ES2011

Micro-foundations of
Macroeconomic Development
2
CHAPTER
This has been a classic year of economic recovery for India. The economy remained
on the path of rapid resurgence which began in 2009-10 and has virtually returned
to the high growth path that it had achieved during 2005-08, before the global
financial crisis and economic meltdown. India’s growth story this year has been
remarkable by any standards. What makes it even more significant is that this is
happening on the heels of a year in which growth was a robust 8 per cent; so there is
no base effect to lay claims on this year’s achievement. Further, as discussed in Chapter
1, the growth prospect over the medium to long term looks excellent. However, as
often happens with strong recovery, the economy has come under strain from high
inflation. Since the growth is in real terms, the average person has the cushion of
more goods and services. Nevertheless, inflation, especially when it is centred on
food, as has been the case in recent times in India, can be a cause of considerable
distress for the common man and woman. Not surprisingly, a substantial part of
this chapter addresses the subject of inflation. Price rise is discussed both as a matter
of overall demand management and from the point of view of productivity and
marketing. The chapter also comments at some length on the efficiency of financial
intermediation. Economic analysts often treat growth and development as rooted in
economic policy alone. In reality, much depends on the social, political, and
institutional milieu. Crafting good policy entails taking proper account of this. The
chapter closes with a discussion of these extra-economic catalysts of economic
development.
INCLUSIVE GROWTH AND INFLATION So clearly there has been an easing of the overall
inflationary situation even though the recent spike
2.2 This has been a difficult year in terms of in food prices is a cause for concern and will be
inflation, even though the overall trend of inflation addressed in this and other chapters. On the other
has been downwards. Inflation peaked around March hand, the high growth that India has achieved this
and April 2010 and has since been on a downward year, when much of the industrialized world is still
trend despite a disturbing turnaround in December teetering on the brink of a possible second dip, is
2010. Inflation in India is measured by a wholesale remarkable. As always with high growth, this is also
price index (WPI) and four different consumer price a moment of opportunities. This is the time when
indices (CPIs) for various categories of consumers. we have to make sure that the economy builds up
Interestingly, measured by all five price indices, it strengths—fiscal, infrastructural and more—so that
was in single digits from October 2010. This had not only do we improve our current standard of living,
not happened since April 2009. Till September 2010, we also accumulate resources and create fiscal
for 17 months, one or the other inflation index has space for bad times that may come our way in the
been in double digits. In fact, from March 2010 to future. In short, a part of the current recovery must
July 2010 all five indices showed double-digit inflation. be stored away to build future resilience.
24 Economic Survey 2010-11
2.3 When growth is as high as it has been for India be based on the comprehensive study of available
this year, if it were the case that all segments of the statistics, the lessons of economic theory and, not
population were partaking in the growth in exactly least, judgement.
the same way, then inflation would not be a matter 2.6 Recognizing the complex nature of inflation,
of great concern. This is because the growth being with roots in domestic and international factors, the
real, everybody is better off and the inflation does Government has set up an inter-ministerial group
not take away anything from this. It is when the (IMG), under the chairmanship of the Chief Economic
average growth is unevenly distributed that we have Adviser, Ministry of Finance, to “review trends in
to worry about the worse-off and vulnerable segments overall inflation, with particular reference to primary
of society. Hypothetically it is possible that while food articles,” and “make recommendations for action
the average Indian is better off by the per capita on fiscal, monetary, administrative and other fronts.”
income growth of approximately 7 per cent per annum In the mean time, in understanding and analysing
that the country has had, some poor people are inflation, it is important to distinguish between two
actually worse off because their nominal incomes different kinds of phenomena. The first is a short-
have hardly grown and inflation has negated that term relative price rise in a couple of commodities
growth. Given India’s objective of inclusive growth, and the second is a sustained overall price increase.
this is a matter of concern. In fact, in much of standard economics, the former
2.4 According to the unit level data of the NSSO is not even called inflation. The latter, on the other
2004-05 round of monthly consumption expenditure, hand, is classic inflation and calls for standard
based on uniform recall period, the bottom quintile remedies involving monetary and fiscal policies. This
of India’s rural population devotes approximately 67% is not to deny that relative price adjustments can be
of their aggregate household expenditure on food. a contributory factor in a country’s overall inflation.
Since food price inflation during much of the year However, these two kinds of phenomena call for very
has been over 10 per cent, it is possible that some different kinds of policy interventions. To begin with
of these people are worse off, despite the high real the phenomenon of sustained overall price increase
gross domestic product growth (GDP) growth. The or inflation, it is important to note an interesting
way this has to be handled is by developing stronger connection between inclusion and inflation. While
systems of food security for the poor, more effective the Reserve Bank of India (RBI) controls the total
systems of providing cheap fertilizer to small farmers, amount of currency in the economy and the Ministry
dependable micro credit to poor households in rural of Finance, Government of India (GOI), controls the
and urban areas, and basic health support and other fiscal and revenue deficits, what is not often
such services. There are several initiatives afoot in understood is that inflation depends on overall liquidity
India right now to make sure that not only do we try in the economy, and that can be affected by the
to control inflation, we also try to put these supportive decisions and behaviour of firms, farms, corporations,
policy structures in place so that the vulnerable and ordinary citizens.
segments of India’s population are protected from 2.7 As Figure 2.1 shows, Indians continue to hold
the ravages of inflation. These policies are important a lot of their savings as cash. In rural India, around
because, though the Government aims to bring down 42 per cent of savings are held as cash. In this
inflation further, there may be reason to expect that environment, once we initiate policies for financial
in the medium term we will have to live with a little inclusion and help people open bank accounts and
higher inflation than the 3 per cent or so that we put their money in the accounts, we will be bringing
used to have in earlier years. money that was earlier lying dormant into circulation.
2.5 In designing inflation control measures it is In the old set-up where lots of Indians, especially in
important to be aware that sudden, sharp policy- rural areas, kept their savings as cash in their homes,
induced contractions in demand can cause the Government and the RBI had the freedom to
unemployment to rise. Given that India’s inflation indulge in an additional amount of spending without
data are remarkably comprehensive and are this giving rise to inflationary pressures. This is a
published on a weekly and monthly basis, whereas case of one person’s decision not to put his money
our employment statistics come out with long into circulation enabling another agent to put her
intervals and time-lag, the trade-off between inflation money into circulation without causing inflationary
and employment escapes public awareness and pressures. Once people are financially included, that
slants discourse. There is however, enough evidence is, they put away their money in banks and mutual
from around the world that, at least in the short run, funds, this money goes into circulation. Hence, the
there is a negative relation between inflation and total effective money supply in the economy goes
unemployment. This is what makes it critical for up. In this situation, even if there is no change in the
government to carefully calibrate the demand behaviour of the RBI and GOI, there will be inflationary
management measures when bringing down inflation. pressure. There is evidence from around the world
There is no known formula for doing this. This has to that monetization of the economy and the desirable
Website: http://indiabudget.nic.in
Micro-foundations of Macroeconomic Development 25
objective of bringing more and more people into December) broad money (M3) growth was 16.5 per
systems of modern money management contribute cent. This is not only reasonable but it is less than
to the overall pressure on prices. This is a case of the growth in the previous year, which was 17.9 per
one good development, namely, greater financial cent. Narrow money (M1) also grew less in 2010-11
inclusion, having an undesired consequence, to wit, compared to 2009-10. This year (year on year, up to
a greater inflationary propensity. This must not deter 31 December) the growth was 15.5 per cent and
us from pursuing financial inclusion since the overall last year the growth was 17.9 per cent). During this
benefit of this can be enormous. What is being year currency growth has been greater than deposit
pointed out is the need to be aware of all its fall- growth, resulting in a higher currency to deposit ratio.
outs, and take appropriate action against possible Also, during the year the growth in bank credit to
negative side effects. Government has also gone down. The demand for
2.8 An analysis of India’s recent monetary and liquidity is evident from the fact that the repo rate
liquidity conditions lends credence to the foregoing emerged as the operative policy rate, at least for
analysis. Overall money supply seems to be well most of the latter part of the calendar year 2010.
under control. In 2010-11 (year on year, up to 31 This shows that the raising of the repo rate was being
Figure 2.1 Prefered form of cash savings

by location
100
7.6 9.7
90 5.4 4.2 Others
80
Post office
Per cent of cash saving
70
45.3
Banks
60 62.6
50 Keeping at
home
40
30
20
41.7
10 23.4
0
Rural Urban
Source: National Council for Applied Economic Research–Center for Macro Consumer
Research (NCAER-CMCR), NSHIE, analysis from Rajesh Shukla (2010), How India
Earns, Spends and Saves: Unmasking the Real India, Sage Publications, New Delhi.
tolerated well by the real economy. The inflation that in India can buy with 100 dollars will typically require
occurred despite these features point to the possible 290 dollars in the US. We also know that by the
role of other non-central bank factors. time a country becomes industrialized, the PPP
2.9 The other route through which a desirable correction has to be smaller. This happens partly
because of exchange rate changes but more
change can have the adverse effect of creating
substantially because the prices of basic non-traded
inflationary pressures in an emerging economy is
goods and unskilled labour in the formerly poor
integration with the global economy and, more
country rise and partly catch up with prices in
generally, globalization. It is well-known that in poor
countries, the purchasing power parity (PPP) is low. industrialized nations.
In other words, the kind of living standard one can 2.10 The most major break for the Indian economy
achieve in a poor country with 100 dollars is occurred with the far-reaching economic reforms of
considerably higher than what one can achieve with the early 1990s. From 1994 India was clearly on a
the same money in the United States, Europe, or higher growth path than ever before. The next big
any other industrialized nation. Currently, India’s PPP step up in growth happened in 2005. If India keeps
correction factor is 2.9. In other words, what a person up the high growth rate it has had from 2005, it will
mean that the real per capita income of Indians will spikes, it is important to take a longer-run view and
rise from the current level of approximately 1300 be restrained in the use of such interventions. We
dollars per annum to 10,000 dollars in 2039. Using should use each such inflationary episode to try and
the data on PPP corrections needed for countries locate and rectify the flaws in the system of
just above the 10,000 dollar benchmark, we would production and marketing.
expect India’s average dollar prices to rise (see Box
2.12 Before going into this, it is important to stress
2.1). If this happened entirely through the adjustment
that not all price increase should be met with
of prices with no change in real exchange rate, we
Government interventions. Prices rise and fall in
would have an additional 2 per cent per annum
response to changing demand and supply scenarios
inflation rate. In reality, there could be some
in the country. Prices are signals to consumers and
exchange rate adjustment as well, though cross-
producers to alter their behaviour in response to
country data suggest this is dominated by the price
exogenous changes in the economy. It is not
adjustment. If simply as a rule of thumb, we take
advisable for Government to step in and flatten out
three-fourths of this to be determined by price
all these price fluctuations. Trying to control these
adjustment, this will mean that we will, over the next
price increases by legislating price controls runs the
30 years, have an inflation rate that is 1.5 percentage
risk of prices being lower but goods vanishing from
points greater than would have been the case in the
store shelves, as happened in countries which tried
absence of this growth spurt. In the years
this strategy in the 1970s and 1980s. In other words,
immediately preceding 2003-04, from when GDP
we risk having low prices for no goods. Such a policy
growth picked up (and went even higher after 2005),
could also give rise to black markets. When an
the average annual WPI inflation was just below 3.5
unwarranted price spike occurs, the need is to see
per cent (it was 3.61 per cent in 2001-02 and 3.38
if there are defects in our marketing system, take
per cent in 2002-03). This implies that, other policies
away lessons, and put corrective measures in place
remaining unchanged, we will have an average annual
to prevent a recurrence. Some such food distribution
inflation of nearly 5 per cent during the next decade
flaws were isolated during the high inflation in
or so of the rapid growth that is widely expected to
foodgrains that occurred from November 2009 to May
occur in India. This suggests the need to revisit some
2010 and corrective measures put in place.
of our standard policies for managing inflation, and
also underlines the need to ensure that India’s growth 2.13 It can be argued that the sharp hike in the
is inclusive and that we have better designed price of vegetables seen during December 2010 and
systems for providing basic security to the vulnerable. January 2011, especially of onions, reveals defects
in our food production and marketing systems. What
2.11 Around this average inflation, there will
came to light during this period was the great
certainly be periods of price spikes and even price
difference in prices for the same product at the farm
declines for different commodities and different
gate and in city retail outlets, and also across different
classes of commodities. The year 2010-11 has been
cities and towns. On 7 January 2011, for instance,
a year of more than one such skewflationary episode.
onions were selling for ` 30 in Agra and 57.5 in Delhi;
At the beginning of the calendar year 2010 and even
for ` 35 in Nagpur and 62 in Mumbai; for ` 23 in
in the first months of the fiscal year 2010-11 inflation
Thiruvananthapuram and 60 in Dindigul. Surely with
was high for foodgrains, sugar, and pulses. During
an efficiently functioning and competitive market
the course of the year, inflation in these commodities
such price differentials could not have survived. What
stabilized, but by November there was another spike
these price differentials suggest more than anything
in prices of another set of commodities, led by
else is not so much hoarding as the cartelization of
onions, cabbage, milk, and a couple of other
trade resulting in the prevention of entry of new
products. While we are often forced to use the blunt
traders. The problem needs to be tackled using our
instrument of controlling aggregate demand in the
Competition Act 2002.
economy through monetary and fiscal instruments,
these price spikes should be treated as occasion to 2.14 When we give free rein to enforcers to check
investigate the micro structure of markets, in these practices in the market and among traders,
particular the production and distribution of goods the tendency often is to lump together a motley
from farm and factory to retail store and consumer. category of behaviour—hoarding, entry deterrence,
While political compulsions sometimes oblige and collusive price hikes—and treat them all as
Government to take short-term measures like banning malpractices to be avoided. Yet such indiscriminate
exports and changing tax rates to correct the price lumping together and punishing traders can do more
Box 2.1 : The Mechanics of PPP Catch-up and Increases in Price Levels
The concept of PPP catch-up inflation arises from the empirical observation that as countries grow in terms of per capita
GDP the required PPP adjustment appears to become lower (see Figure). Countries with per capita GDPs of around US$
850 to 1200 in 2009, like India, Pakistan, Nicaragua, and Vietnam, appear to have an average PPP correction of approximately
2.3.1 In comparison, countries with per capita GDPs between US$ 8500 and US$12,000, like Turkey, Uruguay, Mexico, and
Brazil, have an average PPP correction of around 1.6. It therefore appears that, as the per capita GDP of a country increases,
its PPP correction becomes smaller. This would also indicate that due to this apparent fall in the PPP correction factor, there
would be some increase in prices. For example, in 1980 Brazil had a per capita GDP of US$ 1371 with a PPP correction of
2.7. By 2009 it had a per capita GDP of US $ 8220 and a PPP correction of 1.3. India currently has an annual per capita GDP
of around US$ 1300 with a PPP correction of 2.9. If it reaches a PPP correction level of 1.6 (average PPP correction of
countries with per capita GDP US$ 8,500-12,000), over a period of around 30 years it would face an inflation of 2 per cent
per annum solely on account of this PPP adjustment (provided there is no currency appreciation).
The theoretical basis for this comes from the work of Balassa and Samuelson. As explained by Froot and Rogoff (1995), the
Balassa-Samuelson effect posits that ‘after adjusting for exchange rates, CPIs in rich countries will be high relative to those
in poor countries and that CPIs in fast-growing countries will rise relative to CPIs in slow-growing countries.’ The
underlying mechanism arises from the historical tendency wherein technological progress is faster in the traded goods
sector than the non-traded. Rising wages in the traded goods sector lead to rising wages in the entire economy. The non-
traded goods producer then needs to raise the relative
price of non-traded goods to pay the higher wages. PPP adjustment factor and
per capita GDP (2009)
Suppose we consider a basket of goods in India that
costs ` 5000 today. Given an exchange rate of ` 50 per 6
US dollar, this costs US$ 100 in India. With a PPP PPP adjustment factor
5
correction factor of 2.9, the same basket of goods would 4
cost US$ 290 in the US. If in say 30 years there is no
3
inflation in the US, and the PPP correction factor for
2
India comes down to around 1.6, the basket costing US$
290 would cost approximately US$ 181 in India. If the 1
exchange rate remains at ` 50 per US dollar, the basket 0
would cost ` 9050. This would imply a PPP catch-up
0
20
40
60
80
100
120
inflation of about 2 per cent per annum for 30 years
(compound annual growth rate--CAGR). The other Per capita GDP (2009) (in US$ thousands)
extreme possibility is that there is no inflation in India
and this adjustment occurs only because the ` 5000 basket becomes worth US$ 181 because the rupee appreciates to ` 27.6
per US dollar.
Between these two extreme alternatives, there would be other combinations involving a smaller appreciation and a lower
inflation rate. If we consider real-world examples of current middle-income countries (Table 1), very few countries appear
to have had currency appreciation as their per capita incomes increased. Brazil with its spectacular growth in per capita
GDP had a depreciating currency together with very high inflation. Poland, Uruguay, Chile, Venezuela, and Mexico also
had significant growth, lowering of the PPP factor, currency depreciation, and inflation. These examples lend some
credence to the idea of PPP catch-up due to high growth leading to high inflation in the absence of currency appreciation.
Table 1: Per capita GDPs, Currency Depreciation, Inflation and PPP Adjustment in Some Middle-income Countries.
Country Per capita Per capita Per capita Currency Average PPP PPP
GDP 1980 GDP 1990 GDP 2009 Depreciation Annual Adjustment Adjustment
(1993-2009) Inflation 1990 2009
(1993-2009)
Russia n/a n/a 8681.4 3100.7 99.7 n/a 1.7
Mexico 3291.9 3395.1 8133.9 333.7 11.3 2.1 1.7
Brazil 1371.6 3463.9 8220.4 5123.6 245.2 1.5 1.3
Turkey 2235.1 3859.5 8711.2 14,010.3 47.4 1.4 1.4
Seychelles 2793.5 6366.5 9253.0 162.7 6.1 1.6 2.6
Uruguay 3845.7 3319.2 9420.5 472.6 17.1 1.6 1.4
Libya 12,795.5 7063.1 9511.4 n/a 2.4 1.4 1.4
Chile 2492.9 2409.1 9515.9 38.8 5.3 2.0 1.5
Equatorial Guinea 143.9 294.6 9577.2 66.8 7.7 1.5 1.9
Lithuania n/a n/a 11,115.1 -42.8 35.0 n/a 1.5
Poland 1591.3 1625.2 11,302.1 72.2 10.8 3.6 1.6
Venezuela 4650.0 2481.6 11,383.0 2263.5 34.0 2.8 1.1
Latvia n/a n/a 11,465.6 -25.1 15.3 n/a 1.2
Note: Internal calculations based on International Monetary Fund (IMF) data.
Data Source: IMF, World Economic Outlook (WEO) and International Financial Statistics (IFS).
Reference: Kenneth A. Froot and Kenneth Rogoff (1995), ‘Perspectives on PPP and Long-run Real Exchange Rates’, in Gene
Grossman and Kenneth Rogoff (eds.) Handbook of International Economics, Volume 3, North Holland, Amsterdam.
1
Per capita GDP at current prices, not adjusted for PPP.
harm than good. Our enforcers have to be taught to for small, new traders and farmers to bring their
distinguish between legitimate activities and genuine products to retail outlets. It is also believed that new
malpractices. Hoarding, for instance, like cholesterol, traders are deterred by incumbent traders. If this is
can be both good and bad. When ordinary citizens established, then section 3 of the Competition Act
hoard for a rainy day, they serve the useful role of 2002, can be invoked to put an end to these
evening out price fluctuations. This falls in the practices.
category of good hoarding. When Government talks
2.16 Another, and quicker, method to curtail the
in terms of setting up new warehouses and storage
margin between farm gate and retail prices is to bring
facilities, it implicitly recognizes the socially useful
in modern supply chain management systems and
function of this type of hoarding. On the other hand,
retail sellers into the picture. This will involve a lot of
when hoarding is done by large traders to deliberately
new know-how. A quick way to get at this is to allow
manipulate prices, this can be detrimental to the
foreign direct investment (FDI) in multi-product retail
economy and go against the interest of consumers.
into India. We will certainly need to have a regulatory
It is this latter kind of hoarding that we need to deter.
structure within which such foreign companies will
The important press release by the Prime Minister’s
be required to function, even if it were argued that
Office made on 13 January 2011, which led to the large organized-sector firms would be more wary of
setting up of the IMG referred to earlier, shows violating the nation’s antitrust laws. At any rate, we
awareness of the need to distinguish between are at a juncture where FDI in multi-product retail is
different kinds of hoarding stating as it does, worth considering. It could enable farmers to get
‘Government will take stringent action against higher prices and consumers to have to pay less.
hoarders and black marketers manipulating market We could, as a first step, consider limiting
prices.’ The last three qualifying words are important. international multi-product retailers to a few outlets
The same paragraph goes on to point out the need in each major city. This will prevent them from getting
to use not just our Essential Commodities Act 1955, full control of the market and, at the same time, set
but also the Competition Act 2002. an upper bound on the prices that other retailers will
2.15 The main relevance of the Competition Act be able to charge for their products. Further opening
occurs in the context of the natural propensity of up can follow depending on the success we have
established traders to prevent the entry of new with this.
traders. It was observed in an earlier paragraph how 2.17 The policy changes discussed in the preceding
the same product on the same day had vastly different paragraphs can improve our food delivery and
prices at the farm gate and at different retails distribution systems and provide great benefit to
locations. This does suggest the occurrence of entry- consumers. They can even achieve a once-and-for-
deterrence. For a policy analyst it is important to all lowering of retail prices that consumers pay. But
realize that the best antidote to these large price this in itself will not cure the risk of long-run inflation,
margins and the consequent large profits made by which refers to a sustained across-the-board price
the incumbent traders is the drive of others not increase. Sustained inflation is, in part, a by-product
currently operating in this market to make profit from of growth and financial inclusion. As discussed
the large margins. If we allow new traders to come earlier, with more people putting their savings in banks
into the market, buy where prices are low, and sell and mutual funds, the scope of the RBI and
where prices are high, the large price differentials Government to increase money and run a fiscal deficit
will vanish. So the critical question is why such new may go down. A deficit that earlier did not cause
traders and farmers do not come into the market. inflation may now do so because ordinary citizens
Though a firm answer is not possible at this stage, it are putting their money into circulation. In the parlance
seems likely that there are barriers to their entry, of economics, there may be a steady increase in
caused by the rules and regulations of the Central the velocity of circulation of money. Unfortunately,
and State governments and by deliberate barriers to there are no known formulae for how much we have
entry created by the incumbent traders. It is arguable to cut back on deficit and liquidity to counteract the
that our Agricultural Produce Market Committees fact of rising velocity. This will have to be achieved
(APMC) Act, by restricting the traders permitted to through trial and error. The secular lowering of inflation
trade through the main mandis, facilitates collusive seen through this year suggests that the moves
pricing. Also the various tolls and checks that a trader made by the RBI and Government have been in the
faces in bringing supplies into a city make it difficult right direction.
2.18 There is another novel dimension to inflation economy. But since each nation has a central bank,
today that puts it beyond the full control of any single we are unwittingly returning to a predicament that
nation. This has to do with globalization. As barriers we had once escaped, to wit of having multiple
between economies come down, and goods, money-creating authorities in a single economy. This
services, and capital flow more easily between has given rise to destabilizing currency competitions
nations, there is a natural tendency for each nation’s and may be a factor behind the recent increase in
monetary authority to lose some of the effectiveness inflation in emerging economies (see Table 2.1).
it earlier had. Equivalently, one nation’s monetary 2.19 It is time for the world’s major economies to
policy now has greater externalities for other nations. get together through appropriate international
In earlier times, when one country increased its agencies such as the G-20 to address this problem
money supply, it boosted demand in that nation, and have systemically important economies try and
leading to a combination of greater output and some achieve greater coordination in their monetary and
upward pressure on prices. Nowadays, it is possible fiscal policies. The global economy is beginning to
for the newly created money to flow out of the nation exhibit some troubling characteristics that need
to other countries and give rise to greater demand attending to. What we have is a variant of stagflation
there, boosting output but also creating inflationary at global level. But unlike the standard melting-pot
pressures. It was realized a long time ago that for stagflation, where the stagnation and inflation occur
one economy to have more than one central bank in the same economy, the global economy is
with money-creating rights can be destabilizing. characterized by a salad-bowl stagflation—stag in
Starting with the founding of the Bank of England in some nations, flation in others. This is probably a
1694 it gradually became the norm to have one consequence of the world becoming increasingly
central bank for one economy. With globalization boundaryless. Money creation in such a world is
and the lowering of boundaries between nations, the like pouring water on a flat surface. No matter where
world economy is gradually moving towards a single the water is poured it ends up in the same place, in
this case stimulating growth and prices in those
Table 2.1 : Cross-country Inflation over places, and not necessarily stimulating the economy
the Last Year where the money was created.
Inflation Food Inflation
MICROFINANCE, FINANCIAL PRODUCTS,
Year Year AND FINANCIAL INCLUSION
ago 2010 ago 2010
2.20 Over the last year, there has been a lot of
Argentina 7.1 11.0 * 4.7 15.8 * effort to strengthen economic inclusion. This is as it
Brazil 4.3 5.9 ** 3.3 9.2 * should be. Of the Government’s lynchpin for
China 0.6 5.1 * 3.2 11.7 * economic policy, namely ‘inclusive growth’, the
Egypt 10.7 11.6 *** 17.4 21.9 *** country has done very well on ‘growth,’ but needs to
press more on the peddle for ‘inclusion’. To do better
India 13.5 8.3 * 17.6 5.4 *
on this front we have to define this target more sharply
$
Indonesia 2.8 7.0 ** 4.7 13.2 and then pursue policies to achieve it. It was argued
Iran 7.4 12.5 * 6.6 12.1 *** in last year’s Economic Survey that one way of
Pakistan 10.5 15.5 ** 7.5 20.1 @
formalizing the inclusion target is to evaluate the
Philippines 4.3 3.0 ** 2.2 3.2 *** performance of an economy in terms of the
performance of the bottom quintile of the population.
Russia 8.8 8.8 ** - -
Thus, instead of treating the overall per capita income
Thailand 3.5 3.0 ** 0.8 6.6 ***
as a target, we should aim to enhance the growth of
Turkey 6.5 6.4 ** 9.3 7.0 ** the per capita income of the bottom 20 per cent
Ukraine 12.3 9.1 ** 7.6 13.1 @
(what is called the quintile income) of the population.
Vietnam 6.5 11.8 ** - - Such a definition would avoid the common pitfall of
Uruguay 5.9 6.9 ** 4.6 10.1 @ treating growth and equity as pulling in different
directions. Even with this clarity of definition, the
Source: International Labour Organization (ILO) question remains about how best to achieve this
Department of Statistics, World Bank, National Bureau
of Statistics of China. target? What should be the components of a policy
Notes: *November, **December, ***September, aimed at raising the standards of the marginalized
@
October, $ August. population?
2.21 This Government took the view that in the large SKS Micro Finance, this sector seems to have come
agenda of inclusion, a central and in some ways of age. However, in 2010-11 the sector ran into
pivotal feature is financial inclusion. In order to achieve difficulty with reports of unfair practices by MFIs to
such inclusion, there are plans to expand India’s recover loans and some farmer suicides attributed
banking sector, enable the creation of new financial to these practices.
products and use modern technology to enable the 2.23 These developments have put the microfinance
poor to keep their savings in interest earning sector at crossroads. In regulating MFIs it has to
accounts. One of the most ambitious schemes for be recalled that they have played a major role in
achieving these is the Swabhimaan programme, drawing poor people into India’s mainstream finance
which, takes off on the idea of financial inclusion and enabling farmers to make useful investments
proposed and developed in the Rangarajan and marginal workers to start up small self-employed
Committee Report (Committee on Financial enterprises. There are approximately 30 million
Inclusion). Swabhimaan, launched on 10 February, people throughout India who have been beneficiaries
2011, is an innovative scheme to take banks to the of MFI lending. There is evidence that some of these
doorstep of the rural poor instead of the latter having people have been subjected to unfair threats to make
to go in search of banks. The idea is to have business them repay loans. Such practices must be stopped.
correspondents, or bank saathis, (who may be the However, to react to this by announcing blanket
local merchant) armed with electronic hand-held amnesties and encouraging farmers to default en
devices, which can recognize the bio-markers of bank masse will do more damage than good. Such
customers. The customers can then deposit and practices would lead to the MFI sector disappearing
draw money directly from the bank saathi, without since no MFI, whether it be a profit-making one or a
having to travel long distances to get to the nearest non-profit NGO, would want to give out loans knowing
brick and mortar bank branch. The programme will that these will not be recovered. While we must
be making use of aadhaar which will make it possible recognize that borrowers in special situations have
for individuals to establish their identities in any part the right to plead bankruptcy and not pay back, we
of India. By combining India’s strength in information need an intelligent regulatory structure which
technology with innovative ideas in banking, protects borrowers and, at the same time, allows
Swabhimaan promises to be a major catalyst for this sector to flourish. It is with this in mind that the
growth and inclusion. RBI set up a committee headed by Y.H. Malegam to
2.22 Another constituent of financial inclusion, study and advise on the microfinance sector (see
which could potentially benefit from Swabhimaan, is Box 2.2). The report will, no doubt, give rise to
the extension of the reach of micro finance. discussion, debate, and analysis. In the light of this,
Microfinance can empower the poor so that they it is worthwhile recounting some of the principles we
can move on from relying on hand-outs to being self- have to keep in mind while regulating this important
sufficient and seeing their incomes grow. For sector.
microfinance this has been a year of remarkable 2.24 The central principle of a good system of
developments. The sector has grown rapidly but it finance is a transparent contract. Hence the first
has also been mired in controversy. A micro finance and foremost principle in drafting a regulatory system
institution (MFI) can take many different forms. It for the microfinance sector is to require that the
can be a non-government organization (NGO), a non- lending MFI make the terms and conditions of the
profit non-banking financial company (NBFC), or a loan clear to the borrower. It is, for instance, well
profit-making NBFC incorporated under the Indian known that people often fail to understand the
Companies Act 1956. Following the RBI guidelines meaning of compound interest rates. A poor farmer
of 18 February 2000, MFIs have been taking bulk told that he has to pay 10 per cent interest rate per
loans from banks and on-lending to small borrowers. month tends to believe that he will be paying an
MFIs cannot take in retail deposits and to that extent interest of 120 per cent over the year. However, if the
fall in the category of NBFCs. This sector has grown 10 per cent interest rate is meant to be a compound
exponentially and on 31 March 2010, based on rate, then this works out to an interest of 214 per
returns filed with the National Bank for Agriculture cent over the year. To misunderstand this can lead
and Rural Development (NABARD) we know that there the borrower to make huge losses and the lender to
were 1659 MFIs availing a total credit of ` 13,955 make huge, unfair profits. We have seen these kinds
crore from the banking system. With the success of of phenomena even in advanced economies like the
the initial public offer (IPO) of a leading MFI, namely United States where the sub-prime home borrowers
Box 2.2 : Issues and Concerns of the MFI Sector : Extracts from the Report of the Sub Committee
of RBI Central Board of Directors—the Malegam Committee.
Main Recommendations*
Categorization of MFIs
 Creation of a separate category of NBFCs to be designated as NBFC-MFIs;
 NBFC-MFIs need to be companies providing financial services predominately to low income borrowers with not less than
90 per cent of total assets (other than cash and money market instruments) in the form of qualifying assets;
Terms of credit: borrowers, size and interest rate
 Borrower can be a member of only one SHG or Joint liability group;
 Limits on annual family income of borrowers recommended at ` 50,000;
 Individual ceiling on loan to single borrower recommended to be ` 25,000;
 Loans to be in small amounts with more frequent repayments than bank loans;
 The interest charged from borrowers subject to a ‘margin cap’ of 10 per cent for MFIs with loan portfolio of ` 100 crore
and 12 per cent for smaller MFIs;
 Overall interest cap on loans at 24 per cent;
 Tenure of loan to vary with loan size;
 Restrictions recommended on the extent of ‘other services’ to be provided by MFIs;
 Not more than two MFIs can lend to a single borrower.
Resources, capital structure and provisioning
 Commercial Bank lending to NBFC-MFIs to qualify as ‘priority lending’;
 Minimum net worth of 15 crore for NBFC-MFIs.
 Capital Adequacy Ratio of 15%
 All of the Net Owned Funds should be in the form of Tier I Capital.
 MFIs encouraged to issue preference capital (with a ceiling on the coupon rate to be treated as part of Tier II capital
subject to capital adequacy norms
Consumer protection, code of governance and regulatory issues
 RBI to prepare a draft customer protection code;
 Grievance redressal mechanism to be established
 MFIs to observe code of corporate governance;
 Responsibility of avoiding coercive recovery methods to rest on MFIs;
 Credit information bureau to be established;
 The Reserve Bank should have the responsibility for off-site and on-site supervision of MFIs;
 A four pillar approach comprising of MFIs, Industry associations, banks and RBI for monitoring compliance of regulations
suggested;
 NBFC-MFIs should be exempted from the provisions of the Money-Lending Acts, in view of the recommendation on
interest margin caps and increased regulation.
Note: *This is only a synoptic extract of the recommendations and not the full text.
Source: Report of the Sub-Committee of the Central Board of Directors of the Reserve Bank of India to Study Issues
and Concerns in the MFI sector, January 2011.
took on loans without understanding the terms they 2.25 At first sight an MFI charging an interest rate
were signing on to. Government has to take of 24 per cent or 30 per cent per annum may seem
measures to ensure that MFIs make the terms of extortionist since big urban borrowers manage to
contract transparent to the borrowers. This is more get money at much lower interest rates. However,
important than setting caps on interest rates and there are two arguments against this reaction. First,
other restrictions on the terms of the contract. This it has to be kept in mind that lending to many small
is not to deny that we may have to set some limits borrowers is much more costly than lending to a few
on the terms. But the economics of this is important large borrowers. Second, for a lot of these poor
to understand before we go about ring-fencing the borrowers the alternative to an MFI is not a bank or
terms of the contract. an organized-sector financial institution but the rural
moneylender and such moneylenders often charge investment companies, also came under criticism.
interest rates which, on annual basis, go up to 100 It can be argued that these CDOs caused a ‘rating
per cent or even 200 per cent. Hence to place too inflation’, since in mixing and matching these
severe a cap on the maximum interest rate that an mortgages, banks made sure that each such product
MFI can charge can drive some of the poorest and making it to a certain rating category made it to just
least bankable borrowers towards even greater the edge of that category. In earlier times, ratings
extortion. agencies, such as Standard and Poor’s or Fitch,
used to rate whole companies or even nations. So
2.26 Is there then a case for having an interest when debt issued by some company was given an
rate cap or should we simply insist on transparency AA+rating, the lender knew that this company’s
of the terms of the contract, whatever those terms quality rating was somewhere in the interval from
may be? Even most industrialized nations such as AA+ to just below AAA. Once CDOs came into
the United States have usury laws which cap the vogue, investment banks started creating new assets
interest rate that a lender can charge. Recent that were deliberately aimed at certain ratings. Since
research in behavioural economics shows that human the demand for these CDOs depends on the ratings,
beings have a propensity to make inter-temporal it is not worthwhile creating tranches that lie in the
decisions badly. Over and above the old idea of middle or upper end of a ‘rating interval’. In other
discounting through time, people have an additional words, these new securities were almost invariably
propensity to value a bird in the hand clustered at the bottom cut-off of each interval. It is
disproportionately higher than all future birds in their arguable that many agents buying these assets failed
hands. Moreover, people typically tend to to take adequate account of this change that had
underestimate the pace at which compound interest occurred as a consequence of structured finance.
rates cause the repayment burden to rise over time. They were used to treating an AA+ asset as an asset
In other words, inter-temporal decision making is somewhere between the start of AA+ and below AAA.
often done in a way which is not fully in keeping with But with the arrival of CDOs that was no longer the
a person’s rational interest. This leads to a possible case. The average quality of assets in each rate
view that when a person signs onto a contract where category was invariably at the bottom end of the
the interest rate is too high, that in itself shows that interval. In other words, there was ‘rating inflation’
the person has miscalculated the repayment burden. the way some universities have had ‘grading inflation’.
This could be a justification for why consumers’ Just as happened in the early days of grade inflation,
sovereignty may have to be curtailed in the interest buyers of these assets were partly deceived. In the
of the consumer’s own true interest. For this reason, world of finance, a small mistake per asset of this
there may be a case for setting some limits to the kind can amplify into big errors and, given the
kinds of terms and conditions that go into a lending complicated interdependencies in this market among
contract including a cap on interest rates. However, lenders, the total impact can be vastly amplified, as
in figuring out the exact details of these, we have to happened in 2007 and 2008. Box 2.3 discusses some
keep in mind the two factors earlier mentioned, other reasons for rating inflation.
namely that micro lending is costly to the lender
and to many a poor borrower the alternative to an 2.28 One way of handling this is to go for greater
MFI loan is money from the informal moneylender granularity in grading as Standard and Poor’s rating
whose interest charges tend to be much higher. system specially designed for East Asian nations
does. But for India the more relevant matter right
2.27 These conceptual issues have a bearing on now is the status of new financial products like teaser
some matters that pertain to larger questions of loans. The terminology is sufficiently tainted for a
organized finance. The financial crisis that began neutral term to be of some value. We shall here refer
with the sub-prime housing mortgage market in the to loans in which the monthly repayment instalment
US and spread to other parts of the world has raised rises over time as a ‘terraced loan’. Unlike most
important questions about new financial products industrialized countries, India has had considerable
and structured finance. Teaser loans, in which the success with terraced loans. The State Bank of India
initial repayments are low but then escalate, over (SBI), for instance, came out with two different
time, to larger repayments, have come under terraced loan products—Happy Home Loan in
criticism. Collateralized debt obligations (CDOs), February 2009 and Easy and Advantage Home Loan
whereby new financial products are created by in August 2009. Both these loans hold the interest
packaging different mortgages of differing risk profiles rates fixed and below the market rate in the initial
together and sold off in slices to other finance and years. In the case of Happy Home Loan this was
in the US, these loans in India were not given to
Box 2.3 : Securities, Seniorities, and the sub-prime borrowers. In the case of Easy and
Lending Boom Advantage Home Loans, a borrower’s repayment
A little less than 1 per cent of all corporate bonds get an capacity and hence eligibility was worked out under
AAA rating. During the lending boom, preceding the the presumption that the person would have to pay
financial crash of 2007-09, close to 60 per cent of all asset-
from the beginning what she would actually have to
backed securities were rated AAA. What was the magic
behind these securities being rated so highly? As discussed pay from the fourth year onwards. Second, there
in the text, the ability to create packages by mixing and was a lot of effort made to keep the contracts
matching mortgages can cause some of this rating inflation. transparent so that the borrowers knew exactly what
But there are other reasons as well. The popular practice they were getting into. Given what behavioural
of creating securities of different seniority can also
contribute to this. economics has taught us, we know that this may
not always be adequate, that a borrower’s nod does
Suppose a bank sells two mortgages of ` 100 each and
not always mean that the borrower has fully
suppose each of these mortgages has a risk of default
equal to one-eighth. Further assume that the risks of the comprehended what it is that he or she is getting
two mortgages are un-correlated. Now, suppose that a into. However, especially the decision not to make
clever finance consultant advises the bank to put these these products available to the sub-prime borrowers
two mortgages together and create two new securities of
but instead to expand the choice available to
Rs100 each and sell them off to two buyers. These two
securities are, however, given different levels of seniority. borrowers with an assured capacity to replay played
The junior security will see a default if any of the mortgages a major role. The fact that this enabled many new
defaults. The senior security will incur a default only if home buyers to enter this market speaks well of the
both mortgages go into default. Note that the junior inclusiveness of the scheme, even though the sub-
security is a little worse than one of the original mortgages
because the risk of default is two-eighths. On the other prime segment was deliberately left out. This is
hand, the senior security is vastly better because it is like what enabled India’s mortgage market to remain
the original mortgage but with the risk of default reduced stable even as such markets in industrialized
to one-sixty-fourth. It is this method of exploiting the countries faltered. The basic lesson is clear. In
laws of probability and elevating certain pools of mortgages
into inflated rating categories that was among the causes
general, it is worthwhile giving banks and financial
of the lending boom. Since by mixing and matching nothing institutions the freedom to introduce new products
fundamental at aggregate level is changed, the subsequent and thereby expand the options available to
financial meltdown was all but inevitable. consumers and firms. This can enhance
References: M. Brunnermeier, (2009), ‘Deciphering the entrepreneurship and enable ordinary citizens to
Liquidity and Credit Crunch 2007-2008’, Journal of achieve a higher standard of living than would
Economic Perspectives, 23. otherwise have been possible. The important
R.G. Rajan (2010), Fault Lines: How Hidden Fractures Still restriction should be that banks and even NBFCs
Threaten The World Economy, Collins Business. should be discouraged from lending to categories of
borrowers who are clearly not in a position to take
on such debt burdens. As far as restrictions on the
fixed for the first 12 months and in the case of Easy types of products go, these should be used
and Advantage Home Loan interest was held constant minimally and with judiciousness.
and below the market rate for three years. Thereafter
the rates were expected to move to higher and floating CAPITAL FLOWS AND GEOPOLITICAL
interest rates. The response of the market to this OPTIONS
was very good. The number of loans offered in January
2.30 Overall capital flows into India this fiscal year
2009 was 18,780 with an aggregate value of ` 1499
have been greater than ever before in the country’s
crore. By November 2009 this had risen to 28,492
history. This has been caused largely by a
loans with an aggregate value of ` 3273 crore.
groundswell of money coming through the foreign
Defaults on these have been negligible and cases of
institutional investor (FII) route, in response to the
foreclosure rare. Also, these loans played a major
robust performance of the Indian economy but also
role in promoting inclusiveness. Around 90 per cent
because of low interest rates and returns in general
of the home loan borrowers were first-time home
in industrialized nations. Midway through the fiscal
buyers.
year, there was also ‘currency competition’, with
2.29 Two factors were behind the success of these China allegedly holding its exchange rate at what
terraced loans. First, despite having the shape of was believed to be a depreciated level, the US
repayment associated with conventional teaser loans responding to this and its own sluggish growth and
high unemployment with two rounds of quantitative term capital bring with them. Moreover, the kind of
easing, and Japan buying up foreign exchange and apprehension that India once had about foreign
releasing yens on the market. All these moves investment and political interference is of much less
contributed to a greater flow of money our way. This concern now since it is now a much more robust
was initially a matter of concern to India. However, economy and has greater say in international political
there seems to have been no substantial appreciation matters. To attract more FDI, we will have to think in
of the nominal exchange rate of the rupee during the terms of new areas into which we may channel these
year. This is testimony to India’s growing strength investments. But more than this, the serious
and power of absorption. stumbling block to attracting FDI into India is the
2.31 This must, however, not lull us into fact that our bureaucratic machinery continues to
complacency. We will have to keep open the options be sluggish. Data released by the World Bank show
of having to take corrective measures should these that in terms of the bureaucratic efficiency for “doing
flows affect us adversely. The most important step business,” India ranks as low as 134th in the world.
in this context is to work with the G-20 countries Clearly, this is one area with scope for improvement.
and try to figure out collective decision rules whereby If we can make our bureaucratic, administrative
each country tries to intervene minimally in the flow machinery more efficient, the benefits for the
of capital and, when it does intervene, it does so economy will be enormous. There are examples of
taking into account the externalities on other nations. nations that inherited the cumbersome bureaucratic
But till such a plan of coordinated action is worked system of colonial governments but managed to
out successfully, a nation has to be prepared to adopt reform those. We can learn from those nations but,
policy measures on its own. In contemplating such interestingly, we can also learn from within our own
policy measures in India two inter-related factors have country. A simple calculation shows that if all of India
to be kept in mind. First, although there is very little adopted the best practices found in some part of
nominal appreciation of the rupee, our real exchange India, for instance in terms of facilitating the opening
rate, especially vis-a-vis the systemically important of new business, enforcing contracts, simplifying
currencies, has been on a fairly steady path of procedures to help bankrupt firms close down quickly,
appreciation. This is likely to have contributed to the it would rank 79th in terms of efficiency. In other words,
relatively slow pickup of India’s exports, even though we can improve our ranking by 55 positions simply
over the last few months these have done well. It by learning from within our own nation. This is not to
has also contributed to the large current account promote the parochialism of refusing to learn from
deficit (CAD) that the country faces. In itself this beyond our borders but to emphasize that there is a
would not be a matter of concern but, in this case, a lot that can be achieved even without that.
substantial part of the CAD is being financed by 2.33 Digressing briefly, it is worth turning to the
relatively footloose capital. One possible strategy in interesting question of the economic and
response to this is the market-based intervention of representational power of Governments. There was
buying up some of the foreign exchange coming in a comment earlier about India’s greater say in global
through this route. This will limit the amount of capital economic matters. Indeed, India’s G-20 membership
available for financing the deficit and could also is recognition of this fact. The ‘economic power’ of a
stabilize the real exchange rate. Against this, we Government is an important indicator of how much
will have to balance out the risk of inflationary say that Government has in global fora and also how
pressures generated by the rupees that will be much say it ought to have. The economic power of a
released on the market. However, it can be argued Government is a more complex idea than the
that since the rupees that will come on the market economic power of an individual. We usually measure
will be replacing other currencies, which are the latter by looking at a person’s income or wealth.
convertible and therefore fairly liquid, the inflationary Taking a cue from this, we may think of a
impact of this will not be as serious as is often Government’s power as measured by the total
presumed. It is also hoped that with India’s savings amount of revenue the Government earns and so is
rate beginning to rise, some of the pressures on the able to disburse. We may also look at the ownership
CAD will ease. of assets by a Government to get an approximate
2.32 All these policies must be complemented by idea of the permanent income of the Government.
the effort to attract more FDI into India. FDI capital However, a Government’s economic power depends
is much more stable and, therefore, does not give also on the amount of human capital available in the
rise to the kind of volatility that some forms of short- nation and so at some level available to the
Box 2.4 : Government Economic Power in the Post-crisis World
The economic abilities of nations and governments have always been a force to reckon with. While the process of globalization
saw government economic power supplementing the forces of the market, the global economic crisis witnessed governments
playing a crucial role in stabilizing financial markets and managing to coordinate responses in order to prop up the world
economy. Governments also play a critical role in ensuring redistributive equity and development. Motivated by the need
to develop a set of metrics to encompass this important phenomenon, an index of government economic power was
developed. The index can also be of value in deciding on the voting rights and other powers the governments of various
countries ought to have in international organizations like the IMF and the World Bank. The index has been created for 10
years (2000-09) covering 112 economies.
The index of government economic power (IGEP) endeavours to capture the ability of a government to project itself in the
international sphere. There is also a normative content to this. Since the index shows the extent of charge a government has,
it also can be used to determine how much say the Government should have in multilateral fora. The index is composed of
four variables: government revenues, foreign currency reserves, export of goods and services, and human capital. These
variables broadly capture a Government’s ability to raise resources, its creditworthiness and credibility in international
financial markets, its influence on global economic activity, and its representational strength, that is how much of the global
economy, including global manpower, it can claim to
represent. In order to ensure use of standard data, the index Fig 1: Index values
has been constructed using three widely accepted datasets;
the IFS and WEO of the IMF, and the United Nations 0.6
Development Programme’s (UNDP’s) Human 0.5
Index values
Development Index (HDI). 0.4
The 2009 results show that the top ten ranks are occupied by 0.3
(1) the United States, (2) China, (3) Japan, (4) Germany, (5) 0.2
India, (6) Russia, (7) Brazil, (8) France, (9) Italy, and (10) the 0.1
United Kingdom. In 2000 the top ten places were held by (1) 0
the United States, (2) Japan, (3) China, (4) Germany, (5) 2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
France, (6) the United Kingdom, (7) Italy, (8) (Republic of)
Korea, (9) Canada, and (10) India. Among the top ranking
Year
economies some of the most dramatic rises in rank have been
Brazil’s ascent from 13th place in 2000 to 7th in 2009 and USA Japan China
India’s rise from 10th position in 2000 to 5th in 2009. Japan
was replaced by China in the second spot in 2004. The United Fig 2: Index values
Kingdom went down from 6th place in 2000 to 10th in 2008 0.14
and continued there in 2009. Canada fell from 9th in 2000 to
0.12
15th in 2008.
Index values
0.10
The changing dynamics of global economic power can be
further seen if we analyse the index values over time for some 0.08
of the larger economic entities. If we compare the three top 0.06
ranking countries of 2000, the US, Japan, and China, the US 0.04
and Japan had a slow rise in index values, except for the 0.02
slight fall in 2009. In contrast, China has risen rapidly and,
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
after surpassing Japan in 2004, has almost reached the same
level as the US in 2009 (see Figure 1). Year
On an analysis of the countries holding the 4th , 9th and 10th Germany Canada India
positions in 2000 (namely, Germany, Canada, and India),
India moves from an index value just below Canada in 2000 Fig 3: Change in GDP growth 2009 to 2010
to one very close to Germany by 2009 (Figure 2). Among the
large economies, China and India also demonstrate 12
remarkable robustness by not having lower index values in 10
2009 unlike all the other countries occupying the top ten 8
positions in 2000. 6
Percent
Interestingly, there is a strong positive correlation between 4

the growth in economic power (percentage change in index 2
value between 2000 and 2009) and the change in GDP across
0
the post-crisis period (that is between 2009 and 2010)
indicating a link between growth in economic power as -2
measured by the index and the ability to recover from the -4
crisis (Figure 3). This does not establish a direct causal
0
50
100
150
200
250
300
350
400
450
relationship between the two variables but is of descriptive

interest. Percentage change in index value (2000 to 2009)
Source: A complete description of the index of government economic power and its implications is available in a forthcoming
Economic Division, Department of Economic Affairs, Ministry of Finance, working paper: ‘The Evolving Dynamics of
Global Economic Power in the Post-crisis World: Revelations from an Index of Government Economic Power’.
Government. A Government’s power further depends it comes to distribution and the mitigation of poverty,
on the nation’s level of integration with the world. A Government has to be more proactive with policy
nation that is rich but largely a closed economy may interventions. However, wherever possible, the
not be of much importance to other nations and so intervention should take the form of direct transfers
not able to exercise influence in international matters. from the better-off sections to the poor, with as
On the other hand, a nation that exports and imports minimal a tampering with prices as possible. The
a lot has the power of leverage. The potential threat fact that markets are not naturally inclined to deliver
of interrupting these flows gives such a Government on equity and poverty eradication does not mean
more economic muscle than another nation that may that we should ignore the market. The laws of the
be wealthier but has negligible trade and capital links market will be there whether or not we acknowledge
with the world. Combining all these factors, an index their presence. Good policymaking entails
was created by researchers in the Economic Division recognizing and understanding these laws and
of the Ministry of Finance and is reported in the Box utilizing them to deliver on the targets that we have.
2.4. It shows, as expected, that the US Government
2.36 There are two reasons for having a system of
has the greatest economic power. This is followed,
a minimal amount of food procurement and
in descending order, by China, Japan, Germany,
distribution carried out by the State. The first is to
India, Russia, Brazil, and France. What is interesting
do with evening out foodgrain availability and price
in this story is the rapid rise in the economic power
fluctuations from one year to another. This is also
of India and, more so, China over the last decade.
related to the issue of self-sufficiency. In times of
Box 2.4 is of interest in itself since there is so much
food shortage, we do not want to rely entirely on
writing nowadays on the shifting economic base of
imports from other countries and should be able to
the world.
depend on our own stocks and supply to our
consumers. The second motive is to provide food
NEW INITIATIVES security to the poor and vulnerable. No one, no matter
2.34 The buoyant growth of the economy creates how poor, should have to suffer from food deprivation
opportunities; and it is important to seize them so and malnutrition.
that the growth becomes sustainable. There are
2.37 As far as the aim of evening out food prices
many areas with opportunities for new initiatives, and
from one year to another goes, our success has
only a few of these will be discussed here for
been moderate. Thanks to our procurement policy,
illustrative purposes. It is widely accepted outside
mainly in wheat and rice, we have not had to be held
of and within Government that we have a great
to ransom by international suppliers. However, a
distance to go in eradicating poverty and drawing
study of our food stocks shows that we have
into the mainstream of our economy segments of
continued to hold these at elevated levels in good
the population that are currently marginalized and
years and bad. Likewise, procurement has taken
live on the fringes. The first step towards this is to
place from year to year without the cyclical features
make sure that no one is deprived of basic food and
that one would expect in an effective price
all attain minimal nutritional standards. There have
stabilization system. Thus, in 2006-07 the total
been new initiatives on this front, such as the new
procurement of wheat, rice, and coarse grain was
food security bill.
34.3 million tonnes, in 2007-08 40.1 million tonnes,
2.35 At this stage, some broad principles of in 2008-09 57.7 million tonnes, and in 2009-10 57.2
economic policy are worth outlining. There is a million tonnes. Clearly, given that the last fiscal year
common presumption that markets and inclusion was one of high foodgrain price inflation, we would
are inimical to each other. The truth, however, is that, have expected lower than usual procurement and a
while markets have a natural propensity to deliver larger offloading of stored grains. But neither of these
on efficiency, they do not have any innate propensity happened. Evidently, there is ample scope for
for equity or equality. Hence it is true that for improvement in our strategy of foodgrain release.
eradicating poverty and creating a more equitable The current practice has some systemic flaws. Trying
and inclusive society, there is need for purposive to ensure that the procured food is not released at a
action by Government—Central, State, and local. price which inflicts too large a loss on Government,
The view we take is that Government should play an we have often priced it so high that there were no
enabling role vis-a-vis the market, facilitating trade, buyers. Not releasing foodgrain defeats the purpose
exchange, and enterprise. On the other hand, when of bringing down market prices.
2.38 This has at times led to the suggestion that that some of these are working. We must now
the state should just release this grain at near-zero endeavour to sustain the momentum.
price. At first sight, this sounds reasonable since
2.40 Returning to the food security bill, this is an
there is excess foodgrain lying in warehouses and
important move that can transform the face of poverty
even in the open and going waste. But there is a
and malnutrition in India. There has been a lot of
problem with following this seemingly obvious policy.
debate about how extensive the coverage of this
The way we run our minimum support price (MSP)
programme ought to be. What is, however, not
policy is to have a fixed price and allow farmers to
always appreciated is that the coverage of this
sell their foodgrain at that price to the Government.
programme will depend on the efficacy of the
If with the MSP policy intact, we began the practice
mechanism through which we try to distribute the
of selling off excess food in Government granaries
at near zero price, this is bound to give rise to food food. The current system of handing over cheap food
recycling. That is, traders will buy the food from the to the approximately 500,000 ration shops all over
Government at zero or near zero price and sell it India, and then requiring them to sell the it at below-
back to the Government at the MSP and again buy market price to poor households leads to large
it back; and so on. There is evidence that a certain leakages. In the current method the subsidy is
amount of food recycling happens even now. But if handed over to the ration shop and not directly to
the gap between the MSP and the release price the poor households. Studies show (see Box 2.5)
becomes sufficiently large, this problem can get that ration shopkeepers often sell off the food at the
exacerbated. Our problem of foodgrain policy cannot high market price on the open market and turn away
be corrected through piecemeal action such as the below poverty line (BPL) households or adulterate
getting the government to release food at near zero the food that the BPL households are supposed to
prices without correcting other defects in the system. receive. Clearly, if we try to make the coverage of
We need to take stock of both our release and subsidized rice and wheat wide and stick to the
procurement policies. Procurement should vary from present system of distribution, the total procurement
year to year, depending on production. Also, the will have to be large to the point of being unachievable.
windows for procurement ought to be opened up Hence the important need is to plug the seepage in
much more widely in different parts of the country. the distribution mechanism; and the more effectively
Currently outside of a few States the MSP is a purely we manage to design this, the larger we will be able
notional price as far as farmers are concerned. They to make the coverage of cheap food to our population.
know that they have the right to sell their food at that 2.41 The obvious way of doing this, and this has
price but they have no access to Government been widely discussed in the economics literature,
granaries or take-in windows where they can sell. is to give the subsidy directly to the poor households
There is also urgent need to increase storage space and allow the PDS stores to sell food at market price.
so that foodgrains do not go waste. It should be This will involve handing over smart cards or food
clear that the act of better storage, important though coupons to poor households and then giving them
it is, is not going to cure inflation. For that we have the freedom to go to any PDS or other store and buy
to develop effective strategies for releasing the food at the prevailing market price by using the
foodgrains, and the release should take place not in smart card or the coupons. In this system, a poor
large bulks, which would create monopolies but in customer is as valuable as a rich customer from the
numerous small batches. shopkeeper’s point of view, since both pay the same
2.39 On the second objective of guaranteeing food price. Also, if one shop adulterates its foodgrain
to the poor there are several initiatives and the supply, people will have the freedom to go to another
Government is currently considering a food security store and this, in turn, will mean that the incentive to
bill which will give people legal right to a certain adulterate foodgrain will go down vastly. As the
amount of basic foods. Before venturing into this, it system of Aadhaar-based identification comes into
would be well to stress what is discussed elsewhere activation, the smart card system will become
in the Survey and also in various Plan documents, portable. In other words, the poor can move from
namely, the importance of increasing agricultural one part of India to another and still be able to exercise
productivity and production. This sector used to lag their right to subsidized food. The current system
behind. But there are policies being implemented to places an effective barrier on the ability of poor people
correct this. The estimated growth of agriculture, to move location in response to better wages, since
forestry and fishing of 5.4% in 2010-11 raises hope they risk losing out on other benefits.
the market at market price. This will improve targeting

Box 2.5 : Food Subsidies and Leakages and cut out corruption. It is true that the poor may
It is a part of common wisdom that a large amount of the misuse some of these subsidies on non-essentials,
subsidized foodgrain, targeted at BPL households, some but it is surely better for the poor to do so than for
APL households, and other vulnerable groups, find its way the shopkeeper to do so using the subsidy meant
to the open market, where it is sold off at a higher price than
the stipulated ration shop price. Is this true? And if so,
for the poor.
what is the extent of the pilferage? Recent research by Reetika 2.43 There are other areas where new initiatives
Khera and by Shikha Jha and Bharat Ramaswami has come
out with careful statistical estimates, where earlier we had
are likely to likely to yield large benefits for society.
to rely on guesswork. The Ministry of Food and Consumer One example of this is tourism. Given the vast
Affairs publishes monthly data on the offtake of wheat attractions in India, ranging from diverse natural
and rice under the public distribution system (PDS). The formations to historical monuments and relics going
National Sample Survey (NSS) gives data based on random
samples of the amount of PDS wheat and rice that are
back to more than two millennia, there is vast scope
actually purchased by the households. The gap between for expansion of tourism in India. Till now we have
the offtake and the amount actually reaching households not reaped more than a fraction of this possibility. In
gives a measure of pilferage or diversion from the target 2010 the total number of foreign tourists that arrived
population. Using this method, Khera shows that in 2001-
in India was 5.58 million and they brought in a foreign
02 18.2 per cent of PDS rice and 67 per cent of PDS wheat
was diverted. In other words, over 40 per cent of all grain exchange earning of ` 64,889 crore. It should be
targeted at the poor missed the poor. Jha and Ramaswamy, possible for India to get many times more inbound
using the NSS expenditure survey of 2004-05, report an tourists than it currently does. In 2007, for instance,
overall diversion of 55 per cent of the grain meant for the there were 5.1 million tourists who came to India,
poor. No matter where the exact figure lies between 40 and
55 per cent, the fact of the matter is the leakage that currently compared to 54.7 million to China and 20.1 million
takes place is far too high. Once we give a legal guarantee to Malaysia. Interestingly enough, India sends out
to people about the food that they are to receive, if we try to more outbound tourists than it gets inbound ones.
deliver on this promise using our current delivery This is fairly unusual for an emerging economy. To
mechanism, we shall have to send twice the targeted amount
of grain towards the targeted population.
exploit the huge potential that this sector has will
require investment in infrastructure and even
References: R. Khera, (2011), India’s Public Distribution improvements in our immigration and visa services.
System: Utilization and Impact, Journal of Development
But it will be unwise not to reap the large benefits
Studies, forthcoming.
that are lying unutilized in this sector.
S. Jha, and B. Ramaswami (2010), ‘How can Food
Subsidies Work Better? Answers from India and the 2.44 Another sector with scope for development
Philippines’, Asian Development Bank, Working Paper
and large potential dividend is education, both school-
No. 221.
level and higher education. India currently has a gross
enrolment ratio (GER) of 13.5 per cent in higher
2.42 The same idea carries over to other goods
education, often also called the tertiary enrolment
such as kerosene, diesel, and fertilizers. This
ratio. That is, 13.5 per cent of all those who are
Government’s policy of ensuring that these vital
aged between 18 and 23 (that is the college-going
goods reach the poor, instead of leaving it all to the
age) are actually enrolled in a college or a university.
vagaries of the market as conservative analysts would
For the United States, the figure is 81.6 per cent.
recommend, has much to commend it. But in
Even China and Malaysia over which India had a
choosing the mechanism for reaching these goods
lead a few decades ago have now crossed our GER
to the poor the same principles discussed in the
with figures of 22.1 and 29.7, respectively. India
context of foodgrains apply. As soon as we lower
currently produces close to 6000 PhDs per annum.
the price of a commodity by Government diktat, be
China, which in 1993 produced 1900 PhDs per
it for kerosene, diesel, or fertilizers, we invite
annum, now produces close over 22,000. In principle,
adulteration, pilferage, and corruption. The need,
it is possible for India to quickly double the GER
therefore, is to design mechanisms of delivery which
and reach 30 per cent within a decade from now. In
are incentive-compatible and minimize these
the long run an economy’s growth depends on the
distortions. For the most part this means that it is
quality of its citizenry and the human capital and
best not to distort prices to subsidize the poor but
innovativeness of the population. Clearly we need to
to give the subsidy to the poor directly. We may as
invest more and more intelligently in this sector.
a first step try this on one product, such as kerosene,
by handing over the subsidy to the poor in the form 2.45 One large potential of our higher education
of a smart card; and letting them buy kerosene from sector is to develop India as a hub for global
education. Given that historically we have been very of these investments may need 5, 10, or even 15
strong in higher education and also our advantage in years to become financially viable. Banks are
the English language, it is possible for India to understandably wary of making such long-maturity
develop as a major centre for higher education where loans. The need, therefore, is to create appropriate
students come from all over the world to study. Given systems for drawing domestic and international, and
the high cost of education in industrialized nations private and public investments into infrastructure. For
(annual tuition fees in leading US universities are private money to be directed into any form of
around $40,000), it is possible for India to attract investment the critical ingredient is the reliability of
students not only from developing and emerging contracts. Having put your money into an
countries but even from the United States and other investment, can you be reasonably sure that the
industrialized nations. We can offer these students borrower will not renege? Of course, there will have
education at a price where we will cover all our costs to be clauses under which a borrower can get
and have a profit left over and they will get education legitimate bankruptcy cover, but the legal
at a price which is vastly less than what they would administrative set-up must be such as to ensure
have paid in the United States, or the Government that there is no spurious reneging on contracts. This
would have paid for them in many European is important not only for micro finance but even to
countries. The profit can then be used to expand our ensure that more money flows into infrastructural
universities and colleges for the enrolment of our investments.
own students. For all this, we need complementary
investments. There will have to be quality hostels SOCIAL BASIS OF ECONOMIC PROGRESS
and broadband internet connectivity. We will also
2.48 The foregoing analysis emphasised that in
need to tone up our bureaucratic processes. We
crafting good economic policy it is important to treat
will, for instance, need to give students visas for
the various players on the market —the policeman,
multiple years because no one will want to come to
the ration-shop owner and the ordinary citizen—as
study for two years with a one-year visa and live
reasonably self-seeking, rational agents. If these
under the uncertainty of it being extended. These
agents get the opportunity to earn some extra money
investments in infrastructure and in creating a more
with little effort, they will seize the opportunity. Hence,
efficient bureaucracy can not only boost the higher
to cut down on corruption and pilferage, we have to
education sector, but all these initial costs will be
design policies in such a way that there is no incentive
more than made up for by the high returns they will
for ordinary citizens and the enforcers of the law to
yield in the medium to long term.
cheat. Accordingly, good mechanism design is the
2.46 As just discussed, underlying both the above heart of the problem. Many a noble plan to reach out
initiatives and other developmental projects is the to the poor and increase the welfare of our citizens
need for better infrastructure. This being the eve year has fallen on hard times because of the policymakers’
of the Twelfth Five Year Plan, it is a good moment to propensity to assume that the policies are delivered
take stock of India’s infrastructural needs. As by flawlessly moral agents or perfectly- programmed
discussed elsewhere in this Survey, India has, over robots. Models based on such faulty assumptions
the last few years, made special effort to enhance are destined to fail. It is important for Indian citizens
the country’s infrastructural base. The initiatives cut to understand this because, in democracies, popular
across rural infrastructure, railways, highways, power, opinion plays an important role in promoting
and the development of our cities, small and large. progressive policies.
East Asian economies financed a lot of this through
2.49 This analysis must not be taken to imply that
public land sales implemented through well-designed
uncompromising self-seeking behaviour is innate in
auctions. There is a lesson in this for us to make
human beings. This dismal assumption, widespread
sure that such large infrastructural expansions
in some early mainstream economics, is, fortunately,
remain fiscally viable.
not true. Recent research shows that human beings
2.47 The Planning Commission is working to give have a natural propensity to cooperate, to be
a major thrust to infrastructure over the next Five trustworthy, and to be honest. They are often willing
Year Plan. To ensure that this happens, the big need to give up some personal gains in order to
is not so much a matter of bricks and mortar as of demonstrate pro-social behaviour. These qualities
finance and mechanism design. Infrastructural of honesty and trustworthiness can, however, vary
investments require long-term loans because some from one society to another and, even within one
society, over time and depending on the context (see job, people may prefer to leave their homes unpainted
Box 2.6). What is increasingly recognized is that for longer stretches of time. A person lends money
successful economic development has a strong to a company with the company making a promise
correlation with these human qualities of honesty of paying a certain interest rate over the next 10
and trustworthiness. The drive for greater profit and years and then paying back the principal. In a country
greater personal ulility, devoid of these social where such contracts are not dependable and
qualities, creates a dysfunctional and chaotic society. companies are likely to renege on the contract, it is
unlikely that people will invest money in companies.
2.50 There are studies showing that societies in The bond market will flounder and companies will be
which interpersonal trust is greater are societies that able to invest less than what is optimal. In brief, a
exhibit faster economic growth. It is not difficult to modern, vibrant economy relies critically on contracts
see why this is so. A modern and efficient economy and our ability to have trust in the contracts. A part
critically depends on contracts and the ability of of the responsibility for enforcing contracts lies with
individuals to rely on these contracts. An individual the State and the Judiciary. Long-term contracts,
gives money to a painter to paint her home. If the like a mortgage for buying a house with the promise
risk is high that the painter will breach the contract of repayment over the next 20 years, necessarily
by taking the money and then doing an insignificant have to rely on the State machinery for enforcement.
Box 2.6 : Pro-Social Behaviour and Economic Development

There is a growing literature in economics arguing that pro-social behaviour, which includes altruism and trustworthiness,
is innate to human beings and, moreover, forms an essential ingredient for the efficient functioning of economies. In other
words, human beings have a natural ability to forego personal gains for the sake of other people or because that is what is
required because of a promise the person had made. This trait may well have evolutionary roots but its existence is now well
demonstrated in laboratory tests. The broad idea behind these laboratory experiments is the following. The experimenter
pairs up all the subjects in a laboratory and then asks each pair to have the following interaction. One of the two persons, call
him A, is asked to hand over if he wishes a certain amount of money (which may be called A’s investment) to B. If A refuses
to invest anything, their interaction is over, A and his partner, B, get nothing and they go home. If A invests a certain amount
of money, that is gives this to B, then the experimenter adds some more money and lets B have it all. B is then asked whether
B wants to hand a part of the total money she received back to A. In other words, B is given an opportunity to pay back to
A some of B’s gains, since B would have got nothing if A had not made the first move. In the Trust Game, once B decides how
much to give A, that is given to A, and that is the end of the interaction. (The Hold-up game is a variant of this with a slightly
different closure rule.)
In a totally selfish world, we would expect B to offer nothing to A and for A, anticipating this, not to give any money to B to
start with. However, experiments conducted all over the world with this or related games demonstrated that in a large
number of cases, the first player does give money to the second player and the second player does give back a part of her
income to the first player. Moreover, there are conditions which lead to a higher propensity among the players for this kind
of cooperative behaviour. Recently, Hodaka Morita and Maros Servatka conducted an experiment on 258 undergraduate
students at the University of Canterbury in the New Zealand Experimental Economics Laboratory, using the Hold-up game.
They found that people typically did make positive investment and the person receiving the investment did give back some
return to the investor. Moreover, if the players are initially primed so as to believe that they share a common group identity,
they tend to be more cooperative.
What is not widely recognized but deserves mention is that one of the earliest statements of the Trust Game and the critical
role of morality and trustworthiness in the efficient functioning of an economy occurred in David Hume’s 1739 classic, A
Treatise on Human Nature (Book III, Part II, section iv): ‘[The] commerce of mankind is not confin’d to the barter of
commodities, but may extend to services and actions, which we may exchange to our mutual interest and advantage. Your
corn is ripe today; mine will be so tomorrow. ‘Tis profitable for us both, that I shou’d labour with you to-day and that you
shou’d aid me tomorrow. I have no kindness for you, and know that you have as little for me. I will not therefore take pains
on your account; and shou’d I labour with you on my own account, in expectation of a return, I know I shou’d be
disappointed, and that I shou’d in vain depend on your gratitude. Here then I leave you to labour alone: You treat me in the
same manner. The seasons change; and both of us lose our harvests for want of mutual confidence and security.’
References: R.Benabou, and J. Tirole (2006) ‘Incentives and Prosocial Behavior,’ American Economic Review 96.
T. Ellingsen and M. Johannesson (2008), ‘Pride and Prejudice’, American Economic Review 98.
E.Fehr and S. Gachter (2000) ‘Fairness and Retaliation’, Journal of Economic Perspectives 14.
F. Fukuyama,(1996) Trust: The Social Virtues and the Creation of Prosperity. Free Press.
H. Gintis, S. Bowles, R. Boyd, and E. Fehr (2003) ‘Explaining Altruistic Behavior in Humans’, Evolution and Human
Behavior 4.
H. Morita and M. Servatka (2011) ‘Group Identity and Relation-Specific Investment’, Mimeo: University of New
South Wales.
However, these are not the only kinds of contracts. it is true that we do not as yet have a hard science
Economic life is full of little promises—I will supply of how to develop these cultural qualities in a
you X today, and you will pay me Y tomorrow. For population, we know that even the mere
these, it is impossible each time to bring in the understanding of the importance of certain qualities
policeman and the judge to ensure enforcement. The for promoting the economic development of a group
best enforcer of these little contracts is our word of of people, helps nurture these qualities in people.
honour and the ‘culture of honesty’ and After all, people have learnt not to smoke in a
trustworthiness. If a particular citizenry is known to crowded room even when not smoking is not in their
be trustworthy, people will be more likely to cut deals self-interest simply because they have come to
with the people of that nation and, over time, the understand that this is not in their collective interest.
nation will do better and prosper economically. These good values are then further supported in
2.51 For India to develop faster and do better as society through mechanisms of social stigma, which
an economy, it is therefore important to foster the help bring individual and social interests into
culture of honesty and trustworthiness. Thanks to alignment. So once we recognize that honesty,
the fact of this social prerequisite of economic integrity, and trustworthiness are not just good moral
development remaining unrecognized for a very long qualities in themselves but qualities which, when
time, this has not received adequate attention in the imbibed by a society, lead to economic progress
scientific literature. Fortunately, a large body of recent and human development, people will have a tendency
economics research has been stressing the to acquire these qualities; and that should help build
importance of these social and cultural factors. While a more tolerant and progressive society.
Fiscal Developments
and Public Finance
3
CHAPTER
The fiscal outcome in the first nine months of the current financial year remained
broadly on the consolidation track charted by the Budget. It might be recalled that the
Budget for 2010-11 had begun the process of fiscal consolidation with a partial withdrawal
of the stimulus measures as at that juncture there was clear evidence of economic
recovery. The policy stance was to continue to aid the growth momentum in the short
run to facilitate its attaining pre-crisis levels and simultaneously to address long-run
sustainability concerns. With growth reverting to pre-crisis levels in the current fiscal,
revenues remaining buoyant, and a much higher than budgeted realization in non-
tax revenues arising from telecom 3G/ BWA (third generation/broadband wireless
access) auctions, there was headroom for higher levels of expenditure at the given fiscal
deficit targets. The combined deficits of State Governments also indicated the overall
consolidation process at State level. With continued growth momentum, the prospects
for sustaining and deepening the consolidation process remain bright.
3.2 The macroeconomic impact of the global these could be partly compensated by the rise in
financial and economic crisis and the Government final consumption expenditure (GFCE)
expansionary fiscal stance was clearly visible in (Figure 3.1). As the crisis impacted the economy
the demand-side components of the national in the second half of 2008-09, movements in
income aggregates. A contraction of the aggregate quarterly estimates of the demand side of the GDP
demand was manifest in the rates of growth of provided better indication of the recovery process
private final consumption expenditure (PFCE) and and thus the Budget for 2010-11 envisaged a partial
gross capital formation in 2009-10, which had exit from the stimulus measures on the strength of
shares of 58.4 per cent and 35.4 per cent the outcome of the second quarter of 2009-10. This
respectively in 2008-09. Net indirect taxes minus response was broadly in line with the international
subsidies, an important component of the nominal practices in this regard, which had preferred fiscal
gross domestic product (GDP), also declined. The policy instruments for counteracting the adverse
lower levels of point contribution to growth from economic impact of the crisis.
Figure 3.1 Point contribution to GDP at current market prices

20
Point contribution
15 GDP
(CMP)
per cent
10
5 PFCE
0
GFCE
-5
Indirect
2005-06
2006-07
2007-08
2008-09
2009-10
tax–
subsidy
Year
Fiscal Developments and Public Finance 43
3.3 As a proportion of the GDP (purchasing power year-on-year growth of 20.3 per cent, and was 7.8
parity [PPP]), the overall fiscal balance of the world percentage points higher than envisaged at the time
was estimated by the International Monetary Fund of Budget formulation. As proportions of the GDP
(IMF) (Fiscal Monitor 2010) to have risen from - as per the AE, budgeted fiscal and revenue deficits
0.4 per cent in 2007 to - 2.0 per cent and - 6.8 per work out to 4.8 per cent and 3.5 per cent for the
cent respectively in 2008 and 2009; it was estimated current fiscal. Thus, as proportions of the GDP, the
to have moderated to - 6.0 per cent in 2010 and recent trends in deficit indicators, post-crisis, have
projected at - 4.9 per cent in 2011. At a major been influenced to some extent by the swings in the
grouping level, advanced economies accounted for levels of aggregate demand (Table 3.1 and Figure
the bulk of the fiscal expansion. Among the emerging 3.2).
economies, India had one of the largest fiscal
expansions of the order of about 10 per cent of the Table 3.1 : Trends in Deficits of Central
GDP in both 2009 and 2010. In terms of proportions Government
of potential GDP also, the expansion was sizeable
Year Revenue Fiscal Primary Revenue
in 2009 in the case of India; it was estimated to Deficit Deficit Deficit Deficit as
have declined to - 8.7 per cent in 2010. Going per cent
forward, the Fiscal Monitor indicated that the fiscal of Fiscal
adjustment in emerging economies in general which Deficit
was driven by economic recovery in 2010 would be (As per cent of GDP)
driven by discretionary policies in 2011--a Enactment of FRBM Act
development that would be noteworthy in light of the 2003-04 3.6 4.5 0.0 79.7
fact that the discretionary impulse of the expansion
2004-05 2.4 3.9 0.0 62.3
was estimated to be small.
2005-06 2.5 4.0 0.4 63.0
3.4 In actual terms, the Budget for 2010-11 had
2006-07 1.9 3.3 -0.2 56.3
estimated the level of fiscal deficit at ` 3,81,408
crore and revenue deficit at ` 2,76,512 crore. At 2007-08 1.1 2.5 -0.9 41.4
the time of presentation of the Budget for 2010-11 it 2008-09 4.5 6.0 2.6 75.2
was envisaged that nominal GDP (GDP at current
2009-10(P) 5.1 6.3 3.1 80.7
market prices) would grow by 12.5 per cent and
was estimated at ` 69,34,700 crore. As proportions 2010-11(BE) 3.5 4.8 1.7 72.5
of the nominal GDP, fiscal and revenue deficits were Source: Union Budget documents.
estimated at 5.5 per cent and 4.0 per cent BE-Budget estimates
respectively. As per the advance estimates (AE) P: Provisional actuals (unaudited)
released by the Central Statistics Office (CSO) on FRBM : Fiscal Responsibility and Budget Management
7 February 2011, the nominal GDP for 2010-11 was Note: The ratios to GDP at current market prices are based
on the CSO’s National Accounts 2004-05 series.
placed at ` 78,77,947 crore, which represents a
Figure 3.2 Trends in deficits of Central Government

7
6 Fiscal
deficit
Per cent of GDP
5
4
3 Revenue
deficit
2
1
0 Primary
deficit
-1
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
(Prov)
2010-11 (BE)
Year
CENTRAL GOVERNMENT FINANCES initiatives in expenditure. First, below-the-line

3.5 The key driver of the rapid fiscal consolidation issuance of bonds for financing under-recoveries
after the notification of the FRBM Rules in July 2004 of petroleum oil companies (as also other such
was the buoyancy in tax revenues. As a proportion bonds) was discontinued and all such funds were
of the GDP, gross tax revenue rose from a level of brought into the Budget as subventions booked as
9.2 per cent in 2003-04 to reach a peak level of cash expenditure. Second, the nutrient-based
11.9 per cent in 2007-08; after falling to 10.8 per subsidy policy for fertilizers was put in place. Third,
cent and 9.6 in 2008-09 and 2009-10 respectively, given the elevated levels of prices of international
it was estimated to recover to 10.8 per cent in 2010- crude petroleum, it was proposed that the level of
11 (BE) as per the then estimated levels of GDP. administered prices for domestic petroleum products
However, as a proportion of the GDP as per the would be calibrated to international prices.
advance estimates of the CSO, it is at 9.5 per cent. Budgetary developments in 2010-11
Two significant developments in the recent past in
3.7 Against the backdrop of the fast-paced
terms of the composition of taxes have been the
recovery of the economy in 2009-10 and the elevated
growth in direct tax revenues, particularly corporate
levels of food inflation as well as the
income tax, and in service tax revenues. Union excise
recommendations of the Thirteenth Finance
duties that have traditionally been the single largest
Commission (ThFC), the budget for 2010-11
revenue earner ceded place to corporate income
resumed the path of fiscal consolidation to make
tax in 2006-07. In 2009-10, owing to the fiscal economic growth more broad based and ensure
stimulus package which envisaged significant that supply-demand imbalances are managed better.
reduction in duties and a demand slowdown, union Acting on the ThFC recommendation for limiting
excise duties declined substantially. In 2010-11, with the combined public debt to GDP ratio to 68 per
partial restoration in rates and surge in demand, cent by 2014-15, the Union Budget for 2010-11
union excise duties have done exceedingly well. came up with a promise to analyse the issues in a
With continuance of high growth in corporate Status Paper, which would also unveil the roadmap
income tax and a higher than budgeted outcome in for reduction.
personal income tax in the current year, the
3.8 The Budget for 2010-11 indicated that effective
prospects of revenue-led medium-term consolidation
management of public expenditure by bringing it in
appears bright.
line with the Government’s objectives, particularly
3.6 While tax revenues provided the anchor for through proper targeting of subsidies, was a key
deepening of the fiscal consolidation process in the factor in fiscal management. The Budget for 2010-
post FRBM period (2004-05 to 2007-08), there was 11 also announced the operationalization of the
also some compression in the expenditure to GDP Nutrient Based Subsidy Policy for fertilizers effective
ratio (Table 3.2 and Figure 3.3). Average annual 1 April 2010 and indicated that the recommendations
growth in expenditure in the four-year period was of the Expert Group on a Viable and Sustainable
11.2 per cent, below the 16 per cent growth in the System of Pricing of Petroleum Products would also
nominal GDP. Besides, there were significant reform be operationalized in due course.
Figure 3.3 Receipts and expenditure of the Central Government

16.0
14.0 Revenue
expenditure
Per cent of GDP
12.0
10.0 Revenue
8.0 receipts
6.0 Capital
4.0 receipts
2.0 Capital
0 expenditure
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
(Prov)
2010-11 (BE)
Year
Table 3.2 : Receipts and Expenditure of the Central Government
2005-06 2006-07 2007-08 2008-09* 2009-10 2009-10 2010-11
(BE) (P) (BE)
` crore)
(`
1. Revenue Receipts (a+b) 347077 434387 541864 540259 614497 575458 682212
(a) Tax Revenue (net of States’ share) 270264 351182 439547 443319 474218 459444 534094
(b) Non-tax Revenue 76813 83205 102317 96940 140279 116014 148118
2. Revenue Expenditure 439376 514609 594433 793798 897232 908011 958724
of which:
(a) Interest Payments 132630 150272 171030 192204 225511 211643 248664
(b) Major Subsidies 44480 53495 67498 123581 106004 123396 109092
(c) Defence Expenditure 48211 51682 54219 73305 86879 90668 87344
3. Revenue Deficit (2-1) 92299 80222 52569 253539 282735 332553 276512
4. Capital Receipts 158661 149000 170807 343697 406341 443068 426537
of which:
(a) Recovery of Loans 10645 5893 5100 6139 4225 6204 5129
(b) Other Receipts (mainly PSU disinvestment) 1581 534 38795 566 1120 24557 40000
(c) Borrowings and Other Liabilities** 146435 142573 126912 336992 400996 412307 381408
5. Capital Expenditure 66362 68778 118238 90158 123606 110515 150025
6. Total Expenditure [2+5=6(a)+6(b)] 505738 583387 712671 883956 1020838 1018526 1108749
of which:
(a) Plan Expenditure 140638 169860 205082 275235 325149 302199 373092
(b) Non-plan Expenditure 365100 413527 507589 608721 695689 716327 735657
7. Fiscal Deficit [6-1-4(a)-4(b)] 146435 142573 126912 336992 400996 412307 381408
8. Primary Deficit [7-2(a)] 13805 -7699 -44118 144788 175485 200664 132744
(As per cent of GDP)
1. Revenue Receipts (a+b) 9.4 10.1 10.9 9.7 10.5 8.8 8.7
(a) Tax Revenue (net of States’ share) 7.3 8.2 8.8 7.9 8.1 7.0 6.8
(b) Non-tax Revenue 2.1 1.9 2.1 1.7 2.4 1.8 1.9
2. Revenue Expenditure 11.9 12.0 11.9 14.2 15.3 13.9 12.2
of which:
(a) Interest Payments 3.6 3.5 3.4 3.4 3.9 3.2 3.2
(b) Major Subsidies 1.2 1.2 1.4 2.2 1.8 1.9 1.4
(c) Defence Expenditure 1.3 1.2 1.1 1.3 1.5 1.4 1.1
3. Revenue Deficit (2-1) 2.5 1.9 1.1 4.5 4.8 5.1 3.5
4. Capital Receipts 4.3 3.5 3.4 6.2 6.9 6.8 5.4
of which:
(a) Recovery of Loans 0.3 0.1 0.1 0.1 0.1 0.1 0.1
(b) Other Receipts (mainly PSU disinvestment) 0.0 0.0 0.8 0.0 0.0 0.4 0.5
(c) Borrowings and Other Liabilities** 4.0 3.3 2.5 6.0 6.8 6.3 4.8
5. Capital Expenditure 1.8 1.6 2.4 1.6 2.1 1.7 1.9
6. Total Expenditure [2+5=6(a)+6(b)] 13.7 13.6 14.3 15.8 17.4 15.5 14.1
of which:
(a) Plan Expenditure 3.8 4.0 4.1 4.9 5.6 4.6 4.7
(b) Non-plan Expenditure 9.9 9.6 10.2 10.9 11.9 10.9 9.3
7. Fiscal Deficit [6-1-4(a)-4(b)] 4.0 3.3 2.5 6.0 6.8 6.3 4.8
8. Primary Deficit [7-2(a)] 0.4 -0.2 -0.9 2.6 3.0 3.1 1.7
Memorandum Items ` crore)
(`
(a) Interest Receipts 22032 22524 21060 20717 19174 22018 19253
(b) Non-plan Revenue Expenditure 327518 372191 420861 559024 618834 654188 643599
Source: Union Budget documents.

BE-Budget estimates P: Provisional actuals (unaudited)
* Based on provisional actuals for 2008-09.
** Does not include receipts in respect of the Market Stabilization Scheme, which will remain in the cash balance of the Central
Government and will not be used for expenditure.
Note: 1. The ratios to GDP at current market prices are based on the CSO’s National Accounts 2004-05 series.
2. The figures may not add up to the total due to rounding/approximations.
Revenue and capital receipts the ratios were 58.6 per cent and 39.5 per cent
respectively (Table 3.3 and Figure 3.4).
3.9 The full impact of the fiscal stimulus measures
relating to excise duty cuts and the indirect impact Direct taxes
on gross tax revenues became evident only in 2009-
10. As a proportion of the GDP, gross tax revenues 3.11 The Budget for 2010-11 carried forward the
declined from 10.8 per cent in 2008-09 to 9.6 per thrust on maintaining moderate levels of taxation
cent in 2009-10; the levels would have been even and expanding the tax base. The tax slabs under
lower in 2008-09 had the nominal GDP grown at personal income were broadened and the surcharge
trend levels. Thus the Budget for 2010-11 partially on corporate income tax was reduced from 10 per
restored the excise duties and with economic cent to 7.5 per cent. At the same time, the rate of
recovery gaining momentum envisaged a rise in minimum alternate tax was raised to 18 per cent to
the tax to GDP ratio to 10.8 per cent in the current expand the tax base and improve inter-se equity in
fiscal; this implied a year-on-year growth of 19.1 the taxation of corporates.
per cent and amounted to ` 7,46,651 crore. The
3.12 The Government had signalled its intention
restoration of excise duty levels, albeit partial, was
to consolidate and comprehensively amend the
expected to result in a year-on-year growth of 26.1
existing Income Tax Act 1961 and Wealth Tax Act
per cent in 2010-11 as against a level of 29.4 per
1957 through a single legislation, by releasing a
cent envisaged by the RE. It was also estimated
draft Direct Taxes Code (DTC) and a discussion
that revenue from customs would grow at 36.5 per
paper for public comments in August 2009. Based
cent in 2010-11. With service tax estimated to grow
on analysis of the numerous inputs received from
by 16.3 per cent to reach a level of ` 68,000 crore,
stakeholders, a revised discussion paper was
indirect taxes were estimated at ` 3,15,000 crore,
released in June 2010 followed by the introduction
implying an overall growth of 19.1 per cent in 2010-
of the Direct Taxes Code Bill 2010 in Parliament in
11 over 2009-10. Overall revenue from direct taxes
August 2010. It has now been proposed to make it
was expected to grow by 15.0 per cent in 2010-11
effective from 1 April 2012 (Box 3.1).
to reach ` 4,22,500 crore. In part, this owed to
some positive developments arising from the
Indirect taxes
economic recovery and growth in manufacturing/
industry on the one hand and the higher levels of 3.13 The Budget for 2010-11 had indicated that
exemption arising from broadening of the income the formulation of indirect tax proposals was guided
tax brackets on the other. This was reflected in the by the need to return to the path of fiscal
budget estimates of year-on-year growth of 23.2 consolidation without affecting the growth momentum
per cent in corporate income tax and decline of 1.4 of the economy and moving forward on the road to
per cent in personal income tax. The varying levels a goods and services tax (GST). There was
of growth in the different components of tax accordingly a recalibration of the rates and certain
revenues, given the levels of their relative shares in rationalization and relief measures in the Budget.
gross tax revenues, indicate changes in the
composition of taxes. 3.14 The following were the important measures
taken in the Budget for 2010-11:
3.10 At the beginning of the economic reforms
 The standard rate of excise duty (CENVAT)
process in 1991-92, the ratio of direct and indirect
taxes in gross tax revenue was 22.6 per cent and which was brought down to 8 per cent after two
74.8 per cent respectively. As part of the larger successive reductions in December 2008 and
economic reforms, the reforms in the tax structure February 2009 was increased to 10 per cent.
effected through a gradual and sequenced  Excise duty on petrol and diesel was increased
reduction in the rates of duties in both customs and by ` 1 per litre so as to restore it to pre-June
excise together with the increase in the levels of 2008 levels.
income resulted in a gradual shift in the composition
of taxes. As a result in 2004-05--the year when the  Full or partial excise duty exemptions/
FRBM regime was operationalized--the ratios of concessions available on some items were
direct and indirect taxes were 56.1 per cent and withdrawn and duty imposed on them at the
43.3 per cent of gross tax revenue; in 2009-10, rate of 4 per cent or 10 per cent.
Table 3.3 : Sources of Tax Revenue
2005-06 2006-07 2007-08 2008-09 2009-10 2009-10 2010-11
(BE) (P) (BE)
` crore)
(`
Direct (a) 157557 219724 295938 319859 370000 367415 422500
Personal Income Tax 55985 75093 102644 106046 112850 122280 120566
Corporation Tax 101277 144318 192911 213395 256725 244630 301331
Indirect(b) 199348 241538 279031 269433 269477 247357 315000
Customs 65067 86327 104119 99879 98000 84244 115000
Excise 111226 117613 123611 108613 106477 104659 132000
Service Tax 23055 37598 51301 60941 65000 58454 68000
Gross Tax Revenue * 366151 473512 593147 605298 641079 626916 746651
Tax Revenue as a Percentage of Gross Tax Revenue
Direct (a) 43.0 46.4 49.9 52.8 57.7 58.6 56.6
Peronal Income Tax 15.3 15.9 17.3 17.5 17.6 19.5 16.1
Corporation Tax 27.7 30.5 32.5 35.3 40.0 39.0 40.4
Indirect(b) 54.4 51.0 47.0 44.5 42.0 39.5 42.2
Customs 17.8 18.2 17.6 16.5 15.3 13.4 15.4
Excise 30.4 24.8 20.8 17.9 16.6 16.7 17.7
Service Tax 6.3 7.9 8.6 10.1 10.1 9.3 9.1
Tax Revenue as a Percentage of Gross Domestic Product
Direct(a) 4.3 5.1 5.9 5.7 6.3 5.6 5.4
Personal Income Tax 1.5 1.7 2.1 1.9 1.9 1.9 1.5
Corporation Tax 2.7 3.4 3.9 3.8 4.4 3.7 3.8
Indirect(b) 5.4 5.6 5.6 4.8 4.6 3.8 4.0
Customs 1.8 2.0 2.1 1.8 1.7 1.3 1.5
Excise 3.0 2.7 2.5 1.9 1.8 1.6 1.7
Service Tax 0.6 0.9 1.0 1.1 1.1 0.9 0.9
Gross Tax Revenue * 9.9 11.0 11.9 10.8 10.9 9.6 9.5
Source: Union Budget documents.

