52 increased to 3.8% in 1965-66 and the debt service ratio (amortisation and interest payments as percentage of exports) rose from 0.8 in 1956 to 27.8 in 1966-67. Given the overall situation, the long- term planning had to be temporarily abandoned and there were three annual plans between 1966 to 1969

before the 4th Five Year Plan could commence in April 1969. India also came under strong US pressure when, by refusing to renew the PL-480 (wheat loan) agreement on a long-term basis in the wake of the 1965 India-Pakistan War, it wanted to, in President Johnson’s words, keep India “on a short leash”.

37. Handling of the Crisi s . The US, the World Bank and the IMF wanted India to liberalise its trade and industrial controls, devalue the Indian rupee and to adopt a new agricultural strategy. The rupee was devalued in June 1966 by 36.5% nominally although effectively the devaluation was of a lesser degree. The then Prime Minister, Smt. Indira Gandhi, also took measures to liberalise trade. The effect of these measures was questionable as far as the recession in the industry; inflation and the poor export performance are concerned. The reasons for the questionable effect of these measures are external factors like the drought of

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1966-67 and their inadequate implementation.

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38. L eft-ward Shift and Eco n o m ic Gro w th in the 70 s . The government’s response was, perhaps, more ‘nationalistic’ and resentful of external pressure. The immediate imperative was seen to be the restoration of the health of India’s balance of payments, creation of sufficient foreign exchange reserves and removal of dependence on food imports. To meet the balance of payments crisis and the reduction of fiscal deficit, the government applied severe cuts in government expenditure rather than resort to increasing the tax levels. However, the cuts were felt on the capital expenditure which, in real terms, decreased by about 50% between 1966-67 and 1970-71; consequently, the industrial growth rate came down from an annual average of 7.8% between 1951 and 1966 to 4.99% between 1966 and 1974. Because of the domestic political circumstances and the electoral verdict of March 1971, the government’s policies took a radical left turn. The major private commercia l banks were nationalised in 1969; the Monopoly and Restrictive Trade Practices (MRTP) Act, severely constraining the large business houses, was passed in 1969; insurance was nationalised in 1972 and the coal industry was nationalised in 1973. Foreign Exchange Regulation Act (FERA), passed in 1973 put severe constraints on foreign investments and on the functioning of foreign companies. Nationalisation of wholesale trade was tried in 1973 but given up soon after disastrous results; and, the government also followed a policy of taking over and running “sick” government companies, such as textile mills, rather than allow them to close down.

39. Aggravat i n g Extraneous Factors . The period from 1965 onwards witnessed dramatic changes and economic challenges internally and internationally. Apart from the two wars of 1962 and 1965, there was genocide in 1971 in East Pakistan resulting in the influx of over 10 million refugees into India, 1971 war with Pakistan, two droughts of 1972 and 1974, a major oil shock of 1973 (leading to quadrupling of international oil prices), the oil shock of 1979 (leading to doubling of oil prices) and the disastrous harvest of 1979-80. The country was able to weather these challenges without getting into a debt crisis and recessionary spin as happened in the case of a number of developing countries, especially in Latin America in the 80s, and without serious famine conditions. The challenges were met because the government was able to improve the balance of payments situation, create food stocks, introduce anti- poverty measures and reduce dependence on imports for critical inputs like oil.

40. Green Revo l utio n . The Green Revolution in the agricultural sector is the major achievement of this period. This was brought about through massive investments in agriculture, in comparison to the heavy industry-oriented strategy of the first three Plans, through adoption of high-yield variety (HYV) seeds, fertilisers and other factor inputs like easy credit and marketing infrastructure. Between 1967-68 and 1970-71, food-grain production rose by 35%; net food imports fell from 10.3 million tons in 1966 to 3.6 million in 1970 whilst food availability increased from 73.5 million tons to 89.5 million tons over the same period increasing to 128.8 million tons in 1984. As a result of the Green Revolution, the economy could absorb the negative impact of massive successive droughts of 1987-88 without undue pressure on prices of food or imports unlike

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the crisis of 1965-66. In fact, for the first time in Indian history, rural poverty index continued to show a decline in these crisis years as rural employment and incomes were maintained through government programmes using surplus food stocks.

41. Resili e n ce of the Econom y . The growing food self-sufficiency combined with reduction in fiscal deficit from 7.3% of GDP in 1966-67 to 3.8% in 1969 -70, improvement of balance of payments situation and surge in remittances from the Indian workers from the oil-boom rich Middle-East led to healthy foreign exchange reserves of US$ 7.3 billion (including gold and SDRs) in 1978-79, to cover more than nine months of imports, compared to less than two months’ cover 1965-66. This t u r n -around in the economy gave the leadership greater autonomy in decision making. Increasing self-reliance resulted in the government reducing dependence on foreign aid consistent with the Nehruvian approach to economic development. Net aid as a proportion of Net National Product (NNP) came

down to 0.35% in 1972-73 from the high of 4.22% during the 3rd Five Year Plan; it rose only slightly after the 1973 oil crisis yet averaged not more than 1% of NNP till 1977-78. The debt service ratio (annual outflow of interest and repatriation of principal due to existing debt as a proportion of exports of goods and services) fell to a low 10.2% in 1980-81 from an estimated 23% in 1970-71. Another significant outcome, in India’s quest for self-reliance, was the reduction in the share of imported equipment in the total fixed capital investment in India from 43% in 1960 to 9% in 1974. During this period, private foreign investment continued to be very low in proportion to total investment unlike many Latin American and some East Asian countries. In 1981-82, only about 10% of value added in the factory sector of mining and manufacturing was accounted for by foreign firms and in 1977-80, 86.5% of technology import agreements did not involve any foreign equity. There was also negligible presence of foreign capital in the financial sector.

42. Role of t he Ba n k ing Sec t o r . During the left-oriented economic policy of the government in late 60s and early 70s, the nationalised banking sector spread to the rural areas. Between 1969 (the year of the bank nationalisation) and 1981, the number of branches of all commercial banks in India rose from 8,262 to 35,707, more than 60% of which were in rural areas not only for mopping up savings but also for extending credit, especially to agriculture and, increasingly, to the poorer households as part of the land reform and the ‘garibi hatao’ (“Quit Poverty”) programme. At the same time, despite low volumes of foreign private investments and aid, the average savings rates and the rate of Gross Domestic Capital Formation or investment doubled to 21.22% and 20.68% respectively between 1975-76 and 1979-80 compared to 1 0 . 5 8 % and 11.84% respectively in the 50s.

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Econo mic Resu rgen ce of Th e 80s

43. Growth in the 80s . By the mid-70s, the industrial growth rate also started picking up from a low of about 3.4% between 1965-75 to about 5.1% between 1975 and 1985. If the crisis year of 1979-80 was omitted, then the industrial growth rate during 1974-75 to 1978-79 and 1980-81 to 1984-85 was around 7.7% per annum. In the 80s as a whole, the industrial growth rate maintained a healthy average of about 8% per year. Again, it was in the 80s that the barrier of the low, the so-called ‘Hindu Rate of Growth’ of 3-3.5% over the previous two decades was broken and the economy grew at over 5.5%. By one estimate, the average real GDP growth rate between 1980 and 1989 was an impressive 6%.

44. A new feature of the 80s was the phenomenal increase in the new stock market issues with the stock market, thus, emerging as an important source of funds for industry. It has been estimated that in 1981 the capital markets accounted for only 1% of domestic savings whereas, by the end of the 80s, this proportion had increased by about 7 times. The new stock issue in 1989 amounted to 7.25% of the Gross Domestic Savings of 1989-90. Another significant development, in early 80s, was the highly successful breakthrough in the import substitution programme for oil under the supervision of the ONGC (Oil and Natural Gas Commission), a public sector organisation. The large loan received from IMF during this period helped this effort considerably. In 1980-81, domestic production of oil was 10.5 million tons and imports of 20.6 million tons with the oil import bill taking up 75% of India’s export earnings. With the operationalisation of the Bombay High oil fields by the end of the 6th Plan (1980-85), the oil import bill in 1984-85 was down to a third of export earnings.1991 Crisis And The Launching Of The Libera lisation Process

45. T h e 1991 Crisis & its Bac k g roun d . Despite these impressive strides in India’s economic growth, long term structural weaknesses built up to a major crisis in 1991 when the country was on the verge of default for a combination of domestic circumstances. It is this crisis which brought home to the leadership the immediate necessity of bringing about structural adjustment and economic reform.

(a) The first set of structural problems was rooted in the import- substitution-industrialisation strategy which, though necessary at the time of independence to develop an industrial base, led to, inefficiency and technological backwardness in Indian industry. The problem was accentuated by the so-called ‘licence-quota’ raj and severe restrictions on large industry through the MRTP Act. Second problem concerned the large public sector, initially envisaged to occupy the “commanding heights” of the economy, which emerged as a major source of inefficiency; excessive political and bureaucratic control, e.g., electricity boards and road transport corporations, ran at a loss and bred considerable government corruption. At the time of their creation, the capital output ratio was not a major consideration but some cases were quite egregious. A 1965 study

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showed that the public sector Heavy Electricals Ltd in Bhopal was set up with a capital output ratio of 12 : 14. Estimates for the economy as a whole show that the capital used per unit of additional output or the Incremental Capital Output Ratio (ICOR) kept rising, being a little over 2.0 during the

1st Plan and reaching 3.6 during 3rd Plan. According to one estimate, the ICOR had touched a high of 5.76 between 1971 and 1976; this explains why, despite substantial increases in the rate of investment, there was an actual decrease in the overall growth rates of aggregate output or GDP b etween the 50s and 70s. The ICOR started declining in the 80s though it remained around 4 in the 90s. Even during the 80s, one estimate shows that the (simple) average rate of financial return on employed capital in public sector enterprises was as low as 2.5%. Actually, the rate of return was much lower if the 14 petroleum enterprises were excluded as these accounted for 77% of the profits in 1989-90.

(b) The second set of constraints, becoming increasingly archaic in the rapid transformation of the global economy in the late 60s, was rooted in ‘export pessimism’ inherent in the first three Plans. The internationalisation of production’ led to massive increase in not only the world output of manufactures but, significantly, the world trade in manufactures increased at a much faster pace than the output of manufactures which was taken advantage of by the third world countries, especially the Far Eastern ones. The inward-looking Indian model became more inward and protectionist during the foreign exchange crisis of 1967 which was around the time when the East Asian Miracle, encompassing countries like South Korea, Taiwan, Singapore, Hong Kong, began. Though successful efforts were made to diversify exports, both in terms of commodity composition (e.g. the rapid shift to manufactured

exports, it being 2/3rd of total exports in 1980-81 rising to ¾ in 1989-90), the Quantitative expansion of increase in volume lagged far behind the other developing countries. The volume of India’s manufactured exports in 1980-81 was half that of China, one-third of Brazil and a quarter of South Korea. In 1980-89, China’s real GDP, by one estimate, grew at an average rate of 9.4%, considerably faster than that of India.

(c) The next set of structural problems, primarily as a result of political imperatives, was the diminution of fiscal prudence which characterised the first 25 years of independence unlike many other developing countries. This was evident in the huge subsidies to cater to various sectional demands which were becoming increasingly vocal. Food subsidies doubled between 1975-76 and 1976-77. The fertilizer subsidy multiplied ten times from 1976-77 to 1979-80. Export subsidy multiplied 4-1/2 times from 1974-75 to 1978-79. This trend became stronger in subsequent years causing the fiscal deficit to rise sharply from 4.1% of GDP in 1974-75 to 6.5% in 1979-80, 9.7% in 1984-85, peaking at 10.47% in 1991. Whilst the government expenditure increased exponentially, the savings generated by the government or the public sector kept falling with their growing losses.

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The balance of payments surplus on current account of 1.4% of GDP in 1977-78 turned into a deficit of 1.8% in 1984-85 and of 3.5% in 1990. During this period, however, there was no major external shock and, in fact, the second half of the 80s saw an actual improvement in trade balance with exports growing rapidly at an average of 14% per year in dollar terms and high growth of the economy at an annual average of 5.5%, the industry at over 7%, capital goods at 10% and consumer durables at 12%, etc. This growth, however, was a result of over-borrowing and over-spending and was, thus, debt-led. The total government (centre and state) domestic debt rose from 31.8% of GDP in 1974-75 to 45.7% in 1984-85 and 54.6% in 1989-90. The debt service ratio rose from a manageable 10.2% in 1980-81 to 35% in 1990-91. It bears noting that there was very limited foreign direct investment leading to heavy commercial short-term borrowing by the government. The sharp decline in India’s foreign exchange reserves to US$ 2.24 billion in 1990-91, enough for one month’s import cover, was further aggravated by the Iraqi invasion of Kuwait in August 1990 leading to increasing oil prices, fall in Indian exports to the Middle East and rapid withdrawal of NRI deposits. In March 1991, the government was forced to sell 20 tons of gold to the Indian Bank of Switzerland but by July 1991, the foreign exchange could cover only two weeks’ imports despite loans from the IMF.

46. B eginning of Econo m ic Reforms in 199 1 . The imminent default, faced by the minority Narasimha Rao government in June 1991, was the trigger for fundamental restructuring of the Indian economy when the present Prime Minister was the Finance Minister. The case for economic liberalisation had long been argued with the present Prime Minister stating, in the early 60s (‘India’s Export Trends’, London, 1964), that India’s export pessimism was unjustified. During the 70s, the rupee was allowed to depreciate in response to market conditions not through outright devaluation but by pegging it to a depreciating Pound Sterling. Indira Gandhi, after her return to power in 1980, tried to deregulate industrial licensing and reduction of restrictions on large ‘monopoly’ enterprises. Rajiv Gandhi, upon assumption of office in 1984, attempted reform at a relatively quicker pace towards industrial deregulation, exchange rate flexibility and partial lifting of import controls. However, the major issue of emerging macro-economic imbalance was not addressed. The pace of reforms, however, has been dependent on the extent of political vulnerability of the leadership at a particular point of time, be it the Punjab crisis during Indira Gandhi’s period, the Bofors issue during Rajiv Gandhi’s period and the Babri structure’s demolition during Narasimha Rao’s period. The impetus for economic reform has also been provided by occasions of economic crises. Factors such as the political populism, resistance of entrenched interests and ideological opposition, whether from the left or from the right, have determined the pace and the direction of economic reforms in India unlike the process of reforms in China or the former Soviet Union. In India, the replacement of the Nehruvian consensus, rooted in the political mobilisation characterising the freedom struggle, by a new consensus on economic reforms could only be a result of India’s own political dynamic which has been inclusive, if slow, and quite

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different from decision-making in a non-democratic or totalitarian society.47. P roce s s of Refor m s . The process of reforms in 1991 encompassed several steps. An immediate fiscal correction; making the exchange rate more realistically linked to the market (rupee underwent nearly 20% devaluation at the very outset); liberalisation of trade and industrial controls like freer access to imports; a considerable dismantling of the industrial licensing system and the abolition of MRTP; reform of the public sector including gradual privatisation; reform of the capital markets and the financial sector; removing a large number of restrictions on multi-national corporations and foreign investment and welcoming them, particularly foreign direct investment and so on. The process had two dimensions, i.e. lifting of internal controls and equipping the economy to participate in the globalisation process to its advantage.

48. Decl i ne i n Poverty Leve l s . On the broader economic canvas, India witnessed a significant fall in poverty levels with relatively faster economic growth of the 80s. The proportion of population below the poverty line (“poverty ratio”) fell from 51.3% in 1977-78 to 38.9% in 1987-88. China and Indonesia maintaining a faster economic growth were able to reduce their poverty ratio more dramatically from 59.5% (China) and 64.3% (Indonesia) in 1975 to 22.2% (China) and 11.4% (Indonesia) in 1995 whilst in India’s case, the figures respectively, were 54.9% in 1973-74 and 36% in 1993-94. At the same time, it needs to be mentioned that the Indian society has been more egalitarian, as expressed in terms of the Gini co-efficient, as compared to China, South-East Asia a n d even a developed country like the US. Whilst India’s initial stabilisation programme after the 1991 crisis has been extraordinarily successful causing remarkably “little suffering” in comparison to most other countries, a larger issue for the economic planners and the national leadership is the nature of impact on poverty during the transition to a higher growth path. There was a significant rise in poverty, especially rural poverty, in 1992-93 and its causation was linked mainly to a drought and fall in food-grains output in 1991-92, leading to a rise in food prices and, very weakly, to the stabilisation programme. Even so, the government’s failure in not anticipating the situation and maintaining expenditure on rural employment programme and its not refraining from cuts in the anti-poverty Social Services and Rural Development (SSRD) expenditure in 1991-92 to achieve fiscal stabilisation has been criticised even by the supporters of reform. However, all poverty indicators showed that poverty levels, both rural and urban, fell by nearly 6 percentage point in 1993-94 within one year. The improvement in the poverty situation was helped by the fact that the government increased the overall expenditure on SSRD since 1993-94 – from 7.8% of total central government expenditure in 1992-93 to an average of nearly 10% between 1993 and 1998. Real agricultural wages, which had decreased by 6.2% in 1991-92, grew in the next two years at over 5% per year and by 1993-94 surpassed the pre- reform level. After the low of 1991-92, additional employment generated in the total economy rose to 7.2 million in 1994-95, averaging about 6.3 million jobs every year between 1992-93 and 1994-95, considerably higher than the average annual increase of 4.8 million in the 80s. Moreover, inflation, which hurts the poor the most, was kept under control: from 17% in August 1991, the annual rate of inflation was brought down to

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below 5% in February 1996.49. Constraints on Growth & the Crisis of 1997-9 8 . Political compulsions seem to have hindered sustained efforts to increase public savings and reduce government expenditure and the problem of high fiscal deficits continued. The public saving-investment gap remained at an average of 7.1% of GDP in 1992-96. Subsidies for food-grains, f e r t i l i s e r s , diesel , kerosene and cooking gas remained high. According to the noted economist Hanumantha Rao, the annual subsidy on fertiliser alone amounted to nearly as much as the annual outlay on agriculture by the centre and the states put together. The oil-pool deficit (dues owed to oil companies by government which partly enabled the huge subsidy for diesel, kerosene and cooking gas) amounted to more than 50% of the cumulative deficit in 1996-97. Diversion of huge resources seriously inhibited crit ical investment in sectors which support the very same segment of the population which is the supposed beneficiary of these subsidies. The reform of the public sector had also been cosmetic and services like electricity, transport and irrigation continued at economically unviable costs. Failure to move forward on this front also impeded greater economic efficiency of production and hindered the growth of the economy due to infrastructure bottlenecks. The reform in the labour sector, especially the exit policy for loss-making enterprises, had also been ineffective. The GDP growth rate decelerated to 5% in 1997-98 from 7.8% in 1996-97. Exports, growing since liberalisation, at 20% were negative in 1998-99. Industrial growth decelerated to half the rate achieved in 1995-96. In 1998-99 (April-December), the FDI and portfolio investment declined sharply and turned negative. The other negative development was the high fiscal deficit where the primary deficit, brought down to 0.6% of GDP in 1996-97, rose to 2.4%, both for centre and the states, in 1997-98. One factor contributing to this was the selective acceptance of the 5th Pay Commission recommendations in 1997 for higher government salaries without corresponding savings suggested by the Pay Commission.

Economic Growth From 1997 Onwards And Fu ture Projections

50. 9 th Five Y e ar Plan (1997-2002) . The ave rage an n u a l GD P growth during the 9th Five Year Plan period (1997-2002) was 5.5% with agriculture, industry & services registering growth rates of 2%, 4.6% and 8.1% respectively. The Gross Domestic Savings (percentage of GDP at market prices) were 23.1%, Gross Domestic Investment (percentage of GDP at market prices) were 23.8% and Current Account Balance (percentage of GDP at market prices) was (-) 0.7%. Combined Fiscal Deficit of centre and states (percentage of GDP at market prices) was 8.8% and the rate of inflation (based on Wholesale Price Index) was 4.9%. There are several factors explaining the macro-economic indicators for this period. The productivity of agriculture had been declining throughout the 90s, especially in 1999-2001 with poor monsoons around that time. The other factors were adverse impact on the global economy in the immediate aftermath of the ‘9/11’ terrorist attack in US. The world economy, including India’s, was also affected by the oil price increase of 2000-01. In India, the other adverse factors were the negative security environment during ‘Op Parakram’ – 2002 against Pakistan, natural disasters like the Orissa cyclone and Gujarat earthquake.

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Consequently, the average growth rate during the 9th Plan at 5.6% was lower than the Plan target of 6.5% and the annual average of nearly 7% during the 8th Plan (1992-97).

51. 10 th Five Year Plan (2002-2007 ) . The macro-economic indicators for the 10th Five Year Plan (2002-2007) were stronger because of sound macro- economic fundamentals, the turn-around in US economy post-‘9/11’ and good monsoon in India. As a result, the annual average growth rate was 7% with agriculture, industry and services, registering growth rates of 1.8%, 8% and 8.9% respectively. The figures for Gross Domestic Savings, Gross Market Investment, Current Account Balance, Combined Fiscal Deficit of centre and states and the rate of inflation were 28.2%, 27.5%, (+) 0.7%, 8.4% and 4.8% respectively. Significantly, the combined fiscal deficit of the centre and state governments declined and the inflation remained moderate despite the sharp hike in international oil prices. The foreign exchange reserves remained very comfortable.