BE-Budget estimates P: Provisional actuals (unaudited)
* includes Taxes referred to in (a) & (b) and Taxes of Union Territories and ‘other’ Taxes.
Note: 1. Direct Taxes also include Taxes pertaining to expenditure, interest, wealth, gift, and estate duty.
2. The ratios to GDP at current market prices are based on the CSO’s National Accounts 2004-05 series.
Figure 3.4 Composition of gross tax revenue

45
Per cent of gross tax revenue
40 Excise
35
Customs
30
25 Corporate
tax
20
15 Personal
income tax
10
5 Service
tax
0
1990-91
1995-96
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
(Prov)
2010-11 (BE)
Year
Box 3.1 : Direct Taxes Code (DTC)

The Direct Taxes Code Bill, 2010 introduced in Parliament, seeks to consolidate and amend the laws relating to all
direct taxes, that is income-tax, dividend distribution tax, and wealth tax so as to establish an economically efficient,
effective, and equitable direct tax system which will facilitate voluntary compliance and help increase the tax to GDP
ratio. The salient features of the DTC are :
1.0 It consolidates and integrates all direct tax laws and replaces both the Income Tax Act 1961 and the Wealth Tax
Act 1957 with a single legislation.
1.1 It simplifies the language of the legislation. The use of direct, active speech, expressing only a single point
through one sub-section and rearranging the provisions into a rational structure will assist a layperson to understand
the provisions of the DTC.
1.2 It indicates stability in direct tax rates. Currently, the rates of tax for a particular year are stipulated in the
Finance Act for that relevant year. Therefore, even if there is no change proposed in the rates of tax, the Finance Bill
has still to be passed indicating the same rates of tax. Under the Code, all rates of taxes are proposed to be prescribed
in Schedules to the Code, thereby obviating the need for an annual finance bill, if no change in the tax rate is
proposed. The Code proposes a corporate tax rate of 30 per cent against the current effective rate of 33.2 per cent and
raises the exemption limit as well as broadens the tax slabs for personal income tax.
2.0 It strengthens taxation provisions for international transactions. In the context of a globalized economy, it has
become necessary to provide a stable framework for taxation of international transactions and global capital. This
has been reflected in the new provisions. The new provisions with regard to international taxation are:
2.1 Advance Pricing Agreements for International Transactions--This will bring in certainty in transfer-pricing
issues as any taxpayer can enter into an agreement with the tax administration, which will be valid for a period up to
five years, regarding the manner in which the taxpayer would compute arm’s length price in respect of the taxpayer’s
international transactions.
2.2 Alignment of concept of residence (of a Company) with India’s tax treaties by introduction of concept of ‘place
of effective management’ instead of ‘wholly controlled’ in India.
2.3 Controlled Foreign Company Regulations--This is a provision which will assist in taxation of profits of a foreign
company in the hands of resident shareholders who may have incorporated such a company in low tax jurisdictions
and are accumulating passive income (i.e. interest, dividends, capital gains, etc.) in the company without repatriating
the income to India.
2.4 Branch Profit Tax on Foreign Companies–-Currently, foreign companies are taxed at the rate of 42.2 per cent
(inclusive of surcharge and cess) while domestic companies are taxed at the rate of 33.2 per cent (inclusive of surcharge
and cess) plus a dividend distribution tax at the rate of 16.6 per cent when they distribute dividend from accumulated
profits. It is proposed to equate the tax rate of foreign companies with that of domestic companies by prescribing the
rate at 30 per cent and levying a branch profit tax (in lieu of dividend distribution tax) at the rate of 15 per cent. This
will provide tax neutrality between a branch and a subsidiary of a foreign company in India.
2.5 Taxation of assets held abroad under wealth tax—It is proposed to include certain assets of residents which are
held abroad, such as deposits in bank accounts in the case of individuals and interest in a foreign trust or in a
controlled foreign corporation. This will create a reporting requirement mechanism for assets held abroad.
3. Phasing out Profit-linked Tax Incentives and Replacing them by Investment-linked Incentives--It has been observed
that profit-linked deductions are inherently discriminatory, prone to misuse by shifting of profits from non-exempt
to exempt entity or by reporting higher profits in exempt income entity, and also lead to high level of litigation and
revenue foregone. They also impede the Government’s efforts to give a moderate tax rate to other taxpayers as the
higher taxes paid by others by implication cross-subsidize the lower tax rates of the profit-linked deduction sectors.
Such profit-linked deductions are being phased out of the Income Tax Act and have also been dropped in the DTC.
They are being replaced by investment-linked deductions for specified sectors. Investment-linked incentives are
calibrated to the levels of creation of productive capacity and therefore are superior instruments. Profit-linked
deductions currently being availed of have been protected for the unexpired period in the DTC.
4. Rationalization of Tax Incentives for Savings--In order to focus savings incentives on long-term savings for social
security of the taxpayer during his non-working life, deduction of up to Rs 1 lakh has been provided for investments
in approved provident funds, superannuation funds, and pension funds.
5. General Anti Avoidance Rule to Curb Aggressive Tax Planning—Direct tax rates have been moderated over the
last decade and are in line with international norms. A general anti-avoidance rule assists the tax administration in
deterring aggressive tax avoidance in a globalized economy. Such general anti-avoidance rules already form a part
of the tax legislation in a number of G-20 countries.
6. Taxation of Non-profit Organizations: It is proposed to tax non-profit organizations set up for charitable purposes
on their surplus (at the rate of 15 per cent), after allowing for accumulation of a specified proportion for creation of
assets or for long-term projects, a further carry forward for receipts of the last month of the year, and also after a
basic exemption limit of Rs 1 lakh. Donations to these non-profit organizations will be eligible for tax deduction in
the hands of the donor.
 Excise duty on cigarettes and other tobacco  Full exemption from basic customs duty for truck
products was increased. refrigeration units for the manufacture of
 Ad-valorem component of excise duty on large refrigerated vans/trucks. Such units are
cars, multi utility vehicles, and sports utility already exempt from excise duty.
vehicles was increased from 20 per cent to  Reduction of basic customs duty from 7.5 per
22 per cent. cent to 5 per cent on specified agricultural
 Customs duty was increased on crude machinery such as paddy transplanters, laser
petroleum from nil to 5 per cent; petrol and land levellers, cotton pickers, reaper-cum-
diesel from 2.5 per cent to 7.5 per cent; and binders, straw or fodder balers, sugarcane
other specified petroleum products from 5 per harvesters, tracks used for manufacture of
cent to 10 per cent—once again to restore track-type combine harvester, etc.
these duties to pre-June 2008 levels.  Full exemption from excise duty on specified
 Customs duty on gold, silver, and platinum equipment for preservation, storage, or
increased by 50 per cent of the earlier transportation of apiary, horticultural, dairy,
applicable specific rates. poultry, aquatic and marine produce, and meat
and processing thereof.
 Eight new services were brought under the
 Exemption from service tax for transportation
service tax net to broaden the tax base. In
addition, scope of some existing taxable of cereals and pulses by road.
services was expanded.  Exemption from service tax for testing and
3.15 Fiscal concessions were given to priority/ certification of seeds.
thrust areas of the economy like agriculture, food  Concessional basic customs duty rate of 5 per
processing, renewable energy and conservation of cent on machinery items, instruments, and
energy, and infrastructure. The objective was to appliances required for initial setting up of solar
attract fresh investments in the agricultural/food power generation projects or facilities. These
processing and other related sectors like horticulture/ items are also exempt from excise duty.
apiary/diary/poultry for: (a) creation of farm to  Full exemption from basic customs duty and
market supply chains; (b) prevention of wastage of special additional customs duty for ground
produce; and (c) infusion of technology to boost source heat pump to tap geo-thermal energy.
production. In the energy sector, the aim was to
 Full exemption from excise duty on additional
reduce dependence on fossil fuels and harness the
specified raw materials for the manufacture of
new and clean sources of energy. In specific terms,
rotor blades for wind-operated electricity
the following major fiscal concessions were granted:
generators.
 Project imports status, with concessional rate
 Mono Rail Projects for urban transport granted
of basic customs duty of 5 per cent, for
installation of mechanized handling systems and project imports status with concessional rate of
5 per cent basic customs duty. Concessional
pallet racking systems in mandis or warehouses
customs duty rate of 5 per cent presently
for foodgrains and sugar along with exemption
from additional customs duty and special available up to 6 July 2010 on specified
machinery for tea, coffee, and rubber
additional customs duty . Installation and
plantations extended up to 31 March 2011.
commissioning of such systems is also exempt
from service tax. Excise duty exemption has also been
reintroduced on these items up to 31 March
 Project imports status, with concessional rate 2011.
of basic customs duty of 5 per cent, and full
 A uniform concessional rate of duty of 4 per
exemption from service tax for the initial setting
cent prescribed for parts, required for
up or substantial expansion of a cold storage,
cold room (including farm pre-coolers) for manufacture of all categories of electrical
vehicles including cars, two wheelers, and three
preservation or storage or an industrial unit for
wheelers (like ‘Soleckshaw’) subject to actual
processing of agricultural, apiary, horticultural,
dairy, poultry, aquatic and marine produce, and user condition. Such vehicles will also be
charged excise duty at the rate of 4 per cent.
meat.
 Excise duty reduced from 8 per cent to 4 per from basic customs duty and CVD. Project
cent on LED lights/lighting fixtures. imports status was accorded to ‘Setting up of
Digital Head End’ with 5 per cent concessional
3.16 As regards simplification of procedures, with
basic customs duty and nil special additional
effect from 1 April 2010 small-scale industrial (SSI)
customs duty .
units were allowed to take full CENVAT credit on
capital goods in one instalment in the year of receipt  Basic customs duty on rhodium which is used
of such goods. Facility of payment of excise duty primarily for the manufacture of gold jewellery,
on quarterly basis was extended to SSI units. The was reduced from 10 per cent to 2 per cent.
relaxation from brand name restriction under the  The limit of ` 1 lakh per annum on duty-free
general SSI exemption scheme was extended to import of samples was enhanced to ` 3 lakh
plastic bottles and plastic containers used as packing per annum.
material.
 The list of exempted components, raw materials,
3.17 The following important relief and and accessories for the manufacture of sports
rationalization measures were also extended: goods was enlarged by including some
additional items.
 Varying rates of customs duty on medical
equipment were done away with and now all Collection rates
medical equipment (with some exceptions)
attracts 5 per cent basic customs duty, 4 per 3.18 Various measures like simple average tariffs,
cent countervailing duty (CVD)/excise duty, and weighted average tariffs, and tariff dispersion
nil special additional customs duty (i.e. effective indicate the levels of protection in an economy and
duty of 9.2 per cent). Parts required for the are often used for cross-country comparisons. In
manufacture and accessories of medical many emerging economies, the level of nominal
equipment were also charged 5 per cent tariffs as indicated in the schedule under the customs
concessional basic customs duty with nil special acts might be very different from the applied levels
CVD. as there are numerous exemptions. It is therefore
useful to refer to such measures as collection rates
 Prior to the Budget, umbrellas attracted 4 per
cent excise duty while umbrella parts were for understanding the inter-temporal changes within
charged 8 per cent excise duty and umbrella the country better. The collection rates have steadily
cloth was fully exempt. The rate of excise duty declined over the years. Given the fact that the rates
on umbrellas and all umbrella parts was unified include CVDs, which are not counted as protection,
at 4 per cent in the Budget. the real levels of protection in India are much smaller.
Barring chemicals, man-made fibres, metals, and
 Full exemption from excise duty was provided
capital goods, the collection rates are in single digit
on articles of bedding wholly made of quilted
(Table 3.4 and Figure 3.5).
textile materials; toy balloons made of natural
rubber; betel nut product known as ‘supari’;
Service Tax
dementholised oil, deterpenated mentha oil,
spearmint/ mentha piperita oils, and all 3.19 Since its introduction in 1994-95, service tax
intermediates and by-products of menthol. has helped widen the tax base of indirect taxes.
 Excise duty was reduced from 8 per cent to There has been an increase in the number of
4per cent on replaceable kits for all household- services over the years (Table 3.5). The Budget for
type water filters (except those operating on 2010-11 announced the following measures:
RO technology); corrugated boxes/ cartons (a) Rate of service tax was retained at 10 per
manufactured by stand-alone manufacturers; cent (which had earlier been reduced from
and latex rubber thread 12 per cent in February 2009 as part of the
 Basic customs duty was reduced from 10 per fiscal stimulus package).
cent to 5 per cent on magnetrons of up to 1000 (b) Eight new services were brought under the
kw for the manufacture of microwave ovens. service tax net:
 Promotional material like trailors of films are (i) Services of promoting, marketing, or
imported free of cost in the form of electronic
organizing of games of chance, including
promotion kits /betacams were fully exempted
lottery.
Table 3.4 : Collection Rates for Selected Import Groups*
(per cent)
Sl. Commodity
No. Groups 1990-91 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
(Prov.)
1. Food Products 47 22 32 23 19 4 3
2. POL 34 10 6 5 6 3 2
3. Chemicals 92 22 20 22 22 16 14
4. Man-made Fibres 83 39 34 28 30 17 22
5. Paper & Newsprint 24 7 9 10 10 8 8
6. Natural Fibres 20 11 13 12 13 6 4
7. Metals 95 26 25 24 24 17 17
8. Capital Goods 60 16 13 14 16 13 11
9. Others 20 6 5 6 6 4 4
10. Non-POL 51 12 12 12 13 9 8
11. Total 47 11 10 10 10 7 6
Source: Department of Revenue, Ministry of Finance
* Collection rate is defined as the ratio of revenue collection (basic customs duty + countervailing duty) to value of imports
unadjusted for exemptions, expressed in percentage.
POL-Petroleum oil and lubricants
Sl.No. 1 includes cereals, pulses, tea, milk and cream, fruits, vegetables, animal fats, and sugar.
Sl.No. 3 includes chemical elements, compounds, pharmaceuticals, dyeing and colouring materials, plastic and rubber.
Sl.No. 5 includes pulp and waste paper, newsprint, paperboards and manufactures, and printed books.
Sl.No. 6 includes raw wool and silk.
Sl.No. 7 includes iron and steel and non-ferrous metals.
Sl.No. 8 includes non-electronic machinery and project imports and electrical machinery.
(ii) Health services, namely health check up (iii) Services provided for maintenance of
undertaken by hospitals or medical medical records of employees of a
establishments for the employees of business entity;
business entities and health services
(iv) Services of promoting of a ‘brand’ of
provided under health insurance
goods, services, events, business
schemes offered by insurance
companies. entity, etc.;
(The tax on these health services would be payable (v) Services of permitting commercial use
or exploitation of any event organized
only to the extent payment for such medical check-
by a person or organization;
up or preventive care or treatment, etc. is made
directly by the business entity or the insurance (vi) Services provided by electricity
company to the hospital or medical establishment); exchanges;
Figure 3.5 Collection rates for selected import groups

70
60 Capital
goods
50
Per cent
40 Total
30
20 Food
products
10
0 POL
1990-91
1995-96
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
(Prov)
Year
Table 3.5 : Service Tax-A Growing Revenue  An explanation was added in the definition
Source of the taxable service ‘Commercial Training
No. of Tax Revenue Growth or Coaching Service’ to clarify that the term
Services* Rate ` crore)
(` in per ‘commercial’ appearing in the relevant
in per cent definitions only means that such training
cent over or coaching is being provided for a
Previous
Year** consideration whether or not such training
or coaching is conducted with a profit
2004-05 75 10 14200 80.0
motive. This change was given
2005-06 78 10 23055 62.4
2006-07 93 12 37598 63.1 retrospective effect from 01.07.2003;
2007-08 100 12 51301 36.4
 In the definition of the taxable service
2008-09 106 12*** 60941 18.8
2009-10(P) 109 10 58454 -4.1 ‘Sponsorship Service’, the exclusion
2010-11 relating to sponsorship pertaining to sports
(April- was removed;
December) 117 10 44081 19.2
Source : Receipts Budget and Controller General of  In the definition of ‘Construction of Complex
Accounts. Service’, and ‘Commercial or Industrial
* Based on new entries added each year.
Construction Service’, it was provided that
** Growth for 2010-11 (April-December) is over
corresponding period previous year. unless the entire consideration for the
*** Reduced to 10 per cent w.e.f. 24-2-2009. property is paid after the completion of
P : Provisional actuals (unaudited)
construction (i.e. after issuance of
completion certificate by the competent
(vii) Services related to two types of
authority), the activity of construction would
copyrights hitherto not covered under
existing taxable service ‘Intellectual be deemed to be a taxable service provided
by the builder/promoter/developer to the
Property Right (IPR)’, namely those on
prospective buyer and the service tax
(a) cinematographic films; and (b)
sound recording; would be charged accordingly;
 Amendments were made in the definition

(viii) Special services provided by a builder,
of the taxable service ‘Renting of Immovable
etc. to prospective buyers such as
Property’ to: (i) provide explicitly that the
providing preferential location or
external or internal development of activity of ‘renting’ itself is a taxable service.
This change was given retrospective effect
complexes on extra charges.
from 1June 2007; and (ii) provide that
(c) Certain modifications were made in the renting of vacant land, where the
definition of existing taxable services to widen agreement or contract between the lessor
the scope of the levy of service tax: and lessee provides for undertaking
construction of buildings or structures on
 The scope of the taxable service ‘Air
such land for furtherance of business or
Passenger Transport Service’ expanded to commerce during the tenure of the lease,
include domestic journeys and
shall be subject to service tax;
international journeys in any class;
 The definitions of the taxable services,
 Prior to the Budget, ‘Information
‘Airport Services’, ‘Port Services’, and the
Technology (IT) Software Service’ was ‘Other Port Services’ were amended to
subject to tax only in cases where such IT
provide that (a) all services provided
software is used for furtherance of
entirely within the airport/port premises
business or commerce. The scope of the would fall under these services; and (b)
taxable service expanded to tax such
an authorization from the airport/port
service even if the service provided is used
authority would not be a precondition for
for purposes other than business or taxing these services;
commerce;
 An explanation was added in the definition These conditions include that either the
of the taxable service‘ Auctioneer’s Service’ customs duty (in case of import) or excise
to clarify that the phrase ‘auction by duty (in case of domestic production) has
Government’ means an auction involving been paid on the entire amount received
sale of Government property by any from the buyer;
auctioneer and not when the Government  scope of exemption from service tax
acts as an auctioneer for sale of a private available for transport of fruits, vegetables,
property; eggs, or milk by road by a goods transport
 The definition of ‘Management of agency was expanded by including
Investment under ULIP Service’ was foodgrains and pulses in the list of exempted
amended to provide that the value of the goods;
taxable service for any year of the  Exemption from service tax was provided
operation of policy shall be the actual to Indian news agencies under ‘Online
amount charged by the insurer for Information and Database Retrieval Service’
management of funds under ULIP or the and ‘Business Auxiliary Service’ subject to
maximum amount of fund management specified conditions ;
charges fixed by the Insurance Regulatory
 Exemption from service tax for ‘Technical
and Development Authority (IRDA),
Testing and Analysis Service’ and ‘Technical
whichever is higher;
Inspection and Certification Service’
(d) Certain exemptions from service tax were provided by Central and State seed testing
provided: laboratories, and Central and State seed
certification agencies;
 Statutory taxes charged by any
 Exemption from service tax provided for
Government (including foreign
Governments, where a passenger transmission of electricity.
disembarks) on air passengers were
excluded from taxable Value for the
Tax Expenditure
purpose of levy of service tax under the 3.20 Tax expenditure statement (Statement of
Air Passenger Transport Service; revenue foregone on account of tax incentives or
preferences) was first placed before Parliament in
 Exemption was provided from service tax
on air transport of passengers for journeys the Budget for 2007-08. The estimates are somewhat
originating from the north-eastern Region; counterfactual in nature and seek to quantify the
potential revenue (including through a sampling
 Exemption from service tax was provided process) had these exemptions been not given;
to services relating to ‘Erection, assume that tax base and other conditions remain
Commissioning or Installation’ of, unaltered. Subsequently this continued to be
published every year and in the Budget for 2010-
 Mechanized Food Grain Handling
11, tax foregone on account of exemptions under
Systems, etc.;
corporate income tax for 2008-09 and 2009-10 was
 Equipment for setting up or substantial estimated at ` 66,901 crore and ` 79,554 crore
expansion of cold storage; and respectively. Accelerated depreciation, deduction
of export profits of units located in software
 Machinery/equipment for initial setting
technology parks and of export-oriented units
up or substantial expansion of units for
(EOUs) were some of the major items under such
processing of agricultural, apiary,
corporate exemptions. Tax foregone on account of
horticultural, dairy, poultry, aquatic,
exemptions under personal income tax was
marine, or meat products;
estimated at ` 33,216 crore and ` 36,186 crore
 Packaged IT software, pre-packed in retail respectively in 2008-09 and 2009-10 with deduction
packages for single use, was exempted on account of certain eligible investments and
from service tax leviable under IT Software expenditures under section 80C of the IncomeTax
Service, subject to specified conditions. Act being the main exemptions.
3.21 Revenue foregone estimates in excise and expenditure, pay, and pensions. As a proportion of
customs broadly correspond to the differences in the GDP, defence expenditure and interest payments
statutory or Schedule rates of duties and the have been more or less stable. Given the committed
effective or applied rates of duties multiplied by the nature of other expenditure, the immediate and real
value assessed. Total revenue foregone in excise compression under this classification could only
for 2008-09 was estimated at ` 1,35,496 crore, of come from subsidies; hence the focus on reforms
which area-based exemptions amounted to ` 10,589 in subsidies in recent budgets. Front loading of Plan
crore. Tax expenditure is estimated to have risen to expenditure was possible in 2008-09 and 2009-10
` 1,70,765 in 2009-10 with area-based exemptions in view of the fiscal expansion to combat the adverse
accounting for only ` 5,882 crore. In customs, impact of the global crisis. Though an amount of `
revenue foregone under various exemptions was 3,25,149 crore (equivalent of 5.6 per cent of the
estimated to be of the order of ` 2,02,240 crore in GDP) was earmarked as Plan expenditure in Budget
2008-09 and ` 2,18,191 crore in 2009-10. The estimates for 2009-10, as per the provisional actual
following sectors benefited the most from such data released by the Controller General of Accounts
exemptions: crude oil and mineral oils; machinery; (CGA), plan expenditure was at ` 3,02,199 crore
diamond, gold and jewellery; edible vegetable, fruits, (equivalent of 4.6 per cent of the GDP). As per the
cereals, edible oils; chemicals and plastics; and Budget for 2010-11, plan expenditure for the current
primary metals and articles thereof. Revenue fiscal was placed at ` 3,73,092 crore, equivalent of
foregone on account of various export promotion 4.7 per cent of the GDP. (Figures 3.6 and 3.7)
schemes was estimated at ` 44,417 crore in 2008-
09 and ` 37,970 crore in 2009-10. Overall, tax Interest payments
expenditure as a proportion of aggregate tax
3.23 The levels of outstanding liabilities in end-
collection was placed at 68.6 per cent in 2008-09
March and assumption of incremental liabilities
and is estimated to have risen to 79.5 per cent in during the fiscal have a crucial bearing on the levels
2009-10.
of interest payments in a given year. Reflecting the
less than prudent fiscal management of the past,
Expenditure trends
interest payments have been growing at a steady
3.22 In a 2x2 schema of classification of public rate and appropriating about 35 per cent of the
expenditure into revenue and capital, and Plan and revenue receipts in the last five years. Given the
non-Plan, the thrust of public expenditure fact that the levels of outstanding liabilities could
management policies, particularly in terms of FRBM only come down in the medium to long term with
commitments, has been on containing non-Plan fiscal consolidation, one of the important targets of
revenue expenditure and raising the levels of Plan the FRBM framework was the progressive reduction
expenditure, preferably the capital variety. Non-Plan in assumption of incremental liabilities. Reflecting
revenue expenditure has five major components, this, as a proportion of the GDP, interest payments
namely interest payments, subsidies, defence came down from 4.5 per cent in 2003-04 to 3.4 per
Figure 3.6 Trends in Centre's revenue expenditure

400
350 Others
R thousand crore
300
250 Interest payments
200
Major subsidies
150
100 Defence
expenditure
50
0 Grants to states
and UTs
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
(Prov)
2010-11 (BE)
Year
Figure 3.7 Composition of revenue expenditure
100
28.4 29.9 31.9 33.9 32.5 Others

80 35.4 37.6 37.4
60 13.4 14.0 Grants to states

Per cent
16.8 16.5 18.2 15.6 and UTs

11.9 15.5 16.1
11.4
11.0 10.0 9.1 9.2 9.1
40 12.0 10.0
11.6 10.1 Defence
10.4 11.4
15.6 13.6 11.4 expenditure
20
34.3 33.0 30.2 29.2 28.8 24.2 23.3 25.9
Major subsidies
0
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
Year (Prov.) (BE) Interest payments
cent in 2007-08. Net of the interest payments on the Supplementary demands for grants
National Small Savings Fund (NSSF), the average
3.25 Supplementary demands for grants are placed
cost of borrowing has risen to 7.9 per cent from 7.7
before the Parliament to include all those expenditure
per cent in 2010-11 in the current fiscal reflecting
the higher levels of debt outstanding last year (Table proposals (excess or fresh or reappropriations) that
were not envisaged at the time of presentation of the
3.6 and Figure 3.8).
Budget and have to be incurred in the current year.
Subsidies Two supplementary demands for grants have so far
been presented in the current fiscal. The first batch
3.24 As a proportion of the GDP, subsidies have was approved by Parliament in August 2010
grown from 1.4 per cent in 2004-05 to 2.3 per cent
in 2008-09 (Figure 3.9). Below-the-line bonds issued Table 3.6 : Interest on Outstanding Internal
in lieu of subsidies also rose to a level of ` 1,10,510 Liabilities of Central Government
crore in 2008-09 (2 per cent of the GDP). This rise Out- Interest Average
in subsidies owes to the elevated levels of global standing on Cost of
crude oil prices and the less than full pass through Internal Internal Borrowings
of the international prices to the domestic markets Liabilities Liabilities (per cent
per annum)
and is also reflected in fertilizer subsidies as cost
of feedstock is the major cost. Following the global ` crore)
(`
financial crisis, there was a brief respite; 2004-05 1603785 105176 7.2
2005-06 1752403 111476 7.0
nevertheless global crude prices have started to
2006-07 1967870 128299 7.3
trend up. Some of the subsidies were also not
2007-08 2247104 149801 7.6
targeted properly. The Budget for 2010-11 also
2008-09* 2565991 170388 7.6
announced the intent of bringing all subsidy-related 2009-10(RE) 2902990 198797 7.7
liabilities to fiscal accounting. It was in this context 2010-11(BE) 3306626 227942 7.9
that the recent Budgets have focused on Source: Union Budget documents.
restructuring the subsidy regime in fertilizers and * Excludes ` 563 crore towards premium on account of
petroleum. As a first step, pricing of petrol (motor domestic debt buyback scheme and prepayment of
external debt.
spirit) was liberalized and a modest hike in
Note: 1. Average cost of borrowing is the percentage
administered prices of kerosene and LPG (liquefied of interest payment in year ‘ t’ to outstanding
petroleum gas) was announced. The retail selling liabilities in year ‘t-1’.
price of public distribution system (PDS) kerosene 2. Outstanding internal liabilities exclude NSSF
loans to States,with no interest liability on the
was increased by ` 3 per litre in Delhi with part of the Centre.
corresponding increase in the rest of the country 3. The figures of interest payments reported in
the earlier issues may differ as these figures
and the price of domestic LPG was increased by
are net of interest payments on NSSF paid by
` 35 per cylinder (14.2 kg) in Delhi with corresponding the Government since 1999-2000 i.e. constitution
increase in the rest of the country. of the NSSF.
Figure 3.8 Interest on internal liabilities and average interest cost of borrowing
250 12
Interest on
11 internal
200
Per cent per annum

liabilities
R thousand crore
(R)
10
150
Average
9 cost of
100 borrowing
8 (%)
50
7
0 6
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10 (RE)
2010-11 (BE)
Year
(61 grants and two appropriations) for total gross paramilitary forces (` 2,000 crore); and additional
additional expenditure of ` 68,294.3 crore, of which requirement of the PMGSY (` 3,000 crore).
those with a net cash outgo aggregated to ` 54,588.6
crore. The main items entailing cash outgo included Central Plan outlay
compensation to oil companies (` 14,000 crore); 3.26 With a higher level of gross budgetary support
additional requirement of the Pradhan Mantri Gram (GBS) of ` 2,29,163 crore and internal and extra
Sadak Yojana(PMGSY) (` 7,337.5 crore); and budgetary resources (IEBR) of Central public-sector
transfers to State and Union Territories Governments enterprises (CPSEs) of ` 1,96,427 crore, Central
(` 6,379 crore). The second batch of supplementary Plan outlay was placed at ` 4,25,590 crore for 2009-
demands for grants approved by Parliament in 10 ( revised estimates—RE). The GBS constituted
December 2010 included 56 grants and two 53.8 per cent of the total outlay. With a growth of
appropriations. Total gross additional expenditure 23.2 per cent over 2009-10 (RE), the Central Plan
approved by Parliament was ` 44,945.5 crore. This outlay now stands at ` 5,24,484 crore in the Budget
involves a net cash outgo aggregate of ` 19,812.4 for 2010-11. The outlay comprised budgetary support
crore and technical supplementary involving gross of ` 2,80,600 crore and IEBR of CPSEs of ` 2,43,884
additional expenditure, matched by savings of the crore. The broad sector-wise allocations for important
ministries/departments or by enhanced receipts/ sectors included energy (27.9 per cent); social
recoveries aggregates of ` 25,132.5 crore. The main services (24.3 per cent); transport (19.4 per cent);
items entailing cash outgo included compensation communication (3.5 per cent); rural development
to the Department of Fertilizers (` 5,000 crore) and (10.5 per cent); industry and minerals (7.4 per cent);
the Department of Food and Public Distribution (` agriculture and allied activities (2.3 per cent); and
5,000 crore); additional requirement for Central irrigation and flood control (0.1 per cent). Central
Figure 3.9 Subsidies as per cent of GDP

140 3.5
120 3.0
R thousand crore
Subsidies
Per cent of GDP
100 2.5
80 2.0
Subsidies
60 1.5 as % of
40 GDP
1.0
20 0.5
0 0
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10 (RE)
2010-11 (BE)
Year
assistance to State and UT Plans in 2010-11 (BE) is and Functional Classification of the Central
placed at ` 92,492 crore, a growth of 7.5 per cent Government Budget details the impact of the
over 2009-10 (RE). operations of the Central Government on the levels
of consumption expenditure and capital formation.
Government debt Of the total expenditure of ` 10,79,985 crore in BE
3.27 In many countries, the fiscal rules also include 2010-11 (equivalent of 13.7 per cent of the GDP),
21 per cent was used up as consumption expenditure
a debt reduction target. The FRBM Rules 2004
(amounting to ` 2,24,027 crore or 2.8 per cent of
contain an incremental assumption rule for public
debt which states that ‘the Central Government shall the GDP) and 18 per cent resulted in capital
formation (amounting to ` 1,94,473 crore or 2.5
not assume additional liabilities (including external
per cent of the GDP) with the rest being accounted
debt at current exchange rate) in excess of 9 per
cent of GDP for the financial year 2004-05 and in for as transfer payments (mainly to States).The levels
of dissavings of the Government came down
each subsequent financial year, the limit of 9 per
progressively and in 2007-08 became positive
cent of GDP shall be progressively reduced by at
least one percentage point of GDP’. There is, savings; however, the fiscal expansion resulted in
the re-emergence of dissavings in 2008-09 (Table
however, no explicit rule targeting reduction in the
3.8). After briefly going up in 2008-09 to a level of
overall level of public debt. As a proportion of the
GDP, public debt could come down through limiting ` 2,53,712 crore, the dissavings of the Government
were estimated at ` 1,92,705 crore in 2010-11 (BE).
its growth relative to growth in nominal GDP or
As the gap between the level of savings and capital
through lower assumption of incremental liabilities
or retirement of debt. The ThFC had recommended formation is financed preponderantly by draft on
the other sectors of the domestic economy, the
limiting the combined debt of the Centre and States
reversal of dissavings is an imperative.
to 68 per cent of the GDP by 2014-15. The Budget
for 2010-11 announced the intent of bringing out a
Fiscal outcome
status paper giving detailed analysis of the situation
and a roadmap for curtailing overall public debt 3.30 The outcomes in terms of key fiscal indicators
within six months. A status paper was presented to were much better than was envisaged by the Budget
the Parliament on November 2010 (Box 3.2). estimates on account of the higher than estimated
revenue from telecom 3G/BWA auctions and indirect
3.28 As a proportion of the GDP, the outstanding taxes. The headroom so available facilitated
internal liabilities of the Central Government fell from
additional expenditure proposed through
a level of 58.7 per cent in 2005-06 to 51.5 per cent
supplementary demands for grants. The data on
in 2009-10 (RE). They were budgeted at 48 per Union finances for April-December 2010 released
cent of the GDP in 2010-11 (Table 3.7A and Figure
by the CGA on 31 December 2010 indicated that
3.10). There has been steady decline in the levels
the key fiscal indicators were broadly on the
till 2007-08 subsequent to the operation of the FRBM consolidation track charted by the Budget for 2010-
Act. Thereafter there has been moderation in
11. Growth in gross tax revenue in the nine months
decline following the fiscal expansion in 2008-09
of the current fiscal was 26.8 per cent (year-on-
and 2009-10; a modest deterioration is evident in year) as against a level of 17.9 per cent envisaged
2010-11 (BE) (Table 3.7B). This is also reflected in
for the fiscal by the BE. Non-tax revenues grew by
the assumption of incremental liabilities, which have
136.4 per cent in the first nine months of current
significantly gone up in the last two years. fiscal as against a level of growth of 23.7 per cent
in the corresponding period last year and 32 per
Economic and functional classification of
cent envisaged by the BE. Revenue receipts grew
the Budget
by over 50 per cent in the first nine months (Table
3.29 While analysis on the basis of fiscal indicators 3.9). In major taxes the following were the year-on-
are instructive in understanding the fiscal situation year growth rates (as against growth envisaged by
and management thereof, the macroeconomic the BE): customs 65.8 per cent (36.1 per cent);
dimensions of fiscal policies are better understood Central excise 36.5 per cent (29.4 per cent), service
though a reclassification of the fiscal magnitudes in tax 19.7 per cent (17.2 per cent); corporate income
terms of national income aggregates. The Economic tax 20.4 per cent (18.1 per cent), and personal
Box 3.2 : Government Debt Report

In pursuance of the announcement made in the Budget for 2010-11 to this effect, a status paper on Government debt
was presented in November 2010. The paper made a detailed analysis of the situation and chalked out a roadmap for
reduction in overall debt as a percentage of the GDP for the General Government during the period 2010-11 to 2014-
15. The salient features of the report are detailed as follows:
 The objectives of the debt management policy are to meet Central Government’s financing need at the lowest
possible long-term borrowing costs and also to keep the total debt within sustainable limits . Additionally, it aims
at supporting development of a well-functioning and vibrant domestic bond market.
 The three important attributes of Government debt include source of financing, fixed interest nature of debt, and
long residual maturity. Of the overall Central Government debt, about 92 per cent is internal debt and 8 per cent
is external debt. Internal debt largely consists of market loans in the form of dated securities which are contracted
through auction. Most of the dated securities (97 per cent) are fixed coupon and only the balance 3 per cent are
floating rate bonds. The weighted average maturity of these dated securities is about 10 years while the weighted
average interest rate is about 7.8 per cent per annum.
 Subsequent to the Report of the ThFC which had estimated debt to GDP ratios and a roadmap for its reduction,
the CSO revised the nominal GDP significantly and as per the revised data the reduction in the levels of debt as
proportion of the GDP could be made even with higher than recommended fiscal deficits. As such, a higher than
ThFC recommended target was preferred whereby the fiscal deficit of the Centre would be reduced to 3 per cent
of the GDP by 2014-15 and accordingly debt as a proportion of the GDP would come down from 50.5 per cent in
2009-10 to 43 per cent in 2014-15.
 The outstanding debt of State Governments is estimated at 26.3 per cent of the GDP for 2009-10. However, after
netting of the liabilities on account of investments made in 14-days treasury bills of Central Government, this
comes down to 24.8 per cent of the GDP. The roadmap for States has been prepared with fiscal deficit as a
percentage of the GDP at the level recommended by the ThFC. With the foregoing assumption on fiscal deficit,
consolidated debt for State Governments is estimated to reduce from 24.8 per cent of the GDP in 2009-10 to 23.1
per cent in 2014-15.
 After factoring in the impact of Central loans to States, the consolidated debt of General Government has come
down from 79.3 per cent in 2004-05 to 68.7 per cent in 2007-08. However, it has subsequently increased during the
global economic crisis period to 71.1 per cent in 2008-09 and further to 73 per cent of the GDP in 2009-10. It may be
recalled that the 12th Finance Commission had recommended a consolidated debt for the Centre and State Governments at 74 per
cent of the GDP for the year 2009-10. Even with slippage in 2008-09 and 2009-10 on fiscal deficit targets, the overall General
Government debt at 73 per cent of the GDP in 2009-10 has remained within the recommended target.
 The suggested roadmap for consolidated General Government debt sets a target of reduction from 73 per cent of
the GDP in 2009-10 to 64.9 per cent in 2014-15. This shows a reduction of 8.1 per cent of the GDP in the consolidated
debt for the General Government.
 In the roadmap suggested for debt reduction during the period 2010-11 to 2014-15, the Government’s commitment
towards fiscal consolidation has been reiterated. With the reduction in fiscal deficit for 2010-11, the trend witnessed
in the last two years of increasing debt has been arrested. The Government has undertaken concerted efforts to reduce the
fiscal deficit gradually so as to bring down the debt as a proportion of the GDP to the pre-crisis level of 68.7 per cent by 2013-
14 and further improve to about 65 per cent of the GDP in 2014-15.
Figure 3.10 Debt GDP ratios

70
60 Total
Per cent of GDP
outstanding
50 liabilities
40
Internal
30 liabilities
20
Market
10 borrowings
0
External
debt
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10 (RE)
2010-11 (BE)
(outstand-
ing)
Year
Table 3.7A : Outstanding Liabilities of the Central Government
(end-March)
2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
(RE) (BE)
` crore)
(`
1. Internal Liabilities # 2165902 2435880 2725394 3036132 3376325 3782553
a) Internal Debt 1389758 1544975 1808359 2028549 2337682 2736754
i) Market Borrowings 862370 972801 1092468 1326094 1734505 2079535
ii) Others 527388 572174 715891 702455 603177 657219
b) Other Internal Liabilities 776144 890905 917035 1007583 1038643 1045799
2. External Debt (Outstanding)* 94243 102716 112031 123046 139581 162045
3. Total Outstanding Liabilities (1+2) 2260145 2538596 2837425 3159178 3515906 3944598
4. Amount Due from Pakistan on Account 300 300 300 300 300 300
of Share of Pre-partition Debt
5. Net Liabilities (3-4) 2259845 2538296 2837125 3158878 3515606 3944298
1. Internal Liabilities 58.7 56.7 54.7 54.4 51.5 48.0
a) Internal Debt 37.6 36.0 36.3 36.3 35.7 34.7
i) Market Borrowings 23.4 22.7 21.9 23.8 26.5 26.4
ii) Others 14.3 13.3 14.4 12.6 9.2 8.3
b) Other Internal Liabilities 21.0 20.7 18.4 18.0 15.9 13.3
2. External Debt (Outstanding)* 2.6 2.4 2.2 2.2 2.1 2.1
3. Total Outstanding Liabilities 61.2 59.1 56.9 56.6 53.7 50.1
Memorandum Items
(a) External Debt (` crore)@ 194078 201204 210083 264076 249311 272779
(as per cent of GDP) 5.3 4.7 4.2 4.7 3.8 3.5
(b) Total Outstanding Liabilities
(adjusted) (` crore) 2359980 2637084 2935477 3300208 3625636 4055332
(as per cent of GDP) 63.9 61.4 58.9 59.1 55.4 51.5
(c) Internal Liabilities(Non-RBI)(` crore)## 1969106 2217671 2471396 2687037 3041134 3447362
(as per cent of GDP) 53.3 51.6 49.6 48.1 46.4 43.8
(d) Outstanding Liabilities
(Non-RBI)(` crore)## 2163184 2418875 2681479 2951113 3290445 3720141
Outstanding Liabilities (Non-RBI)
(as per cent of GDP) 58.6 56.3 53.8 52.9 50.2 47.2
(e) Contingent Liabilities of
Central Government (` crore) 110626 109826 104872 113335 n.a. n.a.
Contingent Liabilities of
Central Government
(as per cent of GDP) 3.0 2.6 2.1 2.0 n.a. n.a.
(f) Total Assets (` crore) 1194446 1339119 1571668 1569043 1590027 1754040
Total Assets
(as per cent of GDP) 32.3 31.2 31.5 28.1 24.3 22.3
Source: 1. Union Budget documents. 2. Controller of Aid Accounts and Audit. 3. Reserve Bank of India.
n.a. : not available
* External debt figures represent borrowings by Central Government from external sources and are based upon
historical exchange rates.
@ Converted at year end exchange rates. For 1990-91, the rates prevailing at the end of March,1991; For 1999-2000, the
rates prevailing at the end of March, 2000 and so on.
# Internal debt includes net borrowing of ` 29,062 crore for 2005-06, ` 62,974 crore for 2006-07, ` 1,70,554 crore for
2007-08, ` 88,773 crore for 2008-09, ` 2,737 crore for 2009-10(RE) and ` 50,000 crore for 2010-11(BE) under the Market
Stabilisation Scheme.
## This includes marketable dated securities held by the RBI.
Note : The ratios to GDP at current market prices are based on the CSO’s National Accounts 2004-05 series.
Table 3.7B : Incremental Net Liabilities of the Central Government*
2005-06 2006-07 2007-08 2008-09 2009-10 (RE) 2010-11 (BE)

Target as per FRBM Rules 8 7 6 5 4 3
(as per cent of GDP)
Actual ( ` crore) 265723 278451 298829 321753 356728 428692
Actual as per cent of GDP 7.2 6.5 6.0 5.8 5.4 5.4
*Incremental net liablities assumed has been compiled from data on liabilities given in Annex 3(i) of Receipts
Budget, 2010-11.
income tax 13.1 per cent (-3.6 per cent). crore posted a growth of 9.1 per cent over 2008-
09. Taking into account further accumulation of
3.31 Year-on-year growth in total expenditure in the ` 141 crore in the traffic outstandings, the gross
first nine months of the current fiscal was at 11.2 per
traffic receipts of the Railways for 2009-10 stood at
cent as against a level of 18.5 per cent in 2009-10
` 86,964 crore.
(April-December) and 8.5 per cent envisaged for the
full year by BE 2010-11. While Plan expenditure grew 3.33 Ordinary working expenses at ` 65,810 crore
by 18.9 per cent in April-December 2010-11 as during 2009-10 showed an increase of 21.1 per
against 23.0 per cent in 2009-10 (April-December), cent over the preceding year. This higher growth
non-Plan expenditure grew by 7.9 per cent as against in ordinary working expenses was primarily
16.6 per cent. As per the CGA, 84.7 per cent of the attributable to payment of the second instalment (60
gross market borrowings were completed by end of per cent) of arrears of the Sixth Central Pay
December 2010. Reflecting the above trend in revenue Commission. The total working expenses including
and expenditure, revenue deficit was placed at appropriations for Depreciation Reserve Fund and
` 1,16,309 crore, which was 42.1 per cent of its BE Pension Fund at ` 82,915 crore recorded an
and lower by 53.7 per cent than the April-December increase of 15.4 per cent over the preceding year.
2009 level. Fiscal deficit was ` 1,71,249 crore, which
came to 44.9 per cent of its BE (Table 3.10) and 3.34 Taking into account the net variation of the
represented a decline of 44.8 per cent over the miscellaneous receipts and miscellaneous
level in April-December 2009. The deficit indicators expenditure, Railways net revenue in 2009-10 was
would thus remain at targeted levels even with a ` 5,544 crore. After fully discharging the dividend
pickup in expenditure in the next three months. liability of ` 5,543 crore for the fiscal, Railways
during 2009-10 generated an excess of around
PERFORMANCE OF DEPARTMENTAL ` 1 crore. Lower growth of traffic revenues on account
of prevailing economic conditions, stiff increase in
ENTERPRISES OF THE CENTRAL
working expenses due to implementation of the Sixth
GOVERNMENT Central Pay Commission recommendations and
inflationary factors have adversely affected the
Railways
financial health of the Railways in 2009-10, which
3.32 Indian Railways achieved a freight loading is reflected in its Operating Ratio1 deteriorating to
of 887.79 million tonnes in 2009-10 with an 95.3 per cent as against 90.5 per cent in 2008-09.
incremental loading of 54.40 million tonnes over the The net revenue as a proportion of capital-at-charge
levels in 2008-09. However, freight loading during and investment from the Capital Fund for the fiscal
2009-10 fell short of the revised target by 2.2 million was 4.5 per cent.
tonnes. Consequently freight earnings at ` 58,502
crore, though registering a growth of 9.5 per cent 3.35 The Plan Outlay for 2009-10 stood at ` 39,235
over 2008-09, fell short of the revised target for crore including internally generated resources of
2009-10 by ` 214 crore. Passenger earnings ` 12,196 crore (31 per cent of the total outlay) and
(excluding other coaching earnings) during 2009- market borrowings of ` 9,323 crore by the Indian
10 were ` 23,488 crore as against ` 21,931 crore Railway Finance Corporation which also includes
in 2008-09, registering an increase of 7.1 per cent. borrowing for Rail Vikas Nigam Limited. Apart from
Overall traffic revenues for 2009-10 at ` 87,105 strengthening of the golden quadrilateral under the
1
The Operating Ratio represents the percentage of working expenses to traffic earnings.
Table 3.8 : Total Expenditure and Capital Formation by the Central Government and its Financing
(As per Economic and Functional Classification of the Central Government Budget)
2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
(RE) (BE)
` crore)
(`
I. Total Expenditure 501083 570185 688908 864530 1005297 1079985
II. Gross Capital Formation out of Budgetary
Resources of Central Government 84757 87885 143892 136935 154827 194473
(i) Gross Capital Formation
by the Central Government 34450 36487 43652 51464 61190 71537
(ii) Financial Assistance for Capital Formation
in the Rest of the Economy 50307 51398 100240 85471 93637 122936
III. Gross Savings of Central Government -61431 -33918 13674 -176082 -253712 -192705
IV. Gap (II-III) 146188 121803 130218 313017 408539 387178
Financed by
a. Draft on Other Sectors of
Domestic Economy 109799 110801 118180 299208 361926 362654
(i) Domestic Capital Receipts 130687 106284 145351 246612 367507 362654
(ii) Budgetary Deficit/Draw Down of
Cash Balance -20888 4517 -27171 52596 -5581 0
b. Draft on Foreign Savings 36389 11002 12038 13809 46613 24524
I. Total Expenditure 13.6 13.3 13.8 15.5 15.3 13.7
Resources of Central Government 2.3 2.0 2.9 2.5 2.4 2.5
(i) Gross Capital Formation
by the Central Government 0.9 0.8 0.9 0.9 0.9 0.9
(ii) Financial Assistance for Capital Formation
in the Rest of the Economy 1.4 1.2 2.0 1.5 1.4 1.6
III. Gross Savings of Central Government -1.7 -0.8 0.3 -3.2 -3.9 -2.4
IV. Gap (II-III) 4.0 2.8 2.6 5.6 6.2 4.9
Financed by
a. Draft on Other Sectors of Domestic Economy 3.0 2.6 2.4 5.4 5.5 4.6
(i) Domestic Capital Receipts 3.5 2.5 2.9 4.4 5.6 4.6
(ii) Budgetary Deficit/Draw Down of -0.6 0.1 -0.5 0.9 -0.1 0.0
Cash Balance
b. Draft on Foreign Savings 1.0 0.3 0.2 0.2 0.7 0.3
(increase over previous year)
Resources of Central Government -8.7 3.7 63.7 -4.8 13.1 25.6
Memorandum Items ` crore)
(`
1 Consumption Expenditure 116305 121609 131396 174345 226987 224027
2 Current Transfers 297267 356560 408676 543347 594989 651168
1 Consumption Expenditure 3.1 2.8 2.6 3.1 3.5 2.8
2 Current Transfers 8.1 8.3 8.2 9.7 9.1 8.3
Source: Ministry of Finance, An Economic and Functional classification of the Central Government Budget-various issues.
Notes: (i) Gross capital formation in this table includes loans given for capital formation on a gross basis. Consequently
domestic capital receipts include loan repayments to the Central Government.
(ii) Consumption expenditure is the expenditure on wages and salaries and commodities and services for current use.
(iii) Interest payments, subsidies, pension etc. are treated as current transfers.
(iv) Gross capital formation and total expenditure are exclusive of loans to States’/UTs’ against States’/UTs’ share in the small
savings collection.
(v) The figures of total expenditure of the Central Government as per economic and functional classification do not tally with
figures given in the Budget documents. In the economic and functional classification, interest transferred to DCUs, loans
written off etc, are excluded from the current account. In the capital account, expenditure financed out of Railways, Posts
and Telecommunications own funds, etc. is included.
(vi) The ratios to GDP at current market prices are based on the CSO’s National Accounts 2004-05 series.
Table 3.9 : Central Government Finances

Budget April-December Col.4 as Per cent
Estimates per cent of change
2010-11 2009-10 2010-11 2010-11 over
(BE) 2009-10
1 2 3 4 5 6
` crore)
(`
1. Revenue Receipts 682,212 389,271 584,268 85.6 50.1
Gross Tax Revenue 746,651 416,094 527,782 70.7 26.8
Tax (net to Centre) 534,094 307,591 391,148 73.2 27.2
Non Tax 148,118 81,680 193,120 130.4 136.4
2. Capital Receipts 426,537 318,269 202,584 47.5 -36.3
of which:
Recovery of Loans 5,129 3,983 8,591 167.5 115.7
Other Receipts 40,000 4,306 22,744 56.9 428.2
Borrowings and Other Liabilities 381,408 309,980 171,249 44.9 -44.8
3. Total Receipts (1+2) 1,108,749 707,540 786,852 71.0 11.2
4. Non-Plan Expenditure (a)+(b) 735,657 497,381 536,898 73.0 7.9
(a) Revenue Account 643,599 460,970 487,692 75.8 5.8
of which:
Interest Payments 248,664 130,005 146,304 58.8 12.5
Major Subsidies 108,667 96,740 94,318 86.8 -2.5
Pensions 42,840 37,465 40,210 93.9 7.3
(b) Capital Account 92,058 36,411 49,206 53.5 35.1
5. Plan Expenditure (i)+(ii) 373,092 210,159 249,954 67.0 18.9
(i) Revenue Account 315,125 179,555 212,885 67.6 18.6
(ii) Capital Account 57,967 30,604 37,069 63.9 21.1
6. Total Expenditure (4)+(5)=(a)+(b) 1,108,749 707,540 786,852 71.0 11.2
(a) Revenue Expenditure 958,724 640,525 700,577 73.1 9.4
(b) Capital Expenditure 150,025 67,015 86,275 57.5 28.7
7. Revenue Deficit 276,512 251,254 116,309 42.1 -53.7
8. Fiscal Deficit 381,408 309,980 171,249 44.9 -44.8
9. Primary Deficit 132,744 179,975 24,945 18.8 -86.1
Source: Controller General of Accounts, Ministry of Finance.
National Rail Vikas Yojana, certain important projects yielding a deficit of ` 6,641.3 crore. In the current
and land acquisition work on dedicated freight fiscal as per BE 2010-11, the gross receipts are
corridors are in progress. Railways has also started budgeted to go up to ` 6,955.5 crore and with gross
work on setting up of some mega workshops to meet and net working expenses estimated at ` 11,328.8
its rolling stock requirements. It is also modernizing crore and ` 10,892.1 crore respectively, the deficit
and upgrading its systems to augment rail services. is projected to be ` 3936.6 crore.
Department of posts 3.37 India Post is the largest Postal network in

the world and provides access to postal services at
3.36 The gross receipts of the Department of Posts affordable rates to all citizens in the country through
in 2009-10 were placed at ` 6,266.7 crore. The its vast network, which has grown from 23,344 post
gross and net working expenses during the year were offices at time of Independence to 1,54,979 post
` 13,346.9 crore and ` 12,908 crore respectively, offices as on 31 March 2010. Of the total, 1,39,173
Table 3.10 : Trends in Cumulative Central Government Finance (April-December) for 2010-11
Budget April April- April- April- April- April- April- April- April-
Estimates May June July August Sept. Oct. Nov. Dec.
1. Revenue Receipts
` crore)
(` 682212 12979 44657 199810 238524 290799 398234 447625 476716 584268
Per cent to BE 1.9 6.5 29.3 35.0 42.6 58.4 65.6 69.9 85.6
2. Capital Receipts
` crore)
(` 426537 54247 102252 42398 94176 156904 139743 169810 213971 202584
3. Total Receipts
` crore)
(` 1108749 67226 146909 242208 332700 447703 537977 617435 690687 786852
Per cent to BE 6.1 13.2 21.8 30.0 40.4 48.5 55.7 62.3 71.0
4. Non Plan Expenditure
` crore)
(` 735657 48206 100101 154148 222900 311249 368270 424893 479771 536898
Per cent to BE 6.6 13.6 21.0 30.3 42.3 50.1 57.8 65.2 73.0
5. Plan Expenditure
` crore)
(` 373092 19020 46808 88060 109800 136454 169707 192542 210916 249954
Per cent to BE 5.1 12.5 23.6 29.4 36.6 45.5 51.6 56.5 67.0
6. Total Expenditure
` crore)
(` 1108749 67226 146909 242208 332700 447703 537977 617435 690687 786852
Per cent to BE 6.1 13.2 21.8 30.0 40.4 48.5 55.7 62.3 71.0
7. Revenue Expenditure
` crore)
(` 958724 63617 125877 210387 288599 391151 473155 542455 616874 700577
Per cent to BE 6.6 13.1 21.9 30.1 40.8 49.4 56.6 64.3 73.1
8. Revenue Deficit
` crore)
(` 276512 50638 81220 10577 50075 100352 74921 94830 140158 116309
Per cent to BE 18.3 29.4 3.8 18.1 36.3 27.1 34.3 50.7 42.1
9. Fiscal Deficit
` crore)
(` 381408 53993 100907 40196 90915 151425 133252 162336 186522 171249
Per cent to BE 14.2 26.5 10.5 23.8 39.7 34.9 42.6 48.9 44.9
Source: Controller General of Accounts, Ministry of Finance.
post offices are in rural areas and 15,797 in urban. and catering to the advertising needs of various
India Post has introduced franchisee outlets to cater entities through a single window facility. Doordarshan
to the growing demand for postal services where it as Host Broadcaster for the Commonwealth Games
is not possible to open departmental post offices. (CWG) provided the entire TV coverage of the CWG
As on 31 March 2010, 1082 franchised outlets have in HDTV format, a noteworthy achievement in the
been opened. The Department of Posts has been broadcasting sector. As Right Holder Broadcaster,
given the responsibility of disbursing wages to the Doordarshan provided customized TV coverage of
Mahatma Gandhi National Rural Employment CWG for Indian viewers besides launching an HDTV
Guarantee Scheme (MGNREGS) beneficiaries channel called DDHD to provide high quality services.
through post office savings bank accounts. Nearly Digitalization of the All India Radio network is one of
4.67 crore MGNREGS Accounts have been opened the major thrust areas of the Eleventh Plan. There is
up to October 2010 and the wages amounting to ` an approved scheme of digitalization of transmitters,
7113 crore have already been disbursed during the studios, and connectivity which, inter alia, envisages
current financial year (up to October 2010). A total digitalization of 98 studios and connectivity and 100
of ` 18,876 crore has been disbursed as wages to watts FM digital compatible transmitters at 100
MGNREGS beneficiaries through post offices since locations. Government has allocated a total ` 2,050
the inception of the scheme. crore including CWG 2010 in BE 2010-11 to cover
the resource gap in Prasar Bharati.
Broadcasting
State-level finances
3.38 Prasar Bharati, a public service broadcaster,
incurred a total expenditure of ` 2949.4 crore in 3.39 In the post-FRBMA period the performance of
2009-10 (excluding charges on account of the space combined States was impressive with fiscal deficit
segment and spectrum charges and interest and declining to 2.4 per cent of the GDP in 2005-06
depreciation costs). The total gross revenue earned and further to 1.5 per cent in 2007-08. With the
in 2009-10 was ` 1352.7 crore and the net revenue exception of 2009-10 (RE), the level of fiscal deficit
worked out to ` 1176.3 crore. Prasar Bharati has had remained below the 3 per cent of GDP mark. In
taken a number of steps to increase revenue 2010-11 (BE), it has been estimated at 2.5 per cent
generation by adopting aggressive marketing strategy of the GDP (Table 3.11 and Figure 3.11). A more
noteworthy feature has been that a surplus on exemptions in central excise; widening of service
revenue account has been recorded in the three- tax base through inclusion of eight new services
year period 2007-08 and 2008-09. Revenue receipts and expansion of scope of some of the existing
grew at the rate of 17.6 per cent and 10.7 per cent ones; reduction in excise duty from 16 per cent to
for 2007-08 and 2008-09 respectively. Buoyant 10 per cent on medicines and toilet preparations
revenues of the States (as also Centre) and non-tax containing alcohol (excise duty on medicinal and
receipts combined with a moderate growth in toilet preparations is one of the taxes to be subsumed
revenue have helped in this regard. However, there under the GST); approval of a Mission Mode Project
are significant variations among States in respect for the computerization of State Commercial Tax
of these indicators. Departments.
State-level Reforms 3.42 Though considerable progress has been

made in moving towards a comprehensive GST, the
3.40 Given the exceptional circumstances of 2008- timeline of April 2011 for its introduction is not likely
09 and 2009-10, the fiscal consolidation process of to be met. This is because the convergence of views
the States was disrupted. States would be able to between the Centre and States needed for the
get back to their fiscal correction path by 2011-12, introduction of legislation for a constitutional
allowing for a year of adjustment in 2010-11. The amendment in this regard is yet to be achieved. In
stimulus packages of the Central Government as the meantime, the working groups involved in
well as those announced by individual States coupled developing the IT architecture, business processes,
with the increased transfers recommended by the and draft legislations for the effective implementation
ThFC have implications for the financial position of of GST are continuing their work. An empowered
the States in the medium term. The group under the Chairmanship of Dr Nandan
recommendations of ThFC for the period 2010-15 Nilekani, Chairman UIDAI, is working out the
are presently under implementation. The modalities for creation of a special purpose vehicle
recommendations take into account the current and (SPV) which envisages the setting up of a common
likely macroeconomic and fiscal scenarios so as to portal for the Centre and State Governments through
secure fiscal stability and adequate resource which taxpayers could interact with the two tax
availability for the Centre, the States, and the local administrations. Work is also under way to create
bodies. The higher levels of devolution of taxes and and strengthen the IT infrastructure in State
the inter-se sharing thereof together with higher VAT(value-added tax) departments so that their
levels of non-Plan grants under Article 275 of the transition to the GST becomes easier.
Constitution which include specific grants like grants
for elementary education, outcomes and
environment related grants, maintenance grants, and CONSOLIDATED GENERAL GOVERNMENT
state-specific grants are likely to bring the combined 3.43 Given the grant dependance of local bodies
deficit of the States down to the targeted levels faster. and limited availability of data, consolidated General
The borrowing ceiling for each State for the year Government finances are taken to be the
2010-11 has been fixed by the Government of India, aggregation of Union and combined State finances
keeping in view the recommendations of the ThFC after due process of netting of inter-Governmental
based on targets for fiscal deficit. Besides, the ThFC transactions. The macroeconomic impact of the
has also provided a basis for the finances of local Government’s fiscal operations is thus evaluated by
bodies through a basic grant and a performance looking at consolidated General Government
grant based on a percentage of the divisible pool of finances. As with the Centre and States individually,
the preceding year. The estimated total grant collectively also a revenue buoyancy and relatively
recommended for local bodies aggregates to ` limited growth in expenditure helped in the fiscal
87,519 crore over the award period of the ThFC. consolidation phase in the post-FRBM period up to
2007-08. In 2007-08, the gross fiscal deficit of the
3.41 In this year’s Budget, measures were also
consolidated General Government was placed at 4.1
taken to facilitate movement towards a goods and
services tax (GST). These included unification of per cent of the GDP on a cash basis (Table 3.12 and
Figure 3.12); and revenue deficit was close to zero.
rates between central excise (goods) and service
After the fiscal expansion in 2008-09 and 2009-10,
tax (services) at 10 per cent; removal of certain
Table 3.11 : Receipts and Disbursements of State Governments*
2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
(RE) (BE)
` crore)
(`
I. Total Receipts(A+B) 595,628 673,605 765,735 886,875 1,049,437 1,149,031
A. Revenue Receipts (1+2) 431,021 530,556 623,748 690,581 802,708 906,495
1. Tax Receipts 306,332 372,841 437,948 481,854 529,740 624,380
of which:
State’s Own Tax Revenue 212,307 252,548 286,546 321,351 364,997 426,014
2. Non-tax Receipts 124,690 157,714 185,799 208,727 272,968 282,114
of which:
Interest Receipts 9,380 11,825 12,637 16,594 16,782 16,331
B. Capital Receipts 164,607 143,049 141,987 196,294 246,728 242,536
of which:
Recovery of Loans & Advances 8,904 7,579 7,770 11,068 7,960 4,208
II. Total Disbursements (a+b+c) 561,682 657,280 752,324 877,747 1,073,800 1,167,404
a) Revenue 438,034 505,699 580,805 678,856 849,571 932,683
b) Capital 109,224 137,793 157,258 183,013 207,073 220,022
c) Loans and Advances 14,424 13,789 14,261 15,879 17,155 14,699
III. Revenue Deficit 7,013 -24,857 -42,943 -11,725 46,863 26,189
IV. Gross Fiscal Deficit 90,084 77,508 75,455 134,245 214,137 198,097
I. Total Receipts(A+B) 16.1 15.7 15.4 15.9 16.0 14.6
A. Revenue Receipts (1+2) 11.7 12.4 12.5 12.4 12.3 11.5
1. Tax Receipts 8.3 8.7 8.8 8.6 8.1 7.9
of which:
State’s Own Tax Revenue 5.7 5.9 5.7 5.8 5.6 5.4
2. Non-tax Receipts 3.4 3.7 3.7 3.7 4.2 3.6
of which:
Interest Receipts 0.3 0.3 0.3 0.3 0.3 0.2
B. Capital Receipts 4.5 3.3 2.8 3.5 3.8 3.1
of which:
Recovery of Loans & Advances 0.2 0.2 0.2 0.2 0.1 0.1
II. Total Disbursements (a+b+c) 15.2 15.3 15.1 15.7 16.4 14.8
a) Revenue 11.9 11.8 11.6 12.2 13.0 11.8
b) Capital 3.0 3.2 3.2 3.3 3.2 2.8
c) Loans and Advances 0.4 0.3 0.3 0.3 0.3 0.2
III. Revenue Deficit 0.2 -0.6 -0.9 -0.2 0.7 0.3
IV. Gross Fiscal Deficit 2.4 1.8 1.5 2.4 3.3 2.5
Source: Reserve Bank of India.
*: Data from 2008-09 onwards pertain to 27 State Governments.
RE: Revised Estimates.
Note: (1) Negative (-) sign indicates surplus in deficit indicators.
(2) The ratios to GDP at current market prices are based on the CSO’s National Accounts 2004-05 series.
(3) Capital receipts include public accounts on a net basis.
(4) Capital disbursements are exclusive of public accounts.
Figure 3.11 Revenue and fiscal deficit of states

4
Per cent of GDP
3 Gross fiscal
deficit
2
1
Revenue
0 deficit
-1
-2
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10 (RE)
2010-11 (BE)
Year
both revenue and fiscal deficits are estimated to for the economy as whole is bright with continued
decline sharply in 2010-11 (BE). Thus the outlook fiscal consolidation.
Figure 3.12 Combined (centre and states) revenue and fiscal deficit
12
Per cent of GDP
10 Gross fiscal
deficit
8
6
Revenue
4 deficit
2
0
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10 (RE)
2010-11 (BE)
Year
Table 3.12 : Receipts and Disbursements of Consolidated General Government

2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
(RE) (BE)
` crore)
(`
I. Total Receipts (A+B) 1,014,689 1,125,252 1,329,654 1,604,238 1,885,017 2,052,774
A. Revenue Receipts (1+2) 707,054 877,075 1,061,892 1,112,877 1,250,511 1,446,332
1. Tax Receipts 576,596 724,023 877,496 925,173 994,843 1,158,475
2. Non-tax Receipts 130,458 153,052 184,396 187,704 255,668 287,857
of which:
Interest Receipts 18,735 21,744 22,584 25,462 24,774 25,120
B. Capital Receipts 307,635 248,177 267,762 491,361 634,506 606,442
of which:
a) Disinvestment Proceeds 1,590 2,440 45,750 832 26,319 43,155
b) Recovery of Loans & Advances 11,651 -773 4,682 8,935 9,505 5,520
II. Total Disbursements (a+b+c) 959,855 1,109,174 1,316,246 1,595,110 1,909,380 2,071,147
a) Revenue 806,366 932,441 1,071,518 1,354,691 1,626,434 1,749,031
b) Capital 132,585 157,316 225,803 217,476 257,787 296,787
c) Loans and Advances 20,904 19,417 18,925 22,943 25,159 25,329
III. Revenue Deficit 99,312 55,366 9,626 241,814 375,923 302,699
IV. Gross Fiscal Deficit 239,560 230,432 203,922 472,466 623,045 576,140
I. Total Receipts (A+B) 27.5 26.2 26.7 28.7 28.8 26.1
A. Revenue Receipts (1+2) 19.1 20.4 21.3 19.9 19.1 18.4
1. Tax Receipts 15.6 16.9 17.6 16.6 15.2 14.7
2. Non-tax Receipts 3.5 3.6 3.7 3.4 3.9 3.7
of which:
Interest Receipts 0.5 0.5 0.5 0.5 0.4 0.3
B. Capital Receipts 8.3 5.8 5.4 8.8 9.7 7.7
of which:
a) Disinvestment Proceeds 0.0 0.1 0.9 0.0 0.4 0.5
b) Recovery of Loans & Advances 0.3 0.0 0.1 0.2 0.1 0.1
II. Total Disbursements (a+b+c) 26.0 25.8 26.4 28.6 29.1 26.3
a) Revenue 21.8 21.7 21.5 24.3 24.8 22.2
b) Capital 3.6 3.7 4.5 3.9 3.9 3.8
c) Loans and Advances 0.6 0.5 0.4 0.4 0.4 0.3
III. Revenue Deficit 2.7 1.3 0.2 4.3 5.7 3.8
IV. Gross Fiscal Deficit 6.5 5.4 4.1 8.5 9.5 7.3
Source: Reserve Bank of India.
Note: The ratios to GDP at current market prices are based on the CSO’s National Accounts 2004-05 series.
THE NATURE OF FISCAL CONSOLIDATION given the very low discretionary fiscal stimuli. In the
fiscal consolidation phase in the post-FRBMA period
3.44 The impact of the global financial crisis brought
to the fore the criticality of fiscal policies in combating (2004-05 to 2007-08), there was considerable fiscal
economic shocks. With little monetary headroom in space generated that facilitated the high levels of
advanced economies and given the transmission lags expansion that India had. It is therefore instructive
in emerging market economies, fiscal policies were to analyse the nature of fiscal deficits in India through
the preferred policy instruments across the globe. their decomposition into structural and cyclical
As per international institutional research on the components (Box 3.3).
subject, advanced economies were able to put in
place large doses of fiscal stimuli as they had the
advantage of automatic stabilizers while emerging
PROSPECTS/OUTLOOK
markets, including India, had large fiscal expansion 3.45 With significant levels of reduction envisaged
Box 3.3 : Decomposition of Fiscal Deficit into Structural and Cyclical Components
The Government budget balance is basically influenced by both cyclical (temporary) and structural (permanent)
factors, entailing that change in the fiscal deficit could arise either in response to cyclical changes in output or to
structural factors. The cyclical changes in output have a transitory effect on the fiscal deficit, whereas the structural
factors have a more durable impact. A structural deficit occurs when a country generates a deficit even when the
economy of the country is operating at its full employment level. On the other hand, a cyclical deficit occurs when an
economy is not performing to its potential, for example if an economy is struggling through a recession. A structural
deficit means that a deficit will be posted regardless of how well an economy if functioning-–recession or boom.
When the economy is functioning strongly, revenue generation is higher due to more jobs, more spending, etc. but
with structural deficit the good and strong health of the economy is irrelevant--a deficit will be generated regardless.
Structural deficit could be further decomposed into three parts that is (a) fiscal drag, (b) discretionary fiscal policy
action, and (c) base year balance, to gain still more insight into the determinants of the structural deficit. Of the three
listed components, the first two are important from the point of understanding fiscal stance.
Fiscal Drag
Among the components of the structural deficit, the fiscal drag is important and normally refers to increase in
average tax rates in a progressive income tax scheme as a consequence of increase in nominal income over time--
either on account of higher levels of inflation or real GDP growth. It has been observed that fiscal drag is the
dominant contributory factor for structural deficit of Central Government balances.
Discretionary Fiscal Policy Action
On the other hand, the second component, i.e. discretionary fiscal policy actions, after remaining relatively weak up
to 2007-08, had shown increases in 2008-09 and 2009-10 which can be attributed to revenue losses due to slowdown
in the economy and duty cut together with higher expenditure to provide fiscal stimulus to sustain economic growth.
Traditional deficit indicators normally do not discriminate between these two effects, and hence fail to correctly
evaluate and portray the impact of fiscal operations on the economy as a whole. The decomposition of the budget
balance into its structural and cyclical components is obtained normally through the application of two important
methodologies, namely the IMF and Organization for Economic Cooperation and Development (OECD) methodologies.
The earlier research on the subject that had been done mostly in the pre-FRBMA period had indicated the presence
of the large structural rigidities in the composition of fiscal deficits in India and a very small cyclical component. The
preliminary findings of the study on this subject commissioned in the post-FRBMA period using OECD methodology
too have indicated continued dominance of the structural component in the budgetary balance of the Government;
this observation holds good in the decomposition of primary deficits of the Centre, combined States, and consolidated
General Government.
(Contd....
Box 3.3 Contd....)

Estimates of Structural and Cyclical Components of the GFD
Year Structural Cyclical Gross Fiscal Year Structural Cyclical Gross Fiscal
Deficit(SD) Deficit(CD) Deficit(GFD) Deficit(SD) Deficit(CD) Deficit(GFD)
1990-91 8.0 -0.4 7.6 2000-01 5.4 0.1 5.5

1991-92 5.7 -0.3 5.4 2001-02 6.1 -0.1 6.0
1992-93 5.4 -0.2 5.2 2002-03 6.1 -0.4 5.7
1993-94 6.9 -0.1 6.8 2003-04 4.7 -0.4 4.3
1994-95 5.4 0.1 5.5 2004-05 4.2 -0.3 3.9
1995-96 4.6 0.3 4.9 2005-06 4.2 -0.3 4.0
1996-97 4.3 0.4 4.7 2006-07 3.4 -0.1 3.3
1997-98 5.3 0.3 5.7 2007-08 2.5 0.1 2.5
1998-99 5.9 0.4 6.3 2008-09 6.0 0.0 6.0
1999-2000 4.9 0.4 5.2 2009-10 6.1 0.2 6.3
Decomposition of gross fiscal deficit into structural and cyclical components

9
8 Gross fiscal
deficit
7 (GFD)
Per cent of GDP
6
Structural
5 deficit
4 (SD)
3
Cyclical
2 deficit
1 (CD)
0
-1
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
Year
in the combined State Government deficit in 2010- the terminal year of the award of the ThFC, the
11 (BE) and the progress in the current fiscal in proportion of total expenditure to the GDP is to go
respect of Central Government finances, the down by 2.5 percentage points to reach 13.5 per
resumption of the process of fiscal consolidation at cent of the GDP in 2014-15 and at the same time
both Centre and State levels as also of the the proportion of tax to GDP is set to rise by 1.4
consolidated General Government has really begun percentage points to reach 12.2 per cent of the GDP
after two years of purposive expansion. With the in 2014-15. This estimated level of growth in tax
roadmap laid out by the Medium Term Fiscal Policy revenues seems likely given the recovery in the
Statement coupled with that indicated in the economy to the pre-crisis levels and the fact that it
Government Debt Report 2010, the prospects of was at the same levels before the crisis. Thus it is
extending this process to the medium term and critical to anchor expenditure reforms to realize the
beyond are bright. While the roadmap in terms of projected deficit levels. A beginning has already been
deficit indicators is important in itself, these being made with the reforms announced in subsidies, some
in the nature of derived indicators, it is useful to of which have already been implemented. Going
look at the process by which the reduction is sought forward, deepening the reform process would hold
to be achieved. The Government Debt Report 2010 the key to sustaining the fiscal consolidation
indicates that between 2010-11 (BE) and 2014-15 process.
Prices and Monetary
Management
4
CHAPTER
A s the world economy has begun to stabilize in the aftermath of the global crisis,
inflation has re-emerged as a major concern particularly in the fast- recovering
developing economies. At present, the major pressure on prices is emanating from
the food and energy sectors both at global and domestic levels. However, the risk of
its slippage into the core sector has increased and needs to be mitigated proactively.
Notwithstanding slow recovery in the advanced economies, international commodities
particularly, oil, food, industrial inputs, and metals have witnessed rising prices
towards the end of 2010. International crude prices also briefly crossed US$ 90 a
barrel in the wake of an unusually cold winter, putting pressures on the Government
to take a relook at domestic fuel prices. The renewed inflationary pressure became
evident in December 2010 as headline wholesale price index (WPI) inflation increased
to 8.4 per cent from 8.1 per cent in November 2010. However, in January 2011 it
has moderated to 8.2 per cent. In addition to fuel, metal and mineral prices are also
putting pressure on the domestic economy. Food inflation in particular has remained
stubbornly in double digits for over a year now, which has welfare costs. There is
need to remain cautious and be prepared to take proactive steps as the emerging
scenario warrants, with the objective of bringing down inflation. Going forward,
inflation is likely to moderate in line with the monetary tightening measures taken
by the Reserve Bank of India and other steps taken by the Government to address
the supply-side bottlenecks.
PRICES 4.3 Some of the important items included in the

new series basket are flowers, lemons, and crude
Main features of the new WPI series petroleum in primary articles and ice cream,
4.2 A new WPI series with 2004-05 base was canned meat, palm oil, readymade/instant food
released on 14 September 2010. A representative powder, mineral water, computer stationery, leather
commodity basket comprising 676 items has been products, scooter / motorcycle tyres, polymers,
petrochemical intermediates, granite, marble, gold
selected and weighting diagram derived for the
and silver, construction machinery, refrigerators,
new series. The total number of price quotations
computers, dish antenna, transformers, microwave
has also increased from 1918 in the old series to
ovens, communication equipment (telephone
5482 in the new series, indicating better
instruments), TV sets, VCDs, washing machines,
representation of the prices in the wholesale
and auto parts in manufactured products.
markets. Sector-wise price quotations have
increased from the old to new series from 455 to General wholesale price situation
579 in primary group and from 1391 to 4831 in the 4.4 During the first half of 2009-10, the headline
manufactured products group. A comparison of the year-on-year inflation remained significantly low at
weighting diagram and number of commodities 0.36 per cent on account of sharp increases in prices
between the old and new series for the major groups recorded in 2008-09. The second half of 2009-10
is drawn in Table 4.1.
Table 4.1 : Major Changes in the Weights and Commodities in the Revised WPI Series
Weights No. of Commodities
Items New Series Old Series New Series Old Series New Items
(base: (base: (base: (base: Added/
2004-05) 1993-94) 2004-05) 1993-94) Revised
All Commodities 100.00 100.00 676 435 417
Primary Articles 20.12 22.03 102 98 11
Food Articles 14.34 15.40 55 54 1
Non-Food & Minerals 5.78 6.63 47 44 10
Fuel and Power 14.91 14.23 19 19 0
Manufactured Products 64.97 63.75 555 318 406
Food Products 9.97 11.54 57 41 25
Non-Food Products 55.00 52.21 498 277 381
Source : The Office of the Economic Adviser, Ministry of Commerce and Industry.
showed increasing food prices on account of whose inflation hovered in the range of 14.7 per
unfavourable agricultural supply conditions coupled cent to 21.5 per cent and fuel which recorded
with the waning of base effect, leading to sharp inflation in the range of 10.3 per cent to 14.4 per
increase in inflation. Thereafter, the headline WPI cent. However, the inflation in manufactured
inflation reached 10.23 per cent in March 2010. products remained in the lower range of 4.5 to 6.4
per cent during the current year (Figure 4.1).
4.5 Financial year 2010-11 started with 11 per
cent headline inflation in April 2010.During 2010- 4.7 The Government is committed to ensuring
11, the monsoon situation has been better than last availability of cooking fuels to the common man at
year. As per the Second Advance Estimates, affordable prices. In view of the importance of
production of foodgrains in 2010-11 is likely to be household fuels, namely kerosene and domestic
232.07 million tonnes as compared to 218.11 million liquefied petroleum gas (LPG), the Government has
tonnes last year. However, demand pressures decided that the subsidies on these products will
became visible in early 2010. be continued. The PDS Kerosene and Domestic
LPG Subsidy Scheme 2002 as well as the Freight
4.6 At disaggregate level, the price behaviour of Subsidy (for Far-flung Areas) Scheme 2002 have
three major commodities groups has been in marked been extended till 31 March 2014. However, in order
contrast to the previous year when inflation to reduce the burden of under-recoveries, it has been
remained low on account of global decline in decided to increase the retail price of public
commodity prices. From March to July 2010, distribution system (PDS) Kerosene by ` 3 per
headline inflation remained in double digits. The litre and of domestic LPG by `35 per cylinder, at
major contributors to this were primary articles Delhi, with corresponding increases in other parts
Figure 4.1 Inflationary trend in major subgroups of WPI

25
20 Primary
Inflation (per cent)
articles
15
10 Fuel &
5 power
0 Manufac-
-5 tured
products
-10
-15 All commo-
dities
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
2009-10 2010-11
Year
Prices and Monetary Management 71
of the country. Prices of petrol and diesel, both at Table 4.2 : Annual Average Inflation Rate-
the refinery gate and retail level, will be market based on WPI
determined. However, it is proposed that increase (per cent)
in prices of diesel will be staggered over time to Year Primary Fuel & Manufac- All
minimize the overall impact on the poor and Articles Power tured Commo-
vulnerable. It has also been decided that in case of Products dities
a high rise and volatility in international oil prices, Weights(%) 20.12 14.91 64.97 100
Government will suitably intervene in the pricing of 2000-01 2.8 28.5 3.3 7.2
petrol and diesel. 2001-02 3.6 8.9 1.8 3.6
2002-03 3.3 5.5 2.6 3.4
Average trends in WPI inflation 2003-04 4.3 6.4 5.7 5.5
2004-05 3.7 10.1 6.3 6.5
4.8 The ten-year average of headline WPI inflation
1st 5 Years’
was around 5.3 per cent from 2000-01 to 2009-10;
Average 3.5 11.9 3.9 5.2
in this decade 2000-01, 2003-04, 2004-05, 2006-
2005-06 4.3 13.5 2.3 4.3
07, and 2008-09 had higher inflation relative to the 2006-07 9.6 6.5 5.6 6.5
decadal average. In the current financial year, the 2007-08 8.3 0.0 4.9 4.8
average inflation (April–December 2010) of 9.4 per 2008-09 11.0 11.6 6.2 8.0
cent was also much higher than the decadal rate. 2009-10 12.7 -2.1 1.8 3.6
The ten-year average inflation in fuel was around 2nd 5 Years’
8.9 per cent. The major portion of that was Average 9.2 5.9 4.1 5.5
contributed by the high inflation of 2000-01. The years Decadal
2003-04, 2004-05, 2006-07, and 2008-09 also Average 6.4 8.9 4.0 5.3
witnessed high inflation in manufactured products 2009-10
mainly on account of high prices of raw materials (Apr.-Dec.) 9.8 -5.8 0.7 1.7
such as basic metal alloys and metal products, non- 2010-11
metallic mineral products, and machinery and (Apr.-Dec.)P 18.0 12.3 5.3 9.4
machine tools. The year 2008-09 was different from Source: The Office of the Economic Adviser, Ministry
the previous three years as inflation in all the three of Commerce and Industry.
sectors remained high on account of high Note: P—Provisional
international fuel and commodity prices. The year
2009-10 was an abnormal one due to global in the revised series at 21.9 per cent in February
slowdown and unfavourable monsoon. 2010, thereafter declining to 9.4 per cent in
Notwithstanding, the average inflation was 3.6 per November 2010 and once again rising to 13.6 per
cent backed by negative inflation in fuel. In the cent in December 2010 (Table 4.3). However,
current financial year (2010-11), overall average manufactured food products exhibited a decline in
inflation from April-December 2010 at 9.4 per cent, inflation from 19.3 per cent in December 2009 to
is the highest recorded in the last ten years 0.4 per cent in December 2010. Among food items,
(Table 4.2). sharp rise in prices was observed in onions, fruits,
eggs, meat and fish, and milk. The prices of
Food Inflation in WPI foodgrains, however, remained low on the back of
4.9 The food index consists of two sub good monsoons with a year-on-year inflation of
components, namely primary food articles and -2.6 per cent in December 2010.
manufactured food products. The overall weight of
the composite food index in the WPI is 24.31 per Main drivers of food inflation
cent, comprising primary food articles with a weight 4.10 In 2010-11, inflation in primary food articles
of 14.34 per cent and manufactured food products was mainly driven by rice, vegetables, potatoes,
with a weight of 9.97 per cent. A major concern in onions, fruits, milk, eggs, meat and fish, condiments
the domestic economy has been a sharp rise in and spices, and tea. However, the WPI of
food price inflation during the year 2010-11. The WPI manufactured food products with 2004-05 base is
food inflation has moderated to 8.59 per cent in in the comfortable zone. It was 142.7 in December
December 2010 after reaching its peak of 20.22 2010 as against 142.2 in December 2009. This
per cent in February 2010. Of its two components, has marginally increased due to vanaspati oil,
primary food price inflation touched a historic high groundnut oil, sunflower oil, rice bran extraction,
Box 4.1: An Unexpected Surge in Food Inflation

Food inflation has been unexpectedly high in recent weeks—driven by surging prices of vegetables, fruits, dairy, oilseeds,
and spices. It was unexpected because good rainfall in 2010 was expected to bring down prices. It did: for cereals (wheat,
rice) and pulses, which together provide most of the energy and protein intake of households in India, especially of the
poor. But the surging prices of other foods caused the overall food inflation to rise. Given the critical importance of food
in India’s setting—with high rates of malnutrition and household food spending accounting for above 40 per cent of total
household expenditure (versus some 7-8 per cent in richer countries)—we disentangle in this Box the relative importance
of some competing and popular sets of explanations or factors.
(1) Rising International Prices—Demand-Supply Shocks or Generalized Commodity Surge? There was a sudden
surge in global food prices in 2006-08, which subsequently crashed with the global financial crisis. Prices, however, again
started surging since late 2009, and have now surpassed the 2008 peak—led by sugar, oils and fats, and cereals (but not
dairy and meat). What is driving this global increase? A July 2010 study (Baffes and Haniotis) looking at the previous
2006-08 price rise provides evidence that it was due to a generalized commodity price rise, especially in oil, itself caused
by a world awash with liquidity and a falling dollar. It also provides evidence that it was not, as popular explanations
would have us believe, because of (1) rising demand in emerging markets (such as China and India); (2) a shift to biofuels;
and (3) a trend rise (because price variability dominates any trend). Nevertheless, the previous 53 per cent fall in real food
prices between 1975 and 2001 was probably overdone and some adjustment was inevitable. The 2009-10 price resurgence
is very similar. Everything from a poor summer wheat harvest in Russia to the recent Australian floods, dry spell in
Argentina, Indonesian flooding, poor US maize yields, and rising demand in China and India is being blamed—but
sudden price rises of this magnitude across such a variety of food products are difficult to attribute to any specific
supply or demand problem except in the context of a generalized commodity price surge (whose solutions lie elsewhere).
FAO Annual Real Food Price Index

300
300
FAO annual
Food Price Index
(2002-04=100)
300 real food

price index
295
290
285
280
275
270
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Year
Food Commodity Price Indices FAO Food Price Index

Index (2002-04=100)
350
Index (2002-04=100)
200
300
250
180
200 160
150 140
100
120
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
100
2009-10 2010-11
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Meat Dairy Cereals Oils Sugar

price index price index price index price index price index 2006 2007 2008 2009 2010
(2) Is India buffeted by rising international prices? While some spillovers of global prices to Indian markets are
inevitable, world trade in agriculture is often very thin, with large trade restriction and tariff wedges between domestic
and international prices. While domestic food prices cannot be fully insulated from global ones, local markets do differ,
(Box 4.1 Continued)
Wholesale price of wheat, India and Brazil Wholesale price of rice: India, Thailand and China
900
550
800
475 700
US$/ton
400
US$/ton
600
325 500
250 400
300
175
200
100
Jan 2005
Jul 2005
Jan 2006
Jul 2006
Jan 2007
Jul 2007
Jan 2008
Jul 2008
Jan 2009
Jul 2009
Jan 2010
Jul 2010
Nov 2010
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
India Brazil India Thailand China
the volatility of global prices is far greater than that of domestic prices, and India’s prices have been much more stable,
avoiding the highs and lows. Indeed, recent cereals prices have been declining in India relative to global ones.
(3) So, what caused the unexpected surge in non-cereal prices? Fundamentals versus uncompetitive markets.
One popular explanation for suddenly rising prices of vegetables, spices, dairy, and similar products is rising incomes
in India driving prices higher, as consumers are presumed to be shifting from low-value products to higher value ones
(consistent with Engel’s Law). While this may certainly be true as a general demand-side explanation, it merits deeper
examination because of two other factors: (1) the sudden spike in prices; and (2) the generally high supply elasticities
in such products that should prevent this. Instead, consistent with what is evident globally, when some unexpected
supply or demand shocks happen, it is often easier for commodity prices to spike temporarily—unrelated to
fundamentals and driven sometimes by local cartelization or other conditions such as sudden flows of speculative
capital into thin commodity futures markets. The case of onion prices is a good example of the former, and spices of
the latter. Onion prices surged from Rs 15 per kg to over Rs 80 per kg over a matter of weeks, attributed popularly
to the effects of extended rainfall and damaged crop in Nashik. However, onions are in fact grown all over India, and
the all-India market is generally well-behaved and competitive—in that local prices converge to national ones. However,
in the presence of unanticipated supply or demand shocks, local onion markets do fragment and become much more
‘ill-behaved’ and it is possible to observe sudden temporary spikes and divergence that is more consistent with local
cartelization conditions, supported by cascading entry barriers along the supply chain (including the restrictions of the
Agricultural Produce Marketing Act [APMC] and the restrictions and fees at mandis). Fundamentals, however, catch
up, as evident in onion prices crashing in recent weeks to about Rs. 25/kg at the retail level and even lower at
wholesale market. Similar conditions apply in commodity exchanges where sudden speculative activity can drive
futures prices temporarily higher—until supplies and fundamentals bring spot and hence futures prices back to
reality. Even vegetable prices (such as tomatoes), which had risen dramatically, are easing back, as supply catches up.
“Well behaved” and convergent regional series of Temporarily less "well-behaved" weekly retail
onion retail prices, Andhra Pradesh, 2006-2008
onion price movements, Northern India, Delhi
18 versus Amritsar, Dec 2009 - Dec 2010
16
70
14
60
Price: R/Kg Retail
12
R/Kg.
10 50
8
6
40
4 30
2
20
Average
2006-07
Jan 2006
Apr 2006
Jul 2006
Oct 2006
Jan 2007
Apr 2007
Jul 2007
Oct 2007
Jan 2008
Apr 2008
10
0
Viziana-garam Kakinada & Jaggaiahpet &
1
5
9
13
17
21
25
29
33
37
41
45
48
& Chittivalasa Rajahmundry Miryalguda
Tirupathi & Nizamabad & Kothagudem & Weeks

Renigunta Bodhan Palwaneha Amritsar Delhi
(Box 4.1 Continued)
Daily trading value futures surge for spices

200
Daily
180
trading
160 value
140 futures for
spices
R crores
120
grouped
100 together:
80 chillies,
jeera,
60
dhaniya,
40 castor,
20 turmeric
and pepper.
0
11 Oct 10
22 Oct 10
02 Nov 10
13 Nov 10
24 Nov 10
05 Dec 10
16 Dec 10
27 Dec 10
07 Jan 11
18 Jan 11
References: John Baffes and Tassos Haniotis (2010), ‘Placing the 2006/08 Commodity Price Boom into Perspective’, Policy
Research Working Paper 5371, The World Bank. Food and Agriculture Organization (FAO), Global food price monitor,
14 January 2011 and Global Information and Early Warning System (GIEWS) Country Data.
Table 4.3 : Monthly Break-up of WPI Food Inflation

(per cent)
All (A) (B) (A+B)
Commodities Food Articles Food Products Food Combined
Wt% 100 14.34 9.97 24.31
Period 2009-10 2010-11 2009-10 2010-11 2009-10 2010-11 2009-10 2010-11
Apr. 0.89 11.00 8.69 20.49 8.86 9.09 8.76 16.09
May 1.21 10.60 8.91 21.37 10.12 7.09 9.37 15.85
Jun. -0.71 10.28 11.28 20.97 9.05 6.13 10.42 15.30
Jul. -0.62 10.02 12.74 18.48 8.46 7.34 11.10 14.31
Aug. 0.31 8.82 14.36 14.96 10.73 4.58 12.97 11.06
Sep. 1.09 8.93 13.92 16.29 12.08 3.62 13.21 11.49
Oct. 1.48 9.12 12.47 14.64 12.97 3.75 12.66 10.56
Nov. 4.50 7.48P 16.73 9.41P 17.94 0.57P 17.17 6.11P
Dec. 6.92 8.43P 20.76 13.55P 19.30 0.35P 20.21 8.59P
Jan. 8.53 20.19 19.16 19.80
Feb. 9.68 21.85 17.68 20.22
Mar. 10.23 20.65 15.11 18.50

Source: The Office of the Economic Adviser, Ministry of Commerce and Industry.
Note: P—Provisional.
Table 4.4 : Main Drivers of Food Inflation
WPI y-o-y y-o-y *Financial Financial
Inflation WC year year
inflation WC
Items Weight% Dec. Mar. Dec. Dec. Dec. Apr. Dec.
2009 2010 2010 2010 2010 Dec. 2010
2010
All Commodities 100.00 132.9 135.8 144.1 8.43 100.00 6.11 100.00
Primary Articles 20.12 162.2 165.9 188.9 16.46 47.96 13.86 55.75
Primary Food Articles 14.34 164.6 163.6 186.9 13.55 28.55 14.24 40.25
Rice 1.79 164.5 163.3 166.4 1.16 0.30 1.90 0.67
Wheat 1.12 180.8 172.8 171.6 -5.09 -0.92 -0.69 -0.16
Pulses 0.72 212.1 198.9 189.0 -10.89 -1.48 -4.98 -0.85
Vegetables 1.74 180.0 132.0 224.9 24.94 6.96 70.38 19.43
Potatoes 0.20 240.1 105.4 176.3 -26.57 -1.15 67.27 1.72
Onions 0.18 268.2 171.3 391.1 45.82 1.95 128.31 4.71
Fruits 2.11 136.0 145.6 163.8 20.44 5.23 12.50 4.62
Milk 3.24 151.0 167.2 178.5 18.21 7.95 6.76 4.41
Eggs, Meat, & Fish 2.41 164.3 172.1 195.9 19.23 6.81 13.83 6.92
Condiments & Spices 0.57 202.7 204.9 270.6 33.50 3.45 32.06 4.50
Tea 0.11 165.8 129.1 156.7 -5.49 -0.09 21.38 0.37
Manufactured Food 9.97 142.2 141.7 142.7 0.35 0.45 0.71 1.20
Sugar 1.74 185.7 183.6 167.3 -9.91 -2.85 -8.88 -3.41
Vanaspati 0.71 107.3 108.5 119.6 11.46 0.79 10.23 0.96
Oil, Groundnut 0.30 133.0 131.5 147.8 11.13 0.40 12.40 0.60
Oil, Sunflower 0.17 115.8 112.5 128.4 10.88 0.20 14.13 0.33
Rice Bran Extraction 0.09 210.3 210.4 231.2 9.94 0.17 9.89 0.23
Tea & Coffee Process 0.71 148.6 140.7 160.4 7.94 0.75 14.00 1.69
Malt Liquor 0.15 150.9 150.4 167.1 10.74 0.22 11.10 0.31
Note: WC – weighted contribution.
tea and coffee process, and malt liquor. The per cent in September 2010 from 9.18 per cent in
movement of index, inflation, and their contribution April 2010.
to overall inflation among food groups, may be seen
in Table 4.4. 4.12 Main items of concern in non-food inflation
are raw cotton, raw jute, raw silk, copra, castor seed,
4.11 Core inflation is a measure of inflation that sunflower, raw rubber, copper ore, zinc, iron ore,
excludes items that face volatile price movement, cotton textiles, petrochemical intermediate, and
notably food and energy. It is, therefore, a preferred industrial machinery and machine tools. Movement
tool for framing long-term policy. Core inflation, which of index of non-food components in the WPI is
was 0.55 per cent in November 2009, reached its presented in Figure 4.2.
peak in April 2010 at 8.07 per cent (Table 4.5).
Thereafter it has moderated in response to monetary 4.13 In the fuel and power group the major
measures taken by the Reserve Bank of India (RBI). contribution to inflation is from mineral oils
However, inflation in non-food manufactured products accounting for over 90 per cent (Table 4.6).
(weight 55.00 per cent) had not increased much
and remained in the range of 5.1 to 5.9 per cent in Annual inflation as per different price indices
the current financial year. Notwithstanding, year-on- 4.14 The inflation in terms of the consumer price
year inflation in the composite non-food index index for industrial workers (CPI-IW) remained in
(weight 75.7 per cent) has increased to 8.36 per double digits from July 2009 to July 2010. The
cent in December 2010 after moderating to 7.96 inflation in terms of the CPI-AL (Agricultural
Table 4.5 : Movement in WPI Non-food Inflation during 2010-11

(per cent)
Non-food Non-food Minerals Fuel & Power Core inflation Non-food
Composite Articles Manu-
Index factured
Weight 75.69 4.26 1.52 14.91 60.78 55.00
Apr.2010 9.18 18.08 34.56 13.61 8.07 5.92
May-10 8.71 14.76 25.34 14.42 7.27 5.77
Jun.2010 8.47 15.83 22.08 13.92 7.09 5.55
Jul. 2010 8.43 15.30 31.60 13.26 7.16 5.41
Aug.2010 7.97 15.81 23.77 12.55 6.77 5.21
Sep.2010 7.96 20.75 26.77 11.06 7.13 5.09
Oct.2010 8.57 25.74 29.38 11.02 7.91 5.25
Nov.2010 8.02 23.22 21.54 10.32 7.40 5.41
Dec.2010 8.36 22.31 27.69 11.19 7.60 5.34
Note: Core Index= Total WPI— (Total food+ Fuel & power).
Figure 4.2 Movement of non-food WPI during 2010

Index (2004-05=100)
180
170 Primary
non-food
160 articles
150 (Wt. 4.26%)
140 Fuel &
power (Wt.
130 14.91%)
120
Manufac-
Dec 09
Jan 10
Feb 10
Mar 10
Apr 10
May 10
Jun 10
Jul 10
Aug 10
Sep 10
Oct 10
Nov 10
Dec 10
tured non-
food (Wt.
55.00%)
Year
Total non-
food index
(Wt.
75.69%)
Table 4.6: Index and Contribution of Fuel and Power (disaggregated to overall inflation)
Items Weight WPI:2004-05=100 Dec.2010/Dec.2009 Dec.2010/Mar.2010
% Dec. Mar. Dec. Y-o-Y Y-o-Y FY FY
2009 2010 2010 Inflation WC Inflation WC
Fuel & Power 14.91 135.0 140.1 150.1 11.19 20.10 7.14 17.96
Coal 2.09 162.7 163.0 163.0 0.18 0.06 0.00 0.00
Mineral Oils 9.36 138.6 146.6 160.5 15.80 18.31 9.48 15.68
Electricity 3.45 108.6 108.6 114.0 4.97 1.66 4.97 2.25
Note: Y-on-Y—year-on-year.
WC- Weighted Contribution
Labourers) and CPI-RL (Rural Labourers) had come down to single digit for the first time in 15
reached double digits in May 2009 and continued months (Table 4.7).
so until July 2010. Further, inflation in terms of the
CPI-AL and CPI-RL was higher than inflation based 4.15 At 9.47 per cent, inflation in the CPI-IW has
on the CPI-IW during all these months. In August substantially declined in December 2010 from its
2010, the inflation in terms of all price indices has peak of 16.22 per cent in January 2010. The CPI
Table 4.7 : Year-on-Year Inflation Based on Different Consumer Price Indices
Month WPI CPI(IW) CPI(AL) CPI(RL)
(2004-05=100) (2001=100) (1986-87=100) (1986-87=100)
2009-10 2010-11 2009-10 2010-11 2009-10 2010-11 2009-10 2010-11
APR. 0.89 11.00 8.70 13.33 9.09 14.96 9.09 14.96
MAY 1.21 10.60 8.63 13.91 10.21 13.68 10.21 13.68
JUN. -0.71 10.28 9.29 13.73 11.52 13.02 11.26 13.02
JUL. -0.62 10.02 11.89 11.25 12.90 11.02 12.67 11.24
AUG. 0.31 8.82 11.72 9.88 12.89 9.65 12.67 9.66
SEP. 1.09 8.93 11.64 9.82 13.19 9.13 12.97 9.34
OCT. 1.48 9.12 11.49 9.70 13.73 8.43 13.51 8.45
NOV. 4.50 7.48P 13.51 8.33 15.65 7.14 15.65 6.95
DEC. 6.92 8.43P 14.97 9.47 17.21 7.99 16.99 8.01
JAN. 8.53 16.22 17.57 17.35
FEB. 9.68 14.86 16.45 16.45
MAR. 10.23 14.86 15.77 15.52
Average (Apr-Mar) 3.57 12.37 13.91 13.76
Source: Labour Bureau, Shimla and the Office of the Economic Adviser, Ministry of Commerce and Industry.
Note: P : Provisional.
maintained higher levels last year relative to the of relatively high inflation is concentrated in food,
WPI, mainly because of the larger weight assigned pan, supari, tobacco and intoxicants, and housing.
to food items. In consumer price indices, food items Two major contributors to high CPI-IW inflation were
contribute a weight of 46.20 per cent in the CPI-IW food and housing. The housing sector is the third
and 69.15 per cent in the CPI-AL as against 24.31 major contributor after food and the miscellaneous
per cent in the WPI. The food inflation has group, having a 15.3 per cent weight in the CPI-IW
decelerated after reaching its peak in January 2010. commodities basket. However, the average inflation
As a result CPI inflation rates have gone down (April-December 2010) was lower than in the
substantially. corresponding period last year (Table 4.8).
4.17 The non-food inflation in CPI-IW has
Disaggregated Consumer Price Inflation
increased during April-December 2010 to 11.64 per
4.16 Analysis at this level has assumed cent as against 8.78 per cent in the corresponding
importance in view of the fact that the current phase period last year. During April-December 2010, food
Table 4.8 : Quarterly Inflation Trend in CPI-IW by Major Commodity Groups (Base: 2001=100)
2009-10 2010-11
Apr.- Jul. Oct. Apr.- Apr. Jul.- Oct.- Apr. -
Weights Jun.- Sep. Dec. Dec. Jun.- Sep. Dec. Dec.
General index 100.00 8.87 11.75 13.06 11.67 13.66 10.31 9.16 10.96
Food Group 46.20 11.47 13.97 16.56 14.70 13.99 10.34 7.01 10.29
Pan, Supari, Tobacco & 2.27 7.44 8.80 7.86 8.34 12.93 12.13 11.26 12.10
Intoxicants
Fuel & Light 6.43 4.59 3.02 3.91 4.08 6.00 11.26 10.84 9.41
Housing 15.27 5.97 22.06 22.06 16.82 33.1 21.08 21.08 24.68
Clothing, Bedding & Footwear 6.57 4.14 4.38 4.22 4.34 4.51 5.51 7.05 5.70
Miscellaneous Group 23.26 7.11 5.95 4.30 6.11 5.03 4.72 5.35 5.03
Total Non-food 53.80 6.45 9.64 9.62 8.78 13.33 10.27 11.42 11.64
Source: Labour Bureau, Shimla.
Figure 4.3 Onions movement in Dec 2010: state wise CPI and Y-o-Y inflation
700 180
Inflation (%)
Y-o-Y inflation (per cent)

600 Dec 10/
150 Dec 09
CPI-IW (2001=100)
500 120
CPI
Dec 09
400 90
CPI
300 60 Dec 10
200 30
100 0
Assam
Bihar
Chandigarh
Chhattisgarh
Delhi
Gujarat
Haryana
Himachal Pradesh
Jammu & Kashmir
Jharkhand
Kerala
Madhya Pradesh
Maharashtra
Punjab
Rajasthan
Uttar Pradesh
West Bengal
All India
inflation has declined to 10.29 per cent as unprecedented rise in inflation in the northern
compared to 14.70 per cent during the region, particularly Punjab (Figure 4.3).
corresponding period last year (Table 4.8). Inflation
in the CPI-IW has increased in December 2010 to Introduction of CPI-Urban and CPI-Rural
9.47 per cent as against 8.33 per cent in November 4.19 The Central Statistics Office (CSO) has taken
2010. Food inflation in the CPI-IW has also up a new initiative of compilation of CPI (urban), CPI
increased to 7.98 per cent in December 2010 from (rural), and CPI (rural+urban) for all States/UTs and
5.35 per cent in November 2010. all India by considering all sections of the urban
4.18 Inflation in fruits and vegetables and onions and rural population. These indices would reflect
based on the CPI-IW in December 2010 was 15.3 the true picture of price behaviour of various goods
per cent and 77.6 per cent respectively as against and services consumed by the urban and rural
22.77 per cent and 45.82 per cent respectively based population. Box 4.2 is a short note on the CPI
on the WPI. State-wise CPI-IW and year-on-year (urban), CPI (rural), and national CPI giving salient
inflation in December 2010 for onions shows features of this new series of indices.
Box 4.2 : New Series of CPI numbers

1. The CSO has taken an initiative for compilation of new series of urban, rural, and combined (rural+urban) CPI at
State/UT/all India level with increased scope and coverage.
2. CPI (rural) and CPI (urban) would be compiled for each State/UT as well as at all India level. Weighting diagrams
(consumption pattern) of the indices have been derived from the results of the National Sample Survey (NSS) 61st
round of Consumer Expenditure Survey (2004-05).
3. In urban areas, all cities/towns having population (2001 Population Census) more than 9 lakh and all state/UT
capitals not covered therein were selected purposively. In all 310 towns have been selected either on purposive or
random basis from which 1114 quotations (price schedules) are canvassed every month.
4. In rural areas, with a view to having a manageable workload and considering that the CPI (rural) would provide the
price changes for the entire rural population of the country, a total of 1183 villages have been selected at all India level.
The broad criterion of selection of villages is to have representation of all the districts within the State/UT and
therefore two villages from each district adjusted based on rural population of the State/UT have been selected
randomly from different tehsils.
5. The CSO has also decided to bring out a national CPI by merging CPI (urban) and CPI (rural) with appropriate
weights, as derived from NSS 61st round of Consumer Expenditure Survey (2004-05) data.
6. The Technical Advisory Committee on Statistics of Prices and Cost of Living (TAC on SPCL) in its 49th meeting held
on 10 November 2010 decided to take 2010(January-December) as the base year for a new CPI (urban), CPI (rural)
and CPI(rural+urban)series .Indices for January 2011 are likely to be released by February 2011.
Figure 4.4 Annual trend in price indices and PFCED
170
Indices (2004-05=100)
160 PFCED
150
CPI-IW
140
130 CPI-RL
120
110
100
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

PFCED 100.0 103.4 109.9 115.4 122.8 132.9 145.9
CPI-IW 100.0 104.4 111.4 118.3 129.1 145.0 158.3
CPI-RL 100.0 103.9 111.7 119.7 131.9 150.0 163.0
Sources: Labour Bureau and CSO

Note: The PFCED for 2010-11 is based on advance estimates, CPI-IW and CPI-RL for 2010-11 are for the period
April-December 2010.
Private Final Consumption Expenditure deflator’s ability to account for such substitutions
Deflator (PFCED) makes it the preferred measure of inflation. The
CPI-RL represents rural areas, where price indices
4.20 The gross domestic product (GDP) or gross
are reigning higher than the CPI-IW in response
domestic income (GDI) is the market value of all
to improvements in purchasing power and
final goods and services produced within a country
consumption pattern on account of various
in a given period. It is often positively correlated with
the standard of living. Movement of the consumption employment generation schemes of the Government
pattern of a country can be analysed through its like the Mahatma Gandhi National Rural Employment
deflator generated by the Private Final Consumption Guarantee Scheme (MNREGS).
Expenditure (PFCE) at current prices over constant
prices base 2004-05. Annual price indices data for Global and domestic inflation
the CPI-RL, CPI-IW and PFCED from 2004-05 4.22 From April 2009 global food prices showed
onwards indicate an upward swing in the standard much lower volatility than the WPI-based domestic
of living (Figure 4.4). food inflation. However, a higher volatility was seen
4.21 Price changes may cause consumers to in international food inflation from September 2010
switch from buying one good to another. Whereas as compared to domestic food inflation in India.
the fixed basket CPI does not account for altered Costlier imports could push up domestic inflation
spending habits caused by price changes, the PFCE (Figure 4.5 and Table 4.9).
Figure 4.5 Global and domestic food inflation

40
Y-o-Y inflation (per cent)
30 Global food
inflation
20
10 Domestic
0 food
inflation
-10
-20
-30
-40
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
2008-09 2009-10 2010-11

Year
Table 4.9 : Domestic and Global Y-o-Y Inflation Trend (per cent)
(base: 2004-05=100 )
Commodity Domestic Global Domestic Global Domestic Global
Dec-09 Dec-09 Mar-10 Mar-10 Dec-10 Dec-10
Agriculture 18.5 28.5 20.6 17.8 15.3 27.8

Beverages 6.5 27.8 8.2 23.0 5.3 32.4
Energy 4.6 55.4 13.8 60.1 11.2 19.7
Fats & Oils -0.7 34.6 3.3 18.2 5.0 35.4
Fertilizers 7.0 -41.7 6.2 -27.1 5.5 39.6
Food 20.2 23.8 18.5 8.5 8.6 25.3
Grains 19.5 5.0 13.2 -10.3 -2.6 25.3
Metal & Minerals -7.1 42.8 3.4 41.4 12.4 38.6
Non-fuel 7.4 27.8 9.6 23.0 7.9 32.4
Raw Materials 11.1 36.5 26.1 44.0 24.1 45.8
Timber -1.3 -9.2 8.8 -5.6 50.3 13.4
Other Raw materials 18.3 88.4 44.2 91.1 33.6 63.5
Other Food 16.3 30.7 7.0 16.9 -0.5 10.2
Sources : Pink sheet of the World Bank and the Office of the Economic Adviser, Ministry of Commerce and Industry.
4.23 A comparison of the global food inflation and The pilot study covered 5 cities, namely Bengaluru,
WPI-based domestic food inflation gives the actual Bhopal, Delhi, Kolkata, and Mumbai. Thereafter,
picture of food inflation (Table 4.9). compilation of RESIDEX has been expanded to ten
more cities, namely Ahmedabad, Faridabad,
4.24 During the current year, high inflation in food
Chennai, Kochi, Hyderabad, Jaipur, Patna, Lucknow,
articles is not unique to India and is widespread.
Pune, and Surat. RESIDEX is now being updated
The domestic food price situation could get
on a quarterly basis with 2007 as base year. The
exacerbated by the increase in global food prices
latest data cover 15 cities and have been updated
because of dependency on import of some food
up to June 2010 (April – June).
items like edible oils. Current growth and inflation
trends warrant persistence with an anti-inflationary 4.27 The movement in prices of residential
monetary stance. properties has shown a mixed trend in the 15 cities
covered under the NHB RESIDEX in the first half of
Housing Price Index (NHB- RESIDEX) 2010. Residential housing prices in 10 cities have
4.25 As one of the most populous and fastest- shown an increasing trend compared to the base
growing countries in the world, India has promising year. They are Surat, Mumbai, Lucknow,
conditions for a vibrant housing market with Ahmedabad, Chennai, Pune, Kolkata, Patna,
considerable growth potential. The housing sector Faridabad and Bhopal. However, the 5 cities that
contributes more than 9 per cent of national have shown correction in prices in first half of 2010
employment. Housing finance in India, however, are Jaipur, Bengaluru, Kochi, Delhi and Hyderabad.
remains underdeveloped. The challenge in the Indian Jaipur has shown the maximum price correction in
housing market is primarily in the low and moderate residential property prices (Figure 4.6).
income segments. Though there is no lack of
demand for housing, there is shortage of credit flow. Measures to contain inflation
4.26 RESIDEX was first launched in 2007 by the 4.28 The Government monitors the price situation
National Housing Bank (NHB) to provide an index of regularly as price stability remains high on its
residential prices in India across cities and over agenda. Measures taken to contain prices of
time. Initially a pilot study was conducted with 2001 essential commodities include selective ban on
as base year during the period 2001- 05 to capture exports and futures trading in foodgrains, zero
the trend of price movements in residential property. import duty on select food items, permitting import
Box 4.3 : Measures to Contain Inflation, Particularly Food Inflation
(A) Monetary Measures
As part of the monetary policy review, the RBI has taken suitable measures to moderate demand to levels consistent
with the capacity of the economy to maintain its growth without provoking price rise. It has already raised its key
policy rates several times and has narrowed the liquidity adjustment facility (LAF) corridor to reduce volatility of
rates. The economy has witnessed aggressive tightening since March 2010. As per the announcement of the RBI on
25January 2011, the repo rate and reverse repo rate are 6.5 per cent and 5.5 per cent respectively.
(B) Fiscal Measures

1. Import duties reduced to zero on rice, wheat, pulses, edible oils (crude), butter, and ghee and to 7.5 per cent on
refined and hydrogenated oils and vegetable oils;
2. Import of raw sugar allowed at zero duty under open general licence (OGL).
(C) Administrative Measures

1. Levy obligation in respect of all imported raw sugar and white/refined sugar removed.
2. Export of non-basmati rice, edible oils (except coconut oil and forest based oil) and pulses (except Kabuli chana)
banned.
3. Minimum export price (MEP) used to regulate exports of onion (at US$1200 per tonne for December 2010) and
basmati rice (at US$900 per MT);
4. Futures trading in rice, urad, and tur suspended by the Forward Market Commission.
5. Stock limit orders extended in the case of pulses, paddy, and rice up to 30 September 2011 and edible oil and
edible oilseeds up to 31March 2011.
6. Export of Onion (all varieties) not permitted with effect from 22 December 2010 until further orders.
7. Full exemption from basic custom duty, special additional duty and education cess provided to onions and
shallots with effect from 21 December 2010.
8. NAFED and NCCF to undertake sale of onions at Rs 35 per kg from their retail outlets at various locations, with
suitable budgetary support to be provided for this purpose.
9. Other measures with a wider horizon include the following:
a. A scheme to support the State Governments in the setting up of farmers’ mandis and mobile bazaars and
improve the functioning of civil supplies corporations and cooperatives will be finalized urgently.
b. The existing PDS will be suitably strengthened through computerization and other steps, including opening
more procurement windows across the country.
c. State Governments would be urged to review the APMC Acts and, in particular, consider exempting horticultural
products from their purview thereby mitigating marketing and distribution bottlenecks in this crucial sector.
State Governments will also be urged to consider waiving mandi tax, octroi, and other local levies which impede
smooth movement of essential commodities, as well as to reduce commission agent charges.
d. Investment will be encouraged in supply chains, including provisions for cold storages, which will be dovetailed
with organized retail chains for quicker and more efficient distribution of farm products, minimizing wastage.
The DIPP, Department of Food and Public Distribution, Ministry of Food Processing Industries, and the
Planning Commission will jointly work out schemes for this purpose.
e. An Inter-Ministerial Group (IMG) has been set up under the Chief Economic Adviser, Ministry of Finance, to
review the overall inflation situation, with particular reference to primary food articles. The IMG will, inter alia,
review production/ rainfall trends and build an institutional machinery to read warning signals, assess
international trends, recommend action on the fiscal, monetary, production, marketing, distribution, and
infrastructure fronts to prevent price spikes, and suggest measures to strengthen collection and analysis of
data and forecasting.
f. The Committee of Secretaries under the Cabinet Secretary will review the prices situation with individual
States, and advise the Departments concerned of the Central Government to maintain close coordination with
State agencies to get direct feedback with a view to taking suitable remedial measures on a fast track.
Figure 4.6 Movement in city-wise average RESIDEX

190
2007
Index (2007=100)
170
150
2008
130
110 2009
90
2010 H-1
70
50
Surat
Pune
Patna
Mumbai
Lucknow
Kolkata
Kochi
Jaipur
Hyderabad
Faridabad
Delhi
Chennai
Bhopal
Bengaluru
Ahmedabad
of pulses and sugar by public-sector undertakings, scheduled commercial banks (SCBs) to its pre-
distribution of imported pulses and edible oils crisis level.
through the PDS, and release of higher quota of
4.30 As there were clear signs that the recovery
non-levy sugar. In addition, State Governments are
was consolidating, it was felt that the main policy
empowered to act against hoarders of food items
instruments were at levels more consistent with a
by holding in abeyance the removal of restrictions
fast recovering economy than a crisis economy
on licensing, stock limits, and movement of food
articles under the Essential Commodities Act 1955. and it was imperative therefore to carry forward
Some of the important anti-inflationary measures the process of exit from an accommodative policy
taken are given in Box 4.3. stance. Taking this consideration into account,
during 2010-11 the RBI raised the policy rates six
times whereby the repo rate under the LAF has
MONETARY DEVELOPMENTS DURING cumulatively been increased by 175 basis points
2010-11 (bps) to stand at 6.5 per cent and the reverse repo
rate by 225 bps to 5.5 per cent. The RBI has
4.29 In response to the global financial crisis moreover retained the cash reserve ratio (CRR) at
beginning mid-September 2008, the RBI adopted 6 per cent of the net demand and time liabilities
an accommodative monetary policy stance that (NDTL) of banks. Thus in 2010-11, the persistently
helped instil confidence among market participants high inflation above the comfort level of the RBI ,
and ensure that the economy recovered as quickly together with growth buoyancy, necessitated that
as possible. The Indian economy exhibited the monetary policy focus remain on containing
acceleration in the momentum of recovery during inflation and inflationary expectations.
the course of 2009-10. Despite a deficient monsoon,
4.31 The RBI indicated in its First Quarter Review
the expansionary monetary and fiscal stance
of Monetary Policy (27 July 2010) that it will now
adopted in response to the global crisis contributed
undertake mid-quarter reviews roughly at the
to the recovery. After remaining subdued during
interval of one and half months after each quarterly
the first half of the year, headline inflation spiked
review. By instituting these, it was the Bank’s
in the second half, initially driven by high food
intention to take the surprise element out of off-
prices but turning more generalized over successive
cycle actions. Accordingly, the Reserve Bank
months. In view of rising food inflation and the risk
announced the mid quarter monetary policy review
of it impinging on inflationary expectations alongside
on 16 September 2010 and 16 December 2010.
the consolidating recovery, the RBI stated a clear
shift in stance from ‘managing the crisis’ to 4.32 In 2010-11, the RBI continued its policy of
‘managing the recovery’ and announced the first maintaining adequate liquidity in the system so that
phase of exit from the expansionary monetary policy all legitimate credit requirements for productive
in its Second Quarter Review of October 2009 by purposes were met, consistent with the objective of
terminating some sector-specific facilities and price and financial stability. The management of
restoring the statutory liquidity ratio (SLR) of liquidity was achieved through appropriate use of
open market operations (OMOs), the Market 4.35 The current monetary policy stance, as
Stabilization Scheme (MSS), LAF, and a slew of indicated in the Bank’s Second Quarter Review
special facilities. While the overall liquidity in the (November 2010) was as follows:
system has remained in deficit consistent with the
a. Contain inflation and anchor inflationary
policy stance, the extent of tightness has been
expectations while being prepared to respond
beyond the comfort level of the RBI of (+)/(-) 1 per to any further build-up of inflationary
cent of NDTL, mainly due to the persistence of pressures.
large Government cash balances. In addition, the
liquidity deficit has been accentuated by structural b. Maintain an interest rate regime consistent
factors such as significantly above-trend currency with price, output, and financial stability.
expansion and relatively sluggish growth in bank c. Actively manage liquidity to ensure that it
deposits even as the credit growth accelerated in remains broadly in balance, with neither a
2010-11. While the liquidity deficit improved surplus diluting monetary transmission nor
transmission of monetary policy signals with several a deficit choking off fund flows.
banks raising deposit and lending interest rates,
excessive deficits induce unpredictability in both In the same document the RBI observed that ‘based
availability and cost of funds, making it difficult for purely on current growth and inflation trends, the
the banking system to sustain credit delivery. Reserve Bank believes that the likelihood of further
rate actions in the immediate future is relatively low’.
4.33 In view of the persistent liquidity pressures, This indication of pause will not deter it from taking
the RBI in November 2010 implemented some further policy actions if required and, accordingly, it
measures such as additional liquidity support to also indicated that ‘however, in an uncertain world,
SCBs under the LAF up to 2.0 per cent of their we need to be prepared to respond appropriately to
NDTL, continuation of the second LAF (SLAF), and shocks that may emanate from either the global or
OMO purchase of Government securities. domestic environment’. In continuation of that
Subsequently in the mid quarter review, 16 announced policy, and renewed inflationary
December 2010, the RBI reduced the SLR of SCBs pressures, especially in food prices, the RBI raised
from 25 per cent of their NDTL to 24 per cent with policy rates again in January 2010 by 25 bps in
effect from 18 December 2010. Furthermore, it their Third Quarter Review.
decided to conduct OMO auctions for purchase of
government securities for an aggregate amount of Trends in Monetary Aggregates
` 48,000 crore in the next one month. It was also
4.36 During the year 2010-11, the growth rates of
clearly communicated that as the economy
reserve money (M0) and narrow money (M1)1 have
expands, it needs primary liquidity, which will have been higher as compared to the preceding year
to be provided in a manner consistent with the while broad money (M3) growth has been lower
monetary policy stance. Such provision of liquidity (Table 4.10). The moderation in growth of narrow
should not be construed as a change in the monetary and broad money is largely on account of the
policy stance since inflation continues to remain a deceleration in growth of deposits, both demand and
major concern. time (up to 3 December 2010).
4.34 To sum up, the underlying growth momentum
of the Indian economy remains strong. Even as Reseve Money (M0)
inflation has moderated, it remains significantly 4.37 During 2010-11, on a financial-year basis,
above the comfort level of the RBI. Moreover, risks M0 expanded by 8.4 per cent (up to 10 December
to inflation remain on the upside, both from domestic 2010), compared to an increase of 1.6 per cent
demand and higher global commodity prices. There during the corresponding period of the preceding
is, therefore, a need for continued vigilance on the year (Table 4.11).
inflation front against the build-up of demand-side
4.38 The net foreign assets (NFA) of the RBI
pressures. A major challenge for the RBI in recent
increased by 6.1 per cent during this period, as
times has been liquidity management. It is the RBI’s
against an increase of 1.5 per cent during the
endeavour to alleviate the liquidity pressure in a
corresponding period of the previous year. On a year-
manner consistent with the monetary policy stance
on-year basis, as on 11 December 2010, the NFA
of containing inflation and anchoring inflationary
of the RBI marginally increased by 0.6 per cent
expectations.
compared to a 6.8 per cent increase a year earlier
1
For the period up to 19 November 2010. (Figure 4.7).
Table 4.10 : Movement of select monetary parameters

(per cent)
Items Yearly Variation Growth rates as on December 3, 2010
2008-09 2009-10 Financial-year basis Year-on-year basis
2009-10 2010-11 2009-10 2010-11
M0 6.4 17 1.7 6.3 15.3 22.2
M1 9 18.6 5.1 3.1 18.3 16.5
M3 19.3 16.8 9.6 8.2 18.6 15.3
Source : RBI
Table 4.11 : Sources of change in reserve money

(per cent)
Growth rate
Financial-year basis Year -on-Year
Dec. 11 Dec. 10, Dec. 11 Dec. 10,
2009 2010 2009 2010
over over over over
2009-10 March 31, March 31, Dec. 12, Dec. 11
2009 2010 2008 2009
Reserve Money 17 1.6 8.4 12.8 24.8
A. Components
a) Currency in Circulation 15.7 10.8 14 17.2 19
b) Bankers’ Deposits with RBI 21 -19.6 -4.1 1.2 44.2
c) Other Deposits with RBI -31.1 -34.4 0.3 -28 5.5
B. Select Sources of Reserve Money
1. Net Foreign Exchange Assets of RBI -3.8 1.5 6.1 6.8 0.6
2. Government’s Currency Liabilities to the Public 12.1 7.7 4.4 10.6 8.6
3. Net Non-monetary Liabilities of RBI -22.3 -1.5 17.1 19.5 -7.6
Source: RBI.
Figure 4.7 Reserve money and RBI net foreign exchange assets-annual growth rate
30
25 RM
20
NFA
15
Per cent
10
5
0
-5
-10
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
2009-10 2010-11
Year
4.39 Net RBI credit to the Central Government cent during the corresponding period of the
increased by ` 70,856 crore during the financial previous year. On a year-on-year basis, as on 3
year so far (up to 10 December 2010). This was December 2010, the growth of currency with the
mainly on account of increase in repo operations public was higher at 18.7 per cent as compared to
under the LAF and open market purchases of the 17.2 per cent a year earlier. For the same period,
Bank, partly offset by increase in the cash balances growth in demand deposits was 13.7 per cent as
of the Central Government. On a year-on-year basis, compared to 19.9 per cent a year earlier.
increase in the net RBI credit to the Central
Government, as on 10 December 2010, was Broad money (M3)
` 2,10,714 crore as against an increase of ` 98,273 4.42 Broad money (M3) supply increased by 16.8
crore a year earlier. per cent during 2009-10 which was lower than the
17.0 per cent indicative growth envisaged in the
Narrow Money (M1) Annual Policy Statement of the Reserve Bank for
4.40 Narrow money (M1) increased by 18.6 per 2009-10.
cent in 2009-10 as compared to an expansion of
4.43 The main components and sources of broad
9.0 per cent during 2008-09. During 2010-11, M1
money are indicated in Table 4.12.
growth has generally been higher than in 2009-10,
though there was significant deceleration during 4.44 Time deposits with banks during 2010-11
the latest fortnight for which data are available (i.e., grew at a lower rate of 10.1 per cent (up to 3
3 December 2010). On a financial-year basis, M1 December 2010) as compared to 11.2 per cent
increased by 3.1 per cent during the current year during the corresponding period of the previous
(up to 3 December 2010) compared to increase of year. On a year-on-year basis also, as on 3
5.1 per cent during the corresponding period of December 2010, the growth in time deposits
the previous year. On a year-on-year basis, as on moderated to 14.9 per cent from 18.7 per cent a
3 December 2010, M1 growth was 16.5 per cent as year earlier (Table 4.12).
compared to 18.3 per cent a year earlier (Figure
4.45 During the current financial year 2010-11
4.8). During the current financial year (up to 3
(up to 3 December 2010) the growth in M3 was 8.2
December 2010), currency with the public
per cent as compared to 9.6 per cent during the
expanded by 12.9 per cent (` 99,324 crore),
corresponding period of the previous year. On a
compared to an increase of 9.8 per cent (` 64,962
year-on-year basis, M3 grew by 15.3 per cent on 3
crore) during the corresponding period of the
December 2010, as against growth of 18.6 per cent
previous year.
on the corresponding date of the previous year
4.41 The other important component of M 1 , (Table 4.12 and Figure 4.9). This is lower than the
namely demand deposits with banks decreased by indicative 17.0 per cent target set in the Second
7.3 per cent during the period up to 3 December Quarter Review of the Annual Policy Statement for
2010 as against a marginal increase of 0.1 per 2010-11.
Figure 4.8 Narrow money (M1) - annual growth rate

24
22 2008-09
20
18 2009-10
16
Per cent
14 2010-11
12
10
8
6
4
11 Apr
25 Apr
09 May
23 May
06 Jun
20 Jun
04 Jul
18 Jul
01 Aug
15 Aug
29 Aug
12 Sep
26 Sep
10 Oct
24 Oct
07 Nov
21 Nov
05 Dec
19 Dec
02 Jan
16 Jan
30 Jan
13 Feb
27 Feb
13 Mar
27 Mar
Table 4.12 : Sources of Change in Money Stock (M3)

Growth Rate
31 March 31 March 31 March 5 December 4 December
2009 2009 2010 2008 2009
to to to to to
31 March 4 December 3 December 4 December 3 December
2010 2009 2010 2009 2010
(per cent)
I. M1 (Narrow Money) 18.6 5.1 3.1 18.3 16.5
II. M3 (Broad Money) (1+2+3+4) 16.8 9.6 8.2 18.6 15.3
1. Currency with the Public 15.4 9.8 12.9 17.2 18.7
2. Demand Deposits with Banks 22.8 0.1 -7.3 19.9 13.7
3. Time Deposits with Banks 16.1 11.2 10.1 18.7 14.9
4 Other’ Deposits with RBI -31.1 -33.7 9.1 -23.1 13.4
III. Sources of Change in Money Stock (M3)
1. Net Bank Credit to Government 30.5 19.4 8.7 38.2 18.8
of which:
Other Banks’ credit to
Government 19.7 19.5 6.9 26.7 7.1
2. Bank Credit to Commercial Sector 15.9 4.8 10.3 10.5 21.9
of which:
Other Banks’ credit to
Commercial Sector 16.3 5.1 10.3 10.4 22.0
3. Net Foreign Exchange Assets of
the Banking Sector -5.2 -0.3 5.3 9.0 0.1
4. Government’s Currency
Liabilities to the Public 12.1 7.7 4.4 10.6 8.6
5. Banking Sector’s Net Non-
monetary Liabilities Other than
Time Deposits 16.0 15.1 9.9 23.4 10.8
Memo Items:
1. Money Multiplier (M3\M0) 4.85
2. Velocity of Money 1.20
3. Net Domestic Assets 25.4 13.5 9.1 22.2 20.6
4. Net Domestic Credit 20.2 9.2 9.8 18.2 20.9
Source : RBI.
Figure 4.9 Broad money (M3) - annual growth rate

24
2008-09
22
2009-10
20
Per cent
2010-11
18
16
14
11 Apr
25 Apr
09 May
23 May
06 Jun
20 Jun
04 Jul
18 Jul
01 Aug
15 Aug
29 Aug
12 Sep
26 Sep
10 Oct
24 Oct
07 Nov
21 Nov
05 Dec
19 Dec
02 Jan
16 Jan
30 Jan
13 Feb
27 Feb
12 Mar
27 Mar
Figure 4.10 Bank credit to commercial sector - annual growth rate
30
2008-09
25
2009-10
20
Per cent
2010-11
15
10
5
13 Apr
27 Apr
11 May
25 May
08 Jun
22 Jun
06 Jul
20 Jul
03 Aug
17 Aug
31 Aug
14 Sep
28 Sep
12 Oct
26 Oct
09 Nov
23 Nov
07 Dec
21 Dec
04 Jan
18 Jan
01 Feb
15 Feb
29 Feb
14 Mar
28 Mar
4.46 Among the sources of M3, however, bank close to the indicative projection of 17 per cent,
credit to the commercial sector has been non-food credit growth at 24.4 per cent was much
accelerating since November 2009 (Figure 4.10). above the indicative projection of 20 per cent.
Credit expansion in the recent period has been
Money Multiplier rather sharp, far outpacing the expansion in
4.47 During 2009-10, the expansion in M0 was deposits. Rapid credit growth without
higher than that in M3. Accordingly, the ratio of M3 commensurate increase in deposits is not
to M0 (money multiplier) showed a decrease. At the sustainable, with banks having to rely on borrowing
end of March 2010, this ratio was 4.8, marginally from the Central bank. As a result of injection of
lower than the end-March 2009 figure of 4.11. During primary liquidity of over ` 67,000 crore through
the current financial year 2010-11, the money OMO auctions since early November 2010, the
multiplier has generally shown a decreasing trend structural liquidity deficit in the system has declined
on account of reserve money registering a higher significantly.
growth than broad money supply. As on 3 December
2010, the money multiplier was 4.9 compared to 4.49 Monetary deepening, as measured by the
5.2 on the corresponding date of the previous year ratio of average M3 to the GDP, increased from
(Figure 4.11). 43.8 per cent in 1990-91 to 83.1per cent in 2009-
10. This could be attributed to the spread of banking
Movement in other monetary indicators services in the country and development of the
4.48 While the year-on-year money supply (M3) financial sector. The monetization of the economy
growth at 16.5 per cent in December 2010 was as measured by the ratio of average M1 to the GDP
Figure 4.11 Movements in money multiplier

6.0
2008-09
5.6
2009-10
5.2
Per cent
2010-11
4.8
4.4
4.0
11 Apr
25 Apr
09 May
23 May
06 Jun
20 Jun
04 Jul
18 Jul
01 Aug
15 Aug
29 Aug
12 Sep
26 Sep
10 Oct
24 Oct
07 Nov
21 Nov
05 Dec
19 Dec
02 Jan
16 Jan
30 Feb
13 Feb
27 Feb
12 Mar
26 Mar
31 Mar
Table 4.13 : Select monetary aggregates (ratios to GDP)

As per cent of GDP at Market Prices (1999-2000 base)
Currency Demand deposits Time deposits Aggregate M1 M3
with public with banks with banks deposits
1990-91 8.7 6.4 28.5 34.9 15.3 43.8

1991-92 8.8 6.9 28.8 35.7 15.9 44.7
1992-93 8.6 6.9 29.8 36.6 16 45.7
1993-94 8.8 6.6 30.3 36.9 15.7 46.1
1994-95 9.1 7.2 30.4 37.6 16.7 47.1
1995-96 9.4 6.7 29.8 36.5 16.6 46.4
1996-97 9.2 6.5 30.5 37 16.1 46.6
1997-98 9.3 6.7 33 39.7 16.3 49.2
1998-99 9.1 6.7 35.5 42.2 16 51.5
1999-00 9.5 6.8 37.7 44.5 16.4 54.1
2000-01 9.6 7.2 41.3 48.5 17 58.2
2001-02 10 7.4 44.9 52.2 17.5 62.3
2002-03 10.5 7.5 49 56.5 18.2 67.1
2003-04 10.7 7.8 48.9 56.7 18.7 67.6
2004-05* 10.4 8 47 55 18.5 65.5
2005-06* 10.3 8.8 46.8 55.6 19.3 66.1
2006-07* 10.5 9.4 48.8 58.2 20 68.9
2007-08* 10.5 9.5 52.7 62.2 20.1 72.8
2008-09* 11 9.3 57.5 66.8 20.4 77.9
2009-10* 11.4 9.7 61.9 71.5 21.2 83.1
Source : RBI.
Note:* Based on GDP data with 2004-05 as base.
Figure 4.12 Select monetary aggregates as per cent of GDP

90
Ratios to GDP (per cent)
80 Aggregate
deposits
70
60
M1
50
40 M3
30
20
10
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
Year
has also shown an upward trend, albeit at a slower 15.3 per cent and it increased to 21.2 per cent in
rate, during this period. In 1990-91, this ratio was 2009-10 (Table 4.13 and Figure 4.12).
LIQUIDITY MANAGEMENT further build-up of inflationary pressure, the RBI
increased the repo and reverse repo rates as well
4.50 The Reserve Bank continued its active policy as CRR by 25 bps each in April 2010 in the Annual
of liquidity management through the LAF, CRR, Monetary Policy for 2010-11.The surplus liquidity
and OMOs. During 2010-11 so far, the centre’s in the domestic market gradually declined
surplus balance with the RBI has been a key driver thereafter. A significant development was that the
of autonomous liquidity. Currency in circulation LAF window of the RBI, after remaining in surplus
has been another key determinant of autonomous mode for nearly 18 months, switched into deficit
liquidity. The LAF window of the Reserve Bank, mode towards the end of May 2010 mainly on
which remained in surplus mode for nearly 18 account of 3G (3rd generation spectrum) and BWA
months, switched into deficit mode towards end- (broadband wireless access) auctions and the
May 2010 and largely maintained the trend consequent migration of liquidity to the Central
subsequently. Government’s cash balance account with the RBI.
4.51 The liquidity conditions changed significantly In anticipation of temporary tightening of liquidity
during the first quarter of 2010-11. The gradual conditions, the RBI introduced measures allowing
moderation in volume of surplus liquidity in the SCBs to avail of additional liquidity support under
system since February 2010 reflected the the LAF to the extent of up to 0.5 per cent of their
calibrated normalization of the monetary policy by NDTL and also access to the SLAF on a daily basis
the RBI. Accordingly, the LAF remained in the for the period 28 May - 2 July 2010. The average
absorption mode, though the absorption volume daily liquidity injection under the LAF during June
declined gradually. To anchor inflation and prevent 2010 was around ` 47,000 crore in contrast to the
Table 4.14 : Liquidity management

(` crore)
Outstanding as on last Friday LAF MSS Centre’s surplus* Total
of the month
2009
January 54,605 1,08,764 -9166 1,54,203
February 59,820 1,01,991 -9603 1,52,208
March** 1485 88,077 16,219 1,05,781
April 1,08,430 70,216 -40412 1,38,234
May 1,10,685 39,890 -6114 1,44,461
June 1,31,505 22,890 12,837 1,67,232
July 1,39,690 21,063 26,440 1,87,193
August 1,53,795 18,773 45,127 2,17,695
September 1,06,115 18,773 80,775 2,05,663
October 84,450 18,773 69,391 1,72,614
November 94,070 18,773 58,460 1,71,303
December 19,785 18,773 1,03,438 1,41,996
2010
January 88,290 7737 54,111 1,50,138
February 47,430 7737 33,834 89,001
March* 990 2737 18,182 21,909
April 35,720 2737 -28,868 9589
May 6215 317 -7531 -999
June -74,795 317 76,431 1953
July 1775 0 16,688 18,463
August 11,815 0 20,054 31,869
September -30,250 0 65,477 35,227
October -1,17,660 0 86,459 -31,201
November -1,03,090 0 93,425 -9665
Note : * Excludes minimum cash balances with the RBI in case of surplus.
** Data pertain to 31March.
-ve sign under LAF indicates injection of liquidity through the LAF.
-ve sign under Centre’s surplus indicates WMA /OD (ways and means advances/overdraft).
Figure 4.13 LAF reverse - repo and repo volume

200
150 FLAF
100
R thousand crores
SLAF
50
-50
-100
-150
01 Jan
01 Feb
01 Mar
01 Apr
01 May
01 Jun
01 Jul
01 Aug
01 Sep
01 Oct
01 Nov
01 Dec
01 Jan
01 Feb
01 Mar
01 Apr
01 May
01 Jun
01 Jul
01 Aug
01 Sep
01 Oct
01 Nov
01 Dec
01 Jan
2008-09 2009-10 2010-11
Year
Note: 1) Reverse repo is positive and repo is negative. 2) The second LAF (SLAF) is usually being conducted on Reporting Fridays with effect from
May 8, 2009. As a part of liquidity easing measures, SLAF on a daily basis is temporarily being conducted till January 28, 2011.
average daily absorption of around ` 33,000 crore (announced on 27 July). The liquidity conditions
in May 2010 ( Table 4.14 and Figure 4.13). improved in August 2010 (mainly on account of large
pre-scheduled public debt redemptions on 28 July
4.52 During the second quarter, July-September,
2010), and the average daily net injection of liquidity
of 2010-11, the liquidity conditions generally declined to around ` 1000 crore during the month.
remained in deficit mode. On 2 July 2010, the RBI After a brief period of surplus liquidity (from end-
hiked the repo and reverse repo rates by 25 bps August to early September 2010), the liquidity
each to 5.50 per cent and 4.0 per cent respectively. conditions again switched to injection mode as
With the persistence of deficit liquidity conditions, liquidity migrated to Government account with the
the Bank extended the liquidity-easing measures RBI on account of quarterly advance tax outflows.
introduced earlier. The SCBs were permitted to avail On the basis of assessment of the macroeconomic
of additional liquidity support under the LAF to the situation, the RBI increased the repo rate and reverse
extent of up to 0.5 per cent of their NDTL2. The repo rate by 25 bps and 50 bps respectively in the
SLAF on a daily basis was also extended till 16 mid-quarter monetary policy review (announced on
July 2010. On an assessment of the prevailing 16 September 2010). The liquidity conditions
overall liquidity conditions and with a view to remained tight in the second half of September 2010
providing flexibility to SCBs in liquidity management, as the surplus cash balances of the Centre started
the RBI further extended the SLAF on a daily basis building up, and the average daily net outstanding
till 30 July 2010. The average daily liquidity injection liquidity injection was around ` 24,000 crore during
under the LAF remained at around ` 47,000 crore the month.
during July 2010. In view of the evolving inflationary 4.53 The liquidity conditions tightened further in
scenario, the RBI raised the repo rate and reverse October 2010 on account of increase in Government
repo rate further by 25 bps and 50 bps, to 5.75 per surplus balances and currency in circulation due to
cent and 4.50 per cent respectively in the First festive season demand. The average daily net
Quarter Review of Monetary Policy 2010-11 outstanding liquidity injection was around ` 62,000
2
For any shortfall in maintenance of the SLR arising out of availment of this facility, banks were allowed se ek waiver of penal
interest.
Figure 4.14 Market stabilisation scheme
300
250 Actuals
R thousand crores
200 Limits
150
100
50
0
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
2007-08 2008-09 2009-10 2010-11
Year
crore for the entire October 2010. However, the net on shortfall in maintenance of the SLR to the extent
liquidity injection crossed ` 1,00,000 crore on 29 of 1 per cent of NDTL for availing of additional liquidity
October 2010. In order to ease the frictional liquidity support under the LAF), to remain in force till 16
pressure, the RBI announced certain temporary December 2010. The average daily net liquidity
measures, namely conduct of special SLAF on 29 injection during the month was around ` 99,300
October and 1 November 2010, conduct of a special crore. The liquidity conditions have remained in high
two-day repo auction under the LAF on 30 October deficit so far in December 2010 (till 20 December)
2010, and waiver of penal interest on shortfall in as huge quarterly advance tax payments have
maintenance of SLR (on 30-31October) to the extent increased the liquidity stress in the system. The
of 1 per cent of NDTL for availing of additional liquidity RBI conducted purchase of Government securities
support under the LAF. The RBI extended these through auction as part of its OMOs for an aggregate
liquidity-easing measures further and conducted amount of `12,000 crore each on 9 December 2010
SLAF on all days during 1-4 November 2010 and and 15 December 2010; and accepted an aggregate
extended the waiver of penal interest on shortfall in amount of ` 10,120 crore and `11,706 crore
maintenance of SLR ( to the extent of 1 per cent of respectively in the auctions. The average daily net
NDTL) for availing of additional liquidity support under outstanding liquidity injection was around ` 1,10,000
the LAF till 7 November 2010. To contain inflation crore during 1-20 December 2010.
and anchor inflationary expectations, the RBI
increased the repo and reverse repo rates by 25 bps 4.54 While the overall liquidity in the system has
each in the Second Quarter Review of Monetary remained in deficit consistent with the policy stance,
Policy on 2 November 2010. Consistent with the the extent of tightness has been beyond the comfort
stance of monetary policy and based on the level of the RBI. The RBI decided to (i) reduce the
assessment of prevailing and evolving liquidity SLR of SCBs from 25 per cent of their NDTL to 24
conditions, the RBI conducted purchase of per cent with effect from 18 December 2010;(ii)
government securities under its OMOs for an conduct OMO auctions for purchase of Government
aggregate amount of ` 12,000 crore on 4 November securities for an aggregate amount of `48,000 crore
2010 and accepted an aggregate amount of ` 8352 in the next one month. These two measures are
crore in that auction. The high deficit liquidity expected to inject liquidity of the order of ` 48,000
conditions continued in November 2010 with the crore on an enduring basis. The reduction of the SLR
persistence of high Government balances and rise will free securities and once banks can borrow at
in currency in circulation. On 9 November 2010, the the LAF window with these excess SLR securities,
RBI has re-introduced liquidity-easing measures borrowers can shift from costlier sources to the LAF
(SLAF on a daily basis, the waiver of penal interest window ( Figure 4.14 and Table 4.15).
Table 4.15 : Call money market

Call Turnover Call Rate LAF MSS
(` crore) (per cent)^ (` crore)# (` crore)*
2009-10
Mar.2009 23,818 4.17 33,360 88,077
Apr.2009 21,820 3.28 1,01,561 75,146
May2009 19,037 3.17 1,25,728 45,955
Jun.2009 17,921 3.21 1,23,400 27,140
Jul.2009 14,394 3.21 1,30,891 22,159
Aug.2009 15,137 3.22 1,28,275 19,804
Sep.2009 16,118 3.31 1,21,083 18,773
Oct.2009 15,776 3.17 1,01,675 18,773
Nov-09 13,516 3.19 1,01,719 18,773
Dec.2009 13,302 3.24 68,522 18,773
Jan.2010 12,822 3.23 81,027 9944
Feb.2010 13,618 3.17 78,661 7737
2010-11
Mar.2010 17,624 3.51 37,640 3987
Apr.2010 16,374 3.49 57,150 2737
May2010 16,786 3.83 32,798 922
Jun.2010 14,258 5.16 -47,347 317
Jul.2010 18,954 5.54 -46,653 254
Aug.2010 15,916 5.17 -1048 0
Sep.2010 17,212 5.50 -24,155 0
Oct.2010 17,840 6.39 -61,658 0
Nov.2010 17,730 6.81 -99,311 0
Source : RBI.
Notes : ^ : Average of daily weighted call rate. * : Average of weekly outstanding MSS.
# : Average daily absorption under LAF.
MONEY MARKET half of the month reflecting the onset of high deficit
liquidity conditions. The average call rate increased
4.55 The money market generally remained orderly
to 5.40 per cent in the second quarter (Table 4.15).
during 2010-11. At the commencement of the
The call rate has mostly remained above the upper
financial year 2010-11, the call rate mostly remained
bound of the corridor in the third quarter of 2010-11
around the lower bound of the informal LAF corridor
so far, reflecting the increased liquidity stress in
up to May 2010. With the tightening of liquidity
the system. The average call rate was 6.59 per cent
conditions since end-May 2010, reflecting migration
in the third quarter of 2010-11 (till 20 December 2010)
of liquidity to the Central Government account with
(Figure 4.15).
the RBI on account of 3G auction/ advance tax
payments, the call rate firmed up. The average daily 4.56 The rates in the collateralized segments have
call rate for the first quarter was at 4.16 per cent. It continued to move in tandem with the call rate, albeit
hovered around the upper bound of the LAF corridor below it, so far during 2010-11. The weighted average
till July 2010 as deficit liquidity conditions persisted interest rate in the collateralized segment of the
due to the high Central Government cash balances. money market increased to 5.20 per cent during
The call rate declined towards the end of August the second quarter from 3.97 per cent in the first
and early September with the change in liquidity quarter of 2010-11. Transaction volumes in the
conditions. However, it again firmed up from the collateralized borrowing and lending obligation
middle of September 2010 and breached the upper (CBLO) and market repo segments remained high
bound of the informal LAF corridor in the second during this period, reflecting active market
Figure 4.15 Movement of money market rates
8
7 Market repo
(Non-RBI)
6
5
Per cent
Call money
4
CBLO
3
2 Reverse
1 repo rate
0 Repo rate
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
2008-09 2009-10 2010-11
Year
conditions. Banks continued to remain the major discount rate (WADR) of aggregate CP issuances
group of borrowers in the collateralized segments increased from 6.29 per cent at the end of March
whereas mutual funds (MFs) remained the major 2010 to 7.82 per cent at the end of September 2010,
group of lenders of funds in these segments. The and reached 12.22 per cent at the end of November
collateralized segment of the money market 2010.The shares of ‘leasing and finance companies’,
continued to remain the dominant segment,
‘manufacturing companies’, and ‘other financial
accounting for more than 80 per cent of the total
institutions’ in total outstanding CPs were at around
volume so far during the year.
50 per cent, 39 per cent, and 11 per cent respectively
Certificates of Deposit (CDs) at the end of November 2010 (Table 4.16).
4.57 Though the average gross issuance of CDs
was high during 2010-11 so far, the amount of CDs Treasury Bills (T-Bills)
outstanding declined, indicating decline in net
issuances. The amount of outstanding CDs issued 4.59 T-Bills issuances during the year 2010-11
by SCBs declined marginally from ` 3,41,054 crore were modulated according to the cash management
at the end of March 2010 to ` 3,32,982 crore at requirements of the Government as well as evolving
the end of November 2010. The outstanding amount market conditions. The notified amounts for
constituted 7.45 per cent (as on 19 November 2010) competitive auctions of T-Bills were reduced during
of aggregate deposits of CD-issuing banks with the first two quarters of the fiscal year. The
significant inter-bank variation. During April- outstanding stock of T- Bills went down from
November 2010, the average issuance was of the ` 1,34,500 crore on 31 March 2010 to ` 1,26,269
order of around ` 22,000 crore as compared to crore on 31 December 2010, after taking into
around `11,000 crore during the same period of account a rise in non-competitive allotment. The
the last financial year. The effective interest rate in primary market yields for T-Bills of different tenors
respect of aggregate CD issuances increased from
(91 days, 182 days, and 364 days) moved up
6.07 per cent at the end of March 2010 to 8.16 per
during the year largely influenced by the liquidity
cent as on 19 November 2010.
conditions and monetary policy action by the RBI.
Commercial Paper (CP) The yield behaviour during 2010-11 vis-à-vis 2009-
4.58 During 2010-11 so far, the commercial paper 10 is shown in Figures 4.16, 4.17, and 4.18.
(CP) market has also picked up and the size of
Cash Management
fortnightly issuance increased significantly. The
outstanding amount of CP issued by corporates has 4.60 During the year, a new short-term instrument,
shown an increasing trend from ` 75,506 crore at named cash management bill (CMB), was
the end of March 2010 to `1,12,003 crore at the introduced in May 2010. CMBs are non-standard,
end of September 2010 and ` 1,17,793 crore at the discounted instruments issued for maturities of less
end of November 2010. The weighted average than 91 days, to meet the temporary cash-flow
Table 4.16 : Activity in money market segments

(` crore)
Average daily volume Commercial Certificates of

(one leg) paper deposit
Year/ Call Market CBLO Total Money Term Out- WADR Out- EIR
month repo market money stand- (per- stand- (per-
rate^ ing cent) ing cent)
(per
cent)
Apr.2009 10910 20545 43958 75413 2.41 332 52881 6.29 210954 6.48
May2009 9518 22449 48505 80472 2.34 338 60740 5.75 218437 6.2
Jun.2009 8960 21694 53553 84207 2.69 335 68721 5 221491 4.9
Jul.2009 7197 20254 46501 73952 2.83 389 79582 4.71 240395 4.96
Aug.2009 7569 23305 57099 87973 2.62 461 83026 5.05 232522 4.91
Sep.2009 8059 27978 62388 98425 2.73 381 79228 5.04 216691 5.3
Oct.2009 7888 23444 58313 89645 2.70 225 98835 5.06 227227 4.70
Nov.2009 6758 22529 54875 84162 2.87 191 103915 5.17 245101 4.86
Dec.2009 6651 20500 55338 82489 2.91 289 90305 5.40 248440 4.92
Jan.2010 6411 14565 50571 71547 2.97 404 91564 4.80 282284 5.65
Feb.2010 6809 19821 63645 90275 2.95 151 97000 4.99 309390 6.15
Mar.2010 8812 19150 60006 87968 3.22 393 75506 6.29 341054 6.07
Apr.2010 8187 20319 50891 79397 3.03 345 98769 5.37 336807 5.56
May2010 8393 17610 42274 68277 3.72 338 109039 6.85 340343 5.17
Jun.2010 7129 9481 31113 47723 5.22 447 99792 6.82 321589 6.37
Jul.2010 9477 12011 29102 50590 5.33 385 112704 6.93 324810 6.69
Aug.2010 7958 15553 45181 68692 5.05 281 126549 7.32 341616 7.17
Sep.2010 8606 15927 53223 77756 5.29 617 112003 7.82 337322 7.34
Oct.2010 8920 14401 43831 67152 5.96 712 149620 12.15 343353 7.67
Nov.2010 8865 9967 32961 51793 6.31 415 117793 12.22 332982 8.16
Source: RBI.
Notes: ^ Average of daily weighted call rate.
Figure 4.16 Cut-off yields in the auctions of 91-day T-bills

8
7 2010-11
Cut-off yields
(per cent)
6
5 2009-10
4
3
2
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar

8
7 2010-11
Cut-off yields
(per cent)
6
5 2009-10
4
3
2
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
8
7 2010-11
Cut-off yields
(per cent)
6
5 2009-10
4
3
2
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
mismatches of the Government. During 2010-11, smooth and non-disruptive manner. During the year,
CMBs were issued twice in May 2010 for an the Government undertook buy-back operations
aggregate amount of `12,000 crore, with a maturity whereby securities worth `11,767 crore were bought
of five and four weeks, respectively. back.
4.63 During 2010-11 (up to 31 December 2010),
Central Government Borrowing
gross market borrowings raised through dated
4.61 The Union Budget 2010-11 placed the net securities by the Central Government wereRs
market borrowings (through dated securities) 3,84,000 crore (net `2,98,342 crore) as against
requirement of the Central Government at ` 3,45,010 `3,83,000 crore (excluding issuances under the
crore as against ` 3,97,957 crore raised during MSS) (net ` 3,46,911 crore) raised during the
the previous year. Including repayments of ` corresponding period of the previous year. The
1,12,133 crore, gross market borrowings were weighted average maturity of dated securities
estimated at ` 4,57,143 crore (as compared to ` issued during the year (up to 31 December 2010)
4,51,000 crore raised in the previous year, was moderately higher at 11.54 years as compared
including MSS de-sequestering of ` 33,000 crore). to 11.15 years for issues during the corresponding
The actual issuances during the first half of the period of the previous year. The weighted average
current year amounted to ` 2,84,000 crore (as yield of dated securities during 2010-11(up to 31
against issuances of ` 2,95,000 crore, excluding December 2010) increased to 7.87 per cent from
MSS de-sequestering of `28,000 crore, during the 7.21 per cent during the corresponding period of
corresponding period of the previous year).The the previous year (Figure 4.19).
issuance calendar for dated securities released on
23 September 2010 proposed to raise ` 1,63,000 Yields on 10-year Government Securities
crore during the second half of the year, indicating a
4.64 Secondary market yields on Government
reduction of `10,000 crore from the budget estimate.
securities remained in a broad range during the year.
4.62 The gross borrowings requirement in 2010- Monetary policy, inflation concerns, and supply
11 remained high as in the previous year. The market issues were the major factors influencing yields on
borrowings programme is, however,carried out in a government securities.
Figure 4.19 Weighted average yield of primary issues of dated securities (cumulative)
8.0
2010-11
7.5
Per cent
2009-10
7.0
6.5
6.0
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
4.65 Intra-year movements in yields on Government ahead of most other economies. However, in view of
securities could be attributed to various factors. the rising food inflation and the risk of it impinging
The upward movement in the month of April 2010 on inflationary expectations, the Reserve Bank
was mainly on account of supply pressure in the embarked on the first phase of exit from the
wake of front-loading of the market borrowings expansionary monetary policy in October 2009 itself.
programme. By April 2010, available data suggested that the
recovery was firmly in place, though inflationary
4.66 In the month of May, concerns regarding high pressures accentuated. Accordingly, both repo and
fiscal deficit receded due to higher-than-budgeted reverse repo rates as well as the CRR were
collections from auction of 3G and BWA licences. increased by 25 bps each. The monetary policy
The improved sentiments drove down yields in the stance in April 2010 was guided by the following
month of May. The impact of the improved three considerations. First, the need to move in a
sentiments, however, was offset by concerns of high calibrated manner in the direction of normalizing the
inflation and policy tightening by the Reserve Bank. policy instruments in a scenario where real policy
In the third quarter of the current financial year, tight rates were still negative. Second, the need to ensure
liquidity conditions remained a major factor putting that demand-side inflation did not become
upward pressure on yields. The 10-year yield, which entrenched. Third, the need to balance the monetary
was at 7.87 per cent on 31 March 2010, went up to policy imperative of absorbing liquidity while ensuring
7.94 per cent on 31 December 2010. that credit was available to both the Government
and private sector. Significant developments took
State Government Borrowings place subsequent to the announcement of the
monetary policy in April 2010. Though recovery
4.67 Twenty-two State Governments have raised was consolidating, developments on the inflation
an aggregate amount of ` 74,104 crore on a gross front raised several concerns. The upward revision
basis up to end-December 2010 as compared to ` in administered fuel prices on 25 June 2010 was
1,00,085 crore raised by 25 State Governments also expected to influence inflation in the months
during the corresponding period of the previous year. ahead. Accordingly, the repo and reverse repo rates
The cut-off yields have ranged between 8.05 and under the LAF were increased by 25 bps each on 2
8.58 per cent as compared to 7.04 and 8.49 per July 2010. In the interests of consolidating and of
cent during the corresponding period of the previous more broad-based domestic recovery and with the
year. The weighted average yield worked out to 8.36
per cent up to end-December 2010 as compared to Table 4.17 : Revision in Policy Rates
8.02 per cent during the corresponding period of (per cent)
2009-10 and 8.11 per cent for the year as a whole. Effective Date Repo Reverse Repo CRR
The spread between the yield on State Development rate rate
Loans (SDLs) and the 10-year benchmark 2009
Government of India securities stood lower at 32-69 05.01.2009 5.50 4.00
bps up to December 2010 as compared to 45-129
17.01.2009 5.00
bps during the corresponding period of the previous
05.03.2009 5.00 3.50
year. It is expected that the calibrated strategies
21.04.2009 4.75 3.25
adopted for the market borrowings programme of
the Government of India and the State Governments 2010
would ensure its completion in a non-disruptive 13.02.2010 5.50
manner. 27.02.2010 5.75
19.03.2010 5.00 3.50
MONETARY POLICY STANCE DURING

20.04.2010 5.25 3.75
2010-11 24.04.2010 6.00

02.07.2010 5.50 4.00
4.68 The accommodative monetary policy which
27.07.2010 5.75 4.50
was pursued beginning mid-September 2008
16.09.2010 6.00 5.00
instilled confidence in market participants, mitigated
the adverse impact of the global financial crisis on 02.11.2010 6.25 5.25
the economy, and ensured that it started recovering 25.01.2011 6.50 5.50
then level of consumer price inflation in double digits, economies raised concerns about the sustainability
the First Quarter Review of the RBI (July 2010) of the global turnaround whereas the Indian
upwardly revised the baseline projection of real GDP economy was operating close to the trend growth
growth for the year to 8.5 per cent and raised the rate, driven mainly by domestic factors. However,
projection for WPI inflation for March 2011 to 6.0 notwith-standing some moderation in recent
per cent (Table 4.18). Consistent with this months, headline inflation in India remained
assessment, the repo rate was increased by 25 significantly above its medium-term trend and well
bps and reverse repo by 50 bps. The monetary policy above the comfort zone of the RBI (Table 4.18).
actions were intended to moderate inflation by reining Accordingly, the RBI further increased the repo
in demand pressures and inflationary expectations, rate by 25 bps to 6.25 per cent and the reverse
maintain financial conditions conducive to sustaining repo rate also by 25 bps to 5.25 per cent on
growth, generate liquidity conditions consistent with (2 November 2010). The CRR has been retained
more effective transmission of policy actions, and unchanged at 6 per cent of the NDTL of banks.
reduce the volatility of short-term rates in a narrower
4.71 The RBI in its Third Quarter Review of the
corridor. Given the context of the changing liquidity
Monetary Policy (25 January 2011) indicated that
dynamics, particularly between surplus and deficit
its stance is shaped by four important
modes, it was proposed to set up a working group
considerations:
to review the operating procedure of the RBI’s
monetary policy, including the LAF. It was also  Inflation is clearly the dominant concern. Even
announced that mid-quarter reviews of monetary as the rate itself remains high, the reversal in
policy would be made in June, September, the direction of inflation is striking. Primary
December, and March. The changes in policy rates food articles inflation has risen again sharply.
since 2009 are brought out in Table 4.17. Non-food articles inflation and fuel inflation are
already at elevated levels. Non-food
Quarterly Reviews manufacturing inflation has remained sticky.
4.69 As decided in the First Quarter Review, on There are signs of food and fuel price increases
the basis of assessment of the macroeconomic spilling over into generalised inflation.
situation, the RBI in its Mid-Quarter Review on 16  Second, there has been a sharp rise in global
September 2010 decided to increase the repo rate commodity prices which has heightened
under the LAF by 25 bps from 5.75 per cent to 6.0 upside risks to domestic inflation.
per cent and the reverse repo rate by 50 bps from
4.5 per cent to 5.0 per cent.  Third, growth has moved close to its pre-crisis
trajectory even in the face of an uncertain global
4.70 The Second Quarter Review of Monetary recovery.
Policy for 2010-11 (released on 2 November 2010)
noted that the fragile and uneven nature of the  Fourth, the uncertainty with regard to global
recovery and large unemployment in advanced recovery has reduced.
Table 4.18: Indicative Projections of Macro Parameters for 2010-11 by the RBI
Indicative projections for growth rates (per cent)
Annual Policy First Quarter Second Quarter Third Quarter
2010-11 Review Review Review
(April 20,2010) (July 27, 2010) (November 2, 2010) (Jan. 25, 2011)
GDP growth 8.0 8.5 8.5 8.5

WPI inflation 5.5** 6.0** 5.5 7.0
Money supply growth (M3) 17.0 17.0 17.0 17.0
*Adjusted non-food credit 20.0 20.0 20.0 20.0
Notes : * Includes investment by SCBs in bonds/debenture/shares of public-sector undertakings, private
corporate sector, and CP.
** Old series.
4.72 On the basis of the assessment of the has not only persisted for quite some time, but has
existing macroeconomic scenario, the RBI retained also been rather sharp. High inflation in food articles
the bank rate at 6.0 per cent and the CRR of is not unique to India, it has spiked in many other
scheduled banks at 6.0 per cent of their NDTL; countries as well. The domestic food price situation
increased the repo rate under the LAF by 25 bps could be exacerbated by the increase in global food
from 6.25 per cent to 6.5 per cent; and the reverse prices because of dependency on import of some
repo rate under the LAF by 25 bps from 5.25 per food items like edible oils. Current growth and
cent to 5.50 per cent. On the basis of an inflation trends warrant persistence with an anti-
assessment of the liquidity situation, the RBI inflationary monetary stance.
extended additional liquidity support to the SCBs 4.75 The issue of maintaining an environment
under the LAF to the extent of up to 1 per cent of where the cost and availability of credit is supportive
their NDTL, till 8 April 2011. For any shortfall in of growth momentum, while ensuring that inflation
maintenance of the SLR arising out of availment of falls back to more comfortable target levels, will be
this facility, banks were allowed to seek waiver of at the centre stage of policy consideration in the
penal interest purely as an ad hoc measure. near term. This has to be seen in the context of
more than expected inflation in the recent past,
relative stickiness of prices, especially of food, and
CHALLENGES AND OUTLOOK building of wider inflationary expectations in the
economy, even as monetary policy tools are being
4.73 Inflation is clearly the dominant concern.
used proactively to manage demand and dampen
Average headline inflation in April-December 2010-
inflationary pressures in the economy. The
11 at 9.4 per cent is the highest ever in the decadal concurrent consolidation of fiscal deficits will,
average. This is also true of annual average inflation however, be essential as it is expected to ease the
based on the WPI, for primary food articles, fuel conduct of effective monetary policy in the near
and power, and manufacturing products. During the future. The reduced fiscal deficits will permit greater
current financial year, even as the rate itself remains availability of credit to sustain growth, while tighter
uncomfortably high, the reversal in the direction of monetary policy starts to transmit its impact in
inflation in December is also striking. After some reducing inflationary pressures. The transmission
moderation between August and November 2010, of monetary policy, however, comes with a lag.
inflation rose again in December 2010 on account Inflationary pressures in the economy are also
of sharp increase in the prices of primary food emanating in part from supply-side constraints,
articles and the recent spurt in global oil prices. especially in food and other primary articles, as
Non-food manufacturing inflation has also remained well as the transmission of higher global food, oil,
sticky, reflecting buoyant demand conditions. and other commodity prices. These considerations
However, in January 2011, headline inflation has therefore are complicating the issue in the near
come down to 8.23 per cent and it is expected that term. If external commodity negative price shocks
build further, the dilemmas will become greater.
this trend may continue in the next two months.
Therefore, the policy challenge of maintaining the
4.74 Going forward, the inflation outlook will be growth momentum in the economy with price stability
shaped by the food price situation and the demand- is going to remain a key focus area for monetary
side pressures in the economy. Rise in food inflation policy and macroeconomic management.
Financial Intermediation
and Markets
5
CHAPTER
Broader and deeper financial markets will be crucial for mobilizing higher savings
and intermediating them efficiently to finance higher investment and growth. India’s
financial markets continued to gain strength in recent years, in the wake of steady
reforms since 1991. Prudent regulations and institutions protected the economy from
the recent global financial shocks. And its dynamism is a leading factor in the current
recovery.
Year-on-year non--food credit growth was up 24 per cent at the end of December 2010,
and financed many sectors more broadly (from the agriculture rebound to third
generation [3G] spectrum sales and private infrastructure projects), while the overall
credit to gross domestic product (GDP) ratio rose to about 55 per cent, continuing its
progress (but still structurally well below potential). Domestic capital markets performed
well in 2010, primary markets financing record levels, including the largest-ever initial
public offering (IPO) (for Coal India), while secondary markets reached new highs.
Record foreign inflows helped support the market. Pensions and insurance gained,
with life insurance premium growing nearly 26 per cent and penetration doubling to
5.4 per cent of GDP in 2009, from 2.3 per cent in 2000 when insurance reforms
started. Looking to the future, the twin challenges are to continue this progress on
gradual financial reform and to modernize regulations and institutions to ensure its
continued safety and stability.
The past year saw banking deposit growth slow-down, as real interest rates were
depressed, especially compared to returns in other fast-recovering asset markets (real
estate, gold, and stock markets). The priority is to considerably extend the reach of
banking to help mobilize more savings, add more depth, and more efficiently
intermediate opportunities, including those in the traditional ‘priority’ sectors. To
move ahead (1) financial inclusion needs to be accelerated as a next crucial step;
innovative solutions will be needed in this regard; (2) similar efforts are needed to
deepen domestic capital markets and the role of non-bank institutions, especially
in corporate bond and debt markets; (3) the rapid lowering of fiscal deficits is
needed to help crowd-in such developments; and (4) the Government and Reserve
Bank of India (RBI) have already begun a series of essential regulatory overhaul,
aimed at updating the modern legislation underlying financial markets, and improving
macro-prudential safeguards and institutions. We need to continue along this path.
The rest of the chapter describes this series of developments in the financial sector.
BANK CREDIT stronger industrial recovery and growth. Telecom

5.2 Bank credit that started picking up from the operators raised credit to pay for 3G/broadband
last quarter of 2009-10 continued its momentum wireless access (BWA) spectrums, which partly
during 2010-11 as well. The pickup in credit reflected contributed to stronger credit growth in the first
the improved demand conditions associated with quarter of 2010-11.
Table 5.1 : Flow of bank credit
As on 17 December, 2010
Outstanding as in end-March Outstanding Financial Year Year-on-Year

as on so far
` crore (Percentage variation)
2008 2009 2010 17-Dec. 18-Dec. 2009- 2010- 2009- 2010-
10 09 10 11 10 11
1. Bank Credit 23,61,914 27,75,549 32,44,788 36,39,866 29,42,279 6.0 12.2 11.3 23.7
(a) Food Credit 44,399 46,211 48,489 62,521 45,037 -2.5 28.9 -13.6 38.8
(b) Non-food Credit 23,17,515 27,29,338 31,96,299 35,77,345 28,97,242 6.2 11.9 11.8 23.5
2. Aggregate Deposit 31,96,940 38,34,110 44,92,826 47,99,789 41,84,358 9.1 6.8 17.9 14.7
(a) Demand Deposits 5,24,310 5,23,085 6,45,610 5,84,713 5,25,516 0.5 -9.4 19.9 11.3
(b) Time Deposits 26,72,630 33,11,025 38,47,216 42,15,076 36,58,842 10.5 9.6 17.6 15.2
3. Investment 9,71,715 11,66,410 13,84,752 14,43,303 13,49,540 15.7 4.2 24.6 6.9
(a) Govt Securities 9,58,662 11,55,785 13,78,395 14,38,268 13,42,383 16.1 4.3 25.2 7.1
(b) Other Approved 13,053 10,625 6,358 5,035 7,156 -32.6 -20.8 -34.5 -29.6
Source : RBI.
5.3 As against an increase of 17.5 per cent in in fact above the Reserve Bank’s indicative
2008-09, growth in bank credit moderated to 16.9 projected trajectory of 20 per cent for the full
per cent in 2009-10. Non-food credit during the year as set out in the Second Quarter Review for
same period was 17.8 per cent and 17.1 per cent 2010-11 (2 November). Growth in non-food credit
respectively. During 2010-11 credit started picking so far in 2010-11 on financial-year basis was much
up in a strong way from early June 2010 and since higher at 11.9 per cent as compared to 6.2 per
then the growth in bank credit has shown a cent in the previous year and 23.5 per cent year-
continuous increasing trend. During the financial on-year basis as compared to 11.8 per cent for
year 2010-11, growth in bank credit extended by the corresponding period of the previous year.
scheduled commercial banks (SCBs) stood at 12.2 Growth in aggregate deposits so far in 2010-11
per cent as on 17 December 2010 as compared have been lower than for the corresponding period
to 6.0 per cent for the corresponding period in of the previous year (Table 5.1). The high expansion
2009-10. The year-on-year growth in bank credit in credit relative to lower growth in deposits during
as on 17 December 2010 was high at 23.7 per 2010-11 has caused increase in the credit- deposit
cent as compared to 11.3 per cent for the ratio from 72.2 per cent in end-March 2010 to
corresponding period of the previous year. It was 75.8 per cent on 17 December 2010 (Figure 5.1).
Figure 5.1 Credit deposit ratio

76
75 2007-08
74
73
Per cent
2008-09
72
71 2009-10
70
69 2010-11
68
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
Fortnights
Financial Intermediation and Markets 101
Figure 5.2 Investment deposit ratio
35
34 2007-08
33
32
Per cent
2008-09
31
30 2009-10
29
28 2010-11
27
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
Fortnights
5.4 During the financial year so far, private-sector reviewed and increased their base rates. The base
banks have been faring better in terms of growth in rate of PSBs and private-sector banks changed to
credit extended as compared to public-sector banks the range of 7.60-9.00 per cent and 7.00-9.00 per
(PSBs) and foreign banks. Due to higher credit growth cent respectively in December 2010 (Table 5.2).
and tight liquidity condition, commercial banks’ Subsequent to the migration to the base rate system,
investment in Government and other approved effective 1 July 2010, we find a large degree of
securities remained low at 27.3 per cent as compared convergence of base rates as announced by banks.
to 29.2 per cent in the previous year. Consequently, Almost 60 banks with a of 97 per cent share in total
the investment-deposit ratio declined from 30.8 per bank credit have fixed the base rate in the close
cent in end-March 2010 to 30.1 per cent on 17 range of 7.00-8.50 per cent in November 2010.
December 2010 (Figure 5.2) as the investment and
deposit growth of SCBs is lower. iii. Interest Rates on Non-resident Indian
(NRI)Deposits
INTEREST RATES 5.7 The interest rates on non-resident external term
deposits (NRE) and foreign currency non-resident
i. Deposit Rates
bank account (FCNR[B]) deposits are regulated by
5.5 Domestic deposit rates of SCBs have moved RBI. At present, NRE ceiling deposit interest rate
up so far during 2010-11. Following the RBI’s raising stands at LIBOR plus 175 basis points and FCNR(B)
of the repo and reverse repo rates by 125 basis points ceiling deposit interest rate is at London Interbank
(bps) and 175 bps respectively during March- offered rate (LIBOR) plus 100 bps.
November 2010, the SCBs increased their deposit
rates by 50 bps to 200 bps. Interest rates offered iv. Interest Rate on Rupee Export Credit
by the PSBs, private-sector banks and foreign banks 5.8 The validity of the reduction in interest rate
on deposits of maturity of one to three years ceiling to 250 bps below the BPLR on pre-shipment
changed from the range of 6.00-7.25 per cent, 5.25-
rupee export credit up to 270 days and post-shipment
7.75 per cent, and 2.25-8.00 per cent respectively
rupee export credit up to 180 days was extended to
in March 2010 to the range of 7.00-8.50 per cent,
30 June 2010 from 30 April 2010. However, the RBI
7.25-9.00 per cent, and 3.00-8.00 per cent
meanwhile advised the SCBs on 9 April 2010 to
respectively in December 2010 (Table 5.2).
replace the BPLR system with a base rate system
ii. Lending Rates from 1July 2010. This necessitated changes in the
5.6 The BPL` of SCBs remained unchanged from formula in respect of interest rate on export credit.
July 2009 till end-June 2010. The base rate system Accordingly, it was decided to deregulate the interest
replaced the BPLR system with effect from 1 July rates on pre-shipment rupee export credit up to 270
2010. The base rates of PSBs, private-sector banks, days and post-shipment rupee export credit up to
and foreign banks were fixed in the range of 7.50- 180 days. Banks are, therefore, free to decide the
8.25 per cent, 7.00-8.75 per cent, and 5.50-9.00 lending rate on export credit at or above the base
per cent respectively. Subsequently, several banks rate with effect from 1 July 2010.
Table 5.2 : Movements in deposit and lending rates

(per cent)
Interest Rates Mar.-2009 Mar.-2010 Jun.-2010 Jul.-2010 Sep.-2010 Dec.-2010*
Term Deposit Rates
PSBs
a) Up to 1 Year 2.75-8.25 1.00-6.50 1.00-6.25 1.00-6.25 1.00-7.00 1.00-8.00
b) 1 Year up to 3 Years 8.00-9.25 6.00-7.25 6.00-7.25 6.00-7.25 6.75-7.75 7.00-8.50
c) Over 3 Years 7.50-9.00 6.50-7.75 6.50-7.75 6.50-7.75 7.00-7.75 7.00-8.75
Private-sector Banks
a) Up to 1 Year 3.00-8.75 2.00-6.50 2.00-6.50 2.00-6.50 2.50-7.25 2.50-7.60
b) 1 Year up to 3 Years 7.50-10.25 5.25-7.75 6.25-7.50 6.25-7.75 6.50-8.25 7.25-9.00
c) Over 3 Years 7.50-9.75 5.75-8.00 6.50-8.00 6.50-8.00 6.50-9.00 7.00-9.00
Foreign Banks
a) Up to 1 year 2.50-8.50 1.25-7.00 1.25-7.00 1.25-7.00 1.25-7.30 1.25-7.00
b) 1 year up to 3 years 2.50-9.50 2.25-8.00 3.00-8.00 3.00-8.00 3.00-8.00 3.00-8.00
c) Over 3 years 2.50-10.00 2.25-8.75 3.00-8.50 3.00-8.50 3.00-8.25 3.00-8.25
Source: RBI.
Notes: * As on 10 December 2010.
2. Benchmark prime lending rate (BPLR).
5.9 The Government of India decided to extend per cent in March 2010), while that to industry
interest subvention of 2 percentage points with effect (medium and large) recorded a growth of 28.9 per
from 1 April 2010 to 31 March 2011 on pre- and post- cent (as against 24.8 per cent in March 2010). Credit
shipment rupee export credit for four export sectors, to wholesale trade recorded a growth of 17.0 per
namely handicrafts, carpets, handlooms, and small cent (as against 28.1 per cent in March 2010).
and medium enterprises (SMEs) subject to the
5.11 Credit to the priority sector grew by 21.0 per
condition that the interest rate after subvention will
cent (year-on-year) in November 2010 as compared
not fall below 7 per cent, which is the rate applicable
to 17.1 per cent in March 2010. Among the priority
to a short-term crop loan under priority-sector
sub-sectors, credit to micro and small enterprises
lending. With the changeover to the base rate system,
(MSEs) (including service-sector enterprises)
the interest rates applicable to all tenors of rupee
recorded a growth of 21.5 per cent (year-on-year) in
export credit advances with effect from 1 July 2010
November 2010 as compared to 20.8 per cent in
will be at or above base rate in respect of all fresh/
March 2010. (Table 5.3).
renewed advances. Accordingly, banks may reduce
the interest rate chargeable to exporters as per the Priority-sector Lending
base rate system in the four sectors by the amount
of subvention available. If, as a consequence, the 5.12 A target of 40 per cent of adjusted net bank
interest rate charged to exporters goes below the credit (ANBC) or credit equivalent amount of off-
base rate, such lending will not be construed to be balance sheet exposures (OBE), whichever is higher,
violative of the base rate guidelines. as on 31 March of the previous year, has been
stipulated for lending to the priority sector by
domestic SCBs, both in the public and private
SECTORAL DEPLOYMENT OF CREDIT sectors Within this, sub-targets of 18 per cent and
5.10 Disaggregated data on sectoral deployment 10 per cent of ANBC or credit equivalent amount of
of gross bank credit from 47 banks accounting for OBE, whichever is higher, have been stipulated for
about 95 per cent of bank credit and non-food credit lending to agriculture and the weaker sections
available up to 19 November 2010 showed that respectively. However, to ensure that the focus of
among the major sectors, credit (year-on-year) to the banks on the direct category of agricultural
agriculture recorded a growth of 20.0 per cent (22.9 advances does not get diluted, the indirect lending
Table 5.3 : Sectoral deployment of gross bank credit
Sl . Sector ` crore)
Outstanding as on (` % Variation
No. 27 Mar. 20 Nov. 26 Mar. 19 Nov. 26 Mar./ 27 Mar. 19 Nov.
2009 2009 2010 2010 2010 2009 2010 /
Absolute 20 Nov.
amount 2009
Gross Bank Credit (1 + 2) 26,47,368 27,56,861 30,88,569 33,71,551 4,41,201 16.7 22.3
1 Food Credit 45,544 40,645 48,562 56,248 3018 6.6 38.4
2 Non-food Gross Bank Credit (a+b+c+d) 26,01,825 27,16,216 30,40,007 33,15,303 4,38,182 16.8 22.1
a. Priority Sector 932,459 949,287 1,092,179 1,148,808 159,720 17.1 21.0
i. Agriculture & Allied
Activities 338,656 343,070 416,133 411,816 77,477 22.9 20.0
ii. Micro & Small Enterprises 309,195 335,655 373,530 407,872 64,335 20.8 21.5
iii. Other Priority Sectors 2,84,608 2,70,562 3,02,516 3,29,120 17,908 6.3 21.6
b. Industry (micro & small,
medium and large ) 8,85,393 9,69,261 11,05,051 12,49,843 2,19,658 24.8 28.9
c. Wholesale Trade
(other than food procurement) 67,425 80,922 86,357 94,702 18,932 28.1 17.0
d. Other Sectors 7,16,548 7,16,746 7,56,420 8,21,950 39,872 5.6 14.7
Of Non-food Gross Bank Credit
1 Housing (including priority-
sector housing) 2,79,365 2,91,760 3,00,929 3,27,391 21,564 7.7 12.2
2 Consumer Durables 8187 8028 8294 8928 107 1.3 11.2
3 Commercial Real Estate 92,421 88,581 92,128 1,05,479 (293) -0.3 19.1
4 Tourism, Hotels, & Restaurants 13,625 15,667 19,410 26,470 5785 42.5 69.0
5 Advances to Individuals
against Shares, Bonds, etc. 2287 2347 2863 2935 576 25.2 25.1
Source : RBI.
Note : Date the provisional & relate to select scheduled commercial banks (SCBs) which account for 95 per cent of
total bank credit extended by all SCBs.
to agriculture in excess of 4.5 per cent of ANBC or 5.15 The outstanding priority-sector advances of
credit equivalent amount of OBE, whichever is higher, PSBs increased from ` 7,24,150 crore as on the
are not reckoned for computing performance under last reporting Friday of March 2009 to ` 8,64,564
18 per cent target. However, all agricultural advances crore as on the last reporting Friday of March 2010,
under the categories ‘direct’ and ‘indirect’ are showing a growth of 19.39 per cent. Although, PSBs
reckoned in computing performance under the overall as a group had achieved the overall priority-sector
priority-sector target of 40 per cent of ANBC or credit lending target of 40 per cent of ANBC or credit
equivalent amount of OBE, whichever is higher. equivalent amount of OBE, whichever is higher, and
formed 41.68 per cent of ANBC as on the last
5.13 A target of 32 per cent of ANBC or credit
reporting Friday of March 2010, three banks,
equivalent amount of OBE, whichever is higher, has
namely State Bank of Mysore, Indian Overseas
been stipulated for lending to the priority sector by
Bank, and Industrial Development Bank of India
foreign banks having offices in India. Within the (IDBI) Ltd, out of 27 public sector banks did not
overall target of 32 per cent to be achieved by individually achieve the target.
foreign banks, the advances to MSEs and export
sectors should not be less than 10 per cent and 12 5.16 The outstanding priority-sector advances of
per cent of the ANBC or credit equivalent amount private-sector banks increased from ` 1,87,849
crore as on the last reporting Friday of March 2009
of OBE, whichever is higher, respectively.
to ` 2,15,552 crore as on the last reporting Friday
5.14 The outstanding advances granted by PSBs, of March 2010, showing a growth of 14.74 per cent.
private-sector banks, and foreign banks to the priority Although, private-sector banks as a group had
sector as on the last reporting Friday of March 2008, achieved the overall priority-sector lending target
2009, and 2010 are furnished in Table 5.4. There of 40 per cent of ANBC or credit equivalent amount
were shortfalls in the case of a few individual banks of OBE, whichever is higher, and formed 45.99 per
in the public and private sectors and foreign banks. cent of ANBC as on the last reporting Friday of
Table 5.4 : Particulars of Priority-sector Advances

A. PUBLIC SECTOR BANKS (` crore)
As on the last reporting Friday of March 2008 March 2009 March 2010 (provisional)
Total Priority-sector Advances 6,10,450(44.7) 7,24,150(42.8) 8,64,564(41.7)
Total Advances to Agriculture* 2,49,397(18.3) 2,99,415(17.7) 3,70,730(17.3)
Total Advances to MSEs 1,51,137(11.1) 1,91,408(11.3) 2,78,398(13.2)
Advances to Weaker Sections 1,21,740(8.9) 1,65,829(9.8) 2,12,214(10.2)
2. PRIVATE-SECTOR BANKS
As on the Last Reporting Friday of March 2008 March 2009 March 2010(provisional)
Total Priority-sector Advances 1,64,068(47.8) 1,87,849(46.2) 2,15,552(46.0)
Total Advances to Agriculture* 58,567(17.0) 76,103(18.7) 89,769(15.6)
Total Advances to MSEs 46,912(13.7) 46,656(11.5) 64,534(13.7)
Advances to Weaker Sections 7152(2.0) 14,262(3.5) 25,690(5.5)
3. FOREIGN BANKS
As on the Last Reporting Friday of March 2008 March 2009 March 2010(provisional)
Total Priority-sector Advances 50,254(39.5) 55,483(34.3) 60,290(35.0)
Total advances to MSEs 15,489(12.2) 18,138(11.2) 21,080(12.3)
Total Export Credit (includes SSI export) 28,954(22.7) 31,511(19.4) 35,466(20.7)
Source: RBI
Note: 1. *Indirect agriculture is reckoned only up to 4.5 per cent of the ANBC or credit equivalent of OBE, whichever is
higher.
2. The figures in parentheses show percentage of advances to ANBC or credit equivalent amount of OBE, whichever
is higher.
March 2010, two banks, namely Bank of Rajasthan per cent should go to micro (manufacturing)
Ltd., and State Bank of India (SBI) Commercial Bank, enterprises having investment in plant and
out of 22 private sector banks did not individually machinery up to ` 5 lakh and micro (service)
achieve the target individually. enterprises with investment in equipment up
to ` 2 lakh;
5.17 The outstanding priority-sector advances of
foreign banks increased from ` 55,415 crore as on (b) of the total advances to the MSE sector, 20
the last reporting Friday of March 2009 to ` 60,290 per cent should go to micro (manufacturing)
crore as on the last reporting Friday of March 2010, enterprises with investment in plant and
showing a growth of 8.79 per cent. Foreign banks machinery above ` 5 lakh and up to ` 25
as a group had also achieved the overall priority- lakh, and micro (service) enterprises with
sector lending target of 32 per cent of ANBC or investment in equipment above ` 2 lakh and
credit equivalent amount of OBE, whichever is up to ` 10 lakh. (Thus 60 per cent of MSE
higher, and formed 35.09 per cent of ANBC as on advances should go to micro enterprises).
the last reporting Friday of March 2010. However,
(ii) In terms of the recommendations of the Prime
two of the 28 foreign banks, namely Krung Thai
Minister’s Task Force on Micro, Small and
Bank and Oman International Bank, did not
Medium Enterprises (MSMEs) (Chairman: Shri
individually achieve the target. Table 5.4 gives figures
T. K. A. Nair) constituted by the Government of
of priority-sector advances.
India, banks were advised as follows :
5.18 In order to improve and enhance the flow
(a) to achieve a 20 per cent year-on-year
of credit to the priority sector, the following policy
growth in credit to MSEs to ensure
initiatives were taken during 2010-11:
enhanced credit flow;
(i) All SCBs were advised to ensure that:
(b) to achieve the allocation of 60 per cent of
(a) of the total advances to the MSE sector, 40 the MSE advances to micro enterprises in
stages, namely 50 per cent in the year 2010- 18,20,870 SHGs (26.2 per cent) and savings amount
11, 55 per cent in the year 2011-12, and 60 of ` 1299 crore (21 per cent) and cooperative banks
per cent in the year 2012-13, and; with saving bank accounts of 10,79,465 SHGs (15.5
per cent) and savings amount of ` 1225 crore (19.8
(c) to achieve a 10 per cent annual growth in
per cent). The share under the Swarnajayanti Gram
number of micro-enterprise accounts.
Swarozgar Yojana (SGSY) in total savings accounts
(iii) In terms of recommendations of the Working was 16,93,910 SHGs forming 24.3 per cent of the
Group constituted by the RBI to review the Credit total SHGs having savings accounts in the banks.
Guarantee Scheme of the Credit Guarantee During the year under review, the average savings
Fund Trust for Micro and Small Enterprises per SHG with all banks marginally decreased from
(Chairman: Shri V. K. Sharma, Executive ` 9060 as on 31 March 2009 to ` 8915 as on 31
Director, RBI) banks were advised not to accept March 2010. They ranged from a high of ` 11,352
collateral security in the case of loans up to ` per SHG with cooperative banks to a low of ` 7136
10 lakh extended to units in the MSE sector. per SHG with RRBs. As on 31 March 2010, the
(iv) The limit for waiver of margin/ security share of women SHGs in total SHGs with savings
bank accounts was 53.10 lakh, i.e.76.4 per cent as
requirements for agricultural loans was
compared to last year’s share of 79.5 per cent.
enhanced from ` 50,000 to ` 1 lakh. Thus, at
present, all agricultural loans up to ` 1 lakh do 5.22 As on 31 March 2010, 48.51 lakh SHGs had
not require any collateral. outstanding bank loans of ` 28,038 crore as against
42.24 lakh SHGs with bank loans of ` 22,680 crore
MICRO FINANCE as on 31 March 2009 registering a growth of 14.8
per cent in the number of SHGs and 23.6 per cent
5.19 RBI guidelines to banks for mainstreaming
in bank loans outstanding to SHGs. These figures
micro-credit and enhancing the outreach of micro-
included 12.45 lakh SHGs (25.7 per cent) with
credit providers, inter alia, stipulated that micro-
outstanding bank loans of ` 6251 crore (22.3 per
credit extended by banks to individual borrowers
cent) under the SGSY as against 9.77 lakh SHGs
directly or through any intermediary would
with outstanding bank loan of ` 5862 crore as on
henceforth be reckoned as part of their priority-
31 March 2009. Commercial banks had the
sector lending. However, no particular model was
maximum share of outstanding bank loans to SHGs
prescribed for micro-finance and banks have been
with a share of 66.7 per cent followed by RRBs with
extended freedom to formulate their own model[s]
a share of 22.8 per cent and cooperative banks
or choose any conduit/intermediary for extending
with a share of 10.5 per cent. As on 31 March 2010,
micro-credit.
average bank loan outstanding per SHG was `
5.20 Though there are different models for 57,795 as against ` 53,689 as on 31 March 2009.
purveying micro-finance, the self-help group (SHG)- It varied from a high of ` 62,289 per SHG in the
Bank Linkage Programme has emerged as the major case of commercial banks to a low of ` 33,894 in
micro-finance programme in the country. It is being the case of cooperative banks.
implemented by commercial banks, regional rural
banks (RRBs) and cooperative banks. 5.23 On the basis of the data received from banks
by the National Bank for Agriculture and Rural
5.21 Under the SHG-Bank Linkage Programme, Development (NABARD), the gross non-performing
as on 31 March 2010, 69.53 lakh SHGs held saving assets (NPAs) in respect of bank loans to SHGs
bank accounts with total savings of ` 6199 crore as were 2.94 per cent of the bank loans outstanding to
against 61.21 lakh SHGs with savings of ` 5546 SHGs, as on 31March 2010. Table 5.5 provides
crore as on 31 March 2009. Thus, about 97 million some figures for the Programme.
families were associated with banking agencies
under the Programme. As on 31 March 2010, 5.24 The gathering momentum in the micro-finance
commercial banks had the maximum share of SHG sector has brought into focus the issue of regulating
savings with 40,52,915 SHGs (58 per cent) and the sector. A draft Micro-Financial Sector
savings amount of ` 3674 crore (59 per cent) (Development and Regulation) Bill 2010 is under
followed by RRBs with saving bank accounts of consideration of the Government.
Table 5.5 : Progress of Micro-finance Programme

Year New SHGs Financed by Banks Bank Loan*
` crore)
(`
During the Year Cumulative during the Year
No.(lakh) Growth (%) No.(lakh) ` crore)
Amount (` Growth (%) Cumulative
2006-07 11.06 28.94 6570.39 12,366.49
2007-08 12.28 11.00 36.26 8849.26 35.00 16,999.90
2008-09 16.09 31.10 42.24 12,256.51 38.50 22,679.85
2009-10 15.87 (-)1.40 48.52 14,453.30 17.90 28,038.28
Source: NABARD.
Note:* Includes repeat loans to existing SHGs.
RURAL INFRASTRUCTURE The aggregate allocations have reached `

DEVELOPMENT FUND (RIDF) 1,16,000crore. Further, a separate window was
introduced in 2006-07 for funding the rural roads
5.25 The Government of India set up the RIDF in component of the Bharat Nirman Programme, with
1995 through contribution from commercial banks a cumulative allocation of ` 18,500 crore till
to the extent of their shortfall in agricultural lending. 2009-10.
The Fund has continued, with its corpus being
announced every year in the Budget. Over the 5.26 As against the total allocation of
years, coverage under the RIDF has been made ` 1,16,000crore, encompassing RIDF I to XVI,
more broad based in each tranche and, at present, sanctions aggregating ` 1,13,437 crore have been
a wide range of 31 activities under various sectors awarded to various State Governments and
is being financed. The annual allocation of funds disbursements under the Fund amounted to `
for the RIDF announced in the Union Budget has 73,687 crore up to end November 2010. The
gradually increased from ` 2000 crore in 1995–96 National Rural Roads Development Agency
(RIDF I) to ` 16,000 crore in 2010-11 (RIDF XVI). (NRRDA) was sanctioned the entire amount of
` 18,500 crore (RIDF XII to RIDF XV) and it had
fully availed of it by March 2010 (Table 5.6).
Table 5.6 : Sanctions and Disbursements 5.27 During 2010-11, the disbursement to the
under the RIDF and Bharat Nirman States amounted to ` 9649 crore till end-November
` crore)
(As on 30 November 2010) (` 2010 (Table 5.7).
Region Sanction Disburse- Disburse- Table 5.7 : Disbursements during 2010-11
ment ment
as per cent (As on 30 November 2010) (` crore)
of Sanction
Region Disbursement Achieve
South 29,912 20’502 68.54 ment (%)
West 15,567 11,697 75.14 Target Achievement
North 32,880 21,502 65.40 South 3510 1401 39.91

Central 9944 6290 63.25 West 1960 573 29.23
East 19,788 10,767 54.41 North 4550 1478 32.48
NER & Sikkim 5346 2929 54.79 Central 1440 360 25.00
Sub Total 1,13,437 73,687 64.96 East 3250 1257 38.68
BHARAT 18,500 18,500 100.00 NER & Sikkim 790 179 22.66
NIRMAN
Total 15,500 5248 33.86
Total 1,31,937 92,187 69.87 Source : NABARD.
Source: NABARD. Note: NER—north-east region.
AGRICULTURAL CREDIT Box 5.1 : Recommendations of Task Force ‘to
Flow of Agricultural Credit look into the issue of a large number of farmers,
who had taken loans from private
5.28 As against the target of ` 3,25,000 crore for
moneylenders, not being covered under the
agricultural credit in 2009-10, the banking system
disbursed ` 3,84,514 crore to the agricultural sector,
loan waiver scheme’
thereby exceeding the target by around 18 per cent. i. Financial literacy and counselling campaigns be
Commercial banks and RRBs together extended undertaken to increase awareness among farmers
on the KCC.
credit to 77.49 lakh new farmers during 2009-10
ii. Banks be encouraged to educate their rural branch
and cooperative banks to13.43 lakh, thus taking the staff about the KCC.
total number of farmers brought newly under the iii. Banks use farmers’ cooperatives and SHG
banking system to 90.92 lakh. The total number of federations as banking correspondents to increase
agricultural loans financed as of March 2010 was outreach.
4.82 crore. The total credit flow to agriculture during iv. The coverage of new farmers in the command areas
of bank branches and new areas be ensured through
2010-11 by commercial banks, cooperative banks,
meaningful and purposeful conduct of gram sabhas
and RRBs up to September 2010 was of the order and kisan credit camps at regular intervals.
of ` 1,94,392.63 crore, amounting to 52 per cent of v. Bankers who have already been advised by the RBI
the annual target of ` 3,75,000 crore (Table 5.8). to lend without any collateral, up to Rs1 lakh per
farmer, put such advice into more widespread
practice through joint liability groups (JLGs) of tenant
Kisan Credit Card (KCC) Scheme farmers, sharecroppers, and oral lessees.
5.29 The KCC Scheme has become a widely vi. State governments exempt agricultural loan
accepted mechanism for delivery of credit to agreements from stamp duty.
farmers. The scheme now also covers borrowers vii. The KCC be technology enabled, including the
conversion to a smart card with withdrawals and
of the long-term cooperative credit structure. In order
remittances enabled at automated teller machines
to safeguard the interests of KCC holders, NABARD (ATMs), points of sale(PoS), and through hand-held
has allowed banks the discretion to opt for ‘any machines; banks need to have core banking solutions
insurance company of their choice’. The banks have (CBS) in place at the earliest, to enable technology
to benefit the farmer.
to keep in mind the guiding principles of the Personal
viii. The KCC limit be fixed for five years, based on the
Accident Insurance Scheme (PAIS), especially the banker’s assessment of total credit needs of the
premium-sharing formula and coverage, while farmer for a full year, and that the limit be operated
negotiating with insurance companies. by the borrower as and when needed, with no sub-
limits for kharif and rabi, or for stages of cultivation.
5.30 With a view to making the KCC more user- ix. Each withdrawal under the KCC be allowed to be
friendly, NABARD has enlarged its scope to cover liquidated in twelve months without the need to
term loans for agriculture and allied activities, bring the debit balances in the account to zero at
any point of time.
including a reasonable component for consumption
x. There be automatic renewal and annual increase on
needs, besides the existing facility of providing crop credit limit linked to inflation rate.
Table 5.8 : Flow of Institutional Credit to Agriculture and Allied Activities

(` crore)
Sl. No. Agency 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11*
1. Co-operative Banks** 39,786 42,480 48,258 36,762 63,492 29,450
Share (%) 22 18 19 13 17 15
2. RRB 15,223 20,435 25,312 26,724 35218 19141
Share (%) 8 9 10 9 9 10
3. Commerc-ial Banks 1,25,477 1,66,486 1,81,088 2,28,951 2,85,799 14,5801
Share (%) 70 73 71 78 74 75
Total 1,80,486 2,29,401 2,54,658 2,92,437 3,84,514 1,94,392
Source: NABARD.
Notes* Up to 30 September 2010. **Including Others.
loan limit. Crop loans disbursed under the KCC Table 5.10 : Release under ADWDR
Scheme for notified crops are covered under
` crore)
(`
Rashtriya Krishi BimaYojana (National Crop
Agency Debt Debt Total
Insurance Scheme), a crop insurance scheme Waiver Relief
introduced to protect the interests of the farmer
State Cooperative 15,540.63 2062.02 17,602.65
against loss of crop yield caused by natural
A Banks
calamities, pest attacks, etc. The KCC has thus
SCARDB 3409.06 248.41 3657.47
become a single window for a comprehensive
Source: RBI credit
product. The major policy recommendations of the RRBs 6045.19 694.68 6739.87
Task Force ‘to look into the issue of a large number Total 24,994.89 3005.11 28,000.00
of farmers, who had taken loans from private Note: SCARDB—State Cooperative Agriculture and Rural
moneylenders, not being covered under the loan Development Bank.
waiver scheme’ under the chairmanship of Shri
Umesh Chandra Sarangi, constituted by the Ministry FINANCIAL PERFORMANCE OF BANKS
of Agriculture, Government of India, are given in
5.33 The consolidated balance sheet of the SCBs
Box 1.1.
in India during 2009-10 showed relatively sluggish
5.31 The banking system has issued 955.77 lakh growth performance, marked mainly by slow deposit
KCCs involving a total sanctioned credit limit of growth. The growth in profits of SCBs too was lower
` 4,37,241 crore as on 31 August 2010. The share in 2009-10 than in the previous year. Further, there
of commercial banks stood at 44.4 per cent of the was a rise in the NPA ratio of SCBs in 2009-10.
Though asset quality emerged as a concern for the
total number of cards issued by the banking sector
banking sector, its capital adequacy remained fairly
followed by cooperative banks (40.9 per cent) and
robust during the year, providing cushion for any future
RRBs (14.7 per cent). The year-wise and agency-
losses.
wise break-up of the KCCs issued is given in
Table 5.9. 5.34 The overall growth in the consolidated balance
sheet of SCBs in 2009-10 was 15.0 per cent, which
Agriculture Debt Waiver and Debt Relief was lower than the 21.1 per cent during the previous
(ADWDR) Scheme 2008 year. Moreover, the decline in growth could be seen
across all bank groups with the notable exception
5.32 NABARD is the nodal agency for
of new private-sector banks. The working results of
implementing the Scheme in respect of cooperative SCBs under different bank groups are given in Table
credit institutions and RRBs. The Bank has released 5.11.
of ` 24,994.89 crore towards debt waiver and
5.35 The major factor contributing to the slowdown
` 3005.11 crore towards debt relief claims. The
in growth of banks’ balance sheets was deposits.
agency-wise break-up of the releases under the
The growth in deposits of SCBs decelerated to
ADWDR is given in Table 5.10.
Table 5.9 : Agency-wise KCCs Issued and Amount Sanctioned

(As on 31 August 2010)
Agency Cards Issued (lakh) ` crore)
Amount Sanctioned (`
2007- 2008- 2009- 2010- Total* 2007- 2008- 2009- 2010- Total*
08 09 10 11 08 09 10 11
Co-operative Banks 20.91 13.44 17.43 12.31 391.19 19,991 8428 7606 5164 1,45,758
RRBs 17.73 14.15 19.49 6.73 140.94 8783 5648 10,132 4329 58,293
Commer-cial Banks 46.06 58.34 53.13 — 423.64 59,530 39,009 39,940 — 2,33,190
Total 84.70 85.93 90.05 19.04 955.77 88,264 53,085 57,678 9493 4,37,241
Source: NABARD
Note:*Since inception of the scheme (1998). —: Not available.
Table 5.11 : Working Results of SCBs
Items Foreign Old pvt. sector New pvt. All SCB
PSBs banks banks sector banks
2008-09 2009-10 2008-09 2009-10 2008-09 2009-10 2008-09 2009-10 2008-09 2009-10
` Crore)
(`
A Income 3,15,554 3,54,876 45,216 36,341 21,572 23,649 81,360 79,405 4,63,702 4,94,271
(i) Interest Income 2,73,088 3,06,488 30,322 26,390 18,790 20,565 66,282 62,310 3,88,482 4,15,752
(ii) Other Income 42,466 48,388 14,894 9951 2782 3084 15,078 17,095 75,220 78,519
B Expenditure 2,81,182 3,15,619 37,706 31,600 19,163 21,337 72,901 68,606 4,10,952 4,37,162
(i) Interest Expended 1,93,447 2,11,940 12,819 8938 12,834 14,076 44,123 37,130 2,63,223 2,72,084
(ii) Intermediation Cost
(operating expenses) 55,504 65,991 12,298 11,102 3939 4715 17,840 17,960 89,581 99,769
(iii) Provisions and
Contingencies 32,231 37,688 12,589 11,560 2390 2545 10,937 13,516 58,147 65,310
C Operating Profit
(A - Bi - Bii) 66,604 76,945 20,098 16,301 4799 4858 19,396 24,315 1,10,897 1,22,419
D Net Profit (A-B) 34,373 39,257 7510 4741 2409 2312 8459 10,799 52,750 57,109
E Net Interest Income
(spread) (Ai - Bi) 79,642 94,548 17,503 17,452 5956 6489 22,158 25,180 1,25,258 1,43,669
F Total Assets 37,65,757 44,41,114 4,45,129 4,33,219 2,32,292 2,68,977 7,95,464 8,81,831 52,38,642 60,25,141
G Net Income(Aii + E) 1,22,108 1,42,936 32,397 27,403 8738 9573 37,236 42,275 2,00,479 2,22,188
As per cent of
Total Asset
A Income 8.38 7.99 10.16 8.39 9.29 8.79 10.23 9.00 8.85 8.20
(i) Interest Income 7.25 6.90 6.81 6.09 8.09 7.65 8.33 7.07 7.42 6.90
(ii) Other Income 1.13 1.09 3.35 2.30 1.20 1.15 1.90 1.94 1.44 1.30
B Expenditure 7.47 7.11 8.47 7.29 8.25 7.93 9.16 7.78 7.84 7.26
(i) Interest Expended 5.14 4.77 2.88 2.06 5.52 5.23 5.55 4.21 5.02 4.52
(ii) Intermediation Cost
(operating expenses) 1.47 1.49 2.76 2.56 1.70 1.75 2.24 2.04 1.71 1.66
(iii) Provisions and
Contingencies 0.86 0.85 2.83 2.67 1.03 0.95 1.37 1.53 1.11 1.08
C Operating Profit
(A - Bi - Biii) 1.77 1.73 4.52 3.76 2.07 1.81 2.44 2.76 2.12 2.03
D Net Profit (A-B) 0.91 0.88 1.69 1.09 1.04 0.86 1.06 1.22 1.01 0.95
E Net Interest Income
(spread) (Ai - Bi) 2.11 2.13 3.93 4.03 2.56 2.41 2.79 2.86 2.39 2.38
Source: RBI.
17.0 per cent in 2009-10 from 22.4 per cent in 2008- than that at the end of March 2009. There was an
09. Further, credit growth constrained by a slowdown increase in the proportion of current and savings
in deposits growth was placed at 16.6 per cent in accounts (CASA) in 2009-10 in contrast to a
2009-10 as compared to 21.1 per cent in 2008-09. declining trend noted in the recent past.
The deceleration in credit growth was accentuated
5.36 On a year-on-year basis, the major drivers
on account of an overall slowdown of the economy
of non-food bank credit in 2009-10 were industry
in the aftermath of the global financial turmoil.
and agriculture. There was considerable slowdown
However, while bank credit growth witnessed a
in the growth in personal loans and also credit to
slowdown on a year-on-year basis, bank credit in
the services sector during the year.
general and credit to industry in particular, showed
distinct signs of recovery from October 2009 5.37 The growth in investments of banks
onwards as economic recovery became more decelerated to 18.6 per cent in 2009-10 from 23.1
broad-based. The credit-deposit ratio at the end of per cent in 2008-09. Also, there were notable
March 2010 was 73.6 per cent, marginally lower changes in the investment portfolio of banks. The
percentage contribution of investments in approved during 2008-09, when the global financial crisis
securities declined in 2009-10 in contrast to an intensified. However, in 2009-10, the gross NPA ratio
increase in 2008-09, which was mainly due to banks’ increased to 2.39 per cent from 2.25 per cent in
preference to park their funds in low-risk instruments 2008-09. The total amount recovered and written off
against the backdrop of prevailing global in 2009-10 was ` 49,210 crore. This was lower than
uncertainties. Consequently, the percentage the fresh NPAs added during 2009-10, which were
contribution of investments in non-SLR(statutory to the tune of ` 65,674 crore. The sectoral distribution
liquidity ratio) securities by banks showed an showed a growing proportion of priority-sector NPAs
increase in 2009-10 driven mainly by an increase in 2009-10. Among the various channels of recovery
in investments in mutual funds. available to banks for dealing with non-performing
5.38 Similar to the slowdown in growth in balance loans, the Securitization and Reconstruction of
sheets, there was a moderation in the financial Financial Assets and Enforcement of Security
performance of SCBs in 2009-10. The growth in Interest (SARFAESI) Act has been by far the most
both income and expenditure of the SCBs slowed important channel. However, in 2009-10, there was
down leading to a deceleration in the growth of a decline in the amount of NPAs recovered under
operating and net profits of SCBs. Every indicator the SARFAESI Act as a per cent of total amount of
of profitability also showed a decline in 2009-10. NPAs involved under this channel.
The most salient indicator of profitability, return on 5.42 Among bank groups, the gross NPA ratio of
assets (RoA), declined to 1.05 per cent in 2009-10 PSBs increased to 2.19 per cent in 2009-10 from
from 1.13 per cent in 2008-09. Further, return on 1.97 per cent in the previous year. The most notable
equity (RoE) too declined to 14.3 per cent in 2009- increase in NPA ratio in 2009-10 could be seen in
10 from 15.4 per cent in 2008-09. the case of foreign banks. The NPA ratio of foreign
5.39 After abstaining during 2008-09, banks banks increased to 4.29 per cent in 2009-10 from
started resorting to the capital market for raising 3.80 per cent in 2008-09.
resources in 2009-10. The resources raised from
the capital market by banks were in the form of both Technological Developments in Banks
public issues and private placement in 2009-10. 5.43 Banks in India are using information
technology (IT) not only to improve their own internal
Capital Adequacy Ratio processes but also to increase facilities and services
5.40 One of the major indicators of growing financial to their customers. Efficient use of technology has
soundness of the Indian banking system was the facilitated accurate and timely management of the
improvement in the capital to risk-weighted assets increased volumes of transactions of banks,
ratio (CRAR). The CRAR of all SCBs under Basel I consistent with a larger customer base. Of the total
framework improved to 13.6 per cent by end-March number of PSB branches, 97.8 per cent were fully
2010 from 13.2 per cent a year earlier, thus remaining computerized at the end of March 2010.
significantly above the stipulated minimum of 9.0 5.44 ATMs, particularly off-site ATMs, act as
per cent. As all commercial banks in India excluding substitutes for bank branches in offering a means of
RRBs and local area banks became Basel II anytime cash withdrawal to customers. Growth of
compliant as on 31 March 2009, it is essential to ATMs, which had generally been steadily rising in
also look at the capital adequacy position under this recent years, was observed to be 37.8 per cent in
framework. Under the Basel II framework too, the 2009-10. More importantly, the growth in off-site ATMs
CRAR of SCBs showed an increase in 2009-10; the too was comparably high at 44.6 per cent during the
CRAR improved to 14.5 per cent at the end of March year. At the end of March 2010, the percentage of
2010 from 14.0 per cent at the end of March 2009. off-site ATMs to total ATMs stood at 45.7 per cent
At the bank group level, every bank group reported for all SCBs.
CRAR, on an average, of over 13 per cent under the 5.45 Another important technological development
Basel II framework. in 2009-10 was a significant increase in the
percentage of PSB branches implementing CBS from
NPAs of the Banking Sector 79.4 per cent at the end of March 2009 to 90 per
5.41 The NPAs of SCBs emerged as a major area cent at the end of March 2010. The percentage of
of concern in 2009-10. Gross NPAs as percentage branches under CBS was much larger for the SBI
of gross advances of SCBs had remained unchanged group as compared to nationalized banks.
5.46 With computerization in general, and CBS in Bank was raised subject to conditions, with
particular, having reached near completion, it is effect from December 8, 2008, for a period
important to leverage this technological advancement of one year. On a review, the relaxation
to look at areas beyond CBS that can help in not allowed in December 2008 to select FIs
just delivering quality and efficient services to (SIDBI, NHB and EXIM Bank) in resource
customers but also generating and managing raising norms for FIs has been co-terminated
information effectively. With regard to the second with refinance facility. Accordingly,
aspect of information management, a system of outstanding borrowings of FIs should be
receiving data from banks by the RBI in an automated within the normal prudential limit i.e. ceiling
manner without any manual intervention is under on aggregate resources at 10 times of net
examination. owned fund (NOF) and umbrella limit at one
time of NOF with effect from 31st March,
5.47 Going forward, there are a number of issues
2010.
with regard to development of banking technology
that need to be addressed. These relate to further 5.49 The guidelines regarding lending under
improvement in back office management in the form consortium arrangements/ multiple banking
of streamlining the management information system arrangements, provisioning coverage for advances,
(MIS), strengthening centralized processing, prudential norms on creation and utilization of floating
customer relationship management (CRM), and IT provisions, additional disclosures in notes to
Governance. Back office technological advancement accounts, and prudential norms on income
would help divert banks’ resources more towards recognition, asset classification and provisioning
front office management, thereby increasing the pertaining to advances—computation of NPA levels
customer focus of their services and supporting and projects under implementation—issued to banks
greater financial penetration and inclusion. have been mutatis mutandis applied to select FIs.
Further, the guidelines regarding know your customer
(KYC) norms/ anti-money laundering (ALM)
NON-BANKING FINANCIAL standards/ combating of financing of terrorism (CFT)
INSTITUTIONS (NBFIS) and sale of investments held under Held to Maturity
category issued to banks are also applicable to select
Financial Institutions (FIs)
FIs.
5.48 As at the end of March 2010, four institutions,
namely Export Import Bank of India (Exim Bank), 5.50 Resources raised by FIs during 2009-10 were
NABARD, the National Housing Bank (NHB), and considerably higher than those during the previous
the Small Industries Development Bank of India year. While the long-term resources raised witnessed
(SIDBI) were regulated by the RBI as all-India FIs. a sharp climb during 2009-10 as compared to the
In the wake of recovery in the global as well as previous year, the short-term and foreign currency
Indian economy during 2009-10, the RBI issued resources raised increased marginally. SIDBI
the following instructions to roll back the liquidity mobilized the largest amount of resources, followed
support measures initiated for FIs during 2008-09 by Exim Bank and NHB (Table 5.12).
for on-lending to housing finance companies
5.51 Total sources/deployment of funds of FIs
(HFCs)/NBFCs/micro-finance institutions (MFIs) and
increased modestly by 1.8 per cent to ` 3,02,610
exporters:
crore during 2009-10. A major part of the funds of FIs
(i) The refinance facility of ` 7,000 crore, ` was raised internally (51.8 per cent), followed by
5,000 and ` 4,000 crore for SIDBI, Exim external sources (41.9 per cent); ‘other sources’
Bank and NHB, respectively, under the formed only a small part. The funds raised from
relevant provisions of the Reserve Bank of internal sources declined by 18.9 per cent, while
India Act, 1934 sanctioned in December those from external sources rose by 38.8 per cent
2008 have been withdrawn with effect from over the year 2009-10 mainly due to recovery in the
the close of business on 31st March, 2010. global financial markets during 2009-10. A large part
(ii) The ceiling on aggregate resources raised of the funds raised was used for fresh deployments
including the funds mobilised under (56.8 per cent), followed by repayment of past
‘umbrella limit’ by SIDBI, NHB and EXIM borrowings (38.0 per cent). Other deployments
Table 5.12 : Resources Mobilized by FIs

` Crore)
(`
Financial Total Resources Raised
Institutions
Long-term Short-term Foreign Currency Total Total Outstanding
(as at the
end of March)
2008-09 2009-10 2008-09 2009-10 2008-09 2009-10 2008-09 2009-10 2009 2010
Exim Bank 3197 8150 8905 5052 3800 5193 15,902 18,395 37,202 40,509
NABARD 4252 16 3494 12,330 - - 7746 12,346 26,867 24,922
NHB 3124 7518 16,881 10,306 - - 20,005 17,824 16,503 10,598
SIDBI 5625 13,253 8811 11,500 1361 987 15,797 25,740 24,487 30,186
Total 16,198 28,937 38,091 39,188 5161 6,180 59,450 74,3051,05,059 1,06,215
Source: Respective FIs.
Notes:-: (i) Nil/Negligible. (ii) Long-term rupee resources comprise borrowings by way of bonds/ debentures;
and short-term resources comprise commercial papers (CPs), term deposits, certificate of deposits (CDs),
including interest payments formed only a small part Table 5.13 : Pattern of Sources and
of the funds of FIs. The repayment of past Deployment of Funds of FIs*
borrowings recorded a sharp increase of 103.2 per
(Amount in ` crore)
cent, while fresh deployment registered a decline of
11.7 per cent over the year (Table 5.13). Item 2008-09 2009-10 Percentage
Variation
in 2009-10
Non-Bank Finance Companies (NBFCs)
Sources of Funds
5.52 NBFCs as a whole account for 11.2 per cent (i+ii+iii) 2,97,296 3,02,610 1.8
(100.0) (100.0)
of assets of the total financial system. With the
growing importance assigned to financial inclusion, (i) Internal 1,93,294 1,56,733 -18.9
(65.0) (51.8)
NBFCs have come to be regarded as important
(ii) External 91,314 1,26,813 38.8
financial intermediaries particularly for the small-
(30.7) (41.9)
scale and retail sectors. There are two broad
(iii) Others** 12,688 19,065 50.3
categories of NBFCs based on whether they accept
(4.3) (6.3)
public deposits, namely deposit-taking NBFCs Deployment of
(NBFCs-D) and non-deposit-taking NBFCs (NBFCs- Funds (i+ii+iii) 2,97,296 3,02,610 1.8
ND). (100.0) (100.0)
(i) Fresh Deployment 1,94,711 1,71,922 -11.7
5.53 The total number of NBFCs registered with (65.5) (56.8)
the RBI, consisting of NBFCs-D and NBFCs-ND, (ii) Repayment of Past
declined from 12,740 in end-June 2009 to 12,630 in Borrowings 56,592 1,15,015 103.2
end-June 2010. The number of NBFCs-D declined (19.0) (38.0)
from 336 to 308 during the same period, mainly due (iii) Other Deployment 45,993 15,673 -65.9
(15.5) (5.2)
to the exit of many NBFCs-D from deposit- taking
of which:
activity, while non-deposit-taking systemically Interest Payments 8809 16,561 88.0
important NBFCs (NBFCs-ND-SI with asset size (3.0) (5.5)
` 100 crore and above) increased from 234 to 260
Source: Respective FIs
during the same period. Under the NBFCs-D category Notes:* Exim Bank, NABARD, NHB, and SIDBI.
there are two residuary non-banking companies **Includes cash and balances with banks and balances
with the RBI and other banks. Figures in parentheses are
(RNBCs) (Table 5.14)
percentages to the totals.
Table 5.14 : Number of NBFCs Registered share of 83.2 per cent, followed distantly by loan
with the RBI companies with a 16.8 per cent share.
End June Number of Number of Number 5.58 The asset size of NBFCs-D varies significantly
Registered NBFCs-D of between less than ` 25 lakh to above ` 500 crore.
NBFCs NBFCs- The asset-holding pattern remained skewed, with
ND-SI 15 NBFCs-D with asset size of ‘above ` 500 crore’
2005 13,261 507 - holding 97.5 per cent of total assets of all NBFCs-
2006 13,014 428 149 D, while the remaining 213 held about 2.5 per cent
in end-March 2010.
2007 12,968 401 173
2008 12,809 364 189 5.59 The financial performance of NBFCs-D
2009 12,740 336 234 witnessed moderate deterioration as reflected in the
decline in their operating profits during 2009-10. This
2010 12,630 308 260
decline was mainly on account of higher growth in
Source: RBI. expenditure than income of these institutions. The
decline in operating profits along with marginal
5.54 The ratio of deposits of reporting NBFCs to increase in tax provision resulted in a decline in net
aggregate deposits of SCBs dropped to 0.36 per profits in 2009-10. The cost to income ratio
cent in end-March 2010 from 0.53 per cent in end- deteriorated from 74 per cent in 2008-09 to 81.8 per
March 2009, mainly due to the decline in deposits cent in 2009-10. Non-interest cost at 97.4 per cent
of reporting NBFCs. continued to constitute the dominant share in total
5.55 Total assets of NBFCs-D (including RNBCs) cost of the NBFCs-D during 2009-10 while interest
increased to ` 1,09,324 crore during 2009-10 from cost accounted for a smaller share.
` 97,408 crore in the preceding year. Public 5.60 There was a decline in the gross NPAs to
deposits held by NBFCs-D and RNBCs together gross advances ratio of NBFCs-D in 2009-10 in
recorded a decline to ` 17,247 crore in end-March continuation of the trend observed in the recent past.
2010 from ` 21,566 crore in end-March 2009. Net- Classification-wise, Gross NPA and net NPA ratios
owned funds (NOFs) witnessed a growth of 18.8 per of AFCs and loan companies declined during 2009-
cent during 2009-10 and stood at ` 16,178 crore. 10 as compared to the previous year. Asset quality
5.56 Total assets/liabilities of NBFCs-D (excluding of AFCs as reflected in various categories of NPAs
RNBCs) expanded at the rate of 21.5 per cent during (substandard, doubtful, and loss) shows sharp
2009-10 as compared to 3.4 per cent during 2008- improvement.
09. Borrowings, which are the major source of funds 5.61 Capital to risk-weighted assets ratio (CRAR)
for NBFCs-D, increased by 23.6 per cent during the norms were made applicable to NBFCs-D in 1998,
year, while public deposits increased by 38.4 per whereby every NBFC-D is required to maintain a
cent largely due to the increase in public deposits of minimum capital, consisting of Tier I and Tier II
three NBFCs-D. On the assets side, the major capital, not less than 12 per cent (15 per cent in the
components—hire purchase assets and loans and case of unrated deposit-taking NBFCs) of its
advances—witnessed growth of 7.6 per cent and 42.7 aggregate risk-weighted assets. As at the end of
per cent respectively during 2009-10 as compared March 2010, 212 out of 216 reporting NBFCs-D had
to 6.8 per cent and 14.7 per cent during the previous CRAR of more than 12 per cent as against 221 out
year. Total investments of NBFCs-D increased by of 225 in end-March 2009. It may be pointed out
23.3 per cent during 2009-10 primarily on account that the NBFC sector has been witnessing a
of rise in non-SLR investments. consolidation process in the last few years, wherein
5.57 Among NBFCs-D, asset finance companies the weaker NBFCs are gradually exiting, paving the
(AFCs) held the largest share in total assets/liabilities way for a stronger sector.
(74.5 per cent) while loan companies accounted for
25.5 per cent in end-March 2010. The increase in Profile of NBFCs-ND-SI
assets/liabilities of AFCs was mainly on account of 5.62 The balance sheet of NBFCs-ND-SI stood at
reclassification of NBFCs, which was initiated in ` 5,63,476 crore in end-March 2010 as compared
December 2006. Of the total deposits held by all to ` 4,82,907 crore in end-March 2009 thereby
NBFCs-D, asset finance companies held the largest registering a growth of 16.7 per cent during 2009-
10. This significant increase in balance sheet size certificates (NoCs) from the Department of
of NBFCs-ND-SI is mainly attributed to sharp Non-Banking Supervision of RBI before
increase in owned funds, debentures, bank making such investment.
borrowings, commercial paper, and other liabilities.
(ii) NBFCs-ND-SI engaged predominantly in
Owned funds (which accounted for 25.8 per cent
infrastructure financing had represented to
of total liabilities) increased by 11.3 per cent during
the RBI that there should be a separate
2009-10. Total borrowings (secured and unsecured)
category of infrastructure financing NBFCs
by NBFCs-ND-SI increased by 19.6 per cent to `
in view of the critical role played by them in
3,81,850 crore and formed 67.7 per cent of total
providing credit to the infrastructure sector.
liabilities. During the period ended June 2010, total
As advised in the Second Quarter Review
borrowings further increased by 8.3 per cent to `
of Monetary Policy 2009-10, it was decided
4,13,476 crore.
to introduce a fourth category of NBFCs as
5.63 The pattern of deployment of funds by NBFCs- infrastructure finance companies(IFCs)
ND-SI in the year ended March 2010 remained satisfying certain criteria like a minimum of
broadly in line with that witnessed during the previous 75 per cent of their total assets in
year. Secured loans continued to constitute the infrastructure loans, net owned funds of `
largest share (44.3 per cent of total assets), followed 300 crore or above, minimum credit rating
by unsecured loans (17.8 per cent), hire purchase ‘A’ or equivalent of CRISIL, FITCH, CARE,
assets (7.4 per cent), investments (17.4 per cent), ICRA or equivalent rating by any other
cash and bank balances (4.5 per cent),and other accrediting rating agency, and CRAR of 15
assets (8.4 per cent) during the year ended March per cent (with a minimum Tier I capital of 10
2010. per cent). Such NBFCs would be allowed
to exceed credit concentration norms of
5.64 The financial performance of the NBFCs-ND-
lending to single/group borrowers by 5 per
SI sector improved marginally as reflected in the
cent above that of other infrastructure loans.
increase in net profit of ` 10,897 crore during 2009-
10 over the previous year. However, their net profit (iii) NBFCs-ND-SI were advised to submit
to total assets declined during the same period. Statement of Interest Rate Sensitivity [NBS-
ALM3] within 20 days of the close of the
5.65 Gross and net NPAs ratios of the NBFCs-
half year to which it related. They were also
ND-SI sector deteriorated marginally during the year
advised that eligible companies could file
ended March 2010. However, these ratios showed
the ALM returns on-line.
some improvement in the quarter ended June 2010.
Similarly, there was further diminution in value of (iv) While granting finance to housing/
investments between March 2009 and March 2010. development projects, NBFCs were advised
to stipulate as a part of the terms and
Policy Initiatives conditions that:
5.66 The regulatory and supervisory framework of (a) the builder / developer / owner / company
NBFCs continued to focus on prudential regulations disclose in the pamphlets / brochures /
with specific attention to the systemically important advertisements the name(s) of the entity
non-deposit-taking companies (NBFC-ND-SI). Some to which the property is mortgaged.
of the important developments in chronological order
are as follows: (b) the builder / developer / owner / company
indicate in the pamphlets / brochures,
(i) Instances of NBFCs having made overseas that they would provide NOC /
investments without regulatory clearance of permission of the mortgagee entity for
the Department of Non-Banking Supervision, sale of flats / property, if required. Funds
RBI,which is a violation of Foreign Exchange were would not be released unless the
Management (Transfer or Issue of Security above requirements were fulfilled.
by a Person Resident outside India)
Regulations 2004 and attracts penalty, were (v) NBFCs having foreign direct investment
observed. Accordingly, it was reiterated that (FDI) are required to submit certificates from
all NBFCs desirous of making any overseas their statutory auditors on half-yearly basis
investment must obtain ‘No Objection’ certifying compliance with existing terms
and conditions of FDI. NBFCs were advised the Directions and accounting guidelines
that such certificates may be submitted not issued by RBI.
later than one month from the close of the
(x) As announced in the Annual Policy 2010-
half year to which the certificate pertained.
2011, draft guidelines on core investment
(vi) In terms of the third proviso of para 18 of the companies (CIC) were placed on the RBI
Non-Banking Financial (Non- Deposit website on 21 April 2010. Based on feedback
Accepting or Holding) Companies received from the market participants, the
Prudential Norms (Reserve Bank) regulatory framework for CICs was
Directions 2007, NBFCs were advised that announced. In order to bring more clarity in
any NBFC-ND-SI not accessing public the interest of the system it was decided
funds, either directly or indirectly, may
that investing in shares of other companies,
make an application to the Bank for
even for the purpose of holding stake should
modifications in the prescribed ceilings with
also be regarded as carrying on the business
regard to concentration of credit /
of acquisition of shares in terms of Section
investment norms. NBFCs-ND-SI may also
45I(c) (ii) of the RBI Act. CICs with an asset
be issuing guarantees and devolvement of
these guarantees might require access to size of ` 100 crore or more would be
public funds. Accordingly it was advised considered systemically important core
that any NBFC-ND-SI not accessing public investment companies (CICs-ND-SI) and
funds either directly or indirectly or not would be required to obtain Certificate of
issuing guarantees may approach the Registration (CORs) from the RBI under
Regional Office of the Department of Non- Section 45-IA of the RBI Act even if they
Banking Supervision, RBI in whose had in the past been advised that registration
jurisdiction the registered office of the was not required. Capital requirements,
company is located, for appropriate leverage ratio to be maintained, etc. have
dispensation. been prescribed for CICs-ND-SI. Certain
exemptions from maintenance of statutory
(vii) NBFCs were advised that there should be
minimum NOF, prudential norms including
no discrimination in extending products and
facilities including loan facilities to requirements of capital adequacy, and
physically/ visually challenged applicants on exposure norms have been prescribed for
grounds of disability. those CICs-ND-SI. CICs-ND-SI were advised
to submit annual certificates from their
(viii) All NBFCs excluding RNBCs may statutory auditors regarding compliance with
participate in the designated currency futures these guidelines within one month from the
and options exchanges recognized by the date of finalization of their balance sheet.
Securities and Exchange Board of India
(SEBI) as clients, subject to RBI (Foreign (xi) In view of sub section (2) of Section 17 of
Exchange Department) guidelines in the the Credit Information Companies
matter, only for the purpose of hedging their (Regulation) Act 2005, and Regulation 10
underlying forex exposures. With (a) (ii) of the Credit Information Companies
appropriate disclosures in their balance Regulations 2006, NBFCs were advised that
sheets. those NBFCs which had become member/
(ix) According to the Repo in Corporate Debt members of any new credit information
Securities (Reserve Bank) Directions 2010, company / companies may provide them
dated 8 January 2010 issued by the RBI, the current data in the existing format. Such
NBFCs registered with the RBI (other than NBFCs may also provide historical data in
Government companies as defined in order to enable the new credit information
Section 617 of the Companies Act 1956) companies to validate their software and
are eligible for participation in repo develop a robust database. However, care
transactions in corporate debt securities. should be taken to ensure that no wrong
NBFCs participating in such repo data / history regarding borrowers is given
transactions were advised to comply with to credit information companies.
BOX 5.2 : CORPORATE BOND MARKETS

Economic vibrancy coupled with sophisticated state-of the- art financial infrastructure has contributed to rapid growth
in the equity markets in India. In terms of market features and depth the Indian equity market ranks among the best in
the world. In parallel, the Government securities market has also evolved over the years and expanded given the
increasing borrowing requirements of the Government. In contrast, the corporate bond market has languished both in
terms of market participation and structure. Non-bank finance companies are the main issuers and very small amounts
of finance are raised by companies directly. There are several reasons for this:
(i) Pre dominance of banks loans;
(ii) FII’s participation is limited;
(iii) Pensions and insurance companies and household are limited participants because of lack of investor confidence;
and
(iv) Crowding out by Government bonds.
The corporate bond market as a result is only about 14 per cent of the total band market; and market liquidity and
infrastructure remain constrained. With the intervention of the Patil Committee recommendations, the corporate bond
market is slowly evolving.
With bank finance drying up for long- term infrastructure projects in view of asset liability problems faced by banking
system, the need for further development of a deep and vibrant corporate bond market can hardly be overemphasised.
The following table shows the status of corporate bond market in India:
Private placement of corporate bonds listed on NSE and BSE
Year No. of Issues ` Crore)
Amount (`
2007-08 744 118,485
2008-09 1041 173,281
2009-10 1278 212,635
2010-11(till Nov-10) 929 147,400
Source: SEBI ( includes NBFCs)
The following table gives details of bond issuance in some of the emerging markets including India:
(in US$ billion)
Region/Countries 2007 2008 2009
Latin America Argentina 3.4 0.1 0.5
Brazil 9.9 6.7 10.1
Chile 0.3 0.1 3.0
Mexico 6.3 4.5 15.5
Emerging Europe Hungary 4.1 5.3 3.0
Poland 4.1 3.8 10.2
Russia 30.2 22.1 10.8
Asia China 2.1 2.1 3.3
India 7.5 1.4 2.2
Indonesia 1.8 4.2 5.5
Malaysia 0.9 0.4 0.1
Philippines 1.0 0.4 5.4.
Thailand 0.8 0.5 -
Source: IMF, GFSR, April 2010
Earlier initiatives taken for development of corporate bond market in India
 Regulatory jurisdiction over corporate bond market has been clearly defined and placed under SEBI. SEBI (Issue
and Listing of Debt Securities) Regulations, 2008 simplified disclosures and listing requirements. A minimum market
lot criterion has been reduced from ` 10 lakhs to ` 1 lakh to encourage retail investors.
 The limit of FIIs investment in corporate bonds has been increased to USD 20 billion from the existing limit of USD
15 billion and the incremental limit of USD 5 billion has to be invested in corporate bonds with residual maturity of
over five years.
 BSE, NSE and FIMMDA have set up reporting platforms. Aggregate data reported on these platforms is disseminated
to the public. Summary data is available on SEBI website. Repos in corporate bonds have been permitted, following
RBI guidelines, since March 2010. Exchange traded interest rates futures were introduced in August 2009.
 Draft Credit Default Swap, (CDS) guidelines have been released by RBI in July, 2010.
 The Finance Act, 2008 (with effect from 01/06/2008) mandated that no TDS (tax deduction at source) would be
deducted from any interest payable on any security issued by a company, where such security is issued in
dematerialised form and is listed on a recognised stock exchange in India. The stamp duty on items in central list
(debentures and bonds in the nature of promissory note) have been brought down and made uniform.
 Clearing and settlement through clearing corporations have been mandated for trades between specified entities
namely mutual funds, foresight institutional investors, venture capital funds etc. Clearing and settlement is on DvP
I basis.
Suggested initiatives to be taken for further development of corporate bond market1
 Clearing and settlement on DvP (Delivery versus Payment) III basis. Market making with primary dealers. Enabling
Credit Default Swap. Allowing banks to do credit enhancement -Guaranteeing of corporate bonds by banks. Relaxing
norms on short selling of Government bonds .(RBI).
 Relaxing norms for use of shelf prospectus -requires amendment to Section 60 of Companies Act (MCA).
 Empowering bond holder under SARFAESI (Department of Financial Services, RBI).
 Creating of a comprehensive bond data base (RBI, SEBI, FIMMDA).
 Amendment to Section 9 of the Stamp Act to lower stamp duties across states and make them uniform (Department
of Revenue).
1
Agency responsible is indicated in bracket
Major Policy Changes—Securitization issues stood at ` 46,701 crore as compared to `

Companies/ Reconstruction Companies 46,737 crore in 2009-10. During 2010-11, so far,
(SCs/RCs) 40 new companies (IPOs) were listed both at the
5.67 On 21 April 2010, the RBI modified the NSE and BSE amounting to ` 33,068 crore as
guidelines issued to SCs/RCs on various aspects against 39 companies amounting to ` 24,696 crore
to bring in more transparency and market discipline. in 2009. The mean IPO size for the current financial
year is ` 827 crore as compared to ` 633 crore in
CAPITAL MARKETS the previous financial year, showing an increase of
30.6 per cent. Further, ` 2197 crore was mobilized
Primary Market through debt issue as compared to ` 2500 crore in
5.68 The year 2010-11 has seen the Indian capital 2009-10. The amount of capital mobilized through
market put the worst behind and move towards strong private placement in 2010-11 (as on 30 November
growth. The cumulative amount mobilized as on 30 2010) is ` 1,47,400 crore as compared to `
November 2010-11 through initial public offers 2,12,635 crore in 2009-10. Table 5.15 sums up these
(IPOs), follow on public offers (FPOs) and rights figures.
Table 5.15 : Resource Mobilization through the Primary Market

` crore)
(`
Mode 2007-08 2008-09 2009-10 2010-11*
1. Debt 0 1500 2500 2197
2. Equity 54,511 2082 46,737 46,701
of which IPOs 42,595 2082 24,696 33,068
Number of IPOs 85 21 39 40
Mean IPO Size 501 99 633 827
3. Private Placement 1,18,485 1,73,281 2,12,635 1,47,400
4. Euro Issues (ADR/GDR) NA NA NA NA
Total (1+2+3+4) 2,16,176 1,79,066 2,87,240 2,30,233
Source: SEBI and RBI (for Euro Issues).
Notes: NA indicates Not Available. * As on 30 November 2010
Table 5.16 : Trends in Resource Mobilization (net) by Mutual Funds

(` crore)
Sector 2006-07 2007-08 2008-09 2009-10 2010-11*
1. UTI 7326 10,677 -3659 15,653 -5237
2. Public 7621 9820 9380 12,499 -2956
3. Private 79,038 1,33,304 -34,018 54,928 20,378
Total (1+2+3) 93,985 1,53,802 -28,296 83,080 12,185
Source: SEBI.
Note: *As on 30 November, 2010
Resource Mobilization by Mutual Funds Secondary Market

5.69 During 2010-11 (as in November 2010), mutual 5.70 As on 31 December 2010, Indian benchmark
funds mobilized ` 12,185 crore from the market as indices, the BSE Sensex and Nifty, increased by
17.0 per cent and 17.9 per cent respectively over
compared to ` 83,080 crore in 2009-10. The market
the closing value of 2009-10. Nifty Junior and BSE
value of assets under management stood at
500 also increased by 17.8 per cent and 15.1 per
` 6,65,282 crore as on 30 November 2010 compared
cent respectively over their values in the previous
to ` 6,13,979 crore as on 31March 2010, showing
financial year. (Figure 5.3)
an increase of 8.4 per cent. Table 5.16 puts gives
details in this regard: 5.71 The free float market capitalization of Nifty,
the Sensex, Nifty Junior, and BSE 500 stood at
Table 5.17 : Index Returns, Volatility, Market Capitalization, and P/E ratio
Index 2006-07 2007-08 2008-09 2009-10 2010-2010-$
Nifty
Return (per cent) 12.3 23.9 -36.2 73.8 17.9
Market Capitalization ( Rscrore) 9,27,089 12,40,071 7,71,483 15,25,162 18,27,097
Daily Volatility 1.8 2.0 2.6 1.9 1.0
P/E Ratio 18.4 20.6 14.3 22.2 24.5
Nifty Junior
Return (per cent) 7.3 16.0 -45.6 148.4 17.8
Market Capitalization ( ` crore) 13,76,826 2,02,809 1,13,523 2,92,316 3,37,573
P/E Ratio 18.5 16.7 8.7 15.8 17.6
BSE Sensex
Return (per cent) 15.9 19.7 -37.9 80.5 17.0
Market Capitalization ( Rscrore) 8,31,033 10,71,940 6,95,152 13,28,862 16,32,236
P/E Ratio 20.3 20.1 13.7 21.3 23.6
BSE 500
Return (percent) 9.7 24.3 -42.8 96.4 15.1
Market Capitalization ( ‘ crore) 14,56,632 19,96,839 11,68,850 24,44,151 29,52,135
P/E ratio 17.7 20.0 13.7 20.4 21.4
Sources: BSE and NSE.
Note: $ As on 31 December 2010
Figure 5.3 Movement of indices of NSE and BSE
14000 25000
NIFTY
12000 index
22500
NIFTY
NSE Indices
BSE Indices
10000 20000 jr index
8000 17500 SENSEX

index
6000 15000
4000 12500
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
2010
` 18,27,097 crore, ` 16,32,236 crore, ` 3,37,573 Equity Derivative

crore, and ` 29,52,135 crore respectively, showing
5.75 In the equity derivative segment, the NSE
an increase of 19.8 per cent, 22.8 per cent, 15.5 witnessed a total turnover of ` 2,05,99,192 crore
per cent and 20.8 per cent respectively over their as on 31 December 2010 as compared to `
values in financial year 2009-10. 1,76,63,665 crore during 2009-10. Similarly, the
5.72 The price to earnings (P/E) ratios of Nifty, the total turnover in the equity derivative segment of
Sensex, Nifty Junior, and BSE 500 as on 31 BSE stood at ` 35 crore in 2010-11 (so far) as
December 2010 were 24.5, 23.6, 17.6 and 21.4 compared to ` 234 crore during 2009-10. Table
5.18. shows these trends while Table 5.19 shows
respectively, indicating an increase of 10.1 per cent,
the volatility of weekly returns on Indian equity
10.5 per cent, 11.6 per cent and 4.5 per cent
markets.
respectively over their 2009-10 values.
Table 5.19 : Volatility of weekly returns on
5.73 The details in respect of index return, volatility
Indian equity markets (standard deviation)
Market Capitalisation and P/E ratio are given in
table 5.17. Index 2008-09 2009-10 2010-11*
Nifty 5.5 3.8 2.2
5.74 In the capital market segment, the total
turnover of the BSE stood at ` 8,93,839 crore and Nifty Junior 6.6 4.5 2.5
of the NSE at ` 27,87,862 crore as on 31 December Sensex 5.8 3.6 2.2
2010 as compared to ` 13,78,809 crore and BSE 500 5.7 3.9 2.2
` 41,38,024 crore respectively in 2009-10. Table 5.18 Source: BSE and NSE.
displays these trends in the secondary market. Note: *As on 31December 2010.
` crore)
Table 5.18 : Market Turnover (`
Market 2006-07 2007-08 2008-09 2009-10 2010-11*
BSE
Cash 9,56,185 15,78,670 11,00,074 13,78,809 8,93,839
Equity Derivatives 59,007 2,42,308 12,268 234 35
NSE
Cash 19,45,285 35,51,038 27,52,023 41,38,024 27,87,862
Equity Derivatives 73,56,242 1,30,90,478 1,10,10,482 1,76,63,665 2,05,99,192
Sources: BSE and NSE.
Note: *As on 31 December 2010.
Table 5.20 : Currency Futures

Year NSE MCX- SX USE
2009-10 2010-11$ 2009-10 2010-11* 2009-10 2010-11*
No. of Contracts 37,86,06,983 50,02,21,743 40,81,66,278 61,93,53,844 NA 11,87,44,133
Trading Value (` crore) 17,82,608 23,04,219 19,44,654 28,89,445 NA 5,37,836
Average Daily Trading
Value (` crore) 7428 14,045 8103 17,636 NA 7504
Source: NSE, MCX-SX, and USE.