11th Five Year Plan (2007-12)

12th Five year Plan (2012-17)

52. Impact of Reform s . Although there is, now, a broad consensus in favour of economic reforms as to the consideration of FDI and FII inflows as a major driver for economic growth, the content of the reform itself is subject to political climate prevailing at a particular point of time. Whilst the consensual character of the reform process ensures its stability and irreversibility, the structure of politics also makes it slow and, at times, unpredictable as to its direction. However, the old mind-set of uncertainty and, even, of lack of self- assurance about India’s ability to find a place in the global economy have been almost totally discarded. This enables the country to take the optimum advantage of the globalisation process world-wide; conscious of the fact that it will face many more competitors from different parts of the world. India has emerged as one of the most attractive capital markets (42% compound annual growth of the Sensex in the last four years) which, however, are still lacking in depth and remain highly vulnerable to a few big players, especially FIIs, and to fluctuations in global markets. With corporate profitability annually growing at 25% since 2003, equities are drawing greater investment than fixed return instruments like Public Provident Fund (PPF) and National Savings Certificates (NSCs). Currently, Indian manufacturers are drawing money from profit growth rather than sales growth, are able to export to the western markets due to both quality and cost advantages and have acquired the credibility for raising funds for foreign acquisitions. They are however showing no growth in contribution to technology and processing. However, Indian exports are coming from skill-intensive manufacturing as against the largely volume-driven unremarkable Chinese exports. In agriculture, a crisis needs to be addressed with productivity levels going down in the 90s, due to lack of public investment in important crops, including rice and wheat, even though dairy farming, poultry and fisheries can be counted as success stories. The agriculture work-force comprises nearly 50% labourers today as compared to 25% in 1951. The transformation of the Services sector has meant that cost and quality of services are

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getting better for the consumers, e.g. telephone, travel, etc. It has also meant that increased participation of foreign multinationals, due to better efficiency, own large-even controlling, shares in key sectors like banking, insurance and telecom. In infrastructure, telecom is a success story of economic reforms but it, still, covers only 42% of the population; the power offers a contrasting example with national average for access being 56% (44% in rural areas) and loss in transmission at 33% is higher than Cameroon and Nicaragua. The aviation sector has succeeded in achieving low fares but the reform process has not, yet, settled the issue of supportive infrastructure; and, the impact of reforms process on railways, ports and highways is minimal at best despite their projected investment requirement of US$ 320 billion. Although a strong NGO movement, local community action and judicial activism have made a difference to the quality of environment and forest resources. Sustainability of economic growth, especially in terms of the deteriorating water resources, remains a major challenge to the polity and to the mechanisms of service delivery in urban and rural areas. Putting governance at the heart of the development process, an UNDP report says that India’s economic growth would jump 1.5% and FDI by 12% if corruption came down to the Scandinavian levels.

53. I n dia and t h e In t ern a tio n al Tra d e E n viro n m e n t . With the end of the Cold War, the old system of multi-lateral trading, General Agreement on Tariffs and Trade (GATT), evolved into the World Trade Organisation (WTO) in January 1995. Following the conclusion of the Uruguay Round negotiations; the multi-lateral rules and disciplines were extended to trade in services, trade in knowledge (intellectual property rights) and a separate agreement was concluded on agricultural products. As a founder member of WTO, India expects to benefit from non-discrimination in the form of national treatment and the Most Favoured Nation (MFN) treatment to India’s exports in the markets of other WTO member- countries. A Dispute Settlement Mechanism (DSM) in WTO ensures that due benefits accrue under the WTO rules to a member country or, alternately, to allow it to legitimately resort to anti-dumping or countervailing duty measures, if vindicated in the DSM process. Successive conferences have enlarged the trade and deve lopment a g e n d a fo r the member coun t r i e s . Whilst the Singapore Ministerial Conference (9-13 December, 1996) addressed issues such as information technology agreement and trade and investment, the Doha Ministerial (9-14 November, 2001) addressed issues relating to agriculture, services and intellectual property rights. The issues having direct implications for India’s economic growth and trade are TRIPS (Trade Related Aspects of Intellectual Property Rights) and public health, implementation issues, elimination of export subsidies in developed countries and differential treatment in agricultural subsidies in developing countries including food security and rural development, services (especially the issue of movement of natural persons), market access for non-agricultural products (reduction/elimination of tariff peaks, high tariffs and tariff escalation on products of export interest to developing countries), implementation and procedural aspects of anti dumping and subsidies’ agreement for elimination of arbitrary use of anti-dumping mechanisms, clarifications on d i s p u t e settlement understanding, trade environment issues (effect of environmental measures on market access and TRIPS issues),

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the Singapore issues on trade and investment and the WTO and core labour standards. These negotiations have entailed constructive participation by India and other key developing countries for liberalisation of international trade regime and protection of the interests of developing countries. At the Cancun (10-14 September, 2003) and the Hong Kong (13-18 December, 2005) Ministerial, no agreement could be concluded due to the reluctance of the developed countries to reduce their agricultural subsidies. It is significant that, during the course of the negotiations from 1995 onwards, India and other key developing countries have been able to successfully resist the attempt of the developed countries to front-load their agenda at the cost of the interests of the developing countr ies . Although, the international trade regime has become somewhat liberal in the 90s as evident in the expansion of global trade, significant advances need to be made for a more equitable and trade-facilitating international regime.

54. Whilst continuing its efforts in bringing the Doha Round to a successful conclusion, India has been, simultaneously, engaged with its major trade partners for beneficial regional and bilateral trade arrangements. On 1 July, 2006, the South Asian Free Trade Area Agreement (SAFTA) was launched following its ratification by the SAARC member-countries. Although there has been slow progress in the development of a regional market, not least as a result of Pakistan not granting India the MFN status, SAFTA is expected to benefit all regional economies and to pave the way for a prospective economic union; India’s exports to the member countries were at US$ 4.15 billion in 2003-04 registering an increase of 52.29% over the previous year and its imports from them were US$ 671 million in the same year registering an increase of 30.64% over the previous year. Trade liberalisation has also been attempted in the region through bilateral Free Trade Agreements (FTAs) such as between India-Sri Lanka, besides India- Bhutan and India-Nepal. Several new bilateral FTAs between other South Asian countries and South East Asian countries are being progressed.

55. Alternate Scenarios of India’s Futur e . A World E c o n o m i c Forum- Confederation of Indian Industry joint study, ‘India and the World: Scenarios to 2025,’ (2005), based on series of workshops in India, London and Davos, on alternate scenarios of India’s future, identified six drivers for economic growth: a) favourable demographics, b) a large pool of low cost, skilled labour, c) entrepreneurial, indigenous companies, d) continuing economic reforms and global integration, e) a stable political regime and democracy, and f) a record of high, sustained growth rates. Investment focus on poverty alleviation, agriculture and rural development, healthcare, access to education, overcoming infrastructure constraints and on effective governance would lead to, according to Oxford Economic Forecasting, close to 10% annual growth by 2020 which would be the highest in the world. An export-led growth is to be followed by well-developed domestic market to withstand the negative effects of a global slowdown around 2015. A less favourable scenario envisages unbalanced growth – strong performance in a few select sectors but weak rural economy – leading to the slowdown of the growth rate by 2020 to around 7%. The worst case scenario is a variant of the less favourable one which is compounded by a lack-lustre world economy leading to a growth rate of 5% and declining further. Clearly, the key factors are the performance of the drivers

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identified above.CHAPTER – 4

ENERGY SECURITY AND PROSPECTS – A CRITICAL ANALYSIS

56. India's energy security has come under an alarming pressure from rising dependence on imported oil, regulatory uncertainty and opaque gas pricing policies.

Supply issue

57. “Small pool of skilled manpower and poorly developed upstream infrastructure and dependence on fossil fuels are other factors impacting energy security,” says a report by FICCI and Ernst & Young. There is a dire need to address the supply issue through a slew of policy reforms, as well as to launch a massive awareness campaign on the demand side management, and the pricing of products, so as to incentivise investments for raising domestic production.

Oil price hike

58. According to the Integrated Energy Policy of the Government, the country's requirement of primary commercial energy is projected to increase from 551 million tonne of oil equivalent in current financial year to 1,823 mt of oil equivalent in 2031-32.

59. The increase in oil price by $10 a barrel could potentially slow the GDP growth by 0.2 per cent and may inflate the current account deficit by 0.4 per cent.

Gas demand

60. The recent depreciation of the rupee has raised the crude oil imports costs, impacting trade deficit and domestic inflation. Notably, the import of crude oil and oil products rose from $50.3 billion in 2005-06 to $115.9 billion in 2010-11.

61. In the current financial year (till October 2012), oil imports touched $75 billion. Around 32 per cent of demand for gas in the country is unmet. Most of the gas production and liquefied natural gas (LNG) terminals were located in the western part of the country, adversely impacting the availability of gas in the rest of the country.

62. Over the next few years, the availability of gas is likely to increase on the back of incremental supplies from the KG-D6 block, as well as from the new gas fields of ONGC and Gujarat State Petroleum, coal-bed methane (CBM) and new LNG facilities. In spite of the increase in supplies, shortages are likely to persist due to significant latent demand and overall growth in demand for gas in the country.

Further notes are available in the Approach Paper on 12th Five Year Plan at Appendix –II.

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CHAPTER – 5

FOREIGN DIRECT INVESTMENT (FDI) AND ECONOMIC DEVELOPMENT

63. The last two decades of the twentieth century witnessed a dramatic flow of foreign investment into developing economies, indicating that encouragement of foreign investment has become an integral part of the economic reforms process of these economies. As against a highly suspicious attitude of these countries towards inward foreign direct investment (FDI) in the past, most countries now regard FDI as beneficial for their development efforts and compete with each other to attract it. The explanation for this shift in attitude lies in the changes in political and economic systems that have occurred during the closing years of the 20th century. Developing countries now compete with each other to attract FDI as they see it as a strategic instrument of development policy. FDI is believed to play an important role in the long-term economic development of a country by augmenting availability of capital, enhancing competitiveness of domestic economy through transfer of technology, strengthening infrastructure, raising productivity, boosting exports and generating new employment opportunities. FDI flows are usually preferred over other forms of external finance because they are non-debt creating and less volatile.

64. In the wake of economic liberalization policy initiated in 1991, the Government of India has taken several measures to encourage FDI in almost all sectors of the economy. In particular, the emphasis has been on FDI inflows in the development of infrastructure, technological upgradation of Indian industry and projects having the potential for generating employment on a large scale. The Government has put in place a liberal and transparent foreign investment regime where most activities are opened to foreign investment on an automatic route.

65. Over the past few years, India has become an attractive destination for foreign investment owing to its large and rapidly growing consumer market, a developed commercial banking network, a vast reservoir of skilled and low-cost manpower, and a package of fiscal incentives for foreign investors. Despite the fact that India has strong macroeconomic fundamentals, a liberal FDI regime amongst developing economies and a strategic location with access to a vast domestic and South Asian market, its share in world’s total flow of FDI to developing countries is dismally low. Countries such as China, Singapore, Indonesia and Thailand attract greater amounts of FDI than India. Many of these countries have a more business-friendly environment as compared to India. Some of the deterrents to FDI inflows in India include bureaucratic controls and procedures, infrastructural bottlenecks, outmoded labour laws and a less business-oriented image. Consequently, India is not able to attract a sizeable proportion of FDI flowing to the developing nations. Infrastructure and exports, the key drivers of productivity enhancement and economic growth, face serious investment constraints. More open and liberal policies for investment in these sectors can attract foreign investors who have easier access to capital resources and global

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expertise. Other measures that can be taken for FDI promotion include simplification and modernization of laws, rules and regulations, introduction of modern and professional regulatory systems and improving India’s image as a successful FDI destination.

66. In their efforts to remove impediments to FDI, the Government has also taken several measures to ensure that its tax system is internationally competitive. To stimulate economic growth and encourage investment for industrial development, the Indian government has offered several tax concessions to foreign investors from time to time such as tax holidays for 100 per cent export oriented undertakings, tax concessions in backward areas and those relating to research and development. While considerable steps have been taken to make the tax environment conducive, still a lot needs to be done in terms of making our tax system competitive with other developing nations.

67. Apart from the above policy changes, an attitudinal change towards FDI is required. Although India’s presence has improved significantly in the international investors’ radar screen in recent years, there is still a long way to go. This is especially true in respect of a number of sectors in which India’s requirements may be at variance with international investor perceptions. The need of the hour is to improve investment climate in general.

68. Conclu d ing Obser v atio n s on In d ia’s De v elo p ment E x perie n c e . The enterprise of nation-building that India has been engaged in is truly unique for the values under-pinning its political mobilisation before independence, which provided the sinews to the post-independence political and administrative institutions to successfully cope with the challenges of a cataclysmic partition and of the transformation of a colonised economy into a modern one; and, this has implications for our study of India’s likely future in the new Millennium. Unlike many developing countries, the Indian polity has demonstrated the capacity for handling the transitions to successive stages of developmental challenges and radical changes in international circumstances without destabilising internal disruptions. Besides the partition, one can mention, amongst these challenges, the Green Revolution, the computer revolution in the mid-80s (which prepared the ground for the IT revolution of the 90s) and economic restructuring in the era of globalisation. In the last instance, India is re- writing the script of globalisation far beyond the imagination of its original articulators. This betokens a high institutional maturity, capacity and resilience. Equally significantly, starting as a highly unequal, colonised society at independence, India has been able to bridge its socio-economic disparities in a large measure so much so that the World Bank has described India as less unequal in 2005, as measured by the Gini co-efficient, than China, Brazil and the US. According to some other statistics, it is also less unequal than the ASEAN, African and Latin American countries.

69. At the same time, some other conclusions, based on our post-independence development also seem inescapable. Our major transformational endeavours have been driven by a preceding crisis. The Green Revolution was carried out in rather

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dramatic circumstances created by severe drought and an economic crisis; the launching of the 1991 reform process was preceded by financial bankruptcy. This is indicative of an institutional reflex which appears unable to implement sustained policy packages calibrated to early intimations of developing imbalances but is reactive to a crisis which simply gets out of hand. Further, various internal crises have also interrupted the economic reform process in the country, be it the Punjab crisis during Smt. Gandhi’s time, the Bofors controversy, the Babri structure demolition crisis or, even, the second half of various governments’ tenures when the elections loom on the horizon. Could our past policy vacillations have been minimized to spare the society the attendant human costs? This touches the heart of the process of governance practices and politics, our policy formulation capabilities and the delivery mechanisms for the policy packages at the grass-roots where it matters most.

70. These issues would come into sharper focus as we argue and live the liberalisation debate in the country. Even though considerable synergies have been generated, the current economic growth is largely driven by FDI. The role of FDI as a key driver in our economic growth is dependent on several extraneous factors such as global macro-economic balances, investment environment in India vis-à-vis other competing countries and its over-all volatility. Is the current surge in FDI leading to overheating and over-valuation of stocks? Of late, the volatility of the stocks has increased due to extraneous stimuli even though the Sensex is going through the roof. Apart from the macro- economic imbalances, the performance of other economies will impact on us more directly than hitherto. If the Chinese economy crash lands, it would have direct impact on the Indian economy. As the Indian economy globalises, the issues of systemic ability, as it obtains today, to manage widening socio- economic inequality in our diverse country would get even more hotly debated – not to mention the effects of the environmental costs. How easy or difficult would be the issue of recourse to regulatory authorities to manage our economic modernisation and of the regulation of regulatory authorities? How would globalisation help in creating an economy making the optimal and cost-efficient use of our assets given the cyclical nature of global economic dynamics of which we are, increasingly and rapidly, becoming a part? Finding socially harmonious answers by the political and bureaucratic leaderships to these issues would be critical to the survival of our nation’s economy.

CHAPTER - 6

POWER SECTOR IN INDIA

Introduction

Power Sector in India is at a crucial juncture of its evolution from a controlled environment to a competitive, market driven regime which endeavours to provide affordable, reliable and quality power at reasonable prices to all sectors of the

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economy. The Gross Domestic Product (GDP) of our country has been growing at the rate of about 8 per cent for the last several years. The liberalization and globalization of the economy is leading to an increased tempo in industrial and commercial activities and this, coupled with penetration of technology and I.T. in the day-to-day life of the common man, is expected to result in a high growth in power demand. It is accordingly essential that development of the Power Sector shall be commensurate with the overall economic growth of the nation.

71. The Indian power sector is one of the most diversified in the world. Sources for power generation range from commercial sources like coal, lignite, natural gas, oil, hydro and nuclear power to other viable non-conventional sources like wind, solar and agriculture and domestic waste. The demand for electricity in the country has been growing at a rapid rate and is expected to grow further in the years to come. In order to meet the increasing requirement of electricity, massive addition to the installed generating capacity in the country is required. While planning the capacity addition programme, the overall objective of sustainable development has been kept in mind. Since its structured growth post-independence, Indian power sector has made substantial progress both in terms of enhancing power generation and in making available power to widely distributed geographical boundaries.

72. Over the past 60 years or so, India has taken rapid strides in the development of the power sector both in terms of enhancing power generation as well as in making power available to widely distributed geographical boundaries. In order to meet the increasing demand for electricity, to fuel the economic growth of the country, large additions to the installed generating capacity and development of associated transmission and distribution network are required. However this developmental process has to be within the realms of sustainable development and environmental concerns.

73. During the past, the power sector was perceived to be riddled with some fundamental weaknesses, which necessitated initiation of the reform process in the sector. Even though a number of policy initiatives have been put in place, the task of transforming the power sector is yet to be achieved. Our endeavour is to realise the stipulations of the electricity act 2003 as well as various policies of the government and to ensure fructification of their intended benefits. Further, lifeline energy needs of all households must be met. therefore, it has been the vision and the constant effort of the government, to not only increase the generation of power in the country but also to ensure that power reaches all people with particular attention to the poor and vulnerable sections of the society.

74. The mission of the government is to provide quality power to all at reasonable rates. The enactment of the electricity act in June 2003 was a major milestone, which paved the way for development of the power sector within a competitive and liberal framework while protecting the interests of the consumers, as well as creating conducive environment for attracting investments in the sector. The national electricity policy and the national tariff policy were finalized by the government to steer the evolution of the power sector within the ambit of the act. However, while

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traversing the developmental path, need has been felt to review certain aspects of the electricity act and the government’s policies. This is essential in order to make the government’s objectives achievable in accordance with the stipulated intentions, within the boundaries of the institutional and financial viability. The power sector cannot deliver on its social commitments unless it is commercially and financially viable. To improve the financial health of the distribution utilities, measures are required to strengthen governance standards of DISCOMS, tariff rationalization and optimising the procurement cost of power.

75. As a responsible nation, a two pronged strategy has been adopted whereby on one hand, continuous efforts are being made to augment the supply of clean and green power, and on the other, emphasizing the need for demand side management and energy efficiency measures. Energy efficiency and demand side management has assumed great importance in view of the need to conserve depleting energy resources as well as to minimize the carbon footprint of the power sector.

Indian power sector in the current perspective

76. Currently, India has the fifth largest power system in the world, with an installed electricity capacity of over 2,29,251 mw as on 31.10.2013. Electricity generation is mainly comprised of thermal, hydro, renewable and nuclear source. India’s electricity mix comprises of 68 per cent thermal, 18 per cent hydro, 12 per cent renewable & 2 per cent nuclear energy.

Plan-wise Growth in Generation Capacity

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77. Plan-wise Growth in Generation Capacity vs Targets

Five Year Plan Target (MW) Achievement (MW)

Installed capacity (MW)

Per Capita Consumption

(KWH)1s (1951-56) 1300 1100 2886 30.9

2nd (1956-61) 3500 2250 4653 45.9

3rd (1961-66) 1040 4520 9027 73.9

4th (1969-74) 9264 4519 16664 126.2

5th (1974-79) 12499 10202 26680 171.6

6th (1980-85) 19666 14226 42585 228.7

7th (1985-90) 22245 21401 63636 329.2

8th (1992-97) 30533 16423 85795 464.6

9th (1997-02) 40245 19015 105046 559.2

10th(2002-07) 41110 21130 132329 671.9

11th(2007-12) 78000 54964 199877 884

T&D Loss – World Scenario

*Source: CEA report - growth of electricity sector in India from 1947-2012

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Cost of Supply vs Revenue Realised

Critical Issues

78. In view of the emerging developments, some of the critical issues / risk factors pertaining to the sector are as follows :

Issues pertaining to thermal projects

Availability of power equipment / epc players : there are constraints pertaining to availability of power equipment as also the availability of quality epc players to cater to the requirements of increasing number of thermal power generation projects. Despite the ongoing thrust on domestic capacity addition be the domestic power equipment industry, the reliance on equipment imports is likely to continue in the medium term. Thus the development in domestic power equipment industry and availability of quality epc players will remain crucial for the timely implementation of power projects while meeting the quality and servicing / spare part requirements.

Coal shortages and environmental issues power generation companies have been procuring coal under coal linkages / fuel supply agreements with coal india ltd, captive mine blocks and through imports. However, domestic coal based generation plants have been experiencing coal supply constraints and have lost generation due to coal shortages on account of factors such as constrained supplies by coal india limited (which accounts for 85% of domestic coal supplies) and lack of progress in captive coal mining. Thus the country’s dependence on coal imports has been rising in the recent past.

Gas supply constraints: based on demand supply analysis, while the domestic gas supplies are projected to increase, the country is expected to remain dependent on lng imports to meet the growing demand by end user industries. Gas prices in the future are expected to witness an upward trend due to increase in exploration costs from difficult fields in the country as also

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increase in the proportion of costly lng imports. For the 12th plan period, in view of the expected substantial supply constraints expected, domestic gas would be allocated to meet only 60% of the total gas requirements of all power projects. The gas for the balance capacity would have to be tied through imports or retail contracts.

Competitively bid generation projects : the inherent risk profile of competitive bid projects exceed those of cost plus tariff structure. The levellised cost of competitive bid projects is essentially a function of the risks pertaining to market, technology, construction, fuel and regulatory factors faced by each option (technology / fuel) for generating electricity. The ability of the generating companies to pass through the fluctuation in fuel prices depends on whether such fuel price fluctuations are captured by the relevant index in levellised tariff formulae as quoted during bidding vis –a – vis the escalation rates as notified by central electricity regulatory commission (cerc) from time to time. In case fuel costs are not pass through (where the bidder quoted firm tariff for every year during the contract), the returns from the project may fluctuate considerably depending on the portion of the power being sold in the short – term market. Thus the returns would depend on the bidding strategy adopted by the ipp and the ability to keep the costs (both operating and capital) within the bid levels.

Challenges in hydro power projects : hydro power projects are expected to face risks on account of factors such as environmental delay / cancellation of environmental clearances, delays in land acquisition, poor infrastructure, tunnelling delays, geological surprises, contractual and procurement issues, shortage of skilled man power, difficulties in evacuation of power, etc. Hydro power projects are also increasingly becoming prone to hydrology risks.