Note: * As on 30 November 2010.
Currency Derivative Further, in the debt segment, FIIs invested ` 24,839

crore in 2010-11 (as on 31 December 2010) as
5.76 The turnover at the MCX Stock Exchange
compared to ` 32,438 crore in 2009-10. So far during
(MCX-SX) in the currency derivatives segment stood
2010-11, total investment in equity and debt by FIIs
at ` 28,89,445 crore in 2010-11 (as on 30
stood at ` 1,37,461 crore as compared to ` 1,42,658
November,2010) as against ` 19,44,654 crore in
crore in 2009-10.(Table 5.22)
2009-10. The NSE, witnessed a turnover of
` 23,04,219 crore in 2010 (as on 30 November 2010) International Comparison
as compared to ` 17,82,608 crore in 2009-10.
Further, the USE, which began operations in the 5.80 The trend in major emerging markets alongwith
currency derivatives segment on 20 September P/E ratios are given in table 5.23 and 5.24
2010, witnessed a turnover of ` 5,37,836 crore as respectively. Table 5.23 displays gains/losses posted
on 30 November 2010. (Table 5.20) by global indices over their 2003 levels from 2004 to
2010.
Interest Rate Derivative
Market Movements
5.77 Trading in interest rate futures started at the
NSE on 31 August 2009. During 2010-11 (as on 5.81 The year 2010 has been one of strong growth
30 November 2010), the NSE witnessed a total for the Indian capital markets . Bulls tossed off the
turnover of ` 53 crore in this segment as compared markets in the year 2010 to a net gain of 18per
to ` 2975 crore in 2009-10. (Table 5.21) cent, following global recovery and with FIIs pumping
money in to the market on account of solid domestic
FIIs growth coupled with a resurging corporate sector.
5.78 The number of registered FIIs increased to Indices achieved record highs during the special
1718 as on 31 December 2010 from 1713 on 31 one-hour muhurut trading on 5 November 2010 with
March 2010. The number of registered sub- the Sensex touching 21004.96 and Nifty 6312.45.
accounts also increased to 5503 from 5378 during As on 31 December 2010, the markets stand just 3
the same period. per cent away from this alltime peak and closed at
20509.09 (+ 17.43 per cent from 31 December 2009
5.79 In the Indian equity market, FIIs invested for the Sensex-) and 6134.5 (+ 17.95 per cent for
` 1,12,622 crore during 2010-11 (as on 31 December Nifty).
2010) as compared to ` 1,10,221 crore in 2009-10.
5.82 Indian markets have been making gains for
Table 5.21 : Interest Rate future at NSE eight quarters in a row, their longest winning run in
at least 20 years. While 2009 was basically a year
Year 2009-10 2010-11$ of recovery from the crisis year of 2008, 2010 was
No. of Contracts 1,60,894 2,864 one of consolidation of gains. From 9647 on 31st
Dec 2008, the Sensex climbed to 17464.81 on 31
Trading Value ( ` crore) 2975 53
December 2009 and further consolidated its rally at
Average Daily Trading 20509.09 on 31 December 2010. The total market
Value (Rscrore) 21 0.3 capitalization as on 31 December 2010 stands at
Source: NSE. ` 72,96,725 crore compared to ` 60,81,308 crore as
Note:* As on 30 November 2010. on 31 December, 2009.
Table 5.22 : Transactions of FIIs
Transactions Calendar year
2008-09 2009-10 2010-11*
Number of FIIs (actual) 1635 1713 1718
Number of Sub-accounts (actual) 5015 5378 5503
1. Equity Market Activity ( Rscrore)
Gross Buy 5,54,585 7,05,523 6,03,406
Gross Sell 6,02,292 5,95,302 4,90,785
Net -47,706 1,10,221 1,12,622
2. Debt Market Activity ( Rscrore)
Gross Buy 59,993 1,40,914 1,54,081
Gross Sell 58,098 1,08,477 1,29,241
Net 1,895 32,438 24,839
3. Total Activity (Rscrore)
Gross Buy 6,14,579 8,46,437 7,57,487
Gross Sell 6,60,389 7,03,779 6,20,026
Net -45,811 1,42,658 1,37,461
Source: SEBI.
Note: *As on 31 December 2010.
Table 5.23 : Cumulative Change in Movement of Global Indices*

Index Cumulative Change over end-2003 Level (%)
2004 2005 2006 2007 2008 2009 2010
BSE Sensex, India 13.1 61 136.1 247.4 65.2 199.1 251.2
Hang Seng Index, Hong Kong 13.2 18.3 58.8 121.2 1.1 74.2 83.2
Jakarta Composite Index, Indonesia 44.5 68.1 161 296.8 35.5 264.1 435.3
Nikkei 225, Japan 7.6 50.9 61.3 43.4 -22.9 -5.3 -4.2
Kospi Index, South Korea 10.5 69.7 76.8 133.9 25.6 104.4 153.0
Kuala Lumpur Comp. Index, Malaysia 14.2 13.4 38 82 -3.3 58.7 -
TSEC weighted Index, Taiwan 4.2 11.2 32.8 44.4 -25.2 32.3 35.3
SSE Composite Index, China -15.4 -22.4 78.7 251.5 43.7 116.9 87.6
Source: Derived from various country sources.
Note: * End-year closing.
Table 5.24 : P/E Ratios in Select Emerging Markets

Country Index 2008-09 2009-10 2010-11*
Korea Kospi 25.7 11.1 14.8
Thailand SET 15.7 12.3 15.0
Indonesia Jakarta Composite 20.1 16.6 20.9
Malaysia Kuala Lumpur Comp. 15.0 18.9 17.4
Taiwan TSEC weighted 65.7 19.1 15.7
India BSE Sensex 13.7 21.3 23.6
India S&P CNX Nifty 14.3 22.3 24.5
Source: BSE, NSE, and Bloomberg.
Note:* As on 31 December 2010.
5.83 In terms of month-on- month movement, rate in the third quarter, marking a pickup in growth
indices witnessed a consolidation phase till that may extend into 2011 as consumers and
September 2010. While individual stocks saw many companies gain confidence to spend. Chinese
ups and downs, the indices were mostly range manufacturing growth remains at relatively high
bound. The maximum monthly gains were recorded levels amidst inflation. Global attention is on Chinese
in September when the Sensex and Nifty made 11.67 growth as it is considered the driver of global growth
per cent and 11.62 per cent respectively against in 2011. China´s manufacturing sector grew at the
the closing price in August. Compared globally, while weakest pace in three months in December after
the Jakarta Composite in Indonesia gained the most the Government tightened monetary policy to restrain
among indices with about 45 per cent rise, US’ Dow inflation and closed factories to meet energy-
Jones and UK’s FTSE 100 have each risen by efficiency targets. It is widely believed that following
around 11 per cent and 9 per cent respectively. China, the rest of the central banks in emerging
NASDAQ composite Index was up 16.91 per markets are also tightening their economies to
centwhile S&P rose by 13 per cent. However, safeguard them from inflation, making less cash
Japan’s Nikkei 225 and China’s Shanghai Composite available for equities.
dipped 3 per cent and 14 per cent respectively
5.86 Globally, leaders are striving to keep the pace
during the year, reflecting the rising yen and
of growth intact. Most European and Asian share
monetary tightening in the respective countries.
indices rose as investors’ concerns over the
Reasons For Market Movements Eurozone’s debt crisis were allayed by an 85 billion
euro ($113bn; £72bn) bailout package for Ireland
5.84 Markets are riding on the strong health of
by the European Union and the International
the Indian corporate sector; Also advance tax
Monetary Fund on 28 November). Greece, which
payments by India’s top 100 corporate taxpayers
was the first to be hit, had received a 110 billion
rose by 18.7 per cent in December from a year
euro rescue package in May, which saved it from
ago, indicating better corporate performance in the
bankruptcy. The Monetary Policy Committee of the
third quarter, reinforcing the belief in fundamentals
Bank of England voted to carry forward its £200
in the market sphere. India’s April-November tax
billion quantitative easing programme. The withdrawal
mop-up was estimated to be ` 4.18 trillion compared
of the programme set up by the US Federal Reserve
to ` 3.296 trillion a year ago, indicating the healthy
to ease the strain from Europe’s debt crisis, was
fundamentals of the economy. India’s economy is
extended from January to August. Amid signs of
likely to surpass the Government’s 8.5 percent
recovery, the US Federal Reserve introduced the
growth target for the fiscal year, giving further fillip
policy of buying $ 600 billion in US Treasury bonds
to bourses on the domestic front.
and keeping short-term interest rates near zero.
FII Flows at Historical levels: Historically low yields The US Govt. also extended all Bush-era tax cuts.
in developed markets due to accommodative All these developments have created positive vibes
monetary policies and weak economic prospects in the market. While the measures to rescue the
have pushed FII inflows to emerging markets to Irish banking system are in place, there is now
record highs. growing concern about the other two countries in
the euro group called PIGS (Portugal, Ireland,
The primary market got a new lease of life this
Greece, and Spain) dampening sentiments across
calendar year with Indian companies raising `
the globe.
69,192 crore through IPOs and FPOs. This was
3.5 times higher than the previous year (` 19,567
crore) and 53 per cent higher than the earlier record MAJOR POLICY DEVELOPMENTS
of ` 45,142 crore in 2007. Over 72 per cent of the Equity Finance For Small And Medium
year’s total mobilization was accounted for by public- Enterprises (SMEs)
sector units (PSUs). The year also witnessed the
5.87 In recognition of the need for making finance
largest ever IPO in India—of ` 15,199 crore—from
available to needy SMEs, the SEBI Board in its
Coal India, which single-handedly accounted for
meeting held on 25 October 2007 had agreed upon
22 per cent of the year’s total mobilization.
the creation of a separate exchange for SMEs.
5.85 Global recovery also resulted in an upsurge Accordingly, in May 2008 a discussion paper was
in the markets. Boosting sentiments across the globe, brought out on the issue. Based on the feedback
the US economy expanded at a 2.6 per cent annual received, the SEBI Board in its meeting held on 6
October 2008 decided to encourage promotion of External Commercial Borrowing (ECB)
either dedicated exchanges and/or dedicated Policy
platforms of the existing exchanges for listing and
5.91 A prospective borrower can access ECBs
trading of securities issued by SMEs. On 9
under two routes, automatic and approval routes. A
November 2009, the SEBI Board took a decision
on the operational aspects of the exchanges/ corporate, other than a financial intermediary,
platforms of stock exchanges for SMEs. Accordingly, registered under the Companies Act,1956, can
SEBI has permitted setting up of a stock exchange/ access ECBs under the automatic route up to US $
trading platform for SMEs by a recognized stock 500 million in a financial year both for rupee
exchange with nationwide trading terminals and has expenditure and / or foreign currency expenditure
also issued guidelines for market making for the for permissible end uses. Borrowers in the services
specified securities listed on the SME exchange. sector, namely hotels, hospitals, and software
Further, necessary amendments to the SEBI companies can access ECBs under the automatic
regulations have been carried out. Based on the route up to US$ 100 million in a financial year for
finalized regulations, applications have been import of capital goods and for rupee and / or foreign
received by SEBI for setting up SME platforms. currency capital expenditure and NGOs engaged in
micro finance activities up to US$ 5 million in a
Financial Sector Legislative Reforms financial year. ECBs which are not covered by the
Commission (FSLRC) automatic route are considered under the approval
5.88 The Government in its Budget 2010-11 route on a case-by-case basis by the RBI. The ECB
announced the setting up of the FSLRC with a view policy is operationalized through notifications issued
to rewriting and cleaning up financial-sector laws to by the RBI under the Foreign Exchange Management
bring them in tune with current requirements. Act 1999. These can be accessed on RBI’s website.
5.89 The remit of the Commission will be to review, The norms applicable to ECBs are also applicable
simplify, and rewrite legislation focusing on broad to FCCBs in all respects, except in the case of HFCs
principles. It will evolve a common set of principles for which criteria will be notified by the RBI.
for governance of financial-sector regulatory 5.92 Some aspects of the ECB policy modified
institutions. The Commission will also examine the recently in 2010-11 are summarized as follows:
case for greater convergence of regulation and will
streamline the regulatory architecture of financial (a) As per extant norms, infrastructure finance
markets. companies (IFCs), i.e. NBFCs categorized
as IFCs by the RBI were permitted to avail
Financial Stability And Development Council of ECBs for on-lending to the infrastructure
(FSDC) sector, as defined in the extant ECB policy,
5.90 With a view to strengthening and under the approval route. After a review
institutionalizing the mechanism for maintaining undertaken in April-May 2010, as a measure
financial stability and development, the Government of liberalization of the existing procedures,
set up an apex-level body—the FSDC. The it has been decided to permit the IFCs to
Chairman of the Council is the Finance Minister of avail of ECBs, including outstanding ECBs,
India and its members include heads of the up to 50 per cent of their owned funds under
financial-sector regulatory institutions. Without the automatic route, subject to their
prejudicing the autonomy of regulators, this Council compliance with the prudential guidelines
will monitor macro prudential supervision of the already in place. ECBs by IFCs above 50
economy, including the functioning of large financial per cent of their owned funds would require
conglomerates, and address inter-regulatory the approval of the RBI and, therefore, be
coordination issues. It will also focus on financial considered under the approval route.
literacy and financial inclusion. The Council will have
one Sub-Committee headed by the Governor, RBI. (b) As per the extant policy, using ECBs to
The Secretariat of the said Council will be in the refinance domestic rupee loans was not
Department of Economic Affairs, Ministry of permitted. However, keeping in view the
Finance. The notification constituting the FSDC was special funding needs of the infrastructure
issued on 30 December 2010 and its first meeting sector, it has been decided to put in place a
was held on 31December 2010. scheme of take-out finance arrangement
Table 5.25 : ECBs Registered with the RBI increasing attractiveness as an investment
destination, and need for additional financial
(US$ million)
resources for India’s infrastructure sector while
Details 2009-10 2009-10 2010 -11 balancing its monetary policy, it was decided to
(April-March) (Apr-Nov.) (Apr-Nov.) increase the limit of FII investment both in
ECB 17,602 8632 11,617 Government securities and corporate bonds by US
$ 5 billion each, raising the cap to US$ 10 billion
FCCB 4076 3633 960
and US$ 20 billion respectively. The incremental limit
Total 21,678 12,265 12,577 of US$ 5 billion has, however, to be invested in
Automatic Route 13,924 7445 7683 securities with residual maturity of over five years
and corporate bonds with residual maturity of over
Approval Route 7754 4820 4894
five years issued by companies in the infrastructure
through ECBs, under the approval route, for sector.
refinancing of rupee loans availed of from
domestic banks by eligible borrowers in the
Report of the Working Group on Foreign In-
sea port and airport, roads including bridges, vestment In India
and power sectors for the development of 5.94 With a view to rationalizing the present
new projects, subject to conditions arrangements relating to foreign portfolio investments
stipulated by the RBI. by FIIs/ non- resident Indians (NRIs) and other
foreign investments like foreign venture capital
Indian companies were allowed to buy back
investor (FVCI) and private equity entities, the
their FCCBs under the approval route, up
Government set up a working group to look at various
to 30June 2010. Based on a review of
types of foreign flows, which are taking advantage
policy and in view of the representations
of arbitrage across the respective stand-alone
received from the issuers of FCCBs, it has
regulations, and generate recommendations to the
been decided to consider applications,
Government. The group submitted its report to the
under the approval route, for buyback of
Finance Secretary on 30 July 2010.
FCCBs until 30 June 2011, subject to the
issuers complying with all the terms and 5.95 The group examined the structure of
conditions of buyback / prepayment of regulation and the ways in which practices,
FCCBs. institutions, and procedures inflect and shape these
policy decisions. It looked at foreign exchange law
(c) At present, entities in the services sectors,
with regard to listed and unlisted equity, corporate
namely hotels, hospitals, and software are
and government securities, and derivatives as well
allowed to avail of ECBs up to US$ 100
as tax policy related to these matters. It did not look
million per financial year under the
at FDI policy except in areas where FDI policy and
automatic route, for foreign currency and/or
portfolio investment were intertwined. The group’s
rupee capital expenditure for permissible
report also offers, alongside economic policy
end-uses. After a review it has been
contextualizing capital flows in relation to the Indian
decided to consider applications from
and global economies, close scrutiny of the
corporates in the hotel, hospital, and
structures and incentives created by the law in the
software sectors to avail of ECBs beyond
main areas of the report’s mandate: foreign
US$ 100 million under the approval route.
exchange controls with regard to listed and unlisted
ECBs Registered with the RBI is given in
equity, corporate and government securities
Table 5.25.
regulation, and derivatives trading. The focus of the
FII Investments In Government Securities group has been to identify procedures and practices
and Corporate Bonds which can help avoid uncertainty, delay, or unequal
treatment and to recommend measures which could
5.93 At present, FIIs registered with SEBI are simplify the portfolio investment environment, at the
permitted to invest in Government securities and same time laying a strong emphasis on KYC norms.
corporate bonds up to US$ 5 billion and US$ 15 A copy of the report is available on the Finance
billion respectively. After a review in the context of Ministry website at the following link: http://
India’s evolving macroeconomic situation, its finmin.nic.in/reports/WGFI.pdf
Financial Action Task Force (FATF) 5.101 In the calendar year 2010, S&P upgraded
5.96 The FATF is an inter-Governmental body, India’s foreign currency outlook from negative to
responsible for setting global standards on anti- stable, FITCH upgraded its local currency outlook
money laundering (AML) and combating the from negative to stable, and Moody’s upgraded its
financing of terrorism (CFT). India became Observer local currency outlook from Ba2 to Ba1. Credit
at the FATF in the year 2006. Since then, India has ratings issued by other agencies maintained status
been working towards full-fledged membership of quo.
the FATF.
As part of its membership, a joint FATF / Asia Pacific FINANCIAL STABILITY BOARD (FSB)
Group Mutual Evaluation Team visited India in 5.102 The Financial Stability Forum (FSF) was
November-December 2009 for on-site assessment established by the G7 finance ministers and central
of India’s compliance with the 40+9 bank governors in 1999 to promote international
Recommendations of the FATF. financial stability through enhanced information
5.97 The Mutual Evaluation Report on India and exchange and international cooperation in financial
India’s membership issues were discussed in the market supervision and surveillance. It decided at
third meeting of the FATF Plenary-XXI held in its plenary meeting in London on 11-12 March 2009
Amsterdam the Netherlands from 23to 25 June to broaden its membership and invite as new
2010. The FATF Plenary adopted the Mutual members the G20 countries that were not initially in
Evaluation Report on India on 24 June 2010 and on the FSF. These included Argentina, Brazil, China,
25 June 2010 admitted India as 34th Country India, Indonesia, Korea, Mexico, Russia, Saudi
Member of the FATF. Arabia, South Africa, and Turkey. In order to mark
5.98 FATF membership is very important for India a change and convey that the FSF would play a
in its quest to become a major player in international more prominent role in this direction in the future,
finance. It will help India build the capacity to fight the FSF was relaunched as the Financial Stability
terrorism and trace terrorist money and to Board (FSB) on 2 April 2009, with an expanded
successfully investigate and prosecute offences membership and broadened mandate to promote
related to money laundering and terrorist financing. financial stability.
The FATF process will also help us in coordination 5.103 The current FSB comprises national
of AML/CFT efforts at international level. financial authorities (central banks, supervisory
authorities, and finance ministries) from the G20
India’s Membership of the Eurasian Group countries, as well as international financial
On Anti-money Laundering And Combating institutions, international regulatory and supervisory
The Financing Of Terrorism (EAG) groupings, committees of central bank experts, and
5.99 On 15 December 2010 India gained the European Central Bank.
membership of the EAG which is an FATF-style
regional body, responsible for enforcing global AML FINANCIAL STABILITY ASSESSMENT
and CFT standards. The support for India’s PROGRAMME
membership was unanimous. India is the ninth
member of the group. The other members are 5.104 India’s Financial Sector Assessment
Russia, China, Turkmenistan, Serbia, Tajikistan, Programme (FSAP) was made by the IMF/World
Uzbekistan, Belarus, and Kazakhstan. The group Bank in 2000-2001 but it was not made public as it
also has 16 nations and 15 organizations as was part of a pilot FSAP assessment of 12 countries.
observers. The Committee on Financial Sector Assessment
(CFSA) – chaired by the Deputy Governor, RBI and
INDIA’S SOVEREIGN RATING Finance Secretary had done a self-assessment in
5.100 Presently, India is rated by six international 2009. The results are in the public domain (RBI
credit rating agencies, namely Standard and Poor’s website).
(S&P), Moody’s Investor Services, FITCH, Dominion FSB Members have committed to undergoing
Bond Rating Service (DBRS), the Japanese Credit periodic peer reviews. As a member, India has
Rating Agency(JCRA), and the Rating and Investment requested IMF/World Bank to conduct such a review
Information Inc., Tokyo(R&I). Information flow to by way of a full-fledged FSAP. India’s FSAP is
these credit rating agencies has been streamlined. scheduled for the calendar year 2011.
INSURANCE AND PENSION FUNDS Regulatory and Development Authority Act 1999.
While permitting foreign participation in ventures set
Insurance Sector up by the private sector, the Government restricted
participation of the foreign joint venture partner through
5.105 The insurance sector was opened for private the FDI route to 26 per cent of the paid-up equity of
participation with the enactment of the Insurance the insurance company.
Box 5.3 : Financial Inclusion and Literacy

Financial inclusion plays a crucial role in inclusive development and sustainable prosperity as is being increasingly
recognised and acknowledged globally. Large segments of population need to be part of formal payment system and
financial markets. Financial inclusion would also broaden and deepen financial savings and lead to higher economic
development.
Previous initiatives: While financial sector policies in India have long been driven by the objective of increasing penetration
and outreach, the goal of inclusion has eluded us. About 41 per cent of adult population remains unbanked and the
number of loan accounts covers only 14 per cent of adult population. The previous initiatives included (i) the expansion
of network of co-operative banks to provide credit to agriculture and saving facilities in rural areas, (ii) nationalization
of banks in 1969 and expansion of branches and (iii) creation of an elaborate framework of priority sector lending with
mandated targets as part of a strategy to meet the savings and credit needs of large sections of the Indian population
who had no access to institutional finance. Given the sheer enormity of the challenge, however, the outcomes of these
efforts have so far been mixed.
Recent initiatives/out of box approaches: Recent initiatives include (i) “no frill” account for retail purpose; (ii) simplified
KYC (Know Your Customer) (iii) Credit counselling centre (GCC) facilities; (iv) use of NGOs and formation of SHGs; (v)
Kisan credit cards services and (vi) extension of Smart cards. The Finance Minister in his Budget Speech of 2007-08 also
laid down provisions for funding of financial inclusion goals. The Rangarajan Committee also spelt out priorities for
meeting financial inclusion objectives. Two of the more important approaches in the recent times included the use of
technology such as smart cards and mobile telephone banking. The potential for their spread can be vast especially in
combination with banking correspondence approach launched recently.
New entry and Competition: In addition, new competition and entry also play crucial roles as evident from the global
experience. Two particular initiatives have included the role of Micro Financial Institutions (MFIs) and Non- Bank
Finance Companies (NBFCs). MFI activities have surged in recent years, but has come under scrutiny and regulation
(see Chapter 2). Services expanded at a fast rate, providing access on better terms than the alternatives of traditional
money lenders. However, better regulation is also needed. On NBFCs, gold pawn establishments have also provided
alternate access and are fast expanding in urban and semi-urban settings. As far as caps on interest rates are concerned,
as in case of other products, “subsidies” in the form of low interest rates are often an inhibitor of access to services
because of rationing and misuse.
What we need today, therefore, are new approaches to financial inclusion that build on the lessons of the past but also
involve trying out newer approaches and instruments. Importantly, this also requires a change in the mindset on the
part of policymakers, practitioners and other stakeholders alike to figure out and put in place effective ways of reaching
out to the hitherto un-reached and under-reached segments of our population.
Financial Literacy: Any policy initiative seeking to afford greater access to financial services to a large segment of the
population must necessarily address bridging the existing knowledge gap in financial education and literacy. Over the
last decade or so, researchers all over the world, especially in the developed countries, have, therefore, started to study
and explore whether individuals are well-equipped to make financial decisions. Financial education and literacy assumes
urgency in any given scenario. No wonder policymakers all over are increasingly taking note of this and directing their
efforts to address it. In the UK, the Financial Services Authority has launched a big campaign to improve the financial
skills of the population and enable a better appreciation of risks and rewards inherent in financial instruments and
transactions. The US Treasury, which established its Office of Financial Education in 2002, is working to promote access
to the financial education tools. The Financial Literacy and Education Commission, established by Congress in 2003 was
created to improve financial literacy and education. In Australia, the Government established a National Consumer and
Financial Literacy Taskforce in 2002. In Malaysia, the Financial Sector Master Plan, launched in 2001, includes a 10-year
consumer education programme. The Monetary Authority of Singapore has launched a national financial education
programme (Money SENSE). A nationwide, coordinated effort was also required in India and the Financial Stability and
Development Council (FSDC) is a step forward in this direction. It is expected that this new initiative will help adequately
address the challenge of financial inclusion and literacy.
Idioms and metaphors of development economics keep on changing from time to time. Today, new financial sector
initiatives in a country like ours - be it in the form of prompt and innovative policy responses from the Government,
central bank, other authorities or be it in the form of implementation efficiency and inventiveness from the varied
players - need to explicitly prioritize both financial inclusion and financial education and literacy.
New entrants in the insurance sector companies) underwrote premiums of ` 34,620 crore
in 2009-10, as against ` 30,352 crore in 2008-09.
5.106 Since the opening up of the sector, the
number of participants has gone up from six insurers Insurance Penetration
(including LIC of India, four public-sector general
insurers, and the General Insurance Corporation as 5.110 Insurance penetration is defined as the ratio
national reinsurer) in the year 2000 to 48 insurers of premium underwritten in a given year to the GDP.
operating in the life, non-life, and reinsurance Insurance penetration in the year 2000 when the
segments (including specialized insurers, namely sector was opened up to the private sector was
the Export Credit Guarantee Corporation [ECGC] and 2.32 (life 1.77 and non-life 0.55) and it has increased
Agricultural Insurance Company [AIC]). Three of the to 5.39 in 2009 (life 4.73 and non-life 0.66). The
general insurance companies, namely Star Health increase in levels of insurance penetration has to
and Alliance Insurance Company, Apollo DKV, and be assessed against the average growth of over 8
Max Bupa Health Insurance Company Ltd., function per cent in the GDP in the last five years.
as standalone health insurance companies.
Initiatives taken by the Authority in the In-
5.107 Of the 22 insurance companies that have surance Sector
set up operations in the life segment post opening
5.111 The initiatives taken by the authority in the
up of the sector, 20 are in joint ventures with foreign
insurance sector include the following:
partners. Of the 18 (including stand alone health
insurance companies) insurers who have commenced 1) Amendment to Insurance Legislation: The
operations in the non-life segment, 16 are in Insurance Laws (Amendment) Bill 2008 introduced
collaboration with foreign partners. The three in Parliament recently proposes to amend the
standalone health insurance companies have been Insurance Act 1938, the Insurance Regulatory and
set up in collaboration with foreign joint venture Development Authority (IRDA) Act 1999, and the
partners. Thus, as on date, 36 insurance companies General Insurance Business (Nationalization) Act
in the private sector are operating in the country in 1972. The amendments to the Insurance Act and
collaboration with established foreign insurance the IRDA Act focus on the current regulatory
companies from across the globe. requirements; the proposed changes provide for
greater flexibility in operations and are aimed at
Life insurance deletion of clauses that are no longer relevant in the
present context. The amendments also provide for
5.108 The post-liberalization period has been
enhancement of enforcement powers and levy of
witness to tremendous growth in the insurance
stringent penalties.
industry, more so in the life segment. In 2009-10,
even after the outcome on account of the financial 2) Micro Insurance: The IRDA has formulated
meltdown, the life insurance segment saw an upward the Micro Insurance Regulations to distribute
trend. The first-year premium, which is a measure insurance products that are affordable to the rural
of new business secured, underwritten by the life and urban poor and to enable micro insurance to
insurers during 2009-10 was ` 1,09,894.02 crore become an integral part of the country’s wider
as compared to ` 87,331.09 crore in 2008-09, insurance system. The main thrust of these
registering a growth of 25.84 per cent. In terms of regulations is to provide low income people with
linked and non-linked business during the year 2009- affordable insurance products as a hedge against
10, 54.53 per cent of the first-year premium was unforeseen risks. Total premium income in the micro
underwritten in the linked segment while the insurance portfolio of life insurers for the year 2009-
remaining 45.47 per cent was in the non-linked 10 is ` 402 crore. Fourteen life insurers have so
segment as against 51.13 and 48.87 respectively in far launched 28 micro insurance products and by
the previous year. the end of March 2010 there were 8676 individual
micro insurance agents in India.
Non-life insurance 3) Guidelines on the AML Programme: The
5.109 Non-life insurers in India (excluding IRDA issued guidelines on the AML Programme to
specialized institutions like the Export Credit the insurance industry on 31 March 2006, whereby
Guarantee Corporation and Agriculture Insurance insurers were advised to put a proper AML policy
Corporation and the standalone health insurance framework in place in case of life insurance
companies and non-life insurance companies 8) Corporate Governance guidelines: Corporate

effective from 1 August 2006 and 1 January 2007 governance guidelines have been rolled out for
respectively. An updated master circular on Anti- insurance companies, effective from 1 April 2010.
Money laundering/Counter-financing of terrorism has The objective of the guidelines is to ensure that the
been issued by the Authority on 24 September 2010. structure, responsibilities, and functions of the
The AML/CFT guidelines were reviewed by the Boards of Directors and senior management of
Authority to align certain stipulations with those of companies fully recognize the expectations of all
the 40 +9 recommendations of the FATF and stakeholders as well as those of the regulator. The
additional stipulations/clarifications were issued to guidelines broadly cover major structural elements
insurers vide circular dated 12 November 2010 to be of corporate governance.
complied with by 31 December 2010. 9) Initiatives in the area of Policyholders
4) Data Warehouse: The IRDA has initiated steps Grievances Redressal
to design, build, and manage a data warehouse for a) Grievance redressal guidelines effective from
the insurance industry recognizing that data will help 1 August 2010 specific to both life and
the insurers design new products and allow scientific general insurance companies have been
underwriting, further calculations of actuarial risks, issued by the IRDA fixing the turnaround time
price setting, and various aspects relating to claims for various grievances.
settlement, management of hazards, etc. As a first
step, the IRDA has designed a data set relating to b) The IRDA has during July 2010 inaugurated
health and motor vehicle insurance. The IRDA also the nationwide toll-free grievance call centre
proposes to put in place a formal data warehouse to no.’155255’ for policyholders to lodge
enable access by various stakeholders across the complaints against insurance companies. The
industry. Grievance Redressal Cell of the IRDA looks
into complaints from policyholders. This Cell
5) Consumer Grievance Redressal Cell: The plays a facilitative role by taking up
Grievance Redressal Cell of the IRDA looks into complaints with the respective insurers for
complaints from policyholders. Complaints against speedy disposal.
life and non-life insurers are handled separately. This
c) Guidelines have been issued by the IRDA
Cell plays a facilitative role by taking up complaints
effective from 1 June 2009 on renewability
with the respective insurers.
of health insurance policies clearly defining
6) Public Awareness Campaigns/Programmes: the procedure while declining a renewal or
The IRDA’s strategy for consumer awareness/ imposing a loading and also regarding upfront
education includes campaigns through external disclosures in Prospectuses. Insurers were
media, i.e. mass media, mainly print, television and also guided tocondone delay in renewal up
the Internet, and internal initiatives such as an to 15 days.
exclusive consumer education web page and sample d) The IRDA has also instructed insurers on
booklets on various insurance-related topics, the terms and conditions of health insurance
containing generic information, which insurers would to senior citizens and made it mandatory for
also be advised to publish and distribute. products filed after the circular date to allow
7) Cap on Unit-linked Insurance plans (ULIP) entry at least till 65 years of age. The IRDA
Charges: The insurance industry has introduced vide its circular dated 2 September 2009 has
ULIPs which have found favour with customers in also advised insurers to provide a ‘free look
India. These products prescribe certain charges period’ for health insurance policies with term
which are deducted either from contributions or from three or more years.
the fund. In order to simplify and to ensure that the e) The IRDA is in the process of developing the
charges are reasonable, relevant to the services being new Integrated Grievance Management
provided, and clear to customers, the IRDA has system (IGMS) which will not only facilitate
mandated an overall cap on all charges put together. policyholders to register/track their
Care has been taken to ensure that the insurers complaints online with insurance companies
have freedom to distribute charges across the term but also facilitate the IRDA to monitor the
of the policy. This also imparts flexibility and grievance redressal procedure of insurance
facilitates product innovation. companies
f) The IRDA being in receipt of several (v) Authority revamped its present agency
complaints from policyholders relating to licensing portal with a new Agency portal in
agency identification and servicing, keeping order to widen the scope of the portal and to
the interests of policyholders in view, has integrate the various stakeholders with the
directed all insurers to display the agency agency licensing system. The portal
code, agency name, and nobile number commenced its operations on 5/1/2010.
(landline if mobile number not available) and
11) Credit Insurnace : New guidelines on trade
other contact details prominently on the first
credit insurance policies have been issued by the
page of the policy document to be
IRDA effective from 13 December 2010, with a view
implemented on or before 1 November 2010.
to standardizing the features of these products. All
g) In respect of medical insurance policies, if insurers have to revise their products in line with
there is a change in Preferred Provider of file & use guidelines and trade credit insurance
Network (PPN) of Hospitals, the insurers guidelines. These guidelines specify that a
have been directed on 24 August 2010 to policyholder should necessarily be a supplier of
inform the policyholders at all times of the goods and services and his loss should be by non-
nearest possible alternative hospitals where receipt of trade receivables and can only be issued
the cashless facility is available and the on whole turnover basis covering all buyers.
conditions thereof.
12) Variable Insurance products: Guidelines have
h) Guidance notes have been issued by the been issued by the IRDA on variable insurance
IRDA on 28 June 2010 on recent regulatory products (VIP) on 23 November 2010. As per these
changes on ULIPs. guidelines, all VIP products shall only be offered
under non-unit-linked platform either as participating
10) For the Orderly Growth of Insurance and
or non-participating and shall not be permitted under
Reinsurance industry:
unit-linked platform. Benefit is payable on these
(i) As the inter-company balances in policies either on death or maturity and only regular
reinsurance and coinsurance are growing, premiums with minimum policy and payment terms
the IRDA, noting that these balances can of five years are allowed. Single premium, limited
have serious implications for the liquidity of premium, and group insurance contracts are not
several entities in the insurance sector, has allowed under these products.
decided to induce insurers and brokers to
13) Consumer Education: Consumer education
move over to a computer system of
and policyholder protection being two sides of the
administration and settlement of accounts in
same coin, the Regulator encourages and supports
respect of all inter-company transactions.
consumer bodies to conduct seminars on insurance,
(ii) The IRDA (Sharing of Database for thereby not only educating the consumer but also
Distribution of Insurance Products) providing a platform for the consumer to interact
Regulations 2010 have been issued and all with representative(s). The IRDA itself conducts/
insurers advised to terminate all the referral participates in and supports national-level seminars
arrangements entered into prior to the coming on different topics and is also proposing to launch
into effect of these regulations that are not a consumer portal shortly.
in conformity with the provisions of these
14) Persistency of Life Insurance Policies: In
regulations.
order to increase persistency in the interests of the
(iii) The IRDA (Insurance Advertisements and insurance industry and to create professionalism
Disclosures) (Amendment) Regulations 2010 amongst agents and encourage them to build a long-
have been issued to ensure the orderly term career, the IRDA has issued an exposure draft
growth of the insurance industry. to set certain minimum standards and requirements
for agents and mandate insurers to review the
(iv) The IRDA ( Treatment of Discontinued Linked
performance of agents periodically.
Insurance Policies) Regulations 2010 have
been issued detailing the procedure on policy These proposals would be a step forward in
discontinuance and imposing a cap on protecting the interests of policyholders, who in the
charges on policy discontinuation. ultimate analysis stand to gain if persistency is high,
both in terms of protection of life and profitability of from 1 May 2009, on voluntary basis, the challenge
the life insurance business which would benefit them is to spread the message of the NPS and old age
in the long run. income security to people in the unorganized sector
across the country. This involves spreading the NPS
15) IPO Guidelines: Several insurance companies
distribution network such that NPS is easily
will be completing 10 years of their operations
accessible to all, and there is adequate awareness
shortly, after which they may be allowed by the
about it for people to decide voluntarily to open
Regulator to go in for an IPO. It is essential that the
pension accounts.
investors be made fully aware of the financial
performance, company profile, financial position, NPS Design
risk exposure, elements of corporate governance
in place, and the management of such insurance 5.113 The NPS architecture essentially involves a
companies. The IRDA is participating in the meetings set of financial institutions, called points of presence
of the Standing Committee on Disclosures and (PoP), which are authorized to open NPS accounts
Accounting Issues (SCODA) set up by SEBI to and receive contributions; the Pension Fund
finalize the disclosure requirements for insurance Managers (PFMs), or the PFMs, which are
companies in their prospectus documents. While appointed by the Pension Funds Regulatory and
laying down the stipulations on disclosure Development Authority (PFRDA) and are authorized
requirements, the IRDA has drawn on international to manage the pension corpus of the subscribers;
best practices. It is proposed that the disclosure and the Central Recordkeeping Agency (CRA),
requirements for life and non-life companies would which does the record keeping. A centralized record
be separately mandated given the nature of their keeping for the NPS ensures that the individual
respective businesses. pension account is completely portable across the
country, professions, and employment. The
16) Other activities: The IRDA along with National management of the NPS is highly technology driven;
Disaster Management Authority (NDMA) has the transmission of information and funds is done
conducted a seminar on Disaster Management in in an electronic environment ensuring speed,
New Delhi on 11 August 2010 to lay down a plan for accuracy, and efficiency. The investment of the
devising products for catastrophe perils and also to pension funds is done in accordance with
discuss the collective role of the Government, NDMA, prescribed norms which specify different categories
and IRDA representing insurance companies, on of investment instruments along with prudential limits
disaster management. on the quality and quantity of investments. The
pension fund managers manage three separate
Pension Sector
scheme, consisting of three asset classes, namely
Highlights (i) equity, (ii) Government securities, and (iii) credit
5.112 Pension reforms in India have evolved risk- bearing fixed income instruments, with the
primarily in response to the need of reform in the investment in equity subject to a cap of 50 per cent.
Government pension system. This had been In the equity scheme, the fund managers will invest
designed to make a shift from defined-benefit to only in index funds that replicate either the BSE
defined-contribution by putting a cap on Sensex or NSE Nifty 50 index. The subscriber will
Government’s liability towards civil servants’ pension. have the option to decide the investment mix of his
As a result of implementation of the New Pension pension wealth. In case the subscriber is unable or
System (NPS), all employees of the Central unwilling to exercise any choice regarding asset
Government and Central autonomous bodies, with allocation, his contribution will be invested in
the exception of the armed forces, are now covered accordance with the ‘auto choice’ option with a
by this defined-contribution scheme with effect from predefined portfolio.
1 January 2004. Subsequently, 27 State
Recent Initiatives
Governments have notified and joined the NPS for
their employees. As of now, the subscriber base 5.114 Although the NPS is perhaps one of the
for the mandatory Government sector has crossed cheapest financial products available in the country,
1.1 million with a corpus approaching to ` 70 billion. in order to make it affordable for economically
With opening up of the NPS to all citizens of India disadvantaged people, the PFRDA has recently
introduced a lower cost version of the NPS, known investment decisions based on their risk and return
as NPS-Lite, which enables groups of people to join profiles, and contribute to improving financial literacy
the NPS at substantially reduced cost. The PFRDA levels. The PFRDA is doing every bit to ensure that
has so far authorized nine aggregators to implement the complete distribution network of the NPS is fully
NPS-Lite. One of the distinguishing features of NPS galvanized so that access to the NPS is improved
has been unstinted Government support in It is expected that the success of pension reforms
popularizing the concept of old age income security. will not only help in facilitating the flow of long-term
In this regard, the announcement of the savings for development, but also help establish a
Swavalamban scheme in budget 2010 by the Finance credible and sustainable social security system in
Minister was significant. Swavalamban is an incentive the country.
scheme for the NPS. Under this any citizen in the
unorganized sector, who joins NPS in 2010-11, with
CHALLENGES AND OUTLOOK
a minimum annual contribution of ` 1000 and
maximum of ` 12,000 will receive a Government Licensing for new banks, recapitalization
contribution of ` 1000 in his NPS account. With this of banks
announcement, the Government of India has become
5.117 Providing access to banking facility to all
a direct stakeholder in the old age income security
citizens is one of the main objectives of the inclusive
of every citizen. The scheme is presently available
development agenda in India. While providing
for another three years beyond 2010-11 and will go a
banking access, the issue of regulatory robustness
long way in promoting pension culture in the country.
for the banking sector should not be compromised.
Efforts are under way to expand the reach of the
Therefore, the issue of providing eligibility norms
NPS to new segments like Central and State
for new entities to operate as banks is of paramount
autonomous bodies and the organized sector. The
importance.
PFRDA is in dialogue with several State Government
autonomous bodies and undertakings for extending 5.118 Minimum capital requirement for banks
the NPS to their employees. should be graded. Having two types of licences,
namely one for providing basic banking to fulfil the
Performance of the NPS obligation of financial inclusion and the other for
5.115 In the unorganized sector, nearly 34,000 full banking encompassing all activities of a
subscribers had jointed the NPS as of December commercial bank could be considered.
2010 on voluntary basis. The subscriber base in the
5.119 As regards allowing industrial houses,
newly launched NPS-Lite is around 5000. For all
business houses, and NBFCs to promote banks,
citizens including workers of the unorganized sector,
they may be allowed full banking licence with
the NPS is currently available through nearly 5000
provision for avoiding conflict of interest issues. MFIs
service provider branches of 35 PoPs.
and NBFCs should be considered for being given
5.116 Despite all its good features, popularization licences for basic banking. It is very essential that
of the NPS remains a challenge. To address this the basic banking functions are clearly and
challenge, the PFRDA has appointed an expert objectively defined.
committee, called the Committee to Review
5.120 The issue of the requirement for foreign
implementation of Informal Sector Pension (CRIISP),
promoters in banking needs to be addressed and
to look into a range of issues connected with the
foreign promoters with credible banking experience,
NPS, such as reasons of sluggish public response,
may be considered provided they meet the fitness
viability of the NPS as a financial product, ways and
criteria. Also the principle of reciprocity could be
means of marketing/proper popularizing of the NPS
applied to countries that have allowed Indian banks
and the agency best suited to perform this role, a
to expand in their jurisdictions.
sustainable and viable economic incentive model for
the NPS, and the role of NPS fund managers in the 5.121 There is another important issue relating to
entire NPS architecture, and suggest remedial minimum and maximum caps on promoter
measures. Important challenges before the PFRDA shareholding and other shareholders. One view is
are to expand the distribution network of the NPS that as the bank grows in business, the promoter’s
so that it is available within easy reach of all control should decline and the bank managed more
citizens, educate the citizens to take appropriate professionally and independently.
Human Resource Issues in PSBs market, Government intervention is required in

creating awareness amongst potential investors in
5.122 One of the most daunting tasks for banks in
the pension product. There is also need to consider
the near future is going to be HR management. The
passage of the long pending Pension Fund
market in the financial sector and especially in
Regulatory and Development Authority Bill in order
banking is seeing growth driven by new products
to give a fillip to regulatory robustness in the pension
and services that include opportunities in credit
sector.
cards, consumer finance, and wealth management
on the retail side and in fee-based income and Financial Inclusion and Literacy
investment banking on the wholesale side. These
require new skills in sales and marketing, credit, 5.125 With proliferation in the number and
and operations. Furthermore, given the demographic complexity of financial products, risk is being
shifts resulting from changes in age profile and transferred to the household. Investors and market
household income, consumers will increasingly players are being exposed to formal banking and
demand enhanced institutional capabilities and financial products, as well as new sales practices,
service levels from banks. PSBs need to for the first time. All these require a base level of
fundamentally strengthen institutional skill levels understanding of money, its management and use.
especially in sales and marketing, service The lack of this understanding has the potential of
operations, risk management, and overall frittering away economic gains made at aggregate
organizational performance. level by nations, resulting in wealth transfer from
the financially illiterate to a small segment of the
5.123 Banks may aggressively use technology/ financially literate. Many researches have shown
business process re-engineering to reduce the gap that a financially literate population promotes
created by shortage of staff and improve overall economic growth and well-being by expanding the
manpower efficiency. In addition, a pool of talent quality of available financial services and by
for occupying leadership positions could be built enhancing the ability of individuals to more
up by banks by training and preparing promising effectively use the services in their best interests.
officers to assume future leadership roles. Work on the topic by financial literacy scholar
Annamaria Lusardi, Professor of Economics at
Pension Reforms Dartmouth College and Research Associate at the
5.124 In a paradigm shift wherein a defined- National Bureau of Economic Research (NBER),
benefit pension system was replaced by defined- shows that individuals with low levels of financial
contribution basedone, the NPS has been introduced literacy tend not to plan for retirement and borrow
by the Government of India and made mandatory at high rates of interest. No wonder, there is a rush
for all new recruits to the Government (except armed to make citizens financially literate.
forces) with effect from 1 January 2004. The NPS
5.126 With a household saving rate of 34 per cent,
was opened to all citizens of India from 1 May 2009
the merits of saving over current consumption are
on voluntary basis. Twenty-seven State Governments
well understood in India. Unlike many developed
have notified and joined the NPS for their
countries, where getting people to save is an issue,
employees. As of now, the subscriber base for the
the need in India is for the efficient conversion of
mandatory Government sector has crossed 1.1
this saving into investment. A large part of this money
million with a corpus approaching ` 70 billion.
is in low-yielding assets like bank deposits and
However, covering the majority of the population
traditional insurance but there is a clear trend of
from the unorganized sector for whom the system
individuals preferring security-based investments as
was designed remains a challenge. Many new
they move upwards in income level. Therefore it is
initiatives have been taken by the pension regulator
a big challenge for Indian policymakers to prepare
PFRDA to address the issue of distribution. There
an effective strategy to for financial literacy of these
is no doubt that the NPS is designed very attractively
new savers, investors, and consumers to holistically
with many consumer friendly features and a low
plan for their financial well-being.
cost structure. Therefore, the basic structure of the
pension scheme need not be altered. Government 5.127 Simultaneously, as one segment of the
has also provided a direct co-contribution of ` 1000 population, due to advantages of birth, location, and
per account from last year under the Swavlamban education has benefited from the growth spurt in
scheme.But in a distributor- and supply-driven the Indian economy the other has been unable to
reap the benefits due to exclusion from the financial considered and taken worldwide has been to firstly
system. It is another policy challenge to reach out consider and re look at existing macro prudential
to this financially uncovered segment. Government regulations in the financial sector and then to
has already made its commitment clear by introduce such regulations if they donot exist. As
announcing its intention of providing banking facility the financial crisis had its origin in the housing and
to all areas including rural by 2012. Widespread use real sector in the US, a very close look is required at
of new and cost-effective technology could be made the need for robust macro prudential regulations in
to achieve this goal. this sector. In India also the RBI has recognized this
and initiated steps in this direction in its quarterly
Macro Prudential Regulations and Financial monetary policy review of 2 November 2010. The
Stability : Real Estate Sector steps include increasing the risk weights for housing
5.128 In recent times and especially after the global loans and also increasing the loan to value ratios for
financial crisis, the issue of financial stability has such loans. Such macro prudential regulations are
drawn great attention mainly due to transmission of required in every segment of financial markets in
its impact on the real sector of the economy. The India. The advantage of such regulations is that they
slowdown in the real sector has compounded the are concentrated in the targeted segment and are
need for policymakers to consider steps for not embedded in monetary policy so as to spread
maintaining financial stability. One of the steps any negative impact over the entire economy.
Balance of Payments
6
CHAPTER
The world economy, led by the buoyant economic activity in emerging economies,
is gradually recovering from the crisis. The risks however remain, as advanced
economies face large fiscal deficit, high public debt and unemployment levels and
tepid aggregate demand, leading to subdued growth. The sovereign debt crisis in
the peripheral euro-zone countries is contributing to the uncertainty. At the same
time, large capital flows to emerging economies, rising oil and agricultural prices
are fueling inflationary pressures that may affect the nascent global recovery. In
the backdrop of these developments, the Indian economy continues to exhibit resilience,
moving steadily towards the pre-crisis growth path. The current account deficit
however, has widened due to robust import demand and lower invisibles surplus.
These are being largely financed by the relatively higher capital flows, leading to
moderate accretion in reserves. There are however challenges that include volatile
nature of foreign institutional investment that is characterized by surge and reversal
of capital flows, deceleration in foreign direct investment and the risk of further
slowdown in advanced economies that may affect exports and strain balance of
payments.
GLOBAL ECONOMY Monetary Fund (IMF) has not had the desired
stabilization effect on the markets. Many also
6.2 The world economy is exhibiting signs of
believe that the size of EFSF is not large enough to
recovery, driven largely by the robust growth in
bail out bigger economies like Spain and the high
emerging economies. Advanced countries however, debt countries such as Italy and Belgium in the
continue to face uncertainty with large fiscal deficit, event of the crisis spreading to other euro zone
high public debt and unemployment levels that countries. The risk is that the crisis could further
together with the deleveraging of banks, corporate impair the confidence of investors through contagion
entities and individuals, is affecting aggregate channels and delay the incipient recovery of the
demand and impeding the recovery process. global economy.
6.3 The risk of sovereign debt crisis in peripheral 6.5 Investor nervousness is compounded by the
euro zone economies and the fear that it could high refinancing requirement of sovereign, bank and
spread to the banking and insurance sectors with corporate debts and the fear that there may not be
large sovereign debt exposure, have made the sufficient liquidity in the market to rollover the
markets nervous. The likely impact on the euro and maturing obligations. There is also the apprehension
the risk that the financial sector may take a hit is that the stimulus effort by governments is simply
also responsible for the efforts to avoid haircut on substituting the high private debt before the crisis
sovereign debt of affected countries through with public debt, without benefitting the global
restructuring. economy in a major way.
6.4 With investors dithering, Ireland’s rescue 6.6 The investor uncertainty is reflected in high
package under the aegis of the European Financial volatility of the currency markets. Moreover, as
Stability Facility (EFSF) and the International none of the currencies offers a safe haven, many
Balance of Payments 135
investors are taking refuge in commodities, as it has led to the build up of public debt, without
facilitated by investor-friendly instruments like successfully addressing unemployment and
Exchange Traded Funds (ETF), commodity indices aggregate demand problems in advanced countries.
and the ease of taking positions in the futures
6.9 Some of the mainstream financial market
market. Together with rising demand from the
theories like the efficient market hypothesis that have
emerging economies, the trend is reflected in
been the mainstay of finance are similarly being
increasing and volatile prices of gold, oil, metals and
questioned. The theories based on the risk free
soft products like foodgrains. The surge in prices
nature of sovereign debt that have been the
of commodities like oil and foodgrains, however is
cornerstone of financial market modelling, too have
straining the balance of payments of emerging
come in for criticism due to the risk of default/
economies and contributing to price rise, affecting
restructuring in peripheral euro zone countries and
their growth prospects.
the build up of public debt to unsustainable levels in
6.7 The surge in capital flows to emerging many advanced countries. As a result, the bonds of
economies to take advantage of interest differential many top notch corporate entities and emerging
(carry trade), higher stock market returns and better economies are being priced more competitively vis-
growth prospects is another fallout of uncertain growth a-vis some of the euro zone countries.
prospects and low interest environ in advanced
6.10 In the ensuing melee, there is an attempt to
countries. The deluge of capital, however, is leading
revisit both economics and finance. In the first place,
to stock market/ real estate bubbles and appreciation
it is being recognized that the markets are subject
of local currency, with excess liquidity contributing
to boom and bust cycles, which could assume
to inflationary pressures.
serious proportions due to credit induced asset price
6.8 Economic theory, at the same time, is at a bubbles that are characterized by a positive feedback
cross roads. With free market economics loop. Countercyclical measures and leaning against
discredited and prices no longer regarded an effective the wind may, therefore be necessary. Second, there
signalling mechanism, the confidence in the self- is renewed emphasis on integrating behavioural
correcting attribute of the market mechanism is factors with mainstream economics and finance to
abating. The Keynesian approach of deficit financing make theory correspond more closely with the real
and high public expenditure is also being doubted, world situation.
Box 6.1 : BRIC Study Report

The term BRIC stands for Brazil, Russia, India and China. It was coined by Goldman Sachs in 2001 in a paper titled
‘Building Better Global Economic BRICs’ that looked at the future growth prospects of the four largest emerging economies.
BRIC countries have since come to play a major role on the global stage. The BRIC Heads of State and Finance Ministers also
periodically meet for increasing cooperation among the BRIC countries.
During the meeting of the BRIC Finance Ministers and Central Bank Governors in London on 4 September, 2009, a decision
was taken to commission a study examining the prospects of the world economy and the role of the BRIC countries in the
post-crisis world. The communiqué of the meeting also noted that the emerging economies had helped the world economy
counter the fallouts of the global crisis by absorbing the impact of the widespread deterioration in trade, credit flows and
demand.
Given the increasing importance of the BRIC economies on the global stage and the recognition that they would play a
dominant role in the world economy in the coming years, the purpose of the collaborative study is to identify possible areas
of co-operation and synergies among the BRIC countries for promoting mutual growth and for collectively harnessing
global economic recovery.
It was also decided that India would anchor the study project. A working group, drawing upon government/central bank
experts from each of the four countries, was constituted for successfully conducting the study. Members of this group have
been collaborating among themselves by identifying best practices and lessons in the individual BRIC countries in wide
variety of sectors. The first meeting of the working group was held in New Delhi in September 2010 and was attended by
participants from all the four BRIC countries. The meeting finalized the phases of report preparation covering issues
relating to mutual sharing of information, identification of crucial challenges and opportunities facing the BRIC economies,
and a time frame for preparation of the draft study report.
The first draft of the report has been prepared by the Indian team and is under circulation among the BRIC countries for
appraisal and inputs.
6.11 Third, there is increasing recognition that a elsewhere (GNIE) and miscellaneous (such as,
prudent regulatory and supervisory framework is communication, construction, financial, software,
necessary for smooth functioning of the markets. At news agency, royalties, management and business
the same time, coordination among regulatory services), (b) Income, and (c) Transfers (grants, gifts,
agencies of different countries is necessary to remittances, etc.) which do not have any quid pro
minimize the risk of regulatory arbitrage. Fourth, quo.
macro prudential regulation that takes a top down
6.15 Under capital account, capital inflows can be
approach to regulation is the new policy buzzword,
classified by instrument (debt or equity) and maturity
as is evident from the recently announced Basel III
(short or long-term). The main components of capital
rules that include countercyclical buffer and leverage
account include foreign investment, loans and
restrictions on bank capital to ensure
banking capital. Foreign investment comprising
macroeconomic stability.
foreign direct investment (FDI) and portfolio
6.12 In the back drop of such uncertainty and efforts investment consisting of foreign institutional investors
at stabilization, most emerging economies continue (FIIs) investment, American Depository Receipts /
to perform well with high growth rates that signify a Global Depository Receipts (ADRs/GDRs)
measure of decoupling with the advanced represents non-debt liabilities, while loans (external
economies. This is mainly because (i) many assistance, external commercial borrowings and
emerging economies went through an introspection trade credit) and banking capital including non-
and correction phase after the series of crises in resident Indian (NRI) deposits are debt liabilities.
1980s and 1990s, leading to lowering of external
6.16 BoP developments during 2009-10 indicate
and public debt levels, streamlining of public
that despite lower trade deficit, current account deficit
expenditure and institution building; (ii) emerging
widened on account of slowdown in invisible receipts.
economies had minimal exposure to toxic assets
There was also sharp increase in capital flows, which
that were responsible for the origin and spread of
led to accretion in foreign exchange reserves. The
the crisis; and (iii) financial innovations like
current account deficit of 2.8 per cent of the gross
Collateralized Debt Obligations (CDOs) and credit
domestic product (GDP) in 2009-10 vis-a-vis 2.3 per
default swaps that contributed significantly to the
cent in 2008-09, however remained well within
crisis, had made limited inroads in emerging
manageable limits. The net capital flows increased
economies.
substantially to 3.8 per cent of GDP in 2009-10 as
6.13 India has been more fortunate in that (a) its compared to 0.5 per cent in 2008-09. This led to net
growth was largely domestic economy driven; (b) accretion of US$ 13.4 billion in foreign exchange
the calibrated approach to capital account reserves on BoP basis, as against the net outflow of
liberalization prevented interest arbitrage seeking US$ 20.1 billion in 2008-09.
surge and reversal of capital flows; (c) strict
6.17 BoP in 2009-10 had contrasting ramifications
supervision of banks prevented exposure to toxic
for economic recovery. The decline in exports of
assets abroad and excessive lending to the real
goods and services in response to weak global
estate sector that insulated banks from the fallout of
demand had a dampening impact on overall GDP
pricking of the real estate bubble; (d) credit derivative
growth. However, a higher current account deficit led
instruments like credit default swaps that played the
to stronger absorption of foreign capital. This implied
key role in precipitating the crisis, are yet to be
higher investment activity financed by foreign capital,
introduced in the market.
which partly contributed to the stronger recovery in
growth. Major determinants of BoP transactions-
BALANCE OF PAYMENTS such as external demand, international oil and
commodity prices, pattern of capital flows and the
6.14 Balance of payment (BoP) comprises current
exchange rate changed significantly during the
account, capital account, errors and omissions and
course of the year. With the turnaround in exports
changes in foreign exchange reserves. Under current
and revival in capital flows, external sector concerns
account of the BoP, transactions are classified into
receded gradually in the second half of 2009-10.
merchandise (exports and imports) and invisibles.
Invisible transactions are further classified into 6.18 As per the latest data available, the highlights
three categories, namely (a) Services–travel, of BoP developments during the first half (H1 – April-
transportation, insurance, Government not included September 2010) of 2010-11 were higher trade and
Table 6.1: Balance of Payments : Summary (US$ million)
Sl. Item 2005-06 2006-07 2007-08 2008-09 2009-10PR 2009-10 2010-11
No. H1 (April- H1 (April-
Sept. Sept.
2009)PR 2010)P
1 2 3 4 5 6 7 8 9
I Current Account
1 Exports 1,05,152 1,28,888 1,66,162 1,89,001 1,82,235 82,569 1,10,518
2 Imports 1,57,056 1,90,670 2,57,629 3,08,521 3,00,609 1,38,419 1,77,457
3 Trade Balance -51,904 -61,782 -91,467 -1,19,520 - 1,18,374 - 55,850 - 66,939
4 Invisibles (net) 42,002 52,217 75,731 91,605 79,991 42,511 39,058
A Non-factor Services 23,170 29,469 38,853 53,916 35,726 19,098 19,510
B Income -5,855 -7,331 -5,068 -7,110 -8,040 -3,279 -6,509
C Transfers 24,687 30,079 41,945 44,798 52,305 26,692 26,057
5 Goods and Services Balance -28,734 -32,313 -52,614 -65,604 -82,648 -36,752 -47,429
6 Current Account Balance -9,902 -9,565 -15,737 -27,915 -38,383 -13,339 -27,881
II Capital Account
1 Capital Account Balance 25,470 45,203 1,06,585 6,768 53,397 22,964 36,661
i External Assistance (net) 1,702 1,775 2,114 2,441 2,893 1,023 2,993
ii External Commercial
Borrowings (net) 2,508 16,103 22,609 7,862 2,808 728 5,974
iii Short-term debt 3,699 6,612 15,930 -1,985 7,558 -49 6,749
iv Banking Capital (net) 1,373 1,913 11,759 -3,246 2,084 1,045 834
of which:
Non-Resident Deposits (net) 2,789 4,321 179 4,290 2,924 2,865 2,163
v Foreign Investment (net) 15,528 14,753 43,326 5,785 51,167 30,275 29,137
of which:
A FDI (net) 3,034 7,693 15,893 19,816 18,771 12,330 5,340
B Portfolio (net) 12,494 7,060 27,433 -14,031 32,396 17,945 23,797
vi Other Flows (net) a 660 4,047 10,847 -4,090 -13,113 -10,058 -9,026
III Errors and omission -516 968 1,316 1,067 -1,573 -92 -1,750
IV Overall Balance b 15,052 36,606 92,164 -20,080 13,441 9,533 7,030
V Reserves (-) 15,052 (-) 36,606 (-) 92,164 20,080 (-) 13,441 (-) 9,533 (-) 7,030
[increase (-) / decrease (+)]
Source: Reserve Bank of India (RBI). PR: Partially Revised. P: Preliminary

a includes among others delayed export receipts and rupee debt service.
b Overall balance includes total current account balance, capital account balance and errors and omissions.
current account deficits as well as capital flows vis- cent, as against US$ 189.0 billion in 2008-09, which
a-vis the first half of 2009-10 (Table 6.1). recorded a positive growth of 13.7 per cent over the
exports of US$ 166.2 billion in 2007-08. Similarly,
import payments of US$ 300.6 billion also recorded
CURRENT ACCOUNT a decline of 2.6 per cent in 2009-10, as compared to
US$ 308.5 billion in 2008-09, which was 19.8 per
Merchandise trade cent higher than the imports of US$ 257.6 billion in
6.19 India’s current account position during 2009- 2007-08. Though the decline in exports was relatively
10 continued to reflect the impact of the global higher than that in imports, the merchandise trade
economic downturn and deceleration in world trade deficit in absolute terms decreased marginally to
witnessed since the second half of 2008-09. On a US$ 118.4 billion (8.6 per cent of GDP) during
BoP basis, India’s merchandise exports of US$ 182.2 2009-10 from US$ 119.5 billion (9.8 per cent of
billion during 2009-10 posted a decline of 3.6 per GDP) in 2008-09.
6.20 Commodity-wise analysis of India’s exports higher oil import bill during the first half of 2010-11.
indicated that the share of primary products in total Despite the higher export growth compared to
exports increased by 100 basis points from 13.9 per imports during April-September 2010-11, the trade
cent in 2008-09 to 14.9 per cent in 2009-10. Similarly, deficit widened in absolute terms by 19.7 per cent
the share of petroleum, crude and products (including to US$ 66.9 billion in the first half of 2010-11, as
coal) increased from 14.9 per cent to 15.8 per cent compared to US$ 55.9 billion during the same period
during the same period. The higher growth rate of last year.
3.8 per cent in primary products in 2009-10 (as
against 1.7 per cent in 2008-09) and 2.3 per cent in Invisibles
petroleum (as against negative growth of 3.0 per cent 6.22 The invisibles account of BoP reflects the
in 2008-09) were responsible for increase in the share combined effect of transactions relating to
of these in 2009-10. The share of manufactured international trade in services, income associated
goods, however, decreased from 68.9 per cent in with non-resident assets and liabilities, labour,
2008-09 to 67.2 per cent in 2009-10 due to negative property and cross-border transfers, mainly
growth of 5.9 per cent in 2009-10, as against 23.1 workers’ remittances. Two components of the
per cent growth in 2008-09. Among import items, current receipts namely software services and
the share of petroleum, oil and lubricants (POL) workers’ remittances, continued to remain relatively
declined to 30.2 per cent in 2009-10, as against 31.3 resilient in 2009-10, as was the case in 2008-09,
per cent in 2008-09 on account of negative growth of despite the global economic meltdown and were
7.0 per cent in 2009-10. The other major component mainly responsible for the net invisible surplus.
of imports was gold and silver, whose share increased 6.23 Invisibles receipts of US$ 163.4 billion in
by 100 basis points from 9.3 per cent in 2008-09 to 2009-10 recorded a decline of 2.6 per cent over
10.3 per cent in 2009-10, because of a higher growth US$ 167.8 billion in 2008-09 (as against an increase
rate of 35.5 per cent in 2009-10 as against 22.3 per of 12.7 per cent in 2008-09 over US$ 148.9 billion
cent in 2008-09. The detailed analysis of the trade in 2007-08), mainly due to lower receipts under
performance of India is dealt with in the next chapter. miscellaneous services such as business, financial,
6.21 The widening of India’s current account deficit and communication services, together with lower
investment income. Receipts under all the
during the first half of 2010-11(April-September 2010)
components of business services (such as trade-
reflects the impact of the growth asymmetry between
related services, business and management
India and the rest of the world. India’s exports and
consultancy services, architectural, engineering and
imports growth momentum, which started during the
other technical services, and services relating to
second half of 2009-10, continued during the first
maintenance of offices abroad) showed a decline
half of 2010-11 also. On BoP basis, India’s
during 2009-10 reflecting lagged impact of the global
merchandise exports during the first quarter (Q1-
crisis. Receipts under investment income declined
April-June 2010) and Q2 (July-September 2010) of
to US$ 12.1 billion in 2009-10 from US$ 13.5 billion
2010-11 recorded a growth of 43.6 per cent and 25.0
in the previous year on account of significant decline
per cent respectively, as against a decline of 31.8
in interest rates abroad.
per cent and 19.1 per cent in the corresponding
quarters of 2009-10. During H1 of 2010-11, exports 6.24 Software receipts at US$ 49.7 billion however,
recorded a growth of 33.8 per cent as against showed an increase of 7.4 per cent in 2009-10
negative growth of 25.7 per cent during the (14.9 per cent a year earlier). Private transfer
corresponding period of the previous year. Similarly, receipts, comprising mainly remittances from
imports witnessed a growth of 34.2 per cent and Indians working overseas also increased to US$
22.8 per cent during the first two quarters of 2010- 53.9 billion in 2009-10 (3.9 per cent of GDP) from
11, as against a decline of 20.8 per cent and 21.3 US$ 46.9 billion (3.8 per cent of GDP) in the
per cent recorded during the corresponding quarters previous year. Private transfer receipts constituted
of 2009-10. Imports posted a growth of 28.2 per 15.6 per cent of current receipts in 2009-10 (13.1
per cent in 2008-09).
cent during the first half of 2010-11, as compared to
negative growth of 21.1 per cent during H1 of 2009- 6.25 Invisible payments increased by 9.4 per cent
10. The rising imports of oil, pearls, and semi- from US$ 76.2 billion in 2008-09 to US$ 83.4 billion
precious stones have contributed significantly to a in 2009-10 due to increase in payments under all
burgeoning import bill. Rising crude oil prices, along the components except software services, transfers
with growth in quantity of oil imports, has led to a and investment income. As a result, the net invisible
balance (receipts minus payments) of US$ 80.0 of 11.1 per cent as against a decline of 8.9 per cent
billion (5.8 per cent of GDP) in 2009-10 posted a a year earlier. However, as the growth in invisibles
negative growth of 12.7 per cent over US$ 91.6 billion payments was higher than the invisibles receipts,
(7.5 per cent of GDP) in 2008-09. The net receipts net invisibles surplus stood lower during April-
under the services component (travel, transportation, September 2010, as compared with the
insurance, G.N.I.E. miscellaneous) went down by corresponding period of the previous year. Net
33.8 per cent from US$ 53.9 billion in 2008-09 to invisibles surplus financed about 58.3 per cent of
US$ 35.7 billion in 2009-10. However, software the trade deficit during April-September 2010, as
services registered a positive growth of 10.3 per cent against 76.1 per cent during the same period last
during the same period from US$ 43.7 billion to US$ year.
48.2 billion. The other component of invisibles which 6.29 The goods and services balance i.e. trade
posted a positive growth was transfers (private as balance plus services, increased by 25.9 per cent
well as official). The net private transfers of US$ 52.1 from US$ 65.6 billion (5.4 per cent of GDP) in 2008-
billion in 2009-10 were higher by16.8 per cent from 09 to US$ 82.6 billion (6.0 per cent of GDP) in 2009-
US$ 44.6 billion in 2008-09. 10, on account of the decrease in net services
6.26 The impact of growth asymmetry between India receipts by 33.8 per cent to US$ 35.7 billion in 2009-
and the rest of the world was observed in India’s 10 from US$ 53.9 billion in 2008-09. During the first
invisibles account in the current fiscal 2010-11, half of 2010-11, the goods and services deficit
leading to moderation in net invisibles balance in H1 widened by 28.8 per cent to US$ 47.4 billion from
of 2010-11(April-September 2010). This moderation US$ 36.8 billion during the first half of 2009-10, on
was primarily due to the decline in investment income account of widening of the trade deficit while the net
and private transfer receipts and increase in services services receipts remained at more or less the same
payments. level (Tables 6.1 and 6.2).
6.27 The net invisibles surplus was lower by 8.0 Current account balance
per cent at US$ 39.1 billion during H1 of 2010-11 as
6.30 As a consequence of the decline in invisible
against US$ 42.5 billion during the corresponding
surplus, despite the lower trade deficit, the current
period of 2009-10, essentially due to higher invisible
account deficit increased by 37.5 per cent in 2009-
payments (which recorded a growth of 33.4 per cent 10 to US$ 38.4 billion (2.8 per cent of GDP)
as against a decline of 4.1 per cent a year earlier) from US$ 27.9 billion (2.3 per cent of GDP) in
driven by all major categories of services and decline 2008-09. Similarly, the lower invisible surplus
in gross investment income receipts. Services combined with higher trade deficit during the first
payments increased by 46.9 per cent (against a half of 2010-11 led to more than doubling of the
decline of 4.7 per cent a year ago) mainly due to current account deficit to US$ 27.9 billion from
higher payments under travel transportation, business US$ 13.3 billion during April-September 2009-10
and financial services. (Figures 6.1 and 6.2).
6.28 On the other hand, a significant decline in
receipts under investment income and private CAPITAL ACCOUNT
transfers offset, to a large extent, the increase in 6.31 Stronger recovery in India, ahead of the global
services exports. Investment income receipts recovery along with positive sentiments of global
declined sharply by 40.1 per cent (as compared to a investors about India’s growth prospects, encouraged
marginal decline a year before) mainly due to the a revival in capital flows during 2009-10. The
persistence of lower interest rates abroad. Private turnaround was mainly driven by large inflows under
transfer receipts at US$ 27.2 billion also recorded a FIIs and short-term trade credits. The gross capital
decline of 1.1 per cent (as against an increase of inflows at US$ 345.7 billion during 2009-10 were 10.2
4.3 per cent a year earlier). However, services exports per cent higher than the US$ 313.6 billion in 2008-
witnessed a major turnaround during the period, 09, while gross capital outflows at US$ 292.3 billion
recording a growth of 27.4 per cent (as against a were lower by 4.8 per cent from US$ 306.9 billion in
decline of 16.8 per cent a year earlier) led by all the 2008-09. As a result, net capital flows at US$ 53.4
major components of services such as business, billion (3.8 per cent of GDP) were much higher during
financial, software, travel and transportation services. 2009-10 as compared to US$ 6.8 billion
Reflecting this, invisible receipts recorded a growth (0.5 per cent of GDP) in 2008-09.
Table 6.2 : Selected Indicators of the External Sector

Sl. Item 2005-06 2006-07 2007-08 2008-09 2009-10PR 2009-10 2010-11
No. H1 (April- H1 (April-
Sept. 2009)PR Sept. 2010)P
1 2 3 4 5 6 7 8 9
1 Growth of Exports – BoP (%) 23.4 22.6 28.9 13.7 -3.6 -25.7 33.8
2 Growth of Imports – BoP (%) 32.1 21.4 35.1 19.8 -2.6 -21.1 28.2
3 Growth of Non-factor Services 33.3 28.0 22.4 17.3 -9.6 -14.2 27.4
(Credit) (%)
4 Growth of Non-factor Services 24.0 28.5 16.2 1.1 15.3 -4.7 46.9
(Debit) (%)
5 Exports/Imports—BoP (%) 67.0 67.6 64.5 61.3 60.6 59.7 62.3
6 Exports/Imports of Goods and 85.0 86.2 83.0 92.7 90.0 77.5 77.8
Services (%)
7 Import Cover of FER (No. of months) 11.6 12.5 14.4 9.8 11.1 - -
8 External Assistance (net)/ TC (%) 6.7 3.9 2.0 36.1 5.4 4.5 8.2
9 ECB (net)/TC (%) 9.8 35.6 21.2 116.2 5.3 3.2 16.3
10 NRI Deposits/ TC (%) 11.0 9.6 0.2 63.4 5.5 12.5 5.9
As per cent of GDPmp
11 Exports 12.6 13.6 13.4 15.4 13.2 13.9 14.5
12 Imports 18.8 20.1 20.8 25.2 21.7 23.4 23.2
13 Trade Balance -6.2 -6.5 -7.4 -9.8 -8.6 -9.4 -8.8
14 Invisible Balance 5.0 5.5 6.1 7.5 5.8 7.2 5.1
15 Goods and Services Balance -3.4 -3.4 -4.2 -5.4 -6.0 -6.2 -6.2
16 Current Account Balance -1.2 -1.0 -1.3 -2.3 -2.8 -2.2 -3.7
17 ECBs 0.3 1.7 1.8 0.7 0.2 1.0 0.1
18 FDI (net) 0.4 0.8 1.3 1.6 1.4 0.9 1.7
19 Portfolio Investment (net) 1.5 0.7 2.2 -1.2 2.4 3.8 2.5
20 Total Capital Account (net) 3.0 4.7 8.6 0.5 3.8 3.9 4.8
Source: RBI PR: Partially Revised. Preliminary P:
TC: Total Capital Flows (net); ECBs: External Commercial Borrowings;

FER: Foreign Exchange Reserves; GDPmp: Gross Domestic Product at current market prices.
Figure 6.1 Current account balance, goods and services balance, trade balance,
invisibles balance and net capital inflows as a per cent of GDP during
2005-06 to 2009-10
10
8.6
8 7.5
6.1 5.8 Current
6 5.0 5.5 account
4.7
3.8 balance
As per cent of GDP
4 3.0
2
0.5 Goods &
0 services
-2 -1.2 -1.0 -1.3 balance
-4 -2.3 -2.8
-3.4 -3.4
-4.2 Trade
-6 balance
-6.2 -5.4 -6.0
-8 -6.5
-7.4
-10 -8.6 Invisibles
-9.8 balance
-12
2005-06 2006-07 2007-08 2008-09 2009-10 Net capital
inflows
Year
Figure 6.2 Current account balance, goods and services balance, trade balance,
invisibles balance and net capital inflows as a per cent of GDP during H1
of 2009-10 and 2010-11
10
8 7.2
Current
6 5.1 4.8 account
3.9 balance
As per cent of GDP
4
2
Goods &
0 services
-2 balance
-4 -2.2
-3.7 Trade
-6 balance
-8 -6.2 -6.2
-10 -8.8 Invisibles
-9.4 balance
-12
2009-10 H1 (Apr - Sep 2009) 2010-11 H1 (Apr - Sep 2010) Net capital
inflows
Year
6.32 Both inward as well as outward FDI showed 6.35 Net capital inflows increased significantly
declining trend in 2009-10 vis-a-vis 2008-09. The during H1 of 2010-11, mainly due to FII inflows, short-
inward FDI declined by 12.4 per cent to US$ 33.1 term trade credits and ECBs. Net FII inflows were
billion in 2009-10 from US$ 37.8 billion in 2008-09. higher at US$ 22.3 billion during April-September
Similarly, outward FDI declined by 19.6 per cent from 2010 as compared to US$ 15.3 billion a year earlier
US$ 17.9 billion in 2008-09 to US$ 14.4 billion in reflecting attractive returns in Indian stock markets.
2009-10. Consequently, the net FDI (inward FDI Inflows under short-term trade credits and ECBs
minus outward FDI) was marginally lower at US$ increased significantly on the back of strong domestic
18.8 billion in 2009-10, as compared with US$ 19.8 demand and persistence of higher interest rate
billion in 2008-09. The FDI was channelled mainly differentials between India and abroad. Accordingly,
into manufacturing followed by construction, financial short-term trade credits increased to US$ 6.7 billion
services and the real estate sector. during April-September 2010 as against a marginal
outflow witnessed during the corresponding period
6.33 Portfolio investment witnessed net inflow of
of 2009-10. Net inflows under ECBs to India increased
US$ 32.4 billion in 2009-10 as against a net outflow
to US$ 6.3 billion as compared to US$ 0.8 billion a
of US$ 14.0 billion in 2008-09. The attractive
year earlier. The large increase in these inflows was
domestic market conditions facilitated net FII inflows
considerably offset by the moderation in net FDI to
of US$ 29.0 billion in 2009-10 (as against net outflow
US$ 5.3 billion during H1 of 2010-11 as against
of US$ 15.0 billion in 2008-09). At US$ 3.3 billion,
US$ 12.3 billion during the corresponding period of
the ADRs / GDRs remained at the same level in
2009-10 due to decline in inward FDI. The inward
2009-10 as in 2008-09. Net ECBs slowed down to
FDI declined by 36.4 per cent from US$ 19.8 billion
US$ 2.8 billion (US$ 7.9 billion in 2008-09) mainly
during H1 of 2009-10 to US$ 12.6 billion during H1
due to increased repayments.
of 2010-11. However, outward FDI remained at
6.34 The net short-term trade credits to India more or less the same level at US$ 7.2 billion during
increased significantly to US$ 7.6 billion in 2009-10 H1 of 2010-11, as compared to US$ 7.4 billion in
from net outflows of US$ 2.0 billion a year earlier, H1 of the previous year. The share of net FDI in
reflecting international confidence in domestic net capital flows also declined from 53.7 per cent in
importers. After recording net inflows under non- H1 of 2009-10 to 14.6 per cent in the first half of
resident deposits during the first three quarters, there the current fiscal. With capital account surplus
were outflows during the last quarter of the 2009-10. being higher than the current account deficit, the
Overall net non-resident deposits inflows stood lower overall balance was in surplus at US$ 7.0 billion,
at US$ 2.9 billion during 2009-10 as compared to which resulted in a net accretion to foreign
US$ 4.3 billion during 2008-09. exchange reserves of an equivalent amount during
H1 of 2010-11 as compared to US$ 9.5 billion during embedded strategy within this framework. The
H1 of 2009-10. aftermath of the global financial crisis has, however,
triggered a debate on the costs of building up foreign
6.36 As per the latest available information on
exchange reserves as a self-insurance mechanism.
capital inflows, FDI inflows at US$ 19.0 billion were
It needs to be acknowledged that foreign exchange
almost at the same level during April-November 2010
reserves have helped insulate India from the worst
as it was during the corresponding period of the
impact of the crisis. There is an argument that a
previous year. Portfolio investment including FII
multilateral option of a pre-arranged line of credit that
inflows, however, increased sharply to US$ 32.8
can be easily and quickly accessed can be a
billion during April-November 2010 from US$ 22.2
substitute for costly self-insurance. Such a
billion a year earlier. The surge in FIIs could be
multilateral option, however is necessary but not
attributed to relatively sound economic fundamentals
sufficient, as foreign investors often view the size of
and increased international liquidity due to easy foreign exchange reserves as a key input in taking
monetary policies followed by many advanced investment decisions.
countries.
6.40 In evaluating the level of reserves and the
6.37 The salient features of the BoP during quantum of self insurance of a country, it is also
2009-10 and in the first half of the current fiscal have important to distinguish between countries where
been higher current account deficit due to lower net reserves are a consequence of current account
invisibles surplus and large net capital inflows mainly surpluses and economies with current account
on account of higher inflows under portfolio deficits where reserves are a result of capital inflows
investments and short-term trade credits, leading to in excess of their economy’s absorptive capacity.
net accretion of foreign exchange reserves on BoP India falls in the latter category, wherein reserves
basis. comprise mainly portfolio (FIIs) investment, which
are more vulnerable to sudden stops and reversals
FOREIGN EXCHANGE RESERVES and borrowings from abroad.
6.38 Foreign exchange reserves are an important
component of the BoP and an essential element in India’s foreign exchange reserves
the analysis of an economy’s external position. 6.41 Beginning from a low level of US$ 5.8 billion
India’s foreign exchange reserves comprise foreign at the end of March 1991, India’s foreign exchange
currency assets (FCAs), gold, special drawing rights reserves gradually increased to US$ 25.2 billion by
(SDRs) and reserve tranche position (RTP) in the end-March 1995, US$ 38.0 billion by end-March
International Monetary Fund (IMF). The level of foreign 2000, US$ 113.0 billion by end-March 2004 and US$
exchange reserves is largely the outcome of the RBI’s 199.2 billion by end-March 2007. The reserves
intervention in the foreign exchange market to reached their peak at US$ 314.6 billion at end-May
smoothen exchange rate volatility and valuation 2008, before declining to US$ 252.0 billion at the
changes due to movement of the US dollar against end of March 2009. The decline in reserves in 2008-
other major currencies of the world. Foreign 09 was inter alia a fallout of the global crisis and
exchange reserves are accumulated when there is strengthening of the US dollar vis-à-vis other
absorption of the excess foreign exchange flows by international currencies. During 2009-10, the level of
the RBI through intervention in the foreign exchange
foreign exchange reserves again increased to US$
market, aid receipts, interest receipts, and funding
279.1 billion at the end of March 2010, mainly on
from institutions such as the International Bank for
account of valuation gain as the US dollar
Reconstruction and Development (IBRD), Asian
depreciated against most of the major international
Development Bank (ADB) and International
Development Association (IDA). Both the US dollar currencies. The component-wise details of foreign
and the euro are intervention currencies. Foreign exchange reserves from 1950-51 to 2010-11 (up to
currency assets are maintained in major currencies December 2010) in rupee and US dollar are given in
like the US dollar, euro, pound sterling, Australian Appendices 6.1(A) and 6.1(B).
dollar and Japanese yen. Reserves are denominated 6.42 During 2009-10, of the total US$ 27.0 billion
and expressed in the US dollar, which is the increase in foreign exchange reserves, US$ 13.6
international numeraire for the purpose. billion was on account of valuation gain and balance
6.39 The twin objectives of safety and liquidity are US$ 13.4 billion was on BoP basis (Table 6.3). The
the guiding principles of foreign exchange reserves increase in foreign exchange reserves during this
management in India, with return optimization being period also includes SDR allocations made by the
Table 6.3 : Sources of Variation in Foreign Exchange Reserves on BoP Basis and Valuation
Effect (US$ billion)
Sl. Items April-September

PR PR
No. 2008-09 2009-10 2009-10 2010-11P
1 2 3 4 5 6
I Current Account Balance (-) 27.9 (-) 38.4 (-) 13.3 (-) 27.9
II Capital Account (net) (a to g) 7.9 51.8 22.7 33.1
a Foreign Investment (i+ii) 5.8 51.2 30.3 29.1
(i) FDI 19.8 18.8 12.3 5.3
(ii) Portfolio Investment (-) 14.0 32.4 17.9 23.8
of which:
FIIs (-) 15.0 29.0 15.3 22.3
ADRs/GDRs 1.2 3.3 2.7 1.6
b External Commercial Borrowings 7.9 2.8 0.7 6.0
c Banking Capital (-) 3.2 2.1 1.0 0.8
of which: NRI Deposits 4.3 2.9 2.9 2.2
d Short-term Trade Credit (-) 2.0 7.6 -0.1 6.7
e External Assistance 2.4 2.9 1.0 3.0
F Other Items in Capital Account* (-) 4.1 (-) 13.1 (-)10.2 (-)10.7
g Errors and Omissions 1.1 (-) 1.6 (-) 0.1 (-)1.8
h Overall balance (I+II) (-) 20.1 13.4 9.5 7.0
III Reserve Change on BoP Basis (+) 20.1 (-) 13.4 (-) 9.5 (-)7.0
[Increase (-) / Decrease (+) ]
IV Valuation Change (-) 37.6 13.6 19.8 6.8
Total Reserve Change (III+IV) (-) 57.7 27.0 29.3 13.8
(Increase in reserves (+) /
Decrease in reserves (-))
Source: RBI PR: Partially Revised. P: Preliminary
Note: *: ‘Other items in capital account’ include SDR allocations, leads and lags in exports, funds held abroad,
advances received pending issue of shares under FDI and transactions of capital receipts not included
elsewhere and rupee debt service. As per the BoP compilation practice, an increase in reserves is
indicated by (-) sign and a decrease by (+) sign. For other items (+) sign indicates increase and (-) sign
means decrease. Difference, if any, is due to rounding off.
IMF to India in two consecutive tranches of SDR purchase of 200 metric tonnes of gold from the IMF
3,082.5 million (equivalent to US$ 4,821 million) by the RBI, under the IMF’s limited gold sales
under the general allocation on 28 August, 2009 programme at the cost of US$ 6.7 billion in November
and SDR 214.6 million (equivalent to US$ 340 million) 2009, as part of its foreign exchange reserves
under special allocations on 9 September, 2009 and management operation.
Figure 6.3 Foreign exchange reserves

300
295
Foreign
US$ billion
290 exchange
reserves
285
280
275
270
Mar 2010
Apr 2010
May 2010
Jun 2010
Jul 2010
Aug 2010
Sep 2010
Oct 2010
Nov 2010
Dec 2010
Year
Table 6.4 : Summary of changes in foreign exchange reserves (US$ billion)

Sl. Year Foreign exchange Total Increase / Increase/decrease Increase/decrease
No. reserves at the decrease in in reserves in reserves due
end of financial reserves over on a BoP to valuation
year (end March) previous period basis effect
1 2 3 4 5 6
1 2005-06 151.6 + 10.1 + 15.0 - 4.9

(148.5) (- 48.5)
2 2006-07 199.1 + 47.5 + 36.5 + 11.0
(76.8) (23.2)
3 2007-08 309.7 + 110.6 + 92.2 + 18.4
(83.4) (16.6)
4 2008-09 252.0 - 57.7 -20.1 - 37.6
(34.8) (65.2)
5 2009-10 279.1 + 27.0 + 13.4 + 13.6
(49.6) (50.4)
6 2010-11 292.9 + 13.8 + 7.0 + 6.8
(upto Sept. 2010) (50.7) (49.3)
Source: RBI.
Note: Figures in parentheses indicate percentage share in total change.
6.43 In the current fiscal 2010-11, on month-on- preservation and liquidity. The annualized rate of
month basis, foreign exchange reserves have shown return, net of depreciation, on the multi-currency
an increasing trend. The reserves increased by multi-asset portfolio of the RBI declined from 4.2 per
US$ 18.2 billion from US$ 279.1 billion at the end of cent in 2008-09 to 2.1 per cent in 2009-10.
March, 2010 to US$ 297.3 at the end of December,
6.47 Country-wise details of foreign exchange
2010 (Figure 6.3). This level of reserves provides
reserves show that India is the fourth largest foreign
about 10 months of import cover.
exchange reserve holder in the world, after China,
6.44 A summary of changes in the foreign Japan and Russia (Table 6.5).
exchange reserves since 2005-06, with a
breakdown into increase/decrease on BoP basis Table 6.5 : Foreign exchange reserves of
and valuation effect is presented in Table 6.4. some major countries
6.45 Foreign Currency Assets (FCAs) are the Sl. Country Foreign exchange
major constituent of foreign exchange reserves in No. reserves
India. FCAs increased by US$ 13.1 billion (5.1 per (US$ billion)
cent) from US$ 254.7 billion at end-March 2010 to 1 2 3
US$ 267.8 billion at end-December 2010. The 1 China (June 2010) 2,454.3
increase was largely attributed to valuation gain, 2 Japan (December 2010) 1,118.8
aid receipts and purchase of US dollar by the
3 Russia (December 2010) 479.4
Reserve Bank of India.
4 India (December 2010) 297.3
6.46 In line with the principles of preserving the 5 Korea (October 2010) 293.5
long-term value of the reserves in terms of 6 Brazil (November 2010) 285.5
purchasing power, minimizing risk and volatility in 7 China P R Hong Kong 268.8
returns and maintaining liquidity, the RBI holds FCAs (December 2010)
in major convertible currency instruments. These 8 Singapore (December 2010) 225.8
include deposits of other countries’ central banks,
9 Germany (December 2010) 216.6
the Bank for International Settlements (BIS) and
10 France (December 2010) 188.3
top-rated foreign commercial banks, and securities
representing debt of sovereigns and supranational 11 Italy (October 2010) 157.4
institutions with residual maturity not exceeding 10 Source: IMF except for China;
years, to provide a strong bias towards capital For China: www.safe.gov.cn.
Table 6.6 : International Comparison of Foreign Exchange Reserves (US$ billion) and Ratio
of Reserves to Imports of Goods and Services
Sl. Country / Country 2005 2006 2007 2008 2009 2010 2011
No. Group (Projection) (Projection)
1 2 3 4 5 6 7 8 9
I Country
1 Russia 176.5 296.2 467.6 412.7 417.8 468.7 508.1
(107.4) (141.7) (165.5) (112.3) (164.8) (152.8) (143.8)
2 China 822.5 1069.5 1531.3 1950.3 2348.8 2693.4 3025.6
(115.5) (125.4) (148.0) (158.2) (211.0) (169.6) (157.8)
3 India 132.5 171.3 267.6 248.0 266.2 281.6 295.9
(72.8) (75.5) (95.1) (71.5) (81.6) (76.2) (69.7)
4 Brazil 53.3 85.2 179.5 192.9 237.4 274.9 292.7
(54.4) (70.7) (113.8) (87.6) (135.9) (117.9) (110.0)
5 Mexico 74.1 76.3 87.1 95.1 99.6 119.6 129.6
(30.5) (27.4) (28.5) (28.5) (38.7) (35.9) (36.5)
II Country Group
1 Developing Asia 201.1 248.5 330.0 335.5 393.0 459.4 508.2
(excluding China & (38.6) (42.5) (49.1) (41.8) (60.2) (58.2) (58.4)
India)
Source: World Economic Outlook Database, October 2010.
Note: Reserves are based on official holding of gold valued at SDR 35 an ounce. This convention results in a
marked underestimation of reserves for countries that have substantial gold holdings.
Figures in parentheses indicate ratio of reserves to imports of goods and services.
6.48 A comparative picture of foreign exchange 6.50 During 2009-10, on the back of capital inflows
reserves and import cover, as measured by the ratio and positive growth outlook, the Indian rupee
of foreign exchange reserves to import of goods generally appreciated against the US dollar, though
and services for select country groups and countries marked by intermittent depreciation pressures. An
including India is presented in Table 6.6. Among the easy supply situation in the market also led to
country groups, “Developing Asia” and the “Middle moderation in forward premia.
East” accumulated reserves during the period 2005- 6.51 On a point-to-point basis, the rupee that stood
09, leading to steady improvement in the ratio of at 50.95 per US dollar on 31 March 2009, displayed
reserves to import of goods and services. a two-way movement with generally appreciating trend
in the second half of 2009-10. The appreciation of
EXCHANGE RATES the rupee in 2009-10 was generally led by FII inflows,
driven by strong macroeconomic performance and
6.49 The exchange rate policy is guided by the
better return. The growth in exports, continued capital
broad principles of careful monitoring and
inflows and weakening of the US dollar against some
management of exchange rates with flexibility, while
of the major currencies contributed to appreciating
allowing the underlying demand and supply
pressure on the rupee, taking the rupee-US dollar
conditions to determine its movements over a period
exchange rate to ` 45.14 per US dollar by end-March
in an orderly manner. Subject to this predominant
2010.
objective, RBI intervention in the foreign exchange
market is guided by the goals of reducing excess 6.52 The Rupee/US dollar exchange rate
volatility, preventing the emergence of destabilizing marginally appreciated by 0.7 per cent to ` 44.81
speculative activities, maintaining adequate levels per dollar between 31 March 2010 and 31 December
of reserves, and developing an orderly foreign 2010. Over the same period, the rupee has
exchange market. experienced depreciation of 2.5 per cent against
Table 6.7 : Exchange Rates of Rupee per Foreign Currency and RBI’s Sale/Purchase of
US Dollar in the Exchange Market During 2010-11
Annual/Monthly average exchange rates ( ` per foreign currency)*,
Month US$ Pound Euro Japanese RBI Net sale (-) /
Sterling Yen** purchase (+)
(US$ million)
1 2 3 4 5 6
2009-10 47.42 75.89 67.08 51.10 (-) 2,505
(-3.0) (3.2) (-3.0) (- 9.6)
March 2010 45.50 68.44 61.77 50.18
2010-11
April 2010 44.50 68.24 59.66 47.63 -
(2.2) (0.3) (3.5) (5.4)
May 2010 45.81 67.23 57.67 49.69 -
(-2.9) (1.5) (3.5) (-4.1)
June 2010 46.57 68.70 56.90 51.22 110.0
(-1.6) (-2.1) (1.4) (-3.0)
July 2010 46.84 71.52 59.76 53.43 -
(-0.6) (-3.9) (-4.8) (-4.1)
August 2010 46.57 72.97 60.14 54.53 -
(0.6) (-2.0) (-0.6) (-2.0)
September 2010 46.06 71.68 60.08 54.50 260.0
(1.1) (1.8) ( 0.1) (0.1)
October 2010 44.41 70.39 61.72 54.28 450.0
(3.7) (1.8) (-2.7) (0.4)
November 2010 45.02 71.85 61.50 54.57 870.0
(-1.4) (-2.0) (0.4) (-0.5)
December 2010 45.16 70.46 59.69 54.24 -
(- 0.3) (2.0) (3.0) (0.6)
Source : RBI
* FEDAI indicative rate; ** Per 100 Yen.
Figures in parentheses indicate appreciation (+) and depreciation (-) over the previous month/year.
the Pound Sterling and 12.1 per cent against the the range of ` 44-47 per US dollar between April-
Japanese yen, while it appreciated by 1.2 per cent December 2010. The exchange rate of the rupee
against the euro. (monthly average of buying and selling by the Foreign
Exchange Dealer Association of India [FEDAI],
6.53 On annual average basis, rupee depreciated
depreciated by 1.5 per cent against US dollar from
against all major international currencies except the
` 44.50 per US dollar in April 2010 to ` 45.16 per
pound sterling in fiscal 2009-10. The annual average
US dollar in December 2010. Similarly, the rupee
exchange rate of the rupee was ` 45.99 per US
depreciated by 3.2 per cent against the pound
dollar in 2008-09 and it depreciated by 3.0 per cent
sterling, and 12.2 per cent against the Japanese
to ` 47.42 in 2009-10. Similarly, the annual average
yen during the same period.
exchange rate of the rupee in 2008-09 was ` 65.06
per euro and ` 46.20 per 100 Japanese yen, and 6.55 The month-wise exchange rate of the rupee
it depreciated by 3.0 per cent and 9.6 per cent, against major international currencies and the RBI’s
respectively to ` 67.08 and ` 51.10 during sale/purchase of foreign currency in the foreign
2009-10. The annual average exchange rate of the exchange market during 2010-11 are indicated in
rupee per pound sterling however, showed Table 6.7.
appreciation of 3.2 per cent from ` 78.32 per pound
6.56 Appendix 6.5 presents the exchange rate of
sterling in 2008-09 to ` 75.89 in 2009-10.
the rupee vis-à-vis select international currencies
6.54 The monthly average exchange rate of the year-wise since 1980-81, and month-wise during
rupee has generally been range-bound, moving in 2010-11.
Table 6.8 : Movement of Rupee and NEER and REER Indices during 2010-11
Month/year Rupee per Appreciation (+)/ NEER* REER* Appreciation (+)/ Appreciation (+)/
US Dollar depreciation (-) depreciation (-) depreciation (-)
in Rupee per US in NEER over in REER over
Dollar over previous month previous month
previous month
1 2 3 4 5 6 7
March 2008 40.36 70.94 110.98

March 2009 51.23 -21.2 60.45 95.44 - 14.8 - 14.0
March 2010 45.50 12.6 66.59 114.49 10.2 20.0
2010-11
April 2010 (P) 44.50 2.2 68.40 118.92 2.7 3.9
May 2010 (P) 45.81 - 2.9 68.07 120.00 - 0.5 0.9
June 2010 (P) 46.57 - 1.6 67.55 118.78 - 0.8 - 1.0
July 2010 (P) 46.84 - 0.6 65.70 116.18 - 2.7 - 2.2
August 2010 (P) 46.57 0.6 65.66 116.53 - 0.1 0.3
September 2010 (P) 46.06 1.1 66.00 117.54 0.5 -0.9
October 2010 (P) 44.41 3.7 66.68 118.25 1.0 0.6
November 2010 (P) 45.02 - 1.4 66.10 117.48 - 0.9 - 0.7
December 2010 (P) 45.16 - 0.3 66.80 118.71 1.1 1.0
Source: RBI.
* Six-currency Trade-based Weights, Base: 1993-94 (April-March) =100, P: Provisional.
NEER and REER are taken into account. However, a significant share
of India’s foreign trade is invoiced and settled in US
6.57 The nominal effective exchange rate (NEER)
dollar. REER is less effective indicator of rupee
and real effective exchange rate (REER) indices are
competitiveness to that extent.
used as indicators of external competitiveness of
the country over a period of time. NEER is the 6.59 The six-currency trade-based NEER (base:
weighted average of bilateral nominal exchange rates 1993-94=100) appreciated by 10.2 per cent
of the home currency in terms of foreign currencies, between March 2009 and March 2010 and by 0.3
while REER is defined as a weighted average of per cent between March 2010 and December 2010.
nominal exchange rates adjusted for home and As compared to this, the monthly average exchange
foreign country relative price differentials. REER rate of the rupee against the US dollar appreciated
captures movements in cross-currency exchange by 12.6 per cent between March 2009 and March
rates as well as inflation differentials between India 2010 and in the current fiscal by 0.8 per cent
and its major trading partners. The RBI has been between March 2010 and December 2010 (Table
constructing six currency (US dollar, euro, pound 6.8 and Appendix 6.6).
sterling, Japanese yen, Chinese renminbi and Hong
Kong dollar) and 36 currency indices of NEER and US dollar exchange rate in international
REER. market
6.58 On a point-to-point basis, the six-currency 6.60 During 2009-10 (March 2009 – March 2010),
trade-based REER (base: 1993-94=100) the US dollar depreciated against major currencies.
appreciated by 20.0 per cent between March 2009 It fell by 4.9 per cent against the pound sterling, 1.7
and March 2010. In the current fiscal it appreciated per cent against the euro, 7.4 per cent against the
by 3.7 per cent between March 2010 and December Japanese yen and 23.9 per cent against the
2010. This indicates loss of competitiveness against Australian dollar. The dollar however, gained some
major trading partners, when inflation differentials strength against major currencies, especially in
Table 6.9 : Exchange Rate of US dollar against International Currencies

Month/Year GBP/USD Euro/USD USD/JPY AUD/USD
1 2 3 4 5
March 2009 1.4340 1.3308 98.100 0.6921

March 2010 1.5082 1.3543 90.885 0.9095
US$ Appreciation (+) / Depreciation (-) (-) 4.9 (-) 1.7 (-) 7.4 (-) 23.9
(end-March 2009 – end-March 2010)
2010-11
April 2010 1.5324 1.3404 93.20 0.9263
May 2010 1.4757 1.2693 91.51 0.8672
June 2010 1.4738 1.2183 90.60 0.8671
July 2010 1.5298 1.2650 87.56 0.8694
August 2010 1.5732 1.2960 85.25 0.8998
September 2010 1.5718 1.3642 83.48 0.9669
October 2010 1.6026 1.3921 80.49 0.9805
November 2010 1.5558 1.2986 83.66 0.9590
December 2010 1.5602 1.3381 81.19 1.0235
US$ Appreciation (+) / Depreciation (-) (-) 3.3 1.2 (-) 10.7 (-) 11.1
(end-March 2010 – end-December 2010)
Source: RBI.
December 2009, on the back of a pickup in economic on account of higher commercial borrowings and
activity and market conditions turning more conducive short-term debt. Taken together, these two
to economic growth in the USA. However, between components contributed over 70 per cent of total
end-March 2010 and end-December 2010, the US increase in India’s external debt. The valuation effect
dollar depreciated by 3.3 per cent against the pound arising from depreciation of the US dollar against
sterling, 10.7 per cent against the Japanese yen, major international currencies contributed to an
and 11.1 per cent against the Australian dollar, while increase of US$ 6.3 billion to the total increase.
appreciating by 1.2 per cent against the euro. The Excluding the valuation effect, the increase in external
appreciation against the euro could be attributed to debt would have been US$ 27.2 billion.
the sovereign debt problems in some of the member
countries of euro zone (Table 6.9). 6.63 The maturity profile of India’s external debt
indicates the dominance of long-term borrowings.
EXTERNAL DEBT At the end of September 2010, the short-term debt
6.61 India’s external debt stock stood at US$ 262.3 at US$ 66.0 billion accounted for 22.3 per cent of
billion ( ` 1,184,998 crore) at end-March 2010 total external debt, while the remaining 77.7 per cent
recording an increase of US$ 37.8 billion over end- was long-term debt (Table 6.10).
March 2009 level of US$ 224.5 billion ( ` 1,143,951 6.64 The long-term components, such as
crore). Of the total increase, long-term debt commercial borrowings, NRI deposits and
accounted for 28.7 billion, while short-term debt was multilateral borrowings constitute a significant share
higher by US$ 9.1 billion. Appendices 8.4(A) and of external debt. Taken together, these components
8.4(B) present the disaggregated data on India’s accounted for 60.5 per cent of total external debt at
external debt outstanding for the period from March the end of September 2010, while the remaining 17.2
1991 to September 2010 in Indian rupee and US per cent was accounted by other components (i.e.,
dollar terms, respectively. bilateral borrowings, export credit, IMF and rupee
6.62 At end-September 2010, total external debt debt). The share of commercial borrowings continued
increased by US$ 33.5 billion (12.8 per cent) to US$ to be the highest at 27.8 per cent in total external
295.8 billion ( ` 1,332,195 crore) over end-March debt followed by NRI deposits (16.9 per cent) and
2010. The increase in India’s external debt was mainly multilateral debt (15.8 per cent) (Table 6.11).
Table 6.10 : India’s External Debt Stock
At end-March In US$ million In ` crore
Long-term Short-term Total Long-term Short-term Total
1 2 3 4 5 6 7
2005 116,279 17,723 134,002 508,777 77,528 586,305
2006 119,575 19,539 139,114 533,367 87,155 620,522
2007 144,230 28,130 172,360 628,771 122,631 751,402
2008 178,669 45,738 224,407 714,409 182,881 897,290
2009PR 181,185 43,362 224,547 923,044 220,907 1,143,951
2010PR 209,873 52,471 262,344 948,168 236,830 1,184,998
2010 (end-June)PR 215,069 57,841 272,910 1,001,809 269,483 1,271,292
2010 (end-Sept.)QE 229,837 66,010 295,847 1,035,647 296,548 1,332,195
Source: Ministry of Finance and RBI.

PR: Partially Revised; QE: Quick Estimates.
Table 6.11 : Composition of External Debt (Per cent to total external debt)
Sl. Component March March June September

No. 2009 PR 2010 PR 2010 PR 2010 QE
1 2 3 4 5 6
1 Multilateral 17.6 16.3 16.4 15.8

2 Bilateral 9.2 8.6 8.4 8.3
3 IMF 0.5 2.3 2.2 2.1
4 Export credit 6.4 6.4 6.4 6.2
5 Commercial Borrowings 27.8 27.4 27.3 27.8
6 NRI Deposits 18.5 18.3 17.6 16.9
7 Rupee Debt 0.7 0.6 0.6 0.6
8 Long-term debt (1 to 7) 80.7 80.0 78.8 77.7
9 Short-term debt 19.3 20.0 21.2 22.3
10 Total External Debt (8+9) 100.0 100.0 100.0 100.0

PR: Partially Revised; QE: Quick Estimates.
6.65 The currency composition of India’s total agencies and SDR allocations by the International
external debt shows that US dollar denominated debt Monetary Fund (IMF). The share of US dollar
accounted for 53.9 per cent of total external debt at denominated debt was 28.1 per cent at the end of
end-September 2010, followed by the Indian Rupee September 2010 followed by Japanese yen
(18.8 per cent), Japanese Yen (11.8 per cent), SDR denominated (19.4 per cent) (Table 6.12).
(9.8 per cent) and Euro (3.6 per cent). The currency 6.66 The composition of India’s external debt has
composition of Government debt indicates pre- undergone change over the years with shares of
dominance of SDR denominated debt (39.9 per cent), both multilateral and bilateral components showing
which is attributable to borrowing from International a declining trend in long-term debt. There is
Development Association (IDA) i.e., the soft loan increasing share of private players in India’s total
window of the World Bank under the multilateral external debt. Government (sovereign) external debt
Table 6.12 : Currency Composition of India’s External Debt and Sovereign External Debt
Total external debt Sovereign external debt
Sl. Currency March March June Sept. March March June Sept.
No. 2009PR 2010PR 2010PR 2010QE 2009PR 2010PR 2010PR 2010QE
1 2 3 4 5 6 7 8 9 10
1 US Dollar 54.1 53.4 54.9 53.9 29.6 26.5 28.8 28.1

2 SDR 9.8 10.7 10.1 9.8 39.5 41.7 39.8 39.9
3 Indian Rupees 15.4 18.6 18.1 18.8 5.7 8.9 8.9 8.6
4 Japanese Yen 14.3 11.4 11.5 11.8 19.9 18.6 18.7 19.4
5 Euro 4.1 3.6 3.3 3.6 5.2 4.3 3.8 4.0
6 Pound Sterling 2.0 1.8 1.7 1.7 0.1 0.0 0.0 0.0
7 Others 0.3 0.5 0.4 0.4 0.0 0.0 0.0 0.0
Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Source : Ministry of Finance and RBI.

PR : Partially Revised. QE : Quick Estimates
stood at US$ 72.3 billion, while non-Government debt The bulk of sovereign debt is from domestic sources.
amounted to US$ 223.6 billion at end-September In the domestic debt category also, a significant
2010. The share of Government debt in total external share of dated securities is owned by commercial
debt declined from 25.6 per cent at end-March 2010 and co-operative banks and insurance companies.
to 24.4 per cent at end-September 2010. The ratio Given the composition of public debt and the fact
of Government external debt to GDP has remained that a sizeable share of banking and insurance is in
around 5.0 per cent in the last four years. the public sector, the refinancing risk that has been
6.67 Sovereign external debt is a small proportion at the root of the euro zone crisis, is at best minimal
of the overall public debt of the Government of India. (Box 6.2).
Box 6.2 : India’s Sovereign Debt: Specific Attributes

There have been concerns about the level of public debt, with consolidated debt (Centre and State) at 78.8 per cent of
GDP as at end March 2010 (13th Finance Commission). For determining the vulnerability level of public debt, it is
important however to look at the composition, refinancing requirements and the investor base. Following issues
highlight the specific attributes of Central Government public debt, which place it in a distinct class, making it less
vulnerable to market risks, as experienced in many advanced countries:
a) The share of sovereign external debt in total public debt was 10.8 per cent at end-September 2010. The bulk of the debt
was from multilateral and bilateral creditors with FIIs investment in Government securities accounting for less than
1 per cent of total public debt. As India does not access international capital markets as a sovereign entity, the
refinancing risk due to foreign commercial investors, which significantly contributed to the euro area sovereign debt
crisis, is therefore largely absent;
b) Domestic debt accounts for 89.2 per cent of the total Central Government sovereign debt. Out of this, 11.5 per cent is
in non-marketable categories like securities issued to the National Small Savings Fund. The remaining 77.7 per cent is
marketable securities with 73.4 per cent in dated securities (long term) and 4.3 per cent in Treasury Bills (short term);
c) In the dated securities category, banks (including co-operative banks) accounted for 51.9 per cent and insurance
companies (mainly Life Insurance Corporation) 22 per cent of the total debt. Given the Statutory Liquidity Ratio
(SLR) requirement for banks and the fact that a significant share of banking and insurance sector remains in the public
sector, the refinancing risk, is at best minimal;
d) The average maturity of Central Government securities is nearly 10 years, making it less vulnerable to refinancing risk.
Despite the fact that the sovereign debt carries minimal refinancing and speculative risk, concerted efforts are underway
to lower the public debt levels to sustainable benchmarks through setting fiscal targets and the Medium Term Fiscal
Policy Statement that are part of the Annual Budget of the Government of India.
Table 6.13 : India’s key External Debt Indicators (per cent)
Year External Total Debt- Foreign Concessional Short-term Short-term
Debt External Service Exchange Debt to External Debt*
(US$ Debt to Ratio Reserves Total Debt* to to total
billion) GDP to total External Foreign Debt
External Debt Exchnage
debt Reserves
1 2 3 4 5 6 7 8
1990-91 83.8 28.7 35.3 7.0 45.9 146.5 10.2

1995-96 93.7 26.9 26.2 23.1 44.7 23.2 5.4
2000-01 101.3 22.5 16.6 41.7 35.4 8.6 3.6
2005-06 139.1 16.8 10.1# 109.0 28.4 12.9 14.0
2006-07 172.4 17.5 4.7 115.6 23.0 14.1 16.3
2007-08 224.4 18.0 4.8 138.0 19.7 14.8 20.4
2008-09 224.5 20.5 4.4 112.1 18.7 17.2 19.3
2009-10PR 262.3 18.1 5.5 106.4 16.7 18.8 20.0
End-June 2010 PR 272.9 - 3.9 101.0 15.9 21.0 21.2
End-Sept.2010 QE 295.8 - 3.8 99.0 15.6 22.5 22.3

PR: Partially Revised. QE: Quick Estimates.
- : Not worked out for the broken period. * : Short-term debt is based on original maturity.
#: Works out to 6.3 %, with the exclusion of India Millennium Deposits (IMDs) repayments of US$ 7.1 billion and
pre-payment of US$ 23.5 million.
Note: Debt-service ratio is the proportion of gross debt service payments to External Current Receipts (net of
official transfers).
6.68 The key debt indicators show that India’s International comparison
external debt to GDP ratio was 18.1 per cent (20.5
per cent in 2008-09) and debt service ratio 5.5 per 6.70 A cross country comparison of external debt
cent during 2009-10 (4.4 per cent in 2008-09). India’s of twenty most indebted developing countries, based
foreign exchange reserves provided a cover of 99 on the data given in the World Bank’s “Global
per cent to the external debt stock at end-September Development Finance, 2010”, showed that India was
2010 (106.4 per cent at end-March 2010). The ratio the fifth most indebted country, after the Russian
of short-term external debt to foreign exchange Federation, China, Turkey, and Brazil, in 2008 in
reserves was 22.5 per cent at end-September 2010 terms of stock of external debt. The ratio of India’s
as compared to 18.8 per cent at end-March 2010. external debt stock to gross national income (GNI)
The ratio of concessional debt to total external debt as of 2008 at 19.0 per cent was the fourth lowest
declined steadily and worked out to 15.6 per cent with China having the lowest ratio at 8.7 per cent.
at end-September 2010 as against 16.7 per cent at The element of concessionality in India’s external
end-March 2010. The key external debt indicators debt portfolio was fourth highest after Pakistan,
are presented in Table 6.13. Indonesia and the Philippines (Table 6.14).
6.69 The external debt management policy of the 6.71 In terms of the cover of external debt provided
Government of India continues to focus on raising by foreign exchange reserves, India’s position was
sovereign loans on concessional terms with longer fourth highest at 111.6 per cent after China, Thailand
maturities, regulating ECBs through end-use and and Malaysia. A comparison of the share of short-
all-in-cost restrictions, rationalizing interest rates on term debt in total external debt across countries
NRI deposits and monitoring long as well as short- reveals that India’s position was tenth lowest with
term debt. Pakistan having the lowest ratio.
Table 6.14 : International Comparison of Top Twenty Developing Debtor Countries, 2008
Total Total debt to Short-term Foreign Concessional
Sl Countries External Gross to total Exchange to total
No. debt stock National external Reserves to external
(US $ million) Income debt Total Debt debt
(per cent) (per cent) (per cent) (per cent)
1 2 3 4 5 6 7
1 Russian Federation 402,453 25.8 13.6 106.1 0.5
2 China 378,245 8.7 49.5 514.5* 10.8
3 Turkey 277,277 35.3 18.3 26.6 2.7
4 Brazil 255,614 16.2 14.3 75.8 1.4
5 India 230,611 19.0 19.6 111.6 20.5
6 Poland 218,022 42.1 29.8 28.5 0.2
7 Mexico 203,984 19.1 12.0 46.7 0.5
8 Indonesia 150,851 30.4 17.6 34.2 27.9
9 Argentina 128,285 39.9 29.2 36.2 1.6
10 Kazakhstan 107,595 95.0 9.9 18.5 1.1
11 Romania 104,943 54.7 29.7 37.9 1.5
12 Ukraine 92,479 51.7 22.1 34.1 1.6
13 Malaysia 66,182 35.1 34.5 139.3 6.5
14 Philippines 64,856 35.0 10.8 57.8 23.1
15 Thailand 64,798 32.0 37.4 171.3 11.1
16 Chile 64,277 41.3 23.2 35.9 0.3
17 Venezuela 50,229 16.0 33.8 85.7 1.0
18 Pakistan 49,337 28.7 2.8 18.3 60.6
19 Colombia 46,887 20.2 12.1 50.5 2.1
20 Latvia 42,108 127.3 33.5 12.5 0.3
Source: World Bank’s Global Development Finance, 2010.

*: Foreign exchange reserves data are sourced from State Administration of Foreign Exchange,
Government of China.
Note: Countries are arranged based on the magnitude of debt presented in column no.3 in the Table.
THE G20 meetings and discussed measures to promote

6.72 The Group of Twenty (G20) was established financial stability in the world and achieve sustainable
in 1999 to bring together Finance Ministers and economic growth and development.
Central Bank Governors of systemically important 6.74 In the wake of the global financial and
industrialized and developing economies to discuss economic crisis in 2008, the G20 was elevated to a
key issues relating to the global economy and Leaders Summit. It was designated as a premier
financial stability. By contributing to the forum for international economic cooperation in 2009,
strengthening of the international financial effectively replacing the G8 as a forum for steering
architecture and providing opportunities for dialogue the global issues. The move was considered a
on national policies, international co-operation, and milestone in reforming global governance, making
international financial institutions, the G-20 helps to it more inclusive since this forum comprises both
support growth, financial stability and development emerging as well as industrialized economies
across the globe. (Box 6.3).
6.73 Since its inception, the G20 has held annual 6.75 Several landmark reforms of international
Finance Ministers and Central Bank Governors’ financial institutions were initiated at the behest of
the G20 which heightened the expectation for bringing
Box 6.3 : G 20: Basic facts
about fundamental changes in the functioning of the
 The G20 comprises 19 countries - namely - Argentina, global institutions and in the global governance
Australia, Brazil, Canada, China, France, Germany, structure. India as a member of the G20 has been
India, Indonesia, Italy, Japan, Mexico, Russia, Saudi actively engaged in global economic governance and
Arabia, South Africa, the Republic of Korea, Turkey,
in shaping the world order (Box 6.4).
the United Kingdom, the United States of America
and the European Union which is represented by the
rotating Council presidency and the European Central Main Issues/Outcomes of G20 Summits
Bank as the 20th member. 6.76 The most concerted response to the global
 It represents 90 per cent of the global gross national economic crisis came from the platform of the G20
product, 80 per cent of the world’s trade and two- countries. G20 Leaders Summits have set the
third of the world’s population.
agenda rolling for both short and medium-term actions
 Five Summits at the level of G20 leaders or Head of to meet the crisis.
State have been held since breakout of the global
economic crisis in 2008. 6.77 The first G20 Summit was held in November
Sl. Summit’s Month / 2008 in Washington DC under the shadow of the
No. Venue Year greatest financial crisis in the post-war era. Its
significant achievements were in the form of high
1 Washington DC, USA 15 November, 2008
level commitments to: reform international financial
2 London, UK 2 April, 2009
regulation; to expand the Financial Stability Forum
3 Pittsburgh, USA 24-25 September, 2009 and other major standard setting bodies; and to give
4 Toronto, Canada 26-27 June, 2010 greater voice and representation to emerging and
5 Seoul, South Korea 11-12 November, 2010 developing countries in International Financial
 The next G 20 Summit will be held in Cannes, France Institutions.
on 3-4 November, 2011. 6.78 Four months later, G20 Leaders met again in
London in April 2009, wherein they pledged to do
whatever was necessary to restore confidence,
Box 6.4 : India and G 20
growth and jobs, promote global trade and investment
India is a member of the G20 since it was established as and reject protectionism. They also agreed to
Finance Ministers Forum in 1999. India is the only G20 undertake unprecedented and concerted fiscal
member country from South Asia and one of the important
expansion and monetary easing, and reached an
emerging market member countries in the G20.
agreement to provide over a trillion US dollar of
Some important landmarks in India’s involvement in the
additional resources to the global economy through
G20 are:
the International Financial Institutions, of which 750
 G20 chair in 2002 and hosted G20 Finance Ministers
billion US dollar was for the IMF.
and Central Bank Governors meeting in that year.
 Co-chaired (represented by Deputy Governor, RBI) 6.79 The Third G20 Leaders’ Summit was held in
the G20 Working Group on Enhancing Sound Pittsburgh, USA, on 24-25 September, 2009. The
Regulation and Strengthening Transparency (after the major outcomes related to (a) timelines for voice
November 2008 Washington Summit). and quota reforms in the World Bank and the IMF,
 Currently co-chair of the Working Group on G20 (b) timelines for regulatory reform in the Financial
Framework for Strong, Sustainable and Balanced Sector (c) launching of a Framework for Strong
Growth along with Canada. Sustainable and Balanced Growth, (d) resolve to
 India is contributing to various thematic issues being phase out and rationalize inefficient fossil fuel
deliberated in G20 such as: subsidies, while protecting the interests of the
 Financial sector regulatory reforms poorest, and (e) designating the G20 as the premier
 Climate change multilateral forum for cooperation on economic
 IFIs reform issues.
 Growth and Fiscal Consolidation 6.80 The fourth G 20 Leaders’ Summit was held at
 Enhancing shareholding in forums such as FSB, Toronto, Canada, on 26-27 June, 2010. Building
IASB
on G20 achievements in addressing the global
 Issues pertaining to Non-Cooperative Jurisdiction economic crisis, leaders agreed on the next steps
(Global Forum, FATF etc.)
that the G20 countries should take to ensure a full
return to growth with quality jobs, carry out growth services, imposing new export curbs or implementing
friendly fiscal consolidation, reform and strengthen WTO inconsistent measures to stimulate exports.
financial systems, and create strong, sustainable Besides, the leaders agreed to support bringing the
and balanced global growth. Advanced economies Doha Development Round to a balanced and
committed to fiscal plans that will, at least halve ambitious conclusion as soon as possible.
deficits by 2013 and stabilize or reduce government
debt-to-GDP ratios by 2016. In addition, there was 6.81 The fifth G 20 Summit was held in Seoul, South
agreement on (i) strengthening social safety nets, Korea, on 11 and 12 November, 2010. The summit
enhancing corporate governance reform, financial was notable for the increasing economic and political
market development, infrastructure spending, and influence of the emerging economies and may well
greater exchange rate flexibility in some emerging be indicative of the rebalancing of the global
markets; (ii) pursuing structural reforms across the economy. The earlier G-20 finance ministers’ meeting
entire G-20 membership to increase and sustain played an important role in mollifying the concern of
growth prospects; and (iii) making more progress a possible currency war by pledging to move towards
on rebalancing global demand. The leaders also more market determined exchange rate systems
agreed to renew for three years (until end 2013) that reflect underlying economic fundamentals and
the G20 commitment to refrain from raising barriers refrain from competitive devaluation of currencies
or imposing new restrictions on trade in goods and (Box 6.5).
Box 6.5 : Highlights of the Leaders’ Declaration of G 20 Summit held in Seoul, South Korea in
November, 2010
 Adoption of the Seoul Action Plan included country specific actions, to move closer to the shared objectives of
stronger, sustainable and balanced growth. The Plan includes commitment to:
a) Undertake macroeconomic policies, including fiscal consolidation to ensure ongoing recovery and sustainable
growth and enhance the stability of financial markets, in particular moving towards more market determined
exchange rate systems, and refraining from competitive devaluation of currencies. Advanced economies, including
those with reserve currencies, will be vigilant against excess volatility and disorderly movements in exchange rates;
b) Implement a range of structural reforms that boost and sustain global demand, foster job creation, and increase
the potential for growth; and
c) Enhance the Mutual Assessment Process (MAP) to promote external sustainability. To strengthen multilateral
cooperation to promote external sustainability and pursue the full range of policies conducive to reducing
excessive imbalances and maintaining current account imbalances at sustainable levels. The leaders have tasked
the G 20 Framework Working Group (of which India is a co-chair along with Canada) with technical support of the
IMF and other international organizations to develop indicative guidelines composed of a range of indicators that
would serve as a mechanism to facilitate timely identification of large imbalances that require preventive and
corrective actions to be taken. Indicative Guidelines will then be put up for consideration of the G20 Finance
Ministers and Central Bank Governors in their April 2011 Ministerial.
 Adoption of the Seoul Consensus for Development based on six principles (Focus on Economic Growth, Global
Development Partnership, Global or Regional Systemic Issues, Private Sector Participation, Complementarity and Outcome
Orientation) and nine pillars (Infrastructure, HRD, Trade, Private Investment in job creation, Financial Inclusion, Growth with
Resilience, Food Security, Governance and Knowledge sharing), including a multi-year action plan, and setting up of a High
Level Panel (HLP) on Infrastructure.
 Endorsement of the new instruments of the IMF for Global Financial Safety Nets, and the recent IMF work on
improving global capacity to cope with shocks of a systemic nature, including working with regional financing
arrangements (RFAs). It also endorsed, amongst others, the use of macro prudential measures as a response to
volatile capital flows.
 Endorsement of the Gyeongju G20 Finance Ministers and Central Bank Governors agreement on IMF reforms
of a 6 per cent shift in quota in favour of under-represented and emerging market and developing countries (EMDCs),
and a comprehensive review of quota formula by 2013 to better reflect the economic weights of EMDCs and completion
of the next general review of quotas by January 2014.
 Endorsement of the core elements of the new financial regulatory capital and liquidity framework (Basel III),
and measures to better regulate the SIFIs on which work will continue. It was also agreed to work further on macro
prudential policy frameworks, strengthen regulation and oversight of shadow banking, and regulate commodity
derivates markets.
 Recommit to resist all forms of protectionism, while recognizing that 2011 was a critical window of opportunity to
intensify engagement to conclude the Doha Development Round.
 Adopt the G20 Anti Corruption Action Plan.
CHALLENGES The problem may be further aggravated by the rising
international oil prices.
6.82 The continuing sovereign debt risk in peripheral
6.84 Third, the periodic surge in capital flows could
euro-zone countries and fear that it could spread to
lead to problem of absorptive capacity in the
the financial sector, together with the high fiscal and economy, fuelling asset price bubbles, currency
public debt in several advanced countries, poses a appreciation and stoking inflation. The challenge is
risk to global recovery. In the event of the crisis in managing such surge in capital flows.
spreading, it could have fallout for the Indian economy 6.85 Fourth, the FDI inflows that are stable and
through reversal of capital flows and slowdown in productive in nature, have declined from US$ 37.7
exports. billion in 2008-09 to US$ 33.1 billion in 2009-10 and
US$ 19.0 billion in the current fiscal (up to November
6.83 Second, the fragile global recovery and the
2010). Moreover, the majority of the capital inflow is
robust domestic growth have led to higher current
in the form of FIIs, which are volatile in nature. Steps
account deficit in 2009-10 and 2010-11 (April –
have to be taken to encourage FDI inflows vis-à-vis
September), which is a matter of some concern. other forms of capital.
International Trade
7
CHAPTER
External trade growth collapsed in different countries in the tumultuous recession-

ridden years of 2008 and 2009. The fall in trade, which was steeper than the decline
in real GDP, was arrested in 2010, with trade growth recovering faster than real GDP
growth. The recovery in trade growth has been made possible, in part, by the fiscal
stimulus imparted by the governments and the low base of the preceding years.
However, the extent of recovery differs substantially across countries and world trade
remains below its pre-crisis level. India, which weathered the global crisis well, seems
poised to be among the few countries to surpass the earlier peak and even reach or
surpass the pre crisis trends in trade.
WORLD TRADE While this recovery is partially due to the base effect,
the pickup in world output from the negative territory
7.2 The sudden and sharp decline in world trade
of (-) 0.6 per cent in 2009 to a positive 5.0 per cent in
from US $ 16 trillion in 2008 to US$ 12.4 trillion in 2010 backed by the fiscal stimulus of different
2009 was followed by an impressive recovery in countries helped. As stated by the IMF, world trade
2010. World trade reached US$ 7.03 trillion in the remains below its pre-crisis trend and for some
first half of 2010, with a value growth of 24 per economies, particularly those hit by a banking crisis,
cent. World trade volumes which fell by an it remains below pre-crisis levels. Growth in trade
unprecedented 10.7 per cent in 2009 have quickly volumes of emerging and developing economies in
recovered with a growth of 12 per cent in 2010 as 2010 was more robust than that of advanced
per the International Monetary Fund’s (IMF), World economies, just as the fall in 2009 had been less
Economic Outlook (WEO), January 2011 (Table 7.1). severe.
Table 7.1 : Trends in growth in trade volumes

(per cent change)
Projections
2009 2010 2011 2012
World Trade Volume (goods and services) –10.7 12.0 7.1 6.8
Imports
Advanced Economies –12.4 11.1 5.5 5.2
Emerging and Developing Economies –8.0 13.8 9.3 9.2
Exports
Advanced Economies –11.9 11.4 6.2 5.8
Emerging and Developing Economies –7.5 12.8 9.2 8.8
Source : IMF, World Economic Outlook, January 2011
Website : http://indiabudget.nic.in
International Trade 157
7.3 Growth in world trade volume is expected to trade financing. An International Chamber of
moderate in 2011 and 2012 to 7.1 per cent and 6.8 Commerce (ICC) survey of mid-2010 covering 161
per cent respectively, as per IMF projections. banks located in 75 countries indicates that the
However, the trade growth in emerging and costs of trade finance remain substantially higher
developing economies is expected to be more robust than they were in the pre-crisis period, raising
than that in the advanced economies in 2011 and questions concerning affordability for exporters.
2012.
7.7 According to an April 2010 report by the Group
Trade Credit: International Scenario of 20 (G-20) Trade Finance Experts Group, through
the second half of 2009 and the first quarter of 2010,
7.4 While the global economic crisis adversely there is evidence that short-term trade finance
affected international trade, on the supply side there markets have generally improved. Average prices
is enough evidence to suggest that the financial for letters of credit in large emerging economies have
crisis might have reduced the availability of trade fallen from 150-250 basis points (bps) a year ago
credit. This could have resulted in a decline in the to 70-150 bps, and the markets in many advanced
volume of trade that would otherwise have taken economies are quickly returning to normalcy.
place even with the demand shock. Thus the However, this recovery has not been universal and
shortage in trade credit might have deepened and several regions have markets that remain stressed,
prolonged the recession. Nearly 90 per cent of world especially in Africa. Market sources cite that
trade reportedly depends on some form of trade international or large pan-African banks continue to
finance or insurance, with the total size of this charge 200 to 320 bps to endorse a letter of credit
market estimated at between US$ 10 to 12 trillion in countries regarded as having a lower risk in
in 2008. The World Trade Organization (WTO) has Africa. Low-income countries in Asia and Central
estimated a shortage in trade finance liquidity to the America seem to be in a better situation. In these
tune of US$ 25 billion as a fallout of the economic areas, liquidity has returned to near normal, but
recession, whereas the World Bank estimated that there is still a market gap resulting from the general
the shortage in trade finance accounted for 10 to deterioration in the credit-worthiness of traders,
15 per cent of the decline in trade. coupled with greater risk aversion of commercial
7.5 A recent National Bureau of Economic banks. An interesting development is a potentially
Research (NBER) study provides new evidence that long-lasting shift towards structured trade finance.
adverse credit conditions were an important channel The financial crisis brought a heightened sensitivity
through which the global economic and financial to risk, which has led to an increase in the relative
crisis affected trade volumes. Taking the case of the demand for intermediated trade finance over
US market, the study states that countries with traditional open account financing. In fact, recent
higher inter-bank rates and thus tighter credit estimates indicate that the level of intermediated
availability exported less to the USA. Thus not only (bank-supported) trade finance in 2009 surpassed
the fall in US demand, but even the credit tightening that of open account transactions, reversing a long-
in the US, resulting in higher cost of trade financing term trend towards open account financing.
for firms exporting to the US, could have posed a 7.8 The G-20, in its Communiqué issued during
bigger challenge in countries with high cost of the Seoul Summit (November 2010) has reiterated
credit.
the need for enhancing the availability of trade
7.6 A study undertaken by the Organization for finance in developing countries, particularly the low-
Economic Cooperation and Development (OECD) in income countries. In this regard, the G-20 Ministers
June 2010 shows a differentiated picture in terms have agreed to monitor and assess trade finance
of the impact of trade finance on pre- and post-crisis programmes in support of developing countries and
trade, pointing to a threshold effect. The study to evaluate the impact of regulatory regimes on
highlights that availability of trade finance seems to trade finance. The G-20 Trade Finance Expert
have a limited impact on exports under ‘normal’ Group, together with the WTO Experts Group on
circumstances, i.e. outside crisis periods. However, Trade Finance and OECD Export Credit Group, are
an IMF-BAFT (Bankers’ Association for Finance and mandated with assessing the current need for trade
Trade) survey in March 2010 is of the view that the finance in low-income countries, and, if a gap is
drop in global demand was the most important identified, will develop and support measures to
reason for the decline in trade, followed by reduced increase its availability in low-income countries.
7.9 BAFT-IFSA (the merged entity of BAFT and 7.11 Pre-export financing and loans backed by
International Financial Services Association) export credit agencies have played a major role in
announced the Master Partnership Agreement (MPA) 2010 trade finance markets. National governments
in June 2008 for mitigating the trade finance risk. across the globe devised strategies on war footing
The MPA is an industry standard for use by banks to support trade finance activities, some of them
and their counter parties around the globe to facilitate through the respective export credit agencies or 
the buying and selling of country and bank trade developmental institutions (see Box 7.1).
finance related risk. It is designed to simplify the
exchange of documentation, reduce legal costs, Trade Credit: Indian scenario
increase efficiency, and promote trade. 7.12 In the wake of the global crisis and the
7.10 Multilateral organizations have introduced problems being faced by exporters, the Reserve
several supportive measures to stimulate availability Bank of India (RBI) had reduced the interest rate
of trade finance. More than 850 foreign trade ceiling to 250 bps below the benchmark prime lending
transactions for the total amount of •550 million were rate (BPLR) on pre-shipment rupee export credit
supported by the European Bank for Reconstruction up to 270 days and post-shipment rupee export
and Development’s (EBRD) Trade Facilitation credit up to 180 days. This facility was available up
Programme (TFP) in 2009, providing additional to 30 June, 2010. In addition, the Government of
benefits to the trade finance market. The Asian India in its Union Budget for 2010-11 extended
Development Bank’s (ADB) Trade Finance interest rate subvention of 2 per cent on pre and
Facilitation Programme (TFFP) exposure limit was post shipment rupee export credit for certain
increased to US$ 1 billion. In 2009, the TFFP employment-oriented export sectors such as
supported US$2 billion in trade, an increase of over handicrafts, carpets, handlooms, and small and
300 per cent compared to 2008. Under its Global medium enterprises up to 31 March 2011. On 9
Trade Finance Programme, the International finance August 2010, the interest rate subvention scheme
Corporation (IFC) issued US$3.46 billion in was further extended to leather and leather
guarantees in financial year 2010, a 44 per cent manufacturers, jute manufacturing including floor
increase over the previous year. covering, engineering goods, and textiles for the
Box 7.1 : Response to Trade Credit Crunch in Select Countries

The policy responses of some select countries related to trade credit were as follows:
 The US-Exim (Export-Import) Bank announced a programme for providing US$ 4 billion in new short-term trade
finance facilities and US$ 8 billion in medium- and long-term trade finance facilities to support export of US goods
to emerging markets. Similarly, China, through the China-Exim Bank, provided short- , medium- , and long-term
trade finance facilities for export of Chinese goods and services to emerging markets.
 The Federal Reserve, USA announced currency swap facilities with the European Central Bank and central banks in
various countries to keep the foreign currency liquidity in the international financial system.
 The UK Government announced plans to guarantee as much as £20 billion of bank loans to small and medium
companies ensuring flow of credit.
 Germany announced a financial-sector rescue package of • 480 billion (US $ 672 billion), to secure confidence in and
liquidity into the banking system.
 The Central Bank of Russia announced schemes to lend to commercial banks without requisite collateral for up to six
months. In addition, the Central Bank granted a credit line of US$ 50 billion to Vnesheconomobank until the end of
2009.
 The Government of Hong Kong SAR has proposed extending the maximum guarantee period for working capital loan
for small and medium enterprises (SMEs) from two years to five years.
 The Japanese Government announced US $1.0 billion trade finance facilitation initiative, to be developed in close
cooperation with the IFC and ADB.
 Banco Nacional de Desenvolvimento Economico e Social (BNDES), the export credit agency of Brazil announced R$
6 billion working capital credit facilities for Brazilian companies.
 The Brazilian Central Bank auctioned US$ 1 billion to banks (who will use it for trade credit lines) with repurchase
clauses.
 Colombia and Venezuela jointly pledged US$ 100 million each for creation of a special fund in order to boost cross-
border trade between the two countries.
period from 1 April 2010 to March 31, 2011. With the Table 7.2 : Export Credit
introduction of a base rate, the lending rates charged
on rupee export credit were deregulated with effect Outstanding Export Variations Export
as on Credit (Per credit as
from 1 July 2010. However, the RBI has stipulated
` Crore)
(` Cent) per cent
that banks may reduce the interest rate chargeable
of NBC
as per the base rate in the sectors specified above
by the subvention available, even if the interest rate 24 March 2000 39,118 9.0 9.8
charged to exporters goes below the base rate, 23 March 2001 43,321 10.7 9.3
subject to a ceiling of 7 per cent. 22 March 2002 42,978 -0.8 8.0
21 March 2003 49,202 14.5 7.4
7.13 As a result of difficult financing conditions 19 March 2004 57,687 17.2 7.6
prevailing in the international credit markets and 18 March 2005 69,059 19.7 6.3
increased risk aversion of the lending counterparties, 31 March 2006 86,207 24.8 5.7
the gross inflow of short-term trade credit to India 30 March 2007 104,926 21.7 5.4
during 2008-09 was lower than in 2007-08. The 28 March 2008 129,983 23.9 5.5
gross inflows of short-term trade credit reached US$ 27 March 2009 128,940 -0.8 4.6
41.8 billion during 2008-09, while repayments 26 March 2010 138,143 7.1 4.3
(outflows of short-term trade credit) stood at US$ 31 December 2010* 153,794 11.3 4.1
43.8 billion, resulting in a net outflow of US$ 2.0
Source: Reserve Bank of India (RBI).
billion during 2008-09. Thus financing of short-term
Notes:
trade credit did not pose much of a problem in India. * Variation over the figure as on 26 March 2010.
However, the situation changed in 2009-10 with NBC—net banking credit.
short-term trade credit inflows increasing by 27.5 Data up to March 2004 relate to select banks
per cent to US$ 53.3 billion, while short-term trade accounting for 90 per cent of bank credit. Data 18
credit outflows increased only marginally by 4.5 per March 2005 onwards, pertain to all scheduled banks
excluding regional rural banks (RRBs) availing of
cent to US$ 45.7 billion, thereby resulting in a net export credit refinance from the RBI.
inflow of US$ 7.6 billion. This trend became further
pronounced in financial year 2010-11. Short-term 15.6 per cent in 2009-10, share in outflows increased
trade credit to India recorded a large net inflow of from 9.6 per cent to 15.8 per cent during the same
US$ 6.7 billion in H1 of 2010-11 (as against a period.
marginal net outflow of US$ 0.05 billion during
H1 of 2009-10) in line with the increase in imports
associated with strong domestic economic activity INDIA’S MERCHANDISE TRADE
and improved conditions in the global financial 7.15 India’s trade growth (in US dollar terms) has
markets. After the negative growth, as on 27 March been robust at 20 per cent plus since 2002-03. While
2009, export credit grew moderately as on 26 March India’s trade growth has a strong correlation with
2010. This trend continued with export credit growth world trade growth, it has been significantly higher
at 11.3 per cent as on 31 December 2010. However than world trade growth particularly in two time
export credit as a percentage of net banking credit periods, first just following the 1990 reforms and
fell by 0.9 percentage points from 5.5 per cent as second after 2003 (see Figure 7.1).
on 28 March 2008 to 4.6 per cent on 27 March 2009
7.16 Unlike many other countries, the global
and 4.1 per cent as on 31 December 2010 (see
recession only slightly jolted the continued upward
Table 7.2).
growth in India’s export sector with exports rising at
7.14 The various policy initiatives taken by the RBI a reasonable rate of 13.6 per cent in 2008-09. The
through a hike in the all-in-cost ceiling for improving compound annual growth rate (CAGR) for India’s
the trade credit mechanism, enhancement of the merchandise exports for the five-year period 2004-
limit on overseas borrowings by banks, extending 05 to 2008-09 increased to 22 per cent from the 14
the line of credit as well as swap facility to Exim per cent of the preceding five-year period. However,
Bank, have helped in easing the pressure on trade in 2009-10 export growth was negative at (-)3.5 per
financing. This is further corroborated by the increase cent, partly reflecting the effect of global recession
in share of short-term trade credit (both inflows and and partly the higher base effect due to lagged export
outflows) in overall gross capital flows-– while share data of 2008-09. Despite this negative growth, India’s
of inflows increased from 10.9 per cent in 2007-08 to ranking in the leading exporters in merchandise trade
Figure 7.1 Export growth of World and India

40
30 India
20
Per cent
World
10
0
-10
-20
-30
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Year
Source: IMF & WTO
Note: Data for 2010 is only for three quarters
which slipped marginally from 26th in 2007 to 27th in cumulative exports reaching US $ 164.7 billion during
2008 improved to 21st in 2009. this period. Current indications are that India will not
only achieve the target of US$ 200 billion but surpass
7.17 However, this reasonably good overall picture
it in 2010-11.
for the whole year hides some of the difficulties
through which the export sector went in the 12 crisis 7.19 Export growth in dollar terms decelerated in
ridden months. In the case of India, the rebound in 2008-09 while in rupee terms it exhibited an opposite
export growth from the second half of 2009-10 early movement reflecting the direct effect of the high
2010-11 was as sharp as the earlier fall, partly depreciation of the rupee by 12.5 per cent. In 2009-
reflecting the low base and partly global trends (see 10, while export growth in dollar terms was negative,
Figure 7.2). Some deft handling by the Government in rupee terms it showed a very marginal increase
due to the marginal depreciation of the rupee by 3.1
on the export front also lessened the pain for the
per cent. In 2010-11 (April-December), export growth
exporters in these trying months.
was robust both in dollar and rupee terms, the latter
7.18 Though export growth decelerated from July being slightly less due to the appreciation of the
to November 2010 after high spurts from February rupee by 5.0 per cent (Figure 7.3). Import growth
2010 to June 2010, cumulative export growth in April- movements in dollar and rupee terms exhibited similar
December 2010-11 was good at 29.5 per cent with movements during the same period (Figure 7.4).
Figure 7.2 Monthly trends in India's trade: values and growth

80
Export
Growth (%)
60
Import
40 Growth (%)
Per cent
20
Export
US$ billion
0
-20 Import
US$ billion
-40
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
2008-09 2009-10 2010-11

Year
Source: Based on Directorate General of Commercial Intelligence and Statistics (DGCI&S) data.
Table 7.3 : Trade Performance : Volume and Unit Values
(Annual per cent change)
Exports Imports Terms of Trade
Value Value
Rupee US$ Volume Unit Rupee US$ Volume Unit Net Income
terms terms Value terms terms Value
2001-02 2.7 -1.6 0.8 1.0 6.2 1.7 4.0 2.8 -2.1 -1.3
2002-03 22.1 20.3 19.0 2.9 21.2 19.4 5.8 14.3 -9.8 7.4
2003-04 15.0 21.1 7.3 7.5 20.8 27.3 17.4 3.1 3.6 11.2
2004-05 27.9 30.8 11.2 14.9 39.5 42.7 17.2 18.9 -3.5 7.3
2005-06 21.6 23.4 15.1 6.1 31.8 33.8 16.0 14.0 -6.0 8.2
2006-07 25.3 22.6 10.2 13.7 27.3 24.5 9.8 15.1 -1.3 8.8
2007-08 14.7 29.0 7.9 5.1 20.4 35.5 14.1 1.9 2.6 10.7
2008-09 28.2 13.6 9.0 16.9 35.8 20.7 20.2 13.8 2.5 11.7
2009-10 0.6 -3.5 -1.1 1.0 -0.8 -5.0 9.9 -10.0 12.3 11.0
2010-11* 23.4 29.5 - - 13.6 19.0 - - - -
Source: Computed from DGCI&S data.
Note: * April-December 2010.
Volume and unit value index of exports and imports are with new base (1999-2000=100)
7.20 The deceleration in export growth in rupee compared to the 9 per cent growth in 2008-09. This
terms in 2009-10 was not only due to the large was mainly due to the negative growth in both volume
deceleration of growth in unit values to 1.0 per cent and unit values of manufactured goods. Export volume
compared to 16.9 per cent in 2008-09 but also due of food and food articles like rice, coffee, spices,
to actual decline in quantum by 1.1 per cent and oilseed cake also fell (though their unit values
Figure 7.3 Export growth and exchange rate changes

50
Percentage change
40 Export
growth in
30 US$ terms
20
10 Export
growth in
0 R terms
-10
-20 Exchange
rate
1999-2000
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
changes
Year
Figure 7.4 Import growth and exchange rate changes

50
Percentage change
40 Import
growth in
30 US$ terms
20
10 Import
growth in
0 R terms
-10
-20 Exchange
rate
1999-2000
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
changes
Year
Source: Based on DGCI&S and RBI data.
increased) mainly due to supply constraints and negative unit value growth of machinery and transport
policy interventions like ban on exports in the case equipment coupled with the low quantum growth;
of non-basmati rice. negative unit value growth in miscellaneous
manufactured articles and mineral fuels and non-
7.21 A dissection of the export quantum indices
fuel crude materials, despite their positive quantum
region-wise, shows that the negative quantum growth
growths.
for the first time in the decade was due to the
negative quantum growth for almost all the regions, 7.23 The net terms of trade, which measures the
except the South African Development Community, unit value index of exports as a proportion of unit
Asia-Pacific Economic Cooperation, and the value index of imports, improved by 12.3 per cent.
European Union. In particular, the (-) 8.0 per cent This was despite the very marginal positive growth
growth for the Association of South East Asian in unit value index of exports as the growth of unit
Nations (ASEAN) and the (-) 5.8 per cent growth for value index of imports was negative for the first time
North America which are among our major trading in this decade at 10 per cent. Income terms of trade,
partners and the high negative growth of 22 per reflecting the capacity to import, grew at 11 per
cent for the Commonwealth of Independent States cent like in the two previous years. But unlike the
(CIS) contributed to this fall in quantum of exports. earlier two years this was due to the high favourable
Similarly a dissection of the import unit value growth in net barter terms of trade while export
indices, region-wise, shows that the negative growth volume growth was negative for the first time in this
for the first time in the decade was due to the decade.
negative growth of unit values in imports from all the
7.24 India’s share in world merchandise exports
regions, with the South African Development
has started rising since 2007 albeit by a very slow
Community being the exception.
0.1 percentage point so as to reach 1.3 per cent in
7.22 The deceleration of imports in rupee terms in 2009 and 1.4 per cent in 2010 (January-June). This
2009-10 was mainly due to the high negative growth was mainly due to the relatively slow rise or greater
of unit value indices even while volume growth was fall in world export growth than India’s (Table 7.4).
moderately high. This, in turn, was due to the high The increase in China’s share of world exports
negative unit value growth in chemicals and related between 2000 and 2009 at 5.8 percentage points is
products despite the moderate quantum growth; 50 per cent of the total increase in the share of
Table 7.4 : Export growth and share in world exports : India and other select countries
Value Growth rate % Share in world exports (%) change in
(US$ CAGR Annual shares
billion)
2009 2000- 2008 2009 2010 2000 2008 2009 2010 2009/
07 (Jan- (Jan- 2000
June) June)
China 1202 25.4 17.3 -15.9 35.1 3.9 8.9 9.7 10.0 5.8
Korea 362 11.6 13.6 -14.3 34.3 2.7 2.6 2.9 3.1 0.2
Hong Kong 319 7.9 5.3 -12.2 24.8 3.2 2.3 2.6 2.6 -0.6
Russia 303 18.9 33.1 -35.7 51.4 1.7 3.0 2.5 2.7 0.8
Singapore 270 11.7 13.0 -20.2 37.4 2.2 2.1 2.2 2.3 0.0
Mexico 230 7.3 7.3 -21.3 35.4 2.6 1.8 1.9 2.0 -0.8
Taiwan 204 7.6 3.5 -20.1 49.3 2.3 1.6 1.6 1.9 -0.7
India 165 19.8 29.7 -15.2 35.3 0.7 1.2 1.3 1.4 0.7
Malaysia 157 8.7 19.1 -24.9 36.9 1.5 1.3 1.3 1.4 -0.3
Brazil 153 16.5 23.2 -22.7 27.5 0.9 1.2 1.2 1.3 0.4
Thailand 152 12.1 12.9 -12.0 36.8 1.1 1.1 1.2 1.3 0.1
Indonesia 119 8.8 18.3 -14.4 38.1 1.0 0.9 1.0 1.0 -0.1
South Africa 63 12.8 21.3 -26.0 31.2 0.5 0.5 0.5 0.5 0.0
EDEs 4572 16.9 25.3 -24.4 26.7 25.4 37.9 37.0 37.4 11.6
World 12,358 11.7 15.9 -22.7 24.0 100.0 100.0 100.0 100.0 -
Source : Computed from IMF, International Financial Statistics, November 2010.
Note: EDEs stand for emerging and developing economies.
emerging and developing countries over this period, Table 7.5 : Quarterly Trade Growth of
while India’s rise in share of 0.7 percentage points Major Asian Economies in 2010
forms only 6 per cent of the total increase. However,
Country Y-o-Y Growth (%)
China’s export growth rate which was above 25 per
cent in this decade till 2007, moderated to 17.3 per Q1 Q2 Q3
cent in 2008 and became a negative (-) 15.9 per China Exports 28.7 40.9 32.3
cent in 2009 due to global recession. It improved to Imports 64.8 43.6 27.1
Total Trade 44.1 42.2 29.8
35.1 per cent in the first half of 2010, following the Hong Kong Exports 25.8 23.9 27.4
general trend, as a result of recovery and low base Imports 34.2 29.4 23.8
Total Trade 30.1 26.7 25.5
effect. India’s export growth was also negative at India Exports 36.4 30.1 19.6
(-) 15.2 per cent in 2009 but recovered to 35.3 per Imports 61.6 32.3 31.0
cent in 2010 (January-June). While Russia’s export Total Trade 50.8 31.5 26.5
Indonesia Exports 44.7 32.5 24.2
growth in the first half of 2010 at 51.4 per cent is Imports 49.9 44.7 29.6
very high, standing at (-) 35.7 per cent in 2009, its Total Trade 47.0 37.8 26.6
South Korea Exports 35.8 33.1 23.7
fall had been equally great with Russia’s share in Imports 37.4 43.0 24.5
world exports falling from 3.0 to 2.5 per cent. Total Trade 36.6 37.5 24.1
Malaysia Exports 40.8 33.2 23.1
7.25 International trade activity in Asia, which Imports 45.4 42.7 29.9
rebounded appreciably in the first two quarters of Total Trade 42.7 37.4 26.1
Philippines Exports 42.9 33.3 39.9
2010, has tapered in the third quarter. This is Imports 33.3 25.4 21.3
partially due to the base effect and partially a Total Trade 37.5 28.9 29.9
Singapore Exports 38.3 36.6 27.5
reflection of the global trend in trade in Q3 of 2010. Imports 35.3 33.8 22.6
Both exports and imports have exhibited almost Total Trade 36.9 35.3 25.2
similar growth patterns with a deceleration in Q3 for Thailand Exports 31.6 41.5 21.9
Imports 58.1 46.0 30.5
most emerging Asian countries, except Hong Kong Total Trade 43.4 43.6 25.9
and Philippines, where growth in exports have
Source: Computed from WTO data.
improved marginally compared to the earlier quarter Note: Y-o-Y—year on year.
or earlier two quarters.
7.26 India’s merchandise imports, also affected by negative growth of -5.0 per cent in 2009-10. This
global recession, fell to US$288.4 billion with a was due to the fall in growth of petroleum, oil, and
Figure 7.5 POL Imports

450
400 Value of
imports of
Value (R thousand crore) & Quantity (MMT)
POL
350
Quantity
300 of POL
250
200
150
100
50
0
2006-07 2007-08 2008-09 2009-10 2009-10 (Apr-Dec) 2010-11 (Apr-Dec)
Source : Ministry of Petroleum and Natural Gas (MOPNG).
Figure 7.6 Crude oil price (US$/bbl)

140
120 Indian
Basket
Crude oil price
100
80 Brent
60
40
20
0
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
2006-07 2007-08 2008-09 2009-10
Years
Source : Based on MOPNG data.
lubricant (POL) imports by 7.0 per cent and non- 7.28 Non-POL non-bullion imports declined by 8.6
POL imports by 4.2 per cent. POL import growth per cent in 2009-10 reflecting relatively low demand
was low mainly due to decline in import price of the for imports for industrial activity, partly due to low
Indian crude oil import basket by 16.5 per cent industrial growth and fall in exports resulting in lower
despite the increase in quantity by 7.7 per cent demand for imports of inputs needed for exports.
(Figure 7.5). Imports also started picking up in the second half of
2009-10, though with a month’s lag ending the nine-
7.27 International oil prices recorded an month continuous negative growth in December
unprecedented rise during 2008 and remained 2009. The rebound in imports was much sharper
considerably volatile during the entire ensuing with import growth as high as 73.5 and 78.3 per
period. The price of the Indian basket of crude oil cent in February and March 2010. This was partly
which moved in tune with international oil prices was due to base effect and partly due to the pickup in
also volatile, averaging at US $83.57 per barrel during exports and industrial activity. During 2010-11 (April-
2008-09 after reaching an unprecedented US $ 142 December) import growth was at 19 per cent
per barrel on 3 July 2008 before declining sharply accompanied by an increase in both POL and non-
following global recession. The monthly movements POL imports at 17.7 per cent and 19.6 per cent
in oil prices from 2006-07 to 2010-11 (April-December) respectively. Gold and silver imports registered a
clearly reflect this volatility (Figure 7.6). Current oil growth of 8.7 per cent. Non-POL non-bullion imports
prices are around US $ 95-100 per barrel with Brent increased by 21.2 per cent due to recovery in
crude price even crossing the US$100 mark in industrial activity and exports.
February 2011 and Indian crude oil baset reaching
7.29 Trade deficit (on customs basis) increased
US$ 98.4 per barrel on 11 February 2011.
by 2.4 per cent to US$ 82 billion in 2010-11 (April–
Table 7.6 : Growth in POL trade and non-POL imports (US$ terms)
Total POL POL Net POL Non- POL Gold & Non-POL, non-
imports imports exports imports imports silver gold & silver
imports imports
2001-02 1.7 -10.5 13.3 -13.8 7.2 -1.2 8.5
2002-03 19.4 26.0 21.6 26.8 17.0 -6.4 20.3
2003-04 27.3 16.6 38.5 12.9 31.5 59.9 28.5
2004-05 42.7 45.1 95.9 34.4 41.8 62.6 39.0
2005-06 33.8 47.3 66.5 41.4 28.8 1.5 33.1
2006-07 24.5 29.8 60.1 18.9 22.3 29.5 21.4
2007-08 35.5 39.8 52.5 33.7 33.6 21.0 35.2
2008-09 20.7 17.4 -3.0 28.7 22.2 26.4 21.7
2009-10 -5.0 -7.0 2.3 -10.9 -4.2 32.8 -8.6
2010-11(Apr.-Sept.) 26.0 29.7 66.0 15.1 24.5 12.1 26.3
Source : Computed from DGCI&S data.
December) from US$ 80.1 billion in the corresponding exports to EU and US markets in 2009-10 and the
period of the previous year. Trade deficit reached a first half of 2010-11. In the case of primary products,
peak of US $ 118.4 billion in 2008-09 and moderated the only major change was the fall in share of ‘Others’
to US $ 109.6 billion in 2009-10. The relatively higher (see Table 7.7).
import growth compared to export growth in the first
7.32 While India’s manufactures exports to the EU
half of 2010-11, raised the alarm of a possible
suffered a high negative growth in 2009-10, the
unmanageable current account deficit. With import
recovery in the first half of 2010-11 was moderate
growth slowing down from October 2010 and exports
compared to the robust recovery of manufactures
picking up in November 2010, the fear that the high
exports to the other two destinations. Among
current account deficit may be due to high
manufactures, the performance of different product
merchandise trade deficit is disappearing. Net POL groups was varied. In the case of textiles exports to
import growth, which has been positive since 2002- the US and EU, there was a fall in shares with a
03, became negative at -10.9 per cent in 2009-10 greater fall in the case of the latter. Negative export
after a gap of seven years. However, during 2010-11 growth to the EU continued even in the first half of
(April-September), it turned positive again with a 2010-11, while there was moderate export growth to
growth of 15.1 per cent (Table 7.6). the US after three successive years of negative
growth. In gems and jewellery also, in the first half of
TRADE COMPOSITION 2010-11, the share of exports to both the US and
Export composition the EU fell with a higher fall in case of the former. In
the case of exports of engineering goods to the US
7.30 The export basket has seen major and EU there was a fall in shares with a relatively
compositional changes in this decade with a 10 higher fall in the case of the latter in 2009-10 and a
percentage point fall in shares of manufactures, a rise in shares in the first half of 2010-11. There was
12.6 percentage point gain in shares of petroleum a rise in share of exports to ‘Others’ with a high
crude and products, and a 3.3 percentage point fall growth of 50 per cent in the first half of 2010-11
in shares of primary products. This trend continued (see Box 7.2). In the case of chemicals and related
during the last two years, i.e. from 2008-09 to the products, the share of exports to the US increased
first half of 2010-11, with the share of the major by nearly 3 percentage points, while it was stagnant
category, i.e manufactures, stagnating at 68.9 per in the case of the EU and fell slightly in the case of
cent and even falling in 2009-10; share of primary ‘Others’ in the first half of 2010-11 compared to
products falling to 12.7 per cent in the first half of 2008-09. The slowdown in India’s exports to the EU
2010-11 after increasing in 2009-10; and share of where the recovery from global recession is weak is
petroleum crude and products increasing a cause for concern.
continuously both in 2009-10 and the first half of
2010-11 to reach 16.9 per cent. Within Import composition
manufactures, there has been no major 7.33 The composition of imports also underwent
compositional change in the last two years. However, changes in this decade. The share of food and allied
compared to 2000-01 the share of engineering products imports which fell to 2.1 per cent in 2008-
goods has increased substantially while that of 09 from 3.3 per cent in 2000-01, increased to 3.7
textiles including readymade garments (RMG) has per cent in 2009-10 and fell to 3.2 per cent in the
fallen heavily from 23.6 per cent in 2000-01 to 9.5 first half of 2010-11 with slight fall in import shares of
per cent in the first half of 2010-11. The chemicals edible oils and pulses (Table 7.8). The share of fuel
and related products category has made some gains imports, however, remained at around 33 per cent.
in share, while leather and leather manufactures The most notable change is the sudden rise in share
and handicrafts have lost shares. of capital goods imports from 10.5 per cent in 2000-
7.31 A comparison of the commodity-wise growth 01 to 15.0 per cent in 2009-10 and again a fall to
of major exports of India to the major destinations in 13.1 per cent in the first half of 2010-11 due to the
the first half of 2010-11 over 2008-09 shows a fall in see-saw movement in shares of imports of transport
the shares of manufactures exports to the USA and equipment. The share of gold and silver and electronic
EU, while there is a rise in the case of ‘Others’. In goods in the import basket decreased in the first
the case of petroleum, crude, and products, there is half of 2010-11 compared to 2008-09 and 2009-10.
a gain in export shares to all the three destinations The share of pearls, precious, and semi-precious
with a major gain to EU market, with high growth of stones saw a see-saw movement with negative
Box 7.2 : Indian Engineering Sector : Need for More Focus

The engineering industry is the largest segment of the Indian industrial sector. It accounts for 3 per cent of India’s GDP
with a 30.5 per cent weight in the index of industrial production (IIP); 29.9 per cent share of total investment; and 62.8
per cent share in foreign collaborations. Engineering exports are one of the largest foreign exchange earners for the country
and account for over 20 per cent of India’s total exports with around 35 per cent of the engineering exports contributed
by the micro, small, and medium enterprises (MSME) sector.
India’s export of engineering goods grew at 25.2 per cent (CAGR) during 2000-01 to 2007-08. In 2008-09, the growth
moderated to 18.7 per cent and in 2009-10 it declined by 19.6 per cent because of global recession, with its share in
total exports falling to 18.2 per cent. In the first half of 2010-11, there was a robust growth of 46.0 per cent partially
due to base effect and partially due to global recovery following stimulus measures.
The performance of principal categories of engineering items export shows that in 2009-10, all the major categories
of engineering goods had negative growth. In the first half of 2010-11, all the major categories like machinery, iron
and steel, and other engineering goods registered high growth with the major sub-categories like transport equipment,
primary and semi-finished iron and steel, non-ferrous metals and manufactures of metals registering whopping
growths of 61.8 per cent, 65.0 per cent, 61.5 per cent, and 40.3 per cent respectively. Only one major sub-category, i.e.
machinery and instruments registered moderate growth of 10.5 per cent (see Table 1)
Table 1 : Export Performance of Different Engineering Goods
Share in India’s Total Exports(%) Growth Rate (%)
Engineering Categories 2008-09 2009-10 2009-10 2010-11 2009-10 2010-11

(Apr.- (Apr. (Apr.
Sept.) Sept.) Sept.)
1) Machinery 12.2 11.0 12.5 13.3 -13.3 37.7

a) Machine Tools 0.2 0.2 0.2 0.1 -26.4 -1.2
b) Machinery & Instruments 5.9 5.3 5.7 4.8 -13.3 10.5
c) Transport Equipment 6.1 5.5 6.7 8.3 -12.9 61.8
2) Iron & Steel 3.2 2.0 1.9 2.3 -39.2 63.9
a) Iron & Steel Bar Rods, etc 0.6 0.4 0.4 0.4 -34.2 59.1
b) Primary & Semi-finished Iron & Steel 2.6 1.6 1.5 1.9 -40.4 65.0
3) Other Engineering Items 6.4 5.2 5.1 6.2 -21.7 59.8
a) Ferro Alloys 0.8 0.5 0.4 1.0 -43.1 229.4
b) Aluminium other than Products 0.3 0.3 0.3 0.3 11.3 63.5
c) Non-ferrous Metals 1.1 1.2 1.0 1.3 5.4 61.5
d) Manufacture of metals 4.1 3.1 3.3 3.6 -27.2 40.3
e) Residual Engineering Items 0.1 0.1 0.1 0.1 -5.9 37.6
Total Engineering Exports 21.8 18.2 19.5 21.8 -19.6 46.0
Source: DGCI&S
The major markets for Indian engineering exports are the USA, Singapore, UAE, UK, China, Germany, and Italy.
Notably, while there was a fall in growth of India’s engineering exports to most of the markets in 2009-10, its
engineering exports to China grew by over 62 per cent.
With a 0.8 per cent share of world engineering exports in 2008, India ranks 30th—below all comparable countries—
in the global engineering exports market. This low position is primarily attributable to three factors: 1) Low exports-
to-GDP ratio: exports-to-GDP ratio of 15 per cent for India vis-à-vis 27 per cent for comparable countries 2) Low
engineering-to-total exports ratio: engineering exports to total exports ratio of 24 per cent for India vis-à-vis 30 per cent
for comparable countries 3) Low technology-intensity of engineering exports: share of high and medium technology
products in engineering exports is 62 per cent for India vis-à-vis 71 per cent for comparable countries. Given India’s
current low share of world engineering exports and the significant scope for improvement in competitiveness, there is
potential for achieving higher growth in this major sector of world trade.
Table 7.7 : Composition of exports by major markets
Percentage share CAGR Growth ratea
2000-01 2008-09 2009-10 2009-10 2010-11 2000-01 2008-09 2009-10 2009-10 2010-11
(Apr.- (Apr.- to (Apr.- (Apr.-
Sept.) Sept.) 2007-08 Sept.) Sept.)
I Primary Products
World 16.0 13.9 14.9 13.4 12.7 19.7 1.7 3.8 -27.8 23.2
USA 9.4 7.2 6.8 7.0 7.7 7.9 2.9 -13.5 -27.4 42.6
EU 13.1 8.4 8.6 9.0 8.5 12.7 1.7 -5.7 -23.5 15.8
Others 19.8 16.7 18.0 15.7 14.5 22.8 1.6 6.6 -28.5 23.0
(a) Agri & Allied Products
World 14.0 9.6 10.0 9.3 8.5 14.6 9.7 1.1 -28.4 18.7
USA 9.0 6.0 5.8 5.9 6.6 4.4 13.1 -12.1 -25.9 45.1
EU 11.9 6.9 7.1 7.4 7.1 10.6 6.6 -6.4 -23.5 17.1
Others 16.8 11.0 11.6 10.4 9.1 17.1 10.0 3.8 -29.5 16.6
(b) Ores and Minerals (excl. coal, incl. mica)
World 2.0 4.3 4.9 4.1 4.2 38.9 -12.5 9.9 -26.5 33.5
USA 0.4 1.2 1.0 1.1 1.1 37.9 -29.6 -21.1 -34.5 29.8
EU 1.3 1.4 1.5 1.6 1.4 26.0 -16.7 -2.5 -23.3 9.5
Others 3.0 5.7 6.5 5.3 5.4 40.7 -11.4 11.9 -26.5 35.7
II Manufactured Goods
World 78.8 68.9 67.2 71.1 68.9 16.7 23.1 -5.9 -21.4 26.1
USA 90.6 90.2 89.1 88.5 88.7 11.3 7.1 -8.7 -24.9 30.4
EU 86.8 79.3 73.2 77.3 73.5 15.8 20.6 -15.4 -29.5 15.7
Others 70.9 62.0 62.0 66.5 64.5 19.3 28.9 -1.3 -17.3 28.7
(a) Textiles incl. RMG
World 23.6 10.2 10.5 11.3 9.5 8.1 4.4 -1.2 -8.4 9.7
USA 27.2 18.4 18.4 19.1 16.9 7.1 -4.8 -7.6 -14.1 15.1
EU 29.2 18.2 18.5 19.9 15.7 11.4 7.9 -6.7 -10.5 -4.1
Others 19.8 6.4 6.9 7.5 6.7 6.3 6.2 6.9 -3.9 18.1
(b) Gems & Jewellery
World 16.6 15.1 16.2 17.0 14.9 15.0 42.1 3.7 -20.9 14.2
USA 29.3 21.7 24.2 24.2 20.3 8.9 -7.7 2.8 -23.3 8.9
EU 11.5 8.3 6.7 6.9 6.4 11.3 24.8 -26.2 -48.5 12.8
Others 13.9 16.1 17.8 18.7 16.3 19.8 66.2 8.8 -15.5 15.4
(c) Engineering Goods
World 15.7 21.8 18.2 19.5 21.8 25.2 18.7 -19.6 -32.1 46.0
USA 13.4 23.9 17.1 16.4 22.2 19.5 16.1 -33.9 -48.7 75.8
EU 14.0 25.4 20.8 22.2 22.1 27.1 25.7 -25.1 -41.0 21.1
Others 17.2 20.0 17.6 19.2 21.7 26.0 16.6 -13.1 -24.7 50.2
(d) Chemical & Related Products
World 10.4 12.3 12.8 12.7 12.1 24.3 7.2 0.9 -18.1 23.8
USA 5.7 14.8 17.2 15.8 17.6 26.8 12.8 7.4 -9.9 45.5
EU 9.7 13.0 12.5 12.4 13.0 24.4 7.4 -11.8 -26.4 27.5
Others 12.5 11.6 12.2 12.3 11.0 23.7 6.0 4.0 -16.9 18.2
(e) Leather & leather mnfrs
World 4.4 1.9 1.9 2.0 1.7 8.7 1.5 -5.5 -20.2 14.1
USA 3.7 1.7 1.5 1.6 1.4 -1.5 16.1 -17.8 -24.4 14.5
EU 11.4 5.9 6.3 6.7 6.0 9.5 1.0 -2.1 -16.9 8.2
Others 1.6 0.7 0.6 0.7 0.7 12.6 -2.1 -9.4 -26.8 31.1
(f) Handicrafts including Handmade Carpets
World 2.8 0.6 0.5 0.5 0.5 2.3 -25.8 -10.6 -30.4 22.6
USA 6.0 1.6 1.5 1.5 1.4 -1.7 -30.6 -14.7 -32.2 21.6
EU 4.4 1.1 1.1 1.1 0.9 1.9 -18.0 -7.5 -29.4 3.2
Others 0.8 0.2 0.2 0.2 0.2 10.6 -30.2 -10.6 -29.4 56.4
III Petroleum, Crude & Products (incl. coal)
World 4.3 14.9 15.8 13.3 16.9 46.8 -3.0 2.3 -42.5 66.0
USA 0.0 0.8 2.3 2.2 2.7 214.9 -76.2 180.3 21.5 61.4
EU 0.0 10.6 16.9 12.6 17.4 683.2 5.7 45.4 -10.9 67.9
Others 7.9 18.6 18.1 15.8 19.5 43.7 -5.0 -3.9 -47.8 64.5
Total Exports
World 100.0 100.0 100.0 100.0 100.0 20.4 13.6 -3.5 -25.7 30.1
USA 100.0 100.0 100.0 100.0 100.0 12.1 2.0 -7.6 -23.5 30.1
EU 100.0 100.0 100.0 100.0 100.0 18.3 13.9 -8.4 -26.8 21.7
Others 100.0 100.0 100.0 100.0 100.0 23.5 15.7 -1.3 -25.7 32.6
Source : Computed from DGCI&S data
Note : Totals of I, II, and III may not add up to total exports due to some unclassified items.
a Growth rate in US dollar terms
Table 7.8 : Commodity composition of imports

Percentage share CAGR Growth rate (per cent) a
Commodity Group 2000-01 2009-10 2009-10 2010-11 2000-01 2008-09 2009-10 2009-10 2010-11
(Apr.- (Apr.- to (Apr.- (Apr.-
Sept.) Sept.) 2007-08 Sept.) Sept.)
I Food and Allied Products,

of which 3.3 3.7 3.5 3.2 19.3 9.1 69.0 59.8 13.7
1 Cereals 0.0 0.0 0.0 0.0 73.8 -93.3 123.1 -2.7 237.5
2 Pulses 0.2 0.7 0.6 0.5 42.6 -2.4 58.8 47.1 4.2
3 Edible Oils 2.6 1.9 1.9 1.8 9.7 34.4 62.3 69.7 17.6
II Fuel, of which 33.5 33.2 32.5 33.2 26.0 17.7 -5.5 -39.7 28.9
4 POL 31.3 30.2 29.2 30.1 25.8 17.4 -7.0 -40.8 29.7
III Fertilizers 1.3 2.3 2.6 2.4 33.3 156.8 -48.3 -55.4 14.4
IV Capital Goods, of which 10.5 15.0 15.9 13.1 37.2 -3.9 -8.2 -20.0 4.2
5. Machinery except
electrical & machine tools 5.9 7.4 8.0 7.3 33.1 7.7 -10.2 -24.3 15.7
6 Electrical machinery 1.0 1.1 1.2 1.0 28.7 27.7 -15.1 -28.9 7.4
7 Transport equipment 1.4 4.1 4.2 2.1 61.1 -34.3 -11.6 -18.1 -36.1
V. Others, of which 46.3 42.6 42.5 43.2 22.6 23.8 1.3 -27.8 28.0
8 Chemicals 5.9 5.2 5.6 5.7 22.1 23.0 0.0 -22.9 26.7
9 Pearls, Precious,
Semi-precious Stones 9.6 5.6 4.3 7.7 7.2 107.7 -2.4 -47.8 128.9
10 Gold & Silver 9.3 10.3 9.1 8.1 20.8 26.4 32.8 -23.9 12.1
11 Electronic Goods 7.0 7.3 8.3 6.3 28.1 15.3 -10.0 -17.7 -5.3
Total Imports 100.0 100.0 100.0 100.0 25.6 20.7 -5.0 -30.7 26.0
Source : Calculated from DGCI&S data
Note : * Growth rate in US dollar terms.
Totals of I, II, III, IV, and V may not add up to total imports due to some unclassified items.
growth in 2009-10 and very high growth (129 per cent) a significant share of 5 per cent or more in 12 items
in the first half of 2010-11. (Table 7.9). Among these, three items, pearls,
precious stones, metals, coins, etc.; manmade
Export diversification filaments; and ores, slag, and ash had an increase
7.34 In 2009, India had a global export share of 1 in global share by 0.5 per cent point or more in 2009
per cent or more in 48 out of a total of 99 commodities over 2008. Six items, which include silk; carpets
at the two-digit Harmonised System (HS) level, but and other textile floor coverings; lac, gum, resins,
Table 7.9 : India’s Share in World Exports: Commodity-wise (share of more than 5 per cent)
Change in
Sl. Product Share
No. Code Product Label 2005 2006 2007 2008 2009 2009/2008
1 71 Pearls, Precious Stones, Metals, Coins, etc. 8.2 6.5 6.6 5.7 10.1 4.4
2 50 Silk 12.5 11.4 10.5 10.2 9.7 -0.5
3 57 Carpets and Other Textile Floor Coverings 9.0 9.6 8.7 8.4 8.4 0.0
4 13 Lac, Gums, Resins, Vegetable Saps and Extracts nes 11.4 10.6 9.5 9.7 7.9 -1.8
5 52 Cotton 5.5 6.8 8.5 8.6 7.7 -0.9
6 53 Vegetable Textile Fibres nes, Paper Yarn, Woven Fabric 4.8 4.2 4.6 6.1 6.3 0.2
7 63 Other made Textile Articles, Sets, Worn Clothing, etc. 7.0 6.4 5.7 5.4 5.5 0.1
8 54 Manmade Filaments 2.5 2.6 2.9 3.7 5.1 1.4
9 67 Bird Skin, Feathers, Artificial Flowers, Human Hair 3.4 4.4 5.0 5.0 5.1 0.1
10 14 Vegetable Plaiting Materials, Vegetable Products nes 5.1 4.5 4.8 5.4 5.1 -0.4
11 09 Coffee, Tea, Mate, and Spices 4.7 5.0 5.2 5.3 5.1 -0.3
12 26 Ores, Slag, and Ash 6.8 4.8 4.8 4.5 5.0 0.5
Source : Calculated from National Centre for Trade Information (NCTI) data based on UN-ITC Trade Map Data 2009.
vegetable saps and extracts; cotton; vegetable in 2009-10 and the first half of 2010-11. This is mainly
plaiting materials, vegetable products; and coffee, due to India’s exports and imports of gems and
tea, mate, and spices, lost global shares in 2009 jewellery items followed by POL to the UAE. In both
over 2008. Noticeable is the near doubling in share 2009-10 and 2010-11(April-September), India’s
of pearls, precious stones, metals, coins, etc., with exports to the UAE were higher than imports, while
growth in trading activity, and the fall of nearly 2 India’s exports to China are lower than imports. The
percentage points in lac, gums, resins, vegetable high and rising trade with the UAE may also be due
saps, and extracts, due to crop failures coupled to circular trading to some extent.
with competition from substitute products and
7.36 Export-import ratios in Table 7.10 show that
competing countries. Of the remaining 38 items, 11
among its top 15 trading partners, India had bilateral
lost their shares in 2009 over 2008.
trade surplus with five countries, namely the UAE,
USA, Singapore, the UK, and Hong Kong in 2009-10
DIRECTION OF TRADE and the first half of 2010-11. India’s trade deficit with
the USA and Singapore in 2007-08, turned into trade
7.35 The directional pattern of India’s trade after
surplus thereafter. The export-import ratio fell in 2008-
changing in the first half of this decade with the
09 in the case of Hong Kong, though it recovered in
share of the top 15 trading partners increasing by
2009-10. India’s export-import ratio in the case of
5.5 percentage points to 60.3 per cent in 2007-08
China is not only low but has been stagnating at
compared to 2000-01, has not changed much after
around 0.3 though it increased to 0.4 in 2009-10, to
that with the top 15 countries continuing to hold the
again fall to 0.3 in the first half of 2010-11.
share of around 60 per cent even in 2009-10 and
2010-11 (April-September) (Table 7.10). In the first 7.37 The UAE has displaced the USA as the
half of 2010-11, their share was 59.8 per cent. An topmost destination of India’s exports in 2008-09
interesting development in the direction of India’s and 2009-10 with an export share of 13.2 per cent
trade is that the USA which was in first position in and 13.4 per cent respectively. In 2009-10, India’s
2007-08 has been relegated to third position in 2008- exports to the top two destinations, i.e. the UAE
09, with the UAE becoming India’s largest trading followed by the USA, registered growth of (-)2.1, and
partner, followed by China. This position continued (-)7.6, per cent respectively.
Table 7.10 : India's trade and export-import ratio with major trading partners
Share in total trade Export/Import ratioa
2007-08 2008-09 2009-10 2009-10 2010-11 2007-08 2008-09 2009-10 2009-10 2010-11
(Apr- (Apr- (Apr- (Apr-
Sept) Sept) Sept) Sept)
1 UAE 7.0 9.9 9.3 8.8 9.9 1.2 1.0 1.2 1.5 1.2
2 China 9.2 8.6 9.1 9.1 9.3 0.4 0.3 0.4 0.3 0.3
3 USA 10.1 8.1 7.8 8.6 7.6 1.0 1.1 1.2 1.0 1.4
4 Saudi Arabia 5.6 5.1 4.5 4.4 4.5 0.2 0.3 0.2 0.3 0.2
5 Germany 3.6 3.8 3.4 3.6 3.0 0.5 0.5 0.5 0.5 0.5
6 Switzerland 2.5 2.6 3.3 2.7 3.2 0.1 0.1 0.0 0.0 0.0
7 Singapore 3.7 3.3 3.0 3.2 3.0 0.9 1.1 1.2 1.2 1.3
8 Australia 2.2 2.6 3.0 2.9 2.4 0.1 0.1 0.1 0.1 0.1
9 Iran 3.1 3.0 2.9 3.2 2.2 0.2 0.2 0.2 0.2 0.2
10 Hong Kong 2.2 2.7 2.7 2.6 3.0 2.3 1.0 1.7 2.3 1.4
11 Korea RP 2.1 2.6 2.6 2.4 2.4 0.5 0.5 0.4 0.4 0.3
12 Indonesia 1.7 1.9 2.5 2.7 2.5 0.4 0.4 0.4 0.4 0.5
13 UK 2.8 2.6 2.3 2.4 2.1 1.4 1.1 1.4 1.4 1.5
14 Japan 2.5 2.2 2.2 2.2 2.4 0.6 0.4 0.5 0.5 0.7
15 Belgium 2.1 2.1 2.1 2.0 2.4 1.0 0.8 0.6 0.6 0.6
Total (1 to 15) 60.3 61.0 60.5 60.9 59.8 0.6 0.6 0.6 0.6 0.6
Total Trade 100.0 100.0 100.0 100.0 100.0 0.6 0.6 0.6 0.6 0.7
Source: Computed from DGCI&S data.

Note: *A coefficient of export and import ratio between 0 and 1 implies that India’s imports are greater than exports
and if the coefficient is greater than one, India exports more than what it imports.
7.38 Region-wise, over half of India’s exports (53.5 brought out by the WTO in 2009, world export and
per cent) in the first half of 2010-11 were to Asia import growth in services fell to (-)12 per cent in 2009.
(including ASEAN), up from around 40 per cent in The decline was more or less similar in most of the
2001-02. During 2010-11 (April-September), exports major regions like North America, Europe, and Asia.
to Asia (including ASEAN) increased by 29.2 per Import growth in commercial services fell in the US,
cent and to Europe by 23.3 per cent. India’s EU, and Japan and was at (-)9 per cent,(-)13 per
merchandise exports to South Asian countries cent, and (-)10 per cent, respectively. While India’s
increased by 29.2 per cent. import growth and export growth of commercial
services were at (-)9 per cent and (-)15 per cent
7.39 In 2010-11 (April-September), Asia and
respectively, those of China were at 0 per cent and
ASEAN continued to be the major source of India’s
(-)12 per cent respectively. While India ranks 21st in
imports accounting for 61.5 per cent of the total.
world merchandise exports in 2009 compared to
Country-wise, China remained the largest source
China which is in first position, in commercial
with a 12 per cent share in India’s total imports
services exports it ranks 12th compared to China at
followed by the UAE (7.5 per cent), Saudi Arabia
fifth rank.
(6 per cent), and USA (5.9 per cent). India’s import
growth from 13 of its top 15 trading partners was 7.42 The three broad categories of commercial
positive, the USA and Iran being the exceptions. services, namely transport, travel, and other
commercial services witnessed a decline in export
growth in 2009 (Table 7.11). Among top exporters/
SERVICES TRADE importers of services (with EU-27 taken as a single
7.40 In recent years, the focus of services trade unit) India ranked among the first five countries in
has shifted away from just facilitating trade in goods the export of other commercial services, computer
as the sector has emerged as an independent entity and information services, communication services,
in itself with services trade in the four supply modes and personal, cultural and recreational services in
opening up new opportunities. The integration of 2009/2008 (Table 7.12).
telecommunication and computer technology has
7.43 As per the WTO’s International Trade
made virtually all services tradable across borders.
Statistics 2010, in 2009, all commercial services
Virtually all commercial services are now tradable
sectors were affected by the global crisis but not to
across borders. The trend towards globalization,
the same extent. Transport services growth fell
reinforced by liberalization policies and the removal
mirroring the fall in world trade. Financial services
of regulatory obstacles, has fuelled steady growth
were severely hit due to the turmoil in the financial
of international investment and trade in services.
markets resulting in world exports of financial
World Trade in Services services declining by 15 per cent in 2009 though
they began slowly to recover in the last few months
7.41 The US$ 3.35 trillion world export of of the year. Europe’s financial sector was the most
commercial services was dominated by the developed affected by the economic crisis. The EU’s exports
countries in 2009, with the exception of India and of financial services plummeted by 19 per cent, to
China which were also among the top 12 exporters. US$ 133 billion in 2009. In the United States, the
As in the case of merchandise trade, India has second largest world exporter of financial services,
improved its rank in commercial services trade. As as well as in Hong Kong, the decline was by 7 per
per the latest ‘International Trade Statistics 2010’ cent. At the start of 2010, there was an upward trend
Table 7.11 : World exports of commercial services trade by major category, 2008
Value Annual percentage change
(US$ billion)
2009 2000-09 2007 2008 2009
Commercial services 3350 9 20 13 -12
Transport 700 8 20 17 -23
Travel 870 7 15 10 -9
Other commercial services 1780 12 23 12 -9
Source : WTO
Table 7.12 : India’s sector-wise Rank and Share in World Exports / Imports of Services
Rank Share Per cent Change
2009 2000 2009 2009
Transportation Services Export 13 0.6 1.5 -5
Import 13 2.1 4.2 -17
Travel Services Export 14 0.7 1.2 -10
Import
Other Commercial Services Export 4 3.7 -17
Import 8 2.4 0
Communication Services* Export 4 0.6 43
Import 11 1.5 -11
Construction Services* Export** 12 1 -5
Import** 13 1.5 178
Insurance Services* Export 7
Import 7 5.4 17
Financial Services* Export 7
Import 5 2.1 -1
Computer and Information Services* Export** 2 1.8 163
Import** 4 1.3 19
Other Business Services* Export** 6 0.6 -42
Import** 6 1.4 40
Personal, Cultural and Recreational Services* Export** 5 7.7 -6
Import 12 9.4
Source: Compiled from WTO, International Trade Statistics 2010.
Note : * data relate to 2008; ** WTO Secretariat estimates.
in exports of financial services. Estimates for the India’s Services Trade

first quarter of 2010 indicate recovery across all
7.45 India and China are the two important
countries. Construction, the most dynamic sector
developing countries which are making rapid strides
in 2008, also saw its growth fall sharply. Computer
in the services trade sector. However, the pattern of
and information services as well as royalties and
growth of the different services in India differs from
licence fees were more resilient. World exports of
that of other countries. While other commercial
computer and information services decreased by 6
services is the major category for most of the top
per cent in 2009, after record growth of 23 per cent
service exporters, in the Indian case its share is
in 2008. While exports of computer and information
proportionately higher than in that of others at 77.4
services fell by 9 per cent in Europe and by 14 per
per cent in 2008 compared to 56.5 per cent for the
cent in the CIS, in North America, they stagnated
USA, 54.8 per cent for the EU, 45.9 per cent for
and in Asia, fell by 2 per cent. In 2009, world travel
China, and 60.6 per cent for Japan. Thus this category
exports fell by 9 per cent, reflecting the worldwide
containing many dynamic services is important for
drop in international tourism with tourist arrivals down
India. The share of travel at 11.5 per cent is relatively
by 4 per cent. The decline was most pronounced in
lower than in most other countries. The shares of
Europe (-13 per cent), North America (-11 per cent),
the US and China are more than double that of India.
and the CIS (-22 per cent). Asian economies were
Even in transportation, India’s share is less than half
less affected with a 3 per cent decline. World tourism
that of many leading exporters of services, partly
is recovering rapidly with forecasts from the World
reflecting India’s lower volume of merchandise trade
Tourism Organization indicating that the number of
and partly the relatively lower participation of India’s
international tourists will increase by 3-4 per cent in
shipping sector in India’s export trade. Thus the
2010.
composition of services exports highlights the need
7.44 In commercial services imports, India moved to pay special attention to developing shipping and
from 13th position in 2005 and 2008, to 12th position travel services in India. The composition of India’s
in 2009, with a 2.5 per cent share. The United States, imports compared to other service trading countries
the European Union, China, and Japan are the major also shows the relatively higher importance of other
importers of services in the world. commercial services particularly in 2009-10.
India’s Services Exports The revival of this sector which had a CAGR of 33.9
per cent during 2000-01 to 2007-08 is a good sign,
7.46 India, is moving towards a services-dominated
though it is partially due to the base effect. The
GDP growth with a 10 per cent CAGR for services
increasing share of business services in non-
which is higher than the 6.7 per cent for non-services
software services exports is noteworthy. Both
during 2004-05 to 2009-10. It is also moving towards
business services and financial services exports
a services-dominated export growth with a CAGR
registered very high growth of 111.4 per cent and
of 16.7 per cent for services during 2004-05 to 2009-
64.9 per cent. More than the base effect, this was
10 (the CAGR was 28.7 per cent during 2000-01 to
due to the revival of these exports, following global
2006-07) which is slightly higher than the 16.4 per
recovery (Table 7.13). The fall in share of travel
cent for merchandise exports during the
services from 21.5 per cent in 2000-01 to 11.4 per
corresponding period. Services exports reached US$
cent in the first half of 2010-11 is a cause of concern.
106 billion in 2008-09 with a moderate growth of
This reflects the fact that we have not yet tapped
17.3 per cent over the previous year. As a result of
the vast tourism potential of India.
global recession, they declined to US $ 95.8 billion
in 2009-10 with a negative growth of (-)9.6 per cent.
India’s Services Imports
The miscellaneous item of services exports with a
nearly three-fourths share of total services exports, 7.47 Imports of commercial services have become
slightly improved its share in the first half of 2010- important in recent years reaching US$ 52 billion in
11 with a growth of 28.2 per cent. The share of 2008-09 and US $ 60 billion in 2009-10. But it had
software services declined to 45.7 per cent in the low growth of 1.1 per cent in 2008-09 and moderate
first half of 2010-11 from 50.8 per cent in the growth of 15.3 per cent in 2009-10 (Table 7.14).
corresponding period of 2009-10. This was a result Business services are the most important category
of moderate growth of 14.7 per cent in the first half of services imports, followed by transportation and
of 2010-11 and the revival of non-software services travel. Import growth of business services declined
exports. Non-software services exports which had by (-)7.5 per cent in 2008-09 picked up by 17.8 per
registered a high negative growth of cent in 2009-10. It grew robustly at 62.9 per cent in
(-)41.2 per cent in 2008-09 increased their share to the first half of 2010-11. Import growth of transportation
29.5 per cent with the high growth of 56.9 per cent. and travel which fell in 2009-10 turned positive in the
Table 7.13 : India's Exports of Services

Percentage share CAGR Growth rate*
Sl. Commodity Groups April- 2000-01 April-
No. September to September
2000- 2009- 2009- 2010- 2007- 2008- 2009- 2009- 2010-
01 10 10 11 08 09 10 10 11
1 Travel 21.5 12.4 11.5 11.4 18.3 -4.0 8.9 -5.2 26.2
2 Transportation 12.6 11.7 11.6 11.5 25.5 12.9 -1.2 -10.3 26.6
3 Insurance 1.7 1.7 1.8 1.5 29.4 -13.2 12.7 6.2 10.4
4 GNIE 4.0 0.5 0.5 0.4 -9.2 17.6 13.2 -5.2 9.5
5 Miscellaneous 60.3 73.8 74.7 75.2 31.6 22.3 -13.8 -16.4 28.2
a) Software Services 39.0 51.9 50.8 45.7 30.2 14.9 7.4 -8.2 14.7
b) Non-software Services 21.3 21.9 24.0 29.5 33.9 33.5 -41.2 -36.6 56.9
of which:
i) Business Services 2.1 11.9 11.6 19.3 75.0 10.9 -38.9 -46.4 111.4
ii) Financial Services 2.1 3.9 4.2 5.5 37.5 37.7 -15.6 -19.2 64.9
iii) Communication Services 7.0 1.3 1.7 1.3 11.3 -4.6 -46.5 -42.0 2.3
Total Services Exports 100.0 100.0 100.0 100.0 27.8 17.3 -9.6 -16.8 27.4
Source : Calculations based on RBI data.
Note : * Growth rate in US dollar terms.
GNIE= Government not included elsewhere.
Table 7.14 : India's Imports of Services
Percentage share CAGR Growth rate*
Sl. Commodity Groups April- 2000-01 April-
No. September to September
2000- 2009- 2009- 2010- 2007- 2008- 2009- 2009- 2010-
01 10 10 11 08 09 10 10 11
1 Travel 19.2 15.6 17.8 14.0 18.6 1.8 -0.9 -9.9 15.6
2 Transportation 24.4 19.9 20.3 18.4 18.3 11.3 -6.9 -29.4 33.2
3 Insurance 1.5 2.1 2.7 1.9 24.7 8.3 13.8 22.9 6.3
4 GNIE 2.2 0.9 0.9 1.0 2.4 111.2 -33.7 13.2 49.4
5 Miscellaneous 52.6 61.5 58.3 64.7 21.1 -4.8 32.5 9.2 63.1
a) Software Services 4.1 2.4 3.4 3.2 28.2 -23.6 -42.7 -53.4 39.9
b) Non Software Services 48.6 59.1 55.0 61.5 20.4 -2.4 40.1 18.9 64.5
of which:
i) Business Services 7.0 30.1 32.1 35.5 48.9 -7.5 17.8 10.9 62.9
ii) Financial Services 13.5 7.7 8.0 9.1 6.8 -5.6 56.9 24.2 68.0
iii) Communication Services 0.9 2.3 2.4 1.4 31.4 26.5 24.6 13.0 -14.2
Total Services Imports 100.0 100.0 100.0 100.0 19.8 1.1 15.3 -4.7 46.9
Source : Calculations based on RBI data.
Note : *Growth rate in US dollar terms. GNIE= Government not included elsewhere.
first half of 2010-11. Financial services imports grew

Table 7.15 : India’s Exports, Imports and Balance
by 68 per cent.
of Trade in Services
Balance of Trade in Services (US $ billion)
7.48 There is growing concern about a high Exports Imports Balance
merchandise trade deficit coupled with inflation 2000-01 16.3 14.6 1.7
derailing the growth momentum. However the less
2001-02 17.1 13.8 3.3
known fact is that the falling services trade surplus
2002-03 20.8 17.1 3.6
is adding to the woes on the current account deficit
front, instead of acting as a cushion as was the case 2003-04 26.9 16.7 10.1
earlier. Services trade surplus which increased 2004-05 43.2 27.8 15.4
steadily in this decade to reach US$53.9 billion in 2005-06 57.7 34.5 23.2
2008-09, fell drastically in the global crisis year of 2006-07 73.8 44.3 29.5
2009-10 to US$ 35.7 billion. This was caused by the 2007-08 90.3 51.5 38.9
collapse in exports of non-software services, 2008-09 106.0 52.0 53.9
particularly business services, the slow growth of
2009-10 95.8 60.0 35.7
software services, and the rise in import of non-
2009-10 43.8 24.7 19.1
software services, particularly business and financial
(April-September)
services. The low service trade surplus situation
2010-11 55.7 36.2 19.5
continued in the first half of 2010-11. This was due
(April-September)
to the sudden rise in imports of non-software services,
particularly business and financial services which Source : Computed from RBI data.
overshadowed the rise in exports of business and

financial services. If this situation continues in the
second half of this year and coming years, then we
have to reconcile to the fact that the hitherto extra Policies and Barriers to Trade in Services
cushion provided by the services sector for trade 7.49 In the light of the global recession, some
balance will not be available. The impact on growth measures were taken to help the services sector.
of the rising import of business and financial services These include extension of sunset clauses for
also needs to be evaluated (see Table 7.15). Software Technology Parks of India (STPIs) and
export-oriented units (EOUs) up to 2010-11 and  Levy obligation in respect of all imported raw
doubling of duty free entitlement to hotels under the sugar and white/refined sugar removed.
‘served from India’ scheme. A coordinated and
 Export of non-basmati rice, edible oils (except
synchronized effort is needed towards the services
coconut oil and forest based oil), and pulses
sector as at present services activities are dispersed
(except Kabuli chana) banned.
and fall within the purview of different departments of
the Government (also see Box 7.6). There are also  Minimum export price (MEP) used to regulate
many barriers to trade in services. These include exports of onion (at $1200 per tonne for
the State-level licensing and the ‘Buy American’ December 2010) and basmati rice ($900 PMT).
provisions in the case of business services and IT
 Export of onion (all varieties) including
services in the US; the requirement of the Office of
Bangalore rose onions and Krishnapuram
the Comptroller of Currency (OCC) in the US and
onions fresh or chilled, frozen, provisionally
some State banking supervisors to maintain ‘asset
prepared, or dried but excluding onion cut,
pledges’ in addition to the paid up capital they
sliced, or broken in powder form not permitted
maintain in their home country in the case of financial
with effect from 22 December 2010 and until
services; the fragmentation of the US insurance
further orders.
market into 56 different jurisdictions and direct
discrimination on a number of fronts; restrictions in  Full exemption from basic custom duty
the case of transport and related services and the provided to onions and shallots with effect from
recent protectionist policies in the US and other 21 December 2010. Consequently, these items
economies that deny market access to other also exempt from special additional duty of 4
countries. There is need to negotiate at bilateral and per cent, education cess, and secondary and
multilateral levels for the removal of the market higher education cess. The exemption is open
access barriers to trade in services. ended and does not carry a validity clause
prescribing a terminal date.
TRADE POLICY Policy for Promoting State-wise Exports

Recent Trade Policy measures 7.52 State-wise exports as reflected in the data on
state of origin of exports of goods show clear
7.50 Trade policy measures taken by the
domination of Maharashtra and Gujarat. Tamil Nadu,
Government and the RBI in 2009-10 and 2010-11
Karnataka, and Andhra Pradesh fall in the second
focused on reviving exports and export-related
rung of exporting States. In 2009-10, the growth of
employment. The Government followed a mix of
exports from all the States was negative, except
policy measures including fiscal incentives,
Haryana, Kerala, Goa, and Rajasthan. High negative
institutional changes, procedural rationalization, and
export growth was registered by Delhi, followed by
enhanced market access across the world and
Uttar Pradesh, West Bengal, and Karnataka. In the
diversification of export markets. Improvement in
first half of 2010-11 export growth to all destinations
infrastructure related to exports; bringing down
was positive except for Kerala (Table 7.16) To
transactions costs, and providing full refund of all
encourage exports outlay under the Assistance to
indirect taxes and levies, were the three major areas
States for Developing Export Infrastructure and Allied
of focus (see Box 7.3).
Activities (ASIDE) scheme for the Eleventh Five year
7.51 Some of the trade policy measures to check plan was increased to ` 3793 crore.
inflation in the country are the following:
Market Access Initiative (MAI) and Market
 Import duties reduced to zero for rice, wheat,
Development Assistance (MDA) Schemes
pulses, edible oils (crude), butter and ghee and
to 7.5 per cent for refined and hydrogenated 7.53 The MAI scheme was launched in 2003 to
oils and vegetable oils; act as a catalyst for India’s exports on a sustained
basis. The scheme is formulated on a focus product–
 Import of raw sugar allowed at zero duty under focus country approach to evolve specific strategy
open general licence (O G L). for specific market and specific product. To further
 Import of white/refined sugar allowed. The enable better coordination, synergising, and
facility has been extended up to 31 December facilitating of India’s export promotion activities by
2010 without any quantitative cap. the Indian Missions abroad, a ‘Challenge Fund’ has
Box 7.3 : Trade Policy Measures
Market and Product Diversification and Expansion of Markets:
 27 new markets added under the Focus Market Scheme (FMS) with incentive of duty credit scrip at 3 per cent of
exports.
 Market Linked Focus Product Scheme (MLFPS) with incentive of duty credit scrip at 2 per cent, has been significantly
broadened by inclusion of a large number of products linked to their markets.
 All of Africa, Latin America, and a large part of Oceania covered under the FMS and MLFPS (13 countries added
under the MLFPS at the time of release of the FTP 2009-14 in August 2009 and two countries added in January
2010).
 The incentive available under the FMS has been raised from 2.5 per cent to 3 per cent; and for the Focus Product
scheme (FPS) and MLFPS from 1.25 per cent to 2 per cent; and Special Focus Products at 5 per cent.
 Additional benefit of 2 per cent bonus, over and above the existing benefits of 5 per cent / 2 per cent under the
FPS allowed for about 135 existing products, which have suffered due to recession in exports. Major sectors
include all handicrafts items, silk carpets, toys and sports goods (all of which were earlier eligible for 5 per cent
benefits); leather products and leather footwear, handloom products, and some of engineering items including
bicycle parts and grinding media balls (all of which were earlier eligible for 2 per cent benefit).
 256 new products added under the FPS (at eight-digit level), which became entitled for benefits at 2 per cent of
FOB value of exports to all markets. Major sectors / product groups are engineering, electronics, rubber and
rubber products, other oil meals, finished leather, packaged coconut water, and coconut shell worked items.
 Instant tea and CSNL cardinol included for benefits under the Vishesh Krishi Gram Upaj Yojana (VKGUY) at
5 per cent of FOB (free on board) value of exports.
 Nearly 300 products (at eight-digit level) from the readymade garment sector incentivized under the MLFPS for a
further six months from October 2010 to March 2011 for exports to 27 EU countries.
Support for Technological Upgradation
 The zero-duty Export Promotion Capital Goods (EPCG) Scheme and Status Holder Incentive Scrip (SHIS) scheme
introduced in 2009 for limited sectors and valid only for two years initially, extended by one more year till 31
March 2012 and the benefit of the scheme expanded to additional sectors.
 Three additional Towns of Export Excellence (TEEs) announced, taking the list to 24.
Availability of Concessional Export Credit:
 Interest subvention of 2 per cent extended up to March 2011 for certain labour-intensive sectors of exports.
 Interest rates on export credit in foreign currency reduced to LIBOR + 200 bps in February 2010 from the earlier
LIBOR+350bps.
EOUs/STPIs
 Sections 10A and 10B (sunset clauses for STPI and EOUs schemes respectively) extended for the financial year
2010-11. Anomaly in Section 10AA relating to taxation benefit of ‘unit vis-à-vis assessee’ removed;
Services
 FTP also provided fillip to the services sector (hotels) by doubling duty-free entitlement under the Served From
India Scheme (SFIS) from 5 per cent to 10 per cent of foreign exchange earnings.
Others
 Duty Entitlement Passbook (DEPB) Scheme extended beyond 31 December 2010 till 30 June 2011.
 Time period of export realization for non-status holder exporters increased to 12 months, on par with the status
holders. This facility has been extended up to 31 March 2011.
 Advance Authorization for Annual Requirement now exempted from payment of Anti-dumping and Safeguard
duty.
 Value limit on duty-free import of commercial samples enhanced from Rs 1 lakh to Rs 3 lakh per annum.
 DEPB and Freely Transferable Incentive Schemes provisionally allowed without awaiting receipt of bank realization
certificate (BRC).
 Export obligation period under Advance Authorization Scheme enhanced from 24 months to 36 months without
payment of composition fee.
 Facilitation of Trade through various Electronic Data Interchange (EDI) initiatives, namely online filing and
processing of various authorizations to reduce transaction cost and time.
Table 7.16 : State-wise Exports of Top 15 States

(US$ million)
(April-September) Share(%) Growth rate* (%)
Sl. 2010-11
No. State 2008-09 2009-10 2009-10 2010-11 2009-10 2009-10 (Apr-Sept.)
1 Maharashtra 44,661 43,351 20,275 23,405 24.3 -2.9 15.4

2 Gujarat 40,268 38,771 16,341 24,593 21.7 -3.7 50.5
3 Tamil Nadu 18,538 16,083 7899 8404 9.0 -13.2 6.4
4 Karnataka 12,295 9092 4206 5011 5.1 -26.0 19.1
5 Andhra Pradesh 9896 8558 4594 6620 4.8 -13.5 44.1
6 Kerala 4752 5842 2783 2647 3.3 22.9 -4.9
7 Haryana 4791 5678 2653 3575 3.2 18.5 34.8
8 Uttar Pradesh 7570 5523 2762 3848 3.1 -27.0 39.3
9 Delhi 8466 5187 2575 2933 2.9 -38.7 13.9
10 West Bengal 5582 4197 1826 2821 2.3 -24.8 54.5
11 Rajasthan 3313 3338 1434 1853 1.9 0.8 29.2
12 Orissa 3351 3230 1233 2736 1.8 -3.6 121.9
13 Punjab 3015 2732 1260 1904 1.5 -9.4 51.1
14 Goa 1781 2481 557 1074 1.4 39.3 92.7
15 Madhya Pradesh 2945 2357 916 1147 1.3 -20.0 25.2
Total exports 1,85,295 1,78,751 80,950 1,05,352 100.0 -3.5 30.1
Source : DGCI&S.
* Growth rate in US $ terms
recently been set up. Individual Missions would ‘bid’ April 2000. SEZs in India functioned from 1 November
for support from the Fund by submitting innovative 2000 to 9 February 2006 under the provisions of the
export promotion project proposals. Priority would Foreign Trade Policy and fiscal incentives were made
be given to focused, specific projects with effective through the provisions of relevant statutes.
quantifiable/tangible results. During 2010-11 (up to The SEZ Act 2005, supported by SEZ Rules, came
31 December 2010), a total of 205 projects/export into effect on 10 February 2006, providing for drastic
promotion events and eight market studies/export simplification of procedures and for single window
promotion surveys were approved for assistance clearance on matters relating to Central as well as
under this scheme. State Governments. The SEZ Rules provide for
different minimum land requirements for different
7.54 To stimulate and diversify the country’s export
classes of SEZs.
trade, the Marketing Development Assistance (MDA)
Scheme is under operation. During the year 2010- 7.56 In addition to seven Central Government SEZs
11 up to 31 December 2010, a total of 411 projects/ and 12 State/private-sector SEZs set up prior to the
export promotion events have been approved for enactment of the SEZ Act 2005, formal approval has
assistance. been accorded to 580 proposals out of which 374
SEZs have been notified. The performance of SEZs
Special Economic Zones (SEZs) has been reasonably good despite some criticism
7.55 India recognized early the effectiveness of the (see Box 7.4)
export processing zone (EPZ) model in promoting
exports, with Asia’s first EPZ set up in Kandla in
Tariff Reforms
1965. With a view to overcome the multiplicity of 7.57 The global recession forced a review of the
controls and clearances; absence of world-class tariff reform process. The pause button was pressed
infrastructure; and an unstable fiscal regime to attract on peak duties in the last two years with the highest
larger foreign investments in India, the Special rate on manufactures continuing at 10 per cent. The
Economic Zones (SEZs) Policy was announced in only movement in tariffs was in the area of free trade
Box 7.4 : Performance of SEZs in India
SEZs are becoming increasingly important in India’s exports. The performance of SEZs is mainly examined in three
areas, exports, employment, and investment.
Exports: A total of 130 SEZs are already exporting. Out of this 75 are information technology (IT)/ IT enabled services
(ITES), 16 multi-product and 39 other sector specific SEZs. The total number of units in these SEZs is 3139. The physical
exports from the SEZs have increased by 121 per cent to ` 2,20,711 crore in 2009- 10 with a CAGR of 58.6 per cent during
2003-04 to 2009-10 compared to the CAGR of 19.3 per cent for total merchandise exports of the country for the same
period. When the whole world including India was reeling under the effects of the global recession, growth in exports
from SEZs was 121 per cent in 2009-10 compared to a paltry 0.6 per cent growth in total exports from India. Exports
during the first three quarters of the current year have been to the tune of ` 2,23,132 crore. The share of SEZs in India’s
total exports has increased consistently from 4.7 per cent in 2003-04 to 26.1 per cent in 2009-10 and 29.7 per cent in the
first three quarters of 2010-11 (see Table 1).
Table 1 : SEZs Exports and India’s Total Exports: A Comparison Year
Exports from SEZs Exports from India Share of SEZs

Exports
Value Growth Value Growth in Total Exports
(` crore) (%) (` crore) (%)
2003-04 13,854 39.0 2,93,367 4.7

2004-05 18,314 32.2 3,75,340 27.9 4.9
2005-06 22,840 24.7 4,56,418 21.6 5.0
2006-07 34,615 51.6 5,71,779 25.3 6.1
2007-08 66,638 92.5 6,55,863 14.7 10.2
2008-09 99,689 49.6 8,40,755 28.2 11.9
2009-10 2,20,711 121.4 8,45,534 0.6 26.1
2010-11 (Apr.-Dec.) 2,23,132 - 7,51,633 23.4 29.7
One of the criticisms SEZs face is that exports are mainly from the old SEZs which were formerly free trade zones (FTZs)
and not from greenfield SEZs. It is interesting to know that not only have many greenfield SEZs started exporting but
also the exports of new SEZs, i.e. SEZs notified under the SEZ Act 2005, have grown rapidly over the years resulting in
the highest share of 53.4 per cent for this category in 2009-10 compared to Central Government SEZs and State
Government /private SEZs established prior to the SEZ Act 2005 (see Table 2).
Table 2 : Exports from New and Old SEZs
2005-06 2006-07 2007-08 2008-09 2009-10

Central Govt SEZs
Value (in ` crore) 19,657 25,358 39,275 46,985 58,037
Growth (%) - 29 54.9 19.6 23.5
Share (%) 86.1 73.3 58.9 47.1 26.3
State Govt/Pvt SEZs Established prior to SEZ Act, 2005
Value (in ` crore) 3183 9134 22,167 31,640 44,729
Growth (%) - 187 142.7 42.7 41.4
Share (%) 13.9 26.4 33.3 31.7 20.3
SEZs notified under SEZ Act, 2005
Value (in ` crore) - 122 5195 21,064 1,17,946
Growth (%) 4158.2 305.5 459.9
Share (%) - 0.4 7.8 21.1 53.4
Employment: Out of the total employment of 6,44,073 persons in SEZs, an incremental employment of 5,09,369
persons was generated after February 2006 when the SEZ Act came into force. At least double this number obtains
indirect employment outside the SEZs as a result of the operations of SEZ units. This is in addition to the employment
created by the developer for infrastructure activities.
(Contd.....)
Box 7.4 : Performance of SEZs in India (Contd....)