Evacuation Issues : in recent times, there have been problems pertaining to

evacuation of power in case of generation projects who are unable to identify beneficiaries / tie up transmission through bulk power transmission agreements (BPTAs) leading to uncertainty in planning / investment in transmission line augmentation (associated transmission system) by transmission utilities / licensees. Also, there have been difficulties for evacuating power in case of small-hydro / renewable energy projects which are often located in remote / difficult state regulatory commissions on the issue of interconnection of renewable/non-firm power to the grid). Going forward, interstate transmission planning and evacuation is expected to happened in a planned/coordinated and scientific manner which, however, may witness difficulties at intra-state level due to lack of upgradation of transmission/distribution network/infrastructure in the respective states. While larges interstate projects may comfortably connect to the nearest interstate interconnection point, small and renewable energy projects which rely on respective state transmission utilities for evacuation may face difficulties due to different policies in respective states.

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Distribution Issues: Aggregate Technical & Commercial (AT&C) losses are likely to remain a source of concern for the state sector distribution companies, thus leading to continued dependence on subsidies / grant from the respective state governments, as also resulting in frequent hikes in retail tariffs. Financial health of state DISCOMS will continue to remain fragile with continued reliance on growing subsidies and likely shift of lucrative consumers through open access. Thirteenth finance commission (TFC) has in its recommendation to the GoI, pointed out that even better performing states need a minimum of 7% increase in tariff on an annual basis (at 2007-08 subsidy levels), to bridge the gap between actual receipts and government subsidy. TFC has pointed out that requirement to hike the tariff in poorly performing state could be as high as 19% per annum which could be difficult to achieve. TFC, in its projection has pointed out that net losses of state transmission and distribution utilities are expected to rise from Rs. 68, 643 crore in fy 2011 to rs. 1,16,089 crore in 2014-15 if immediate steps are not taken to reform the utilities.

Outlook

79. The power sector is endeavouring to meet the challenge of providing adequate power needed to fuel the growing economy of the country. However, this growth of the power sector has to be within the realms of the principles of sustainable development. A low carbon growth strategy has been adopted in the planning process and highest priority is accorded to development of generation based on renewable energy sources. Thrust is also accorded to maximizing efficiency in the entire electricity chain, which has the duel advantage of conserving scarce resources and minimizing the effect on the environment. Draft amendments to the electricity act, 2003 is being expedited to enable further improvement in grid security, efficiency of distribution sector through separation of carriage and content, rationalization of tariff etc.

80. Despite the efforts being made to ramp up the generation capacity, the country may witness slippages in capacity addition on account of various emerging challenges leading to continued deficit scenario in the medium term (according to estimates by CEA / ICRA, the peak and energy deficit are projected to the 12 per cent and 6 per cent respectively by the end of twelfth plan period, while Crisil has projected a reduction in peak deficit to a level of 4 per cent by fy2015). While the importance of renewable energy projects is expected to increase, minimization of AT & C losses and effective demand management will remain critical for sustainable growth of the sector. While the externalities and constraints in transmission / distribution components particularly at state level would continue to persist, the ongoing regulatory developments is expected to create an hybrid power market (comprising of long term contracted power and short term market) in the medium term.

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CHAPTER- 7

URBANISATION IN INDIA: TRENDS, ISSUES AND CHALLENGES

“Urbanisation is a process of switch from spread out patterns of human settlements to one of concentration in urban centres. It is a finite process ... a cycle through which nations pass as they evolve from agrarian to industrial society”

– Kingsley Davis

Introduction

81. Urbanization and Economic Growth. Urbanisation is an increase in population and economic activities in the urban areas which leads to further development of towns and urban agglomerations to contain this rising population. It is a cause and effect relationship of heightened economic progress in a region. Though migration is the key factor, other aspects such as the demand for economic employment, better educational opportunities, health facilities and higher standard of living act as major propellants contributing to the upward trend in urbanisation.

Census data shows that India’s urban population has grown from 290 million in 2001 to 377 million in 2011, which accounts for over 30 percent of the country’s population. The number of urban cities and towns has also increased from 5,161 in 2001 to 7,935 in 2011. The number of 1 million plus cities has grown from 35 in 2001 to 53 in 2011.

Report of the High Power Executive Committee (2011) estimated that by 2031, India will have more than 87 metropolitan areas and the country’s urban population is likely to soar to over 600 million, adding about 225 million people to present urban population. This pace and scale of urbanization is unprecedented for India and will be the fastest in the world outside of China.

The population growth of urban India is mainly organic, together with reclassification of rural areas and expansion of city boundaries. According to the High Powered Expert Committee 2011, direct migration to urban areas accounts for 20 to 25 percent of the increase in urban population.

82. This transition will place cities and towns at the centre of India’s development trajectory. In the coming decades, the urban sector will play a critical role in the structural transformation of the Indian economy and in sustaining the higher rate of economic growth. Ensuring high quality public services for the population in the cities and towns of India is an end in itself, but it will also facilitate the full realization of India’s economic potential.

Urbanization has shown significant positive linkages for economic growth. Urban India accounted for 62 to 63 percent of the country’s GDP in 2009–10. This growth in urban areas also creates opportunities for the rural economy and helps improve its productivity, especially in rural areas adjacent to urban centres.

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83. While the true scale of urbanization is yet to unfold, Indian cities are struggling at the current levels. Quality of life in our cities is poor as the majority of citizens find it difficult to avail the sustainable livelihood opportunities and basic services. For example 24 percent of the urban population lives in slums and many slum dwellers do not have access to basic sanitation facilities and potable water. The share of public transport in India is only 22 percent and share of buses was only 1.1 percent of total registered vehicles in 2001. Unfortunately, the lack of suitable livelihood opportunities further deteriorates the quality of life for many, including the physically challenged, e.g. 26 percent of the urban population lived below the monthly consumption of Rs. 539 in 2004–05.

84. Definition of Urbanization varies from person to person and region to region, however, the true essence of urbanization is the rapid growth of population in the urban areas and economic activities which bring about more development of towns. Migration from rural to urban areas is an important factor for urbanization. Usually, there are better facilities for health, education, employment and higher standard of living in the urban areas in comparison with rural areas and this is another impact in the urbanization.

85. Trends and patterns of urbanization in India. Urbanization is measured by two ways: First, level and growth of urban share of total population and its distribution by size classes of cities and towns. This is called demographic approach. Second, changes in number and growth of urban centres and an expansion of geographical boundaries of existing urban areas. This is called geographical approach.

Demographic approach

Table 1 shows that the annual exponential growth rate of urban population has increased from 3.23 percent during 1961-71 to 3.79 percent during 1971-81, but declined to 2.75 percent during 1991-2001. The decline in growth rate was slightly reversed back during 2001-2011. During the same period, the share of urban population in the total increased from 17.97 percent in 1961 to 31.16 percent in 2011. This indicates that an increasing trend of India’s urbanization over the decades.

Table 1: Trends in India’s urbanization: 1961-2011

Note: As the 1981 Census was not conducted in Assam, and the 1991 Census was not held in Jammu and Kashmir, the population of India includes projected figures for these states in those periods. Source: Bhagat (2011).

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As per the World Urbanization Prospects: 2011 Revision, the percentage of total urban population in India is 30.9 in 2010, which is lower than the developed countries like the United States of America (82.1 per cent) and Japan (90.5 percent) during the same year. It is also lower than in other fast growing developing countries, such as, China (49.2 per cent), Brazil (84.3), and Russian Federation (73.7 per cent) in 2010.

Figure 1 illustrates that India’s urban population is mainly concentrated in and around class I cities. The percentage share of urban population in class I cities has increased from 51.42 in 1961 to 68.7 in 2001. On the other hand, classes II to VI cities have registered a decreasing rate of urban population growth (percentage). For instance, the percentage share of urban population in class IV cities decreased from 12.77 in 1961 to 6.84 in 2001.

86. Geographic Approach. Table 2 shows that the number of Census towns increased from 1362 in 2001 to 3894 in 2011 – an increase of about 186 percent. On the other hand, the number of statutory towns registered a marginal increase of about 6.37 percent during 2001-2011. The number of urban agglomerations has increased from 384 in 2001 to 475 in 2011, an increase of about 23.7 percent. The results indicate an increasing trend of number of urban agglomerations (UAs) /towns and out growths (OGs) from 2001 to 2011.

Table 2: Number of UAs/Towns and out growths

Notes : The following definitions are based on Census of India 2011.

1. All places within a municipality, corporation, cantonment board or notified town area committee, etc. are reckoned as Statutory Towns).

2. All other places which satisfied the following criteria (known as Census Town):

2.1 A minimum population of 5,000

2.2 At least 75 per cent of the male main workers engaged in non-agricultural pursuits; and

2.3 A density of population of at least 400 per sq. km.

3. An urban agglomeration is a continuous urban spread constituting a town and its adjoining outgrowths (OGs), or two or more physically contiguous towns together with or without outgrowths of such towns.

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4. An outgrowth is a viable unit such as a village or a hamlet or an enumeration block made up of such village or hamlet and clearly identifiable in terms of its boundaries and location.

87. The total area of All Classes of cities and towns increased from 38509.28 square kilometers in 1961 to 78199.66 square kilometers in 2001. On the other hand, total area of Class I cities increased from 8174.29 square kilometers in 1961 to 30984.69 square kilometers in 2001. The table also highlights some interesting trends of CAGR of urban area, and shows that the total area of cities and towns of All Classes increased from 1.19 percent during 1961-1971 to 2.05 percent during 1991-2001. On the contrary, though CAGR of total area of Class I cities increased from 3.64 percent during 1961-71 to 3.92 percent during 1971-81, it declined to 2.58 percent during 1991-2001. The results show an increasing trend of India’s urban growth over the decades.

88. According to 2001 census, the net addition was 546 new towns i.e., an increase of 11.83 percent during 1991-2001. The highest increase is evident in class III towns, where the number of towns increased from 517 to 1387 during 1961-2001. The number of cities (or class I towns) has risen from 105 in 1961 to 441 in 2001. The number of towns in class I to class V has been steadily rising since 1961. The total number of metropolitan cities (population 1 million and above) in India has increased from 23 in 1991 to 35 in 2001 and on to 53 by 2011. In addition, the number of towns has increased from 2657 in 1961 to 7935 in 2011. The results indicate an increasing trend in the addition of new cities/ towns in India.

CHAPTER – 8

CAPITAL MARKET AND ECONOMIC DEVELOPMENT

Historical Background

89. The history of evolution of Indian capital market dates back to nineteenth century when the stock exchange as an institution started evolving in India. At the time of independence (1947) India had 7 stock exchanges and 1,119 listed companies. Based on the equity market capitalization as on December, 2011 Bombay stock exchange is the 6th largest stock exchange in Asia and 14th in the world. As on the same date with same criteria national stock exchange, the other major stock exchange in India is the raked 16th largest stock exchange in the world. The fact that the number of listed companies on Bombay stock exchange has gone up from 1,119 at the time of independence to 5133 in December, 2011 with the number of stock exchange also going up from 6 to 19 during the corresponding period shows that Indian securities market has covered a long journey since independence. Presence of SEBI registered market intermediaries like 8922 brokers (cash-segment), 823 depositories participants, 199 merchant bankers, 74 registrars to an issue and share transfer agents, 51 mutual funds and 1767 foreign institutional investors (fii), etc. During the period between April, 2011 and December, 2011 further shows the level of depth achieved by the Indian securities market over time.

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Role of capital market

90. The transition from being a private company to a public one is one of the most important decisions to be taken by the management in the life of a firm. It is also of particular interest for all class of investors, including institutional investors, qualified institutional borrowers (QIBs) and retail investors and the transition is facilitated through capital market. The capital market provides a fresh source of capital that is critical to the growth of a company and provides the founder/promoters and other shareholders, a liquid market for their share. From an investor’s perspective, participation in capital market through various instruments offered in the primary market segment [initial public offerings (IPOs), right issues and further public offerings (FPOs)] and secondary market trading of listed shares on stock exchanges provide an opportunity to share in the rewards of the growth of firm. It is, therefore, important that the quality of the market in terms of its efficiency, enhanced transparency, price discovery process, etc., is brought at par with the international standards so as to inculcate a fair degree of confidence among the investors in the market.

91. In 1980s and 1990s, there was an increasing realisation on the part of the policy planners in India that an efficient and well developed capital market is essential for sustained growth in an emerging market economy like India. The capital market fosters economic growth by promoting channelisation of real savings for capital formation and raises productivity of investment by improving allocation of investable funds. However, it is quality of the market which determines effectiveness of this mechanism for capital flow. Accordingly, with the view to improve the quality of the market in terms of market efficiency, transparency, price discovery process, preventive unfair trade practices etc., and bringing the market up to the international standards, a package of reforms comprising of measures to liberalise, regulate and develop the Indian capital market are being implemented since early 1990s.

92. Extensive reforms have since been taken in the Indian capital market, inter alia covering reforms in the legislative framework, trading mechanisms, institutional support, etc. These reforms were all the more desirable because the Indian market was plagued by relative inefficiency in the trading mechanisms and regulatory gaps. In particular, the Indian capital market was characterised by excessive government control inefficient trading mechanisms through open out-cry, settlement of transactions by physical movement of papers, instances of manipulation on the secondary market price of the shares of the target company and non-existence of derivative market for hedging and speculation. Some of the major milestone in the history of capital markets reforms in India, inter-alia, include repeal of capital issues (control) act, 1947, establishment of securities market regulator i.e. Securities and exchange board of India (SEBI), introducing disclosure & investor protection (dip) guidelines moving the market from merit based to disclosure based regulation, screen based trading, etc. Some of the initiative taken for effectively managing market risk and for protecting its integrity, inter-alia, included introduction of t+2 settlement cycle, dematerialisation of shares, enactment of depositories act, 1996, amendment to the securities contracts (regulation) act to expand the definition of “securities” to include derivatives and to provide legal framework for trading of securitised debt,

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setting up of clearing corporations for assuming counter-party risk, setting up of trade and settlement guarantee funds, introduction of grading of IPOs to help retail investors assessing the fundamentals of the company, etc.

Trends in the Primary Market

93. As a result of the reforms initiated by the government of India, primary market1

(including IPOs) started emerging as one of the major source of funds for Indian companies as well as an important avenue for retail investors to channelise their savings for higher return as indicated in the table below:

Primary market trends (in ` crore)

Year /

month

Category wise Issue type

Total Public Rights Listed Ipos

No.

of

issues

Amoun

t

No. of

issues

Amount No. of

issues

Amount No. of

issues

Amount No. of

issues

Amount

2002-03 26 4070 14 3639 12 432 20 3032 6 1039

2003-04 57 23272 35 22265 22 1007 36 19838 21 3434

2004-05 60 28256 34 24640 26 3616 37 14507 23 13749

2005-06 139 27382 103 23294 36 4088 60 16446 79 10936

2006-07 124 33508 85 29797 39 3710 47 5002 77 28504

2007-08 124 87029 92 54,511 32 32,518 39 44434 85 42,595

2008-09 47 16220 22 3583 25 12638 26 14138 21 2082

2009-10 76 57555 47 49236 29 8319 37 32859 39 24696

2010-11 91 67609 68 58105 23 9503 38 32049 53 35559

2011-12 71 48480 55 46105 16 2375 37 42576 34 5903

1 Primary market in India includes public issues as well as right issues. Public issues cover both IPOs and listed issues.

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It is observed from the above table that Indian market exhibited a rising trend up to 2007-08. Thereafter, the market started declining on account of global economic crises. The effect of global economic prices is reflected in terms of decline in the ipo activities during 2008-09 and 2009-10. Then, there was a recovery period of one year when the number of IPO issues as well as amount went up in 2010-11. However, the subdued IPO market of 2011-12 can be regarded as the fall-out of impact of euro zone crises on the India growth story.

94. The details of the share of different categories of issues (IPOs, FPOs, and rights) in the total resources mobilised since 2001-02 is provided in the figure below. It is observed from the figure that the share of IPOs which was 15.9% in 2001-02 went upto 48.7% in 2004-05 and then declined marginally to 39.9% before reaching the peak of 85.1% in 2006-07. Thereafter, it exhibited a sharp decline in the next two

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

0

10

20

30

40

50

60

70

80

90

IPOs FPOs

Rights

years and then 09-10 before reaching to the level of 50.3% in 2010-11.

Figure : share of different category of issues in resources mobilised through primary market

95. From the above details, it is observed that during the last decade the IPO segment of the primary market has emerged as an important source of funds for the Indian companies and also an avenue for the small and retail investors for productively channelising their savings. Strong macroeconomic fundamentals, sustained growth, active institutional support, sound business outlook has further provided boost to this segment of market. Although, there are fluctuating trends in the IPO market, both in terms of issues and amount raised as detailed above, keeping in view the requirements of Indian corporates and the available sources of funding, this trend is going to continue except for the temporary phases of cyclical downturn due to domestic and international factors.

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Trends in the Secondary Market

96. The Indian stock market is one of the best performing markets in the world in 2012. Relative to its level on the last trading day in 2011, the Sensex gained 3050 points (19.7 per cent) and Nifty gained 995 points (21.5 per cent) as on 31 October, 2012. As compared to growth in some of the global indices over the same period, like DAX, Germany (23.1 per cent growth), Hang Seng, Hong Kong (17.4 per cent ), S&P 500, USA (12.3 per cent), the Indian market may be regarded as exhibiting a relatively better performance in the recent times. However, in the current financial year, Sensex gained 1101 points (or 6.3 per cent) whereas, nifty gained 324 points (or 6.1 per cent). Market capitalisation is around 0.73 times the GDP of 2011-12. Subdued FII inflows, depreciation of Indian rupees, Euro zone crisis, etc., could be some of the possible reasons for the subdued performance of the Indian market.

Outlook

97. Accordingly, from a long term perspective of making the Indian capital market sustainable, it is important that the behaviour of the market and its participants is constantly observed and appropriate regulatory measures are put in place to protect the integrity of the market and the interests of the investors. But more importantly, there is also a need to constantly innovate new market products and better price discovery process, if the policy makers really want to sustain the momentum of the Indian capital market without compromising the integrity & transparency of the market. Against this background and in the overall context of the evolving macro-economic situation, it is therefore necessary that, the government in close collaboration with market regulator should take initiatives as a continuous process to meet the growing capital needs of the Indian economy.

CHAPTER – 9

EXPERIENCES & CHALLENGES IN PUBLIC – PRIVATE PARTNERSHIP IN INDIA

98. Public-Private Partnership (PPP) describes a government service or private business venture which is funded and operated through a partnership of government and one or more private sector companies. These schemes are sometimes referred to as PPP, p3 or p3.

99. PPP involves a contract between a public sector authority and a private party, in which the private party provides a public service or project and assumes substantial financial, technical and operational risk in the project. In some types of PPP, the cost of using the service is borne exclusively by the user of the service and not by the taxpayer. In other types (notably the private finance initiative), capital investment is made by the private sector on the basis of a contract with government to provide

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agreed services and the cost of providing the service is borne wholly or in part by the government. Government contributions to a PPP may also be in kind (notably the transfer of existing assets). In projects that are aimed at creating public goods like in the infrastructure sector, the government may provide a capital subsidy in the form of a one-time grant, so as to make it more attractive to the private investors. In some other cases, the government may support the project by providing revenue subsidies, including tax breaks or by removing guaranteed annual revenues for a fixed time period.

100. Typically, a public sector consortium forms a special company called a “special purpose vehicle” (SPV) to develop, build, maintain and operate the asset for the contracted period. In cases where the government has invested in the project, it is typically (but not always) allotted an equity share in the SPV. The consortium is usually made up of a building contractor, a maintenance company and bank lender(s). It is the SPV that signs the contract with the government and with subcontractors to build the facility and then maintain it. In the infrastructure sector, complex arrangements and contracts that guarantee and secure the cash flows make PPP projects prime candidates for project financing. A typical PPP example would be a hospital building finances and constructed by a private developer and then leased to the hospital authority. The private developer then acts as landlord, providing housekeeping and other non-medical services while the hospital itself provides medical services.

101. PPP is a young, rapidly evolving area. Certain basics are as follows :-

PPPs should be limited to projects delivering greater Value for Money (VFM)

than other forms of procurement.

The contractibility of the quality of service,

The transfer of a significant share of risks to the private sector,

The presence of competition or incentive-based regulations,

A sound institutional and legal framework,

A sufficient level of technical expertise in the government, and, last but not

least,

The proper disclosure of PPP commitments, along with government guarantees,

in government financial statements (and in debt-sustainability-analysis).

102. Govt of India defines a PPP as “a partnership between a public sector entity (sponsoring authority) and a private sector entity (a legal entity with 51% equity with private partners) for the creation and / or management of infrastructure for public purpose for a specified period of time (concession period), on commercial terms and in which the private partner has been procured through a transparent and open procurement system.

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103. Most of the PPP projects are located in Maharashtra, Karnataka, MP, Gujarat, AP and Haryana. 60% of the projects are road projects followed by ports, power, water and airports. About 320 billion rupees has been invested in India in PPP projects.

CHAPTER – 10

ECONOMIC CRIMES AND PARALLEL ECONOMY

104. Black money is income on which tax is evaded. It represents a large part of bustling economy where transactions have been carried out in cash circumventing banking channels. Various agencies have been working to estimate the size of India’s black economy since 1985. Three think tanks namely National Council for Applied Economic Research, National Institute of Public Finance and Policy and National Institute of Financial Management has estimated the size of India’s black economy at about 30% of GDP which is about Rs. 25 lakh crore. About 1/3 of India’s black money transactions are believed to be in real estate followed by manufacturing, gold and consumer goods. Property deals bullion and jewellery purchases, financial market transactions, rigging of markets through foreign entities, using instruments such as participatory notes, manipulations through entities claimed to be constituted for non-profit motives, differing tax rates in differing tax jurisdictions under invoicing and money laundering using the hawala or informal banking route are among the common methods used for generating black money. Under-invoicing is the common accounting trick used by firms to evade taxes. Investments in hundreds of unlisted companies is another source for funnelling hundreds of crore of black money into the legitimate financial system. The instruments used are convertible debentures. Convertible debentures are instruments through which an investor exchanges the funds, which he had lent, into equity at a later date, thus making them legitimate share holders of the company. For example, a person ‘A’ lends Rs.50 crore in cash to a real estate company through a convertible debenture. The real estate firm uses the money to pay vendors for the ongoing projects. Under the deal, person ‘A’ converts Rs. 50 crore into equity shares at a later date and becomes the legitimate shareholder of the real estate firm. Since these are unlisted companies they do not come under the stringent norm of Security Exchange Board of India (SEBI).