Investment: The total investment in SEZs till 31 December 2010 is approximately ` 1,95,348 crore including ` 1,91,313
crore in the newly notified zones. In SEZs 100 per cent FDI is allowed through automatic route.The Government’s role has
been more as a facilitator by fast tracking the approvals rather than providing any direct monetary support. SEZs being
set up under the SEZ Act 2005 are primarily private investment driven.
Issues: Some important issues relating to SEZs are the following:
Direct Tax Code (DTC) Impact: The issue is related to deadlines for profit-linked deductions: As per the DTC, SEZ
developers will be allowed profit-linked deductions for all SEZs notified on or before 31 March 2012. Units in SEZs that
will commence commercial operations by 31 March 2014 too will be allowed profit-linked exemptions. Developers and
units notified after these dates will only have investment-linked exemptions and not profit-linked exemptions. There is
concern about these dates among developers and units particularly in the big SEZs with long gestation time.
Goods and Services Tax (GST): As per the GST model being considered, GST will be levied on imports with necessary
constitutional amendments. Though full and complete set off would be available on the GST paid on import of goods
and services, after the introduction of the GST, tax exemptions, remissions, etc. related to industrial incentives should be
converted, if at all needed, into cash refund schemes after collection of tax, so that the GST scheme on the basis of a
continuous chain of set-offs is not disturbed. Regarding special Industrial Area Schemes, such exemptions, remissions
would continue up to legitimate expiry time both for the Centre and the States. However, any new exemption, remission,
or continuation of an earlier one would not be allowed. In such cases, the Central and State Government could provide
reimbursement after collecting the GST.
Issue of Power generation and distribution: Another area of concerns is the generation and distribution of power by the
SEZ developers/units. While one opinion is that it should be left to the entrepreneur to decide whether he would like to
provide power as an infrastructure, as defined in the SEZ Act, or set up a unit to sell power as a good, another view is
that power cannot be an infrastructure and can be only a good to be generated and distributed by the unit. It may be
worth considering appropriate policy to encourage power generation and distribution.
Coordination issues: The Directors, STPI, have been declared Development Commissioners (DCs) for the IT SEZs under
their respective jurisdiction. An STPI is under administrative control of the Department of Information Technology.
Other multi-product and sector-specific SEZs are under the charge of DCs appointed by the Department of Commerce.
However a number of issues, for example processing of notification of IT SEZs, coordination with state governments etc,
relating to IT SEZs are also looked after by the DCs appointed by the Department of Commerce. This leads to a situation
of dual control adversely impacting effective coordination and needs to be resolved.
Disinvestment: The new SEZs have come up mainly in the private sector with no funding from the Government. Now the
time has possibly come to see whether some of the established SEZs which are state owned could also be privatized.
Disinvestment in these SEZs could not only add to the kitty of the Government and release more money for social-sector
development but could also make these SEZs more efficient.
agreements (FTAs) like the one with ASEAN. The Contingency Trade Policy and Non-tariff
tariff policy in 2009-10 focused on tackling inflation Measures
by lowering import duties of specific items. While
7.59 Anti-dumping investigations initiated by all
the current concerns on current account deficit may
countries started falling after reaching a peak in
lead to the pause button remaining pressed, a step
2001, numbering 165 in 2007. However, in 2008, they
forward in tariff reforms could be taken even in these
again rose to 213. While they fell marginally to 209
trying times (see Box 7.5)
in 2009, there seems to be a downward movement
7.58 The other tariff reforms could include measures in 2010, with only 69 investigations initiated in the
like reducing end-use exemptions as the revenue first half of the year (Table 7.17). India’s anti-dumping
foregone on account of export promotion initiations fell from 55 in 2008 to 31 in 2009. In
concessions in 2009-10 was ` 43,622 crore, the first half of 2010, there were 17 anti-dumping
rectifying the inverted duty structure, removing initiations by India. During 2010-11 (up to 31
Quantitative Restrictions (QRs) from petroleum December 2010), the Directorate General of
products as the Administrative Price Mechanism Antidumping and Allied Duties has initiated 13 fresh
(APM) has been dismantled, and introducing sunset anti-dumping investigations. The products involved
clauses for export promotion schemes having tariff are certain hot rolled flat stainless steel products,
concessions. azodicarbonamide, sewing machine needles,
Box 7.5 : Lowering Peak Duties with Least Revenue Loss
Peak duties for manufactures could be reduced from 10 per cent by tinkering intelligently with the tariffs without any
fall in collection rates given the fact that total collection rates (an indicator of overall incidence of tariffs including
countervailing and special additional duties) have fallen to a low of 5.9 per cent in 2009-10 (see Table 1). The falling
collection rate is a function of both rising import volumes as well as leakages due to exemptions on account of end use
and the countervailing excise duty applicable on import goods.
Table 1: Tariff collection Rates for selected import groups*
Sl No. Commodity Group 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
1 Food Products 19.3 22 32.2 23.2 19.3 4.2 2.5

2 POL 11.2 9.9 5.9 5.4 5.7 2.7 1.9
3 Chemicals 24.1 21.6 20.1 22.1 21.6 16.4 13.9
4 Man-made Fibre 45.9 38.7 33.6 28.3 30.1 17 22
5 Paper and Newsprint 7.2 7.4 9.2 9.5 10.3 8.4 7.7
6 Natural Fibre 13 10.6 12.5 12.1 12.6 5.6 4.3
7 Metals 32 25.8 25 24.1 24.3 16.8 17.4
8 Capital Goods 19 15.8 12.5 14.3 15.7 12.5 11.3
9 Others 7.6 5.5 5.2 5.7 6.1 4 3.8
10 Non POL 14.4 12.1 11.5 12.3 12.8 8.7 7.6
Total 13.5 11.5 9.8 10.2 10.4 6.9 5.9
Source: Department of Revenue, Ministry of Finance.

* Collection rate is defined as the ratio of revenue collection (basic customs duty+ countervailing duty) to value of imports
unadjusted for exemptions, expressed in percentage.
Sl No.1 includes cereals, pulses, tea, milk and cream, fruits, vegetables, animal fats, and sugar.
Sl No.3 includes chemical elements, compounds, pharmaceuticals, dyeing and coloring materials, plastic, and rubber.
Sl No.5 includes pulp and waste paper newsprint paperboards and manufactures and printed books.
Sl No.6 includes raw wool and silk.
Sl No.7 includes iron and steel and non ferrous metals.
Sl No.8 includes non-electronic machinery and project imports, electrical machinery.
In 2009-10, there are 340 tariff lines under capital goods and 4135 lines under intermediates consisting mainly of goods
going into manufacture of finished products with tariffs of 10 per cent and above. The two groups in the high duty
category account for as much as 39 per cent in the total number tariff lines. The share of the two categories in the duty
slab of 10 per cent and above in notional duty (that is the revenue which should have come to the exchequer from the
import volumes and duty rates but for the end use exemption or special category like export promotion) is 2.5 per cent
(in the case of capital goods) and 33.5 per cent (in the case of intermediate goods) of the total notional revenue estimated
at ` 2,02,705 crore. If both capital and intermediate goods are brought under the 7.5 per cent duty slab and if collection
rates are assumed to be the same, then there is a revenue loss of around ` 11,747 crore. However, in the case of
intermediate and capital goods the collection rates are higher in the 7.5 per cent duty slab compared to the 10 per cent
and above slab. If these collection rates were factored into the calculations, there could be an actual gain in revenue due
to better compliance and fall in undervaluation associated with improved collection rate in the low duty 7.5 per cent slab
as compared to the 10 per cent plus slab. One of the reasons for this is that countervailing duty exemptions, for example
in textiles, are high in the 10 per cent slab compared to the 7.5 per cent slab.
Moving capital and intermediate goods to the 7.5 per cent slab would result in the number of tariff lines with duty of 7.5
per cent accounting for 79.6 per cent (or nearly 80 per cent) of the total. They will cover 97.45 per cent of imports. Even
if some intermediate goods and all capital goods are moved to the 7.5 per cent and below category, then a major part of
manufactures will have peak duty of 7.5 per cent or less. This will give a big push to industrial growth and exports,
besides giving leverage power in WTO negotiations as well as FTAs.
Table 1 also shows that the collection rates for capital goods are still relatively high at 11.3 per cent in 2009-10 after all
the exemptions including concessions under the Export Promotion Capital Goods (EPCG) scheme. This also needs
attention.
Table 7.17 : Investigations initiated by top ten users of anti-dumping measures 1995-2010
Country 1995 2000 2001 2004 2005 2006 2007 2008 2009 2010* 1995-
2010*
India 6 41 79 21 28 35 47 55 31 17 613
United States 14 47 77 26 12 8 28 16 20 2 442
European Community 33 32 28 30 25 35 9 19 15 8 414
Argentina 27 43 28 12 12 11 8 19 28 7 277
South Africa 16 21 6 6 23 3 5 3 3 0 212
Australia 5 15 23 9 7 10 2 6 9 4 212
Brazil 5 11 17 8 6 12 13 23 9 5 184
Canada 11 21 25 11 1 7 1 3 6 1 152
China PR 0 11 14 27 24 10 4 14 17 4 182
Turkey 0 7 15 25 12 8 6 23 6 1 145
All Countries 157 298 371 220 202 203 165 213 209 69 3752
Source: WTO *Upto June 2010.
caustic soda, paranitroaniline , stainless steel cold trade remedy actions (anti-dumping duties,
rolled flat products of 200 series having width below countervailing measures, and safeguards). The new
600 mm, stainless steel cold rolled flat products of restrictive measures introduced during different
400 series having width below 600 mm, soda ash, periods following the global recession show a fall,
opal glassware, melamine, morpholine, geogrids and covering only 0.3 per cent of total G-20 imports and
aniline-III. The countries involved in these 0.2 per cent of world imports in May 2010-October
investigations are the European Union, Korea, South 2010 (see Table 7.18).
Africa, Taiwan, the USA, China PR, Thailand,
7.62 However, there is an accumulation of the trade
Norway, UAE, Kenya, Iran, Pakistan, Turkey,
restrictive measures with limited progress in
Ukraine, Indonesia, Japan, Malaysia.
unwinding them. Since October 2008, on aggregate,
7.60 Over the last two decades the world has new G-20 trade restrictions have grown to cover 1.8
witnessed rapid expansion of global trade and per cent of G-20 imports and 1.4 per cent of total
reduction in tariff rates both through the multilateral world imports. Only around 15 per cent of the trade
arrangement under the WTO as well as various types restrictive measures introduced since the outbreak
of trade cooperation agreements including FTAs. of the crisis have so far been removed, which
However, at the same time developed countries are indicates that the bulk of them still remain in force.
increasingly resorting to the use of non-tariff
7.63 In terms of number of trade measures, the
measures (NTMs) to protect their domestic
most affected sectors include electrical machinery
industries.
and equipment; chemical products; mineral fuel;
7.61 The WTO-UNCTAD (United Nations machinery and mechanical appliances; iron and
Conference on Trade and Development)-OECD steel; cereals; plastic products; and dairy products.
Reports on G-20 trade and investment measures The sectors most heavily affected in terms of
(the fourth one being the latest) states that the coverage of restrictive trade measures were electrical
number of new measures imposed by G-20 countries apparatus for line telephony, bio diesel, and automatic
is still increasing, but more slowly than in the past data processing machines. The large majority of
and with a welcome decline in the initiation of new G-20 actions since mid-May 2010 have been trade
Table 7.18 : Share of New Trade Restrictive Measures

Oct. 2008–Oct. 2009 Nov.2009–May 2010 May 2010–Oct. 2010
In total world imports 0.8 0.4 0.2

In total G20 imports 1.0 0.5 0.3
remedies, in particular the initiation of new anti- WTO NEGOTIATIONS AND INDIA
dumping investigations, followed by increases in
tariffs and other import-related taxes. Among non- Trade Negotiations
verified measures, the most frequent actions were 7.66 The Doha Round of trade negotiations at the
related to export taxes or restrictions, non-tariff WTO has been under way since 2001. Discussions
measures (import bans, licences, or other border were slow to resume after they paused in December
controls), and government measures aimed at 2008 and there has not been much progress since.
favouring domestic industries or products. The most A stock taking exercise at the level of senior officials
frequently reported export measures concern took place in the WTO in March 2010, where
restrictions on some agricultural products (export members agreed to take the discussions ahead
bans and quotas affecting grains) and some minerals based on the work already done while maintaining
(export quota reductions and reported informal bans the focus on the development dimension of the
on rare earth minerals) Round. The positive signals given by world leaders
at the G-20 Leaders’ Summit held in Seoul in
7.64 Some G-20 members have raised tariffs and
November 2010, have imparted a sense of urgency
introduced new non-tariff measures to protect
amongst members regarding the Geneva process
domestic production in certain sectors, notably steel
that is supposed to resume in January 2011. The
and motor vehicles. G-20 members have continued
Director General, WTO, has suggested a cocktail
to use trade defence mechanisms in these as well
approach of discussions combining the Chair-led
as other sectors like non-automatic import licenses.
processes within the negotiating groups and bilateral
The US and EU have re-introduced agricultural export contacts, both in specific areas and at horizontal
subsidies for the dairy sector, measures that are level. India is willing to work with the coalition groups
generally acknowledged to be among the most highly in the WTO towards an early conclusion of the Doha
trade-distorting. Some of the fiscal and financial Round. Its stand, however, is unequivocal: the
packages that have been introduced to tackle the protection of poor, subsistence farmers of developing
crisis contain elements such as state aids, other countries and vulnerable industries is a priority.
subsidies, and ‘buy/lend/invest/hire local’ conditions
that favour domestic goods and services at the 7.67 In the area of agriculture, discussions are still
expense of imports. Stricter application of Sanitary taking place on the basis of the revised draft
and Phytosanitary measures (SPS) and TBT agriculture modalities text of 6 December 2008. As
(technical barriers to trade) regulations and slower per this draft, developed countries would have to
reduce their bound tariffs in equal annual installments
procedures and additional procedural requirements
over five years with an overall minimum average cut
are the other measures imposed by countries. Thus,
of 54 per cent. Developing countries would have to
in the area of trade, there has been policy slippage
reduce their bound tariffs with a maximum overall
since the crisis began and this has continued after
average cut of 36 per cent, over a larger
the G-20 London Summit in April 2009.
implementation period of ten years. Both developed
7.65 India has adopted a multi-pronged strategy and developing country members would have the
to deal with the issues relating to non-tariff measures flexibility to designate an appropriate number of tariff
(NTMs). On the export side, an online database has lines as sensitive products, on which they would
been set up, on the SPS and TBT notification (which undertake lower tariff cuts. Developing countries
may result in NTMs) notified to the WTO by members. would have a special products (SP) entitlement of
This is to provide information to exporters about the 12 per cent of agricultural tariff lines. An average
regulatory regime of other countries. Besides, steps tariff cut of 11 per cent is proposed on SPs,
are being taken to upgrade the infrastructure and including 5 per cent of total tariff lines at zero cuts.
surveillance system at the major ports and airports There are also reductions/disciplines proposed for
to ensure due compliance with our standards and various categories of domestic and export subsidies.
regulations. Moreover, wherever India’s export 7.68 In the case of Non-Agricultural Market Access
interest is affected, issues are raised by the (NAMA) negotiations, the tariff reductions are
Government in suitable redressal forums available proposed through a non-linear Swiss formula with a
under the WTO such as in the SPS and TBT three-tiered coefficient of 20, 22 and 25 for formula
Committee. These issues are also taken up in reductions linked to specific flexibilities for protecting
bilateral forums. sensitive NAMA tariff lines of developing countries
and a coefficient of 8 for tariff reduction of developed 7.71 India has shown considerable movement from
countries. With regard to the Sectoral proposal of Uruguay Round commitments to revised offers;
some countries, by which the tariffs in certain however its primary requests in Modes 1 and 4 have
identified sectors are proposed to be brought to zero not been addressed by key developed countries.
or near zero levels, India’s negotiating position has Some of the major developed country members have
been that participation in sectoral initiatives must shown little or no movement in their Mode 4 offers
be non-mandatory and on a good faith basis without which is a major cause of concern to India. The US
pre-judging the outcome. Another important aspect and other developed countries such as Australia are
of NAMA negotiations pertain to Non-Tariff Barriers trying to introduce a new approach to services
(NTBs). With regard to this, India is one of the initial negotiations by way of the clustering initiative. India
proponents of the Horizontal Mechanism (HM)
has opposed this cluster approach on procedural as
proposal. It aims to bring in a ministerial decision on
well as substantive grounds. The lack of progress in
“Procedures for the facilitation of NTBs’. This
services under the Doha Round is not due to problems
proposal has received the support of more than 100
with the approach of negotiations but because of
WTO Member countries. Though the Doha mandate
lack of political will, inadequate response from
refer to NTBs in the context of ‘products of export
interest to developing countries’, there have been developed countries in sectors and areas of export
some moves to utilize this increasing market access interest to developing countries, and little movement
of remanufactured goods by some countries, led by in agriculture and NAMA.
United States of America. India’s negotiating position 7.72 One of the areas of crucial interest to India is
on this is that since there is no agreed definition on development of disciplines in domestic regulations
remanufactured goods, a work programme is required (DR) involving qualifications and licensing
in the first place for defining and distinguishing requirements and procedures without which Mode 4
remanufactured goods in contrast to other second access gets severely impeded. Negotiations on this
hand goods which might have grave implications on
subject are proceeding on the basis of the
the environment and livelihood aspects of the
Chairman’s text of March 2009. In order to take the
developing countries. The work programme has now
negotiations forward, a fresh round of offers would
got support from around 17 countries.
need to be tabled at the WTO by member countries.
7.69 In services, India has been a demandeur. It A timeline for the submission of the second revised
has also offered substantial sectoral and modal offers in services would be decided after a
coverage in its initial offer (January 2004) and the breakthrough is achieved in agriculture and NAMA.
first revised offer (August 2005) of the ongoing An ambitious outcome in services has to be an
services negotiation. At the Signaling Conference essential part of any breakthrough package. India
(July 2008) which was held on the sidelines of the has repeatedly stated that any future work in services
Mini-Ministerial meeting, some further improvements must be anchored in Annex C of the Hong Kong
were also conveyed. However, India’s offers / signals Ministerial Declaration. Members need to spell out
are conditional on receiving satisfaction in respect
clearly how they intend to meet the modal objectives
of its Modes 1 / 2 and Mode 4 requests.
outlined in Annex C. In particular, developed countries
7.70 The services negotiations at the WTO have need to provide clear signals of market openings in
been rejuvenated after the G-20 Meeting. Substantive sectors and modes of interest to developing
interest has been evinced by all members to intensify countries, particularly in Modes 1 and 4.
the negotiations to make use of the limited window
of opportunity (2011) to conclude the negotiations. Rules Negotiations
As a part of the plurilateral process (where more
than two countries are involved), 22 plurilateral groups 7.73 Negotiations are taking place in the
have been formed at the WTO in service sectors/ Negotiating Group on Rules (NGR) aimed at clarifying
modes. India is the coordinator of the plurilateral and improving disciplines under the Anti Dumping
requests in Mode 1 (cross-border supply) and Mode Agreement and the Agreement on Subsidies and
4 (Movement of Natural Persons) - the core areas of Countervailing Measures (ASCM), while preserving
its interest in the services negotiations. India is also the basic concepts, principles, and effectiveness of
co-sponsor of plurilateral requests in computer and these agreements and their instruments and
related services (CRS) and architectural, engineering objectives. Members are also discussing new
and integrated engineering services. disciplines for fisheries subsidies.
7.74 The discussions on Chair’s draft text of 18 commitments to support and assistance for
December 2008 continued during 2010. Consensus infrastructure development. It is important that this
eludes on the bigger issues in anti-dumping such linkage is respected by the entire WTO membership,
as zeroing, sunset reviews, lesser duty rule, public particularly the developed countries and that
interest, causation, and anti-circumvention. In adequate assistance is provided for implementation
Subsidies Agreement, considerable divergence of commitments so that a high standards agreement
remains in the proposals on specificity, subsidies on trade facilitation can be reached.
in the case of inputs provided at regulated prices,
and benchmarks for export finance. India has been BILATERAL AND REGIONAL
seeking strengthened anti-dumping rules so as to COOPERATION
prohibit the use of zeroing in dumping margin
calculation, strengthening of the rules for conduct 7.76 In the past, India had adopted a very cautious
of sunset reviews, and mandatory application of and guarded approach to regionalism. However,
lesser duty. In the Subsidies Agreement, India is recognizing that Regional and Preferential Trading
opposed to the enlargement of the scope of Agreements (RTAs) would continue to feature
prohibited subsidies in the ASCM and /or limiting of prominently in world trade and given the slow nature
the existing flexibilities for the developing countries. of multilateral negotiations, India began moving in
In the negotiations on the new disciplines on fisheries most cases towards Comprehensive Economic
subsidies, India is seeking effective special and Cooperation Agreements (CECAs). Some of the
differential (S&D) treatment for the developing recent developments related to major FTAs/RTAs/
countries, particularly in the light of employment and CECAs are the following:
livelihood concerns for small, artisanal fishing  India-EU Trade and Investment Agreement
communities and for retaining sufficient ‘policy Negotiations: Negotiations for a Broad-based
space’ so as to enable it to develop its infrastructure. Bilateral Trade and Investment Agreement
(BTIA) between India and the EU started in
Trade Facilitation June 2007. So far eleven rounds have been
7.75 Another important area of the Doha round is held. The last round was held in India in January
the negotiations on trade facilitation. Simplification 2011.
of trade procedures by reducing trading costs is in  India-Japan Economic Partnership
the interest of all WTO members. A Draft Agreement (EPA) Comprehensive
Consolidated Negotiating Text on Trade Facilitation Economic Cooperation Partnership
was worked out by the WTO members on Agreement (CEPA)Negotiations: The
14 December 2009. The draft text has since been negotiations for a CEPA started in January 2007
revised six times in 2010 through discussions in the and an ‘in principle’ Agreement was signed
meetings of the Negotiating Group on Trade during the 14th Round on 9 September 2010
Facilitation. India has been actively participating in in Tokyo.
these meetings and has also tabled a few proposals  India–Malaysia Comprehensive Economic
on ‘Customs Cooperation’, ‘Rapid Alerts System of Cooperation Agreement (CECA): India-
Customs Union’, and ‘Appeal Mechanism’. Malaysia CECA negotiations were launched
Developed countries do not want to change their in February 2008. The negotiations have been
trade procedures but expect others to do so. concluded in September 2010. The CECA
Developing countries have, by and large, adopted including trade in goods, services, investment,
an extra defensive approach to negotiations. Least and other areas of economic cooperation, would
developed countries, in general, do not want to be signed as a Single Undertaking. Taking into
undertake any binding commitment. Capacity account the India-ASEAN Trade in Goods
constraints and lack of resources are two major Agreement that was implemented in January
factors that prevent developing countries (and least 2010 between India and Malaysia, both sides
developed countries) from taking on binding have offered ‘ASEAN plus’ market access in
commitments in trade facilitation. The current goods. On 27 October 2010, the Prime
scenario indicates that developed countries and Ministers of India and Malaysia have
other donors may not invest in building physical announced conclusion of the negotiations with
infrastructure in these countries, although the July the Agreement scheduled to be signed by early
2004 Framework Agreement clearly links 2011 and implemented by 1 July 2011.
 India-Korea CEPA: An India—Korea CEPA in world trade, though transient in nature at present.
was signed on 6 August 2009 and implemented While world merchandise trade picked up in the first
with effect from1 January 2010 covering trade half of 2010, there was a slowdown in the third quarter
in goods, investment, services and bilateral of 2010 due to the base effect and drying up of fiscal
cooperation in areas of common interest. Under stimulus. The growth of exports and imports has
the CEPA, tariffs will be reduced or eliminated also moderated in India’s major trading partners in
on 93 per cent of Korea’s tariff lines and 85 per the last few months of 2010. In particular, the import
cent of India’s tariff lines. It will facilitate trade growth of the EU has been decelerating even before
in services through additional commitments it could fully pick up, falling to as low as 7.8 per cent
made by both countries to ease movement of and 6.1 per cent in July and September 2010
independent professional and contractual respectively and picking up in October and November
service suppliers. 2010 to 9.3 per cent and 12.6 per cent respectively.
This situation in the EU may continue for some time
 India-ASEAN Trade In Goods Agreement:
with fresh bouts of financial turbulence flaring up in
On 13 August 2009, India and ASEAN
the periphery of the Euro area in the fourth quarter of
comprising Brunei Darussalam, Cambodia,
2010. Deceleration was also registered in other
Indonesia, Lao PDR, Malaysia, Myanmar,
markets like Hong Kong, USA, Japan, and
Philippines, Singapore, Thailand, and Vietnam
Singapore.
signed the Trade in Goods Agreement under
the broader framework of a Comprehensive 7.78 On the import side there is new trouble brewing
Economic Cooperation Agreement (CECA) up in the Middle East resulting in oil prices (Brent)
between India and ASEAN. The Trade in Goods which were hovering at around US$ 95 per barrel
Agreement provides for elimination of basic crossing the US $ 100 mark in February 2011 and
customs duty on 80 per cent of the tariff lines gold prices steadying at around US$1341 per troy
accounting for 75 per cent of the trade in a ounce (as on 28 January 2011) after reaching a peak
gradual manner starting from 1 January 2010. of US$1423 on 7 December 2010. Although the
India has excluded 489 HS 6 digit lines from concerns on the trade deficit front have subsided
the list of tariff concessions and 590 HS 6 digit with pickup in exports in the last five months
lines from the list of tariff eliminations to and slowdown in imports in the last three months of
address sensitivities in agriculture, textiles, 2010-11 (April-December), the situation needs to be
auto, chemicals, crude and refined palm oil, watched. However, the deceleration in net surplus of
coffee, tea, pepper, etc. services trade is a cause for worry on the current
account deficit front.
 Asia Pacific Trade Agreement (APTA): APTA
includes Bangladesh, the Republic of Korea,
Challenges
Sri Lanka, China, Lao PDR and India. The fourth
round of negotiations was launched in Goa in 7.79 After withstanding the crisis successfully, the
October 2007 in the Second Session of the short-term challenges on the trade front for India are
Ministerial Conference. To move forward the related to speeding up and maintaining the tempo of
fourth round of negotiations, the third meeting export growth and ensuring that the slightly dimmed
of the Ministerial Council and the 35th Session prospects on the trade growth front do not come in
of the Standing Committee were held on 15 the way of the reforms agenda. The gradual
December 2009 and 13 – 14 December 2010 withdrawal of stimulus measures by India and other
respectively in Seoul, South Korea. countries is not likely to adversely affect India’s rising
exports. However, there is need to be vigilant about
any fallout of the financial turbulence in the periphery
CHALLENGES AND OUTLOOK of the Euro zone and the new disturbances in the
Middle East. Equally important is the need to guard
Outlook against new protectionist measures. Though many
7.77 The outlook for India’s trade sector has of these are on the decline, those already in place
brightened with a good growth of 29.5 per cent in need early winding up. India may have to raise its
2010-11 (April-December), a robust growth of 36.4 pitch in bilateral and international forums on early
per cent in December 2010 and similar signs for withdrawal of these trade distorting measures and
January 2011. However, this bright picture needs to also insist on sunset clauses for the remaining
be moderated on account of the recent developments measures. The continuation of inflation concerns on
Box 7.6 : Trade Policy Reforms : Some Challenges for the Medium and Long Term
Some important challenges for India’s trade sector in the medium and long term are the following:
Challenge of becoming a major player in world trade: The challenge for India is to achieve a share in world trade
commensurate with its size. Despite making great strides in its export growth with 20 per cent plus growth continuously
from 2002-03 to 2007-08, India has not made much progress in terms of the share in world trade. While India’s exports
were higher than those of China till 1954, they started lagging thereafter. In 1990, shares in world exports of China and
India were 1.8 per cent and 0.5 per cent respectively and in 2009, their respective shares stood at 9.7 per cent and 1.3 per
cent. If India can attain at least half of China’s share in world exports, the impact on its employment and manufacturing
activity will be enormous. While trade policy measures, shift in focus to some markets and some products, trade
facilitation, tariff reforms, etc. have helped in some measure, if India has to achieve a substantial share in world exports,
a big push will be needed.
Challenge of real diversification of India’s exports: While India has diversified its export basket as well as export
markets over the years, substantial diversification in tune with world demand has not taken place. This can be seen by
matching India’s exports with the top 100 imports of the world at the six-digit HS level. The exercise based on PCTAS
data 2010(data for 2008) shows that India’s presence in these top items of world demand is negligible except for a few
items such as diamonds and jewellery, oil cakes, t-shirts, mens/boys trousers, flat rolled iron products, and maize
(corn). There are many electronic, electrical, and engineering items (the three Es) in the top 100 imports of the world where
India’s presence is negligible.
Challenge of increasing export competitiveness: India’s export competitiveness is being challenged not only from
China and the South East Asian countries but also from the newly emerging Asian countries, less developed countries
like Bangladesh, and small countries like Vietnam in items like textiles. At macro level, the two major determinants of
export competitiveness are the exchange rate and inflation reflected in the real effective exchange rate (REER). As per the
RBI, there has been a distinct divergence between the movements of six-currency and 36-currency REER indices so far
during 2010-11. While the six-currency REER remained above base level by 16 to 20 per cent, signifying higher inflation
differentials with these economies, the 36-currencyREER largely remained below or around base level, implying that
inflation in India has been comparable to or below the levels prevailing in its trading partners in the developing world.
The magnitude of nominal exchange rate appreciation/depreciation of the currencies of these countries also differed, as
reflected in the 30-currency REER derived after the exclusion of the 6-currency index from the 36-currency index. If the
positive inflation differentials persist and the tendency among some countries to use undervalued exchange rates to
boost their export further amplifies, then the competitiveness of Indian exports may come under pressure. At the micro
level there are issues like the high transaction cost in exports. The recent Department of Commerce report of the ‘Task
Force on Transaction Cost in Exports’ also highlights this issue. Quoting the World Bank ‘Doing Business’ Report it
states that it takes 17 days to export a container from India and costs US$945 per container, compared to US$450 and
US$ 500 in Malaysia and China respectively. Denmark, Brazil, Mexico and China take 5 days, 12 days, 14 days and 21
days respectively to export a container from their countries. The report estimates the magnitude of transaction cost at
approximately US$ 13 billion. It has identified 44 issues for action, of which 21 issues have been implemented and 11
issues are under the process of implementation. Implementation of the 21 issues and another 2 issues is likely to
mitigate the transaction cost by ` 2100 crore (i.e. around US$467 million). Further efforts to reduce transaction cost
could increase India’s export competitiveness.
Challenges related to tariff reforms: India has been progressively lowering peak customs duty. The fall in peak duty
has not led to the feared collapse in revenue collections. The duty cuts have neither wiped out the domestic manufacturing
sector nor resulted in large-scale unemployment as forecasted by many. The data show that progressive peak duty cuts
have been accompanied by rise in customs duty collections. However, further bold tariff reforms with minimum revenue
loss are needed to reach levels comparable to those in ASEAN both for peak rate as well as total duty (also see Box 7.5).
One area of tariff reforms is related to customs duty exemptions and export promotion schemes. As a percentage of
aggregate tax collection, revenue foregone remains high with more than half of all notional revenues flowing into the
foregone account. What is worse, an increasing trend is visible over the last three years. In financial year 2009-10, only
41.7 per cent of notional duty was collected compared to 44.6 per cent and 51.1 per cent in 2008-09 and 2007-08
respectively. Substantial revenue is foregone on account of the different export promotion schemes. In 2010-11, revenue
foregone will continue to be significant at more than ` 50,000 crore due to enlargement of the scope of schemes under
the Foreign Trade Policy 2009-14 (FPS/FMS/VKGUY) and improvement in export promotion rates in the Duty Entitlement
Passbook (DEPB) Scheme coupled with pickup in exports. The revenue loss from end-use exemptions will also go up
with rising imports. There is also the question of accountability in the case of different schemes, which involve substantial
exemptions. While some exemptions are needed particularly at this juncture to promote exports, there is scope for
reducing the duty foregone by rationalization and convergence of these schemes. One such example is related to the
Export Promotion Capital Goods (EPCG) scheme. With import duties of general capital goods being reduced consistently,
the differential with total EPCG has come down from 35.4 per cent to 21.5 per cent during the last five years. Another
reduction in import duties for all capital goods preferably to the 3 per cent duty level stipulated for the general EPCG
and simultaneous withdrawal of the EPCG scheme could help in avoiding revenue leakages and serve as a major step
(Contd.....)
Box 7.6 : Trade Policy Reforms: Some Challenges for the Medium and Long Term (Contd...)
in rationalizing export promotion schemes. It will also serve as an upfront push to the import of capital goods for
modernization of the manufacturing and services sector in general and export manufacturing in particular.
Challenges related to FTAs/Comprehensive Economic Cooperation Agreements (CECAs) in the absence of successful
WTO negotiations. The proliferation of FTAs in the world is characterized as the ‘spaghetti bowl’ in which trade criss-
crosses in a complex fashion between countries based on tariff differentials and complicated rules of origin. In recent years,
India too is a part of many regional and bilateral groupings. While there are benefits from these FTAs for Indian exports,
in some cases the benefits to the partner countries are much more, with net gains of incremental exports from India being
small or negative. FTAs also lead to a new type of inverted duty structure with duties for final products being lower from
FTA partners compared to duties for the previous-stage raw materials imported from non-FTA countries. This acts as a
disincentive to local manufacturing which is not competitive against FTA imports because of the inverted duty structure
phenomenon. For example, the normal customs duty on Indian TV sets is 10 per cent, but in the case of imports from
Thailand and Singapore there is zero duty subject to the rules of origin requirement. There are similar issues even in
agricultural items. For example, arecanuts or betel nuts have a basic customs duty of 100 per cent. But this duty is nil or
at concessional low rate at different levels for imports from Sri Lanka under the Indo-Sri Lanka FTA and the South Asian
Free Trade Area (SAFTA) agreement and from FTA partners like Myanmar, Bhutan, and Nepal. This could affect some
regions which depend mainly on cultivation of arecanuts for livelihood. Following the ban of some States on arecanut
products, demand crashed. Allowing imports at concessional duties under FTAs for items that are banned by some States
needs reconsideration. The policy challenge related to FTAs/CECAs should take note of specific concerns of the domestic
sector and ensure FTAs do not mushroom. Instead they should lead to higher trade particularly higher net exports from
India.
Challenges related to services trade: Services trade is uncharted territory with plenty of opportunities and challenges.
A more conducive environment for trade in services can be created by liberalizing FDI in services as FDI inflows and trade
in services have a close relationship given the nature of intra-firm trade of multinational parent firms with affiliates;
rationalizing taxes in services like shipping and telecom; going forward with totalization agreements; streamlining domestic
regulations like licensing requirements and procedures, technical standards, and regulatory transparency which can help
in the growth and export of services; and continuing with the focus on services in multilateral and bilateral negotiations.
These, along with systematic marketing of services, collection and dissemination of market information by setting up a
portal for services, streamlining the services data system, and a more focused, coordinated, and synchronized policy by
the different agencies involved, could help the services sector make further strides. (Also see Chapter 10)
the domestic front would also mean that trade policy negotiations and shaper of world trade policy, it is
measures could be put to further test in the coming still a small player in world trade. While it is trying
fiscal year to tackle inflation. This could further erode to gain markets and increase competitiveness in
the exports of the already battered agricultural export new areas, it is losing markets and competitiveness
sector. This has necessitated the formation of a in some of the traditional areas. While it has made
systematic inflation-tackling mechanism with early some forays into exports of some dynamic
warning systems, rather than resorting to ad hoc commodities having high shares and high
policy measures. growth, it has not been able to make a real dent
7.80 The challenges in the medium to long term in the trade of these big ticket items which are top
have to be seen in the light of the many paradoxes of the list of world demand. Thus the potential for
in the Indian trade sector (Also see Box 7.6). While India in trade is great, but the challenges are also
India is becoming an active player in world trade aplenty.
Agriculture and Food
Management
8
CHAPTER
P ioneering work by agriculture scientists and the efforts of farmers had helped
achieve a breakthrough in the agriculture sector in the 1960s, popularly known as
the ‘Green Revolution’. High agricultural production and productivity achieved in
subsequent years has been the main reason for attaining food security to a large
extent. The country has not witnessed any big technological breakthrough in
agriculture since then. The food safety net for each and every of the over a billion
citizens—a number that is growing— requires enhanced agricultural production and
productivity in the form of a Second Green Revolution. Further, special attention is
required for achieving higher production and productivity levels in pulses, oilseeds,
fruits, and vegetables, which had remained untouched in the First Green Revolution
but are essential for nutritional security. In this regard, achieving high production of
poultry, meat and fisheries is also essential. The relatively weak supply responses to
price hikes in agricultural commodities, especially food articles, in the recent past
brings back into focus the central question of efficient supply chain management and
need for sustained levels of growth in agriculture and allied sectors. The choice before
the nation is clear—to invest more in agriculture and allied sectors with the right
strategies, policies, and interventions. This is also a ‘necessary’ condition for ‘inclusive
growth’ and for ensuring that the benefits of growth reach a larger number of people.
8.2 The growth of agriculture and allied sectors the period 2004-05 to 2007-08, the GDP for agriculture
is still a critical factor in the overall performance of and allied sectors had increased from ` 5, 65,426
the Indian economy. As per the 2010-11 advance crore to ` 6,55,080 crore, at constant 2004-05
estimates released by the Central Statistics Office prices; thereafter it stagnated at this level for two
(CSO) on 07.02.2011, the agriculture and allied sector years (2008-09 to 2009-10) (Figure 8.1). In 2009-10,
accounted for 14.2 per cent of the gross domestic it accounted for 14.6 per cent of the GDP compared
product (GDP), at constant 2004-05 prices. During to 15.7 per cent in 2008-09 and 19.0 per cent in
Figure 8.1 GDP for agriculture and allied sectors

700
R thousand crore
GDP
650
600
550
2010-11 (AE)
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10 (QE)
Year
Table 8.1 : Agriculture Sector: Key Indicators

(per cent)
Sl. Item 2008-09 2009-10 2010-11
No. (Advance
Estimates)
1 GDP—Share and Growth (at 2004-05 prices)

Growth in GDP in agriculture & allied sectors -0.1 0.4 5.4
Share in GDP—Agriculture and allied sectors 15.7 14.6 14.2
Agriculture 13.3 12.3
Forestry and logging 1.6 1.5
Fishing 0.8 0.8
2 Share in Total Gross Capital Formation in the Country (at 2004-05 prices)
Share of Agriculture & Allied Sectors in total Gross Capital Formation 8.3 7.7
Agriculture 7.7 7.1
Forestry and logging 0.07 0.06
Fisheries 0.56 0.54
3 Agricultural Imports & Exports (at current prices)
Agricultural imports to national imports 2.71 4.38
Agricultural exports to national exports 10.22 10.59
4 Employment in the agriculture sector as share of total workers 58.2
as per census 2001
Source : Central Statistics Office and Department of Agriculture and Cooperation.
2004-05. Its share in GDP has thus declined rapidly activities) recorded an average growth of 2.03 per
in the recent past. This is explained by the fact that cent against the Plan target of 4 per cent per annum.
whereas overall GDP has grown by an average of In the first year, 2007-08, of the current Plan the
8.62 per cent during 2004-05 to 2010-11, agricultural agriculture sector had achieved an impressive growth
sector GDP has increased by only 3.46 per cent of 5.8 per cent. However, this high growth could not
during the same period. The role of the agriculture be maintained in the following two years and
sector, however, remains critical as it accounts for agriculture-sector growth fell into the negative zone
about 58 per cent of employment in the country (as of - 0.1 per cent in 2008-09, although this was a
per 2001 census). Moreover, this sector is a supplier year of a record 234.47 million tonnes food production.
of food, fodder, and raw materials for a vast segment The decline in growth of agricultural GDP was
of industry. Hence the growth of Indian agriculture primarily due to the fall in the production of agricultural
can be considered a necessary condition for ‘inclusive crops such as oilseeds, cotton, jute and mesta, and
growth’. More recently, the rural sector (including sugarcane. In 2009-10, despite experiencing the
agriculture) is being seen as a potential source of worst south-west monsoon since 1972 and
domestic demand, a recognition that is even shaping subsequent significant fall in kharif foodgrain
the marketing strategies of entrepreneurs wishing production, the growth marginally recovered to 0.4
to widen the demand for goods and services. In terms per cent primarily due to a good rabi crop. Several
of composition, out of a total share of 14.6 per cent advance measures taken by the government to
of the GDP in 2009-10 for agriculture and allied salvage the rabi crop had the desired effect of
sectors, agriculture alone accounted for 12.3 per cent checking the impact of the drought situation on the
followed by forestry and logging at 1.5 per cent and rabi crop. Things are looking bright in the current
fisheries at 0.8 per cent (Table 8.1). year with a relatively good monsoon and the
agriculture-sector is expected to grow at 5.4 per cent
as per the 2010-11 advance estimates. The
PERFORMANCE OF THE AGRICULTURE agriculture sector growth in the first four years of the
SECTOR DURING THE CURRENT FIVE Plan is estimated at 2.87 per cent. In order to achieve
YEAR PLAN (2007-2012) the Plan target of average 4 per cent per year, the
8.3 During the first three years of the current Five agriculture sector needs to grow at 8.5 per cent during
Year Plan, the agriculture sector (including allied 2011-12.
Agriculture and Food Management 189
` crore at 2004-05 prices)
Table 8.2 : GCF in Agriculture and Allied Activities (`
Year GDP Agriculture & allied GCF/GDP in GCF in
activities agriculture & agriculture as
allied per cent of
GCF GDP activities total
2004-05 29,71,464 76,096 5,65,426 13.46 2.56
2005-06 32,54,216 86,611 5,94,487 14.57 2.66
2006-07 35,66,011 90,710 6,19,190 14.65 2.54
2007-08 38,98,958 1,05,034 6,55,080 16.03 2.69
2008-09P 41,62,509 1,28,659 6,54,118 19.67 3.09
2009-10QE 44,93,743 1,33,377 6,56,975 20.3 2.97
Source : Central Statistics Office.
Notes: P- provisional. Q-quick estimates.
GROSS CAPITAL FORMATION (GCF) tonnes in 2008-09. The production of foodgrains

IN AGRICULTURE AND THE ALLIED declined to 218.11 million tonnes during 2009-10 (final
SECTOR estimates) due to the long spells of drought in various
parts of the country in 2009. The productivity of almost
8.4. The GCF in agriculture and allied sectors as a
all the crops suffered considerably, which led to
proportion to the GDP in the sector stagnated around
decline in their production in 2009. As per the second
14 per cent during 2004-05 to 2006-07. However,
advance estimates released by Ministry of Agriculture
there is a marked improvement in this figure during
on 9.2.2011, production of foodgrains during 2010-
the current Five Year Plan. It increased to 16.03 per
11 is estimated at 232.07 million tonnes compared
cent in 2007-08 and further to 19.67 per cent in 2008-
to 218.11 million tonnes last year (Table 8.4). This is
09 (provisional) and to 20.30 per cent in 2009-10
only marginally below the record production of 234.47
(quick estimates [QE]). However, the GCF in
million tonnes of foodgrains in 2008-09. The country
agriculture and allied sectors relative to overall GDP
is likely to achieve record production of wheat (81.47
has remained stagnant at around 2.5 to 3.0 per cent
million tonnes), pulses (16.51 million tonnes) and
(Table 8.2). As a result the share of GCF in agriculture
cotton (33.93 million bales of 170 kg. each) this year.
and allied sector in total GCF has remained in the
This high level of production has been achieved
range of 6.6 to 8.2 per cent during 2004-05 to 2009-
despite crop damage due to drought in Bihar,
10 (Table 8.3). There is need to significantly step up
Jharkhand, Orissa and West Bengal and the effects
investment in agriculture, both by the private and
of cyclones, unseasonal and heavy rains, and cold
public sectors to ensure sustained target growth of
wave and frost conditions in several parts of the
4 per cent per annum.
country.
CROP PRODUCTION
8.5 For four consecutive years from 2005-06 to
GROWTH RATES OF AREA,
2008-09, foodgrains production registered a rising PRODUCTION AND YIELD OF
trend and touched a record level of 234.47 million AGRICULTURAL CROPS
8.6 Growth in the production of agricultural crops
Table 8.3 : Share of Agriculture & Allied depends upon acreage and yield. Given the
Sectors’ GCF in total GCF (per cent) (at limitations in the expansion of acreage, the main
2004-05 prices) source of long-term output growth is improvement in
2004-05 7.5 yields. Trends in indices of area, production, and
2005-06 7.3 yield of different crops for two periods 1980-81 to
1989-90 and 2000-01 to 2009-10 (base triennium
2006-07 6.6
ending[TE] 1981-82=100) are given in Table 8.5. An
2007-08 6.5
analysis of growth rates of area, production, and yield
2008-09 8.3
of various crops based on their respective indices
2009-10 7.7 has been made in the following paragraphs.
Table 8.4 : Agricultural Production 2010-11

(million tonnes)
Crops 2nd Target Percentage 2009-10 Percentage
Advance 2010-11 of 2010-11 (final change in
Estimates production estimates) 2010-11
2010-11 to target set compared to
for 2010-11 2009-10
Rice 94.01 102.00 92.17 89.09 5.52
Wheat 81.47 82.00 99.35 80.80 0.83
Coarse Cereals 40.08 44.00 91.09 33.55 19.46
Pulses 16.51 16.50 100.06 14.66 12.62
Total Foodgrains 232.07 244.50 94.92 218.11 6.40
Oilseeds 27.85 33.20 83.89 24.88 11.94
Sugarcane 336.70 315.00 106.89 292.30 15.19
Cotton* 33.93 26.00 130.50 24.22 40.09
Jute and Mesta** 10.08 11.50 87.65 11.82 -14.72
Notes : *million bales of 170 kg each **million bales of 180 kg each
Table 8.5 : Compound Growth Rates of Area, Production and Yield

(as per cent per annum with base TE 1981-82=100)
Crop 1980-81 to 1989-90 2000-01 to 2009-10
Area Production Yield Area Production Yield
Rice 0.41 3.62 3.19 -0.03 1.59 1.61

Wheat 0.46 3.57 3.10 1.21 1.89 0.68
Jowar -0.99 0.28 1.29 -3.19 -0.07 3.23
Bajra -1.05 0.03 1.09 -0.42 1.68 2.11
Maize -0.20 1.89 2.09 2.98 5.27 2.23
Ragi -1.23 -0.10 1.14 -3.03 -1.52 1.57
Small millets -4.32 -3.23 1.14 -5.28 -3.58 1.78
Barley -6.03 -3.48 2.72 -1.41 -0.25 1.17
Total Coarse Cereals -1.34 0.40 1.62 -0.76 2.46 3.97
Total Cereals -0.26 3.03 2.90 0.09 1.88 3.19
Gram -1.41 -0.81 0.61 4.34 5.89 1.48
Tur 2.30 2.87 0.56 0.26 1.82 1.56
Other Pulses 0.02 3.05 3.03 -0.34 -0.32 0.02
Total Pulses -0.09 1.52 1.61 1.17 2.61 1.64
Total Foodgrains -0.23 2.85 2.74 0.29 1.96 2.94
Sugarcane 1.44 2.70 1.24 0.77 0.93 0.16
Oilseeds 1.51 5.20 2.43 2.26 4.82 3.79
Cotton -1.25 2.80 4.10 2.13 13.58 11.22
8.7 Rice and wheat: During the 1980s the growth suggests that in these two crops the yield levels
in area in rice was marginal at 0.41 per cent but have plateaued and there is need for renewed
growth in production and yield was above 3 per cent. research to boost production and productivity
From 2000-01 to 2009-10 the situation changed with (Figures 8.2 and 8.3). Given the constraints in area
growth in area turning negative and in production expansion, there is no other alternative. Both public
and yield standing at 1.59 per cent and 1.61 per and private-sector investment in research and
cent respectively. In wheat too, during the 1980s the development (R&D) needs to be encouraged. Figure
growth in area was marginal at 0.46 per cent but in 8.4 shows changes in the index of area, production,
production and yield was above 3 per cent. During and yields of rice during 2003-04 to 2009-10,
2000-01 to 2009-10 the growth in area in wheat was Figure 8.5 shows changes in the index of area,
1.21 per cent and in production and yield was 1.89 production, and yield of wheat during 2003-04 to
per cent and 0.68 per cent respectively. This 2009-10.
Figure 8.2 Compound growth rate of area, production and yield of rice
4.5
Compound growth rate (per cent)
4.0
3.5 1980-81 to
1989-90
3.0
2.5
2.0 2000-01 to
2009-10
1.5
1.0
0.5
0
-0.5
Area Production Yield
Figure 8.3 Compound growth rate of area, production and yield of wheat
4.0
Compound growth rate
3.5
3.0 1980-81 to
1989-90
(per cent)
2.5
2.0
1.5 2000-01 to
2009-10
1.0
0.5
0
Figure 8.4 Index of area, production and yield of rice

250
200 Area
Index
150
Production
100
50 Yield
0
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
Year
Figure 8.5 Index of area, production and yield of wheat

250
200 Area
Index
150
Production
100
50 Yield
0
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
Year
8.8 Coarse Cereals: In coarse cereals the Box 8.1 : Coarse cereals
situation is totally different. Since there was no
technological breakthrough in these crops, the growth The food and nutritional security of India currently
rate in area of total coarse cereals, in both the depends to a great extent on the production of wheat and
periods (1980-81 to 1989-90 and 2000-01 to 2009- rice. These two crops together constituted 78 per cent of
10) was negative reflecting either shift to other crops total foodgrains production in 2009-10, whereas coarse
or relatively dry area remaining fallow. In all the major cereals constitute only 15 per cent in the same year. The
coarse cereals there was negative growth in area area under coarse cereals has shown a decline over the
during both the periods except for maize, which years whereas their yield has shown significant
recorded a growth rate of 2.98 per cent in the 2000- improvement despite decrease in area in all the major
coarse cereals except maize. The nutritional value of coarse
01 to 2009-10 period. However, growth in production
cereals is also gradually being realized. There is every
and yield for coarse grains which was 0.40 per cent
reason to promote the production of these crops and help
and 1.62 per cent respectively in the 1980s improved
them realize their full potential with increased investment
significantly to 2.46 per cent and 3.97 per cent
in research and schemes to promote their cultivation
respectively in the 2000-01 to 2009-10 period (Figure
particularly in rain-fed areas.
8.6). This increase is primarily driven by maize and
bajra. Figure 8.7 illustrates changes in the index of
area production and yield of total coarse cereals
of pulses in the country. During the 1980s there was
during 2003-04 to 2009-10. Special effort is required
negative growth in total area under pulses and growth
to promote production and productivity of all coarse
in production and yield was 1.52 per cent and 1.61
cereals to ensure food security (Box 8.1)
per cent respectively. During 2000-01 to 2009-10,
8.9 Pulses: Pulses are the main source of protein whereas area and production have grown by 1.17
for a large section of population in India. Gram and per cent and 2.61 per cent respectively, growth in
Tur are the major contributors to the total production yield at 1.64 per cent has remained at about the
Figure 8.6 Compound growth rate of area, production and yield of coarse cereals
4.0
3.5
3.0 1980-81 to
1989-90
2.5
2.0
1.5 2000-01 to
2009-10
1.0
0.5
0
-0.5
-1.0
-1.5
Figure 8.7 Index of area, production and yield of coarse cereals

250
200 Area
Index
150
Production
100
50 Yield
0
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
Year
same level reflecting that the growth in production is of area, production, and yield of sugarcane during
primarily because of increase in area (Figure 8.8). A 2003-04 to 2009-10.
technological breakthrough in pulse production is
8.11 Oilseeds: The significant improvement in
necessary to keep pace with rising demand for this
annual growth in indices of yield and area under
commodity. Figure 8.9 illustrates changes in the
oilseeds during 2000-01 to 2009-10 as compared
index of area, production, and yield of total pulses to the 1980s has resulted in increase in the annual
during 2003-04 to 2009-10. growth rate of production of oilseeds. India, however,
8.10 Sugarcane: The compound growth rate of still imports a significant proportion of its requirement
area, production, and yield of sugarcane during of edible oil (Figure 8.12). The current growth rate
2000-01 to 2009-10 has declined compared to the needs to be maintained to ensure a reasonable level
of self-sufficiency in this crop. Figure 8.13 shows
1980s. The decline in growth rate of yield during
changes in the index of area, production, and yield
this period is because of relatively higher decline in
of oilseeds during 2003-04 to 2009-10.
growth rate of production compared to decline in
growth rate of area (Figure 8.10). Concerted effort 8.12 Cotton: A significant improvement in yield has
is required to increase yield rate of this crop to resulted in an increase in growth rate of cotton
avoid fluctuations in production and spikes in price production from 2.80 per cent during the 1980s to
of sugar. Figure 8.11 displays changes in the index 13.58 per cent per annum during 2000-10 (Figure
Figure 8.8 Compound growth rate of area, production and yield of total pulses
3.0
2.5
2.0 1980-81 to
(per cent)
1989-90
1.5
1.0
0.5 2000-01 to
2009-10
0
-0.5
Figure 8.9 Index of area, production and yield of total pulses

250
200 Area
Index
150
Production
100
50 Yield
0
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
Year
Figure 8.10 Compound growth rate of area, production and yield of sugarcane
3.0
2.5
2.0 1980-81 to
(per cent)
1.5 1989-90
1.0
0.5 2000-01 to
2009-10
0
Figure 8.11 Index of area, production and yield of sugarcane

250
200 Area
Index
150
Production
100
50 Yield
0
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
Year
Figure 8.12 Compound growth rate of area, production and yield of oilseeds
5.5
5.0
4.5 1980-81 to
1989-90
4.0
3.5
3.0 2000-01 to
2009-10
2.5
2.0
1.5
1.0
0.5
0
Figure 8.13 Index of area, production and yield of oilseeds

300
250 Area
Index
200
Production
150
100 Yield
50
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
Year
Figure 8.14 Compound growth rate of area, production and yield of cotton
14
12
10 1980-81 to
1989-90
(per cent)
8
6
4 2000-01 to
2009-10
2
0
-2
Figure 8.15 Index of area, production and yield of cotton
500
400 Area
Index
300
Production
200
100 Yield
0
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
Year
8.14). Figure 8.15 shows changes in the index of Further, export of non-basmati rice is permitted on
area, production, and yield of cotton during 2003-04 diplomatic/humanitarian considerations. Export of
to 2009-10. basmati rice is permitted with a minimum export
price (MEP) of US $ 900 per ton or ` 41, 400 per
AREA COVERAGE IN 2010-11 ton. Government has reduced the import duty on
pulses to nil from 8 June 2006 to augment their
8.13 The total cropped area under foodgrains,
supply. Export of pulses except kabuli chana
oilseeds, sugarcane, and cotton during kharif 2010
(chickpeas) has been prohibited with effect from
is higher by 2.33 lakh ha as compared to that in
1 April 2008.
kharif 2009. Owing to drought in major rice-producing
areas, i.e. Bihar, Jharkhand, West Bengal, and
eastern Uttar Pradesh, the area under rice during AGRICULTURAL INPUTS
kharif 2010 is lower by about 5.40 lakh ha. While
8.15 Agricultural inputs play a crucial role in
the area under coarse cereals has gone down by
determining yield levels and in turn augmentation of
3.42 lakh ha, there has been significant increase of
level of production in the long run. Improvement in
6.11 lakh ha in the area under pulses with the result
yield depends on application of technology, use of
that total area under foodgrains in kharif 2010 is only
quality seeds, fertilizers, pesticides, micronutrients
marginally lower by 2.71 lakh ha than that in kharif
and irrigation.
2009. In oilseeds, while area under groundnut has
gone up by 4 lakh ha, seasmum, soyabean, and Seeds
sunflower have recorded lower acreage; consequently
the overall area under oilseeds during kharif 2010 is 8.16 Seeds are a critical input for long-term
lower by 8.27 lakh ha as compared to kharif 2009. sustained growth of agriculture. In India, more than
However, there is significant increase in the area four-fifths of farmers rely on farm-saved seeds leading
under sugarcane (6.53 lakh ha) and cotton (6.90 lakh to a low seed replacement rate. Hence the Central
ha). Thus there appears to be some shift in the Government has been addressing this issue through
cropping pattern in kharif 2010. various programmes/schemes. This includes the
Indian Seed Programme involving the participation
Exports and Imports of Central and State Governments, the Indian Council
of Agricultural Research (ICAR), State agricultural
8.14 Depending on domestic availability,
universities, cooperatives and the private sector, and
Government allows exports and imports of food
farmers and plant breeders. Year-wise details of
items especially wheat, rice, and pulses. Government
production of breeder and foundation seeds and
has reduced the import duty on wheat to nil from
distribution of certified seeds are given in Table 8.6.
9 September 2006 to augment its supply. Export of
wheat has been prohibited since 8 October 2007. 8.17 The Ministry of Agriculture has been
The import duty on semi-milled or wholly milled rice implementing the Central- sector Development and
has been reduced to nil from 20 March 2008 to Strengthening of Infrastructure Facilities for
augment its supply. Export of non-basmati rice has Production and Distribution of Quality Seeds scheme
been prohibited since 15 October 2007 except for since 2005-06 with the aim of ensuring timely
a quantity of 10,000 tonnes per annum of organic availability of quality seeds of various crops at
non-basmati rice permitted since 7 December 2009. affordable prices. The major thrusts of the scheme
The new Act is expected to (i) create a facilitative

Table 8.6 : Production of Breeder and
climate for growth of the seed industry, (ii) enhance
Foundation Seeds and Distribution of
seed replacement rates for various crops, (iii) boost
Certified Seeds
the export of seeds and encourage import of useful
Production of Production of germ plasm, and (iv) create a conducive atmosphere
Year breeder foundation Distribution for application of frontier sciences in variety
seeds seeds of certified/ development and for enhanced investment in R&D.
(quintals) (lakh quality seeds
The Seeds Bill was introduced in the Rajya Sabha
quintals) (lakh quintals)
in 2004. It was referred to the Parliamentary Standing
2004-05 66,460 6.9 113.10 Committee on Agriculture which recommended
2005-06 68,654 7.4 126.74 several modifications in 2008. These will be taken
up for further consideration.
2006-07 73,829 7.96 155.01
2007-08 91,960 8.22 179.05 Fertilizers
2008-09 74,361 9.69 215.81 8.20 India is meeting 85 per cent its urea
2009-10 94,410 11.46 257.11 requirement through indigenous production but
(Anticipated) depends heavily on imports for its phosphatic and
Source : Department of Agriculture and Cooperation. potash (P & K) fertilizer requirements. Urea, 21
grades of P & K fertilizers, and 15 grades of NPK
(nitrogen, phosphorus, and potash) complex
are improving quality of farm-saved seeds through fertilizers are provided to farmers at subsidized
seed village programmes to enhance seed prices. Farmers pay only 25 to 40 per cent of the
replacement rates, boosting seed production in the actual cost and the rest of the cost is borne by the
private sector, and helping public-sector seed Government in the form of a subsidy, which is
companies contribute to enhanced seed production. reimbursed to the manufactures/importers.
Since the inception of the scheme in 2005-06,
1,31,023 seed villages have been covered across Production
the country and 183.10 lakh quintals of certified/
8.21 The domestic production of urea, Di-
quality seeds produced till 2009-10, which is a
ammonium phosphate (DAP), and complex fertilizers
significant achievement. This effort needs to be
further promoted. in the year 2009-10 has increased compared to 2008-
09. The production of urea is estimated at 215.37
8.18 Under the component of assistance for lakh tonnes in 2010-11 and that of DAP and
boosting seed production in the private sector, complexes at 39.58 lakh tonnes and 91.66 lakh
credit-linked back-ended capital subsidy of 25 per tonnes, respectively (Table 8.7). Availability of raw
cent of project cost subject to a maximum limit of ` material/intermediates has been a major bottleneck
25 lakh per unit is provided on seed infrastructure in the increase in production of fertilizers.
development. In order to establish/strengthen
infrastructure facilities for production and 8.22 Timely import of urea and other fertilizers was
distribution of quality seeds, States/UTs and State arranged to ensure timely availability of fertilizers in
Seeds Corporations are provided financial required quantity (Table 8.8).
assistance for creating facilities for seed-processing
plants and machinery for seed cleaning, grading,
treating, and packing. Assistance is also provided Table 8.7 : Production of Urea, DAP and
for creation/strengthening of seed-processing Complex Fertilizers
plants. The Protection of Plant Varieties and (in lakh tonnes)
Farmers’ Rights (PPV&FR) Authority established in Year 2006- 2007- 2008- 2009- 2010-
November 2005 at New Delhi has been mandated 07 08 09 10 11*
to implement provisions of the PPV&FR Act, 2001. Urea 203.10 198.60 199.20 211.12 215.37
8.19 Considering the vital importance of the seed DAP 48.52 42.12 29.93 42.46 39.58
industry in promoting agricultural growth, the Ministry Complex 74.64 58.50 68.48 80.38 91.66
of Agriculture has been proposing replacement of fertilizers
the existing Seeds Act 1966 by suitable legislation. Note: *Estimated
Table 8.8 : Import of Urea, DAP and MOP (iv) Distribution and movement of fertilizers are
monitored through the online web-based
(in lakh tonnes)
fertilizer monitoring system (FMS), which
Urea DAP MOP
tracks the import, production, movement,
2006-07 47.18 28.76 34.48 availability, distribution, and sale of fertilizers
2007-08 69.28 29.90 44.20 in all States.
2008-09 56.67 61.91 56.72
2009-10 52.09 58.89 52.86 (v) Government has placed 20 per cent of the
2010-2011* 45.83 68.12 47.84 produced/imported decontrolled P & K fertilizer
under the Movement Control Order of the
Note : *(April-November 2010).
DAP : di-ammonium phosphate Department of Fertilizers as per the Essential
MOP : muriate of potash. Commodities Act 1955 with the objective of
making fertilizers available in the difficult areas.
8.23 Chemical fertilizers play a significant role in (vi) The manufacturers of customized and mixture
the development of the agricultural sector. In India, fertilizer are allowed by the Government to
the per hectare consumption of fertilizers in nutrient source the subsidized fertilizers from the
terms has been increasing (Table 8.9). manufacturers/importers after their receipt in
8.24 There have been major policy initiatives in the the districts.
fertilizer sector. A few recent ones are as follows: (vii) Government has put the export of (DAP) and
(i) Introduction of nutrient-based subsidy scheme MOP in the restrictive category to discourage
with effect from 1 April 2010. Under the nutrient- export and illegal diversion.
based subsidy scheme (NBS), Government
has amended subsidy per kg of nutrients N, P, Irrigation
K and S contained in P & K fertilizers as well 8.25 Irrigation is one of the most important inputs
as per MT of fertilizers. Maximum retail prices for enhancing productivity and is required at different
(MRPs) of the decontrolled P&K fertilizers have
critical stages of plant growth of various crops. The
been kept open and companies are free to
Government of India has taken up irrigation potential
announce their MRPs. However, manufacturers/
creation through public funding and is assisting
importers of fertilizers are required to print
farmers to create potential on their own farms.
MRPs along with applicable NBS on each bag
Substantial irrigation potential has been created
of fertilizer clearly. The failure to do so invites
through major and medium irrigation schemes. The
action under the Essential Commodities Act
total irrigation potential in the country has increased
1955.
from 81.1 million hectares in 1991-92 to 108.2 million
(ii) A uniform freight subsidy policy has been hectares in March 2010.
announced under which rail freight is paid on
actual and road freight on a normative average 8.26 The Central Government initiated the
district lead for urea. Accelerated Irrigation Benefit Programme (AIBP)
from 1996-97 to extend assistance for the
(iii) Government has included three new grades of
completion of incomplete irrigation schemes. Under
complex fertilizers under the NBS.
this programme, projects approved by the Planning
Commission are eligible for assistance. Further, the
Table 8.9 : Per Hectare Consumption of assistance, which was entirely a loan from the
Fertilizers in Nutrient Terms
Centre in the beginning, was modified by inclusion
(in lakh tonnes) of a grant component with effect from 2004-05. AIBP
Product 2006 2007 2008 2009 2010- guidelines were further modified in December 2006
-07 -08 -09 -10 11*
to provide enhanced assistance at 90 per cent of
Nitrogenous(N) 137.73 144.19 150.90 155.80 80.56
the project cost as grant to special category States,
Phosphatic (P) 55.43 55.15 65.06 72.74. 41.72
Drought Prone Area Programme (DPAP) States/tribal
Potash (K) 23.35 26.36 33.13 36.32 17.13 areas/flood-prone areas, and Koraput-Balangir-
Total (N+P+K) 216.51 225.70 249.09 264.86 139.41 Kalahandi (KBK) districts of Orissa. Under the AIBP,
Per Hectare 111.8 116.50 127.2 135.3 ` 41,729.37 crore of Central loan assistance (CLA)/
Consumption (kg)
grant has been released up to 31 March 2010. As
Note : *Relates to estimated kharif 2010. on 31 March 2010, 281 projects have been covered
under the AIBP and 120 completed. Irrigation Reservoir storage status
potential of 9.82 lakh ha is estimated to have been
8.28 The total designed storage capacity at full
created from major/medium /minor irrigation
reservoir level (FRL) of 81 major reservoirs in the
projects during 2009-10. country monitored by the Central Water Commission
(CWC) is 151.77 billion cubic metres (BCM). At the
RAINFALL AND RESERVOIR LEVELS end of monsoon 2010, the total live storage in these
reservoirs was 115.23 BCM which is more than the
8.27 Rainfall influences crop production and
live storage of 89.84 BCM at the end of the monsoon
productivity in a big way in India, with agriculture in 2009 and also more than 100.25 BCM which is
still being largely rainfed. More than 75 per cent the average of the last 10 years.
of annual rainfall is received during the south-
west monsoon season (June-September). During
the south-west monsoon season of 2010, the PRICE POLICY FOR AGRICULTURAL
country as a whole received 2 per cent more PRODUCE
rainfall than the long period average (LPA). 8.29 The price policy for agricultural commodities
Central India, north-west India, and the southern seeks to ensure remunerative prices to growers for
peninsula experienced 4 per cent, 12 per cent, their produce with a view to encouraging higher
and 17 per cent more rainfall respectively. North- investment and production and safeguarding the
east India received 18 per cent less rainfall than interest of consumers by making sure that adequate
the LPA. At district level, 28 per cent of districts supplies are available. The price policy also seeks
received excess rainfall, 41 per cent normal, 29 to evolve a balanced and integrated price structure
per cent deficient, and 2 per cent scanty rainfall. in the perspective of the overall needs of the economy.
During south-west monsoon 2010, out of 36 With this aim, the Government announces minimum
subdivisions, 5 recorded deficient rainfall and support prices (MSPs) for major agricultural
the remaining 31 excess/normal rainfall. Out of commodities each season and organizes purchase
597 meteorological districts for which data are operations. The designated Central nodal agencies
available, 413 (69 per cent) received excess/ intervene in the market for undertaking procurement
normal rainfall and the remaining 184 (31per operations with the objective of ensuring that the
cent) deficient/scanty rainfall during the season. market prices do not fall below the MSPs fixed by
The performance of the south-west Monsoon the Government. Over the years, the MSPs have
during 2001-10 (June-September) is given in been raised reasonably to ensure that farmers are
Table 8.10. incentivized to enhance production of their crops.
Table 8.10 : Monsoon performance : 2001 to 2010 (June – September)

Year Number of meteorological subdivisions Percentage of Percentage
districts with of long period
Normal Excess Deficient/ normal/ average rainfall
scanty excess for the country
rainfall as a whole
2001 29 1 5 67 92
2002 14 1 21 39 81
2003 26 7 3 77 102
2004 23 0 13 56 86
2005 23 9 4 72 99
2006 20 6 10 60 99
2007 17 13 6 72 105
2008 30 2 4 76 98
2009 10 3 23 41 77
2010 17 14 5 69 102
Source : India Meteorological Department.
Note: Excess: +20 per cent or more of LPA; Normal: +19 per cent to -19 per cent of LPA;
Deficient: -20 per cent to -59 per cent of LPA; Scanty: -60 per cent to -99 per cent of LPA.
These operations involving high costs have put 2010 -11 season at `1575 per quintal , and for toria
considerable fiscal strain on the economy. The MSPs of FAQ variety for 2010-11 to be marketed in 2011-
of kharif and rabi crops of 2009-10 and 2010-11 12 at ` 1780 per quintal.
are given in Table 8.11.
8.31 The National Agricultural Cooperative
8.30 In addition, Government has also notified the Marketing Federation of India Ltd. (NAFED), the
MSPs of commercial crops like copra, raw jute, de- Central Nodal Agency for implementing price support
husked coconut, and toria. The MSPs for fair operations for commercial crops, entered the
average quality (FAQ) variety of milling copra and markets with a view to safeguarding the interest of
FAQ variety of ball copra for 2010 season have coconut growers and procured 44,418 quintals of
been fixed at ` 4450 per quintal and ` 4700 per milling copra and 480 quintals of ball copra up to 4
quintal respectively. The MSP for de-husked October 2010, as the wholesale prices ruled below
coconut for 2010 season has been fixed at ` 12 their MSPs for 2010 season. During the marketing
per kg, for TD-5 variety of ex-Assam raw jute for season 2010-11, month-end wholesale price of
Table 8.11 : Minimum support prices

(` per quintal)
2009-10 2010-11 Difference between

2010-11 and
2009-10 Prices
(in `)
Kharif Crops
Paddy (common) 950 1000 50
Paddy (Gr.A) 980 1030 50
Jowar (Hybrid) 840 880 40
Jowar (Maldandi) 860 900 40
Bajra 840 880 40
Maize 840 880 40
Ragi 915 965 50
Arhar (Tur) 2300 3000* 700
Moong 2760 3170* 410
Urad 2520 2900* 380
Groundnut in shell 2100 2300 200
Sunflower 2215 2350 135
Soyabean (black) 1350 1400 50
Soyabean (yellow) 1390 1440 50
Seasmum 2850 2900 50
Nigerseed 2405 2450 45
Cotton (F-414/H-777/J34 2500 2500 0
Rabi crops
Wheat 1100 1120 20
Barley 750 780 30
Gram 1760 2100 340
Masur (lentil) 1870 2250 380
Rapeseed/Mustard 1830 1850 20
Safflower 1680 1800 120
Note: * An additional incentive at the rate of ` 5 per kg is also available for tur, moong, and urad sold to
procurement agencies during the harvest/arrival period of two months.
TD-5 grade raw jute ruled above the MSP and (PoA). The Mission also emphasizes the need to
therefore no procurement was made under the Price harness traditional knowledge and agricultural
Support Scheme. heritage for in-situ conservation of genetic
resources.
SCHEMES/PROGRAMMES IN THE 8.34 The PoA would be operationalized by

AGRICULTURE SECTOR mainstreaming adaptation and mitigation strategies
in ongoing R&D programmes and in flagship
8.32 Agriculture is a State subject. Hence the
schemes including the Rashtriya Krishi Vikas Yojana
primary responsibility for increasing agricultural
(RKVY), National Horticulture Mission (NHM), and
production, enhancing productivity, and exploring the
National Food Security Mission (NFSM) through a
vast untapped potential of the sector rests with the
process of selective upscaling and course correction
State Governments. Central Government
measures. This would further be supplemented by
supplements the efforts of the State Governments
introduction of new programmatic interventions and
through a number of centrally sponsored and Central-
by seeking convergence with other National
sector schemes. The major schemes/programmes
Missions and collaborations with key Ministries/
are as follows:
Departments for institutionalizing linkages in order
National Mission for Sustainable Agriculture to address cross-sectoral issues.
8.33 While agricultural productivity is adversely Macro Management of Agriculture

affected by climate change, agricultural activity itself
8.35 The Macro Management of Agriculture (MMA)
contributes to global warming. The adoption of
scheme was revised in 2008 to improve its efficacy
‘ecological agriculture’, which integrates natural
in supplementing / complementing the efforts of the
regenerative processes, minimizes non-renewable
States towards enhancement of agricultural
inputs, and fosters biological diversity, has
production and productivity and provide opportunity
tremendous scope for reducing emissions and
to draw upon their agricultural development
enhancing soil carbon sequestration. At the same
programmes relating to crop production and natural
time, many ecological agricultural practices also
resource management, with the flexibility to use 20
constitute effective strategies for adapting to climate
per cent of resources for innovative components. The
change, which is a priority for developing countries.
revised MMA Scheme has formula-based allocation
This calls for more investment and policy support to
criteria and provides assistance in the form of grants
be devoted to this productive and sustainable form
to the States/UTs on 90:10 basis except in case of
of farming. Recognizing the challenge of climate
the north-eastern States and Union Territories where
change to Indian agriculture, the National Mission
the Central share is 100 per cent. MMA assistance
for Sustainable Agriculture (NMSA), which is one of
during 2010-11 has been used to treat 3.02 lakh ha
the eight Missions under the National Action Plan
of land under the National Watershed Development
on Climate Change (NAPCC) has been
Project for Rainfed Areas (NWDPRA) and 1.94 lakh
conceptualized. It seeks to address issues regarding
ha under River Valley Projects (RVP) sub-schemes
‘sustainable agriculture’ in the context of risks
and for financing acquisition of 10,208 tractors and
associated with climate change by devising
5766 power-tillers among other farm machinery.
appropriate adaptation and mitigation strategies for
ensuring food security, enhancing livelihood
The National Food Security Mission
opportunities, and contributing to economic stability
(NFSM)
at national level. While promotion of dry-land
agriculture would receive prime importance by way 8.36 The NFSM was launched in rabi 2007-08 with
of developing suitable drought and pest resistant crop a view to enhancing the production of rice, wheat,
varieties and ensuring adequacy of institutional and pulses by 10 million tonnes, 8 million tones,
support, the Mission would also expand its coverage and 2 million tonnes respectively by the end of the
to rainfed areas for integrating farming systems with Eleventh Plan. The Mission aims to increase
livestock and fisheries, so that agriculture continues production through area expansion and productivity;
to grow in a sustainable manner. The Mission create employment opportunities; and enhance the
identifies ten key dimensions for promoting farm-level economy to restore confidence of farmers.
sustainable agricultural practices, which will be The NFSM is presently being implemented in 476
realized by implementing a programme of action identified districts of 17 States of the country.
Besides, a series of activities for more vigorous pulses promotion strategies and other initiatives
promotion of pulse crops has been adopted under undertaken to boost agricultural productivity in these
the NFSM to intensify the pulse production states.
programme from 2010-11. These are:
8.41 The progress reports received from the States
i) Merging of the pulse component of the indicate significant achievements under the NFSM
Integrated Scheme of Oilseeds, Pulses, Oil during the course of its implementation in the last
Palm and Maize (ISOPOM) with the NFSM so four years, i.e. during 2007-08 to 2010-11(till date).
as to increase the scope and area coverage of New farm practices have been encouraged through
the pulses programme. Jharkhand and Assam 3.24 lakh demonstrations of improved package of
have also been included under the programme practices. As many as 63,273 demonstrations of
since there is immense potential for pulse the system of rice intensification (SRI), and 32,344
promotion in rice fallows. demonstrations of hybrid rice have been conducted.
Nearly, 96.84 lakh quintals of high yielding variety
ii) Through a new programme under the NFSM
seeds of rice, wheat, and pulses and hybrid rice
called the Accelerated Pulses Production
have been distributed. About 72.27 lakh ha of area
Programme (A3P), 1000 block demonstrations
has been treated with soil ameliorants, such as
of technology have been launched from 2010-
gypsum/lime/micro nutrients to restore soil fertility
11. This programme will essentially promote
for higher productivity. An area of about 29.25 lakh
plant nutrients- and plant protection-centric
ha has been treated under Integrated Pest
technologies in compact blocks of 1000 ha
Management (IPM). Further, nearly 21.27 lakh
each for five major pulse crops, namely, tur,
improved farm machineries, including water-saving
moong, urad, gram, and lentil.
devices have been distributed. As a capacity-building
8.37 Focused and target-oriented technological initiative, 33,205 farmers’ field school (FFS) - level
intervention under the NFSM has made significant trainings have so far been held. In addition, about
impact since its inception, reflected in the increase 353 (3.53 lakh ha) block demonstrations have been
in production of rice and wheat in 2008-09 and conducted during the 2010 kharif under the A3P.
2009-10.
The Rashtriya Krishi Vikas Yojana (RKVY)
8.38 From 2010-11, as a new initiative, the A3P
has been launched as a part of NFSM Pulses. Under 8.42 The RKVY was launched in 2007-08 with an
the A3P, one million ha of potential pulses area, outlay of ` 25,000 crore for the Eleventh Plan to
covering tur, urad, moong, gram, and lentil, has been incentivize States to enhance public investment so
taken up for large-scale demonstration of technology as to achieve a 4 per cent growth rate in agriculture
in compact blocks. A total of 600 A3P units of tur, and allied sectors during the Plan. During the three-
urad, moong, gram, and lentil have been proposed year period 2007-10, an amount of ` 7895.12 crore
for 2010-11. For organizing A3P units at the farmers’ was released under the RKVY. Out of the budget
fields, an amount of ` 54.66 lakh per unit has been provision of ` 6722crore for implementation of the
proposed. RKVY in the States, an amount of ` 3986.76 crore
has been released as on 25 November 2010. Specific
8.39 Further, an amount of ` 300 crore has been
allocation has to be made for the following three new
provided in the Union Budget 2010-11 for promoting
initiatives introduced under the RKVY in 2010-11:
dry-land farming in 60,000 pulses and oilseeds
villages in rainfed areas. These funds have been (i) Extending the Green Revolution to the eastern
provided as additional Central assistance under the region of the country, covering the States of
ongoing RKVY to the States of Andhra Pradesh, Assam, Bihar, Chhattisgarh, Jharkhand,
Gujarat, Karnataka, Madhya Pradesh, Maharashtra, Orissa, eastern UP, and West Bengal, with
Rajasthan, and Uttar Pradesh. the objective of increasing the crop productivity
of the region by intensive cultivation through
8.40 Another programme, namely Bringing Green
recommended agricultural technologies and
Revolution in the Eastern States is operational in
package of practices.
seven states—Uttar Pradesh, Jharkhand, Bihar,
West Bengal, Assam, Orissa, and Chhattisgarh. The (ii) Special initiatives for pulses and oilseeds in
Rice Development and Organizing Pulses and dry-land areas by organizing 60,000 pulses
Oilseeds Villages is another programme, beside the and oilseeds villages in identified watersheds
where pulse and oilseed farmers are provided Development Programme is under implementation
farm machinery and equipment on custom- in 15 States, viz. Andhra Pradesh, Bihar,
hiring basis. These initiatives dovetail with other Chhattisgarh, Himachal Pradesh, Jammu and
schemes of the Government of India having Kashmir, Gujarat, Karnataka, Madhya Pradesh,
components for promotion of oilseeds and Maharashtra, Orissa, Punjab, Rajasthan, Tamil
pulses production. Nadu, Uttar Pradesh, and West Bengal.
(iii) Implementation of the National Mission on
Drought Management
Saffron – Economic Revival of Jammu &
Kashmir Saffron Sector during 2010-11. 8.45 Due to deficit rainfall during south-west
monsoon 2010 in Bihar, Jharkhand, Orissa, and
8.43 The RKVY has linked 50 per cent of Central West Bengal, the Central share of the State Disaster
assistance to the percentage of State Plan Response Fund (SDRF) for 2010-11 has been
expenditure on agriculture and allied sectors. This released to enable these States to expeditiously take
has incentivized States to step up allocation to the necessary drought-mitigation measures. In view
agriculture and allied sectors, which was 5.11per of drought/deficit rainfall in certain regions, it was
cent of total State Plan Expenditure in 2006-07, to decided to implement a Diesel Subsidy during kharif
6.29 per cent in 2009-10. The RKVY has emerged 2010 (14 July 2010 to 30 September2010) in drought/
as the principal instrument in financing development deficit rainfall areas to save the standing crops in
of agriculture and allied sectors in the country. Its the field.
convergence with other schemes like the Mahatma
Gandhi National Rural Employment Scheme
(MGNREGA) is expected to boost development of ALLIED SECTORS
the agrarian economy. The States will take up
projects under the RKVY primarily from amongst The National Horticulture Mission (NHM)
those that appear in their District and State 8.46 The Ministry of Agriculture has been
Agriculture Plans. There will be increased synergy implementing the centrally sponsored NHM for the
between agricultural planning and implementation holistic development of the horticulture sector since
of schemes in the coming years, which will play a 2005-06, duly ensuring forward and backward
crucial role in promoting holistic development of linkages, and with the active participation of all the
agriculture and allied sectors. stakeholders. All the States and the three Union
Territories of Andaman and Nicobar Islands,
The Integrated Scheme of Oilseeds, Pulses, Lakshadweep, and Puducherry are covered under
Oil Palm and Maize (ISOPOM) the Mission except the eight north-eastern States
including Sikkim and the States of Jammu and
8.44 The ISOPM is being implemented in 14 major
Kashmir, Himachal Pradesh, and Uttarakhand. The
States for oilseeds and pulses, 15 for maize, and 10
latter are covered under the Horticulture Mission
for oil palm. The pulses component has been merged
for the North East and Himalayan States
with the NFSM with effect from 1 April 2010. The
(HMNEH).The scheme is being implemented in 372
Scheme provides flexibility to the States in
districts in the country. During 2005-06 to 2009-
implementation based on a regionally differentiated
10, an additional 16.57 lakh ha of identified
approach to promoting crop diversification. Under the
horticulture crops has been covered. Apart from
Scheme, assistance is provided for purchase of
establishment of 2192 nurseries for production of
breeder seed, production of foundation seed,
quality planting materials, 2.78 lakh ha has been
production and distribution of certified seed,
covered under rejuvenation of old and senile
distribution of seed minikits, plant protection
orchards. Organic cultivation of horticultural crops
chemicals, plant protection equipment, weedicides,
has been adopted in an area of 1.37 lakh ha.
gypsum/ pyrite/ liming/ dolomite, sprinkler sets, and
water carrying pipes, supply of rhizobium culture/ 8.47 With the implementation of the NHM and
phosphate solubilizing bacteria and improved farm other schemes, the production of horticulture crops
implements, publicity, etc. The Oil Palm has increased from 170.8 million tonnes in 2004-
Development Programme under the ISOPOM is 05 to 214.7 million tonnes in 2008-09. The per capita
being implemented in the States of Andhra Pradesh, availability of fruits and vegetables has increased
Karnataka, Tamil Nadu, Gujarat, Goa, Orissa, from 391 gram/day in 2004-05 to 466 gram/day in
Kerala, Tripura, Assam, and Mizoram. Its Maize 2008-09.
Technology Mission for Integrated SHGs have been formed that are involved in the
Development of Horticulture in North promotion of floriculture and in exports. For proper
Eastern States, Sikkim, Jammu and handling and marketing of horticultural produce, 47
Kashmir, Himachal Pradesh, and wholesale markets, 344 rural primary/Apni Mandies,
Uttarakhand 35 cold storages, and 64 processing units have been
set up. Under the Mission 2,65,435 persons,
8.48 The Technology Mission for Integrated including 53,276 women, have so far been trained.
Development of Horticulture was launched in 2001-
02 to address issues related to production and Micro Irrigation
productivity, post harvest handling, marketing, and
8.50 The Centrally sponsored National Mission on
processing of horticultural crops in the north- eastern
Micro Irrigation (NMMI) was launched in June 2010
States. The Mission was extended to the three
in addition to the earlier Micro Irrigation Scheme
Himalayan States, namely Himachal Pradesh,
launched in January 2006. The Mission is being
Jammu and Kashmir, and Uttarakhand in 2003-04.
It covers the entire spectrum of horticulture implemented during the Eleventh Plan period for
development right from production to consumption enhancing water-use efficiency by adopting drip
through backward and forward linkages. During the and sprinkler irrigation systems in all States and
course of its implementation, it was realized that Union Territories for both horticulture and agricultural
some additional components need to be introduced crops. The scheme provides assistance at 60 per
to achieve the objective of holistic growth of the cent of the system cost for small and marginal
horticulture sector. Accordingly, some new farmers and at 50 per cent for general farmers.
components such as high density planting, vegetable Since 2005-06, a sum of ` 2739 crore has been
seed production, and horticulture mechanization have released by the Government of India under the
been included in the Mission. This has now been scheme and 2.27 lakh ha brought under micro-
renamed the Horticulture Mission for North East and irrigation. The system is beneficial for farmers in
Himalayan States (HMNEH) along with revision of increasing crop productivity and water-use
the cost norms so as to incentivize investment and efficiency; reducing fertilizer consumption
supplement income generation for the beneficiaries. (fertigation through drip system) and electricity and
labour consumption; and enhancing income.
8.49 The implementation of the Mission has helped
bring an additional 5,12,614 ha under various National Bamboo Mission (NBM)
horticulture crops (fruits, vegetables, spices,
8.51 With a view to harnessing the potential of
plantation crops, medicinal plants, aromatic plants,
the bamboo crop in the country, the Ministry of
root, and tuber crops) in these States. In addition,
Agriculture has been implementing the centrally
26,571 ha of senile and unproductive orchards have
sponsored NBM in 27 States in the country with a
been rejuvenated to increase productivity. The
Mission has succeeded in bringing 54,938 ha under total outlay of ` 568.23 crore. The Mission aims to
organic farming. Major infrastructure which has come promote holistic growth of the bamboo sector by
up under the Mission includes 974 nurseries, 10,979 adopting an area-based, regionally differentiated
community tanks, and 12,758 tube wells. Drip strategy and to increase the area under bamboo
irrigation has been extended to 16,303 ha. Twenty- cultivation and marketing. Under the Mission, steps
five model floriculture centres, fifty-nine herbal have been taken to increase the availability of quality
gardens, twenty-five tissue culture units, and twenty- planting material by supporting the setting up of new
two disease forecasting units have also been set nurseries/tissue culture units and strengthening of
up. The Mission gave special thrust to protected existing ones. To address forward integration, the
cultivation of high-value crops like tomato, coloured Mission is taking steps to strengthen the marketing
capsicum, strawberry, and flowers to ensure quality of bamboo products, especially handicraft items.
production. Special attention has been given to During the current year (2010-11), 7946 ha forest
promoting and popularizing mechanization in and 2079 ha non-forest area has been covered
horticulture. So far 5,785 power tillers, 4,64,595 under bamboo plantation.
manually operated machines, 12,542 power operated
implements, and 12,887 diesel engines have been Rubber
distributed among the farmers of the region. To 8.52 India is the fourth largest producer of natural
strengthen the hands of women farmers, self-help rubber (NR) with a share of 8.5 per cent in world
groups (SHGs) have been promoted. Till now 8527 production in 2009. Despite not having the best of
geographically favourable regions for growing NR, Table 8.12 : Production and per capita
India continued to record the highest productivity availability of milk
among major NR-producing countries. The
Year Per capita Production
production of NR in 2010-11 is projected at 851,000 availability (million tonnes)
tonnes, which is an increase of 2.4 per cent over (grams/day)
2009-10. India has emerged as the second largest
consumer of NR, overtaking the United States with 1990-91 176 53.9
a share of 9.6 per cent in world consumption in 2000-01 220 80.6
2009. Consumption of NR in 2010-11 is projected 2005-06 241 97.1
at 948,000 tonnes, which is an increase of 1.9 per 2006-07 246 100.9
cent over the previous year. Given the relatively 2007-08 252 104.8
higher domestic prices prevailing in the last many 2008-09 258 108.5
months, exports of NR are expected to be lower 2009-10 263 112.5
and imports higher in 2010-11.
Source: Department of Animal Husbandry, Dairying
and Fisheries.
Coffee
8.53 India ranks sixth in coffee production after Five Year Plan envisages an overall growth of 6-7
Brazil, Vietnam, Columbia, Indonesia, and Ethiopia. per cent per annum for the sector. In 2009-10, this
It produces both Arabica and Robusta varieties of sector produced 112.5 million tonnes of milk, 59.8
coffee in a proportion of 33:67. Coffee is cultivated in billion eggs, 43.2 million kg wool, and 4.0 million
about 3.99 lakh ha mainly confined to the southern tonnes of meat. The result of the 18th Livestock
States of Karnataka, Kerala, and Tamil Nadu, which Census (2007), derived from village-level count, has
form the traditional coffee tracts. To a lesser extent, placed the total livestock population at 529.7 million
coffee is also grown in non-traditional areas like and poultry birds at 648.8 million.
Andhra Pradesh, Orissa, and the north-eastern
8.56 India ranks first in world milk production,
States, the main emphasis being tribal development
increasing its production from 17 million tonnes in
and afforestation. Coffee is predominantly an export-
1950-51 to about 112.5 million tonnes in 2009-10
oriented commodity in India with 65 to 70 per cent of
(Table 8.12). The per capita availability of milk has
the production being exported, thereby earning
also increased from 112 grams per day in 1968-69
considerable foreign exchange. For the past five to
to 263 gram per day in 2009-10. It is however still
six years, the productivity in India has been around
low compared to the world average of 279.4 grams/
800 kg/ha. The production of coffee stood at 2,89,600
day, as per FAOSTAT (Food and Agriculture
MT in 2009-10. For the year 2010-11, the post
Organization Statistical Database) 2009 data. Box
monsoon crop estimate is placed at 2,99,000 MT.
8.2 gives some details of the milk situation in India.
Tea 8.57 A major programme for genetic improvement
8.54 India is the largest producer and consumer of called the National Project for Cattle and Buffalo
black tea in the world. Tea is grown in 16 States in Breeding (NPCBB) was launched in October 2000
India. Assam, West Bengal, Tamil Nadu and Kerala to be implemented over a period of 10 years in two
account for about 96 per cent of the total production. phases of five years each. The NPCBB envisages
The teas originating from Darjeeling, Assam, and genetic upgradation and development of indigenous
the Nilgiris are well known for their distinctive flavours breeds on priority basis. At present, 28 States and
the world over. Tea production in India during the one Union Territory are participating in the project.
year 2009-10 has been estimated at 991.18 million
kg against 972.77 million kg achieved in 2008-09.
Livestock insurance
8.58 A Centrally sponsored scheme of livestock
insurance is being implemented in all the States with
ANIMAL HUSBANDRY, DAIRYING, twin objectives: providing protection mechanism to
AND FISHERIES the farmers and cattle rearers against any eventual
8.55 The livestock & fisheries sector contributed loss of their animals due to death; and demonstrating
over 4.07 per cent to the total GDP during 2008-09 the benefits of insuring livestock to the people. The
and about 29.7 per cent to the value of output from scheme, which was introduced in 100 selected
total agricultural and allied activities. The Eleventh districts on pilot basis during 2005-06, has now been
Box 8.2 : Milk Scenario in India
Annual milk production in India has grown more than six times since independence. The average annual growth rate in the
production of milk in recent years has been close to 4 per cent. Even though the level of per capita availability at 263 gram/
day for India in 2009-10 is much lower than that in developed countries, it is well above the developing country average.
The Eleventh Five Year Plan envisages an overall growth of 6-7 per cent per annum for the sector. As per an assessment
made by the Planning Commission, the domestic demand for milk by 2021-22 is expected to be 172.20 million tonnes. As
projected under the proposed National Dairy Plan, the production of milk in the country is required to increase to 180
million tonnes by 2021-22 to meet the demand. However, the country has not been able to keep pace with the domestic
demand for milk. The domestic demand for milk is growing at about six million tonnes per year whereas annual
incremental production over the last ten years has been about 3.5 million tonnes per year. With higher growth of the
economy, increase in population, and increased health consciousness among the populace, it is only natural that the
demand for milk and milk products will increase leading the proportion of income spent on milk and milk products to
increase. Further, urban centres will demand more and more processed and packaged dairy products but in the rural areas
people may still prefer to purchase from the local milkmen.
About 80 per cent of milk produced in the country is still handled in the unorganized sector and only the remaining 20 per
cent is equally shared by cooperatives and private dairies. Despite the appreciable growth in the milk production in the last
six decades, the productivity of our animals is still low. Our marketing systems are also not modernized or developed to
a satisfactory level. Other issues in this sector are ineffective breeding programmes, limited availability and affordability
of quality feed and fodder, improper veterinary infrastructure, lack of vaccinations, inadequate access to formal credit
mechanisms, inadequate research capacity, limited processing capacity, and lack of transport. Considering that the
requirement of milk in 2021-22 is expected to be 180 million tonnes and the current level of milk production is 112 million
tonnes, the milk production must increase at around 5.5 per cent per annum in the next 12 years. If it fails to do so, India
may need to resort to imports from the world market. A large consumer like India entering the international market would
have the potential to cause international prices to spurt. Hence it is prudent that we depend on the domestic market and
develop the milk sector with the right attention and focus and the required investment. Recent hikes in prices of milk and
milk products have been a matter of concern. The gap between domestic demand for milk and production of milk has put
upward pressure on milk prices in the country. A strong supply response with focus on production and productivity can
only keep the prices stable.
extended to 300 selected districts covering all states. impart training to farmers to upgrade their technical
The scheme benefits farmers and cattle rearers skills. The Central Poultry Performance Testing
having milch cattle and buffaloes. In 2010-11, `. 20.12 Center (CPPTC), located at Gurgaon is entrusted
crore has been released up to December 2010 and with responsibility of testing the performance of layer
20.63 lakh animals were insured from 2006-07 to and broiler varieties. This Center gives valuable
2009-10. information relating to different genetic stocks
available in the country. The Centrally sponsored
Poultry Poultry Development scheme has three components,
8.59 Poultry development is one of the most Assistance to State Poultry Farms, Rural Backyard
resilient sectors in the country, fast adapting itself Poultry Development, and Poultry Estates.
to the changing biosecurity, health, and food safety Assistance to State Poultry Farms aims at
needs. India produces more than 59.8 billion eggs strengthening existing State poultry farms to enable
per year, with per capita availability of 51 eggs per them to provide improved stocks suitable for rural
annum. The poultry meat production is estimated to backyard rearing. The main objective of the Rural
be 1.85 million tonnes in 2008-09. To provide Backyard Poultry Development component is to
necessary services to the farmers, four regional provide supplementary income and nutritional
Central Poultry Development Organizations (CPDOs) support to below poverty line (BPL) people. Poultry
have been restructured on the principle of one- Estates are aimed primarily at educated,
window service. These are located at Chandigarh, unemployed youth and small farmers with some
Bhubaneswar, Mumbai, and Hessarghatta. They margin money, to make profitable ventures out of
various poultry- related activities. The Central-sector, and Feed Development Scheme with effect from 1
Poultry Venture Capital Fund scheme encourages April 2010 to supplement the efforts of the States to
entrepreneurship skills of individuals, covering improve fodder production. Financial assistance to
various poultry activities. the tune of ` 2903.04 lakh (up to December 2010),
has been provided to the States in 2010-11. Under
Livestock health the Central Minikit Testing Programme, fodder seed
8.60 Animal wealth in India has increased manifold minikits of latest high-yielding fodder varieties are
prompting the animal husbandry sector to adopt distributed free of cost to farmers. During the current
modern practices. With increased trade activity and year (2010-11) 11.79 lakh fodder seed minikits have
extensive cross-breeding programmes, the chances been allotted to the States for distribution to farmers.
of ingress of exotic diseases into the country have
increased. To ensure disease-free status and be CREDIT AND INSURANCE
compatible with the standards laid down by the World
Animal Health Organization, many animal health Agricultural Credit
schemes have been initiated, which provide financial
8.63 From Kharif 2006-07 to 2008-09, farmers
assistance to States/UTs to control major livestock
were receiving crop loans up to a principal amount
and poultry diseases and strengthen veterinary
of ` 3 lakh at 7 per cent interest. In the year 2009-
services including reporting of animal diseases. All
10, Government provided an additional 1 per cent
avian influenza outbreaks reported were effectively
interest subvention to those farmers who repaid their
controlled and the country declared free from avian
short-term crop loans as per schedule. The
influenza in June 2010.
Government has raised this subvention for timely
repayment of crop loans from 1 per cent to 2 per
Fisheries Fisheries
cent from the year 2010-11. Thus the effective rate
8.61 Fish production increased from 7.14 million of interest for such farmers will be 5 per cent per
tonnes in 2007-08 to 7.85 million tonnes in 2009-10. annum.
Fishing, aquaculture, and allied activities are reported
to have provided livelihood to over 14 million persons Revamping of Cooperative Credit Structure
in 2008-09, apart from being a major foreign
8.64 In January 2006, the Government announced
exchange earner (Table 8.13).
a package for revival of the Short-term Rural
Cooperative Credit Structure involving financial
Feed and fodder
assistance of ` 13,596 crore. The National Bank
8.62 Adequate availability of feed and fodder for for Agriculture and Rural Development (NABARD)
livestock is very vital for increasing milk production has been designated the implementing agency for
and sustaining the ongoing genetic improvement the purpose. States are required to sign
programme. The estimated green fodder shortage in memorandums of understanding (MoUs) with the
the country is about 34 per cent. The Department Government of India and NABARD, committing to
of Animal Husbandry & Dairying has been implementation of the legal, institutional and other
implementing a modified centrally sponsored Fodder reforms as envisaged in the revival package. So far
Table 8.13 : Production and export of fish

Fish production (million tonnes) Export of marine products
Year Marine Inland Total Qty Value
(‘000 tonnes) ` crore)
(`
1990-91 2.3 1.5 3.8 140 893
2000-01 2.8 2.8 5.6 503 6288
2005-06 2.8 3.8 6.6 551 7019
2006-07 3.0 3.8 6.8 612 8363
2007-08 2.9 4.2 7.1 541 7620
2008-09 3.0 4.6 7.6 602 8608
2009-10 2.98 4.87 7.85 664 9921
twenty- five States have executed such MoUs.This Company of India Ltd. (AIC) is the implementing
covers 96 per cent of the primary agricultural agency (IA) for the Scheme. The main objective of
cooperative societies (PACS) and 96 per cent of the scheme is to protect farmers against crop losses
the Central cooperative banks (CCBs) in the suffered on account of natural calamities. The
country. As of November 2010, an amount of ` scheme is available to all the farmers—loanee and
8009.75 crore has been released by NABARD as non-loanee—irrespective of their size of holding. It
Government of India share for recapitalization of is operating on the basis of an area approach. It
49,983 PACS. envisages coverage of all the food crops, oilseeds,
and annual commercial/horticultural crops in respect
Rehabilitation Package for Distressed of which past yield data are available for adequate
Farmers number of years. Premium rates for food and oilseeds
8.65 The Government is implementing a crops are ranging between 1.5 per cent and 3.5 per
rehabilitation package for 31 suicide- prone districts cent. In case of annual commercial/horticultural crops,
in the States of Andhra Pradesh, Karnataka, Kerala, actuarial premiums are being charged. A 10 per cent
and Maharashtra involving a financial outlay of ` subsidy is available for small and marginal farmers.
16,978.69 crore. Special packages are being All financial liabilities under the scheme are shared
implemented in Kerala for the development of by the Central and State Governments on 50: 50
Kuttanad wetland ecosystem and mitigation of basis. The scheme is at present being implemented
agrarian distress in Idukki district with an outlay of by 25 States and two UTs.
` 1840.75 crore and ` 764.45 crore, respectively. ii) The Pilot Modified NAIS (MNAIS)
Kisan Credit Card (KCC) Scheme Keeping in view the limitations/shortcomings of the
existing scheme, the Government has approved the
8.66 The KCC scheme was introduced in August
Modified NAIS for implementation on pilot basis in
1998. About 970.64 lakh KCCs have been issued up
50 districts from rabi 2010-11 season. The major
to September 2010. The scheme includes
improvements made in the MNAIS are: actuarial
reasonable components of consumption credit and
premium with subsidy in premium at different rates,
investment credit within the overall credit limit
i.e. 40 per cent to 75 per cent depending upon the
sanctioned to the borrowers to provide adequate and
slab, provided to farmers, all claims liability on the
timely credit support to the farmers for their cultivation
insurer, unit area of insurance reduced to village
needs
panchayat level for major crops, indemnity for
prevented/sowing/planting risk and for post harvest
Task Force on Private Moneylenders
losses due to cyclone, payment up to 25 per cent
8.67 A Task Force has been constituted under the advance of likely claims as immediate relief, more
chairmanship of Chairman, NABARD, to look into proficient basis for calculation of threshold yield,
the issue of a large number of farmers who had taken minimum indemnity level of 70 per cent instead of
loans from private moneylenders in the country. The 60 per cent, and private-sector insurers with
Task Force has submitted its report in June 2010. adequate infrastructure allowed (at present, ICICI-
This has been circulated to stakeholders for furnishing Lombard, IFFCO-Tokio and Cholamandalam-MS).
their comments/ views. Only upfront premium subsidy is shared by the
Central and State Governments on 50: 50 basis and
Agricultural Insurance claims are the liability of the insurance companies.
8.68 Four crop insurance schemes, namely the Seven States have already notified the areas for
National Agricultural Insurance Scheme (NAIS), Pilot implementation of the scheme during rabi 2010-11.
Modified NAIS (MNAIS), Pilot Weather Based Crop It is expected that the scheme will be notified by 14-
Insurance Scheme (WBCIS), and Pilot Coconut Palm 15 States.
Insurance Scheme (CPIS) are under implementation
iii) Weather Based Crop Insurance Scheme
in the country.
(WBCIS)
i) The National Agricultural Insurance Scheme
Efforts have been made to bring more farmers under
(NAIS)
the fold of crop insurance by introducing a Weather
The NAIS is being implemented in the country from Based Crop Insurance Scheme (WBCIS) as
rabi 1999-2000 season. The Agriculture Insurance announced in the Union Budget 2007 in selected
areas on pilot basis. The WBCIS is intended to States and Union Territories have enacted
provide insurance protection to farmers against legislations (the Agriculture Produce Marketing
adverse weather incidences, which are deemed to Committee [APMC] Act) to provide for regulation of
unfavourably impact crop production. It has the agricultural produce markets. Seventeen States/ UTs
advantage of settling claims within the shortest have amended their APMC Acts and the remaining
possible time. The WBCIS is based on actuarial rates are in the process of doing so (Table 8.14). There
of premium but to make the scheme attractive, are 7157 regulated markets in the country as on
premium actually charged from farmers have been 31March 2010. The country has 21,221 rural
restricted on a par with the NAIS. In addition to the periodical markets, about 15 per cent of which
Agriculture Insurance Company of India Ltd. (AIC), function under the ambit of regulation. The advent
private insurers have also been included for of regulated markets has helped mitigate the market
implementing the scheme in selected areas. During handicaps of producers/ sellers at wholesale
kharif 2007 to kharif 2010, about 81 lakh farmers assembling level. Internet connectivity is being
have been covered under the pilot scheme. provided to important agricultural markets in the
country to establish a nationwide information network
iv) Coconut Palm Insurance Scheme (CPIS)
for speedy collection of prices and market-related
The CPIS is being implemented on pilot basis since information. Presently, wholesale prices of 300
2009-10 in selected areas of Andhra Pradesh, Goa, commodities and about 2000 varieties are being
Karnataka, Kerala, Maharashtra, Orissa, Tamil Nadu, reported on the Agricultural Marketing Information
and West Bengal. The scheme is administered by Network (AGMARKNET) portal from more than 1900
the Coconut Development Board (CDB) through the markets. But rural periodic markets in general and
AIC. As on 30 July 2010, 14.33 lakh palms of about tribal markets in particular have remained outside
27,023 farmers have been covered under the scheme. the ambit of the APMC Act.
Agricultural Marketing 8.70 Other major initiatives include setting up of

terminal market complexes (TMC) for fruits,
8.69 Organized marketing of agricultural vegetables, and other perishables in important urban
commodities is being promoted in the country centres in those States which provide for market
through a network of regulated markets. Most of the reforms as per the Model Act. These markets will
Table 8.14 : Progress of Reforms in Agricultural Markets (APMC Act) (as on 31 October 2010)
Sl. No. Stage of reforms Name of State/ Union territory
1. Reforms to the APMC Act have been done Andhra Pradesh, Arunachal Pradesh, Assam,
for Direct Marketing; Contract Farming and Chhattisgarh, Goa, Gujarat, Himachal Pradesh,
Markets in Private/Coop. Sectors. Jharkhand, Karnataka, Madhya Pradesh,
Maharashtra, Mizoram, Nagaland, Orissa,
Rajasthan, Sikkim, and Tripura
2. Reforms to APMC Act have been done (a) Direct Marketing:NCT of Delhi
partially
(b) Contract Farming:Haryana, Punjab and
Chandigarh
(c) Private Markets:Punjab and Chandigarh
3. There is no APMC Act and hence not requiring Bihar*, Kerala, Manipur, Andaman & Nicobar Islands,
reforms Dadra & Nagar Haveli, Daman & Diu ,and
Lakshadweep
4. The APMC Act already provides for reforms Tamil Nadu
5. Administrative action has been initiated for Meghalaya, Haryana, J&K, Uttarakhand, West Bengal,
the reforms Pondicherry, NCT of Delhi and Uttar Pradesh
Note: * APMC Act has been repealed with effect from September 1, 2006.
provide state-of-the-art infrastructure facilities for 8.74 The Agri-clinic and Agri-business Centres
electronic auction, cold chain and logistics, and Scheme was launched in 2002 to provide extension
operate through primary collection centres services to farmers on payment basis through setting
conveniently located in producing areas to allow easy up of economically viable self–employment ventures.
access to farmers. Selected trainees are provided agri-preneurship
training. NABARD monitors the credit support to Agri-
Extension Services Clinics through commercial banks. Provision of credit-
8.71 A scheme called Support to State Extension linked back-ended subsidy at 33 per cent of the
Programmes for Extension Reforms was launched capital cost of the project funded through bank loan
in 2005-06, with the aim of making the extension as well as full interest subsidy for the first two years
system farmer driven and farmer accountable. For on the bank credit has recently been approved under
this purpose new institutional arrangements are the scheme. From the inception of the scheme
being made for technology dissemination in the form 22,158 unemployed agriculture graduates have been
of an Agricultural Technology Management Agency trained up to September 2010.
(ATMA) at district level to operationalize the extension 8.75 Information dissemination through agri fairs/
reforms with the active participation of farmers/ exhibitions is an excellent mechanism for
farmer groups, non-government organizations showcasing latest technological advancements and
(NGOs), Krishi Vigyan Kendras, Panchayati Raj dissemination of information to the farming community
Institutions and other stakeholders operating at and also promoting business opportunities in
district level and below. Up to October 2010, 591 agriculture and allied sectors. Agri fairs are promoted/
district-level ATMAs have been established. Gender organized at national, State, district, and block levels.
concerns are being mainstreamed by mandating
that 30 per cent of resources on programmes and
activities are allocated for women farmers and FOOD MANAGEMENT
extension functionaries. 8.76 The main objectives of food management are
8.72 The Mass Media Support to Agriculture procurement of foodgrains from farmers at
Scheme focuses on use of Doordarshan remunerative prices, distribution of foodgrains to
infrastructure for providing agriculture-related consumers, particularly the vulnerable sections of
information and knowledge to the farming society at affordable prices and maintenance of
community. Audio/ video spots on emerging issues/ food buffers for food security and price stability.
schemes such as rabi/kharif campaign, Kisan Call The instruments used are MSP and Central issue
Centre Scheme, and KCC are publicized using free price (CIP). The nodal agency which undertakes
commercial time. Live ‘crop seminars’ on procurement, distribution, and storage of foodgrains
Doordarshan involving farmers and experts have is the Food Corporation of India (FCI). Procurement
also been organized. The mass media initiative also at MSP is open-ended, while distribution is governed
includes the use of 96 All India Radio FM transmitters by the scale of allocation and its offtake by the
to broadcast 30-minute area-specific agricultural beneficiaries. The offtake of foodgrains is primarily
programmes six days a week. With a view to creating under the targeted public distribution system (TPDS)
awareness about assistance available under various and other welfare schemes of the Government of
schemes, a ‘Focused Publicity Campaign’ has been India.
launched during 2010-11. Under this campaign
publicity through newspapers as well as electronic Procurement and Offtake of Foodgrains
media was carried out. 8.77 During rabi marketing season (RMS) 2010-
8.73 The Kisan Call Centre scheme was launched 11, 22.52 million tonnes of wheat was procured
in 2004 to provide agricultural information to the against 25.38 million tonnes in RMS 2009-10. In
farming community through toll-free telephone lines. kharif marketing season (KMS) 2009-10, the total
A country-wide common 11-digit number—1800- procurement of rice was 31.46 million tonnes against
180-1551—has been allocated for KCCs. Replies 33.69 million tonnes in KMS 2008-09. Procurement
to the queries of the farming community are being of coarse grains in 2009-10 stood at 4.07 thousand
provided in 22 local languages. Calls are attended tonnes compared to 13.75 thousand tonnes in 2008-
to from 6.00 am to 10.00 pm on all seven days of 09. Procurement of foodgrains in States like Punjab,
the week. Haryana, Uttar Pradesh, Madhya Pradesh, Andhra
Pradesh, and Chhattisgarh is higher than in other reducing transportation costs. As on 22 December
States. In fact, Punjab and Haryana make the 2010, a total of ` 9376 crore of food subsidy has
maximum procurement. Increased MSP along with been released to various States under DCP
various other steps taken by the Government has operations in 2010-11. States under DCP operations
resulted in higher levels of procurement of foodgrains. have shown a healthy trend of increase in
This has paved the way for comfortable levels of food procurement of rice (94.9 lakh tonnes in KMS 2006-
stocks to meet the TPDS needs and buffer stocks 07 to 119.5 lakh tonnes in 2009-10). In KMS 2008-
norms. Offtake of wheat and rice from the Central
09 and 2009-10, the rice procurement by DCP states
pool for the TPDS and other welfare schemes) has
was 135.4 and 119.5 lakh tonnes respectively. In
gone up in the last many years (Table 8.15).
the case of wheat, however, the procurement in
Decentralized Procurement Scheme DCP States, particularly Uttar Pradesh and Madhya
Pradesh was rather low in RMS 2006-07 and 2007-
8.78 A number of States have opted for 08 primarily due to aggressive purchases by private
implementation of the Decentralized Procurement
companies on expectation of higher market prices,
Scheme (DCP) introduced in 1997, under which
lower rates of taxes and levies than Punjab and
foodgrains are procured and distributed by the State
Haryana and proximity to markets in southern and
Governments themselves. Under this scheme, the
eastern States of the country. However, there was
designated States procure, store and issue
foodgrains under the TPDS and welfare schemes of record procurement of wheat in RMS 2008-09 and
the Government of India. The difference between the 2009-10. Under the decentralized system of
economic cost fixed for the State and the CIP is procurement, the procurement of wheat has
passed on to the State Government as subsidy. The increased from 0.5 lakh tonnes in 2006-07 to 60.7
decentralized system of procurement has the lakh tonnes in 2009-10. In 2010-11, the wheat
objectives of covering more farmers under MSP procurement in DCP states has gone down primarily
operations, improving efficiency of the PDS, providing due to Uttar Pradesh withdrawing from the DCP
foodgrains varieties more suited to local tastes and scheme.
Table 8.15 : Procurement and offtake of wheat and rice (million tonnes)
2005-06 2006-07 2007-08 2008-09 2009-10
Procurement of Wheat and Rice
Rice 27.66 25.11 28.74 33.69 31.46
Wheat 14.8 9.2 11.1 22.7 25.4
Total 42.5 34.3 39.8 56.38 56.9
Offtake of Wheat and Rice for the TPDS*
2005-06 2006-07 2007-08 2008-09 2009-10 2009-10 2010-11
April-September
Rice 19.1 21.1 22.5 22.1 23.4 12.1 12.4
Wheat 12.0 10.3 10.8 12.5 19.0 9.5 9.5
Total 31.1 31.4 33.3 34.6 42.4 21.6 21.9
BPL (rice + wheat) 15.7 14.2 15.1 15.6 16.5 8.3 8.7
APL (rice+ wheat) 8.0 8.5 8.7 9.5 16.1 8.4 8.2
AAY (rice + wheat) 7.4 8.7 9.5 9.5 9.8 4.9 5.0
Offtake of Wheat and Rice for Other Schemes
Welfare Schemes 10.1 5.4 4.1 3.7 5.2 1.8 3.0
Open/Tender Sales/Exports 1.1 0.0 0.0 1.2 2.1 0.0 0.3
Total 42.3 36.8 37.4 39.5 49.7 23.4 25.2
Notes:* Revised.
BPL : below poverty line;
APL : above poverty line;
AAY : antyodaya anna yojana
Buffer Stock applicable) as the price paid to the farmers,
procurement incidentals, and the cost of distribution.
8.79 The stock position of foodgrains in the Central
The economic cost for both wheat and rice witnessed
pool as on 1 October, 2010 is 46.2 million tonnes
a significant increase during the last few years due
comprising 18.4 million tonnes of rice and 27.8 million to increase in MSPs and proportionate increase in
tonnes of wheat. This is adequate for meeting the the incidentals (Table 8.17 and Figure 8.16).
requirements under the TPDS and welfare schemes
during the current financial year (Table 8.16). Food Subsidy
8.81 Provision of minimum nutritional support to
Economic Cost of Foodgrains to the FCI
the poor through subsidized foodgrains and ensuing
8.80 The economic cost of foodgrains consists of price stability in different States are the twin objectives
three components, namely MSP (and bonus if of the food security system. In fulfilling its obligation
Table 8.16 : Buffer Stock Norms and Actual Stocks

(lakh tonnes)
As on WHEAT RICE TOTAL
Minimum Actual Minimum Actual Minimum Actual
Buffer Norms Stock Buffer Norms Stock BufferNorms Stock
January 2008 82 77.12 118 114.75 200 191.87
April 40 58.03 122 138.35 162 196.38
July* 201 249.12 98 112.49 299 361.61
October 140 220.25 52 78.63 192 298.88
January 2009* 112 182.12 138 175.76 250 357.88
April 70 134.29 142 216.04 212 350.33
July 201 329.22 118 196.16 319 525.38
October 140 284.57 72 153.49 212 438.06
January 2010 112 230.92 138 243.53 250 474.45
April 70 161.25 142 267.13 212 428.38
July 201 335.84 118 242.66 319 578.50
October 140 277.77 72 184.44 212 462.21
Notes:* Buffer norms include Food Security Reserve of 30 lakh tonnes of wheat from 1 July 2008 and
20 lakh tonnes of rice from 1 January 2009 onwards.
Table 8.17 : Economic cost of Rice and Wheat

(`/quintal)
Year 2002-03 2004-05 2006-07 2007-08 2008-09 2009-10 (RE) 2010-11 (BE)
Rice
Procurement Incidentals* 61.67 58.48 193.66 214.91 252.58 295.03 316.81
Distribution Cost 157.72 256.51 289.58 297.82 263.81 208.40 254.51
Economic Cost ** 1165.03 1303.59 1391.18 1549.86 1732.48 1873.58 2043.14
Wheat
Procurement Incidentals 137.63 182.74 180.15 164.02 193.62 219.22 224.99
Distribution Cost 145.51 222.80 269.36 244.43 230.27 216.06 248.89
Economic Cost 884.00 1019.01 1177.78 1311.75 1384.42 1457.30 1543.93
Notes: * For rice, from 2006-07, weightage of levy rice incidentals is also being added in the procurement incidentals.
** Weighted average of common and grade ‘A’ rice taken together.
BE : budget estimates; RE : revised estimates.
Figure 8.16 Economic cost of rice and wheat

2500
2000 Rice
R/qunital
1500
Wheat
1000
500
0
2002-03
2004-05
2006-07
2007-08
2008-09
2009-10
2010-11
Year
Notes: Weighted average of common and grade ‘A’ rice taken together. For rice, from 2006-07, in the procurement incidental weightage of levy rice
incidentals is also being taken.
towards distributive justice, the Government incurs Table 8.18 : Quantum of food subsidies
food subsidy. While the economic cost of wheat and released by Government
rice has continuously gone up, the issue price has
Year Food subsidy Annual growth
been kept unchanged since 1 July 2002. The
Government, therefore, continues to provide large ` crore)
(` (per cent)
and growing amounts of subsidy on foodgrains for 1999-2000 9200.00 5.75
distribution under the TPDS, other nutrition-based
2000-01 12,010.00 30.54
welfare schemes, and open market operations. The
food subsidy bill has increased substantially in the 2001-02 17,494.00 45.66
past few years (Table 8.18 and Figure 8.17). 2002-03 24,176.45 38.20
2003-04 25,160.00 4.07
TPDS Allocation and CIP
2004-05 25,746.45 2.33
8.82 Allocations of foodgrains for the BPL and
Antyodaya Anna Yojana (AAY) categories are made 2005-06 23,071.00 -10.39
at 35 kg per family per month for all accepted 6.52 2006-07 23,827.59 3.28
crore BPL (including 2.43 crore AAY) families in the
2007-08 31,259.68 31.19
country as per 1993-94 poverty estimates of the
Planning Commission and March 2000 population 2008-09 43,668.08 39.69
estimates of the Registrar General of India (RGI). 2009-10 58,242.45 33.37
For the APL category, allocations to different States/ 2010-11* 51,196.97 -
UTs are made depending upon the availability of
Note: *Figures up to 22 December 2010.
stocks of foodgrains in the Central pool and past
offtake by the States. The allocation for the APL months. Accordingly, these allocations range
category has been increased from 10 kg to 15 kg between 15 kg and 35 kg per family per month.
per family per month from August 2010 for six Wheat and rice are issued by the Central
Figure 8.17 Quantum of food subsidies released by government

70
60 Food
Rthousand crore
subsidy
50
40
30
20
10
0
1999-2000
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
Year
Government at uniform CIPs to States and Union Table 8.20 : Quantity of Wheat and Rice
Territories for distribution under the TPDS. Details Disposed of under the OMSS (D)
of CIPs of wheat and rice since 2002-03 are given
Year Qty (lakh MT)
in Table 8.19.
Wheat Rice
8.83 The difference between wholesale prices of
wheat and rice in the open market and the CIPs at 2009-10 16.28 4.94
which foodgrains are issued to cardholders has 2010-11* (as on 17.11.2010) 2.07 1 .67
widened in the last five years due to non-revision of Note: *Lifting after March 2010 against allocation made
the latter, as a result of which offtake under the in 2009-10.
TPDS, particularly by APL families has gone up
substantially. During the current year, the wheat and rice disposed of under the Open Market
Government has released a quantity of 470.80 lakh Sale Scheme (domestic) (OMSS [D]) during the last
tonnes under the TPDS covering AAY, BPL and two years is given in Table 8.20.
APL families. In addition, 5.90 lakh tonnes of
foodgrains was released to States as calamity relief, Sugar
etc. Further, special ad hoc allocation of 30.66 lakh
8.85 Sugar production in India is cyclic in nature.
tonnes of foodgrains was made to States/UTs in
The 2006-07 and 2007-08 sugar seasons (October-
May 2010 for all accepted numbers of BPL/AAY/
September) were years of high production whereas
APL families in the country. The issue price of this
the 2008-09 and 2009-10 seasons were years of low
allocation was ` 8.45 per kg for wheat and ` 11.85
production. The production of sugar in the 2008-09
per kg for rice. A total quantity of 25.00 lakh tonnes
and 2009-10 sugar seasons is estimated at about
has been allocated as special ad hoc/additional
146.7 lakh tonnes and 188 lakh tonnes compared to
allocation for BPL families at BPL prices to all States/
282 lakh tonnes and 263 lakh tonnes in 2006-07
UTs in September 2010 for distribution over next
and 2007-08 respectively. The decline in sugar
six months. Further, during the current year, an
production in 2008-09 and 2009-10 put upward
allocation of 47.55 lakh tonnes of foodgrains has
pressure on domestic sugar prices and the Central
been made till November 2010 for other welfare
Government had to take a number of measures to
schemes such as the Midday Meal Scheme,
augment domestic stocks of sugar and contain sugar
Integrated Child Development Services (ICDS),
prices during this period such as allowing import of
welfare Institutions, and the Emergency Feeding
duty-free sugar, imposing stock-holding and turnover
Programme.
limits on sugar, bringing khandsari sugar under the
ambit of stockholding and turnover limits and
Open Market Sale Scheme (Domestic)
suspension of futures trading in sugar. The sugar
OMSS (D)
production in 2010-11 is expected to be better at
8.84 In addition to maintaining buffer stocks and about 245 lakh tonnes, as per estimates given by
providing foodgrain stocks to meet the requirement Cane Commissioners.
of the TPDS and other welfare schemes, the FCI on
8.86 The concept of ‘statuary minimum price’ has
the behalf of the Government of India has been
been replaced by that of ‘ fair and remunerative price’
undertaking sale of wheat and rice at predetermined
(FRP) for sugarcane to provide reasonable margin
prices in the open market from time to time to
to sugarcane farmers on account of ‘risk’ and ‘profit’
enhance the supply so as to have a moderating
and is to be uniformly applicable to all States. The
influence on open market prices. The quantity of
amendments to the Sugarcane (Control) Order
1966, have come into force from 22 October 2009.
Table 8.19 : CIPs For the 2010-11 sugar season, the Central
(`/quintal) Government has fixed an FRP of ` 139.12 per quintal
Year Category Wheat Rice linked to a basic recovery rate of 9.5 per cent subject
to a premium of ` 1.46 for every 0.1 percentage
2002-03 APL 610 830
increase in recovery above that level.
(w.e.f 1.7.2002 BPL 415 565
till date) AAY * 200 300 Edible Oils
* CIPs for AAY households are effective since the 8.87 The production of oilseeds (kharif 2010-11) and
inception of the scheme in December 2000. net availability of edible oils from all domestic sources
(primary) are estimated at 172.74 lakh tonnes and Table 8.21 : Turnover on commodity futures
35.19 lakh tonnes respectively. In order to increase markets
the availability and control price of edible oils, the (` crore)
Government has reduced custom duties on crude
and refined edible oils to ‘nil’ and 7.5 per cent Name of the Calendar year
respectively since April 2008. It has been decided exchange 2008 2009 2010
that this duty structure will continue till September (up to Nov.
2010)
2011. Export of all major edible oils from the country
has been banned since March 2008 up to September, Multi Commodity 42,84,653 59,56,656 78,95,404
2011 (except coconut oil through Cochin Port and Exchange, Mumbai
certain oils from minor forest produce and edible oils National Commodity 6,28,074 8,05,720 9,73,217
in branded consumer packs of up to 5 kg, with a and Derivatives
ceiling of 10,000 tonnes per year).The Government Exchange, Mumbai
launched a scheme for ‘Distribution of Subsidized National Multi 37,272 1,95,907 1,80,738
Edible Oils’ in 2008-09 to provide relief to consumers Commodity Exchange,
Ahmedabad
from rising prices of edible oils. Under this Scheme,
imported edible oil was distributed through State Others 83,885 1,32,173 4,45,366
Governments/UTs at the rate of 1 litre per ration card
Total 50,33,884 70,90,456 94,94,725
per month. The Scheme continued in 2009-10 with
a subsidy of ` 15 per kg on imported oil up to 10
lakh tonnes and has been extended till 31 March 31 and agricultural commodities (11.53 per cent).
2011. However, in quantity terms trade in energy accounted
for 56.77 per cent followed by agricultural
commodities (31.67 per cent), metals (11.51 per
COMMODITY FUTURES MARKET cent), and bullion (0.05 per cent).
8.88 The commodity futures market facilitates the
8.91 The Forward Markets Commission (FMC), the
price discovery process and provides a platform for
regulator for commodity futures trading under the
price risk management in commodities. The market
provisions of the Forward Contracts (Regulation) Act
comprises 21 commodity futures exchanges, which
1952, continued its efforts to strengthen and broad
include five national and 16 (commodity-specific)
base the market during 2010. The efforts were
regional commodity exchanges. During 2010, one
directed at enlarging the participation of physical
commodity exchange, namely the Ahmadabad
market stakeholders, especially farmers, as hedgers
Commodity Exchange (ACE), was upgraded to a
in the commodity futures market by increasing the
national exchange and rechristened ACE Derivatives
level of awareness of physical market participants
and Commodity Exchange Limited, Ahmadabad.
and policymakers about the economic role of this
Agricultural commodities, bullion, energy, and base
market. The FMC also ensures the dissemination of
metal products account for a large share of the
spot and futures prices of agriculture commodities
commodities traded in the commodities futures
at Agricultural Produce Market Committees (APMCs)
market. Futures trading in zinc and lead, mini
through the implementation of the Price
contracts were introduced for trading during 2010.
Dissemination Project, in coordination with
8.89 The total value of trade in the commodity AGMARKNET and the national commodity
futures market has risen substantially in 2010 (Table exchanges. The project envisages placement of
8.21). The growth could be attributed to larger electronic price ticker boards at APMC markets
participation in the market, increase in global displaying AGMARKNET spot prices and futures
commodity prices, the advent of new commodity prices of agriculture commodities discovered on the
exchanges and the restoration of trade in some of National Exchanges, on a real-time basis. On the
the suspended agriculture commodities. regulatory front, the FMC also took the following
steps for the development of commodity futures
8.90 During the year 2010-11 (up to November
market:
2010), in value terms bullion accounted for the
maximum share of traded value among the i. The Commission amended the guidelines for
commodity groups (45.22 per cent) followed by grant of recognition to new commodity
metals (23.80 per cent), energy (19.45 per cent) exchanges under the Forward Contracts
(Regulation) Act 1952 by specifying the equity provide the most efficient spot price inputs to futures
that can be held by a single stock exchange exchanges. On the agricultural side, the exchanges
or commodity exchange and the cumulative will enable farmers to trade seamlessly on the
equity shareholding of all stocks and platform by providing real-time access to price
commodity exchanges. information and a simplified delivery process, thereby
ensuring the best possible price. On the buy side,
ii. The equity structure of the nationwide multi-
all users of the commodities in the commodity value
commodity exchanges was specified after five
chain would have simultaneous access to the
years of operation, in view of which, no
exchanges and be able to procure at the best
individual or persons acting in concert can hold
possible price. Therefore the efficiency levels attained
more than 15 per cent of the paid up equity
as a result of such seamless spot transactions would
capital of the exchange. The original promoter/
result in major benefits for both producers and
investors can also not hold more than 26 per
consumers.
cent of the paid up equity capital of the
exchanges. The amended clause also restricts
the shareholding of stock exchange(s) and OUTLOOK AND CHALLENGES
commodity exchange (s) in the National
8.93 The country has made great strides towards
Commodity Exchange.
increasing foodgrains production since the mid-
iii. To protect the interests of customers, sixties. Today, India ranks high in the production of
guidelines on market access through various commodities such as milk, wheat, rice, fruits,
authorized persons for all national commodity and vegetables. However, the agriculture sector in
exchanges were amended whereby the system India is at a crossroads with rising demand for food
of sub-brokers was discontinued and the items and relatively slower supply response in many
members of the national commodity exchanges commodities resulting in frequent spikes in food
were required to provide access to their clients inflation. The technological breakthrough achieved
only through authorized person(s) appointed in the 1960s is gradually waning. The need for a
as per the Commission’s guidelines. second green revolution is being experienced more
than ever before.
iv. Guidelines were issued specifying the
conditions which are required to be fulfilled by 8.94 Increasing agriculture production and
the members of the commodity exchanges productivity is a necessary condition not only for
willing to set up wholly owned subsidiaries and ensuring national food security, livelihood security,
joint ventures in the overseas markets. and nutritional security but also for sustaining the
high levels of growth envisaged in the current Plan.
DEVELOPMENT OF ELECTRONICS SPOT However, with very little growth in area and marginal
EXCHANGE growth in yields of many crops during the last
decade, increasing agricultural production remains
8.92 Four National Commodity Spot Exchanges
a challenge. Concerted and focused efforts are
with electronic trading platforms were set up, namely
required for addressing the challenge of stagnating
the National Spot Exchange Limited (NSEL), NCDEX
productivity levels in agriculture. A holistic approach,
Spot Exchange (NSPOT), Reliance Spot Exchange,
simultaneously working on agricultural research,
and National APMC. Of these, the NSEL, NCDEX
development, dissemination of technology, and
Spot Exchange, and Reliance Spot Exchange are
provision of agricultural inputs such as quality seed,
in operation. At present, the spot exchanges offer
fertilizers, pesticides, and irrigation, would help
trading in more than 30 commodities having delivery
achieve the critical levels of productivity needed.
locations spread over 15 states. Spot exchanges
Further, effective coordination and monitoring of
electronically connect large numbers of buyers and
the ongoing agriculture and allied sector
sellers geographically located at distant places to
programmes needs to be ensured for optimum
converge on a single platform to overcome problems
results.
of time, distance, and information flow and also
provide guarantee for each trade market linkage 8.95 Capital investment in agriculture as a
among farmers, processors, exporters and users with percentage of the GDP has been stagnating in recent
a view to reducing the cost of intermediation and years, although the capital expenditure in agriculture
enhancing price realization by farmers. They also as a percentage of the GDP in agriculture has shown
some improvement in the current Five Year Plan. It requirements which are of vital importance for the
may, however, also be noted that the agriculture growth of agriculture sector.
sector GDP has itself been stagnating during the 8.101 A higher growth rate of the economy and
last three years from 2007-08 to 2009-10. The real rising levels of income are putting pressure on
challenge in agriculture sector is to enhance capital products from the livestock sector. Many items such
investment in the sector both by public and private as meat, milk, and poultry are experiencing upward
sector in a sustained way. pressure in their prices adding to the wholesale food
8.96 Sixty per cent of our net sown area is still price inflation. A long-term strategy to increase the
rainfed. Various studies indicate that the potential of production of these items is the need of the hour.
rainfed areas has not been fully utilized. A targeted These steps would also help enhance rural income
development of rainfed areas should be prioritized. and supplement the livelihood options of the rural
populace.
8.97 Enhancing the returns farmers get on their
production is essential for incentivizing the farmers 8.102 There has been substantial increase in the
to produce more. Farmers need to realize the market MSPs of various crops over the last few years. This
price for their produce. Setting up of efficient supply is considered necessary for incentivizing farmers
chains is not only essential for ensuring adequate to increase production and productivity. At the same
supplies of essential items at reasonable prices but time, the MSP signals the floor price for the
also to ensure that producers get adequately produce which, in turn, has the potential of
compensated. Linking farmers to the market is, increasing the prices. Addressing the welfare of
therefore, very important. The successful experience the agricultural producers and of the consumers
of cooperatives in the milk sector in managing the simultaneously poses a challenge. Further, inability
supply chain and providing remunerative prices to of a large number of small and marginal farmers to
the producers may be emulated in the case of directly access the agri-market puts a question mark
agricultural products. on increases in MSP actually benefiting such
farmers. Record procurement of rice and wheat in
8.98 The level of secondary food processing in India the last few years has helped build up the buffer
is very low compared to many western countries. stock and strategic reserve of wheat and rice. There
With increasing income and population, demand for is, however, a huge cost involved in the process,
processed food is likely to increase. It is necessary which is met through budgetary sources in the form
to cater to this changing demand and at the same of food subsidy. The procurement operations linked
time enhance the income of farmers. So far the focus with MSPs cause fiscal stress by way of increasing
in food management has been on cereals, mainly food subsidies. The issue of efficient food stocks
rice and wheat. However, the demand for processed management and offloading of stocks in time needs
food is expected to increase. Investment in food urgent attention.
processing, cold chains, handling, and packaging
8.103 One of the most pressing of emerging
of processed food needs encouragement.
challenges is that of conservation. Enactment of
8.99 Declining per capita availability of foodgrains laws for ecological foundations for climate resilient
has been a matter of major concern. For ensuring agriculture, management of agricultural waste,
nutritional security, it is not only important to increase building carbon sequestration of soil and overall
the per capita availability of foodgrains but also to natural resource management is urgently needed.
ensure that right quantities of food items are there in
8.104 To conclude, raising farm productivity with
the food basket of a common man. A thrust on
adequate focus on rainfed areas, diversification of
horticulture products is required for enhancing per
Indian agriculture from just crop farming to livestock,
capita availability of food items as well as ensuring
fisheries and poultry and horticulture while
nutritional security.
simultaneously addressing environmental concerns
8.100 Addressing infrastructure requirements in should be the focus for the agriculture sector. Higher
the agriculture sector, especially storage, levels of investments are required for not only
communication, roads, and markets should be a increasing farm productivity but also creating
priority. Public Private Partnership models can be of adequate infrastructure for transport, storage and
help in ensuring faster development of these distribution of agricultural produce.
Industry 9
CHAPTER
G rowth in the industrial sector was buoyant during the first two quarters (April-
June, July-September) of the current financial year. The manufacturing sector, in
particular, showed a remarkable robustness, growing at rates of 12.6 percent and 9.9
percent respectively, during these two quarters. Thereafter industrial output growth
has begun to moderate. This compares with global trends as global manufacturing
continued to rebound post crisis till the first half of 2010 and has thereafter moderated.
India’s post recovery industrial output growth has been largely driven by a few sectors
such as the automotive sector along with a revival in cotton textiles, leather, food
products, and metal products. Some sectors have shown extreme month-on-month
output volatility. The impact of favourable monsoon on the domestic-demand-driven
industrial sector has not been widespread. On the consumer non-durable segment in
particular it has not been discernible so far but is expected to be visible in the fourth
quarter of this fiscal year. A higher base effect had adverse impact on the industrial
growth rate in the Q3 (October-December 2010) and accordingly may moderate the
industrial sector’s contribution to the gross domestic product (GDP) in Q3 of the
current financial year.
9.2 Industry-sector GDP, which includes gross 9.3 The IIP-based cumulative industrial output
value added (GVA) of the construction sector apart growth rate during April-December 2010 was 8.6 per
from mining, manufacturing, and electricity, has cent, at par with the growth rate in the corresponding
shown quarterly growth rates comparable to growth months of the previous year (Figure 9.1). Component-
rates based on the index of industrial production wise cumulative growth figures, however, show wide
(IIP). IIP data for Q2 and Q3 of the current financial variation. Growth rates in the mining and electricity
year indicate that moderation has set in across all sectors have been comparatively low. Likewise, on
the broad sectors covered under it. Manufacturing the basis of use-based classification, intermediate
growth rate declined to 5.1 per cent in Q3 of the and consumer non-durable goods have also had
current financial year. This is a moderate comparatively lower growth.
performance compared to the peak growth of 16.8 9.4 Due to poor performance of the basic goods
per cent achieved during Q4 (January-March) of and consumer non-durables segments, which
the last financial year. Within the manufacturing constitute about 59 per cent of the IIP, a sizeable
sector, the capital goods segment has been the main chunk of the industrial sector has not contributed
driver of growth though it has shown extreme volatility significantly towards overall IIP growth. The growth
as it registered a growth of 3.5 percent in Q1 of has mainly been driven by the capital goods and the
2009-10 and surged up to 45.7 per cent during Q4 consumer durables segments. Weighted contribution
of the last financial year and continued to be in of capital goods and consumer durables during April-
double digit till Q2 and moderated further to 3.8 per December 2010 was about 29 per cent and 21 per
cent during Q3 of the current financial year. (Table cent as against their weights of 9.26 per cent and
9.1). 5.37 per cent respectively in the IIP. The basic goods
Table 9.1 : Growth in the IIP and its major components

(per cent)
Period Mining Manu- Electri- Basic Capital Inter- Consu- General
facturing city goods goods mediate mer
goods goods
Q1 2008-09 4.0 6.1 2.0 3.3 9.2 3.0 8.7 5.6

Q2 2008-09 3.8 5.6 3.2 4.9 15.2 -1.3 7.0 5.2
Q3 2008-09 2.0 1.3 2.9 2.5 5.7 -5.9 4.8 1.5
Q4 2008-09 0.9 0.8 3.0 0.4 4.0 -3.0 3.2 1.0
Q1 2009-10 6.8 3.6 5.8 6.3 3.5 7.0 -0.3 4.0
Q2 2009-10 9.0 8.7 7.4 5.9 6.7 11.6 9.7 8.6
Q3 2009-10 10.3 14.4 3.8 6.1 22.7 19.4 10.6 13.3
Q4 2009-10 12.9 16.8 7.1 10.3 45.7 17.0 5.2 15.8
Q1 2010-11 10.2 12.6 5.6 6.8 31.9 10.5 9.2 11.9
Q2 2010-11 7.0 9.9 2.1 4.7 18.4 10.8 7.0 9.1
Q3 2010-11 5.8 5.1 6.5 6.8 3.8 6.5 3.7 5.3
Source : Central Statistics Office (CSO).
Figure 9.1 Growth (per cent) in the IIP and its major components
25
22.7
21.4
20 April-Dec
2009-10
16.7
15
Per cent
12.5
11.2 April-Dec
10 8.7 8.9 9.1 9.2 8.6 8.6 2010-11
7.7
5.7 6.1 6.1
5 4.7
1.4 0.7
0
Mining
Manufacturing
Electricity
Basic goods
Capital goods
Intermediate
Durables
Non-durables
General
segment, which has a weight of 35.57 per cent in Table 9.2 : Sector-wise weighted contribution
the IIP, contributed only 20 per cent during April- Weight contribution
December 2010 (Table 9.2). Weight April- April-
Dec 2009 Dec 2010
9.5 The manufacturing sector, which has a weight Sector
of 79.36 per cent in the IIP, is its key driver. Mining 10.47 7 6
Manufacturing output growth has dipped from a peak Manufacturing 79.36 88 90
of 18 per cent in April 2010 to 1.0 per cent in Electricity 10.17 5 4
December 2010, as a result of which IIP growth General IIP 100.00 100 100
has also come down from 16.6 per cent in April Use-based
2010 to 1.6 per cent in December 2010. However, Basic goods 35.57 20 20
this slowdown is in a large part driven by the base Capital goods 9.26 19 29
Intermediate goods 26.51 37 28
effect. Despite wide fluctuations, the April–December
Consumer goods (total) 28.67 24 23
2010 cumulative growth rate has remained at a
Consumer Durables 5.37 20 21
robust 9.1 per cent for the manufacturing sector Consumer Non-durables 23.3 4 2
and 8.6 per cent for the IIP. Month-wise annual General IIP 100..00 100 100
growth rate for the remaining months of the financial Source : Central Statistics Office (CSO).
Industry 219
Figure 9.2 Projection of IIP growth for Q4 2010-11
20
3-years
average
Annual growth (per cent)
15 annual
growth
10
2-years
average
5 annual
growth
0 Seasonally
adjusted
annual
-5 growth
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
2010 2011
Year
year is likely to remain moderate but annual growth cent, has contributed significantly to pulling down
rate is expected to remain at par with the last years the IIP (Table 9.3).
growth rate. (Figure 9.2).
9.7 The IIP with 1993-94 as its base has become
9.6 During April-December 2010, out of the dated. It has, therefore, not been able to capture
seventeen industrial groups covered under the the structural shift in manufacturing, both in terms
manufacturing sector, nine have had higher than of the products to be included and the coverage of
10 per cent cumulative growth rates and three higher producing units. There has been a consistent
than 5 per cent. Only five groups have had less downward bias in the IIP and this widens as the
than 5 per cent or negative cumulative growth rates. base becomes dated. A comparative study of IIP
The poor performance of basic chemicals and and Annual Survey of Industries (ASI) data clearly
chemical products, with an IIP weight of 14 per establishes that the downward bias of IIP has
Table 9.3 : Growth of Industry Product Groups (at two-digit level)

Index of Industrial Production (base 1993-94=100)
April- Dec. April- Dec.
Industry Group Weight 2008-09 2009-10 (2009-10) (2010-11)
Manufacturing 793.6 3.3 11 8.9 9.1
Industrial Groups with Growth Rates above 10 per cent during April-December 2010-11
Transport Equipment 39.8 2.4 26.9 18.5 24.5
Other Manufacturing Industries 25.6 3.5 9.2 6.4 22.1
Metal Products 28.1 0.5 11.5 0.2 21.9
Machinery & Equipment 95.7 9 20.6 15.7 12.7
Food Products 90.8 -9.7 -1.5 -6.9 12.4
Leather Products 11.4 -6.9 2.5 1.1 11.4
Rubber, Plastic & Petroleum 57.3 -1.5 15.4 14.5 11
Jute Textiles 5.9 -10 -24.4 -14.1 10.8
Cotton Textiles 55.2 -1.9 5.5 4.1 10.2
Industrial Groups with Growth Rates below 10 per cent during April-December 2010-11
Basic Metals 74.5 4 6.5 4.6 8.4
Paper Products 26.5 1.9 3.9 2.1 8
Non-metallic Mineral Products 44 1.3 9.5 8.1 6.5
Textile Products 25.4 5.8 8.4 10.6 3.7
Basic Chemicals & Chemical Products 140 5.5 8.8 11.3 2
Industrial Groups with negative Growth Rates during April-December 2010-11
Wool, Silk & Man-made Textiles 22.6 0 8.1 11.8 -0.6
Beverages & Tobacco Products 23.8 16.2 -0.2 -1 -3.1
Wood Products 27 -9.6 9.7 8.6 -13.8
Source : Central Statistics Office (CSO).
Table 9.4 : Rate of Growth of ASI Manufacturing (1999-2000 prices) and IIP Manufacturing
2004-05 2005-06 2006-07 2007-08 2008-09
ASI Output 22.01 9.26 19.72 10.17 8.90
ASI Gross Value Added 17.36 12.79 19.69 14.83 2.80
IIP Manufacturing 9.2 8.9 12.9 9.2 3.3
Difference 8.2 3.3 6.8 5.6 -0.5
Source : Office of the Economic Adviser, Department of Industrial Policy and Promotion (DIPP).
considerably increased and this has implications for Structural shift in the organized manufactur-
GDP growth and the share of manufacturing in this ing sector
growth. Assessment of the growth of registered
manufacturing based on the ASI and IIP for the last 9.10 There is a general perception that in the Indian
five years clearly indicates persistence of this organized manufacturing sector, there has not been
continued bias (Table 9.4). much increase in the rate of growth of employment.
Product market reforms which eliminated capacity
Volatility in the IIP at individual items level regulations and rent seeking in Indian industry were
expected to provide impetus for greater absorption
9.8 Since the weight of an item (4-digit NIC) of labour in line with resource availability. ASI data,
broadly indicates its relative importance in the IIP, which are the most comprehensive data set on the
it is generally expected that contribution of an item organized sector, did indicate that the number of
in any given monthly IIP would be close to its persons engaged in the organized manufacturing
assigned weight in the basket. In other words, any sector, after continuous increase in the initial years,
excess contribution over and above the base year’s
witnessed a deceleration from 1997-98 onwards. The
assigned weight in the IIP would affect overall IIP
decline continued until 2003-04. From 2004-05
growth. The Office of the Economic Adviser, DIPP,
onwards, there has been continuous increase in
has carried out an exercise to identify the highly
employment in the organized manufacturing sector.
volatile items with high standard deviation (SD)
Further, even in 2008-09, the latest year for which
during the past five years.
ASI data are available, there appears to be a
9.9 The exercise has identified 26 highly volatile significant increase in the number of persons
items with a weight of 8.2 per cent in the IIP. Within employed. This is contrary to the anecdotal evidence
these 26 volatile items there are five with a weight and various surveys undertaken during this period
of 1.8 per cent showing very high SD, namely which indicated a decline in the employment in the
ampicillin(200), alarm time pieces (875), organized manufacturing sector. While there has
agarbatti(409), well/offshore platforms(13,475) and been an increase in the capital employed per unit of
insulated cables and wires (204). These items have labour during the period and the output per unit of
created wide fluctuations in the IIP. There is need labour, a sharper increase has been observed in the
to shift to a new base and an IIP series based on rate of growth of labour absorption itself
an updated basket. (Figure 9.3).
Figure 9.3 Structural shift in organised manufacturing

35 12
capital/labour ratios
Output/labour and
30 11 Output/
Persons engaged
Labour
25 10
in millions
(R Lakhs)
20 9
15 8 Capital/
Labour
10 7 (R lakhs)
5 6
0 5 Persons
engaged
1981-82
1982-83
1983-84
1984-85
1985-86
1986-87
1987-88
1988-89
1989-90
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-20
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
Year
Industry 221
Corporate-sector performance profits have recovered. But first half results in 2010-
11 reveal pressures on net profits on account of
9.11 Based on analysis of abridged financial results
higher commodity prices and staff costs and higher
of the listed manufacturing companies, it is observed
interest outgo. With faster increase in total
that revenue growth in the second half (October-
expenditure in relation to sales, the profitability
March) of 2009-10 rebounded to pre-crisis level
margin has contracted in recent months
amidst improving demand conditions and confidence.
(Table 9.5)
Consequently, consumption of raw material as well
as power and fuel expenses followed an upward trend
during the considered period. Accumulated stocks- INDUSTRIAL GROWTH BY SECTORS
in-trade during the first half of 2008-09 were depleted Textiles
during the later quarters indicating adjustments of
inventory levels to changes in business demand 9.13 The IIP covers four textile groups, namely
which had picked up, during the latter half of 2009- cotton textiles; wool, silk & man-made fibre textiles;
10 and first quarter of 2010-11, indicating revival of jute & other vegetable fibre textiles (except cotton);
the demand. The non-core ‘other income’ which and textile products (including wearing apparel).
contributed significantly to net profits was seen to Cotton textiles production grew by 10.1 per cent
be at lower levels during Q2 and Q3 (July-September, during April –November 2010-11 as compared to 3.6
October-December) of 2009-10 and contracted further per cent during April-November 2009-10. Jute textiles
in Q1 of 2010-11. However, in Q2 it has risen to a production have also recovered and grew by 6.8 per
peak of 69.5 per cent. cent as compared to a decline of 16.7 per cent during
April-November 2009-10. Textile products grew by
9.12 The growth in net profits followed a downward 5.7 per cent during April-November 2010-11 as
trend and was very low in Q3 and Q4 of 2008-09. compared to 3.9 per cent during the corresponding
However, during the subsequent quarters, aided by months of the previous year. In the wool, silk, and
low base and momentum in demand, corporate man-made fibres segment of textiles growth has,
Table 9.5 : Year-on-Year Growth in Sales and Expenditure of listed public limited manufacturing
companies in the private sector
Items 2008-09 2009-10 2010-11
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
No. of Companies 1926 1837 1849 1901 1885 1876 1901 1912 1900 1933
Growth Rates in per cent
Sales 30.1 32.1 6.3 0.1 -2.7 -0.4 28.7 34.9 28.8 21.2
Change in Stock-in-trade 131.9 230.1 a a -79.5 0.1 b b 354 -46.5
Expenditure 34.3 38.8 9.3 -2.9 -6.6 -3.4 26.6 37.5 34.5 22.5
Consumption of Raw Materials 38.1 44 4 -9.6 -14.5 -4.7 35.5 46.6 40.6 21.9
Staff Cost 19.3 17 12.4 7.9 9.9 9.1 12 18.1 16.9 20.4
Power & Fuel 28.8 37.8 21.7 3.1 -1.4 -5.7 1.7 10.6 13.1 15.5
Other Income -9.5 2.7 14.9 26.8 62.7 10 12.3 42.4 -28.5 69.5
Interest Costs 52 69.9 60.5 43.3 8.3 -2.1 -5 1.1 10.9 7.8
Profits after Tax (PAT) 6.9 -4.2 -66.4 -28.3 3.2 17.6 178 69.4 8.2 10.9
Ratio in per cent
PAT to Sales 8.7 7.6 3.6 6.7 9.2 9 8 8.6 8 8.1
Source : Reserve Bank of India Studies on Corporate Performance based on a abridged results of select
companies in the private corporate sector.
Note: a: Numerator is negative; b : Denominator is negative
Table 9.6 : Production of fabrics/cloth (million sq. m)

April- October
Sector 2006-07 2007-08 2008-09 2009-10 2009-10 2010-11
(P) (P)
Mill Sector 1746 1781 1796 1961 1097 1130
-5.40% -2.00% -0.80% -9.20% -3.00%
Handloom 6536 6947 6677 6769 3956 3770
-7.00% -6.30% -3.90% -1.40% -1.70%
Powerloom 32,879 34,725 33,648 36,644 21699 22067
-7.40% -5.60% -3.10% -8.90% -1.70%
Hosiery 11,504 11,804 12,077 13,623 7941 8362
-10.40% -2.60% -2.30% -12.80% -5.30%
Others 724 768 768 814 448 476
-0.059 -6.10% 0.00% -5.70% -6.30%
Total Cloth Production 53,389 56,025 54,966 59,809 35,141 35,805
-7.70% -4.90% -0.019 -8.80% -1.90%
Source : Office of the Textile Commissioner, Mumbai.
Notes : P is Provisional.
however, dipped to mere 0.1 per cent during April- CHEMICALS, PETROCHEMICALS AND
November 2010 as compared to 13 per cent during FERTILIZERS
April-November 2009-10.
Chemicals
9.14 Overall, the production of textile fabrics
increased by 1.9 per cent during April-October 2010- 9.16 Major chemicals undergo several stages of
11. This is a moderate performance when compared processing to be converted into downstream
with the robust increase of 8.8 per cent during 2009- chemicals. These processed chemicals are used
10. The decline in textile fabrics/cloth during the in agriculture and industry as auxiliary materials
current financial year has been on account of such as adhesives, unprocessed plastics, dyes, and
comparatively lower growth rates in the production fertilizers. Chemicals are also directly used by
of mill, power loom and hosiery segments. consumers in the form of pharmaceuticals,
(Table 9.6). cosmetics, household products, paints, etc. The
trend in production of chemicals in the current year
9.15 Post slowdown/recession in the developed vis-à-vis the preceding three is given in Table 9.7.
economies, the textile sector has gathered During April-November 2010-11 dyes and dyestuffs
momentum yet the export performance of Indian registered impressive growth of 18.52 per cent.
textiles continues to lag substantially behind that of
China’s as regards rate of growth as well as share in Petrochemicals
world textile exports. During 2009, China had a 28.3
9.17 Petrochemicals include synthetic fibres,
per cent share in world textile exports as against polymers, elastomers, synthetic detergents, and
India’s share of only 4.3 per cent. In clothing exports, performance plastics, apart from their intermediates
China had a share of 30.7 per cent as against India’s such as synthetic fibre intermediates, synthetic
share of 3.6 per cent. India’s textile exports grew by detergent intermediates, olefins, and aromatics. The
6.31 per cent during 2009-10 as against a decline of main sources of feedstock and fuel for
5.0 per cent during 2008-09. As per the latest petrochemicals are natural gas and naphtha.
available data for April-September 2010, exports of Petrochemical products cover the entire spectrum
textiles and clothing were of the order of US$ 11.27 of daily use items ranging from clothing, housing,
billion, thus recording a growth of 11.47 per cent vis- construction, furniture, automobiles, household
à-vis exports worth US$ 10.11 billion in April- items, toys, agriculture, horticulture, irrigation, and
September 2009. packaging to medical appliances.
Industry 223
Table 9.7 : Production of major petrochemicals
(000’ MT)
Years Alkali Other Organic Pesticides Dyes & Total
Chemicals Inorganic Chemicals (Tech.) Dyestuffs Major
Chemicals Chemicals
2007-08 5443 609 1552 83 44 7731
2008-09 5442 513 1254 85 32 7326
2009-10 5602 518 1280 82 42 7524
April-Nov 2009 3659 341 846 60 27 4933
April-Nov.2010 3876 365 867 56 32 5196
Growth rate 5.93 7.04 2.48 -6.67 18.52 5.33
Source : Department of Chemicals and Petrochemicals. Note: MT- Metric Tonne
Table 9.8 : Production of major petrochemicals

(000’ MT)
Years Synthetic fibers Polymers Elastomers Synthetic Performance Total major
detergent plastics petro-
intermediates chemicals
2007-08 2524 5304 105 585 157 8675
2008-09 2343 5060 96 552 141 8192
2009-10 2601 4791 106 618 172 8287
April-Nov 2009 1727 3152 70 406 117 5472
April-Nov. 2010 1824 3450 65 422 124 5915
Growth rate 7.35 9.45 -7.14 3.94 5.98 8.17
Source : Department of Chemicals and Petrochemicals. Note: MT- Metric Tonne
9.18 The production of major petrochemicals in requirement of potash, about 90 per cent of
primary form and the growth rates from 2007-08 phosphatic, and about 20 per cent of urea is met
onwards are exhibited in the Table 9.8. It is worth through imports.
noting that polymers account for the largest share 9.21 In addition to urea, 21 grades of P & K
by far of petrochemical production and in 2009-10 fertilizers, namely di-ammonium phosphate (DAP),
this share was 58 per cent. During April-November muriate of potash (MOP), mono-ammonium
2010-11 major petrochemicals have increased by phosphate (MAP), triple super phosphate (TSP),
8.17 per cent. ammonium sulphate (AS), single super phosphate
(SSP), and 15 grades of NPK complex fertilizers
Foreign Trade in Chemicals and Petro- are provided to farmers at subsidized rates, which
chemicals are much below the actual cost. Farmers pay only
9.19 The share of chemicals and petrochemicals 25 to 40 per cent of the actual cost and the rest is
in total national exports declined from 11.6 per cent borne by the Government in the form of a subsidy
to 9.96 per cent during the period 2003-04 to 2009- that is reimbursed to the manufacturers/importers.
10. Likewise, imports declined from 9.2 per cent to 9.22 The domestic production of urea in the year
7.2 per cent. 2009-10 was 211.12 lakh MT, as compared to 199.20
lakh MT in 2008-09. The production of DAP increased
Fertilizers sharply in 2009-10 and was at 42.46 lakh MT as
9.20 India is meeting 85 per cent of its urea compared to 29.93 lakh MT in 2008-09. The
requirement through indigenous production but is estimated production of urea in 2010-11 is projected
largely import dependent for meeting the phosphorus at 215.37 lakh MT and that of DAP and complexes
and potassium (P&K) fertilizer requirements either at 39.58 lakh MT and 91.66 lakh MT respectively
as finished fertilizers or raw materials. The entire (Table 9.9)
Table 9.9 : Production and import of fertilizers

( lakh MT)
Production Imports
Year 2008-09 2009-10 2010-11* 2008-09 2009-10 2010-11*
Urea 199.2 211.12 215.37 56.67 52.09 45.83
DAP 29.93 42.46 39.58 61.91 58.89 68.12
Complex Fertilizers 68.48 80.38 91.66
MOP Nil Nil Nil 56.72 52.86 47.84
Source : Department of Chemicals and Petrochemicals

Note : * estimated; MT- Metric Tonne.
Steel infrastructure (affecting logistics and transport), and

9.23 India ranked as the fourth largest producer of uncertainties in land acquisition have emerged as
crude steel in the world during January–November bottlenecks to greenfield expansion. During April-
2010, after China, Japan, and the USA as per the November 2010-11, consumption, imports, and
World Steel Association. This was a slip in rank exports of finished steel recorded growth rates of
from its number three position in 2009. The country 9.8 per cent,11.1 per cent, and 13.8 per cent
has also been the largest sponge iron producer in respectively.
the world since 2002. Domestic crude steel
production grew at a compounded annual growth
Information technology and electronics
rate of 8.4 per cent during 2005-06 to 2009-10 9.25 The revenue aggregate of the information
(Table 9.10).The increase in production rode on the technology (IT)-business process outsourcing
back of capacity expansion, mainly in private-sector (BPO) industry has grown by 5.4 per cent to reach
plants, as also higher utilization rates. US $ 73.1 billion in 2009-10 as compared to US $
69.4 billion in 2008-09. IT services exports were
9.24 The Indian steel industry has diversified its
US $ 27.3 billion in 2009-10 as compared to US $
product mix to include sophisticated value-added
25.8 billion in 2008-09, showing a growth of 5.8 per
steel used in the automotive sector, heavy
cent. Information Technology Enabled Services
machinery, and physical infrastructure. It, however,
(ITeS)-BPO exports have increased from US $ 11.7
suffers from the high ash content of locally available
billion in 2008-09 to US $ 12.4 billion in 2009-10,
metallurgical coal and a marked dependence on
registering a year-on-year (Y-o-Y) growth of 6 per
imported coal. The issues regarding raw material
cent. Revenue from the domestic market (IT services
security (e.g. getting iron ore mining lease),
and ITeS-BPO) has grown to US $ 14 billion in the
Table 9.10 : Production, consumption, import and export of total finished steel and pig iron
(million tonnes)
Item 2005-06 2006-07 2007-08 2008-09 2009-10 Change (per cent)
over 2008-09
Production for Sale TFS 46.56 52.53 56.07 57.16 59.69 4.4
PI 4.69 4.93 5.284 6.21 5.73 -7.6
Import TFS 4.31 4.93 7.03 5.84 7.3 25
PI 0.03 0.03 0.11 0.08 0.11 38
Export TFS 4.8 5.24 5.08 4.44 3.24 -27
PI 0.44 0.71 0.56 0.35 0.28 -21
Real Consumption** TFS 41.43 46.78 52.12 52.35 56.48 7.9
PI 4.13 4.33 4.62 5.87 5.46 -6.9
Source : JPC, Ministry of Steel.

Notes : TFS= total finished steel, both alloy and carbon; PI=pig iron;
*provisional.; ** adjusted for stock variation and double counting.
Industry 225
year 2009-10 as compared to US $ 12.8 billion in by individual creativity and innovation, and make
2008-09, a growth of about 9 per cent. Total IT significant contributions to the country’s GDP,
software and services employment has reached manufacturing output, exports, and employment
2.28 million in 2009-10 (excluding employment in generation. MSMEs contribute 8 per cent of the
the hardware sector) as against 2.20 million in 2008- country’s GDP, 45 per cent of manufactured output,
09.The IT-ITeS industry’s contribution to national and 40 per cent of exports. The labour-capital ratio
GDP is estimated to increase from 6.0 per cent in in MSMEs is much higher than in larger industries.
2008-09 to 6.1 per cent in 2009-10. NASSCOM Moreover, MSMEs are better dispersed. In view of
expects IT-BPO exports to grow by at least 18 per these factors, MSMEs are important for achieving
cent in 2010-11 to reach US $58.7 billion as against the national objective of growth with equity and
US $ 49.7 billion in 2009-10. inclusion.
Electronics hardware manufacturing

CENTRAL PUBLIC-SECTOR
9.26 The production of electronics is estimated to
ENTERPRISES (CPSES)
grow by 13 per cent to reach Rs.109,940 crore in
2009-10 as compared to ` 97,260 crore in 2008- 9.28 There were altogether 249 CPSEs under the
09. Electronics hardware exports are estimated to administrative control of various ministries/
be ` 31,250 crore in 2009-10 as compared to departments as on 31March 2010. Of these, 217
` 31,230 crore in 2008-09. The cumulative export were in operation and 32 under construction. The
figure in electronics during 2010-11 (April to July) cumulative investment (paid-up capital plus long-
is estimated at US $ 1.36 billion (` 6259 crore) term loans) in all the CPSEs stood at ` 579,920
whereas during the same period in the previous crore as on 31 March 2010, an increase of 12.93
year, exports of electronics amounted to US $ 1.92 per cent over 2008-09. The capital employed in all
billion (` 9339 crore). the CPSEs went up by 14.73 per cent during the
same period. A great deal of investment in CPSEs
Micro, small, and medium enterprises is accounted for by internal resources rather than
(MSMEs) through investment from outside.
9.27 The role of MSMEs in the economic and social 9.29 The net profit of the profit-making CPSEs (158)
development of the country is widely acknowledged. stood at `108,434.68 crore in 2009-10. The net loss
They are nurseries for entrepreneurship, often driven of the loss-making enterprises (59) on the other hand,
Table 9.11 : Performance of CPSEs during 2009-10

(` crore)
Sl. Particulars 2009-10 2008-09 % change over
No. previous year
1. Investment(long-term loan + equity) 579,920 513,532 12.93

2. Capital employed (net fixed assets + working capital ) 910,120 793,240 14.73
3. Total turnover 1,235,060 1,271,529 -2.87
4. Profit of Profit Making CPSEs 108,435 98,488 10.10
5. Loss of Loss Making CPSEs 15,842 14,621 8.35
6. Net worth 660,245 665,686 -0.82
7. Dividend declared 33,223 25,501 30.28
8. Corporate tax 119,529 131,583 -9.16
9. Interest paid 35,720 39,300 -9.11
10. Contribution to Central Exchequer 139,828 151,529 -7.72
11. Foreign Exchange Earnings 77,745 74,206 4.77
12. Foreign Exchange Outgo 420,415 433,332 -2.98
Source: Department of Public Enterprises.
stood at `15,842 crore during the same period. The with growth of about 6 per cent for the world. Foreign
year also witnessed severe financial under-recoveries exchange earnings (FEEs) from tourism in 2010-11
by public-sector oil marketing companies (OMCs) (April-November) increased by 16.8 per cent in rupee
as they had to keep prices on sale of petroleum terms, and by 22.7 per cent in US dollar terms, as
products low in the domestic market. The foreign compared to the corresponding period of 2009-10
exchange earnings of the CPSEs amounted to ` (Table.9.12).
77,745 crore during 2009-10 and were clearly
overtaken by the foreign exchange outgo of ` 420,415 FINANCING AND INVESTMENT
crore (Table 9.11).
Industrial Credit
Tourism Sector 9.31 On a year-on-year basis, credit growth to
9.30 Foreign Tourist Arrivals (FTAs) in the first eight industry sharply accelerated to 27.0 per cent in
months of 2010-11 have registered significant growth November 2010 from 14.2 per cent in November
of 9.4 per cent after the negative growth in 2008-09 2009 (Table 9.13). The sectoral composition of the
and low growth in 2009-10. This compares favourably gross deployment of bank credit to industry,
Table 9.12 : Number of FTAs, FEEs in Rupees and Us Dollars, and Per Cent Change
Year FTAs %Change over FEEs % Change Over FEEs % Change over
(lakh) Previous ` crore)
(` Previous (million Previous
Year Year US$) Year
2006-07 46.67 13.8 41,127 17.9 9123 16.2
2007-08 51.75 10.9 45,526 10.7 11,349 24.4
2008-09 50.66* -2.1 48,657** 6.9 10,543** -7.1
2009-10 52.86* 4.3 59,124** 21.5 12,521** 18.8
2010-11 33.65* 9.4 40,104** 16.8 8777** 22.7
(April-Nov)
Note: *provisional;** advance estimates.

Source: Department of Tourism.
Table 9.13 : Industry-wise deployment of gross bank credit
Sector % Growth (y-o-y) Share in outstanding

credit to industry(%)
Nov. 2009 Nov. 2010 Nov. 2009 Nov. 2010
Mining & Quarrying (incl. Coal) 2.6 27.0 1.3 1.3
Food Processing 5.9 30.3 4.6 4.8
Beverage & Tobacco 49.2 -2.3 0.9 0.7
Textiles 7.4 18.1 9.4 8.7
Leather & Leather Products -0.5 16.1 0.5 0.5
Wood & Wood Products 4.1 27.9 0.4 0.4
Paper & Paper Products 11 16.3 1.5 1.4
Petroleum, Coal Products & Nuclear Fuels -22 -14.6 5.9 4.0
Chemicals & Chemical Products 1 19.9 6.6 6.3
Rubber, Plastic & their Products 6.5 37.8 1.2 1.3
Cement & Cement Products 18.3 40.9 1.8 2.0
Basic Metal & Metal Product 18.3 25.7 12.8 12.6
All Engineering 4.7 31.9 5.7 5.9
Vehicles, Vehicle Parts & Transport Equipment -2.9 16.5 3.1 2.9
Construction 8.9 16.4 3.2 3.0
Infrastructure 47.2 44.2 29.0 32.9
Industries 14.2 27.0 100.0 100.0
Industry total minus Infrastructure 4.6 20.0 71.0 67.0
Source : RBI.
Notes : Data are provisional and relate only to select banks.
Industry 227
including infrastructure, shows widely varying decline in stock market indices also affected
patterns. It is the infrastructure sector that kept credit valuation gains and the combined effect of these
growth to industry at the level of 27.0 per cent during factors led to a decline in industry GCF. But during
the year ended November 2010. Net of 2009-10, industry GCF as a share of overall GCF
infrastructure, year-on-year credit growth to industry has increased to 43.8 per cent due to revival of
was 20.0 per cent in November 2010, compared to investment sentiments (Table 9.14).
4.6 per cent during the corresponding period of the 9.34 While the GCF indicates actualization of
previous year. investment, investment intentions indicated in the
9.32 Industrial credit to micro and small enterprises Industrial Entrepreneur Memorandums (IEMs) filed
(MSEs), including service-sector, grew at a higher are lead indicators of likely investment flow to industry
rate of 21.5 per cent in November 2010 compared to and of entrepreneurs’ perception. The investment
19.3 per cent during the corresponding period of the intentions also provide the sectoral preferences of
previous year. Further, industrial credit to MSEs in investors and shifts in these preferences over time.
the manufacturing sector grew at 16.9 per cent during During 2001-09, overall investment indicated in the
November 2010 as compared to 19 per cent during IEMs filed increased at an average annual rate of
November 2009. 35.5 per cent. There was, as expected, a decline in
investment intentions in 2009, but investment
Industrial Investment intentions in 2010 (January-November) indicate revival
9.33 The industry sector has been attracting a of business sentiment and an improvement in
sizeable chunk of domestic capital formation entrepreneurs’ perception. Metals, machinery,
resulting in an addition to productive capacities. As cement, chemicals, and the auto sector continue to
per the new series of National Accounts (2004-05), dominate as the preferred industries. This is
average annual growth of new investment in the consistent with the growth of these industries
industrial sector (excluding construction) was 11.3 (Table 9.15).
per cent, as against average GDP growth of 8.6 per
cent during 2004-05 to 2009-10. The rate of growth Foreign Direct Investment (FDI)
of gross capital formation (GCF) for mining, registered 9.35 Domestic savings in India have not been large
manufacturing, and the electricity sector was even enough to wholly meet investment requirements.
higher. There was a decline in the share of industry Capital inflows from other countries, particularly of
GCF in the total GCF in 2008-9, which could be an investment nature, have become important. The
considered an abnormal year because the global ratio of domestic savings to GDP has generally been
economic meltdown had affected investor sentiment lower than that of GCF to GDP. During 2004-08,
resulting in a dip in investment and deferment of this gap was 1.3 per cent of GDP. Equity inflows
investment decisions. The internal accruals of the are more stable and bring in managerial skills and
corporate sector were also adversely affected. A technological knowhow together with the investment.
Table 9.14 : Gross Capital Formation (GCF) in Industry

(` Crore at 2004-05 prices)
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 CAGR
1. Mining 37,322 52,260 60,412 68,470 59,266 96,079 20.82
2. Manufacturing 344,517 405,047 472,223 611,469 417,971 563,633 10.35
2.1 Registered 245,984 342,671 380,294 521,967 381,056 477,202 14.17
2.2 Unregistered 98,533 62,376 91,929 89,502 36,915 86,431 -2.59
3. Electricity 53,300 64,673 76,366 85,040 95,533 98,908 13.16
Total Industry GCF* 435,139 521,980 609,001 764,979 572,770 758,620 11.76
Rate of growth (%) 19.96 16.67 25.61 -25.13 32.45
Total GCF excluding valuables1,011,178 1,183,485 1,365,019 1,606,013 1,542,642 1,731,209 11.35
Share of industry in total GCF 43.0 44.1 44.6 47.6 37.1 43.8
Source: Office of the Economic Adviser, DIPP and CSO
Notes: CAGR- compound annual growth rate; * Industry GCF excludes construction
Table 9.15 : Investment Indicated in Industrial Entrepreneur Memorandums (IEMs) Filed

(` Crore)
2005 2006 2007 2008 2009 2010
(Jan. Nov.)
Food 40,098 62,845 10,520 15,924 15,637 18,272
Fermentation Industries 2888 8008 5171 8230 4566 2998
Textiles 21,605 26,325 22,193 10,730 9200 25,747
Wood & Wood Products 163 - 105 622 96 122
Paper and Paper Products 5473 8199 4649 5841 6037 5908
Leather and Leather Products 209 148 266 106 106 152
Chemicals 28,350 45,722 34,352 155,756 27,661 51,072
Rubber 1102 2403 1191 2867 2118 5330
Cement 11,800 42,406 76,906 125,948 53,742 94,732
Metals 101,730 144,128 180,973 364,978 254,285 380,691
Machinery 87,340 165,227 375,276 556,635 503,651 884,582
Transport 2059 10,688 11,314 24,862 5048 10,437
Others 25,707 48,669 69,583 207,842 95,958 64,398
Fuel 25,432 23,782 35,001 42,225 61,743 72,956
Total 353,956 588,550 827,500 1,522,566 1,039,848 1,617,397
Source: Office of the Economic Advisor, DIPP.
To encourage FDI inflows, FDI policy has continued (UNCTAD) World Investment Report (WIR), 2009,
to be fine tuned and progressively liberalized, had noted a fall in global FDI inflows from a historic
allowing FDI in more and more industries under the high of US$1.979 trillion in 2007 to US$1.697 trillion
automatic route. In the year 2000, Government in 2008, a decline of 14 per cent. UNCTAD had
allowed FDI up to 100 per cent on the automatic subsequently predicted a fall in global FDI investment
route for most activities; a small negative list was flows by 30 per cent, from US $ 1.7 trillion in 2008 to
notified where either the automatic route was not US$ 1.2 trillion in 2009. The Organization for
available or there were limits on FDI. Since then, Economic Cooperation and Development (OECD),
the policy has been gradually simplified and in its report on investment, released in March 2010,
rationalized and more sectors have been opened up had also noted significant stagnation in global
for foreign investment. investment activity due to the global economic crisis.
9.36 There has been tremendous growth in FDI
Table 9.16 : Growth in FDI inflows
inflows to India since 2003-04. Equity inflows have
risen nearly thirteen-fold, from US$ 2.23 billion in (US$ billion)
2003-04 to US$ 27.31 in 2008-09 and US$ 25.89 Financial As per Per- FDI Per-
Year International centage Equity centage
billion in 2009-10. Total FDI inflow into India since
Practices* Growth Inflows# Growth
the onset of the liberalization process (August 1991-
2003-04 4.32 (-) 14% 2.23 (-) 18%
May 2010) is nearly US$ 136.86 billion. This
represents only the equity capital component. Under 2004-05 6.05 (+) 40% 3.78 (+) 69%
international practices of reporting, i.e. including 2005-06 8.96 (+) 48% 5.97 (+) 58%
equity capital, reinvested earnings, and intra- 2006-07 22.83 (+) 155% 16.48 (+) 176%
company loans, the figure comes to US $168.94 2007-08 (P) 34.84 (+) 53% 26.86 (+) 63%
billion as against US$ 6.13 billion in 2001-02, US $ 2008-09 (P) 35.18 (+)1% 27.99 (+)4%
35.18 billion in 2008-09, and US $ 37.19 billion in 2009-10 (P) 37.18 (+)6% 27.15 (+)3
2009-10. While the FDI inflows have somewhat 2010-11 (April-
flattened out over the course of the last three years, Oct 2010) 14.9 - 12.62 -
the pace of inflows has been stable, including during Source : Office of the Economic Adviser, DIPP.
2009-10. This is despite the fact that the United Note: * As per Reserve Bank of India (RBI) estimates.
Nations Conference on Trade and Development # As per DIPP estimates.
Industry 229
Table 9.17 : Sector-wise FDI Inflows into industry and infrastructure
(US $ million)
1991-2002 2002-07 2007-08 2008-09 2009-10 2010-11
(Apr.-Nov)
Food Products 972.6 392.2 80.7 150.5 348.2 166.0
Fermentation Industries 51.1 216.3 270.1 144.7 112.0 18.0
Textiles 249.2 327.2 186.0 157.4 140.6 56.2
Wood Products 0.1 0.6 0.4 11.3 6.5 0.7
Paper 327.2 139.0 104.2 310.1 85.9 28.1
Leather 43.4 16.8 7.5 3.3 5.1 0.3
Chemicals 1810.4 1934.1 582.3 992.5 611.8 500.6
Rubber, Plastic, &
Petroleum Products
(including oil exploration) 342.1 464.7 1441.9 497.2 296.2 542.2
Non-metallic Minerals 515.8 877.9 143.0 944.2 45.6 279.1
Metals and Metal Products 223.0 548.7 1176.9 960.9 406.7 960.3
Machinery and Equipments 3092.4 6854.4 2645.7 2528.1 2515.3 1317.1
Transport Equipments 431.1 1130.8 674.8 1151.7 1176.6 533.0
Others Manufacturing 2834.2 1184.7 704.3 1566.1 1079.4 1232.6
Mining
(including mining services) 7.8 55.8 458.3 34.4 174.0 75.1
Power* 1885.8 398.5 1011.2 1070.1 1935.2 1028..0
Telecommunications 2140.4 1505.9 1261.5 2558.4 2554.0 1029.8
Total 14,926.0 16,047.6 10,748.5 13,080.8 11,493.0 7831.2
Source: DIPP.
Note : Total excludes inflows to services sector and other NRI schemes;
*=includes Non-conventional energy sector
9.37 FDI equity inflows, as a percentage of the the sectors attracting highest FDI are services,
GDP, grew from 0.37 per cent in 2003-04 to nearly telecommunications, computer software and
2.21 per cent in 2008-09. As a percentage of the hardware, housing and real estate, and construction.
GCF, they grew from 1.35 per cent to nearly 6.32 Sectors like agricultural services, sea transport, and
per cent during the same period. The 2009 survey of electrical equipment have shown a quantum jump in
the Japan Bank for International Cooperation (JBIC), FDI inflows during 2009-10. Sector–wise FDI inflows
conducted among Japanese investors, continued to into some of the key industrial and infrastructure
rank India as the second most promising country for sectors are given in Table 9.17.
overseas business operations, after China. The WIR,
2010, in its analysis of global trends and sustained
POLICY DEVELOPMENTS AND
growth of FDI inflows, has ranked India as the second
PROGRAMMES
most attractive location for FDI for 2010-12. According
to it, the top five most attractive locations for FDI for Textiles
2009-11 are China, India, Brazil, the United States,
9.39 The two flagship schemes of the Ministry of
and the Russian Federation. The WIR, 2009, had
Textiles, namely the Technology Upgradation Fund
listed India as the third most attractive destination.
Scheme (TUFS) and Scheme for Integrated Textile
For India to maintain its momentum of GDP growth,
Parks (SITP), have been approved for continuation
it is vital to ensure that the robustness of its FDI
in the Eleventh Five Year Plan. TUFS, which was
inflows is also maintained.
commissioned on 1 April 1999 with a view to
9.38 In FDI equity investments, Mauritius tops the facilitating the modernization and upgradation of the
list of first ten investing countries followed by the textile industry by providing credit at reduced rates
US, the UK, Singapore, Netherlands, Japan, to entrepreneurs both in the organized and the
Germany, France, Cyprus, and Switzerland. Among unorganized sectors, has been fine tuned to induce
rapid investments in the targeted segments of the ` 40,000 crore has been planned to be invested by
textile industry. Under the scheme, an amount of the government to e-enable delivery of over 1100
` 85,091 crore was sanctioned against project cost services across the country in public private
of ` 207,747 crore and loans worth ` 85,091 crore partnership (PPP) mode; to make available a
were disbursed to 28,302 applicants up to 30 June converged backbone network for data, voice, and
2010(P). Under the SITP, 40 integrated textiles parks video communications throughout States/UTs, and
of international standards, covering the weaving, to provide common secure IT infrastructure to host
knitting, processing, and garmenting sectors with State-level e-Governance applications/data in order
project proposals worth ` 4133.09 crore (of which to enable seamless G2C, G2B, and G2C services.
assistance from the Government is `1419.69 crore) Significant progress has been made in creating
have been sanctioned. So far, eight textile parks these core e-infrastructures comprising State Wide
have been inaugurated. Area Networks (SWAN), State Data Centres (SDC),
State Service Delivery Gateways (SSDG), and one-
9.40 The Ministry of Textiles formulated a draft
stop shop front-end service access points—the
National Fibre Policy incorporating inputs from all
Common Services Centres (CSCs).
the major stakeholders. The Policy has been
designed with a decadal perspective (2010-20) and 9.44 The Government had decided to establish a
seeks to place India firmly on the world fibre map by National Knowledge Network (NKN) with scalable
strengthening the existing policy framework and multiples of 10 Gbps capacity high speed data
providing institutional and technological support for communication network. It will connect about 1500
rapid fibre growth in the country in the coming decade. nodes covering Institutions of higher learning,
9.41 A new scheme, namely the ‘Integrated Skill research, and governance. A core backbone
Development Scheme’ for the textiles and apparel consisting of 17 Points of Presence (PoPs) have
sector including jute & handicrafts, was launched been established. The total number of operational
on 5 August 2010 with the objective of capacity NKN core links is 37. Around 88 institutions of higher
building of institutions providing skill development learning and advanced research have already been
and training for workers in the textiles sector. The connected to the network and 15 virtual classrooms
Scheme envisages an investment of ` 272 crore, of set up.
which the Government contribution would be ` 229 9.45 To maintain an edge there is need to be
crore during 2010-11 and 2011-12 with a target of attentive and continuously work towards generating
2.56 lakh persons to be trained. quality manpower. The Government announced the
9.42 The Government of India has decided to National Skill Development Policy in 2010 which has
include sericulture activities up to the stage of cocoon set a target of equipping 500 million with skills by
production along with extension system for cocoon 2022. The policy also aims at taking the advantage
production in agri-enterprises up to the stage of yarn of the demographic dividend, i.e. increasing
production and marketing to be eligible for funding population of the working age group of 15 to 59
under the Rashtriya Krishi Vikas Yojana (RKVY). years in India. The Department of Information
The benefits of the RKVY can now be availed of for Technology (DIT) has been listed under the skill
improvement of the sericulture extension system, development initiative and given the target of training
enhancement of soil health, development of rain-fed 10 million persons by the year 2022.
sericulture, and integrated pest management. 9.46 Recognizing the importance of
nanotechnology, the DIT initiated a Nanotechnology
Electronics and IT Development Programme in 2004 with the objective
9.43 Several Governments across the world, of creating infrastructure for research in
including in India, have devised e-Governance nanoelectronics and nanometrology at national level
strategies and are employing technology applications and also funding small and medium-level research
in the delivery of public services. The National e- projects in specific areas such as nanomaterials,
Governance Plan(NeGP) has been approved by the nanodevices, carbon nano tubes (CNT), and
Cabinet in May 2006 with a vision to providing access nanosystems. A nanometrology laboratory is being
to critical public services and promoting rural set up at the National Physical Laboratory, Delhi.
entrepreneurship. The NeGP consists of 27 Mission The facilities created at the Indian Institute of
Mode Projects (MMPs) (9 Central, 11 State, and 7 Science, Bangalore (IISc), and Indian Institute of
Integrated) and 8 Support Components. Over Technology, Powai (IITP), are made available to
Industry 231
researchers in the country through the Indian the development and promotion of MSMEs. The
Nanoelectronics Users Programme (INUP) through detailed recommendations cover six major thematic
which more than 40 organizations are already areas, namely credit, marketing, labour,
accessing these facilities from all over the country rehabilitation and exit policy, infrastructure,
for R&D activities. technology and skill development, and taxation as
also special measures for the north-eastern region
9.47 In order to promote indigenous production
and Jammu and Kashmir. The implementation of
of medical electronic equipment in the country, the
these recommendations is being monitored
DIT has been supporting technology development
periodically by the Steering Group constituted under
activities for the development of diagnostic,
the chairmanship of Principal Secretary to the Prime
therapeutic, and related medical electronic devices.
Minister. Further, a Council on Micro, Small and
Under the Jai Vigyan Mission (JVM), six JMV
Medium Enterprises under the chairmanship of the
integrated medical linear accelerators (linac) for
Prime Minister has been set up to lay down broad
cancer treatment have been developed and deployed
policy guidelines and review the development of the
at the Mahatma Gandhi Institute of Medical Sciences
MSME sector.
(MGIMS), Wardha, and Regional Cancer Centre
(RCC), Adyar, and are being used for treatment of 9.51 The National Manufacturing Competitiveness
cancer patients and four more machines are under Programme (NMCP) is the nodal programme of the
development for deployment in other hospitals in Government of India for developing global
the country. Telemedicine centres have been set competitiveness among Indian MSMEs through
up in the rural and remote areas of Tripura, Punjab, improvement in their processes, designs, and
Himachal Pradesh, West Bengal, Kerala, and Tamil technology and market access. With the balance
Nadu and tele-consultations been provided through three schemes operationalized this year, all its ten
these centres to patients in remote areas. components are now under implementation. These
ten components include Building Awareness on
9.48 For alignment of IT process with business
Intellectual Property Rights for MSMEs, Scheme for
processes and for IT to deliver the correct and
providing Support for Entrepreneurial and
appropriate business solutions, there is a need for
Managerial Development of SMEs through
quality assurance in the field of electronics and IT
Incubators, Enabling the Manufacturing Sector to
in the country. This is being carried out by the
be Competitive through Quality Management
Directorate of Standardization, Testing and Quality
Standards and Quality Technology Tools (QMS/
Certification (STQC) of the DIT. It provides testing,
QTT), Mini Tool Rooms under PPP mode, Marketing
calibration, training, and certification services
Assistance Support to MSEs (Bar Code), Lean
through its well-developed network of test laboratories
Manufacturing Competitiveness Programme for
spread across the country including the north-east
MSMEs, Promotion of Information & Communication
region. These services have been primarily utilized
Tools (ICT) in the Indian MSME Sector; Design
by small and medium-scale industries and so far
Clinics Scheme for MSMEs, Marketing Assistance
more than 10,000 organizations have availed of
and Technology Upgradation Scheme for MSMEs,
them.
and Technology Quality Upgradation Support to
9.49 For deriving economic benefits from an IT- MSMEs.
led society, a holistic approach was made towards
9.52 In line with the overall target set by the Prime
e-commerce and information security with the
Minister’s National Council on Skill Development,
passage of the Information Technology Act 2000
the Ministry of MSME has taken up skill development
and its amendment in 2008. The Indian Computer
as a high priority area. The agencies under the
Emergency Response Team (CERT-In) has been
Ministry will conduct skill development programmes
designated as nodal agency for coordinating all
for about 4.16 lakh trainees during 2010-11. Further,
matters related to cyber security and emergency
the Ministry aims to train 4.78 lakh trainees in the
response.
year 2011-12 through its various programmes for
the development of self-employment opportunities
MSMES as well as wage employment opportunities in the
country.
9.50 The report of the Task Force on Micro, Small
and Medium Enterprises, presented to the Hon’ble 9.53 The Government has adopted the cluster
PM on 30th January, 2010, provides a roadmap for approach as a key strategy for enhancing the
productivity and competitiveness as well as capacity of khadi and polyvastra has been introduced from
building of MSEs and their collectives in the country. 2010-11. The scheme provides for assistance up to
The guidelines of the MSE Cluster Development 20 per cent of the value of production to be shared
Programme have been comprehensively modified among artisans, producing institutions, and selling
to provide higher support to the MSEs. During 2010- institutions in the ratio 25:30:45.
11,12 new clusters were taken up for diagnostic
9.58 The Government has tied up financial aid
study, 11 new clusters for soft interventions, and 6
from the Asian Development Bank (ADB) amounting
clusters approved for setting up of common facility
to US$150 million over a period of three years for
centres (CFCs). With this, a total of 471 clusters
implementing a comprehensive Khadi Reform
spread over 28 States and seven UTs have so far
Programme worked out in consultation with the ADB
been taken up for diagnostic study, soft
and Khadi and Village Industries Commission
interventions, and setting up of CFCs and efforts
(KVIC). Under this reform package, it is proposed
are under way to cover more and more clusters
to revitalize the khadi sector with enhanced
from all the States/UTs.
sustainability of khadi, increased incomes and
9.54 Under the Credit Guarantee Fund Scheme employment for artisans, and artisans’ welfare and
for Micro and Small Enterprises, over 1.5 lakh MSE to enable the KVIC to stand on its own with gradually
proposals for an amount of ` 7568 crore have been decreasing dependence on Government grants.
approved for extending loans without collateral/third- Initially, the programme will be initiated in 300 khadi
party guarantee during the year (up to November institutions keeping the needs of regional balance,
2010)—thereby registering a growth of over 150 geographical spread, and inclusion of backward
per cent in terms of number of proposals and over areas in view. The first tranche fund of ` 96 crore
200 per cent in terms of credit amount over the has already been released to the KVIC for
corresponding period of last year. Cumulatively, implementation of the programme.
about 4.50 lakh MSE proposals for loans of ` 18,946
crore have been approved under the scheme up to
November 2010.
CPSES
9.59 With a view to delegating enhanced financial
9.55 Under the Credit Linked Capital Subsidy
and operational powers to the CPSEs, the
Scheme,15 per cent capital subsidy is provided
Government had introduced the Navratna and
upfront on loans subject to a maximum of ` 15 lakh,
Miniratna schemes. During 2010-11, the
for technology upgradation through adoption of well-
Government has introduced the Maharatna scheme
established and improved technologies approved
to empower mega Navratna CPSEs to expand their
under the Scheme. The ambit of the Scheme was
operations both in domestic as well as foreign
recently enlarged to include 201 new technologies,
markets. During the year, four CPSEs, namely
including 179 in the pharmaceutical sector. During
Indian Oil Corporation Ltd., National Thermal Power
the year (upto November 2010) 1963 MSEs have
Corporation Ltd., Oil and Natural Gas Corporation
been assisted and subsidy amounting to ` 117.3
Ltd., and Steel Authority of India Ltd., were granted
crore has been sanctioned.
Maharatna status. Two more CPSEs, i.e. Oil India
9.56 Under the Prime Minister’s Employment and Rashtriya Ispat Nigam Ltd., were granted
Generation Programme (PMEGP) launched in Navratna status in 2010-11 and there are now 16
August 2008, over 2.65 lakh applications have been Navratna CPSEs as a result. Three more CPSEs,
received up to November 2010, of which 1.13 lakh namely the Bridge & Roof Company Ltd., Bharat
have been selected by the District Level Task Force Pumps & Compressors Ltd. and National Seeds
concerned for assistance.Financial assistance for Corporation Ltd., were granted Miniratna status
30,881 projects has been sanctioned by banks and during the year and presently there are 62 Miniratna
loans were disbursed in 23,059 cases which will give CPSEs.
employment to about 2.31 lakh persons. It is
9.60 Besides endeavouring to professionalize the
expected that 6 lakh additional employment
Boards of Directors of these enterprises, the
opportunities will be generated in 2010-11.
Government has issued guidelines on corporate
9.57 A flexible growth stimulating and artisan- governance of CPSEs. The Government,
centric scheme named Market Development furthermore, established the Board for Reconstruction
Assistance (MDA) to promote production and sales of Public Sector Enterprises (BRPSE) in December
Industry 233
2004 to advise the Government, inter alia, on revival specifically of women and children, and make India
/ restructuring of sick and loss-making CPSEs. The a safe tourism destination. As a follow-up of the
BRPSE has made recommendations in respect of efforts of the Ministry of Tourism to develop
62 cases until 31 December 2010. The Government, Sustainable Tourism Criteria, a Pledge for
in turn, has approved the proposals for revival of 40 Commitment towards Safe, Honourable, and
CPSEs and closure of two. The total assistance Sustainable Tourism was taken by the stakeholders
approved by the Government in this regard up to 31 of the travel trade and hospitality industry on World
December 2010 has been ` 23,612 crore, of which Tourism Day, 27 September 2010.
` 3,290 crore comprises cash assistance and `
9.65 The Ministry of Tourism continued promotional
20,322 crore non-cash assistance. Out of 20 revived
efforts under the ‘Incredible India’ campaign in
CPSEs (which posted profit in 2008-09), 11 have
overseas and domestic markets. Emphasis was also
been posting profit consistently for three years.
laid on social awareness campaigns in the domestic
market to sensitize the masses and various
Tourism
stakeholders to the importance of tourism.
9.61 The Ministry of Tourism is making concerted
efforts for development of nationally and Fertilizers
internationally important destinations and circuits
9.66 The Government is examining the feasibility
through Mega Tourism Projects. These projects are
of revival of Hindustan Fertilizer Corporation Ltd.
a judicious mix of cultural, heritage, spiritual, and
(HFCL) and Fertilizer Corporation of India Ltd.
eco tourism in order to give tourists a holistic
(FCIL), subject to confirmed availability of gas. An
experience. The Ministry is also combining with other
Empowered Committee of Secretaries, constituted
Central Government ministries such as Railways,
to look into the various financial models for revival
Civil Aviation, Road Transport & Highways, Food
of the closed units, has submitted its
Processing and Urban Development as well as the
recommendations. Various modules of revivals are
concerned State Governments to achieve
under consideration. Proposals are under
convergence and synergy with their programmes
consideration for revamp of Madras Fertilizers
so that the impact of investment in these destinations
Limited (MFL).
is maximized.
9.67 The concession scheme for decontrolled
9.62 The Visa-on-Arrival (VoA) scheme was
P & K fertilizers which was allowed to continue by
started in the country from January 2010 on pilot
the Government from 1992 to 31 March 2010 was
basis for nationals of five countries, namely Finland,
changed to a Nutrient Based Subsidy scheme (NBS)
Japan, Luxembourg, New Zealand, and Singapore.
with effect from 1 April 2010, whereby for P & K
A total of 5644 VoAs were issued during January-
fertilizers, the Government has announced subsidy
November 2010. The scheme is being extended to
per kg of nutrients N, P, K, and S as well as per MT
nationals of five more countries, namely Cambodia,
of fertilizers under the NBS during 2010-11 and 2011-
Laos, Phillipines, Myanmar, and Vietnam from
12. The Government has also provided additional
January 2011.
subsidy on fertilizers fortified with secondary and
9.63 The Reserve Bank of India has delinked credit micronutrients, namely boron and zinc. An
for hotel projects from real estate, thereby enabling additional subsidy of ` 300 and ` 500 per tonne
hotel projects to avail of credit at relaxed norms and respectively has been sanctioned for boron- and zinc-
reduced interest rates. fortified fertilizers. With the objective of providing a
variety of subsidized fertilizers to farmers depending
9.64 The Ministry of Tourism has adopted the Code
upon soil and crop requirements, the Government
of Conduct for ’Safe & Honourable Tourism’ in July
has included three new grades of complex fertilizers
2010 essentially to strengthen the critical pillar of
under the NBS, namely NP 24-24-0-0, NPK 16-16-
‘Suraksha’ (Safety) and ensure that Indian tourism
16-0, and NPKS 15-15-15-09, in 2010-11.
follows international standards of safe tourism
practices, applicable to both tourists and local 9.68 Under the NBS, freight subsidy on
residents, i.e. local people and communities who decontrolled P & K fertilizers (except SSP) for rail
may be impacted by tourism in some way. The Code movement is being paid as per the actual claim.
has been formed to sensitize travellers and the travel The secondary freight is also paid. Freight for direct
industry, close all possibilities of exploitation, road movement from plant or port is subject to lower
of the actual claim or the equivalent rail freight up to to the free list. However, most of the other policy
a maximum distance of 700 km with effect from 1st measures adopted to safeguard the economy during
January 2011. Manufacturers have been allowed to the recessionary period like removal of export duty
fix the maximum retail price (MRP) of boronated on steel remain in place. At the same time, the
SSP higher than that of powered or granulated SSP. government has set up an Inter-Ministerial Group to
To ensure easy availability of fertilizers in all parts facilitate interaction between investors and various
of the country, a uniform freight subsidy policy has agencies in matters of acquisition of land, mining
been announced under which rail freight is paid on rights, power, and transportation including rail, road,
actual basis and road freight on a normative average and port sectors.
district lead for urea.
9.69 The Government has placed 20 per cent of SOME CRITICAL DIMEMSIONS OF
produced/imported decontrolled P & K fertilizers INDUSTRIAL DEVELOPMENT
under the control of Department of Fertilizers under
the Essential Commodities Act 1955 with the Recent trends in industrial pollution
objective of making fertilizers available in the difficult 9.73 Industrial effluents comprising organic
areas. In order to improve availability of fertilizers pollutants, chemicals and heavy metals and run-off
in the country, import of all the subsidized fertilizers from land based activities such as mining are a
has been permitted. major source of water pollution. The major water-
9.70 The manufacturers of customized and mixture polluting industries include fertilizers, refineries, pulp
fertilizer are allowed by the Government to source and paper, leather, metal plating, and other chemical
the subsidized fertilizers from the manufacturers/ industries. Continued monitoring by the Central
importers after their receipt in the districts. With a Pollution Control Board (CPCB) and State Pollution
view to ensuring adequate availability in the country Control Boards of water quality of aquatic resources
and the subsidy paid, the Government has put the has revealed that organic pollution continues to be
export of DAP and MOP in the restricted category predominant pollutant of aquatic resources. Based
to discourage exports and illegal diversion. Steps on the primary water quality criteria evolved in terms
are being taken to put all P & K fertilizers under the of bio-chemical oxygen demand (BOD), 150
restricted category. Possibilities for setting up of stretches on 105 rivers have been identified as
joint venture ammonia/urea projects in countries polluted.
abroad where adequate gas is available are being 9.74 Rapid industrialization and urbanization have
explored. Indian entities are in dialogue for joint also resulted in increase in pollution load on rivers.
ventures in the field of phosphatic and potassic According to CPCB estimates, against an estimated
fertilizers in resource-rich countries. sewage generation of about 38,254 million litres per
day (mld) from Class I cities and Class II towns of
Steel Sector the country, the available treatment capacity is for
9.71 The World Steel Association forecast for steel 11,787 mld, indicating a wide gap between sewage
consumption in India is optimistic, indicating that generated and treatment capacity created. Discharge
India’s steel demand is likely to grow by 8.2 per of untreated waste water constitutes a major source
cent in 2010 and 13.6 per cent in 2011. For 2010- of pollution load for the rivers.
11, with Indian GDP likely to register steady growth
9.75 Existing pollution abatement infrastructure in
and provided that the current performance trends
the country provides adequate treatment facilities
of its major end-use segments (manufacturing,
to various streams of pollution generated by
construction, consumer durables including
industries. Fly-ash, phospho-gypsum, and iron and
automobiles, capital goods )are sustained,
steel slags are the main forms of Industrial solid
consumption of finished steel is likely to end the
wastes generated in India. It is estimated that around
year with 9 per cent growth.
112.29 million tonnes of fly-ash is generated annually
9.72 Responding to the improving economic by thermal power plants, of which only 53.92 million
outlook, the Government rolled back the earlier- tonnes is utilized by different sectors like cement,
effected reduction in excise duty, leading to a hike road embankments, fly ash bricks and products,
in the duty rate from 8 per cent to 10 per cent. Import and back filling of mines. Besides, there are 36,145
of hot rolled coils was also moved from the restricted hazardous-waste- generating industries in the
Industry 235
country producing 6.2 MT hazardous waste every 9.79 Prior environmental clearance of development
year, brought about by expansion of chemical-based projects based on environmental impact assessment
industries. It is further estimated that 1.47 lakh MT is mandatory for designated sectors/projects.
of e-waste was generated in the country in 2005, Various steps, including involvement of stakeholders
which is expected to increase to about 8.0 lakh MT through public hearings, have been taken to bring
by 2012. Presently there exist 23 e-waste recycling greater transparency and professionalism in the
units with 90,000 MTA capacity. granting of environmental clearances. Status of
projects appraised in 2010 is displayed in
Current programmes and policy Table 9.18.
9.76 The Government has notified emission and
effluent standards for relevant pollutants for 74
Labour relations
categories of processes and industries, including 9.80 Due to constant endeavour of the industrial
17 categories of highly polluting industries under the relations machineries of both the Centre and States,
Environment (Protection) Act 1986. The concerned the industrial relations climate has generally
State Pollution Control Boards / Authorities along remained peaceful and cordial. The number of
with the CPCB monitor the discharges from these incidences of strikes and lockouts has exhibited a
units. A total number of 2504 units have been declining trend over the past few years. Strikes and
identified under these 17 categories, out of which lockouts have declined from 349 in 2009 (P) to 99 in
1810 have set up pollution control facilities to comply 2010(P). Correspondingly, the total number of man-
with standards, 265 are defaulting, and 429 have days lost has also declined from 9,169,037 in 2009
been closed. to 1,699,826 in 2010(P) (Table 9.19).
9.77 There exists a charter on Corporate 9.81 As regards spatial/industry-wise dispersions
Responsibility for Environmental Protection (CREP) of incidences of strikes, lockouts, there exist
covering 17 categories of highly polluting industries.
Industrial-sector-specific action points for each Table 9.19 : Strikes and Lockouts
category were identified and listed for implementation (man-days lost )
after consulting various stakeholders. Year Strikes Lockouts Total Man-
9.78 Other measures taken by the Government days lost
towards effective control of industrial pollution include
2005 227 229 2,96,64,999
inspection and enforcement of emission and effluent
standards through issue of directions and consent 2006 243 187 2,03,24,378
mechanism, mandatory prior environmental 2007 210 179 2,71,66,752
clearance for designated development projects, 2008(P) 240 181 1,74,32,965
financial assistance for establishment of CETPs for 2009(P) 157 192 91,69,037
small-scale industrial units located in industrial
2010(P) 79 20 16,99,826
clusters, identification of critically polluted areas, and
Source : Labour Bureau, Ministry of Labour
preparation of action plans for abatement of pollution.
Table 9.18 : Projects appraised during April-November 2010

Nature of Project Cleared Pending Rejected/ Returned/
withdrawn EC
EC TOR EC TOR TOR
1. Industry 150 288 104 172 85
2. Thermal power 32 71 23 90 33
3. River valley and Hydroelectric 07 24 10 10 01
4. Mining (Coal & Non Coal) 72 152 80 153 40
5. Infrastructure, construction & Industrial Estates 125 58 105 58 00
6. Nuclear 01 01 00 03 03
Total 387 594 322 486 162
Source: Ministry of Environment and Forests.
Notes: EC – Environmental clearance; TOR - Terms of Reference
widespread variations among different States/UTs. less than 1.4 per cent. The growth of manufacturing
The maximum incidences were recorded in the State is crucial for employment generation, augmentation
of Gujarat. Wage and allowance, bonus, personnel, of domestic supply, resource utilization and value
indiscipline and violence, and financial stringency addition, and for sustainable growth of exports.
were the major reasons for these strikes and Neglect of research and development (R&D) in new
lockouts. technology and skill development continues to
shackle growth in the manufacturing sector. High
technology base and skilled manpower are crucial
CHALLENGES AND OUTLOOK for enhancing manufacturing competitiveness in the
9.82 Looking at IIP data for the past few months, globalized economy. For many of the economically
in the short-term the industrial sector is likely to successful emerging economies, promotion of
grow at moderate but sustainable rates. Continued manufacturing has been a key objective. Some of
buoyancy in corporate sales, comparatively higher these countries like South Korea have become
credit flow to industry, larger number of investment technological giants solely on the basis of
intentions across all major industries and States, indigenous learning, skill, and R&D effort. China has
accelerated growth in some sectors, and robust been the most successful in building the world’s
merchandise exports so far are likely to sustain largest manufacturing base by giving special
industrial activities in the remaining months of the attention to technology development and by gearing
financial year. Over the medium to long term, to FDI policy to promote technology transfer. All of
sustain double-digit output growth and reduce the these countries have also laid emphasis on making
vulnerabilities of the sector, there is need to put in their SME sector highly competitive and the driver
place a policy framework for embarking on another of technology. There is a strong case for enhancing
round of multifaceted reforms. public investment and building PPP in the R&D in
skill and technology development.
9.83 The latest available data on bank credit and
the financial resources from non-bank sources 9.85 Manufacturing inflation so far has been benign
flowing to the industrial sector indicate increased compared to overall inflation. Point to point
investment activities in the sector. Gross banking manufactured products inflation rate for the month
credit to the industrial sector net of infrastructure of December 2010 was 4.46 per cent as compared
has increased by 20.0 per cent in November 2010, to 3.61 per cent a year ago. But the domestic prices
compared to 4.6 per cent during the corresponding of minerals, mineral oil, electricity, and other inputs
period of the previous year. At the same time (except coal) are on the rise partly due to the
increasing cost of financing and slowdown in the hardening of international commodity prices.
flow of FDI equity inflows during the current financial Persistent high inflation is also leading to rise in
year are causes of concern. Long-term foreign average wages and this may impact labour-intensive
investment supplements the domestic investable industries such as textiles and leather etc. In the
funds and eases the liquidity crunch that constricts short to medium term, rising input costs may
the sector from time to time. Industrial credit to undermine the competitiveness of some sectors and
MSEs in the manufacturing sector grew at 16.9 per also dampen domestic and foreign demand.
cent in November 2010, marginally lower compared 9.86 Overall production of the six core industries,
to last year. For medium to long-term sustainable namely crude oil, petroleum refinery products, coal,
robust growth, availability and ease of credit flow electricity, cement, and finished steel, has
to the industrial sector in general and MSE sector marginally gone up so far during this financial year
in particular is critical. The MSE sector seems to but there is a huge gap in terms of the required
be relatively less favourably placed in terms of credit capacity addition needed to catch up with the
availability and credit cost of working capital as projected demand in some sectors. There has not
compared to the medium and large scale industrial been significant capacity addition in some of the
and services sectors. This persistent bias needs to core industries. Likewise slow rate of capacity
be corrected. addition in physical infrastructure sectors is
9.84 The manufacturing sector, despite being the constricting industrial sector growth. Capacity
driver of industry, has not grown significantly over addition in core sectors and removal of infrastructure
time in terms of its share in the GDP. The share of bottlenecks would spur industrial sector output in
Indian manufacturing in world manufacturing is also the medium to long term.
Services Sector
10
CHAPTER
India stands out for the size and dynamism of its services sector. The contribution of
the services sector to the Indian economy has been manifold: a 55.2 per cent share in
gross domestic product (GDP), growing by 10 per cent annually, contributing to
about a quarter of total employment, accounting for a high share in foreign direct
investment (FDI) inflows and over one-third of total exports, and recording very fast
(27.4 per cent) export growth through the first half of 2010-11.
10.2 The data on this sector is still sparse and services; legal services and consultancy;
has to be collected from multiple sources. While construction; and some specialized social services
the latest available data has been taken from such as sports.
different national and international sources, care
has been taken as far as possible to use data from
only reliable sources. It is hoped that having a
IMPORTANCE OF THE SERVICES
separate chapter on services will be a catalyst for SECTOR FOR INDIA
better and more regular data on this sector in the 10.4 The importance of the services sector can
future. Some services, such as infrastructure be gauged by looking at its contributions to different
(roads, railways, civil aviation), financial services, aspects of the economy.
and social services (health and education) are
discussed in other chapters of the survey. The Services GDP
construction industry is briefly discussed in this
chapter, because of similar related characteristics 10.5 The share of services in India’s GDP at
and RBI and international institutions like WTO factor cost (at current prices) increased rapidly:
including it under services, even though from a from 30.5 per cent in 1950-51 to 55.2 per cent in
national accounts classification, it is part of the 2009-10. If construction is also included, then the
secondary rather than the tertiary sector. share increases to 63.4 per cent in 2009-10.
10.3 This chapter examines the role of services 10.6 The ratcheting up of the overall growth rate
in India’s economy in terms of contribution to GDP, (compound annual growth rate [CAGR]) of the
employment, FDI, and States’ domestic product, Indian economy from 5.7 per cent in the 1990s to
and draws some international comparisons. The 8.6 per cent during the period 2004-05 to 2009-10
chapter goes on to examine the performance of was to a large measure due to the acceleration of
different services sub-sectors which are not well- the growth rate (CAGR) in the services sector from
covered in other chapters such as domestic trade; 7.5 per cent in the 1990s to 10.3 per cent in 2004-
tourism including hotels and restaurants; shipping 05 to 2009-10. The services sector growth was
and port services; storage; telecommunications significantly faster than the 6.6 per cent for the
related services; real estate; information technology combined agriculture and industry sectors annual
(IT) and IT enabled services (ITeS); accounting and output growth during the same period. In 2009-10,
auditing services; research and development (R&D) services growth was 10.1 per cent and in 2010-11
Figure 10.1 Growth rate of GDP and services sector GDP