105. It is learnt that the Government has tracked undisclosed income of more than 50,000 crore over the last 3 years. Tax evasion was more Rs. 1000 crore has been detected from inputs from foreign countries. The Government has introduced compulsory reporting in case assets are held abroad. In certain cases, tax is being collected at source in case of purchases in cash of gold and jewellery. The estimate of Rs. 25 lakh crore is staggering compared to India’s total annual welfare spending of only about Rs. 3 lakh crore. It is imperative to develop systems to plug the loopholes in India’s bustling cash economy that remain a major area in the proliferation of black money. This will require keeping fairly high transaction limits and exempting those with a reasonable audit trail at both ends of transactions. Payments by debit and credit cards should be encouraged. System of e-banking should be strengthened to

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encourage payments in these modes which will reduce the cash economy. The government can also give tax incentives for use of financial instruments as practiced in countries like Korea. 106. If it is true that the black money component in India is Rs. 25 lakh crore, if disclosed and taxed at 30%, it would generate tax revenue of Rs. 8.5 lakh crore. This amount of money could offer as zero tax year for all individuals in the country and still have surplus for funding planned and non planned expenditure. It is therefore imperative that earnest steps are taken to curb the menace of India’s Black Money.

CHAPTER – 11

UID, AADHAAR BASED DIRECT CASH TRANSFER OF SUBSIDY AND ITS IMPACT ON POVERTY ALLEVIATION

107. Direct benefit transfer is a program launched by Government of India on 01 January 2013. This program aims to transfer cash or subsidies directly to the target beneficiaries.

108. Cash transfer are programs that transfer cash directly, to beneficiaries, with or without conditions to provided a monetary benefit for specific purpose or use such as for education through a scholarship, for health care through a medical assistance program, etc. The purpose could also include direct income support such as old age income support through a pension, unemployment benefits, etc. Cash transfers could also be made to provide direct subsidy for specific products such as for food, fuel, fertilizers, electricity etc.

109. Direct cash transfer is being used in as many as 29 countries in the world. The best known examples are in Latin American Countries namely, Oportunidades in Maxico, Socio Protection Network in Nicaragua and Bolsa Familia in Brazil.India has more than one third of the world’s poor, but many of its anti poverty programs end up nourishing rich more than the deprived. The public services in India are frequently failing to reach the poor. A new Direct Benefit s Transfer (DBT) program hopes to change that. The government of India has embarked upon an ambitious scheme to provide a unique identification, ‘Aadhaar’, to every resident of India.

110. Aadhaar has been envisioned as a means for residents of easily and effectively establish their identity, to any agency, anywhere in the country, without having to frequently produce identity documentation to agencies. Aadhaar would thus ensure that residents across India- including the poorest and the most marginalized can access the benefits and service that are meant for them. Aadhaar would thus be critical to the Government in achieving its goal of social justice and financial inclusion in the coming years.

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111. In India, subsidies are justified as tools to induce higher consumption and production, offset market imperfection and achieve socio policy objectives including redistribution of income. Total subsidy payable in 2011-12 was estimated at Rs 2,16.297 crore against Rs 26,949 crore in 2001-02. According to the Budget propels for 2013-14 fiscal, the government’s subsidy bill on food, petroleum and fertilizers is estimate at Rs 2,20,971.50 crore as against Rs 2,47,854 crore in the revised estimate for the 2012-13 fiscal. Interestingly, the RE for 2012-13 are higher by 38 percent compared to BE of Rs 1,79,554 crore. The food and fuel subsidy for 2012-13 (RE) is estimated at 90,000 crore and 96,880 crore respectively. Subsidy is best when it is transparent, well targeted, and implementable.

112. One of the priorities that have emerged in recent years is the need to improve the delivery mechanism of the poverty alleviation programs. This is to ensure that vulnerable groups can withstand unpredicted shocks to income and continue to access basic goods and services at affordable prices. The budget 2013-14 has recommended Direct Benefits Transfer (DBT) to improve the efficiency and reach of welfare programs for the marginalized and underprivileged.

India spent nearly 2.4 percent of its GDP on subsidies. But the delivery system is poorly managed and woefully inefficient. For example, a planning Commission’s study (2005) had estimate that 58 percent of subsidized PDS food grain is diverted. Over 36 percent of the budget subsidies in food are siphoned off the supply chain and another 21 percent reaches the APL household. According to the study, for one rupee wroth of income transfer to the poor, the government spend Rs 3.65, indicating that one rupee of subsidy is worth only paisa to the poor. Therefore, there is a need for a more effective, efficient and transparent delivery system. A big part of the inefficiency in government service delivery is due to the inability to authenticate the identity of individuals. This was, for long, held responsible for the poor not getting their ration and banks not being interested in deepening their presence among the poor, especially in rural areas. Aadhaar projects aims to provide unique ID number to all resident. In a bid to control expenditure and eliminate wasteful expenses, the Economic Survey (2012-13) has also laid emphasis on initiatives like DBT for better targeting and improved delivery.

113. 43 districts were identified for roll during Phase I. However, the DBT was rolled out in 7 schemes in 20 districts on 1 January 2013. The roll out plan was highly scaled down from original proposal of 43 districts and 26 schemes. Most of the schemes which were covered were already cash transferred. Number of estimated beneficiaries was more over 2 lakh. From 1 Feb 2013, the DBT was launched in 11 more districts with a target to cover all 26 schemes. From 1 March 2013, DBT was rolled out in remaining 12 of the 43 identified districts. It was further decided to keep the major subsidies. - 3Fs i.e., Food, Fertilizer and Fuel outside the ambit of the DBT due to complex issue of entitlements involved with them. On 1 July 2013, the Central Government expanded the DBT scheme to cover 78 more districts, altogether 121 districts, covering nearly one fifth of the country. Three pension schemes for old age person, widows and personal with disabilities were added making a total of 28 schemes in Phase II.

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114. DBT for LPG Consumers (DBTL) scheme was launched on 01 June 2013 in 20 identified high Aadhaar districts. Under the scheme, all Aadhaar – linked domestic LPG consumers get an advance of 435 rupees an LPG cylinder in their bank account as soon as they book the first subsidies unit before delivery. When the first subsidized cylinder delivered to such consumers, the next subsidized cylinder at the market rate. A maximum of nine subsidized LPG cylinders are provided by the Government to household in a year. The scheme hit 4 million transactions within 10 weeks of its launching. The Government extended DBTL to 35 more districts from 1 September 2013. Later it was decided to go for a massive roll out of the scheme in 269 districts by 1 January 2014.

115. In order to roll out the implementation of Aadhaar based DBT to beneficiaries, the Governments constitute several committee on DCt is chaired by the Prime Minister. This committee is assisted by the Executive Committee on DCT, chaired by the Principal Secretary, PMO and convened by Secretary, Planning Commission. Mission Mode Committee, namely, financial Inclusion Committee, Technology Committee and implementation of DBT replacing Secretary, planning Commission. In July 2013, the Mission along with its staff was shifted to the Minister of Finance.

There are many obstacles to success rollout of the DBT. A major stumbling block is opening bank accounts in “difficult pockets”. The post office banking network is still not ready to take a part of the load as core banking in post offices is behind schedule. Progress in issuing Aadhaar and National Population Registration is not providing much comfort either. For instance, in 242 of the 650 districts penetration varies between zero and 10%. Only 160 districts have Aadhaar coverage of over 50%. Eight months down the line, it has emerged that a little over half of the population identified for 25 schemes in 121 districts, where pilots are being run, had bank accounts. While a quarter had both bank accounts and Aadhaar, there were less than 10% who had them linked. So, till bank accounts and Aadhaar, tere were less than 10% of population in the test cases had actually experienced the benefits of direct transfer. During the first eight months, the government had allocated about Rs 250 crore on various welfare programs and made around 32 lakh transactions through Aadhaar Payment Bridge (APB) across 121 selected districts. This is too limited in scope when one is looking at an annual subsidy transfers of Rs 3.25 lakh crore through Aadhaar enabled DBT. But a good beginning has been made. India needs to consolidate the gains of pilot Phase and move ahead as DBT will make her delivery systems more accountable and transparent. Fixing leakage through DBT would annually save upto Rs 25,000 crore and India could spend saving in enhancing its internal and external security which are so essential to her.

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CHAPTER – 12

INDIA’S FISCAL POLICY

Objectives of Fiscal Policy in India

116. Fiscal Policy in India always had to major objectives, namely improving the growth performance of the economy and ensuring social justice to the people. Growth Performance of the Economy.

117. Fiscal policy influences growth performance of an economy mainly in two ways. In the first place, it affects growth by influencing the mobilisation of resources for development. Secondly, it exercises its influence by improving the efficiency of resource allocation.

118. Fiscal Policy and Resource Mobilisation. India has done well in terms of tax effort. In 1950-51, when the planning process was initiated, the tax GDP ratio was as low as 6.3 %. Since then, it rose steadily for four decades and stood at 15.8 per cent in 1991-92. During the liberalisation phase of 1990s the tax GDP ratio has risen again and was 17.6 per cent in 1998-99 due to sharp reduction in tax rate. However, during the last few years, tax-GDP in 2007-08 though it declined to 16.1 per cent of GDP in 2010-11. For a poor country like India, which started its development effort with a very low per capita income and has recorded an extremely modest rate of growth for a considerable period of planning, this record in mobilising tax revenue is not bad by any standard. In India, all the major direct taxes, such as personal income tax and corporation tax have recorded buoyancy greater than unity. However, in recent years buoyancy of Union exercise duty and customs duty has been low. Obviously this has not enabled as much mobilisation of resources through taxation as one would normally expect in the conditions prevailing in India. It has to be admitted that there remains some scope for raising additional tax revenue in the country.

119. Apart from tax revenue other important aspects of resource mobilisation are generation of non-tax revenues, restricting of current government expenditure and raising of surpluses of public sector enterprises. Each of these needs careful analysis for assessing the government’s effort in respect of resource mobilisation.

120. In India, fiscal policy has been used for providing both special incentives for private savings and encouraging investment in specified areas like housing. As a result of these policies in case of the last three Five Year |Plans, the actual private savings rate has exceeded the Plan target.

121. The failure of the fiscal policy in India is perhaps the most conspicuous in its inability to prevent the growth of black economy. The studies which have attempted to quantify the size of the black economy indicate that in the recent years the government has suffered heavy losses on account of tax evasion. This revenue loss to the government has reduced the built-in-elasticity of the tax system. The black economy has also constrained the resource mobilisation effort through large scale

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leakages of funds from development projects and other programmes. This black income has a general tendency to lower down the savings propensity as its common outlet is consumption expenditure on “luxury services”. The use of black income for accumulation of real or financial assets is often avoided because it carries far greater risks of detection and penalty.

122. Fiscal policy and allocation efficiency. Fiscal policy also influences growth performance of an economy thorough its effects on the allocation of resources. An efficient and rational allocation of resources will obviously be helpful in raising the rate of economic growth. Therefore, if fiscal policy favourably affects the efficiency of resource allocation, then in the process, growth performance of the economy is bound to improve. An indifferent fiscal policy adversely affecting the efficiency of resource allocation on the country retards the productive activity and thereby results in lower rate of economic growth.

123. Among the various instruments of fiscal policy, perhaps tax policy is the most important determinant of the efficiency of resource use. During the first found decades of economic planning, the reliance on commodity taxation had increased and it accounted for around 84 per cent of the tax revenue of the Central Government in 1990-91. However, during the period of economic reforms, the trend was reversed and the ratio of indirect tax revenue to total tax revenue declined to 44.2 per cent in 20910-11.

124. Upto the mid 1980s fiscal imbalance was seen in terms of the overall budget deficit measured by the gap between the expenditure and the receipts under the revenue and capital accounts taken together. This gap was sought to be filled by deficit financing which in India is defined as borrowings from the Reserve Bank of India against the issue of Treasury Bills and running down of accumulated cash balances. When government borrows from the Reserve Bank of India who, on the basis of these securities, issues more notes and puts them into circulation on behalf of the government. This amounts to creation of money.

Rationale for Deficit Financing

125. In a developing economy when the government fails to mobilise adequate resources for the public sector plan from domestic as well as external sources, recourse to deficit financing becomes necessary. Alternatively the government can cut the size of the plan itself and that in turn will slash the demand for investible funds. It will, however, have serious repercussions on growth. Therefore, a developing country often has to make a difficult choice between two regrettable necessities, viz., a lower growth rate and an inflationary price rise. Obviously, of the two, price rise is a lesser evil and is thus to be preferred to a lower growth rate. According to the planners, over the years India has been facing precisely this problem. Pramit Chaudhuri rejects this contention. He assets that the government did not make adequate efforts to mobilise resources from domestic sources even at a time when there was an excess supply of saving from within the private sector. In fact, the failure of the government to raise adequate resources is largely on account of its inability to use its powers of taxation systematically.

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126. The need for deficit financing in this country arises on the one hand from the failure of the government to mobilise the desired volume of surplus for the public sector plans and on the other, from its rapidly growing expenditures (mostly on unproductive non-developmental activities).

Consequences of Deficit Financing

127. Deficit financing can play a useful role during the phase of depression in a developed economy. During this phase, the level of expenditure falls down to a very low level and the banks and the general public are in no mood to undertake the risk of investment. They prefer to accumulate idle cash balances instead. The machinery and capital equipment are all there, what lacks is the incentive to produce due to deficiency in aggregate demand. If the government pumps in additional purchasing power in the economy (though deficit financing), the level of effective demand is likely to increase. To meet this demand, the machinery and capital equipment lying hitherto unused will be pressed into operation. The level of production will accordingly, increase. If this increase is able to match the increase in the aggregate spending level, inflationary tendencies will not be generated.

128. Conditions in underdeveloped countries are different. This is on account of the fact that in these countries, the capital equipment does not exist but has to be built up. Thus, while newly created money (as a result of deficit financing) leads to an immediate increase in the purchasing power in the hands of the people, the production of goods does not increase simultaneously. In fact, there is likely to be a considerable time lag in the generation of extra purchasing power and the availability of additional consumer goods. In the meantime, the level of prices increases. According to Meier and Baldwin, capital accumulation in developing countries through deficit financing is likely to generate inflation because in these countries “the propensity to consume is high, there are many market imperfections, there is little excess capacity in plant and equipment, and the elasticities of food supplies are low.”

Themes of the New Fiscal Policy

129. In the broad framework of the economic liberalisation approach of the recent years, the major themes of the fiscal policy have been concretised in this country. There is broad agreement on these themes and they can be summarised as follows:-

a systematic effort to simplify both the tax structure and the tax laws;

a deliberate shift to a regime of reasonable direct tax rates, combined with

better administration and enforcement, to improve compliance and raise

revenues;

the fostering of a stable and predictable tax policy environment;

greater recognition and weight given to the resources allocation and equity

consequences of taxation;

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more reliance on non-discretionary fiscal and financial instruments in managing

the economy, as compared to ad hoc, discretionary physical controls;

concerted efforts to improve tax administration and reduce the scope for

arbitrary harassment;

growing appreciation of the links between fiscal and monetary policy;

fresh initiative to strengthen methods of expenditure control.

CHAPTER – 13

ECONOMIC OUTLOOK FOR INDIA

130. Global economy is passing through a difficult phase. Most serious threat to global stability is uncertainty due to euro-zone crisis, as no definitive solution still in sight. This has impacted investment and growth around the world, including India the immediate fallout has been sharp deceleration in global economic growth. As per the IMF world economic outlook, October, 2012 the world output is expected to grow by 3.3 per cent in 2012, down from 5.1 per cent in 2010 and 3.8 per cent in 2011. Advanced countries as a group is expected to grow only by 1.3 per cent, down from 3.0 per cent in 2010 and 1.6 per cent in 2011. Emerging market and developing economy are expected to grow by 5.3 per cent, as against 7.4 per cent in 2010 and 6.2 per cent in 2011.

131. The Indian economy has also been affected by these developments. India’s GDP growth that was 8.4 per cent in 2009-10 and 2010-11 growth decelerated to 6.5 per cent last year and may be only around 6 per cent in the current year. The slowdown is attributable both to the domestic as well as global factors. The global slowdown due to unfolding of euro zone sovereign debt crisis has, inter-alia, impacted the Indian economy through deceleration in exports, widening of trade and current account deficit, decline in capital flows, fall in the value of Indian rupee, stock market volatility and ultimately resulted in lower economic growth.

132. The reasons external sector vulnerabilities are affecting the Indian economy is rapid globalisation of the economy. This can be gauged from the fact that the export of goods and services that was 22.9 per cent of GDP in 1990s increased to 55.7 per cent of GDP in 2011-12. Similarly capital account payments and receipts that was at 15.1 per cent of GDP in 1990s, increased to 48.2 per cent in 2011-12. As a result, global developments have increasingly larger impact on the economy through the trade and capital account channels. Besides, in the global environment of uncertainty and low investment, impact is also transmitted through the confidence channel.

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133. While the global economic slowdown had affected the export dependent sectors, depressed sentiments, high interest rates, moderation in credit growth and a deceleration in growth of investment also contributed to the overall moderation in growth. Sustained high level of inflation has also been a major policy concern for over the last two year.

134. The growth rate of industry sector declined from 7.2 per cent in 2010-11 to 3.4 per cent in 2011-12. The deceleration in the industrial sector was sharper during the first half of the current financial year in comparison to that in the same period of the previous year. During April-September 2012-13, iip growth was 0.1 per cent as compared to 5.1 per cent in April-September 2011-12. The combination of factors that affected industrial production during 2011-12, continued to be a drag on industrial output even during the current financial year. However, major cause of manufacturing sluggishness in this financial year has been the drop in investment as reflected in the slow pace in disbursement of bank credit and lower investment in new projects. The cycle of adverse business sentiment leading to lower investment and slowdown of aggregate demand has delayed the industrial recovery. Further, infrastructure bottlenecks also impinged on the performance of the mining and electricity sectors.

135. Keeping in view the above background, the Government has taken several steps keeping in mind the following objectives:

a) To stabilize government finances and make the fiscal deficit more manageable, so that higher growth is possible and sustainable;

b) To make this growth process socially and regionally more inclusive and equitable. The key pillars of inclusive growth are new employment opportunities and a lower rate of inflation;

c) To step up public investment as well as public-private partnerships, especially in infrastructure;

d) To tap into available capital and technology from around the world that seeks investment opportunities in India;

136. Monetary policy has an important role to play in keeping inflation under control while also supporting growth. The Reserve Bank of India has sought to support a revival of growth by reducing the CRR successively over two quarters. Central banks have to balance the compulsions of stimulating growth and controlling inflation. Both are important. But we must recognize that lower inflation is good both for growth and for making growth more socially inclusive.

137. Bringing the fiscal deficit under control is an essential element in restoring investor confidence. The roadmap to reduce the fiscal deficit from a projected 5.3 per cent this year to 3 per cent by 2016-17 has been announced. The action taken recently to reduce fuel subsidies must be seen in this perspective. However the Government is also mindful of the effects such steps have on the poor and vulnerable and all possible measures are being taken to protect their “lifeline” needs.

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138. A large number of infrastructure projects are stuck because of the delay in granting various clearances and the non-transparency in determining the conditions under which clearances can be given. The Government is looking at ways to speed up clearance processes and making them more transparent. Ramping up of investment in infrastructure is critical for reviving the growth momentum. The 12th plan has a target of investing almost a trillion dollars in infrastructure. Investment in infrastructure has to be in the vanguard of public investment for many years to come and we are working in that direction. However, about 50 percent of the investment needed in infrastructure has to come from the private sector and this will require up-scaling of private sector participation on a sustainable basis.

139. Deceleration in global economic growth has affected the external sector as reflected in terms of trade deficit of 10.3 per cent and current account deficit of 4.2 per cent of GDP in 2011-12. This is because while the export growth slowed considerably, imports continued to remain high due to high international oil prices and gold imports. It is difficult to reduce the deficit in the short run because exports may not grow very rapidly whereas efforts to raise the investment rate will mean higher imports. FDI is perhaps the best source of external financing to finance the deficit. It is more stable than other forms of inflows and it brings in many externalities such as know-how and access to global supply and marketing chains. Keeping this in view, the Government has recently liberalized FDI in retail, aviation, insurance, power exchanges and broadcasting.

140. The pursuit of inclusive growth depends critically on making banking facilities accessible to millions of our countrymen. The Unique ID program providing Aadhaar numbers for all residents is going to be the basis of the biggest transformation that is going to take place in the way transactions are conducted. The government intends to roll out Aadhaar based services rapidly so that benefits like scholarships, pensions, health benefits, MNREGA wages and many other benefits are transferred directly into bank accounts using Aadhaar as a bridge. This will bring in crores of people into an automated financial transaction system. It will eliminate middlemen, cut down leakages and target beneficiaries better. It will also enable an expanded programme of cash transfers in lieu of physical distribution of subsidized commodities. The proposed Goods and Services Tax is another major reform in the pipeline. Every possible effort is being made to build a consensus for an early rollout of GST.

141. There is also a need to ensure capitalization on the demographic dividend that is expected. Skill Development, expansion of secondary and higher education and better healthcare facilities will all contribute to a more skilled workforce which can then look forward to gainful employment opportunities.

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CHAPTER – 14

BANKING SECTOR AND ITS INFLUENCE ON INDIA’S DEVELOPMENT

142. At the end June 2011, scheduled commercial banks in India comprised 26 public sector banks (State Bank of India and its 5 associate banks, 19 nationalised banks and IDBI), 36 foreign banks, 14 old private sector banks and 36 foreign banks. In terms of business, the public sector banks now have a dominant position. They accounted for 54.9 per cent of assets (fixed and other assets), 77.9 per cent of investment s of all scheduled commercial banks as at end-March 2011. Amongst the public sector banks, the State Bank of India and Associates had 17,976 branches as on June 30, 2011. The nationalised banks and IDBI had 44,862 offices all over the country. In recent years in order to meet the credit requirements of the weaker sections, small and marginal farmers, landless labourers, artisans and small entrepreneurs, the regional rural banks have been set up in different parts of the country. On June 30, 2011, their branches numbered 15777. In terms of business they however, remain very much less important than the traditional commercial banks. The foreign scheduled banks operate mostly in big cities and their number of branches in the whole country is just 318. Other scheduled commercial banks are private sector banks and their branches numbered 11,842 as on June 30, 2011. As a whole, India now has a far more developed and integrated banking system than that at the time of independence. However, in a highly regulated system not only the service to customers, both a depositors and borrowers, has suffered but many irregularities also developed in the banking system which surfaced in 1992. Under financial sector reforms, an attempt is being made to overcome these weaknesses of the banking system. It is nevertheless true that certain neo-liberal reforms have eroded the achievements of bank nationalisation.

Bank Lending

143. Of all the functions of commercial banks lending of funds is certainly the most important function. While performing this function banks provide working capital to commerce and industry. In India, only after the nationalisation of 14 major banks substantial amounts of loans have been given for agricultural operations.

Evaluation of banking since Nationalisation

144. The period since bank nationalisation is of great importance from the point of view of banking development as the size and the reach of the banking system registered spectacular progress in this period. Aggregate bank deposits have risen from 11 per cent of GDP to 67.2 per cent in 2010-11 and the total number of branches from 8262 to 90830. Of these, 37.2 per cent are now in rural areas as against less than 22.5 per cent at the time of nationalisation of major banks in 1969. Opening of rural branches has improved mobilisation of savings in the rural sector. Presently rural

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deposits account for about 15 per cent of total deposits. Since bank nationalisation in this country priority sector credit has increased from 14.6 per cent of non food gross bank credit to 33.8 per cent. Over the years development of banking has been faster in relatively less development of banking has been faster relatively less developed regions of the country, and as a result regional disparities have declined and the concentration of banking business is now less.

145. The performance of the banking system in India since the nationalisation of 14 banks is definitely impressive. The achievements of the banking sector as stated above are, however, nowhere near meeting the needs of the economy. Since development oriented policy of the banks eroded their profitability, it was used by the Narasimhan Committee to criticise directed credit programmes. The Committee argued that the directed investment and directed credit programmes. The Committee argued that the directed investment and directed credit programmes together with mounting expenditures completely eroded the profitability of the banks. The fact is that in the later post-nationalisation phase, overall profitability of the banks was either low or even negative and their non performing loans both as a percentage of total advances and as a percentage of assets were fairly high and their financial position was extremely weak.

146. Commercial banks during the post nationalisation phase had a societal purpose and thus directed credit programme was pursued, though it eroded profitability of the commercial banks. Banks were not regarded as profit maximising institutions. Hence, it is wrong to assess their performance in their terms of their profitability. Nevertheless in the process of ignoring profitability considerations, many commercial banks lost their financial viability and by the end of 1980s, it had become clear that further neglect of profitability considerations could ultimately send banking institutions to their bankruptcy.

Banking Sector Reforms

147. Some recommendations were made by the Chakravarty Committee in 1985 for improving the performance of the banking sector. However, the government lacking initiative did not carry out reform measures earnestly. In 1991, the country was caught into a deep economic crisis. The government at this juncture decided to introduce comprehensive economic reforms. The banking sector reforms were part of this package. The government appointed a Committee on the financial system under the Chairmanship of M. Narasimham in August 1991 which delivered its report within three months. The government also appointed the Committee on Banking Sector Reforms under the Chairmanship of M. Narasimham which submitted its report in April 1998. These reports are landmark documents and have influenced greatly the banking sector reforms during the past few years.

148. Financial markets need supervision to prevent criminal fraud as well as financial panic. Supervision and regulations are essential for healthy growth of banking system. It is necessary that banks must be subject to rules concerning income recognitions provisioning and portfolio concentration.

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149. The decades of the 1980s and 1990s and the first decade of the present century have witnessed several financial crisis around the world. The crises were sometimes country specific, often regional, and in the case of the current crisis, global in scope. In such case, the banking sector became a drag on the real economy, jeopardised public finances and hurt economic growth. It is noteworthy that while other countries and regions went through banking upheavals, the Indian banking remained safe. This was both due to cautious and prudent regulation exercised by the Reserve Bank, on the one hand, and the relatively lower globalisation of our banking sector. The Indian banks have, in recent times, registered higher credit growth, deposit growth, better return on assets, sound capital to risk weighted assets ratio and an improvement in gross non-performing assets ratio.

150. However, certain concern needs to be addressed. The Indian banking system must ensure financial inclusion, improved credit to rural areas, confirm to the priority sector lending, must finance infrastructure projects, plan for better risk management and improve their efficiency and delivery system.

CHAPTER – 15

INDUSTRIAL SECTOR IN INDIA

Phase I (1951-65) Building up of Strong Industrial Base

151. As noted above, phase I laid the basis for industrial development in the future. The Second Plan, based on Mahalanobis model, emphasises the development of capital goods industries and basic industries. Accordingly, huge investments were made in industries like iron and steel heavy engineering, and machine building industries. The same pattern of investment was continued in the Third Plan as well. As a result, there occurred a noticeable acceleration in the compound (annual) growth rate of industrial production over the first three Plan periods upto 1965 from 5.7 per cent in the First Plan to 7.2 per cent in the Second Plan and further to 9.0 per cent in the Third Plan.

Phase II (1965-80) Industrial Deceleration and Structural Retrogression.

152. The period 1965 to 1976 was marked by a sharp deceleration in industrial growth. The rate of growth fell steeply from 9.0 per cent per annum during the Third Plan to a mere 4.1 per cent per annum during the period 1965 to 1976. It is also important to point out that even this meagre rate of industrial growth does not express the true situation as there was a sharp increase of 10.6 per cent in industrial production in the year 1976-77. If this year is left out then the rate of industrial growth over the eleven year period 1965 to 1976 declines further to a meagre 3.7 per cent per annum. In a similar way, the rate of growth of 6.1 per cent per annum during the Fifth Plan

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owes considerably to the 10.6 per cent increase recorded in the year 1976-77. If this year is left out, the rate of industrial growth for the remaining four years comes down considerably. The last year of Phase II i.e. 1979-80, recorded a negative rate of growth of industrial production of -1.6 per cent over the preceding year. Phase III (1981 to 1991): The period of Industrial Recovery.

153. The period of 1980s can broadly be termed as a period of industrial recovery. This is clearly brought out by a study of the revised Index of Industrial Production (base 1980-81).

154. The rate of industrial growth was 6.4 per cent per annum during the year 1981-95, 8.5 per cent per annum during the Seventh Plan and 8.3 per cent in 1990-91. As noted by Vijay Kelkar and Rajiv Kumar, “This is a marked upturn from growth rates of around 4 per cent achieved during the latter half of 1960s and the 1970s. This performance is also an improvement upon the growth rates achieved during the First and Second Plan periods.

155. Similar trends of industrial recovery in 1980s are noted by some other economists we well. In her study spanning the period 1959-60 to 1985-86, Isher Judge Ahluwalia notes that the period 1980-81 to 1985-86 (i.e. the first half of the 1980s) was marked by significant acceleration in the growth of value added in the manufacturing sector and all its use based sectors. The value added in the manufacturing sector grew at the rate of 7.5 per cent per annum in the first half of 1980s as against only 4.7 to 5 per cent per annum in the period 1966-67 to 1979-80. According to Ahluwalia, a very important aspect of the growth revival during the first half of the 1980s was that it was not associated with an acceleration in the growth of factor inputs but was, rather, based on better productivity performance. Thus, total factor productivity which registered a negative and negligible growth of -0.2 to -0.3 per cent per annum in the period 1966-67 to 1979-80 showed a marked improvement in the first half of the 1980s when it registered a growth of 3.4 per cent per annum.

New Industrial Policy and Liberal Fiscal Regime.

156. According to some economists, one of the main causes of industrial recovery during the 1980s was the liberalisation of industrial and trade policies by the government. According to Ahluwalia, “The most important changes have related to reducing the domestic barriers to entry and expansion to inject a measure of competition in domestic industry, simplifying the procedures and providing easier access to better technology and intermediate material imports as well as more flexibility in the use of installed capacity with a view to enabling easier supply responses to changing demand conditions. These factors operating from the supply side were helped by the pursuit of what may be termed as a liberal fiscal regime. The important features of liberal fiscal regime were (i) maintenance of high budgetary deficits year after year; (ii) the encouragement of dissaving. All these aspects of liberal fiscal regime helped to expand the demand for manufactured goods in the economy.

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157. The above discussion shows that while liberal fiscal regime helped in generating demand for manufactured goods, liberal industrial and trade policies ensured that an adequate supply response was forthcoming.

Phase IV (The period 1991-92 onwards)

158. The year 1991 ushered in a new era of economic liberalisation. Major liberalisation measures designed to affect the performance of the industrial sector were – wide scale reduction in the scope of industrial licensing, simplification of procedural rules and regulations, reductions of areas exclusively reserved for the public sector, disinvestment of equity of selected public sector undertakings, enhancing the limits of foreign equity participation in domestic industrial undertakings, liberalisation of trade and exchange rate policies, rationalisation and reduction of customs and excise duties and personal and corporate income tax etc. A question that has engaged the attention of the economists in recent times is: what has been the effect of these liberalisation measures on the performance of the industrial sector in the post reform period?

159. The post reform period witnessed revival of industrial growth which rose upto 11.5% by the Tenth Plan period. The Index of Industrial Production (IIP) shows that growth was however volatile and not smooth. While different sectors had different volatility spectrum capital goods and intermediates were the most volatile. High volatility in industrial growth creates distortion; uncertainty increases the inflationary pressure on economy.

160. Scarcity of resources has been recognised as a limiting factor for the process of economic growth. The scope for output expansion, based on increased use of resources or inputs, is restricted beyond a certain point due to non-availability and/or diminishing returns. Therefore, efficiency or productivity of resources becomes a crucial factor in the process of growth.

161. An overall view of India’s industrial development shows an increase in the share of industrial sector in GDP. There is also a growth of infrastructure industries, capital goods industries, a well diversified industrial structure, rapid growth of consumer durables, emphasis on chemical and petro chemical industries and emergence of a strong public sector.

162. However, certain problem needs to be addressed like a gap between target and achievement, underutilisation of capacities, infrastructural constraints, growth of regional imbalances and industrial sickness.

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CHAPTER – 15

TAX REFORMS IN INDIA

163. Since beginning of 90’s India has adopted the structural adjustment programme with reforms in each major sector of the economy. Reforms were attempted in public expenditure, followed by disinvestment of the public sector undertakings. The objective was to increase operational efficiency through transfer of ownership to private sector and improving management practices.

164. The structural adjustment programme was backed up with the reforms in the overall tax system since nineties. Efforts were made to attain a higher tax-GDP ratio by lowering tax rates, broadening tax base, and rationalizing tax exemptions and incentives. Reforms were attempted, though at a later stage, at the States’ level too. Fiscal Significance

165. In terms of revenue the existing tax system yields approximately 17% of the GDP. In developed countries, however, this proportion is more than 30%. This is due to the fact that major proportion of population in India is dependent on agriculture and this sector is practically un-taxed. Also, service sector which has a significant contribution in GDP is not fully taxed.

166. Due to tax reforms initiated in the nineties, the growth in revenue of the Union Government from indirect taxes (such as customs duty and union excise duty) slowed down while the revenue from direct taxes (like personal income tax and corporation tax) showed an accelerated growth. Consequently, the direct tax to GDP ratio of the Centre has recorded an upward trend (increased from 1.94 in 1990-91 to 6.31 in 2007-08) while the indirect tax-GDP ratio has fallen over time (declined from 8.17 in 1990-91 to 5.68 in 2007-08). At the same time, the tax-GDP ratio of the States has shown a marginal increase.

167. In the late nineties and the period following the year 2000, the revenue from the States’ indirect taxes relative to GDP has recorded an upward trend. Taxes on commodities and services have contributed 58.9% to the total tax revenue of the Centre and the States in 2008-09. The revenue from the direct taxes has shown a moderately high growth rate (18.3%) during the period 1991-92 to 2008-09.

168. At the Central level, higher service tax and customs duty collections neutralized the lower collections from income taxes and excise duties resulting in the overall growth of gross tax revenue.

169. Sales tax has been the main source of revenue for the State Governments. It has contributed more than 60% of the States’ own tax revenue. A major achievement at the States’ level has been the replacing of the sales tax by State VAT to have a

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transparent and efficient tax system. However, the direct taxes such as land revenue, agricultural income tax and profession tax have remained insignificant sources of revenue for the States due to both political and structural reasons.

Taxes of the Union Government

170. The Union Government levies buoyant, broad-based having all-India coverage taxes on income and property as also on commodities and services. In addition, the Union Government levies taxes on imports and exports of commodities.

Taxes on International trade

171. The Union List authorizes the Central Government to levy tax on international trade which takes the form of ‘customs duty’. The customs duty comprises export duty and import duty.

172. With the increasing volume of imports and exports, the customs duty occupies an important place in the overall tax revenue, with an annual growth rate of 8.69%. However, with the opening up of the economy and the reduction of the effective rate of customs duty, its share has declined over time.

173. Export duty is levied on exports of specified commodities to mop up windfall export profits. The rate of duty and the possibility of levy of this tax depend upon the elasticity of demand for our products in the international market. It is levied on FOB (free on board) value. In addition to export duty, export cess is leviable on specified articles on their export under various enactments passed by the Government.

174. Import duty is levied as a wedge between the domestic prices and prices of imported goods to guard against cheap imports and to provide a level playing field for the domestic producers. It is imposed on almost all commodities imported into the country. The statutory rates of import duties, called tariff rates, are fixed by the Parliament. However, the Union Government has the power, under the law, to provide full or partial duty exemption.

175. Basic Customs Duty is levied on almost all commodities. The standard rate-of basic customs duty is ad valorem and applicable to all goods. Prior to 1991-92, the maximum rate of duty was 300% which was reduced to 110% in 1992-93, 50% in 1995-96 and 10% in 2008-09.

176. Current peak rate of duty is 10% on non-agricultural items (except for natural rubber sheets, fish and cars). The average industrial tariff is about 9.4%. Reduction in duty rates has been accompanied by reduction in dispersal of duty rates. The tax base for customs duty is primarily the c.i.f. (cost, insurance and freight) value of goods imported. Rates in general are higher for consumer goods, finished goods and industrial products as compared to capital goods, inputs and agriculture goods. The changes in the rate structure of customs duty have been introduced after the opening up of the economy.

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177. Besides basic customs duty, there are other forms of duties that are levied along with the basic duty. These are additional duty of custom or countervailing duty; special countervailing duty; national calamity contingent duty on mobile phones, two-wheelers, motor cars and multi-utility vehicles; education cess; secondary and higher education cess, anti-dumping duty and safeguard duty.

178. Apart from the general principles of commodity classification, rates are also determined on the basis of a number of Regional Trade Agreements that India has signed with various countries. Preferential duty rates and duty concessions are extended via these agreements to participating countries. With the adoption of the policy of liberalization and open economy customs duty rates are now comparable to the structure prevailing in other countries.

179. Central Board of Excise and Customs (CBEC) is the apex organization for policy formulation and administration with regard to customs duty.

Central Taxes on Income and Property

180. The important taxes on income and property levied by the Union Government include corporation tax and personal income tax. The other taxes in this category include wealth tax, gift tax and estate duty.

(a) Corporation Tax

The corporation tax is a tax on the corporate profits. It is the most important source of revenue for the Central government and is also the most buoyant tax among the direct taxes assigned to the Centre with annual growth rate of 21%.

Prior to 1994-95, distinction was made between widely held and closely held companies and between domestic and foreign companies. From 1994-95, this tax is levied only on the basis of origin of company, i.e. whether a company is domestic or foreign company.

In 1993-94, the tax rate varied from 45% to 50% for domestic companies and 65% for foreign companies. Over the years, the range of rates has come down. Presently, the rate of corporation tax is 30% for domestic companies and 40% for foreign companies.

In addition to the tax on corporate income, there is a surcharge on the corporation tax. Currently, the rate of surcharge is 5% and 2.5% on domestic and foreign companies, respectively.

Since 2007-08 an additional cess of 1% is levied on the amount of corporation tax and surcharge termed as “secondary and higher education cess”.

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Notwithstanding the above statutory rates, the effective rates of corporation tax are much lower than the nominal (statutory) rates due to exemptions, concessions and incentives given for depreciation and investment allowance etc. In fact, certain tax incentives have been incorporated in the income tax structure to promote investment and capital formation in the economy. These include incentive for industrial development, for promoting investment in infrastructure, for environmental protection and incentive for development of social sectors.

Given all these concessions and incentives, some companies were able to reduce their tax-liability to zero by working in backward areas, in infrastructure or power sectors and in export processing zones or as export oriented units (EOU).

However, to mobilize some resources from such zero tax companies, a minimum alternate tax (MAT) was introduced on their book profit in 1996-97. The effective rate of MAT at the time of its introduction (i.e. in 1996-97) was 12.9% of book profit. It was gradually reduced to 7.5% in 2001-02 and again gradually increased to 15% by 2009-10. The rate of MAT was further increased to 18.5% through the Union Budget of 2011-12.

Dividend income from company shares were taxed in the hands of the recipient until 1997. However, through the Finance Act, 1997, this was replaced by a dividend distribution tax (DDT), levied on domestic companies on the profits distributed as dividends. It was levied at the rate of 10% on distributed profits of the companies. It was abolished in 2002, but was reintroduced in 2003 at a higher rate of 12.5%.

(b) Personal Income Tax

Personal income tax is a composite tax on individual’s aggregate income from all sources such as salary, income from property, interest income, business income, income from shares etc. However, agriculture income being a state subject is exempt from the tax.

With the overall growth of the economy and the consequent increase in per capita income. the yield from this tax has steadily increased over the years with an annual growth rate of 16.8% and buoyancy value of 1.3% during 1991-92 to 2008-09.

In early seventies personal income tax had a marginal rate of 85% with large number of tax slabs. In addition, there was 15% surcharge resulting in the effective marginal tax rate to be 97.75%. This was gradually reduced to bring it down to 50% by 1985-86. On the recommendation of Tax Reforms Committee the marginal tax rate was further brought down to 30% by 1997-98.

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Currently, the general category of individual tax payers are subjected to a rate schedule comprising three slabs: 10, 20 and 30 % with an initial exemption limit of Rs. 1.6 lakh. Higher exemption limits of Rs. 1.9 lakh is applicable to women assessees and of Rs. 2.40 lakh to senior citizens. The budget 2011-12 has further enhanced the exemption limit of individual tax payers to Rs. 1.8 lakh and for the senior citizens to Rs. 2.5 lakh. Also, the qualifying age for senior citizens is reduced from 65 to 60 years. A new category of ‘very senior citizens’ with eighty years and above, has been created in the recent budget who are eligible for a higher exemption limit of Rs. 5 lakh.

To encourage investment in the desired sectors of the economy, the Income Tax Act offers a variety of exemptions and concessions under various clauses of Section 10 of the Income Tax Act, 1961. In addition, some provisions have been incorporated in the income tax structure to promote savings and make investments more attractive. These include exemptions of income from specified financial assets subject to certain monetary limits; deductions from income, on a netting principle, of the whole of the funds invested in the national saving scheme, certain schemes of Life Insurance Corporation of India and the equity linked saving scheme of mutual funds; rebate in tax payable as a percentage of the funds invested in specified financial assets or construction of house property.

(c) Capital Gains Tax

Capital gains tax is levied on profits made while selling/transferring a capital asset, i.e. a house, an apartment, office space, factory, godown, or a plot of land or investments such as shares and bonds. The tax is levied on the difference between purchase price and the sale price of the financial and tangible assets.

Since capital gains are not annual accruals from a given source but represent appreciation in the market value of assets over a period of time, they are treated on a different footing and categorized as short term and long term capital gains, depending on the time period for which the investment has been under possession. Short-term capital gains are taxed at the normal income tax rates. But, capital gains arising on the transfer of equity shares or units of mutual funds are taxed at a flat rate of 15%. In case of long term capital gains, assets other than equity shares or equity mutual funds, the rate of tax is 20%. It is 10% in the case of debt mutual funds, if the cost of acquisition is not indexed and 20% if the cost of acquisition is indexed. Long-term capital gains from sale of equity shares or units of mutual funds are exempt from tax. Also the long term capital gains are fully exempt if the proceeds are invested in specified savings plan/ schemes.

(d) Wealth Tax and Gift Tax

Other Union taxes on income and property such as wealth tax and gift tax do not contribute significant revenue to the Central kitty.

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Wealth tax is levied on net wealth. Currently it is levied at a flat rate of 1% with a basic exemption of Rs. 30 lakh. No cess and surcharge is levied on wealth tax.

Gift tax is levied on gifts received by individuals and Hindu Undivided Families (HUFs). Prior to 1987-88, the rate structure of gift tax was highly progressive, ranging from 5% on the value of taxable gifts not exceeding Rs. 20,000 to 75% on the value of taxable gifts in excess of Rs. 20 lakh. The basic exemption limit was Rs. 5,000. However, from the assessment year 1987-88, a flat rate of 30% is applicable on the gifts over and above the exemption limits. From 1st October, 2009, individuals and HUFs receiving shares or jewellery, valuable artifacts, valuable drawings, paintings or sculptures or even property valued over Rs 50,000 as gifts from non-relatives, have to pay the tax.

(e) Administration of Taxes on Income and Property

The administration of taxes on income and property is entrusted to Central Board of Direct Taxes (CBDT) which provides essential inputs for policy and planning of direct taxes in India and deals with administration of direct tax laws through the Income Tax Department.

(f) Central Domestic Trade Taxes

In addition to taxes on international trade, the Union Government has the authority to levy taxes on manufacture and services. These are known as union excise duty and service tax, respectively.

(g) Union Excise Duty (Cen VAT)

o Union excise duty (UED) is levied on all goods manufactured or produced. Set-off is given for the tax paid on inputs used in the manufacturing of final product. UED is called Central Value Added Tax (CenVAT) since 2001. In addition to CenVAT, there are some variants of it that have been levied to fulfil different objectives. These include Additional Duties of Excise (ADE), Additional duty on Tea and Tea waste, Additional Duty on motor spirit, High Speed Diesel oil, Additional Duty of Excise on pan masala and certain tobacco products and on textile and textile articles, and cesses and surcharges.

UED is one of the significant revenue provider. It contributed 17.94% to the total tax revenue of the Central Government in 2008-09 recording an annual growth rate of 9.69% and buoyancy of 0.76 during 1991-92 to 2008-09.

Revenue collected from cesses, surcharges and some specified levies are earmarked for certain pre-determined purposes, viz. education or upliftment of the workers engaged in a particular industry etc. Cesses and surcharges do not

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form part of the CenVAT chain and therefore, no credit can be availed of on these.

Prior to initiating reform in the tax system, the structure of UED was complex and highly distortionary. Tax-structure was mix of specific and ad valorem rates, varied from 2% to 100%. In effect the then prevailing UED was a manufacturer’s sales tax administered at factory gate. This was a cascading type tax as it was levied on inputs, capital goods and final goods.

Various Committees including the Indirect Tax Enquiry Committee (Jha Committee) suggested incorporation of VAT procedures in UED. Based on the recommendations of all such Committees, VAT procedures were first introduced in 1986 in the form of MODVAT and the rates were gradually unified. Later, as recommended by Tax Reforms Committee, rates were gradually unified. In 1999-2000 almost 11 tax rates were merged into one rate of 16% and MODVAT was converted as CenVAT. For few goods Special Additional Excises were levied with 8, 16, and 24% rates. Under CenVAT input credit was provided for all inputs-- capital as well non-capital goods. In 2008-09, the standard rate of excise duty was reduced from 16% to 14 %. Currently, while there are a large number of rates of CenVAT, the standard rate is 10%.

While the standard rate is 10%, several commodities are charged excise duty at the lower rates of 4%, and 8% which creates distortions. Similarly, existence of a number of exemptions and lack of effective monitoring mechanism leads to confusion and disputes. In this context to make the system more effective, a meaningful review of the existing tax system is required without affecting the growth momentum of the economy and moving forward on the road to a goods and service tax.

The excise duty structure is replete with exemptions of different kinds. The most important ones relate to small scale industries (the exemption is applicable to units whose clearances of excisable goods for home consumption are below Rs. 4.5 crore in the preceding financial year) and to some specific areas like North Eastern States, Jammu and Kashmir, Uttarakhand, Himachal Pradesh and Sikkim. The exemption was provided to specified goods manufactured by an eligible unit in the specified State and/or located in a specified Industrial Growth Centre, Industrial Infrastructure Development Centre or Export Promotion Industrial Park or Industrial Estate.

h. Service Tax

Apart from the levy of UED on manufactured commodities, the Central Government also levies a tax on services. Except a few specified services which were assigned to States (viz. entertainment tax, passenger and goods tax and electricity duty) services were left to the Concurrent List.

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Drawing the powers from the Concurrent List, the Union Government initially levied service tax on three services, viz. general insurance, telephone service and service provided by stock brokers from July, 1994 at the rate of 5%. Since then the scope has been considerably enhanced and at present 114 services are taxed at the rate of 10%. The Union Budget 2011-12 has expanded the tax base by bringing two new services (hotel accommodation if the rent of the hotel exceeds Rs. 1000 per day and air conditioned restaurants having licensed to serve liquor) in to the tax net and expanding the scope of existing service categories. The Union Budget 2012-13 has made a major breakthrough by bringing in the concept of negative list for taxing all the services.

Among all the indirect taxes collected by the Union, service tax has proved to be the most buoyant source of revenue contributing 10.07% to the total tax revenue of the Centre in 2008-09.

Input tax credit (ITC) is available for taxes paid on goods and services used as inputs in providing services.

i. Taxes of the State Governments

The State Governments levy taxes on income and property as also on commodities and services generally having regional coverage. That is, the States are assigned those taxes that could be better administered at the State level allowing for regional variations.

j. State Taxes on Commodities and Services

The important taxes on commodities and services levied by the State Governments include sales tax (state VAT), motor vehicles and passengers & Goods Tax, state excise duty, electricity duty and entertainment tax.

k. Sales Tax/State VAT

Sales Tax is one of the most important sources of revenue for the States. It yields approximately 60% of States’ own tax revenue with a high annual growth rate of 13.9% during 1991-92 to 2008-09.

Of late, it has been replaced by State VAT, which has a three rate structure. The zero-rated items i.e. exempt items include natural and unprocessed products, goods which are legally barred from taxation and goods which have social implications. Another category consists of basic necessities such as medicines and drugs, declared goods (such as iron & steel, hides & skins etc.), agricultural products and food items. These are taxed at 4%. The standard rate of State VAT is 12.5%. In addition, there is a special rate of 1% on bullion and silver and 20% and above on petroleum products and liquor. Although, the lists of goods have been specified to be taxed under the three rate categories for the States, there exist some variations in the items lists from State to State. Efforts are being made by the Empowered Committee of State Finance Ministers to ensure that there is complete uniformity in the rates.

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While State-VAT is a State subject, taxation of inter-State sales is included under the Union List. To ensure an equal treatment for commodities entering into inter-State trade and on those locally produced, the Parliament levies central sales tax (CST) on the inter-state transaction. The current rate of CST is 2% on inter-State sales to registered dealers. In spite of the low rate of CST on registered dealers, the levy of CST on the basis of 'origin' goes against the principle of a unified market. CST levied on inputs cascades and results in higher prices. Due to these reasons the CST is being phased out and would be brought down to “zero” percent by the time GST will be introduced in India.

Since VAT has replaced the prevailing sales tax in the States, the organization for tax administration prevalent under sales tax has been adapted for VAT, with the necessary changes to suit the system of VAT. It is suggested that to implement VAT successfully the States should attempt reengineering of the tax department. Also, efforts are afoot to introduce a goods and services tax (GST) to replace the existing State VAT.

l. Further Reforms

o The analysis of the Indian tax system at the Centre, States and Local Governments indicates that reforms have been introduced in almost all the taxes during the last two decades. Introduction of VAT to replace the complex, cascade type commodity taxes both at the Centre and at the States’ level, has been the most remarkable achievement. It was in fact a paradigm shift in the overall tax system.

While the Report of the Taxation Enquiry Commission of 1953-54 (Matthai Commission) was a major study of the overall tax system highlighting plethora of problems and suggesting solutions for them, the Indirect Taxes Enquiry Committee of 1978 (Jha Committee) highlighted the urgent need to reform the indirect tax system of the country both at the Central and State levels. The Tax Reforms Committee of 1991-93 (Chelliah Committee) was an important study recommending path-breaking reforms in both direct and indirect taxes at the Central level. Also, its recommendations were directed towards bringing the Indian tax system in tune with the structural adjustments to have open economy and to have Indian tax system at par with the tax systems of the other countries of the world.

A path breaking reform in the indirect tax system, supported by the recommendations of the above Committees, viz. Jha Committee and Chelliah Committee, was to move towards introduction of a value added tax to replace the excise (of Centre) and sales tax (of States) system in the country.

However, due to the dichotomy in distribution of tax powers between the Centre and the States not only the switchover to VAT regime was rather slow but this made India to adopt a system of dual VAT: Central VAT (CenVAT) at the Central level and State-VAT at the State level.

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Keeping steps with the technological revolution, path-breaking recommendations for a modern tax administration and for the introduction of a Goods and Services Tax (GST) were given by the Reports of the Task Forces on Direct2 and Indirect Taxes (2002)3.

It was felt that while the new system of VAT was a definite improvement over the earlier system of excises and sales tax, yet it is fraught with certain weaknesses. First, due to the separate taxation of goods and services the value of transaction needs to be split into the value of goods and the value of services for the purpose of taxation. This leads to greater complexities, and higher administrative and compliance costs. Second, due to further globalization of the Indian economy, a number of Free Trade Agreements have been signed in the recent years. This allows ‘duty free’ or ‘low duty imports’ into India. Hence, there is need to have a nation-wide simple and transparent system of taxation to enable the Indian industry to compete not only internationally but also in the domestic market. Third, the CenVAT is levied up to the manufacturing level only. This causes cascading beyond manufacturing level and also creates lack of transparency in the tax burden. It is, therefore, imperative to introduce GST to remove all these weaknesses. The system of GST4 would, therefore, be a step forward in the reforms at the national as well as the sub-national level.

The introduction of GST in the indirect tax system of the Union and the State Governments and the DTC in the direct taxes of the Union Government would establish an economically efficient, cost effective and transparent tax system. It would make the Indian taxpayer competitive at home as well as in the international market. However, the other taxes at the State level need to be further reformed. Special care need to be taken to reform the State taxes, viz. state excise, motor vehicles tax, passengers and goods tax and stamp duty and registration fee on the lines recommended in this study. That would make the Indian tax system suitable for taking the country to new horizon of growth and prosperity.

2 government of india (2002), report of the task force on direct taxes, ministry of finance, new delhi.

3 government of india (2002), report of the task force on indirect taxes, ministry of finance, new delhi.

4 GST is a multipoint sales tax with set-off for both goods and services. It is tax on consumption. Its final and total burden is fully and exclusively borne by the domestic consumer of goods and services;. NO GST is charged on goods or services exported.

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CHAPTER – 16

ECONOMIC POTENTIAL OF INDIA’S MARITIME DOMAIN

181. In order to assess the potential of India’s maritime environment, one need to first imbibe the correct geostrategic perspective that India presents to the world. That perspective comes from looking at our peninsular configuration, the way it dominates the Indian Ocean and the way it acts as a focal point of trade routes. This ocean is the smallest of the three navigable ones, does not possess wide, unobstructed gateways and yet happens to be the most important water body for all trade routes between the other two. And yet, the world cannot but use this ocean for nearly 50% of its energy trade, 1/3rd of its bulk commodities and 50% of its containers. The most important of these routes pass close to Indian shores. While this places a large responsibility on India in terms of security of global sea lines of communication, there is also a resident opportunity in this challenge, that of catering to the potential of business at ports and earning revenue through bunkering and maintenance facilities in our transit ports. The advantage that accrues to India because of her geographical location is enormous.

If the West coast of India has an expanse that remains shallow for miles beyond the shore, it is not assumed as a disadvantage by anyone except port authorities and the shipping industry. Fishing communities thrive on surface Tuna and other shallow water varieties including shrimp that multiply in these waters; oil exploration and production companies find it inexpensive to carry out exploration and extraction; tourism finds safe and attractive habitat on beaches and inshore waters. Fish catch from waters off coastal Gujarat and Maharashtra alone, account for 68% of the entire country’s marine harvest. Thus, shallows are not a handicap for us.

182. On the other hand, the East coast has a very steep gradient. And the fish that are harvested in the East, add up to only 30% of all India catch. That is not because there is less fish in deep waters, but because we do not sufficiently invest in deep water fishing. Maritime nations crave for deep waters as they offer abundant benefits in terms deep water ports, transhipment hubs, oil and gas nodes offshore, and, to establish shipbuilding industry along deep water shores. India’s East coast is ripe territory for all these activities with untold potential for economic activity.

183. We also need to understand that the sub-continental terrain everyone talks about, is not a positive asset to India’s existence. To all intents and purposes, India should be considered an island nation. With negligible volumes of trade possible across land borders, our economic engagement with the world is almost entirely dependent upon the sea. Hence the importance of India’s peninsular configuration. This aspect needs to be taken as a positive property because maritime nations are considered as “haves” as against land-locked ones.

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184. So what does 7516 km of India’s coastline offer? Beautiful beaches, a huge EEZ and offshore assets – not just for tourism, but also for oil and gas within the Exclusive Economic Zone which at the moment extends to 200 NM but is set to become 350 NM in the near future. In that event India’s EEZ would become 2.54 million square km instead of 2.02 million square km. And that means we are multiplying the offshore estate that is available for extracting fish, minerals, gas, oil - whatever one wants. There is abundance of fish and mineral resources that need to be tapped to generate higher volumes of economy.

185. For any offshore activity – particularly trade – to generate revenue, a country needs access points, or ports. We have an inventory of 12 major and nearly 200 intermediate and minor ports. However, the largest of these by real estate measure – major ports – are still set in the mould of archaic procedures. The result is a serious lag between capacity and throughput, leading to loss of revenue and diversion of trade to more attractive transhipment hubs in our neighbourhood. If we are to move on a North-bound graph of economic growth, the first requirement is to set our infrastructure in order. This can happen through modernisation and “true” liberalisation.

186. After ports, the next asset to focus upon should be the Indian owned shipping fleet. At under 9 Million Gross tons, with a fleet of just 700 vessels, we have barely 186 foreign going ships available under the Indian flag. This is an unhealthy sign for a major maritime nation. For, it is always ownership of a large fleet and more importantly, indigenous shipbuilding industry that guarantee economic growth even in times of crises. India needs to encourage the private sector in establishing shipbuilding yards with the aim of not only building a “home” fleet, but also competing with the newly emerging giants in the East.

187. Another asset that our maritime domain offers is the natural network of inland waters. Despite having established the Inland Waterways Authority of India in 1986, we still transport an insignificant proportion of the total inland cargo, by water. The primary reason is a lack of awareness amongst stakeholders and the public at large, of the immense benefit that can accrue from using this medium where cost of transportation is a fraction of the expenditure incurred by road. Same is the story of coastal shipping. With nine coastal states and five coastal Union Territories – most of them industrially developed – there is no reason why coastal shipping should not be the preferred mode of bulk transportation! Once again, lack of awareness and a misplaced conception that land transportation is faster, are responsible for neglect of this avenue of an economical and environment-friendly mode of transportation.

188. More than any other asset on this planet it is the seas that produce variety in weather. This variety contains untold energy which is waiting to be tapped. From solar to wind to hydrological energy, the potential along the coasts is so huge that all our domestic power needs can be met through these renewable sources alone. All that is needed is a regime of public private partnership with targets to be met within a two-decade period.

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189. Lastly, tourism. The Indian coastline is dotted with heritage sites dating from as long ago as five millennia. Most developing countries have nurtured and multiplied their tourism potential in order to create money, popularise their countries as business and tourism destinations and generate employment opportunities for the grass-root level. Most of our sites go a-begging in this respect.

190. The economic potential of India’s maritime domain is enormous. All that is required is: a focused plan to capture this potential in a time-bound manner. The spin offs from these avenues will be realised in a burgeoning downstream industry, exponential generation of employment and “inclusive growth”.

CHAPTER-17

WTO : BALI AND BEYOND

191. After more than a dozen years of negotiations in the Doha round trade talks – and a final push during a high-level meeting in Bali – it seems the World Trade Organisation (WTO) has achieved something: the organisation's 160 members have reached an agreement. The implications for developing countries are huge.

192. The Bali meeting's tense final moments came down to a standoff over food security, an issue that had divided developing countries. On one side, India was arguing that it should be allowed to pay its farmers above-market prices for the crops that it buys for the government's domestic food stockpiles. In a country where more than half of the workforce is employed in the agricultural sector, farming is very big politics. With elections looming in the first half of next year, Indian officials didn't want to look as though they were selling out Indian farmers on the world stage.

193. On the other side, developing countries such as Thailand, Pakistan, and Uruguay – all of which, like India, are major exporters of rice – contended that overpaid farmers in India could undercut producers in their own countries. The US was also a vocal opponent, arguing that India was asking for allowances that went against the spirit of the free trade talks, which generally aim to reduce – not increase – government intervention in the marketplace.

194. After closed-door meetings that lasted well into the early hours in Bali, the negotiators in Bali finally came to a provisional agreement. Countries agreed to a four-year peace clause, meaning that they won't challenge India's food security measures before December 2017. In return, India has vowed to ensure that its policies "do not distort trade or adversely affect the food security of other [WTO] members", among a few other conditions.

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195. By ironing out their differences on food security, negotiators paved the way for deals on two other topics that will have big impacts in the developing world. The first is trade facilitation, which could add $1tn to the global economy by cutting red tape – which tends to be at its thickest in poor countries – at border crossings. The second is a package of issues that are relevant to Least Developed Countries (LDCs); these include allowing LDC exports easier access to rich-country markets. Although the language in those texts has been diluted by years of bargaining, negotiators now appear ready to finalise both agreements.

196. But taking a step back from the nitty-gritty of the negotiations themselves, the biggest news to emerge from Bali is the mere fact that trade officials managed to agree on anything at all. For at least the past five years, as the global trade talks have continued to stumble, the WTO has appeared to be on a slow but seemingly inexorable slide toward total irrelevance. The organisation's Doha talks have barely made any progress since 2001, even as regional and bilateral trade agreements – which some see as more realistic alternatives to the global negotiations – have flourished.

197. But something changed in Bali. Negotiators proved that they could actually get something done. The so-called Bali package represents just a tiny fraction of the issues that negotiators set out to tackle in the Doha Round talks. But still, it's progress. And who knows how many more breakthroughs Bali agreement might inspire. The Bali package ends with a commitment for trade officials to develop a "clearly defined work programme" to tackle the remaining issues in the Doha talks. In time, that work could lead to progress on any number of issues that affect developing countries, including deeper cuts to rich countries' farm subsidies and easier access for developing country exports to foreign markets.

198. The WTO has long come under fire from anti-globalisation protestors, and such criticisms continue today, albeit to a lesser extent. But the WTO remains the only international economic forum in which developing countries are on an equal footing with their rich-country counterparts. Because all decisions at the WTO are taken by consensus, every country that takes part in the global trade talks has the opportunity to block a deal. The same cannot be said of the regional and bilateral negotiations that have become so popular of late. So the WTO has lived to see another day, and perhaps another decade. Developing countries certainly have their work cut out for them in the negotiations that lie ahead. But progress, as we've seen, is at least possible; it just might take a dozen years to achieve.

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CHAPTER 18

INITIATIVES OF PRIVATE SECTOR IN INDIA’S DEFENCE PRODUCTION

199. The Indian Armed forces are currently under- going a significant modernisation drive. Nearly 70 per cent of these high technology acquisitions are imported. This has made India the largest importer of defence equipment. Will this modernisation drive result in creating a strong Defence Industrial Base (DIB)? The answer may be a resounding ‘no’. It may lead to some happy global majors and they may collaborate with. It is time we turned this ‘largest arms importer’ tag on its head. 200. A strong DIB in India is needed, one that designs, develops, manufactures cutting-edge equipment for domestic as well as the global market. China, which was the largest arms importer of defence equipment as late in 2006, become the third largest arms exporter in 2012! India can do better. The US and leading European powers are advanced DIBs that export defence products across the world. Closer home South Korea started its defence modernisation programme through imports but currently has a thriving DIB that also caters to the export market. In these countries, the private sector is seen by the government as an equal partner and supported in its global forays. In India over-dependence on DPSUs and an unstated suspicion about the private sector has discouraged Indian companies in making any substantive investments. Although the Ministry of Defence (MoD) allowed 100% participation of private sector since 2001, the industry faces regulatory, technological, operational and financial hurdles. The Indian private sector is still treated as a supplier and vendor, and not as a valued partner.

201. The successful model adopted by ISRO, whose space programmes has an active participation from the private sector, provides a good case study for MoD. ISRO steered clear of the outdated ‘public versus private sector’ debate and has catapulted India into the top 5 nations with its own cryogenic engine. This was triggered by the denial technology to India due to international sanction, but has become a blessing in disguise. In our quest to be a global power, we need to be pragmatic. The current product range of Indian defence majors is restricted to components of large defence equipment. We need to acquire deeper capabilities through strategic partnership with global defence majors through the FDI route. Global defence majors need to be incentivised to established production facilities here. We want them to use India as part of their global supply chain and not restrict themselves to their offset obligation.The global majors are facing challenges due to the end of the Cold War and the cutback in defence budget in their home countries.

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202. India has a golden opportunity to leverage this situation and facilitate an FDI-led DIB in India. The FDI cap of 26% is impractical. It is a myth that global OEMs will pass on critical technologies- developed over decades of research, with billions of dollars- to their Indian partner for a measly 26% equity stake. A decade later, the number of actual FDI is in a few million dollars. The Mayaram panel’s recommendation to raise FDI to 49% was shot down. It should be raised to 74%. The increase in FDI can be complimented with an increase in the offset obligation to 70%. This could encourage global OEMs to set up JVs with Indian companies, rather than restricting themselves to just a few large Indian groups. There are many concerns about FDI in defence. Some are legitimate and can be addressed through adequate checks and balance. Most others are imaginary and motivated. There are concerns that global OEMs’ facilities in India may create a security threat. There are ways to address that. For instance, the US has stringent provision under its International Traffic in Arms Regulation (ITAR). BEA, a UK company with manufacturing facilities in the US, is one of the largest suppliers to the US armed forces. ITAR restricts BAE USA from sharing any strategic information with its parent company in the UK. All BEA USA employees are US citizens.

203. There are fears that allowing global players in India will hamper growth of Indian companies. On the country, in all sector that has been opened up, both global and Indian players have flourished. Toyota sells here, so does Tata. HP sells here, so does HCL. The Indian entities of the global majors will employ Indian staff, providing them an opportunity to gain expertise. This will enrich India in the long run. MoD needs to pressure DPSUs to perform or perish. DPSUs should be given swift permission to create JVs with global and Indian partners for global defence orders. MoD’s intentions to facilitate a DIB in India are highly welcome. India’s slowing GDP growth, high current account deficit, depleting forex reserves and slow job growth can be addressed partly by a robust DIB. Its multiplier effect would be felt across adjacent sectors like automotive, aviation, IT, metals, bioscience, etc. The need of the hour is fresh thinking, humbleness to accept mistakes, a new vision, complete policy overhaul and a relentless focus on execution.

CHAPTER – 19

STATE OF NORTH EAST AND THEIR ECONOMY

204. The member states of the North Eastern Region (NER) are predominantly mountainous, interspersed with valleys and plains; the altitude varies from mean sea level to over 7000 meter above the mean sea level. The region’s average rainfall – even touching 10,000 mm and above – creates problems through flood and soil degradation. Conversely, it has bestowed the region with unparalleled bio-diversity and abundant natural resources.

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205. The North Eastern Region together with Sikkim covers an area of about 2,62,000 square km and the eight States together share over 5400 km of border with neighbouring countries. The region is known for its ethnic, linguistic, cultural, religious and physiographical diversities. The region can be broadly divided into two sub regions, the North East Hills (NEH) sub-region comprising of Arunachal Pradesh, Nagaland (except for the area adjoining Assam), Manipur (except for the Manipur valley area), Mizoram, Tripura (except for the plains), Meghalaya, two hilly districts of Assam and entire Sikkim and the North East Valley sub-region comprising of the rest of the region.

206. The population growth in the NER States as per 2011 Census is shown in the Table-I below:-

Table-I

Sl. No States 1971 1981 1991 2001 2011

1 2 3 4 5 6 7

1Arunachal Pradesh 467511 631839 864558 1097968 1382611

2 Assam 14625152 18041248 22414322 26655528 31169272

3 Manipur 1072753 1420953 1837149 2293896 2721756

4 Meghalaya 1011699 1335819 1774778 2318822 2964007

5 Mizoram 332390 493757 689756 88573 1091014

6 Nagaland 516449 774930 1209546 1990036 1980602

7 Sikkim 209843 316385 406457 540851 607688

8 Tripura 1556342 2053058 2757205 3199203 3671032

9 Total 19792139 25067989 31953771 38184877 45587982

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207. The Table – I above reveals that a population growth in the NER States is growing rapidly despite the low shares of Agriculture & Allied Sector in the total GSDP as can be seen from Table-III below, this fact stressing the importance of activities in the primary sector of the economy. The GSDP for Agriculture including Livestock at constant (1999-2000) prices for 2009-10 is indicated in the Table-II below.

Table-II(Rs. in lakhs )

Sl. No

State Agriculture Total SDP % to the Total

1 2 3 4 51 Arunachal Pradesh 65387 302827 21.59

2 Assam 1247811 5670231 22.01

3 Manipur 94082 489866 19.21

4 Meghalaya 112783 645901 17.46

5 Mizoram 35633 262033 11.60

6 Nagaland 139661 484992 28.80

7 Sikkim 29217 175562 16.64

8 Tripura 170569 834958 20.43

208. The abundant natural resources of the region still remain to be tapped in full measure. The tremendous hydro potential of the region could have not only brought self sufficiency in energy needs to meet the present and future requirements of the region but could have also contributed to alleviate the power shortages of the country significantly. The region is considered as the potential powerhouse of the nation. The tourism potential of the region is yet to be exploited to any worthwhile extent. Despite various programmes taken up by the State and Central governments, self sufficiency in food grains is an objective that remains unattainable in the foreseeable future. The magnitude of allotment and offtake of rice and wheat as shown in the Table –IV & V below reveals the fact that the demand for food grains by the population of the region is high. The road networks are poor and inadequate. On the positive side, the literacy rates in the region, both for males and females, are higher than the nation average.

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Table-III

Commodity: Rice(In ‘000 MTs)

Sl. No

State 2009-10 2010-11 2011-12

Allotment Offtake Allotment Offtake Allotment Offtake

1 2 3 4 5 6 7 8

1 Arunachal Pradesh 114.93 91.60 117.34 86.49 122.27 93.34

2 Assam 1449.19 1258.56 1844.69 1557.90 2190.52 1707.63

3 Manipur 127.66 126.96 168.06 79.41 180.09 172.89

4 Meghalaya 160.12 144.25 199.89 162.58 224.73 195.75

5 Mizoram 187.34 145.38 198.91 146.19 208.31 150.99

6 Nagaland 129.95 122.45 151.78 151.27 163.15 149.14

7 Sikkim 48.00 45.11 54.22 46.94 59.55 54.32

8 Tripura 330.61 275.28 368.79 273.70 363.71 326.40

9 Total 2547.80 2209.59 3103.68 2504.48 3512.33 2850.46

Table-IV

Commodity: Wheat (In 000 MTs)Sl. No

State 2009-10 2010-11 2011-12

Allotment Off-take Allotment Off-take

Allotment Off-take

1 2 3 4 5 6 7 8

1 Arunachal Pradesh 20.08 8.99 15.26 12.62 12.25 9.35

2 Assam 565.58 336.83 746.48 460.94 723.97 503.50

3 Manipur 30.48 16.72 35.72 8.54 33.79 22.70

4 Meghalaya 28.54 21.90 38.88 24.50 35.19 27.30

5 Mizoram 12.66 9.50 19.97 10.40 15.43 12.00

6 Nagaland 66.79 47.77 61.43 44.79 54.36 48.41

7 Sikkim 7.47 7.09 6.74 5.07 7.15 5.40

8 Tripura 41.50 24.95 43.23 20.73 37.97 18.39

9 Total 773.10 473.75 967.71 587.59 920.11 647.05

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209. Region’s basic Strengths & Weaknesses

The region’s basic strengths are:

Large natural resources and potential for growth in the agro-forestry and horticultural sectors including expansive and extensive bamboo plantation, exotic flora.

Large mineral deposits (particularly in Assam and Meghalaya)

A vast bio-diversity hot spot.

Vast water resources including tremendous hydel power potential.

Great promise for tourism development.

Proximity to one of world’s fastest – growing economies, those of the S.E. Asia.

A highly literate population.

Rich heritage of handicrafts/handloom/tribal artefacts.

Strong community spirit and traditional democratic system of local – self-governance.

North East’s weaknesses are:

Inadequate development of basic infrastructure.

Geographical isolation and difficult terrain that reduces mobility: high rainfall and recurring flood in the Brahmaputra valley.

Lack of capital formation and proper enterprise-climate.

Slow spread of technology.

Absence of a supporting market structure and adequate institutional finance structure.

Low level of private sector investment.

Lack of local agricultural surplus.

Insurgency problems.

Late start in the development process.

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Turn in the wheel

210. The Government of India have all along been making determined and multi-directional efforts to make the region take long and rapid economic strides so that its economy comes at par with the other fast-developing States of the country. Since, the creation of the North Eastern Council (NEC as) an Advisory Body to aid and advise the Union Government about development and security-related matters in the NER vide the North Eastern Council Act, 1971, this effort took a new dimension. The NEC gets the gross budgetary support from the Union Government directly. Subsequently, it was also decided later on that all the Central Ministries (with few exceptions), as a policy, would be required to spend 10% of their budget in the region. Any shortfall out of the earmarked 10% accrues to the non-lapsable central pool of resources (NLCPR). The NLCPR was initially administered by the Planning Commission and was later transferred to the Department of Development of North Eastern Region (DoNER) from 2001-02. The Department has been upgraded to a full-fledged Ministry in 2004 (M/O DoNER) . The Ministry gets its budgetary support for its flagship programme, administering the NLCPR, from the NLCPR accruals, a pool account that is maintained by the Ministry of Finance, Government of India.

211. The NEC has been declared as the Regional Planning Body for the NER by an Act of the Parliament in 2002. It was also considered essential to evolve a 15 years perspective plan for development of the region. The NEC took up the responsibility absolutely seriously. Experts from various fields and civil society members took an active part in the process. Consultations with people also took place. Accordingly, the NER Vision 2020 document was formulated which was an essential exercise undertaken to chalk out programmes for the development of the region. All developmental Sectors of north east states are taking cue from this Vision document for preparation of their plans and programmes.

212. The Eleventh Five year Plan has been a turning point in the planning process for the development of this region due to inclusion of Sikkim as one of the Member States and issuing of a set of guidelines for the development of NE States :

Preparation of the Vision NER 2020 document and regional plans expeditiously.

Focus primarily with projects that benefit two or more States, with wide ranging impact and areas of a critical nature and not spread its resources thin.

Prepare of a shelf of important projects through consultations in order to avoid overlap.

Regional institutions should be transferred to line Ministries immediately. This will ensure that additional resource, on account of avoided O & M expenditure, become available to NEC. It will also help secure professional management input. It was emphasized that the regional character should be maintained under all circumstances and the line Ministries should make special efforts to allay local apprehensions, if any.

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The Planning Commission would review umbrella and subsidy-oriented schemes like SPINE, Sports and Youth Affairs, Agriculture, etc. with a view to avoiding overlap with the schemes launched by the Central Government and State Governments.

Instructions would be issued (by the Ministry of DoNER) to the State Governments to open separate accounts for NLCPR/NEC funds.

There should be proper linkages and coordination between Planning Commission, Ministry of DoNER and NEC.

The line Ministries, while approving the programmes for NER should invariably consult M/o DoNER and NEC in a time bound manner. They should be guided by M/o DoNER to create schemes/projects that are in tune with the priorities. Appropriate advisories could go out from the Cabinet Secretariat for this purpose.

Promoting Industrialisation :

213. The Transport Subsidy Scheme (TSS) was introduced in July, 1971 for promoting industrialization in hilly remote and inaccessible areas. The objective of the Scheme was to provide subsidy to eligible industrial units ranging between 50 per cent and 90 per cent on the transport cost incurred on the movement of raw material and finished goods from the designated rail-heads/ports up to the location of the industrial unit(s) and vice-versa for a period of five years from the date of commencement of commercial production. The scheme is applicable to all industrial units (barring plantation, refineries and power generating units) irrespective of their size, both in private and public sector located in the eight States of North-Eastern Region along with Himachal Pradesh, Jammu & Kashmir, Sikkim, Darjeeling District of West Bengal, Union Territories of Andaman & Nicobar Islands and Lakshadweep, and the hilly districts of Uttarakhand. The scheme has since been revised and notified as Freight Subsidy Scheme (FSS), 2013,w.e.f. 22.01.2013. The salient features of this Scheme are as follows:

Definition of ‘manufacturing activity’ adopted from the union budget 2009-10;

Subsidy on transportation of fly ash disallowed;

Sunset clause introduced so that the scheme terminates after 5 years from its date of notification;

Provision for subsidy for an additional period of 5 years to MSME;

Plantations, refineries, power generating units, coke (including calcined petroleum coke) industry and the units producing tobacco and manufactured tobacco substitutes, pan masala and plastic carry bags of less than 20 microns are in the negative list.

North East Industrial and Investment Promotion Policy (NEIIPP), 2007 :

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214. The NEIIPP, 2007 is the revamped version of erstwhile North East Industrial Policy (NEIP), 1997. Announced on 1.4.2007 and to be implemented for a further period of 10 years i.e. up to 2017, the Policy is for the accelerated industrial development of the North Eastern Region (NER). NEIIPP aims at promoting industrial development of the NER by subsidizing eligible industrial units on their Capital Investment, Interest on working capital loan and Insurance Premium paid. All new units as well as existing units which go for industrial expansion located anywhere in North Eastern Region, which commence commercial production within 10 years period from the date of notification of NEIIP, 2007 are eligible for incentives for a period of 10 years from the date of commercial production. Industries considered hazardous to public health and environment such as tobacco and its substitutes, Pan Masala, Plastics carry bags, Refinery products etc. are not eligible for subsidy. In addition to manufacturing sector, the benefits under NEIIPP, 2007 have for the first time, been extended to service sector. (i.e. Hotels not below Two Star category, adventure and leisure sports including ropeways, nursing homes with a minimum capacity of 25 beds, old-age homes, vocational training institutes such as institutes for hotel management, catering and food crafts, entrepreneurship development, nursing and para-medical, civil aviation related training, fashion, design and industrial training, Bio-technology industry’ and Power Generating Industries - up to 10 MW). The subsidies given under NEIIPP 2007 are Capital Investment Subsidy, Interest Subsidy and Comprehensive Insurance Subsidy.

Under capital investment subsidy component, subsidy @ 30 per cent of the value of plant and machinery is provided.

Under the interest subsidy component, subsidy of 3 per cent of the working capital loan is provided for a maximum period of 10 years from the date of commencement of commercial production.

Under insurance subsidy component, industrial units are eligible for reimbursement of 100 per cent insurance premium paid for the insurance policy of capital assets.

Other incentives/concessions comprise excise duty exemption based on “value addition” norms specified by the department of revenue and 100 per cent income tax exemption.

215. The Scheme was earlier evaluated in 2010 by the Ministry of Development of North East Region (DoNER). The study revealed that industrialization that started due to the NEIP, 1997 has gained momentum after introduction of NEIIPP, 2007. The observation of the evaluation was also that the industrialization in the NER is not progressing at the same pace as in the rest of the country and steps need to be taken in a more methodical and organized manner. At present, evaluation of the schemes under NEIIPP, 2007 is being done an independent agency, whose report is awaited.

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216. The Government t has focused its attention on three priority sectors: (i) Transport & Communication, (ii) Health and (iii) Power. In fact, the Transport & Communication Sector alone accounted for more than 61 per cent of allocation of funds and these three sectors, taken together, accounted for around 78 per cent of allocation of funds. It may be remembered that such a trend had emerged from the historical and economic necessity of the development process of the NER and this trend has, in the long run, benefited the economy of the region immensely. During the 12th FYP (2012-17) the focus would continue be on Transport & Communication, Health and Power. There is also a need to ensure that more & more transparent flows into the region so that it bear the fruits in terms of income generation for the masses. However, it is important to note that, from the Eleventh FYP onwards, Agriculture & Allied Sector (comprising Agriculture, Horticulture, Floriculture, Animal Husbandry, Development of Medicinal & Aromatic Plants, Fisheries, Agricultural Storage & Marketing, etc., and Livelihood Projects as sub-sectors) has gained in relative importance as a sector, in view of the importance of primary sector activities in the economy of the region. Human Resources Development & Employment is another sector that, too, is gaining in relative importance from the Eleventh Five Year Plan onwards. And, these trends are being followed both in the Twelfth FYP.

CHAPTER - 20

SCIENCE & TECHNOLOGY

217. Popularizing science and the inculcation of scientific temper is vital for any nation’s growth. The ability to cope with and to fully participate in the surge of historical forces unlocked by the process of globalization can only be attained through the creation of a broad-based knowledge technocracy and a skilled population. The leadership of the Indian freedom movement was painfully conscious of loss of India’s global position in the humanity’s scientific and technological march and ascribed the loss of India’s freedom to colonialism to this fact. As early as 1938, the National Planning Committee of the Indian National Congress, under Jawaharlal Nehru’s inspiration, set up a working group on ‘scientific research’ and on becoming the first Prime Minister of India, he assumed charge of the Ministry of Science and Cultural Affairs in 1949, perhaps the first Minister of Science in the world.

218. N e hru’s Emph a s i s o n Scientific Temper in I nd ian Societ y . Pandit Nehru’s deep sense of history was reflected in the statement he made to encourage, in the newly independent citizenry in India, a ‘scientific temper’: “it is an inherent obligation of a great country like India, with its traditions of scholarship and original thinking and its great cultural heritage to participate fully in the march of science, which is probably mankind’s greatest enterprise today”. He had been aware that, not only has India been widely famous for its philosophy, mysticism, architecture, sculpture, performing arts and the like,

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India’s scientific contributions ranged from the decimal place value counting system using nine digits and the zero to the highly developed holistic philosophy and practice of medicine, Ayurveda, to major discoveries in astronomy, chemistry, metallurgy, plant systems and to works on sophisticated aspects of grammar, linguistics and logic. Famous for its fabled universities set up before the Christian era, like Nalanda (in modern Bihar state) and Taxila (in modern Punjab in Pakistan), over 10,000 books on science and technology, during just 600 years from 12th to 18th century, have been identified with many of these translated into Persian and Arabic.

219. Scientific Awakening before Independenc e . As a significant manifestation of the nationalistic stirring during the freedom struggle, over three quarters of a century before Indian independence, there was a major awakening of Indian science as evident in the seminal contributions of scientists like J.C. Bose, Srinivas Ramanujam, C.V. Raman (the first Indian to receive the Nobel prize in physics in 1930), Meghnath Saha and S.N. Bose (whose collaboration with Einstein led to certain particles, categorized by application of Bose-Einstein Statistics, being called ‘Bosons’). One also cannot minimize the foundational role played by other great scientists in India, some of whom like Homi Bhabha and Vikram Sarabhai were already poised to lead the nascent Indian scientific community into building the enormous knowledge infrastructure after Indian independence.

Historical Phases Of The Gro w th Of S&T Since In depend ence

220. First Phase of S&T Develo p ment Af t er I n depe nd enc e . The independent Indian leadership assumed the task of reorienting the modest existing scientific pool towards the requirements of socio-economic transformation and to bring science and education closer to the people, especially the poorest. In the first phase lasting nearly 20 years, the emphasis was on building the infrastructure – in education, science and technology and industries. This led to the creation of a chain of universities and educational institutions, including the Indian Institutes of Technology (IITs) and to the development of core indigenous competence in areas, such as coal, steel and power. A significant aspect of this infrastructure was high technology, in areas such as nuclear energy and space. Since this infrastructure, given the legacy of colonialism, could only be developed by the government, requiring massive infusion of funds and human resources, there was a certain scepticism both in India and abroad as to its necessity in a country which was poor and underdeveloped. This period also witnessed the phenomenon of “brain drain” where a poor country like India was seen to be subsidizing the technological growth in the developed countries.

221. Second P h ase of S &T De v elo p m en t . The next phase, in the 70s, was built upon the first one. India’s indigenous scientific capacity was deployed in carrying out rapid socio-economic transformation as witnessed in the phenomenon of the Green Revolution (essentially in wheat and, later, in rice) which could be carried out through the combination of scientific capacity and administrative infrastructure to deliver the requisite policy package to poor – and mostly illiterate – farmers. The

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effect of the Green Revolution was significant within the country as well as abroad where the agricultural sector in developed countries came under competitive pressure from India. Other remarkable example is the so-called ‘White Revolution’ which made India the largest producer of milk in the world through milk and milk-processing cooperatives organized by poor farmers. During this phase, substitution of imports by products manufactured through reverse engineering was also successfully carried out.

222. T h ird Ph a s e of S&T Development . The third phase began, during the period of economic liberalization, in the 80s which established India as a globally competitive economy. Considerable encouragement to technological assimilation and advancement took place under the dynamic leadership of the young and technology-minded Prime Minister, late Rajiv Gandhi. The computer revolution in India which occurred as a result of government-private sector partnership, especially involving medium size private companies, which prepared the ground for India’s IT revolution. This was evident in the remarkable phenomenon of the mushrooming of the “street corner” computer teaching shops throughout the country! There were other major achievements at that time: one example is the C-Dot telephone exchange which, developed indigenously at a fraction of the cost of imported exchanges, which is used by more than half the telephone exchanges in the country. It stood up very well against international telecommunication giants which even tried to dislodge it from the Indian market. Sanctions placed upon India in areas such as nuclear energy, space, missiles and computers, were turned into opportunities to develop indigenous technological capabilities; India’s PARAM supercomputer, for example, was developed in response to denial of such equipment by US under its sanctions regime and was, subsequently, patented in US itself. This new sense of confidence, in the country’s own science and technology capability, enabled India to fully connect with the globalization process when the opportunity arose. In this early phase, India emerged very strongly in the pharmaceutical industry and in computer software.

Science & Technology Today Civil And Military

223. Current P h ase of S &T in In d i a . India is currently spending 0.8% of GNP on R&D of which government’s share is 74%. The aim of the science policy is to be globally competitive but, at the same time, relate science to the people, especially in the villages, which is exemplified in the strides in bringing the IT revolution to the villages through government-private sector participation. The current institutional structure shaping the growth of science and technology in India consists of the central government, the provincial governments, higher educational sector, public and private sector industry and non-profit institutions/associations. These institutional structures, with their research laboratories are the main contributors to research and development. Notable among these are, the Council of Scientific and Industrial Research (CSIR), Indian Council of Agricultural Research (ICAR) and the Indian Council of Medical Research (ICMR). In addition, there are many departmental laboratories of various Ministries, viz., Department of Atomic Energy, Department of Electronics,

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department of Space, Department of Ocean Development, Defence Research and Development Organization, Ministry of Environment and Forests, Ministry of Non-Conventional Energy Sources and the Ministry of Science & Technology. Further, there are over 1200 in-house research and development units in industrial undertakings. Many Indian universities and the IITs also undertake substantial research and development work. The Department of Science & Technology is, in particular, tasked with the responsibility in fundamental research in different areas as well as with giving direction to this activity through prioritization.

224. Undoubtedly, the Indian science output as reflected by publications and international patents has picked up pace over the last decade and half. The rate of growth of publications was about 5% in the decade of 1995 to 2005 but doubled to over 10% during the five year period from 2000-2005. Also, the Indian share in international publications has steadily increased over the period. Patent applications have enhanced tenfold from less than 50 in 1998, the year recourse was made to this route, to around 500 in 2004. A recent study of US patents granted from Bangalore over the period 1995 to 2005 shows that nearly 500 patents were granted, of which, however, less than 10% were owned by Indian entities, demonstrating the scientific and technical talent in India which is, however, yet to be fully tapped by the Indian private sector.

225. Defence R&D. Science and technology has always been an effective instrument for growth and change. Innovation is the key to growth and success of the Nation. In the present world, the innovation is primarily associated with the critical or high technologies and matching infrastructure. It is evident from history that the major innovations and inventions have emanated from Defence R&D efforts. Even, the major progress in science and technologies was registered during the competitive surge among the countries to develop better weapons and technologies during the 2nd

World War.

226. The Defence R&D started taking shape in India with the inception of Defence R&D Organisation (DRDO) in 1958. This was the time when scientific/academic infrastructure, industrial infrastructure and skill human resource were not enough in the country and, rather, country was going through the process of evolution. That time, DRDO took up the responsibility to design, develop and productionise defence technologies and systems to meet the requirements of the Armed Forces. Over a period of time, DRDO grew phenomenally. At present, DRDO is a conglomerate of 51 laboratories spread all over the country and involved in the design, development and productionisation of state-of-the-art technologies and systems for Armed Forces. These laboratories are aptly supported by several Technical and Corporate Directorates at DRDO HQ. The major technologies and systems developed by DRDO and inducted in the Armed Forces are Ballistic Missiles, Cruise Missiles, Ballistic Missile Defence (BMD), Multi Barrel Rocket Launching System (MBRL), Under Water Launch Missile, Advanced Naval Platform, Main Battle Tank (MBT), Radar Systems, Sonars, Super Computers, Sensors, EW Systems, Advanced Light Helicopter (ALH), Aeronautics, Unmanned Aerial Vehicles (UAV), Life Support Systems, Armoured Systems, Precision ammunition, Small Arms, Robotics, Assault Bridging &

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Engineering Systems, etc. Therefore, the indigenization efforts in defence technology area have brought higher sustainability of the advanced Defence Systems/technologies at reduced cost. DRDO brought many academic institutions and industries together to collaborate to develop these major technologies and systems. This consortium approach developed a new scientific culture among the industries and promoted R&D in the academic institutions. Many systems developed by DRDO were produced by DPSUs /PSUs /private industries. This approach has strengthened the confidence of academia to be more proactive to carryout applied research and also, enormous confidence and equity were generated by industries to take up bigger technology challenges. It goes long way in Nation building and to operate futuristic high technology programmes. Apart from R&D laboratories, DRDO developed many agencies such as ADA, GATEC, NFTDC, SITAR, etc with an aim to carry out development of high precision systems/subsystems leading to production. A multi-pronged approach of DRDO has yielded into result-oriented R&D with special emphasis on inclusive growth of R&D in academics and creating a bigger industrial base in manufacturing sectors. This is an effort which has not only provided the best technologies and Systems to the Armed Forces but also contributed immensely in the Nation building.

227. In the current phase of S&T development, India can be counted amongst the very few countries in the world to have developed an indigenous light combat aircraft and advanced light helicopter. In nuclear and space technology, it has developed fast breeder reactors and extensive satellite and launch vehicle technology. Indian Space programme has matured and the country is now poised to send its first ever manned mission to the moon. In the industrial R&D, India has established a credible record. In the chemical industry sector, India has achieved international recognition and has broken the monopoly of the multinationals. In pharmaceuticals, an industry practically non-existent at the time of independence, the country has emerged as one of the most competitive producers of therapeutics in the world and a supplier of medicines at very affordable prices. A net exporter of pharmaceuticals, it meets more than three quarters of the Indian requirements of bulk drugs, almost all the requirements of formulations and is poised to enter the international markets after the expiry of patents in US in the near future. Indian leather industry is amongst its top five export earners. In the area of industrial catalysis, India counts among the top few countries possessing world class capability in this knowledge-based sector of catalyst development and manufacture. In petroleum refining and petro- chemicals, the country has even transferred technology to US and Europe. India is completely self-sufficient in agro-chemicals for which it was predominantly dependent on imports in the 70s. Apart from the new PARAM 1000 supercomputer, through the development of other parallel computing-based efforts, such as ANUPAM, ANURAG, FLOW-SOLVER, India has demonstrated its ability in supercomputing which are presently available only with US, Europe and Japan. India is demonstrating its capability in R&D and technical skills by attracting several major multinationals to set up R&D base in India or partnerships with local collaborators. Several facilities owned by the Council for Scientific and Industrial Research, an autonomous organization of the Government of India, the Indian Institutes of Technology and

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other scientific institutions, are partnering with global leaders in diverse areas, such as software, bio-technology, food processing, chemical industries, pharmaceuticals, petro- chemicals, aircraft equipment, telecom, etc., so that the cycle of product development and its commercial exploitation can be further shortened in the current milieu of intense international market competition. India’s collaboration in space with other international scientific organizations, both for research and for commercial purposes (launching of satellites on behalf of foreign countries and firms) is already well established.

228. India’s S&T strengths are being recognized in the current age of globalization. About 150 MNCs of the ‘Fortune 500’ have set up research base in India in different areas, like IT, pharmaceuticals, automotive sectors etc. General Electric, for example, does cutting edge research in Bangalore on aircraft components. A large number of SME firms are doing R&D work on outsourcing basis on behalf of western firms. Reliance Life Sciences, going by the patents the company has filed, is doing significant work on the stem cell lines it owns. Many of the ubiquitous MP3 players are powered by software created at IITIAM Systems, a small IT company based in Bangalore. A good part of Intel’s latest chip Intel Core 2 Duo was designed out of Bangalore. The new versions of Yahoo’s instant messenger were coded in India. Add to all of this the kind of work being produced by Indian laboratories for dozens of companies like Microsoft, Intel, Yahoo, Google, Amazon and IBM. According the Vice President of Nasdaq, R&D in India costs 10% of what it costs in US.

229. Vi s i on for S&T for Societal T r an s f ormation . In his book, ‘Envisioning an Empowered Nation: Technology for Societal Transformation’, 2004, former President of India, Dr. A.P.J. Abdul Kalam, has talked about technology as the prime mover for a developed nation. He has identified areas, such as agriculture, manufacturing, health, the strategic sector and knowledge sector for priority development. According to him, the core areas for R&D are stem cell research, interactive tele-education system (facilitated by the launch of EDUSAT, India’s exclusive educational satellite), bio-fuel Jatropha plant), BRAHMOS (supersonic cruise missile with speed upto Mach III), molecules to drugs (using nano-technology), nano-technology applications (e.g. next generation computers, solar energy, etc.) and prediction research in seismology. An autonomous body under the Department of Science & Technology, Technology Information Forecasting and Assessment Council (TIFAC) has mapped out a ‘Technology Vision for India up to 2020’ covering 17 sectors and bring out 25 volumes of reports. Whilst India is getting rapidly connected with the ebbs and flows of globalization, the Indian leadership is conscious that its own growing economy is placing heavy demands on educational and vocational training systems and on R&D infrastructure. Given the fact that services sector constitutes more than half the size of India’s current GDP and that IT and IT-enabled services constitute an important segment of the services sector, it is critical that India should aim for being a knowledge-driven society. Vast potential exists in application of IT in fields such as bio-technology, pharmaceuticals, designer-made material and others. Huge opportunities also exist for R&D in the field of genomics, bio- informatics, DNA technologies,

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clinical studies and genetically modified crops.

230. Perspective on India’s S&T Capabiliti e s . The Indian scientific community, both in the Government and the private sector, has much to be proud of for its achievements since independence. It has created the sinews to give India’s S&T a capability to support national objectives even in the face of technology-denial regimes which have existed, in some form or the other, since independence and has, now, enabled India to participate in the globalization process with enormous confidence. India’s capacity to absorb and to indigenize technology from different sources, from the west as well as from the former Soviet Union, has been a major factor in creating the industrial and S&T base in the country, both in the civilian and the defence sectors. Some industrialists, now, even believe that India’s further industrialization would be technology-driven. Our research base, until now buried in the red-tape of the departments and ministries, is being quite keenly familiarized with by foreign multi-nationals for their commercial applications. Indeed, our scientists are being sought out due to their competence and relative ‘inexpensiveness’. An interest in science and technology amongst the students endures unlike the developed countries, like US, where there is serious concern about the lack of interest in the field in university entrants. A serious attempt has been made, by our scientific establishment especially CSIR, to record and disseminate traditional knowledge.

231. Still, major questions remain about adaptation of our existing S&T capabilities to our economic liberalisation process, about optimal use of our existing capabilities and about developing cross-spectrum institutional synergies. Since literacy and general education form the base of the knowledge pyramid and the continuous advancement of science and application of improved technology form its middle-rung, India’s science and technology capabilities cannot develop until the technical education, both vocational and professional, is significantly upgraded. Equally and importantly, our education system needs to abandon the practice of segregating students into different, mutually exclusive “streams” of science, ‘arts’ and commerce and to develop cross-“stream” academic culture. A handful of world-class IITs cannot power India’s drive for knowledge society. A large number of the country’s approximately 500 engineering colleges need to be significantly upgraded in terms of their quality. Private sector initiative and investment, whether from Indian corporate or NRIs or reputed foreign universities, need to be fully encouraged. Close links need to be fostered between technical institutions and industry. Although having the third largest pool of scientists and engineers ahead of US, UK, France and Germany (Global Competitiveness Report,

2003-04), as a proportion of the total population India is at 1/100th of US levels and

1/50th of the Korean levels. China’s manpower base of scientists and engineers as a percentage of its population exceeds ours by more than three times. In terms of

total investment in R&D, India’s expenditure is 1/60th of that of Korea, 1/250th

of that of US and 1/340th of that of Japan. More than 20% of the budgetary allocations to the various scientific institutions are not being utilised. More

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significantly, atomic energy, space and defence research account for 71% of all central spending on science and technology which means that relatively little is left for investment in agriculture, energy, tele- communications and other crucial sectors. R&D expenditure even in India’s fast growing IT sector has been averaging around 3% of sales’ turn-over which is much lower as compared to the 14-15% expended by international reputed software firms. Similarly, country’s ability to transfer proven technologies from its vast network of scientific research institutions to the factory is very inadequate. Despite India producing world class scientists and engineers, the national research system rarely produces world class results. Although, India’s recent experiment with the Science and Technology Entrepreneur Parks (STEPs) has been quite successful, the missing link between scientists and the practitioners in agriculture and industry remains a major obstacle to developing the required synergies. Another obstacle is the lack of continuous flow of young talented researchers in non-teaching research institutions in which an atmosphere of bureaucratisation and lack of accountability prevails. ‘Grass-roots’ consultancy and turn-key projects are increasingly in demand and need to be tapped. Finally, there is need for fostering close ties between basic research and business.

CHAPTER – 21

SKILL DEVELOPMENT AS A STRATEGY TO REAP DEMOGRAPHIC DIVIDEND

Introduction

232. Fast growth, competitiveness and social stability depend on skill development. India’s industrial growth is picking up at a time when industry’s ability to absorb unskilled rural migrants has been lost in history. A few aspects stand out in any analysis of India’s skill landscape:

a) To compete in the open domestic economy, leave alone the global market, companies need to achieve standards that can be delivered only by trained manpower working on sophisticated machines that run to precise algorithms. Even in the service sector, workers need a whole lot of skills to become part of the modern economy, even if it is confined to social graces and discipline. Untrained, unemployable youth can easily turn to crime or be mobilised by political parties that thrive on hatred of ‘the other.’ Skill development is a national priority.

b) The phenomenon of educated unemployed in a fast-track economy is peculiar to India. According to a 2005 NASSCOM-McKinsey World Institute study, over 75 percent of engineering and 85 percent of arts, science and commerce

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graduates in India are unemployable. Neither is the education they are prescribed up-to-date, nor are they taught marketable skills during their three-four years in college.

c) Sixty years after independent India adopted the centrally planned model of economic development, the productivity of Indian industry and the labour force in particular, is abysmally low, the inevitable outcome of continuous neglect of vocational education and training. Consequently despite hosting the world’s largest working age population and labour force, the Indian economy which for the past decade has been averaging unprecedented annual GDP (gross domestic product) growth rates of 8-9 percent, is experiencing the paradox of a massive — and growing — shortage of skilled and sufficiently trained personnel in agriculture, manufacturing and service industries. Confronted with the highest in-service employee training costs worldwide, intensifying shortage of skilled workers and rising wages which are jeopardising India Inc’s cost-competitiveness in world markets, alarm bells have begun to ring in somnolent government offices and the councils of Indian industry.

d) In India very few young people enter the world of work with any type of formal or informal vocational training. Indeed the proportion of formally trained youth in our labour force is among the lowest in the world. Currently the VET system has the capacity to train only 3 million youth against industry’s requirement of 13 million annually.

233. Taking cognizance of this challenge and opportunities, the Government of India launched coordinated action for skill development which is envisioned to be a major initiative for inclusive growth and development and it consists of a conglomeration of programs and appropriate structures, of which National Skill Development Corporation (NSDC) is an important part. Government and Indian industry bodies like CII, FICCI, ASSOCHAM teamed together to set up NSDC. Indian Industry holds 51% stake and 49% is held by Indian Govt. This Organisation (NSDC) has been mandated by Indian Govt. to “catalyse” (advocate, create, fund, facilitate and incentivize) skill development in India. It has Prime Minister’s mandate to skill 150 million people in India by 2022. NSD Cintends to address these issues on two tracks. Firstly, for building capacity in the VET segment, it is encouraging private sector investment and initiatives (in profit as well as non-profit enterprises) in training and skill development in 20 high growth sectors and the huge unorganized sector.. It has been provided a seed corpus of Rs.1, 000 cr. by Govt to start the process. Secondly, NSDC is tasked with developing an enabling environment for skills development, including support for (i) clarification of sector-specific competencies/skills through promotion of Sector Skills Councils (SSCs), (ii) quality assurance such as independent third-party accreditation of trainees’ skills acquisition; (iii) capacity development for skills development institutions/ such as curriculum and standards, faculty development, and so forth; (iv) trainee placement mechanisms, and (v) monitoring and evaluation, supporting systematic collection and analysis of data about skills development, including employer feedback regarding the quality of NSDC trainees. To ensure a strong private sector training supply, NSDC will facilitate establishment and growth of private “train the trainers” centres where instructors will be updated with the latest sector-specific

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skills and competencies required, using current equipment and technology, and modern training techniques.

234. Today, industry realises the criticality of skill development for every industry vertical, and all Industry Forums evaluate how industry could participate in skill development initiatives. The best option for industry sectors is to set up SSCs to complement the existing vocational education system for the Industry Sector in meeting the entire value chain’s requirements of appropriately trained manpower in quantity and quality across all levels on a sustained and evolving basis. Sector Skill Councils are national partnership organizations that bring together all the stakeholders – industry, labour and the academia. The SSC will operate as autonomous body. It could be registered as a Sec 25 Co, or Public Limited Co. Funding is initially done by the government. As it grows, the SSCs become self funded, for-profit organizations.

235. This initiative has been adopted by a few leading economies, such as Canada, UK, Australia, New Zealand, Netherlands, South Africa, who have been successful in addressing their country’s human resource development needs.

CHAPTER – 22

WATER SECURITY AND MANAGEMENT OF INDIA’S WATER RESOURCES

236. India accounts for 16 per cent of the world’s population and 4 per cent of its water resources. This population–water imbalance, widening over the years, is turning into a full-blown water crisis. While the aggregate picture is not alarming, the situation is quite precarious in some regions, especially the arid and semi-arid tracks. For instance, groundwater exploitation in Rajasthan, which meets 80 per cent of its drinking water requirement from ground water, has crossed 100 per cent during recent years. The exploitation rates are as high as 150% in some districts. At aggregate level the total utilisable water in India is estimated at 1120 cubic meters per capita per year, as against the threshold level of 10000 cum requirement. Per capita availability of below 1000 cum is regarded as a water scare situation. The estimated demand for water is about 750 cum during the year 2000 and the projected demand for water would be 1050 by 2025. More than 80% of water is used for irrigation with an irrigation potential of 90 million hectares. But, a tenth of this potential remains un-utilised and a sixth of the irrigated are is afflicted with water logging and salinity. The economic and environmental costs associated with under-utilisation, water logging and salinity are far more serious than the generally perceived demand-supply gap. The looming water scarcity crisis is much more than a simple hydrological or physical phenomenon. Water crisis stem from pervasive gaps in the economic and institutional dimensions, allocation, use and management of water resources.

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237. Judicious management of water resources is among the critical policy issues across continents. The need for action in this direction is growing by day, as countries and communities across the globe are increasingly experiencing water stress in various contexts. Water stress often leads to civil strife and conflict. Water resources development and management assumes paramount importance in agrarian economies like India. In these economies, irrigation consumes more than 70 per cent of water utilised and continues to face shortage in quality as well as quantity terms. Water scarcity is resulting in regional inequalities and political turmoil. In other words, water, especially irrigation, has become the great divider across communities and regions. Through genuine natural or environmental factors explain such a division, policy induced ill management of water is at the core of the water stress and conflicts, In order to improve management practices, various policy measures such as institutional approaches and market mechanisms are suggested. Often, in the literature, either of these issues is emphasised to the neglect of the other. Similarly, partial approaches in the case of resource management is common. While the integrated water resource management (IWRM) is a right step in this direction, approaches to water management are far from integrated.

238. In the absence of such an approach ‘water security’ would remain a distant dream. Water security means that “people and communities have reliable and adequate access to water to meet their different needs, present as well as in future, are able to take advantage of the different opportunities that water resources present, are protected from water related hazards and have fair resources where conflict over water arise”. Such water security ensures equity and sustainability. In the context of scarcity, allocation of water should be governed by optimality rather than productivity. For, optimality combines economic as well as social benefits. Water security is indispensable for addressing inter and the intra regional as well as inter household inequalities in growth and development and sustaining the ecological balance. In fragile resource regions, environmental degradation is seen as a cause of household food insecurity and as a consequence of water insecurity. That is, food security is linked to water security through environmental degradation in these regions. Water resource degradation is manifested in the lopsided or imbalanced development of different sources of irrigation.

239. An important dimension 0f water resources that has not received due attention is its quality aspects. While the magnitude of the problem is limited and spread over, the losses due to its impact are quite substantial. The pervasive spill over effects between sectors that are kept outside the domain of the market is one of the important constraints, which leads to severe environmental degradation both in developed and developed countries. The impact of industrial pollution on other sectors is one of the most classic examples of this sort. The main reason behind this is market failure. One way to overcome the problems of market failures is to enforce property rights. However, in many externality type situations, the cost of enforcing property rights is found to be high and difficult to enforce. The problem is acute, especially when it comes to environmental problems related to industrial pollution. It means each individual/organisation has no incentive to take into consideration the effects of his use on other individual/ organisations. In the case of negative effects of industrial pollution, the social cost, which is equal to the sum of the costs to all individuals, is greater than the private cost to the individual using air and water for waste disposal. The implication of this is that decision on how much to dump in to the environment.

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240. One of the main reasons for the poor performance of the water sector in India is the philosophy of supply side management hitherto followed, to the neglect of demand management structures. Unless demand regulation is given due importance in water resource planning and management, it would be difficult to meet the demands of the increasing population, either in terms of water or food, in the event of increasing water shortages coupled with mounting financial constraints. Demand regulation includes conservation of water, enhancing the productivity of water, etc. through following appropriate price policies and adopting technologies fostered with suitable legislation and institutions.

CHAPTER - 23

FOOD SECURITY IN INDIA IN THE 21 ST CENTURY

Background

241. Food security is one of two major concerns for India; the other being inclusive growth. As the country progresses towards these twin National objectives the ‘supply side’ constraints in food production, both in case of the durable and perishables, have come into focus. A strategy for increasing agricultural production by ushering in a sustainable second green revolution is a ‘work in progress’. Merely producing more is not enough; it is equally important to save each grain produced by minimizing losses and reducing wastages. This would not only improve farmers’ income and economic viability of agricultural operation in the country but will increase the efficiency of the entire food supply chain.

242. Food is lost or wasted throughout the supply chain, from initial agricultural production down to final household consumption. In medium and high income countries the wastage is mainly during the consumption stage and minimal during the production stages. In India and other developing countries food losses occur mostly during the early and middle stages of production which is in the form of Pre harvest and Post harvest losses. Empirical evidence confirms that India losses 25% - 40% of its agricultural production, per annum, to post harvest losses. When translated in to figures one realized the enormity of the problem and its impact on the issue of food security. In 2009 out of the estimated loss of Rs 76,500 crore, equivalent to the annual budget of three big Indian states, Rs 52,4000 crore accounted for loss on account of perishable fruits, vegetables and poultry which calls for augmenting infrastructure facilities and gearing up food processing industry on a war footing.

243. Given that many small farmers in India live on the margins of food insecurity, a reduction in food losses especially post harvest losses of this magnitude would have an immediate impact on their livelihoods. Since these losses are attributable to financial, managerial and technical limitations in harvesting/post harvesting techniques, storage & cooling facilities, infrastructure , packing and marketing systems a well thoughout strategy making profitable investments, both in public and private sector, in augmenting Institutional and Infrastructural facilities is the way ahead.

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244. Undoubtedly investment in the food processing sector will be the most significant component of this strategy; considering its potential in incentivising increase in agricultural production, strengthening the food supply chain and ensuring better remuneration to farmers. It will supplement India’s food security policy which has a laudable objects of ensuring availability of food grains to the common people at an affordable price and have access to food where none existed. The food processing sector will also weed out the inefficiencies built in the post harvest operations thereby substantially reducing food losses and increasing farm profitability & food availability. A developed and mature food processing industry will have other linked spinoffs as well; better markets access to farmers, value addition to farm produce, additional employment opportunities as well as export earning leading to a better socio-economic condition for millions of farm families and common people.

245. Every year 10 million tonnes of food is lost in India due to post harvest losses. In financial terms these losses are estimated to be Rs 44,000 crore as confirmed by the Agriculture Minister in the Parliament on 24th August 2013. This figure is quite disturbing especially because 29.8% of our population lives below the poverty line and approx 4600 die of malnutrition every day. Though the GDP growth in the last one decade has been better than most countries, it is in no way inclusive. The average annual earning of farmers is Rs 22,000 which is much below the national average of Rs 54,000. At the same time unemployment, especially in the rural areas, is also on the increase. These issues have been agitating the minds of our policy makers because of which food security and inclusive growth have emerged as the twin national objectives.

246. With reducing agri-productivity and growing population, the only solution for food security lies in reducing post harvest losses. Similarly if inclusive growth has to be achieved farmers’ income has to improve for which the supply side barriers in terms of post harvest losses will have to be overcome. Thus for both these objectives an efficient supply chain management in a robust Food processing sector is the only solution. It brings remunerative advantage to the farmers and generates employment (both direct and indirect) which is two and half times of the other sectors in India. With focus on the post harvest losses will go a long way in addressing some of the most critical national issues facing the country.