12
11 Services
GDP
10
9 Overall
GDP
8
Annual growth
7
(per cent)
6
5
4
3
2
1
0
2005-06 2006-07 2007-08 2008-09 2009-10
Year
Source : Central Statistics Office (CSO)
(advance estimates—AE) it was 9.6 per cent. India’s the trend was similar, the fall in employment in
services GDP growth has been continuously above primary sector was less (at -1.1 per cent) with a
overall GDP growth, pulling up the latter since 1997- small commensurate rise in employment in the other
98. It has also been more stable (Figure 10.1). two sectors, which was again almost equally divided
between the other two sectors (Table 10.1)
Services Employment in India
FDI in Services in India
10.7 Although the primary sector (agriculture
10.8 The measurement of the share of services
mainly) is the dominant employer followed by the
in FDI inflows encounters problems as it is difficult
services sector, the share of services has been
to clearly differentiate activities between services
increasing over the years while that of primary sector
and goods in sectors such as computer hardware
has been decreasing. Between 1993-94 to 2004-
and software, telecommunications, and
05, there was a sharp fall in the share of the primary
construction. Nevertheless, the share of the four
sector in employment. The consequent rise in share
sectors combined (services [financial and non-
of employment of the other two sectors was almost
financial], computer hardware and software,
equally divided between the secondary and tertiary
telecommunications, and housing and real estate),
sectors. In 2007-08 compared to 2004-05, though
predominantly consisting of services, in FDI equity
Table 10.1 : Share of Broad Sectors in Employment (UPSS)
Shares Change in shares
Sectors 1993-94 2004-05 2007-08 2004-05 over 2007-08 over 2007-08 over
1993-94 2004-05 1993-94
Primary 64.5 57.0 55.9 -7.5 -1.1 -8.6
Secondary 14.3 18.2 18.7 3.9 0.5 4.4
Tertiary 21.2 24.8 25.4 3.6 0.6 4.2
Note : For the years 2004-5 and 2007-8 projected population at mid-point of these two rounds was obtained
by applying projected population figures from the Registrar General of India’s (RGI) office. For the
year 1993-94, the population at mid-point of the survey period was obtained by interpolation of
census population of 1991 and 2001. Work participation rates of rural males, rural females, urban
males, and urban females were obtained separately from unit-level data of the National sample
Survey (NSS) and by multiplying them with the respective population, the total numbers of Usual
Principal and Subsidiary Status (UPSS) workers for these four categories were obtained. Then the
distribution of employment from unit-level data for broad sectors (primary, secondary, and tertiary)
was obtained. From the number of workers in the four categories and sectoral distribution of
employment, total employment for three sectors for each of these four categories was obtained.
From this, overall employment distribution at broad sectoral level was calculated.
Services Sector 239
Table: 10.2 : Sectors Attracting Highest FDI Equity Inflows
` crore)
(`
Ranks Sector 2008-09 2009-10 2010-11 Cumulative % age to
(Apr.-Mar.) (Apr.-Mar.) ( Apr.-Dec.) Inflows Total Inflows
(Apr. 2000- (In US$ter-ms)
Dec. 2010)
1 Services Sector 28,516 20,776 13,044 1,18,274 21%
(financial & non-financial) (6,138) (4,353) (2,853) (26,454)
2 Computer Software & Hardware 7,329 4,351 3,054 47,144 8%
(1,677) (919) (670) (10,601)
3 Telecommunications 11,727 12,338 6,021 46,727 8%
(radio paging, cellular mobile, (2,558) (2,554) (1,327) (10,258)
basic telephone services)
4 Housing & Real Estate 12,621 13,586 4,680 42,049 7%
(2,801) (2,844) (1,024) (9,380)
5 Construction Activities 8,792 13,516 4,109 39,802 7%
(including roads & highways) (2,028) (2,862) (911) (8,964)
Source : Department of Industrial Policy and Promotion.
Note : Figures in parantheses are US$ million.
inflows in April 2000–December 2010 is around 44 in the services sector also fell by 29.1 per cent (in
per cent. If construction is included then the share US dollar terms). The first nine months of 2010-11
rises to 51 per cent. The financial and non-financial have also not shown any improvement on the FDI
services sector which falls purely in the services front, overall and in services sectors.
category is the largest recipient of FDI equity inflows
with a 21 per cent share. This is followed by the State-wise Comparison
other two sectors, namely computer software and 10.10 A comparison of the share of services in
hardware, and telecommunications each with 8 per the gross state domestic product (GSDP) of different
cent share. Housing and real estate, and States and Union Territories shows that the services
construction with 7 per cent share each were next sector is the dominant sector in most States of India
in importance (Table 10.2). (Figure 10.2). States such as Delhi, Chandigarh,
10.9 The year 2009-10 has seen a drying up of Kerala, Maharashtra, Bihar, Tamil Nadu and West
FDI inflows to India due to the global crisis with a Bengal have shares equal to or above the all-India
fall of 5.5 per cent. Mirroring this trend, FDI inflows share.
Figure 10.2 Share and growth of services sector in 2008-09

90
80
70 Share of
services
60
Per cent
50
Services
40 growth
30
20 Overall
growth
10
0
Chattisgarh
Himachal Pradesh
Jharkhand
Goa
Gujarat
Rajasthan
Punjab
Jammu & Kashmir
Orissa
Madhya Pradesh
Uttar Pradesh
Andhra Pradesh
Haryana
Assam
Uttarakhand
Karnataka
All india
West Bengal
Tamil Nadu
Bihar
Maharashtra
Kerala
Chandigarh
Delhi
Note: Data in the case of Goa and Jammu and Kashmir are for 2007-08. Shares in current prices, Growth rate
constant prices.
10.11 State-wise growth of GSDP is also closely less pronounced than the slowdown in merchandise
associated with faster growth of the tertiary sector. export growth, and has recovered rapidly in the first
Interestingly, Bihar which has the highest overall half of 2010-11 with a growth of 27.4 per cent. The
growth rate in 2008-09 also has the fastest growth overall openness of the economy reflected by total
among States in services, in part due to its rapid trade including services as a percentage of GDP
progress from a low base (only Goa’s growth rate shows a remarkable increase from 29.2 per cent in
in services is higher than that of Bihar, but this is 2000-01 to 53.9 per cent in 2008-09, though it dipped
for 2007-08). Even small States such as to 46.1 per cent in 2009-10 due to the global crisis.
Chhattisgarh and relatively low-income States such The dip was more due to fall in share of merchandise
as Orissa and Rajasthan which have relatively low trade to GDP to 35 per cent in 2009-10 compared
overall growth rates have started piggy-backing on to 41 per cent in 2008-09. The fall in the share of
the good performance of their services sectors to services trade to GDP was less than 2 percentage
climb up the ladder of progress. Thus, the services points from 12.9 per cent to 11.2 per cent.
revolution in India seems to be becoming more
broad based rather than being concentrated in only Important Services for India
a few States. 10.13 Some services have been particularly
important for this improving performance in India.
Services Exports
Software is one sector in which India has achieved
10.12 India is also moving towards a services-led a remarkable global brand identity. Tourism- and
export growth. During 2004-05 to 2008-09 as per travel-related services and transport services are
the Balance of Payments data, merchandise and also major items in India’s services. Besides these,
services exports grew by 22.2 and 25.3 per cent the potential and growing services include many
respectively. Services growth slowed in 2009-10 as professional services, infrastructure-related
a result of the global recession, but the decline was services, and financial services.
Table 10.3 : Share of different services categories in GDP at factor cost (current prices)
2004-05 2005-06 2006-07 2007-08 2008-09@ 2009-10*
Trade, hotels & restaurants 16.1 16.7 17.1 17.1 16.9 16.3
Trade 14.6 15.1 15.4 15.4 15.4 14.9
Hotels & restaurants 1.5 1.6 1.7 1.7 1.5 1.4
Transport, storage & communication 8.4 8.2 8.2 8.0 7.8 7.8
Railways 1.0 0.9 0.9 1.0 0.9 1.0
Transport by other means 5.7 5.7 5.7 5.5 5.5 5.2
Storage 0.1 0.1 0.1 0.1 0.1 0.1
Communication 1.7 1.6 1.5 1.4 1.4 1.5
Financing, insurance, real estate &
business services 14.7 14.5 14.8 15.1 16.1 16.7
Banking & insurance 5.8 5.4 5.5 5.5 5.7 5.4
Real estate, ownership of dwellings &
business services 9.0 9.1 9.3 9.6 10.4 11.4
Community, social & personal services 13.8 13.5 12.8 12.5 13.3 14.4
Public administration & defence 5.9 5.6 5.2 5.1 5.8 6.3
Other services 8.0 7.9 7.6 7.4 7.5 8.1
Construction 7.7 7.9 8.2 8.5 8.5 8.2
Total Services (excluding Construction) 53.0 52.9 52.9 52.7 54.1 55.2
Total Services (including Construction) 60.7 60.8 61.1 61.2 62.6 63.4
Total GDP 100 100 100 100 100 100
Source : CSO
@ provisional estimates * quick estimates
Services Sector 241
10.14 CSO’s classification of the services sector across the globe has been playing a dominant role
falls under four broad categories, namely a) trade, in the growth of economies, especially in high-
hotels, and restaurants; b) transport, storage, and income economies which have transited to
communication; c) financing, insurance, real estate, services-led economies. India with a services sector
and business services; and d) community, social, share of 52 per cent in national GDP in 2009 and
and personal services. Among these, financing, 55.2 per cent in 2009-10 compares well even with
insurance, real estate, and business services; and the developed countries in the top 12 countries with
trade, hotels and restaurants are the largest groups the highest overall GDP. China’s share of services
accounting for 16.7 per cent and 16.3 per cent in its national GDP at 39.2 per cent is relatively
respectively of the national GDP in 2009-10. The low, though it is ahead of India in absolute terms
community, social, and personal services category (as its overall GDP is more than three times that
accounts for a 14.4 per cent share, while transport, of India). In terms of services growth rate, China
storage, and communication accounts for a 7.8 per (10.5 per cent) followed by India (8.9 per cent) are
cent share. Construction, which is a borderline the two fastest growing economies in the top 12
services inclusion, has a share of 8.2 per cent countries. In the global crisis year of 2009, when
(Table 10.3). most of the top 12 countries registered negative
growth in services, only China(9.4 per cent), India
SERVICES SECTOR : INTERNATIONAL (6.8 per cent), and Brazil (2.6 per cent) registered
positive growth. India’s world ranking in overall GDP
COMPARISON at current prices in 2009 was 11 and in services
GDP it was 12. Except for the Russian Federation
Services GDP
moving to 11th position and India moving to 12th in
10.15 With an overall share of 64.2 per cent in services, there is no major change in rank in terms
world GDP in 2009 (Table 10.4), the services sector of overall GDP and services GDP.
Table 10.4 : Performance in Services Growth of Top 12 Countries

Country Rank Overall GDP Share of Services Services Growth
(US$ billion) (% of GDP) Rate (%)
Overall Services At At
Current Constant
Prices Prices
GDP GDP 2009 2009 2000 2008 2009 2000 2008 2009 2000-09(b)
United States 1 1 14119 12,899 74.1 76.8 76.5 3.4 0.9 -3.1 2.0
Japan 2 2 5069 4451 71.0 71.3 71.0 1.9 0.1 -5.6 0.5
China 3 4 4984 3544 39.0 39.1 39.2 9.7 9.5 9.4 10.5
Germany 4 3 3330 2847 61.6 64.4 66.6 3.4 3.1 -1.4 1.4
France 5 5 2649 2192 68.8 70.0 71.1 3.7 0.9 -1.1 1.5
United Kingdom 6 6 2170 2285 65.4 69.3 70.5 4.7 0.5 -3.3 2.3
Italy 7 7 2113 1725 62.5 64.6 66.6 3.9 -0.2 -2.0 0.9
Brazil 8 9 1572 1021 55.5 55.8 57.3 4.0 4.8 2.6 3.6
Spain 9 8 1464 1182 59.3 61.9 63.6 5.2 2.3 -1.0 3.1
Canada 10 10 1336 1168 59.5 64.0 65.5 4.6 2.2 -0.2 2.8
India 11 12 1287 1141 45.9 52.4 52.0 4.9 9.7 6.8 8.9
(55.2)(a)
Russia 12 11 1231 865 50.2 52.4 54.0 6.0 7.4 -5.1 5.6
World - - 58069 49,356 63.7 64.0 64.2 3.9 2.0 -1.6 2.5
Source : UN National Accounts Statistics accessed on 4 February 2011.
Note : Rank is based on current prices.
Growth rates are based on constant prices (US$).
(a) In 2009-10 as per CSO, India.
(b) CAGR is estimated for 2000-09.
Table 10.5 : Number of Greenfield FDI Projects in Services Industries 2007–2009

Sector 2007 2008 2009
Hotels & Tourism 297 553 370
Transport, Storage, and Communications 1024 1269 1133
Communications 448 594 544
Financial Services 1161 1616 1267
Business Services 2922 3647 2927
Source: UNCTAD, World Investment Report 2010.
FDI in the Services Sector countries, and was among the top 12 service
exporters of the world in 2009. However, China in
10.16 The global economic and financial crisis had fifth rank is ahead of India with 12th rank (see
a dampening effect on cross-border FDI flows. Though Chapter 7 for details).
the crisis took a heavy toll on flows to manufacturing
activities, the services sector was also affected. As
per the United Nations Conference on Trade and INDIA’S SERVICES DATA
Development (UNCTAD), the impact of the crisis
10.19 One of the important challenges faced by
across sectors has resulted in a shift in their relative
the country is collection of data on the services
weights in FDI flows-it has fallen in manufacturing,
sector. The challenge of data collection leads to
relative to the primary and services sectors. The share
difficulties in compilation of an index for services
of manufacturing in total cross-border mergers and
sector production, non-representation of many
acquisitions (M&As) was lower in developed
services sectors in the calculation of the wholesale
countries--where it stood at 30 per cent of their value
price index, limited availability of published data on
in 2009--than in developing and transition economies,
pricing of services, and limited data on trade in
where it accounted for 32 per cent of the transaction
services. Even where data are available, they suffer
value. The shares of the primary sector and services
from deficiencies related to definition, method of
in total cross-border M&As by value, on the other
collection, suitability for pricing, and construction
hand, were higher in developed countries than in
of indices.
developing and transition economies. Business
services were among the sectors where investment 10.20 Recently some efforts are being made to
expenditures were hard hit by the crisis, registering collect services data (see Box 10.1). While these
a reduction of greenfield investment projects in the initiatives have to be speeded up, a lot more effort
world by 20 per cent in 2009 compared to the previous in coordination may be needed.
year. Greenfield investments in financial services also
declined from 1616 in 2008 to 1267 in 2009 (Table
PERFORMANCE OF SUB-SECTORS
10.5).
10.21 The two fast-growing broad services
10.17 On the positive side, at global level, medium- categories are: a) financing, insurance, real estate
term prospects for services are generally better than and business services; and b) transport, storage,
those for the manufacturing sector with international and communication. The latter overtook the former
investment in the services sector expected to grow in 2009-10 with a high growth of 15 per cent (Table
relatively faster. In addition, many services 10.6). A third category, growth of trade, hotels, and
transnational companies, which some years ago restaurants, slowed in 2008-09 and has recovered
were mainly focused on their home markets, are moderately in 2009-10. The fourth category,
now pursuing internationalization strategies involving community, social, and personal services, saw a
ambitious investments abroad. Developing and sudden jump in 2008-09 to overtake the growth of
transition economies, particularly in Asia, are all other categories, reflecting the high growth in
considered as most attractive destinations. public administration and defence. This category
has continued to grow rapidly in 2009-10, despite a
Trade in Services
slowdown in growth in public administration and
10.18 India has made much progress in Trade in defence (with the commitments for pay arrears
services, which is dominated by developed under the new revised scale for Government
Services Sector 243
Box 10.1 : Some Recent Efforts to Collect Services Data
1. Index of services production (ISP) : The contribution of the services sector to the national economy, both in terms of
value addition and employment generation, is growing over the years. However, there is no short-term indicator to
measure the dynamics of this vast and heterogeneous sector. To fill this gap, the ISP is being compiled by the CSO.
The index for railways, air transport, and ports has been completed.
2. Services price index (SPI) : Dr Rangarajan Commission (2001), set up by the Ministry of Statistics and Programme
Implementation, had recommended the compilation of a separate SPI, which should eventually be merged with the
wholesale price index (WPI) once it has stabilized and established its robustness. Ten sectors, namely banking, trade,
business services, postal services, telecommunication, air transport, port services, insurance, rail transport, and road
transport have been identified in the initial phase for development of an experimental SPI. Methodologies for
developing the SPI have been finalized for seven sectors, namely railways, trade services, business services, banking,
telecommunications, postal services, and air transport. A common format is developed for the sector-specific
methodologies approved by the Expert Committee covering the scope of the index, products to be covered, and
weighting diagram. Construction of the SPI on experimental basis is to be undertaken sequentially beginning with the
index of banking services and rail transport.
3. Trade in services data : There are some developments on the services trade front also. While the RBI has been
providing data on services at a more disaggregate level in recent years, as per the recommendations of the Working
Group on Balance of Payments (BOP) manual, the RBI will also provide aggregate data on trade in services with a lag
of 45 days from April 2011, i.e. April 2011 data will be available on 15 June 2011. The working group had suggested
that disaggregated data on services should be released on a quarterly basis. As a follow up, RBI has started releasing
disaggregated quarterly data on trade in services beginning the first quarter of 2010-11, which has been published in
the February 2011 issue of the RBI bulletin. A joint committee on International Trade in Services formed by the
Department of Commerce had also submitted its report in 2001 and in 2010 an expert group on Strengthening of
Institutional Mechanism for Regular Collection and Compilation of Data on International Trade in Services has been
set up by the Ministry of Statistics and Programme Implementation.
Table 10.6 : Annual Growth in India’s Services GDP at Factor Cost (in constant prices)
(percentage)
2005-06 2006-07 2007-08 2008-09* 2009-10**
Trade, Hotels, & Restaurants 12.2 11.0 10.0 5.5 6.7
Trade 11.7 10.7 9.7 6.5 7.2
Hotels & Restaurants 17.5 14.4 13.1 -3.1 2.2
Transport, Storage, & Communications 12.2 12.7 12.9 11.1 15.0
Railways 7.5 11.1 9.8 7.6 9.4
Transport by Other Means 9.3 9.0 8.7 5.2 7.0
Storage 4.7 10.9 3.4 10.5 10.7
Communications 25.5 24.9 25.4 25.8 32.1
Financing, Insurance, Real Estate,
& Business Services 12.7 14.0 11.9 12.5 9.2
Banking & Insurance 15.9 20.6 16.7 14.0 11.3
Real Estate, Ownership of Dwellings,
& Business Services 10.6 9.5 8.4 11.2 7.5
Community, Social, & Personal Services 7.0 2.9 6.9 12.7 11.8
Public Administration & Defence 4.2 2.0 7.6 20.2 13.0
Other Services 9.1 3.5 6.3 7.4 10.9
Construction 12.8 10.3 10.7 5.4 7.0
Total Services (excluding Construction) 11.0 10.1 10.3 10.1 10.1
Total Services (including Construction) 11.2 10.1 10.4 9.5 9.7
Overall GDP 9.5 9.6 9.3 6.8 8.0
Source : CSO
Notes : * provisional estimates.
**quick estimates.
employees coming down), due to the offsetting rise services excluding construction grew by 10.1 per
in growth of other services reflecting the fiscal cent in 2009-10. In 2010-11(AE), they grew by 9.4
stimulus to social sector activities. Among the sub- per cent and 9.6 per cent respectively.
categories, in 2008-09, double-digit growth was
10.22 The two broad services categories, namely
registered by communication (25.8 per cent), public
trade, hotels, transport and communication; and
administration, and defence (20.2 per cent),
banking and insurance (14 per cent) and storage financing, insurance, real estate and business
(10.5 per cent). Negative growth was registered only services, comprising many dynamic services have
by hotels and restaurants (-3.1 per cent). Among performed well with growth of 11 per cent and 10.6
business services, the two important categories are per cent, respectively in 2010-11 (AE). Only
computer-related services and the category community, social and personal services have
consisting of many services like R&D services, registered a low growth of 5.7 per cent due to base
market research, business and management effect of fiscal stimulus in the previous two years,
consultancy, architectural engineering, and thus contributing to the slight deceleration in the
advertising, with shares of 3.26 per cent and 0.88 growth of the services sector. Construction sector
per cent respectively in the GDP. While computer- grew at a moderate 8 per cent.
related services, which grew by 21.2 per cent in
10.23 A comparison of the different indicators
2008-09, registered a moderate growth of 5.2 per
related to different services in India shows good
cent in 2009-10 due to the global crisis, R&D
performance in services like telecom, aviation, and
services registered good growth of 19.6 per cent
railways. Storage services show a fall in the number
and 19.9 per cent in 2008-09 and 2009-10
of warehouses which is a just a reflection of demand
respectively. Among other services, the two
important ones in terms of share of GDP are and supply in different places (Table 10.7). The
education and medical health, with the former performance and outlook for the services sector
growing at 13.9 per cent and the latter at 5.3 per based on the limited firm-level data, though sketchy
cent in 2009-10. All other services are of minor and based on estimates and forecasts also indicates
importance in India’s GDP. While total services a robust performance in services activities in 2010-
including construction grew by 9.7 per cent, total 11 and 2011-12 (see Box 10.2).
Table 10.7 : Performance of India’s Services Sector: Some Indicators

Sector Indicators Unit Period
2007-08 2008-09 2009-10 2010-11
Aviation Airline Passengers (domestic and international) Million 53.49 49.5 56.94
Telecom Telecom Connections (wireline and wirless) lakh 3004.92 4297.25 6212.8 7647.6(b)
Tourism Foreign Tourist Arrivals Million 5.08(a) 5.28(a) 5.11(a) 5.58(a)
Foreign exchange earnings from tourist arrivals US $ Million 10,729(a) 11,750(a) 11,394(a) 14,193(a)
Shipping Gross Tonnage of Indian Shipping Million GT 8.84(a) 9.31(a) 9.39(a) 10.1(c)
No. of ships Numbers 867 925 1003
Ports Port Traffic Million Tonnes 521.47 532.53 562.74 416.61(d)
Railways Freight Traffic by Railways Million Tonnes 804.11 833.31 887.99 673.31(e)
Net Tonne Kilometers of Railways Million 523,000 538,226 584,760 444,515(e)
Storage Storage Capacity MT 98.78 105.25 105.98
No. of Warehouses Numbers 490 499 487
Sources: Directorate General of Civil Aviation, Telecom Regulatory Authority of India, Ministry of Tourism, Ministry
of Shipping, Ministry of Railways and Central Warehousing Corporation. (Compiled by EXIM Bank of India)
Notes : (a) calendar years, for example 2007-08 for 2007.
(b) April-November.
(c) As on 01 September 2010.
(d) April – October.
(e) April – December.
Services Sector 245
Box 10.2: Performance of Services Firms: A Sectoral Analysis
The Centre for Monitoring Indian Economy’s (CMIE) analysis of the sector-wise performance of services activities based
on firm-level data is given here. The data for 2010-11 and 2011-12 are based on estimates and forecasts.
Transport logistics: The sales of the transport logistics services industry are estimated to have grown by a healthy 7.2 per
cent during 2009-10. This growth is likely to have been achieved by a combination of higher cargo volumes and better
realizations. In 2010-11 as a whole, the sales of this sector is expected to grow by 13 per cent and Profit After Tax (PAT)
is expected to grow by 11 per cent.
Shipping: The shipping sector’s sales are expected to fall by 3 per cent in 2010-11. Freight rates are likely to remain weak
during the second half of the year. After two consecutive years of decline, the sales growth is likely to pick up in 2011-12
at 3.2 per cent with a slow recovery in cargo volumes and an improvement in freight rates. However, the industry’s PAT
is expected to decline by 3.3 per cent in 2011-12 with a sharp growth in depreciation charges and interest expenses, by 12.6
per cent and 13.7 per cent , respectively, which is likely to eat into a major part of the industry’s operating profits. A
substantial tonnage addition to its fleet during the two years is also likely to affect the rise in these expenses.
Aviation: Oil marketing companies hiked aviation turbine fuel (ATF) prices for the fortnight beginning 1 January 2011.
The ATF price ex-Mumbai rose by 5.9 per cent as compared to the corresponding fortnight a month ago, to Rs.48,059 per
kilolitre. This was 16.6 per cent higher than the average ATF price in January 2010. In 2010-11 as a whole, sales are
expected to grow by 25.9 per cent. This will be due to an expected rise in passenger volumes and the passing on of higher
ATF prices. In 2011-12, sales are likely to grow by a healthy 14 per cent.
Retail sector: Retail sector is expected to record healthy sales in 2010-11 and grow by 10.2 per cent in 2011-12. The
sector’s PAT margin is expected to expand over the next three years on account of a faster rise in income vis-a-vis expense.
For the year ending March 2011, projects worth Rs.8,281 crore are expected to be completed adding retail space of 115.1
lakh square feet. During 2011-12, projects worth Rs.24,143 crore are expected to be completed adding a capacity of 168.6
lakh square feet.
Health Services: The health services sector’s sales is expected to grow by a healthy 25.6 per cent in 2010-11 and 19.8 per
cent in 2011-12 driven by a healthy rise in sales. The sector’s PAT increased by a whopping 107.1 per cent in the quarter
ending September 2010-11 on account of a faster rise in income vis-a-vis expenses and is expected to grow by 45 per cent
in 2010-11.
Hotel: After falling in 2009-10, the hotel sector’s sales are likely to grow in 2010-11 by 18.1 per cent due to both, higher
occupancies and Average Room Rate (ARRs). However, fresh room additions in 2011-13 will keep the ARRs under check.
Sales are expected to grow by 15.1 per cent in 2011-12.
Telecom: After rising by just 2.2 per cent during 2009-10, sales growth of the telecom industry witnessed a recovery and
improved during the first half of 2010-11. This recovery in sales growth is expected to continue. During 2010-11 and
2011-12, sales are expected to rise by 11.4 per cent and 14.6 per cent respectively driven by an increase in the subscriber
base and a deceleration in the fall of both, average revenue per user (ARPU) and the minutes of usage per user (MOU).
Software: The Indian software industry is mainly export-oriented. The industry garners around 60-70 per cent of the total
revenue from its two largest markets, namely the US and Europe. The economic slowdown in these major export
destinations led to a deceleration in growth of sales of the Indian software industry to 5.9 per cent. However, sales are
expected to grow at 16.9 per cent and 17.8 per cent, respectively during 2010-11 and 2011-12 due to higher client
additions and an uptick in billing rates.
Construction and allied activities: Sales growth of the construction industry is expected to pick up in the second half
of 2010-11. With increased activity in the industrial and infrastructure construction segments, due to Government’s
thrust on infrastructure creation, sales growth of this sector is expected to rise by 20.2 per cent and 21.7 per cent in 2010-
11 and 2011-12 respectively.
Source: Compiled by EXIM Bank of India based on CMIE Industry Analysis.
P ERFORMANCE OF S OME M AJOR in 2004-05 to ` 6,71,396 crore in 2009-10, at a CAGR

SERVICES of 9.1 per cent. The share of trade in the GDP,
however, remained fairly stable at around 15 per cent
Trade
in the last four years.
10.24 Trade is an important segment in India’s
GDP. The GDP from trade (inclusive of wholesale 10.25 The last decade has witnessed acceleration
and retail in the organized and unorganized sectors) in the growth rate of real GDP. It has been in the
at constant prices increased from ` 4,33,967 crore range of 8-9 per cent during the last five years.
This fast growth means rising disposable income of India. Since tourism does not fall under a single
the population, in particular that of the middle class. heading in the National Accounts Statistics, its
With the growth in consuming population, the retail contribution has to be estimated. In 2007-08, the
business also got a boost. There are no official contribution of tourism to the country’s GDP, and to
estimates of the size of retail trade in the country, total jobs (direct and indirect) in the country was
though such estimates have been made by some estimated at 5.92 per cent, and 9.24 per cent
institutions. Quoting a NSSO Survey, the respectively. In absolute numbers, the total number
International Council for Research on International of tourism jobs in the country increased from 38.6
Economic Relations (ICRIER) study of 2008 places million in 2002-03 to 49.8 million in 2007-08.
employment in the retail trade at 35.06 million, which According to the UN World Tourism Organization,
constitutes 7.3 per cent of the workforce in the tourism provides 6 per cent to 7 per cent of the
country. On the basis of employment intensity in world’s total jobs directly and millions more indirectly
retail trading, the contribution of the retail sector in through the multiplier effect in this sector. Tourism
the GDP is estimated in the range of 10 to12 per also plays an important role in the country’s foreign
cent. A large number of small and decentralized exchange earnings, as its share in India’s export of
traders dominate the Indian retail scene. One services accounted for 13 per cent of the total export
estimate puts their number at 1.3 crore. The of services in 2009-10.
organized corporate sector has started showing
10.27 In India, the tourism sector witnessed
interest in the retail business. With fast growth in
significant growth in recent years. During the period
the GDP and rising disposable income of the
2004 to 2009, the CAGRs of foreign tourist arrivals
consuming classes, the modern format of retailing
and foreign exchange earnings from tourism in
(i.e. organized retailing) is attracting domestic and
rupee terms were 8.1 per cent, and 14.5 per cent
foreign investment (Box 10.3).
respectively. Foreign tourist arrivals in India, which
Tourism, including Hotels and Restaurants were at 5.28 million in 2008, fell to 5.11 million in
2009 due to the global crisis. These arrivals, which
10.26 Tourism is one of the major engines of registered negative or low growth rates in the first
economic growth in most parts of the world including eleven months of 2009, started recovering from
Box 10.3 : FDI in Retail Trading in India December 2009 with a good growth of 21 per cent.
and Other Countries In the year 2010, the recovery continued with foreign
tourist arrivals at 5.58 million registering a growth
In India, retail trade is a state subject. There is no national of 9.3 per cent. The foreign exchange earnings from
framework for its regulation and development and states
tourism in the year 2010 witnessed a growth of 18.1
have their own regulations. At central level, only the
flow of FDI into the sector is regulated. While FDI in per cent over the previous year in rupee terms
cash and carry wholesale trading is permitted in India, compared to the decline of 3.3 per cent in 2009.
FDI in multi-brand retailing is prohibited. FDI in single- Domestic tourism also plays an important role in
brand retailing up to 51per cent has been allowed since overall tourism development in the country. The
2006. A total of 94 proposals have been received till May number of domestic tourist visits increased to 650
2010, of which 57 were approved. During the period million in 2009 as compared to 562.98 million in
April 2006 to March 2010, FDI inflows valued at US $
2008, witnessing a growth of 15.5 per cent in spite
194.69 million have come into this sector, accounting for
0.21 per cent of total FDI inflows during this period. of various adverse factors during this period.
FDI in retail trading is permitted in Brazil, Argentina, 10.28 The hotels and restaurants sector is an
Singapore, Indonesia, China, and Thailand without limits
important sub-component of the tourism sector.
on equity participation, while Malaysia has equity caps
on FDI in the retail sector. Permitting FDI in retail in a Availability of good quality and affordable hotel
phased manner beginning with metros and incentivizing rooms plays an important role in boosting the growth
the existing retail shops to modernize could help address of tourism in the country. Presently there are 1593
the concerns of farmers and consumers. FDI in retail classified hotels with a capacity of 95,087 rooms in
may also help bring in technical know-how to set up the country. The hotels sector comprises various
efficient supply chains which could act as models of forms of accommodation, namely star category
development.
hotels, heritage category hotels, timeshare resorts,
Source: Based on the Department of Industrial Policy and apartment hotels, guest houses, and bed and
Promotion’s Discussion paper, ‘FDI in Multi brand Retail
Trading’, Department of Consumer Affairs’ inputs, and
breakfast establishments. The share of the hotels
working paper No.1. 2010, Department of Economic Affairs. and restaurant sector in the overall economy
Services Sector 247
increased from 1.46 per cent in 2004-05 to 1.69 per who satisfy certain criteria specified in terms of
cent in 2007-08, and then decreased to 1.53 per turnover, infrastructure, and manpower.
cent and 1.45 per cent in 2008–09 and 2009-10
10.30 Since infrastructure development holds the
respectively. The CAGR in the GDP contributed by
key to India’s sustained growth in the tourism sector,
the hotels and restaurants sector was 8.5 per cent
the Government has been making efforts to develop
in 2004–05 to 2009–10. There was, however, negative quality tourism infrastructure at tourist destinations
growth (-3.41 per cent) in 2008–09 over the year 2007– and circuits. A scheme has been launched for
08, which was due to the adverse global economic development of nationally and internationally
conditions in this year, while in 2009-10, the sector important destinations and circuits through mega
registered a growth of 2.2 per cent. Several studies projects. So far, 38 projects have been identified out
have identified the demand-supply gap in hotel rooms of which 23 have been sanctioned. The mega
in India; some of them have estimated a gap of projects are a judicious mix of heritage and cultural,
150,000 hotel rooms, of which 100,000 rooms are in spiritual, and ecotourism in order to give tourists a
the budget segment. Since the construction of holistic experience. In order to meet the huge skill
hotels is primarily a private-sector activity and is gap in the hospitality industry, the Government has
capital intensive with a long gestation period, the put in place a multipronged strategy which includes
Government is making efforts to stimulate strengthening and expanding the institutional
investments in this sector and speed up the approval infrastructure for training and education. Besides,
process. steps are being taken for skill training of youth in
10.29 Various financial and fiscal incentives have the hospitality sector and providing skill certification.
been announced by the Government for the Special efforts were also made for the
hospitality sector including a five-year tax holiday Commonwealth games including creation of
under the Income Tax Act for two, three, and four additional hotel accommodation and assistance for
star category hotels located in all United Nations training of service providers like tourist taxi drivers,
Educational, Scientific and Cultural Organization auto drivers and immigration personnel in Delhi, the
NCR region, and Agra for making them tourist
(UNESCO) World Heritage sites (except Mumbai
friendly and hospitable. While the general security
and Delhi) for hotels starting operations from 1 April
situation has improved, to strengthen the National
2008 to 31 March 2013; a five-year tax holiday
Tourism Policy 2002’s critical pillar of Suraksha
announced in 2007-08 for two, three, and four star
(Safety), the Government has adopted the Code of
category new hotels and convention centres coming
Conduct for ‘Safe and Honourable Tourism’ on 1
up between 1 April 2007 and 31 July 2010 in the
July 2010.
National Capital Territory of Delhi and some
neighbouring districts of the National Capital Region. 10.31 Along with the continuation of promotional
Other incentives include: relaxation of external efforts under the Incredible India campaign, the
commercial borrowings (ECB) to reduce the liquidity Government has introduced the Visa-on-Arrival
crunch being faced by the hotel industry for setting (VoA) scheme for tourists from five countries,
up new hotel projects; allowing FDI up to 100 per namely Singapore, Finland, New Zealand,
cent under the automatic route for the hotel and Luxembourg, and Japan on a pilot basis with effect
tourism-related industry; delinking of credit to hotel from 1 January 2010. During January–December
projects from commercial real estate by the RBI, 2010, a total of 6549 VoAs were issued under this
thereby enabling hotel projects to avail of credit at scheme. The VoA scheme has been extended to
relaxed norms and reduced interest rates; and an the nationals of Cambodia, Vietnam, Laos, and
investment-linked deduction under Section 35 AD Philippines with effect from 1 January 2011 and
of the Income Tax Act announced in the Union Myanmar and Indonesia from 25 January 2011.
Budget 2010-2011 for establishing new hotels of 2- 10.32 Despite these efforts, there is a lot more to
star category and above, all over India, thus allowing be done given the potential of this sector. In fact at
100 per cent deduction in respect of the whole or 11.5 per cent, the share of travel in India’s exports
any expenditure of capital nature. Government also of commercial services in 2008 is relatively lower
has a voluntary scheme of granting approval to than that of many other exporters of services and
bonafide tour operators, travel agents, tourist half the shares of the USA, EU, and China
transport operators, and adventure tour operators (Table 10.8).
Table 10.8 : Composition of Commercial Services Exports of India and Other Major Services
Exporters
(shares in 2008)
India USA EU Japan China Singapore Hong Kong
1 Transportation 11.0 17.5 23.0 31.9 26.2 34.8 31.4
2 Travel 11.6 26.0 22.2 7.5 27.9 12.7 16.6
3 Other Commercial Services 77.4 56.5 54.8 60.6 45.9 52.5 52.0
Source: calculated from World Trade organization (WTO) data.
10.33 India’s share in international tourist arrivals Table 10.9 : Share of Merchant Fleets by
is a paltry 0.58 per cent in 2009. In fact, at 11.07 Flags of Registration as on 1 January 2010
million, outbound Indians in 2009 were more than
Rank Flag of Registration DWT Share
double the inbound tourists, though foreign exchange
(In ‘000) (%)
outgo due to outbound Indians is much less than
the foreign exchange inflow from inbound tourists. 1 Panama 2,88,758 22.63
These facts show that this high potential sector with 2 Liberia 1,42,121 11.14
multiplier effects on income and employment 3 Marshall Islands 77,827 6.09
generation is still relatively untapped. 4 Hong Kong 74,513 5.83
5 Greece 67,629 5.30
Some Transport Related Services 6 Bahamas 64,109 5.02
Shipping 7 Singapore 61,660 4.83
8 Malta 56,156 4.40
10.34 Shipping plays an important role in the
economic development of the country, especially in 9 China 45,157 3.54
India’s international trade. The Indian shipping 10 Cyprus 31,305 2.45
industry also plays an important role in the energy 11 South Korea 20,819 1.63
security of the country, as energy resources, such 12 Norway 20,811 1.63
as coal, crude oil, and natural gas are mainly 13 UK and Northern Ireland 20,176 1.58
transported by ship. Further, during crisis situations, 14 Japan 17,707 1.39
Indian shipping contributes to the uninterrupted 15 Germany 17,570 1.38
supply of essentials, and can serve as second line 16 Italy 17,276 1.35
of defence. Approximately, 95 per cent of the
17 Isle of Man 16,711 1.30
country’s trade by volume, and 68 per cent in terms
18 India 14,970 1.17
of value, is being transported by sea. Though India
has one of the largest merchant shipping fleets World Total 12,76,137 100
among the developing countries, it was ranked Source : UNCTAD, Review of Maritime Transport
2010.
eighteenth in the world in terms of dead weight
tonnage (DWT) as on 01 January 2010. Leaving
overseas trade and the rest to coastal trade. The
the ‘flags of convenience’ countries, India’s share
gross foreign exchange earnings/ savings of Indian
is low at 1.17 per cent, while China’s is around
ships during 2007-08 were at a record level of
three times higher than India’s (see Table 10.9).
` 14,589 crore. Net foreign exchange earnings/
Indian shipping tonnage (capacity) was practically
savings of Indian shipping companies, after
stagnant at around 7 million gross tonnage (GT) till
accounting for financial costs at ` 8952 crore were
the beginning of 2004-05. However, the tonnage
around 61 per cent of gross earnings/ savings.
tax regime introduced by the Government of India
in that year boosted the growth of the Indian fleet 10.35 In order to facilitate growth of the Indian
as well as its tonnage. The Indian fleet presently shipping industry and make it competitive at
stands at 10.16 million GT and 1040 ships (as on international level, the government has initiated
01 January 2011), with the Shipping Corporation several measures like bringing acquisition of all
of India, a public-sector undertaking, having a major types of ships under open general licence; allowing
share of 35.3 per cent in India’s shipping tonnage. 100 per cent FDI in the shipping and port sectors;
Of this 9.1 million GT with 340 ships caters to India’s cargo support to Indian shipping lines by providing
Services Sector 249
for centralized shipping arrangements through the of ports in the world in 2008 places Singapore,
Chartering Wing (Transchart) of the Ministry of followed by Shanghai and Rotterdam at the top, with
Shipping; introducing tonnage tax system during Madras and the Jawaharlal Nehru Port Trust (JNPT)
2004-05; formulating a Cruise Shipping Policy of in the 70th and 71st positions in terms of total cargo
India in June 2008; and establishing the Indian volume. In terms of container traffic also, Singapore
Maritime University in November 2008. followed by Shangai are at the top, while the JNPT
ranks 25th.
10.36 According to the National Council of Applied
Economic Research (NCAER), a 5 per cent 10.38 The average turnaround time in major Indian
increase in the national shipping tonnage saves or ports was 4.38 days in the year 2009-10 and was
earns an additional 17 per cent of the freight bill relatively higher in some ports like Paradip,
and according to a report by The Energy and Kolkata,Vizag, and Kandla, while average output per
Resources Institute (TERI), a 1 per cent change in ship-berth-day was 10,168 tonnes with more than
gross registered tonnage (GRT) is likely to bring double the average in the JNPT and around one-
about a 0.0068 per cent change in the GDP. While fifth the average in Kolkata port. With the average
India’s overseas seaborne trade has been growing turnaround time in India already relatively high by
substantially over the years from 224.62 million international standards, the turnaround time of
tonnes in 1999-2000 to 598.70 million tonnes in Singapore being less than a day, what is cause for
2008-09 with a CAGR of 10.57 per cent during 2004- further worry is the rise in average turnaround time
05 to 2008-09, there is a sharp decline in the share and average pre-berthing time and fall in average
of Indian ships in the carriage of India’s overseas output per ship-berth-day in 2009-10. (See Table
trade from about 40 per cent in the late 1980s to 10.10)
9.5 per cent in 2008-09 with a 5.7 per cent share in 10.39 A lot of attention needs to be paid to our
India’s export trade and 12 per cent share in India’s port sector. There is need to follow a holistic
import trade. Given the relatively low participation approach for improving the existing infrastructure
of Indian ships in India’s export trade and given the and services at ports through modernization of the
fact that Indian ships are ageing, with the average systems using latest technology. The infrastructure
age of the Indian fleet increasing from 15 years in facilities at major ports for handling crude oil
1999 to 18.3 years in 2009, there is urgent need to particularly need to be strengthened through a
increase the shipping fleet for a country of India’s facilitative policy on single-point moorings. The
size. This can lead not only to higher growth of the facilities at existing ports with regard to cargo
economy but also higher foreign exchange earnings/ handling, stevedoring, pilotage services, bunker
savings and higher employment. services, and warehousing facilities need to be
upgraded. The trans-shipment of Indian cargo taking
Port Services place outside the country at present needs to be
10.37 Being the gateways of international trade, handled at Indian ports through concerted
ports play a vital role in the overall economic measures. This would include increasing the drafts
development of the country. India is blessed with a
long coastline with 13 major ports and around 200 Table10.10 : Some Performance
Indicators for Major Ports in India
non-major ports. While around 72 per cent of the
total cargo handled by volume was through India’s Year Average Average Average
major ports and the rest through non-major ports till Turnaround pre-Berthing Output per
Time Time Ship Berth
2008-09, with the development of private ports the
(in days) (in hours) day (in
share of major ports fell to 67 per cent during 2009-
tonnes)
10. Despite the recessionary trend and decline in
2004-05 3.41 6.03 9298
exports, during the years 2008-09 and 2009-10,
traffic at major ports attained a growth of 2.2 per 2005-06 3.50 8.77 9267
cent and 5.74 per cent respectively over the previous 2006-07 3.62 10.05 9745
year. Some recent developments in the port services 2007-08 3.93 11.40 10071
sector include the finalization of a model concession 2008-09 3.87 9.55 10473
agreement for awarding projects on public private
2009-10(P) 4.38 11.67 10168
partnership (PPP) basis in 2008 and introduction
Source : Ministry of Shipping website.
of web-based port community systems. The ranking
available at Indian ports, rationalization of port dues goods. The CWC has also diversified its business
and providing differential levels of tariff for different into CFSs/ICDs and also started Container Rail
sizes of vessels or for different cargoes so as to Transportation from Loni (UP) to Jawaharlal Nehru
attract mother ships to berth at Indian ports. The Port. The expansion of the overall capacity of the
many port charges in India need to be reduced as CWC has been slow as it is cost intensive. The
they are higher than in many other countries due to profits generated are being ploughed back to
inefficiency of ports and inclusion of unrelated costs construct additional warehouses thereby
like pension and other contributions to labour in strengthening the warehousing infrastructure
port services. throughout the country. At State level, the 17 SWCs
meet the storage requirements and complement the
Storage Services
work of the CWC. As on 31 October 2010, these
10.40 The warehousing services sector plays an SWCs were operating a network of 1585
important role in the economy of the country. warehouses with an aggregate storage capacity of
Warehousing services are an important cog both in 214.41 lakh MT.
inbound logistics, as raw materials, parts, and stores
10.42 Major policy initiatives taken recently by the
have to be stocked, inventory control maintained,
Government include construction of godowns under
and materials which do not meet specifications
the seven-years guarantee scheme of the
returned to suppliers, as well as outbound logistics
Government of India, most of them being managed
as the goods produced have to be stored in different
by the CWC or SWCs; permission of up to 100 per
geographical locations before shipping/ dispatch as
cent FDI in the construction of warehousing
per demand/ order inflows. In India, the most
infrastructure; and construction of warehouses
important component of warehousing is agricultural
under the Grameen Bhandaran Yojana of NABARD
storage for agri-produce, foodgrains, fertilizers,
and the Rastriya Krishi Vikas Yojana. In the year
manure, etc. Other components include industrial
2007-08, the Government enacted the Warehousing
warehousing for industrial goods, import cargo, and
(Development & Regulation) Act 2007 to make the
excisable cargo; inland container depots (ICDs)/
warehouse receipt fully negotiable. Recently the
container freight stations (CFSs) for facilitating
Government took another major initiative for
import/export trade; and special warehouses for cold
construction of godowns under its Private
and temperature controlled storage. The warehousing
Enterpreneurs Godown (PEG) scheme. The CWC
sector also provides ancillary services like handling,
has constructed 0.9 lakh MT godowns during the
transportation, pest control, farmer extension
year 2009-10 and has planned to construct
schemes, dedicated warehousing at doorsteps,
additional capacity to the tune of 1.77 lakh MT during
consultancy, and project execution.
the year 2010-11.
10.41 The Government has established the Central
10.43 Some issues related to the warehousing
Warehousing Corporation (CWC) with the objective
sector include increasing high quality storage
of providing scientific storage facilities for agricultural
capacity as well as the numbers of trained samplers/
implements and produce and other notified
graders; addressing issues like storage loss due to
commodities. Besides, with the same objective, 17
deterioration of the produce during storage, lack of
State Warehousing Corporations (SWCs) were also
provision for dealing with cases where stocks are
set up under the Warehousing Corporations Act
pledged with banks and the depositor either
1962. The CWC and the respective State
absconds or refuses to take delivery; delay in
Governments are equal shareholders of these
delivery and deposit of stocks due to extension of
SWCs. The commercial outreach with social
‘no-entry’ zones in cities, levy of property tax on
objectives has resulted in the CWC operating a large
warehouses and high fees by ports.
warehousing network across the country. As on 31
December 2010, the CWC was operating 476
Telecom and Related Services
warehouses, with a total storage capacity of 102.24
lakh MTs and an average utilization of 85 per cent. 10.44 The opening of the telecom sector in India
It made an entry into operation of public bonded has not only led to rapid growth but also helped a
warehouses in the late 1970s, when the Central great deal towards maximization of consumer
Board of Excise and Customs, acknowledging the benefits as tariffs have been falling across the board
expertise of the CWC in the field of storage and as a result of increasing competition, with the telecom
warehousing, identified it as a custodian for dutiable service price index falling from 100 in 2004-05 to
Services Sector 251
85.08 in 2007-08. The telecom sector has grown the objective of promoting housing finance institutions
from a level of 22.8 million telephone subscribers in both at local and regional levels has conceptualized
1999 to 54.6 million in 2003, and further to 764.77 the reverse mortgage loan product exclusively for
million at the end of November 2010. Wireless covering house-owning senior citizens. It has
telephone connections have contributed to this introduced the residential real estate price index
growth as the number of wireless connections rose (RESIDEX), which is an initiative towards providing
from 3.57 million in March 2001 to 729.58 million the housing finance sector with an index which
by the end of November 2010. Tele-density, which reflects the trends in the prices of residential
was 2.32 per cent, increased to 64.34 per cent in properties across the country.
November 2010. However, there is a wide gap
10.47 The global economic crisis impacted the
between rural tele-density (30.18 per cent in
Indian real estate industry significantly. However,
November 2010) and urban tele-density (143.95 per
various measures taken by the Government to boost
cent in November 2010). This shows that the market
the demand for residential properties, as also the
still has large untapped potential.
relaxation in provisioning requirements by the RBI
10.45 The Internet, which is another growing mode for banks and NHB for Housing Finance Companies
of communication, is a worldwide system of (HFCs), has minimized the impact of economic
computer networks. Broadband is often called ‘high- crisis on this sector. The sector has started
speed’ Internet, because it usually has a high rate recovering following the increasing activity in the
of data transmission. Broadband subscribers grew Indian economy, however with a fundamental
from 0.18 million in 2005 to 10.71 million as at the difference. Customers are now going for need-
end of November 2010. The number of Internet and based purchases rather than investment based on
broadband subscribers is expected to increase to the euphoria and hype witnessed in 2007 and 2008.
40 million and 20 million, respectively by 2010.
10.48 A joint study by Price Waterhouse Coopers
Introduction of BWA (Broadband Wireless Access)
(PWC) and Urban Land Institute of India (ULI) has
services will enhance the penetration as well as
cited India as one of the emerging markets for real
growth of broadband subscribers. Wi-Max has also
estate sector in the Asia Pacific region. The study
been making headway in penetration of wireless
classifies India as semi-transparent market in the
broadband connectivity across all sectors. (For
Asia Pacific region, and ranks it 41st on a global
further details, see Chapter 11.)
transparency scoring scale. It places Mumbai
(ranked 3rd), New Delhi (5th), and Bangalore (10th)
Real Estate Services among the top 10 prospective cities for real estate
10.46 The real estate sector includes development investment for the year 2011. Mumbai and New Delhi
of commercial and residential real estates, with in that order capture the top two places in terms of
participation and involvement of both Government city development prospects for the year 2011.
agencies and private developers. The GDP from 10.49 In this emerging services sector, while short
the real estate sector (including ownership of term worries like hardening interest rates need to
dwellings) along with business services witnessed be addressed, there is also need for some
a growth of 7.5 per cent (at constant prices) in the fundamental reforms like tackling the high stamp
year 2009-10. In terms of share, it accounted for duty issue which makes even honest citizens deal
9.3 per cent of the GDP in the year 2009-10. Fiscal in black money and problems related to foreclosure
incentives for the housing sector provided in of loans and the Urban Land Ceiling Regulations
successive budgets together with liberal investment Act (ULCRA).
and credit policies and reforms brought the housing
and real estate sector to the centre stage of the Some Business Services
Indian economy. The policy measures include
IT and ITeS
permission for FDI in townships, housing, built-up
infrastructure, and construction development 10.50 India has gained a brand identity as a
projects, including SEZs, under the automatic route, knowledge economy due to its IT and ITeS sector.
which has attracted foreign investors into this sector. The IT-ITeS industry has four major components:
However, FDI is not allowed in real estate business. IT services, business process outsourcing (BPO),
The National Housing Bank (NHB) established with engineering services and R&D, and software
products. The growth in the services sector in India 10.53 This sector has also led to employment
has been led by the IT-ITeS sector which has become generation. Direct employment in the IT services and
a growth engine for the economy, contributing BPO/ITeS segment was 2.3 million in 2009-10 and
substantially to increases in the GDP, employment, is estimated to reach nearly 2.5 million by the end
and exports. This sector has improved its contribution of financial year 2010-11. Indirect employment of over
to India’s GDP from 4.1 per cent in 2004-05 to 6.1 8.3 million job opportunities is also expected to be
per cent in 2009-10 and an estimated 6.4 per cent in generated due to the growth of this sector in 2010-
2010-11. The industry has also helped expand tertiary 11. These jobs have been generated in diverse fields
education significantly. The top seven States that such as commercial and residential real estate,
account for about 90 per cent of this sector’s exports retail, hospitality, transportation, and security.
have started six to seven times more colleges than
other States. 10.54 India continues to be the dominant player
10.51 The Indian IT-ITeS industry has registered in the global outsourcing sector. However, its future
robust growth since 2004-05. According to will depend on how the challenges related to its
NASSCOM, the year 2010-11 is characterized by continued competitiveness are tackled. These
broad-based growth across mature and emerging include increasing competition, rising costs, talent
verticals. The overall Indian IT-ITeS revenue has grown shortfall, infrastructure constraints, increasing risk
to US $ 63.7 billion in 2009-10 and an estimated US perception, protectionism in key markets, and
$ 76.1 billion in 2010-11, translating into a CAGR of deteriorating business environment.
22.5 per cent from 2004-05 to 2010-11. The industry
grew by an estimated 19.5 percent in 2010-11 10.55 The Government has been supporting the
compared to the moderate growth of 6.2 per cent in IT and ITeS sector in many ways. This was continued
2009-10 (see Table 10.11). Exports dominate the IT- in the 2010-11 Budget with policies like Government
ITeS industry, and constitute about 77 per cent of expenditure for improving IT infrastructure and
total industry revenue. Total IT-ITeS exports have delivery mechanism, reduction in surcharge from
grown from US$ 17.7 billion in 2004-05 to US $ 49.7 10 per cent to 7.5 per cent for IT companies and
billion in 2009-10 and an estimated US $ 58.9 billion Government’s E-Governance plan. There are some
in 2010-11 registering a CAGR of 22.2 per cent from issues in the IT-ITeS sector which need attention.
2004-05 to 2010-11. These include shifting from low-end services to high-
10.52 Though the IT-ITeS sector is export driven, end services like programming in the light of
the domestic market is also significant with a revenue competition in BPO from other countries and policies
growth of US $ 14 billion in 2009-10 and an estimated in some developed countries like UK to employ
revenue of US $ 17.2 billion in 2010-11. The IT and locals; addressing data protection issues as half of
BPO industry (excluding hardware) witnessed a quick offshore work does not come to India; concluding
rebound in growth and has been estimated to have totalization agreements with target countries to
grown by 19.5 per cent, aggregating revenues of US$ resolve the social security benefits issue as is being
76.1 billion in 2010-11 with exports at US$ 58.9 billion done now; and increasing the coverage and depth
accounting for a major portion. of IT and ITeS services in the domestic sector.
Table 10.11: IT-ITeS Revenue and Exports (US $ billion)

Year 2009-10 2010-11 Growth Rate CAGR (2005-06 to
(Estimated) in 2010-11 (%) 2010-11) (%)
Total IT-BPO Services Revenue 63.7 76.1 19.5 22.5

Exports 49.7 58.9 18.5 22.2
Domestic, of which 14.0 17.2 22.8 23.7
(i) IT Services 8.9 10.9 22.5 20.8
(ii) ITeS-BPO 2.2 2.8 27.3 29.3
(iii) Software Products 2.9 3.5 20.7 30.7
Source : Nasscom.
Services Sector 253
Accounting and Auditing Services the world. However, there is limited use of cost audit
and cost management techniques in India. Scientific
10.56 Accounting, auditing, and book-keeping
use of management accounting tools on a wider
services are part of ‘business services’. The
accounting profession in India is highly developed scale can bring about higher cost efficiency in
with the potential to become internationally more operations and take the Indian accounting industry
competitive. As per the WTO data, in the $33.76 to greater heights.
billion other business services exports by India in 10.58 There is need to tap outsourcing in niche
2008, the share of legal, accounting, management, areas like actuarial and accountancy services as
and public relations services was 17.4 per cent and there is good scope for outsourcing actuarial services
in the $21.06 billion imports of other business and accountancy services to India including setting
services by India, their share was 17.9 per cent. up back offices. But Indian service providers need
Indian accounting firms are increasingly getting high-quality training in tax laws of US and other
integrated, and are providing associated services countries besides laws related to insurance, pension,
such as management consultancy, corporate etc. Tie-ups to overcome the weakness of small size
finance, and advisory services, in addition to their of domestic accountancy firms can also help India’s
core business of accounting, auditing, and tax accounting sector grow manifold.
services. The accounting profession is structured
in India as partnership with few partners or R&D
proprietorship concerns. The Indian accounting
sector mainly comprises small and medium 10.59 As per the Department of Science and
enterprises (SMEs), matching the existing economic Technology estimates, the national investment on
structure of India. The number of chartered R&D activities was ` 37,777.9 crore in 2007-08.
accountancy firms with five or more partners is about Though India, with a R&D share of 0.8 per cent in
2000 out of more than 13000 firms. The remaining the GDP in 2007-08, is ahead of other developing
are practicing as proprietary firms or in their countries like Mexico, Malaysia, and Chile, it lags
individual names. The Chartered Accountancy behind countries like South Korea (3.5 per cent),
Profession in India has globally benchmarked its Russia (1.1 per cent ), China (1.5 per cent), and
qualification, training and standards (including Brazil (1per cent)
convergence to global standards on IFRS) for 10.60 A cross-country comparison of expenditure
increased mobility and has entered into qualification on R&D by sectors shows the dominance of the
recognition arrangements with accounting bodies business enterprises sector in other countries. In
in UK, Australia, Canada and Ireland. the US and China, the business enterprises sector
10.57 The cost and management accounting accounted for as much as 72 per cent of total R&D
profession in India has attained great maturity with expenditure in 2007 and in the UK, this figure was
the quality of professional cost and management 64 per cent. In India, while the Government sector
accounting services being on par with the best in continues to account for a leading share, an
Table 10.12 : R&D Expenditure by Sectors : A Cross-country Comparison

(per cent)
2002 2007
Country Business Govt Higher Pvt. Business Govt. Higher Pvt.
Enterprises Edn Non-profit Enterprises Edn Non-profit
US 70.0 12.1 13.4 4.5 72.6 10.6 12.9 3.9

UK 64.8 9.2 24.0 1.9 64.2 8.3 25.2 2.3
China 61.2 28.7 10.1 - 72.3 19.2 8.5 neg
S. Korea 74.9 13.4 10.4 1.3 58.6 18.6 21.3 1.5
Russia 69.9 24.5 5.4 0.2 62.9 30.1 6.7 0.3
Brazil 40.4 20.6 38.9 0.1 40.2 21.3 38.4 0.1
India 19.3 76.5 4.1 - 29.6 66.0 4.4 neg
S. Africa 55.5 21.9 20.5 2.1 57.7 21.7 19.4 1.2
Source: UNESCO Science Report 2010.
Note: neg—negligible.
important development has been the rising share of established referral relationships with Indian firms.
the business enterprises sector from 19 per cent in
10.64 India has over 750 law colleges and about
2002 to almost 30 per cent in 2007 (Table 10.12)
30,000 lawyers graduating every year. The Bar
10.61 As per estimates in 2009-10, the sectors Council of India, which lays down the standards of
which attracted largest R&D expenditures include professional conduct and etiquette, as also
pharmaceuticals, electrical and non electrical standards for legal education, has been constituted
machinery, transport equipment, electronics, and under the Advocates Act 1961. In addition, there
plastics. R&D intensity (R&D as per cent of sales) are also State Bar Councils that enrol advocates
for the pharmaceuticals sector was much higher and enforce discipline. Government has constituted
than that for other sectors. the National Legal Services Authority, under the Legal
Services Authorities Act 1987 to monitor and
10.62 There is huge potential for R & D services,
evaluate implementation of legal aid programmes
particularly in healthcare, biotech and electronics.
and lay down policies and principles for making
However, there are issues related to intellectual
legal services available under the Act. The National
property rights (IPRs) in the sector. India has
Litigation Policy has also been launched with the
amended the IPR laws in the past two decades and
objective of reducing Government litigation in courts
its laws are fully compliant with WTO regulations.
so that court time can be used for resolving other
There is an impartial judicial process in India which
pending cases and average pendency time reduced
implements the laws. The Government has taken
from 15 years to three years, a goal set by the
many measures to encourage R&D like enhancing
National Legal Mission.
the weighted deduction on expenditure incurred on
in-house R&D from 150 per cent to 200 per cent 10.65 India is ranked 41st, with a score of 4.8, in
for the manufacturing business and from 125 per terms of judicial independence, according to the
cent to 175 per cent for payments made to national Global Competitiveness Report (2010-11) of the
laboratories, research associations, colleges, World Economic Forum. As regards efficiency of
universities, and other institutions for scientific the legal framework in settling disputes, India is
research, and allowing a 125 per cent weighted ranked 47th, with a score of 4.1. India rises to 37th
deduction for approved associations engaged in position when it comes to the efficiency of the legal
research in social sciences or statistical research, framework in challenging regulations, with a score
besides exemptions in the income from approved of 4.2.
research associations in the Budget 2010-11.
Equipped with these incentives, the private sector 10.66 Over the years, the legal system in India
should take a cue from other countries and step up has undergone changes with the increasing
its R&D investments. globalization of the Indian economy. This has
enabled transformation of Indian lawyers into global
Legal Services service providers. Trans-border mergers, corporate
10.63 The legal systems in India, the USA, and in restructuring, acquisitions, IPRs are some of the
the UK are rooted in British common law, thus areas in which Indian lawyers have acquired
making Indian lawyers competent, without much expertise. Since liberalization, Indian lawyers have
additional training, to undertake standard legal work been gaining dynamic experience in handling cases
such as vetting of contracts, patent registrations, or spanning fields such as banking, telecom,
reviewing of documents. India has an estimated insurance, power, civil aviation, and transportation,
600,000 legal practitioners and is next only to USA which were earlier largely under the purview of the
in terms of numbers. According to industry sources, public sector. In addition, they have acquired
Indian commercial law practice is approximately of experience in areas related to taxation, mergers and
the order of ` 600 crore to ` 650 crore per annum acquisitions, joint ventures, IPRs, FDI, and special
in revenues. The service providers are individual economic zones. The conclusion of The Trade
lawyers and small or family-based firms. In India, Related Intellectual Property Rights (TRIPS)
the practice of law is governed by the Advocates Agreement and Information Technology Agreement
Act of 1961. Under this Act, foreign law firms are has brought the necessary experience in newer
not allowed to engage in practice of law in India. dimensions of patent services, analysis and
Many foreign legal firms have set up liaison offices prosecution support and internet-based disputes and
(currently permitted under the law), while a few have cyber crimes.
Services Sector 255
10.67 India’s prominence in the legal process off- organizations, academic institutes, and professional
shoring (LPO) segment is being widely bodies. Consulting firms are the dominant players
acknowledged in the global market. Potential exists (64 per cent) followed by individual consultants (22
for India to tap a significant share of world LPO per cent), R & D organizations (10 per cent),
business. India holds significant advantage in academic institutes (3 per cent), and professional
various parameters that work in favour of driving bodies (1 per cent). The client sectors to which
the LPO industry towards India. Off-shoring legal consulting services are provided include agriculture,
work to India saves about 80 per cent of the cost banking and financial services, chemicals,
that may be incurred in a developed country like education, energy, entertainment, environment,
USA. It is estimated that the cost of employing a governance, public administration and policy,
fresh law graduate in the USA would be US $ hospitality, infrastructure, manufacturing, real estate,
150,000 per annum as compared to US $ 15,000 retail, information technology, telecommunications,
per annum in India. On per hour basis, this works transport, and utilities.
out to US $ 600 in the USA as compared to US $ 70
10.70 The Indian management consultancy market
in India. Establishment cost to set up a legal firm in
is one which is still in its nascent stage, with high
India is also low as compared to the USA or Europe.
growth and large entry of players being the key
According to estimates, India is 40 times more cost-
characteristics. Although it is still relatively small in
effective than in the USA in this regard.
revenue size as compared to the global management
Consultancy consultancy market, standing at US$ 1.5 billion in
the year 2006-07, the Indian management
10.68 Consultancy is essentially a knowledge-
consultancy industry has shown high growth partly
based profession with an underlying developmental
due to the low base from which it picked up. Growth
role spanning a wide range of sectors. Not only do
in management consultancy exports was also high
consultancy services play an important role in the
with exports amounting to US$7.3 billion in the year
development of the economy, but such consultancy
2006-07.
exports enhance the visibility of Indian technical
expertise abroad and boost the external sector in 10.71 The Indian engineering consultancy market
multiple ways, including foreign exchange revenues, is experiencing a boom, with many large-scale
promotion of export of technology and merchandise development projects driving its growth. It is a more
(especially capital goods and raw materials), and developed market as compared to the management
training of personnel, while contributing significantly consultancy market. Although it is still relatively small
to national development in the host country. in revenue size as compared to the global
Revenues of Indian consulting industry are estimated engineering consultancy market standing at US$
at US$ 4.41 billion in 2007. Though the consulting 2.91 billion in the year 2006-07, the Indian
profession contributed only 0.44 per cent to the engineering consultancy industry has shown a
GDP in 2007, growth rates of the industry have steady growth over the last few years.
been extremely promising over the last few years 10.72 Over the past decade, India has emerged
with a CAGR of about 73.68 per cent between 2002 as one of the fastest growing consultancy markets
and 2007. The Asia Pacific (APAC) consulting worldwide. This is largely attributable to increased
industry generated revenues worth US$33.5 billion investment activities due to liberalization of FDI
in the year 2008 with India’s contribution at US$1.81 restrictions, entry of many new players into the
billion, i.e. a share of 5.4 per cent of the total APAC Indian market, high growth in most key sectors,
market. and India being an emerging economy and a low-
10.69 The consultancy services market can be cost sourcing destination.
broadly categorized into management consultancy
and engineering consultancy. Some of the Construction
commonly provided services across both fields of 10.73 The construction industry in India is an
consultancy include detailed project reports, impact important indicator of development as it creates
studies, evaluation/ assessment studies, advisory investment opportunities across various related
services, design and detailed engineering. sectors. The construction industry has contributed
Consulting services in India are being provided by an estimated ` 3,84,282 crore (at constant prices)
a host of entities, the major categories being to national GDP in 2010-11 (a share of around 8
individual consultants, consulting firms, R&D per cent). The industry is fragmented, with a handful
of major companies involved in construction activities 10.77 Some initiatives that could be taken in the
across all segments; medium sized companies construction sector include using the standard
specializing in niche activities; and small and contract document for all domestic civil engineering
medium contractors who actually work on projects, setting up consortiums to bid effectively
subcontract basis and carry out the work in the for international projects, and resolving the issue of
field. The sector is labour intensive and, including precondition in most of the overseas tenders floated
indirect jobs, provides employment to more than 35 by clients wherein equipment to be supplied by the
million people. contracting company has necessarily to be sourced
from an approved list of suppliers from developed
10.74 Creation of physical assets is an important
countries. Another area that needs consideration is
outcome of construction activity. Prior to
the possibility of a double guarantee avoidance
liberalization, the sector was dependent on
treaty on the lines of the double taxation avoidance
Government spending on infrastructure as also
treaty as overseas clients insist on bank guarantees
construction activity undertaken by the private sector
to be issued under the contract being routed through
for housing complexes. The sector was given
a local bank operating in the country of project
industry status in the year 2000. Since then, there
execution which results in Indian contracting
are more initiatives by the Government to undertake
companies being called upon to pay the bank
projects on PPP basis. These initiatives have
guarantee charges to Indian banks as also to the
resulted in more private ownership of build-operate-
local overseas banks which issue the final end
transfer (BOT), build-operate-own-transfer (BOOT),
guarantees to the client, based on the counter
and build-operate-lease-transfer (BOLT) projects.
guarantees from the Indian banks.
FDI is allowed upto 100 per cent under the automatic
route in townships, housing, built-up infrastructure,
Some Social Services
and construction of development projects (which
include housing, commercial premises, educational 10.78 Healthcare and education are the two major
institutions, and recreational facilities). social services (see chapter 12). Besides these two,
some other social services like sports are gaining
10.75 The construction sector has major linkages
importance in India.
with the building materials industry since they
account for sizeable share of the construction costs Sports
(approximately 40 per cent to 50 per cent). The 10.79 Sports have always been seen as an integral
construction component, on an average, accounts part of all round development of the human
for more than half of the investment required for personality. Apart from being a means of
setting up critical infrastructure like power projects, entertainment and physical fitness, sports have also
ports, railways, roads, and bridges. The sector played a great role in national identity and bonding
therefore is critical for enhancing the productive with the international community. Organizing sports
capacity of the overall economy. With plans to events is emerging as an important activity for inflow
enhance infrastructure investment to US $ 1 trillion, of tourists and generation of employment and is
the construction sector is all set to become one of thereby contributing to national income.
the growth engines of the Indian economy in the
10.80 Physical education, games, and sports have
foreseeable future.
been receiving attention over successive Plans.
10.76 Construction services have been brought However, it was only after India hosted the Ninth
under the ambit of services tax since the year 2004. Asian Games in 1982 that ‘sports’ became a subject
However, certain infrastructure projects like dams, of policy. The National Sports Policy 1984 was the
roads, bridges, railways, and airports and projects first move towards developing an organized and
awarded by Government/ local bodies are exempt systematic framework for the development and
from services tax. Construction service providers promotion of sports in the country and it was
have been allowed to avail of Central value added succeeded by the National Sports Policy 2001. The
tax (CENVAT) credit on capital goods, inputs, and policy envisages broad-basing of sports,
input services since 2004. Moreover, excise duty upgradation and development of infrastructure,
on supply of goods to deemed export projects is strengthening of scientific and coaching support,
refunded. The existing VAT Act provides for among others. The Sports Authority of India (SAI)
deduction of subcontractor turnover based on was established in 1984 with the objective of spotting
documentary evidence. and nurturing talent at all levels, by providing the
Services Sector 257
requisite infrastructure and equipment, coaching Challenges
facilities, scientific back-up, nutritious diet, and
exposure to competition. 10.83 Given the myriad activities in services,
10.81 The 19th Commonwealth Games (CWG), a supporting its growth will require careful and
mega sporting event held every four years, in which differentiated strategies. The opportunities in this
71 countries and territories participate, were fast-growing, employment-oriented, FDI attracting
organized successfully by India. The event has sector, with vast export-potential are striking.
significantly contributed to employment generation, However, the challenges are also many. One of the
infrastructure development, tourism inflow, and challenges in this area is to retain India’s
growth in national income. The Sports Ministry had competitiveness in those sectors where it has
undertaken a massive and unprecedented training already made a mark such as IT & ITeS and
programme for the top sportspersons of India, to Telecommunications. Their deeper and broader use
prepare the Indian contingent for CWG 2010. A in the domestic sectors would also have a dramatic
Scheme for Preparation of Indian Athletes for CWG potential to increase the efficiency and productivity
2010 was put in place for providing comprehensive of other goods and services. The second challenge
and intensive training and exposure to Indian lies in making inroads into some traditional areas
sportspersons, both domestically and abroad. In this
such as tourism and shipping where other countries
effort, 170 Indian and 30 foreign coaches and 78
have already established themselves, but where the
supporting technical personnel were involved. This
potential for India is nevertheless very high. The
has resulted in the best-ever performance by India
in any major, multi-disciplinary sports event with a third challenge is in making forays into globally
haul of 101 medals (38 gold, 27 silver, and 36 bronze), traded services in still niche areas for India, such
which is more than double the medals India won at as financial services, health care, education,
CWG, Melbourne, 2006. This achievement placed accountancy, and other business services where
India second in medals tally after Australia and ahead India has a large domestic market and has also
of major sporting countries such as England, shown recent signs of making a dent in the
Canada, and South Africa. international market, but only a very small part of
the full potential has been tapped. There are also
CHALLENGES AND OUTLOOK challenges related to collecting better data and
developing a better coordinated strategy to pull
Outlook together all the dispersed information. Regulatory
10.82 The outlook for the services sector which improvements will also be important as many
had slightly dimmed due to the fallout of the sub- domestic regulations and market access barriers
prime crisis in the US and the global financial crisis could come in the way of fully tapping this growth-
has once again brightened. Recent business accelerating sector. Since there are diverse sectors
performance indicators of different service firms in
within services, the issues and policies cannot be
different sub-sectors also support this healthy
separated into watertight compartments. Addressing
prognosis. Even during the crisis year, annual
these challenges and issues could further
services growth was around the 10 per cent mark,
which it has maintained since 2005-06. This is in strengthen the services sector which is the driving
contrast to the overall GDP growth which fell to 6.8 force for India to realize double-digit growth potential,
per cent in 2008-09 from 9.3 per cent in 2007-08. both overall and at state level, while providing more
Thus the resilience of the services sector has greatly and better jobs. to help achieve more inclusive and
contributed to the resilience of the economy. balanced growth.
Energy, Infrastructure
and Communications
11
CHAPTER
O ne of the major requirements for sustainable and inclusive economic growth is

an extensive and efficient infrastructure network. It is critical for the effective
functioning of the economy and industry. The key to global competitiveness of the
Indian economy lies in building a high class infrastructure. To accelerate the pace
of infrastructure development and reduce the infrastructure deficit, the Government
has initiated a host of projects and schemes to upgrade physical infrastructure in
all crucial sectors. Despite several challenges, the positive results of the Government’s
initiatives are showing in some sectors. However, required capacity addition in a
time-bound manner needs focused attention in other sectors.
11.2 The Planning Commission in its Mid-Term OVERVIEW OF

Appraisal of the Eleventh Five Year Plan has taken PERFORMANCE
stock of total investment in infrastructure (electricity,
roads and bridges, ports, airports, telecommuni- 11.3 While the overall investment in infrastructure
cations, railways, irrigation, water supply and seems on target, the targets in some sectors have
sanitation, storage, and oil and gas pipelines) during not been achieved. During 2007-08 to 2009-10,
the first two years (2007-08 and 2008-09) of the Plan. capacity addition has been lower than the target in
It has revised the estimates of total investment in power, roads (National Highways Development
infrastructure during the Eleventh Plan period based Project [NHDP]), new railway lines, and doubling
on the revised data available during the first two years of railway lines. The sub-sectors where
of the Eleventh Plan and it is now estimated that it achievements have been above or close to target
would be ` 20,54,205 crore, which is comparable are telecommunications, villages electrified under
with the initial investment planned. The contribution the Rajiv Gandhi Grameen Vidyutikaran
of the private sector during the first two years was Yojana(RGGVY), railway lines electrification,
34.32 per cent and 33.74 per cent respectively, higher railway gauge conversion, and new and renewal of
than the targeted 30 per cent. The investment in roads construction under the Pradhan Mantri Gram
infrastructure has reached 7.18 per cent of the gross Sadak Yojana(PMGSY).
domestic product (GDP) in 2008-09 and this is 11.4 The Department of Programme
expected to increase to 8.37 per cent in the terminal Implementation monitors the progress in Central-
year of the Plan. Total investment in infrastructure sector projects costing ` 150 crore and above on a
during the Eleventh Plan is, therefore, likely to monthly basis. The progress report of October 2010
increase by 2.47 percentage points of the GDP as indicates that projects such as roads, power,
compared to the Tenth Plan. During the first three railways, petroleum, telecom, coal, and steel
years (2007-08 to 2009-10) actual expenditure in constitute about 92 per cent of the total 559
the ten infrastructure sectors (including investment monitored projects and overtime project delays have
in gas pipelines along with oil) is about ` 10,65,828 been creeping up. As on October 2010, out of the
crore as against the target of ` 9,81,119 crore. 559 projects, 14 are ahead of schedule, 117 are on
Energy, Infrastructure and Communications 259
schedule, and 293 are delayed. Of the balance approved costs shows that the former declined from
projects, no dates have been fixed for commissioning. 61.6 per cent in March 1991 to 12.06 per cent in
In the road transport and highways sector, 51 March 2008. There is, however, an upward trend
projects have reported delay in the range of 1 to 36 from March 2008 as cost overruns reached 14.72
months. In the power sector, 20 projects have per cent in March 2010 and further climbed to 20.7
reported delays in the range of 1to18 months over per cent in October 2010. The rise is partly due to
the completion schedule earlier targeted. In the exclusion of projects costing less than ` 150 crore
petroleum sector, 16 projects have reported delays from the monitoring system as these had lower cost
in the range of 1 to16 months. overruns compared to the bigger projects. The
increase is also partly dueto steep rise in prices of
11.5 There has been a steady decline in the time
steel and cement in 2006-07.
and cost overruns of Central-sector projects costing
` 150 crore and above and this can be attributed to 11.6 During April-November 2010, the performance
closer monitoring and system improvements by the of core industries and infrastructure services has
Ministries concerned. An examination of cost been mixed. The switching capacity addition and
overruns in the last twenty years as against originally cellphone connections in the telecommunications
Table 11.1 : Growth in core industries and infrastructure services (in per cent)
Sl. Sector 2006-07 2007-08 2008-09 2009-10 2010-11
No. (April-Nov.)
1 Power 7.3 6.3 2.5 6.8 4.6

2 Coal 5.9 6.0 8.2 8.0 0.6
3 Finished Steel 12.2 6.8 13.2 3.2 6.7
4 Railway Revenue Earning
Freight Traffic 9.2 9.0 4.9 6.6 3.3
5 Cargo Handled at Major Ports 9.5 12.0 2.2 5.7 0.8
6 Telecommunications:
a) Addition in Switching Capacity -23.0 -25.4 101.0 -3.6 39.7
b) Telephone Connections -19.6 83.7 - -
c) Cellphone Connections 85.4 38.3 80.9 47.3 27.1
7 Fertilizers 3.3 -8.6 -2.6 13.2 0.0
8 Cement 9.4 7.8 7.6 10.1 4.1
9 Petroleum:
a) Crude Oil 5.6 0.4 -1.8 0.5 11.5
b) Refinery 12.6 6.5 3.0 -0.4 0.8
c) Natural Gas -1.4 2.1 1.4 44.8 19.8
10 Civil Aviation:
a) Export Cargo Handled 3.6 7.5 3.4 10.4 17.7
b) Import Cargo Handled 19.4 19.7 -5.7 7.9 26.1
c) Passengers Handled at Inter-
national Terminals 12.1 11.9 3.8 5.7 12.7
d) Passengers Handled at
DomesticTerminals 34.0 20.6 -12.1 14.5 15.9
11 Roads:*
Upgradation of Highways
i) NHAI -12.5 164.6 30.9 21.4 -32.2
ii) NH(O) & BRDB -10.5 12.5 17.3 4.0 -0.2
Notes: * Includes widening to four lanes and two lanes and strengthening of existing weak pavement only.
NHAI—National Highways Authority of India. BRDB- Border Road Development Board.
Source: Ministry of Statistics and Programme Implementation (MOSPI).
sector have increased by 39.7 per cent and 27 per of domestic /imported coal also affected the thermal
cent respectively. Crude oil production has increased generation.
by 11.5 per cent and natural gas production by 11.8 In the thermal category, growth in generation
19.8 per cent. The civil aviation sector has also from coal, lignite and gas-based stations was of the
performed comparatively better than the previous order of 2.77 per cent, 4.75 per cent and 6.71 per
year both in terms of cargo and passengers handled. cent respectively. The overall plant load factor (PLF),
The power and cement sectors have grown at a measure of efficency, of thermal power stations
comparatively lower rates. Coal-sector growth has during April-December 2010, though less than that
been very low at 0.6 per cent as compared to the achieved during April-December 2009, exceeded the
previous year's 8 per cent. Lower coal-sector output target of 71.35 per cent for the first three quarters of
has impacted thermal power generation this year. the current financial year (Table 11.3).
Fertilizer production has also not seen any rise as
against the previous year's 13.2 per cent growth
(Table 11.1). Table 11.3 : Thermal power generation
during April-December 2010
POWER Components Generation

(Billion
Growth
(%)
PLF (in per cent)
Apr.- Apr.-
KWh) Dec. Dec.
Generation 2009 2010
Coal 387.912 2.77 76.46 73.23
11.7 Electricity generation by power utilities
Lignite 18.808 4.75 74.40 70.68
during 2010-11 has been targeted to go up by 7.7
Gas Turbine 75.139 6.71 66.03 66.03
per cent to 830.757 billion KWh. The growth in power
Multi-fuel 0 0 - 0
generation during April-December 2010 was about
Diesel 2.072 (-)30.62 - -
4.5 per cent as compared to about 6.17 per cent
Thermal Total 483.932 3.03 76.17 72.86
during April-December 2009, with nuclear, hydro,
and thermal power generation registering growth of Source: Ministry of Power.
33 per cent, 8 per cent and 3 per cent respectively
(Table 11.2). Good monsoon and improved availability
of water moderated demand as well as supply of
power. On the one hand the agricultural requirement 11.9 The sector-wise and region-wise break-up of
of power reduced; on the other hand, there were the PLF from 2007-08 to 2010-11 (April-December)
some developments adversely affecting growth in shows the continuity and change over time as well
thermal generation. Some thermal units had to be as regional variation (Table.11.4). Out of the total
put under reserve shut down. Scheduling of installed generation capacity in the country, about
generation from costlier liquid fuel and gas based 11 per cent is based on gas or liquid fuel (excluding
plants was also affected. Commissioning of diesel). The commencement of production of gas
stabilization of some of the new thermal power from D-6 fields of the KG (Krishna-Godavari) basin
stations, unscheduled/ extended planned since April 2009 has improved gas availability for
maintenance of some of the thermal units, shortage electricity generation.
Table 11.2 : Power Generation by Utilities (Billion KWh)

Category 2008-09 2009-10 April-December Growth
2009-10 2010-11 (per cent)
Power Generation 723.8 771.551 571.573 597.290 4.50
Hydroelectric* 113.0 106.680 83.360 90.145 8.14
Thermal 590.0 640.876 469.694 483.932 3.03
Nuclear 14.8 18.636 13.408 17.849 33.12
Bhutan Import 5.9 5.358 5.111 5.364 4.96
Note: *Excludes generation from hydro stations up to 25 MW.

Source: Ministry of Power;
Box 11.1 : Power Sector Reforms
Taking Stock : Electricity reform in India started in the early 1990s, prompted by the rising losses of State Electricity
Boards (SEBs) and their inability to meet demand. It followed worldwide reforms that began in the United Kingdom,
Norway, Canada, and the USA and were later adopted in Latin America as well. In developed countries, sweeping reforms
focused on restructuring vertically integrated cost-of-service monopolies and introducing wholesale competition, while
developing countries focused on their need to accelerate power generation investment. In India, reforms have made major
progress in the following areas:
 entry by private independent power producers (IPP); corporatization of state-owned enterprises; unbundling of generation,
transmission, and distribution (T&D)
 a national enabling legislation (Electricity Act 2003); independent power regulation at national level (CERC) and in
States
 bulk transmission improvements (for example Powergrid), with wholesale electricity markets emerging in inter-State
trading and merchant power sales (as an alternative to long-term power purchase agreements in cost-of-supply
memorandums of understanding [MOUs]with States) and spot and futures markets
 Some, limited, private entry into distribution (for example Orissa, Delhi,), and splitting up of some State electricity
distribution companies into discoms (distribution companies); and
 Central incentives (APDRP, accelerated power development, and reform programme) to support the implementation of
electricity reform in States including accelerated metering and reducing high unaccounted-for T&D losses.
A composite reform index (although it does not assess quality), ranks India among the top reformers worldwide---
comparable to Latin America (for example Chile, Brazil), better than East Asia (for example China, Indonesia, Thailand)
and a step behind the most advanced (for example France, the UK, some US states). Among States in India itself, there
remain significant variations. The highest ranked include most of the larger states, i.e. Andhra Pradesh, Gujarat, Haryana,
Madhya Pradesh, Maharashtra, and West Bengal (as evident in their utilization of APDRP incentives), apart from Orissa
and Delhi, two States with private distribution (with mixed impacts). With expected lags and some temporary reversals,
outcomes are now beginning to emerge : accelerated power generation investments and competition; switch to tariff-based
awards for new power projects; more efficient fuel sourcing (offshore natural gas, imported coal); rapid development of a
national grid (with four out of five regions synchronized and the fifth--southern--interconnected), with greater reliability;
and increased wheeling of electricity generated with emergence of a national bulk market with open access to States and
wholesale trading.
Future Directions : Nevertheless, reform remains incomplete. And performance lags behind accelerating demand, especially
given the massive future investment requirements and the critical role of the power sector in sustaining growth:
 economic growth and higher incomes are fuelling rapid demand growth (6 per cent a year) and rising unmet demand
(peak deficits of 12-13 per cent);
 unreliable services are hampering agriculture and industry and penalizing households with large welfare losses; progress
on connecting rural households and habitations as yet unconnected to grid-based electricity supply is also slow;
 very high unmetered and unaccounted-for sales (35 per cent), among the highest in the world, is draining public
revenues, forcing larger price increase requirements, and causing massive losses (combined annual losses of the SEBs are
about 1 per cent of the GDP);
 electricity tariffs don't match economic values (extensive subsidies, cross-subsidies) because of political economy
reasons, hampering efficient use of scarce public resource (for example excessive mining of ground-water) and deterring
efficient supply;
 competition in many critical segments of the industry, especially distribution, is inadequate or incomplete and remains
under threat (including peak price escalation), while existing monopolies of State-owned distribution continue to
underperform (unmetered sales, leakages, outages, lack of transparency in financial accounts and performance
management).
Reforms are now essential in three directions:
(1) Strengthening Regulation : Worldwide, and in India, electricity reform is technically challenging and politically
constrained. The States have a crucial role in implementing further reform and the Centre in setting out a broader
framework. Political economy conflicts are often complicated, with multiple actors and interests:SEBs, generation,
transmission and distribution companies, wholesale and retail actors, and a variety of consumers--the farm sector,
urban households, and industry. In this setting, and given substantial 'natural' monopolies in parts of the chain, the
strong role of independent regulators is crucial: to balance these interests, promote competition, and enhance the
working of the market. Worldwide evidence suggests that electricity reform works only in the presence of strong,
independent regulators, insulated from political and commercial pressures. For example, regulators will need to ensure
adequate competition and act on uncompetitive behaviour in wholesale trade, including capping wholesale tariffs and
investigating competition.
(2) Improving Distribution and Opening Bulk Supply to Competition : The next step is to introduce competition and
open access at bulk level. Most power distribution is still the monopoly of SEBs, with mounting losses and poor services.
Three different models of restructuring are possible, with States adopting whichever model works best and setting-up
surrogate competition amongst these modes: (a) public private partnership (PPP) mode with open access. Long-term
concessions granted to private distribution companies, incorporating high investment requirements, performance standards,
tariffs subject to regulation, and permitting bulk consumers open access to networks (similar to telecom). (b) Distribution
franchisee mode. Competitive bidding to select franchisee operators, where ownership of assets remains with state
discoms and licencee supplies bulk electricity to franchisee at predetermined prices, franchisee retains predefined portion
of revenues and pays discoms annual rate bids, T&D losses are monetized and borne by discoms with incentives to lower
them and tariffs remain the same as in larger licensing area. (c) Performance-based State electricity discoms. With
management independence and overhaul, and strict commercial performance standards, some stronger state discoms
could potentially provide competitive services, with bulk consumers again permitted open access to networks.
(3) Revising Tariffs to More Economic Levels : The previous two steps will not be enough without a strong political
economy decision by all States to revise electricity tariffs to economic levels and reduce subsidies and cross-subsidies.
India currently has some of the lowest and most uneconomic average electricity tariffs in the world--8 cents/kwh at retail
level, compared to about 12-15 cents/kwh in countries much better-endowed with coal or gas energy (Canada, South
Africa, the USA), and 19-20 cents/kwh elsewhere (much of Europe, developing countries). The current tariffs levels are
unsustainable, cannot elicit needed investments, drain resources, and are not targeted at the poor. Instead, lifeline
metering and supply measures with explicit subsidies that are more carefully targeted are possible. Consumers prefer
reliable supplies over subsidized and unreliable supplies. The evidence in India itself clearly suggests that better performing
States have more economic pricing (till they reach a threshold level) and lower cross-price subsidies and distortions in
tariffs (with industrial supply price ratio to domestic tariffs rationalized). Better tariff setting thus goes hand-in-hand
with better performance.
State level electricity reform and State level electricity reform and
domestic tariffs, 2008 ratio of industrial to domestic tariffs, 2008
700 3.5
Ratio of industrial to
Domestic electricity
600 3.0
tariff (paisa/kwh)
domestic tariff
500 2.5
400 2.0
300 1.5
200 1.0
100 0.5
0 0
0
7
State Electricity Reform Index State Level Reform Index
Source: Economic Division, Department of Economic Affairs (DEA), estimates.

Bibliography: (1) Gajendra Haldea, 2010. Infrastructure at Cross-roads; (2) Rahul Tongia, 2003. The Political Economy
of Indian Power Sector Reforms, Working Paper No. 4, Stanford. (3) Himachal Power Engineers' Association, 2008.
Power Sector Reforms: Reorganisation & Restructuring of SEBs, Issues, Concerns and Some Suggestions. (4) Keya
Ghosh, 2009. Electricity Reforms in West Bengal, CUTs Calcutta Resource Centre.
Power deficit cent during the corresponding period in the previous

11.10 The deficit in power supply in terms of peak year, mainly due to growth of availability of power
availability and total energy availability rose steadily exceeding the growth in its requirement.
from 2003-04 to 2007-08, a period of high growth in
peak demand and total energy requirement. Despite Capacity addition
modest growth in electricity generation, the peak 11.11 The Eleventh Plan envisaged capacity
deficit came down significantly in 2008-09 on addition of 78,700 MW in the power sector, of which
account of a slowdown in growth of peak demand. 19.9 per cent was hydro, 75.8 per cent thermal,
During April-December 2010, the peak and total and the rest nuclear power. This has been revised
energy deficits came down to 10.2 per cent and 8.8 to 62,374 MW now comprising 8237MW hydro,
per cent respectively from 12.6 per cent and 9.8 per 50,757 MW thermal, and 3380 MW nuclear power.
Table 11.4 : PLF of Thermal Power Stations
between project authorities, contractors and their
sub-vendors, delay in readiness of balance of plants
(per cent)
by the executing agencies, design problems in
Category 2007-08 2008-09 2009-10 2010-11 CFBC boilers, and shortage of fuel.
(Apr.- (Apr.-
Dec.) Dec.)
Ultra Mega Power Projects (UMPPs)
i) State Sector 71.9 71.20 69.80 63.91 Initiative
ii) Central Sector 86.7 84.30 83.63 83.14
11.14 The Ministry of Power had launched an
iii) Private Sector 90.8 91.04 84.43 79.68
initiative for development of coal-based super critical
REGIONS UMPPs each of about 4000 MW capacity under
Northern 81.4 81.79 81.88 76.73 Case II bidding route. Four UMPPs, i.e Sasan in
Western 80.3 79.45 77.77 72.72 Madhya Pradesh, Mundra in Gujarat,
Southern 84.9 83.30 82.64 76.98 Krishnapatnam in Andhra Pradesh, and Tilaiya in
Eastern 69.6 64.66 62.94 65.70 Jharkhand have already been transferred to the
North-Eastern 20.4 47.62 0 0 identified developers and are at different stages of
All India 78.6 77.27 76.17 72.86 implementation. Two units of 800 MW each of the
Mundra UMPP are expected to be commissioned
Source: Ministry of Power.
in the Eleventh Five Year Plan.
Capacity addition of 32,032 MW has been achieved Development of hydropower

till 31 December 2010 and projects with a capacity
of 30,725 MW are under construction for 11.15 As per the reassessment study carried out
commissioning during the remaining period of by the Central Electricity Authority(CEA), the
Eleventh Plan. identified hydroelectric potential of the country
(having installed capacity above 25 MW) is 1,45,320
11.12 Against the revised target of 12,039 MW,
MW. As of now, 172 schemes with installed capacity
capacity addition of 9,263 MW was achieved during
of 37,367 MW are under operation, 46 (installed
2007-08. On account of revision in the definition of
capacity 13,785 MW) are under construction, 31
commissioning of thermal projects, the capacity
(installed capacity 16,087 MW) have been approved
addition target for the year 2008-09 was revised to
7,530 MW, against which a capacity of 3,454 MW by the CEA, detailed project reports (DPRs) of 44
was added. The capacity addition target for the year (installed capacity 15,441 MW) have been prepared
2009-10 was 14,507 MW, against which a capacity and are under various stages of examination, and
of 9585 MW was added up to 31 March 2010. In the 108 schemes (installed capacity 41,945 MW) are
current fiscal, 9730.5 MW has been added till 31 under survey and investigation. The hydro capacity
December 2010 which is higher than the highest addition of 15,627 MW planned for the Eleventh Five
ever capacity addition of 9585 MW in a single year, Year Plan has been revised to 8237 MW in the Mid-
i.e 2009-10 (Table11.5). Term Appraisal (MTA) of the Eleventh Plan. Of this,
3,921 MW has been added till 31December 2010.
11.13 The main reasons for underachievement of
capacity addition targets were delayed and non- 11.16 The main reasons for slow development of
sequential supply of material by suppliers, shortage hydro-power include difficult and inaccessible
of skilled manpower for construction and potential sites, difficulties in land acquisition,
commissioning of projects, contractual disputes rehabilitation, environmental and forest-related
Table 11.5 : Capacity Addition Target (original) and Achievement during April – December 2010
(MW)
Sector Thermal Hydro Nuclear Total
Target Actual Target Actual Target Actual Target Actual
Central 5,890 2,115 529 120 1220 0 7,639 2,235
State 6,012 2,331 5,97.5 178 0 0 6,609.5 2,509
Private 5,891 4,794.50 2,19.5 192 0 0 6,110.50 4,986.50
Total 17,793 9,240.50 1,346 490 1,220 0 20,359 9,730.50
Source: Ministry of Power.
issues, inter-State issues, geological surprises, and total number of transactions under open access at
contractual issues. A multi-pronged strategy has inter-State level was 18,128. The Central
been adopted to harness the hydro potential Transmission Unit (CTU) has received 225
resources in the country. Some of the policy applications from private developers for long- term
measures and initiatives taken by the Government open access amounting to 1,62,898 MW. At State
are finalization of an investor-friendly New Hydro level, as per information available with the Forum of
Policy 2008 and the liberal National Rehabilitation Regulators Secretariat, 24 SERCs have notified
and Resettlement Policy, 50,000 MW Hydroelectric terms and conditions of open access regulations,
Initiative, and Mega Power Project Policy. The salient
20 have determined cross-subsidy surcharge, 25
features of the New Hydro Policy 2008 are a level
have allowed open access up to 1 MW, 22 have
playing field for private hydro projects; exemption
determined transmission charges, and 18 have
from tariff-based competitive bidding up to January
determined wheeling charges. In addition, the Power
2011 to private hydro projects; private developers to
have the facility of merchant sale of up to 40 per System Operation Corporation Limited (POSOCO),
cent of saleable energy; an additional 1 per cent has been operationalized by the Government of India
free power over and above 12 per cent to be with effect from 1 October 2010 to manage load
earmarked for a Local Area Development Fund; each dispatch functions earlier being managed by the
project-affected family (PAF) to get free 100 units of CTU, i.e. the power grid.
electricity every month for a period of 10 years after
commissioning of the project; and project authorities Trading of Electricity
to bear the 10 per cent of the State contribution 11.20 Power trading helps in resource optimization
under the Rajiv Gandhi Grameen Vidyutikaran by facilitating the disposal of surplus power with
Yojana (RGGVY) for electrification of the affected distribution utilities and in meeting the short-term
area.
demand. The Central and State Electricity
Regulatory Commissions have powers to grant inter-
TRANSMISSION, TRADING, ACCESS, State and intra-State trading licences respectively.
AND EXCHANGE The CERC has so far granted 47 inter-State trading
National Grid licences, of which 38 were in existence as on
11.17 An integrated power transmission grid helps 31 December 2010. Details of electricity trading by
even out supply-demand mismatches. The existing licensed inter-State traders, in terms of volume,
inter-regional transmission capacity of about 22,400 price, and margin are given in Table 11.6.
MW connects the northern, western, eastern, and
north-eastern regions in synchronous mode Power Exchange
operating at the same frequency and the southern 11.21 The CERC has issued power market
region in asynchronous mode. This has enabled regulations that focus on the creation of an overall
inter-regional energy exchanges of about 38,000 power market structure, the role of power exchange
million units in financial year 2010-11 (till November traders, and also provide for market oversight and
2010), thus contributing to greater utilization of surveillance. The two power exchanges, namely the
generation capacity and an improved power supply Indian Energy Exchange Ltd. (IEX), New Delhi, and
position. Proposals are under way to have Power Exchange India Ltd. (PXIL), Mumbai, already
synchronous integration of the southern region with in operation from 27June 2008 and 22 October 2008
the rest. respectively have been deemed to be registered
under these regulations. The price of electricity
Open access traded through the exchanges was high during the
11.18 The regulations on open access in inter-State initial months of the current financial year but it
transmission and on inter-State trading are issued showed a declining trend over the year. The weighted
by the Central Electricity Regulatory Commission average price of power traded through the IEX in the
(CERC). The responsibility for introduction of open months of November and December 2010 was
access at distribution level rests with the State ` 1.99 per kWh and ` 2.36 per kWh respectively. In
Electricity Regulatory Commissions (SERCs). addition to transactions in the day ahead market
(collective transactions), power exchanges have
11.19 Open access in inter-State transmission is been undertaking transactions in the term ahead
fully operational. During financial year 2009-10, the market (i.e. transactions through intra-day contracts,
Table 11.6 : Electricity trading
Period Volume of Weighted average Weighted average Trading
electricity purchase price sale price margin
traded (MUs) ` /kWh)
(` ` /kWh)
(` ` /kWh)
(`
2005-06 14,188.8 3.14 3.23 0.09
2006-07 15,022.74 4.47 4.51 0.04
2007-08 20,964.77 4.48 4.52 0.04
2008-09 21,916.92 7.25 7.29 0.04
2009-10 26,819.15 5.22 5.26 0.04
2010-11
(upto 31st Oct, 2010) 18,150.04 5.12 * 5.17 * 0.05
Source : Ministry of Power.
Note:* The prices have come down during the months of November and December 2010.
day ahead contingency contracts, and weekly purchase obligations (RPOs). It can make the
contracts) since September 2009. The volume of renewable electricity market stable and predictable
electricity transacted in the term ahead market of by maximizing the benefits of renewable generation
the two power exchanges, i.e. IEX and PXIL, during while reducing costs. It could also be used by those
April-October 2010 has been 486.47 MUs and States that do not have substantial renewable energy
656.71 MUs respectively. resources to meet their RPOs. The CERC and
SERCs created the necessary regulatory and
Promotion of Green Power institutional framework and rolled out the scheme
11.22 The CERC has amended the Terms and from November 2010. The REC mechanism sets
Conditions for Tariff Determination from Renewable the way forward for encouraging competition and
Energy Sources Regulations 2010 for increasing the eventually mainstreaming renewable energy.
visibility of the generic tariff determined for solar photo
voltaic (PV) and solar thermal projects. The capital Aggregate Technical and Commercial
cost and other norms applicable for the year 2010- (AT&C) losses and Restructured APDRP
11 shall also apply for solar PV projects during the
11.25 The focus of the Re-structured Accelerated
year 2011-12; for solar thermal projects during the
Power Development Reforms Programme
years 2011-12 and 2012-13, if the power purchase
(R-APDRP) is on actual, demonstrable performance
agreements in respect of the solar PV and solar
in terms of reduction in AT&C losses. Projects under
thermal projects are signed on or before 31 March
the scheme will be taken up in two parts in urban
2011; and the entire capacity covered by the power
areas--towns and cities with population of more
purchase agreements is commissioned on or before
than 30,000(10,000 in case of special category
31 March 2012 in respect of solar PV projects and
States).
on or before 31 March 2013 in respect of solar
thermal projects. 11.26 Part-A of the Scheme shall include projects
for the establishment of baseline data and Information
11.23 The CERC has also notified Terms and
Technology (IT) applications for energy accounting/
Conditions for the recognition and issuance of
auditing and IT-based consumer service centres.
Renewable Energy Certificate for Renewable Energy
Preparation of baseline data for the project area
Generation Regulations 2010 on 18 January 2010
covering consumer indexing, GIS (geographic
as well as their first amendment on 1 October 2010.
information system) mapping, metering of
These Regulations assume special importance in
distribution transformers and feeders, and automatic
fulfillment of the mandate to promote renewable
data logging for all distribution transformers and
sources of energy and development of a market in
feeders and SCADA(supervisory control and data
electricity. The Renewable Energy Certificate (REC)
acquisition) / DMS (distribution management
framework is expected to give a push to renewable
system) system is only for big cities. It would
energy capacity addition in the country.
include asset mapping of the entire distribution
11.24 The REC is a market-based instrument to network at and below 11 kV transformers and
promote renewable energy and facilitate renewable adoption of IT applications for meter reading, billing
and collection, energy accounting and auditing, The objective of the Mission is to achieve growth
redressal of consumer grievances, and with ecological sustainability by devising cost-
establishment of IT-enabled consumer service effective strategies for end-use demand-side
centres. The baseline data will be verified by an management. The Ministry of Power and BEE have
independent agency appointed by the Ministry of been entrusted with the tasks of preparing the
Power. implementation plan for the NMEEE and upscaling
the efforts to create and sustain a market for energy
11.27 Part B of the scheme will include regular
efficiency and unlock investment of around ` 74,000
distribution strengthening projects. These include
crore. The Mission, by 2014-15, is likely to achieve
renovation, modernization and strengthening of 11
about 23 million tonnes oil-equivalent of fuel savings
kV-level substations, transformers/transformer
in coal, gas, and petroleum products, along with an
centres, re-conductoring of lines at 11kv and below
expected avoided capacity addition of over 19,000
level, load bifurcation, load balancing, high voltage
MW. The carbon dioxide emission reduction is
distribution system (HVDS), and installation of
estimated to be 98.55 million tonnes annually.
capacitor banks and mobile service centres. In
exceptional cases, where the sub-transmission
system is weak, strengthening at 33 kV- or 66 kV- PETROLEUM
level may also be considered.
Oil and gas production
Rural Electrification 11.31 Efficient and reliable energy supplies are a
11.28 Under the RGGVY, 87,791 villages have been precondition for accelerated growth of the Indian
electrified and connections released to 135.31 lakh economy. While the energy needs of the country,
below poverty line(BPL) households up to 30 especially oil and gas, are going to increase at a
November 2010. Under the Tenth Five Year Plan, rapid rate in the coming decades, the indigenous
235 projects covering 68,763 villages and 83.10 lakh energy resources are limited. Oil and gas constitute
BPL connections were sanctioned at a cost of ` around 45 per cent of total energy consumption. At
9,732.90 crore. In Phase I of the Eleventh Plan the same time, the dependence on imports of
period, 338 projects have been sanctioned for petroleum and petroleum products continues to be
implementation at a cost of ` 16,620.61 crore for around 80 per cent of total oil consumption in the
electrification of 49,736 villages and release of country.
connections to 163.34 lakh BPL households. Till
11.32 During the current financial year (2010-11),
30 November 2010, 333 projects have been awarded
production of crude oil is estimated at 37.96 million
and franchisees are in place in 1,10,567 villages in
metric tonne (MMT), which is about 12.67 per cent
16 States.
higher than the crude oil production of 33.69 MMT
during 2009-10. The projected production for natural
Energy Conservation and efficiency
gas, including coal bed methane (CBM), for 2010-
11.29 Several measures have been taken by the 11 is 53.59 billion cubic metres (BCM) which is 12.80
Ministry of Power and Bureau of Energy Efficiency per cent higher than the production of 47.51 BCM in
(BEE) to promote energy conservation and its 2009-10. The increase in natural gas production is
efficient use targeting 5 per cent reduction in demand primarily from the KG deepwater block.
during Eleventh Plan through schemes being
implemented by BEE. The Ministry of Power has Exploration of Domestic Oil and Gas
also launched an awareness programme which
11.33 India has an estimated sedimentary area of
includes giving incentives for efficiency and
3.14 million sq. km, comprising 26 sedimentary
conservation efforts by way of National Energy
basins. Prior to the adoption of the New Exploration
Conservation Awards, painting, debate and essay
Licensing Policy (NELP), only 11 per cent of India's
competitions for schoolchildren, and creating
sedimentary basin was under exploration. Since
general awareness through the media on the need
operationalization of the NELP in 1999, the
for energy conservation.
Government of India has awarded 47.3 per cent of it
11.30 The National Mission for Enhanced Energy for exploration. So far 87 oil and gas discoveries
Efficiency (NMEEE) is one of the eight missions have been made by private/joint venture (JV)
under the National Action Plan on Climate Change. companies in 26 blocks and more than 640 MMT of
It has been approved and will soon be implemented. oil-equivalent hydrocarbon reserves have been
added. As on 1 October 2010, investment made by between the Directorate General of Hydrocarbons
Indian and foreign companies was of the order of (DGH) and U S Geological Survey (USGS), USA for
US $ 14.8 billion, of which, US $ 7.5 billion was in exchange of scientific knowledge and technical
hydrocarbon exploration and US$ 7.3 billion in personnel in the field of gas hydrate and research
development of discoveries. energy is in progress. An MOU was recently signed
in the area of marine gas hydrate research and
Offering of NELP Blocks under NELP IX technology development between the Leibniz
11.34 The ninth round of NELP (NELPIX) was Institute of Marine Sciences, Germany, and DGH
launched on 15 October 2010 and 34 exploration for research on methane production from gas hydrate
blocks including 8 deepwater, 7 shallow water, 11 by carbon dioxide sequestration.
on-land, and 8 Type-S on-land were offered. On-land
blocks are spread over six States, namely Shale Gas
Assam(2), Gujarat(11), Madhya Pradesh(2), 11.38 Shale gas is being explored as an important
Rajasthan(2), Tripura(1), and Uttar Pradesh(1). new source of energy in the country. India has several
shale formations which seem to hold shale gas.
Domestic Exploration of Other Gaseous The shale gas formations are spread over several
Fuel sedimentary basins such as Cambay, Gondwana,
Coal Bed Methane (CBM) and KG on land and Cauvery river. The DGH has
initiated steps to identify prospective areas for shale
11.35 CBM is found embedded in coal seams. The
gas exploration and acquisition of additional geo-
CBM policy has provided a level playing field for
scientific data. An MOU has been signed with the
exploration and commercial exploitation of CBM by
USA during the visit of President Obama to India in
national and international companies since the 2000.
November 2010 for cooperation in the field of shale
Total CBM resources in 26 blocks awarded so far
are estimated at 1374 BCM. In the fourth round, the gas assessment and development.
Government of India has awarded 7 CBM blocks in
the States of Assam, Chhattisgarh, Jharkhand,
Gas production from KG-D6 Basin
Madhya Pradesh, Orissa, and Tamil Nadu and 11.39 Gas production from KG-D6 began on 1 April
signed 33 contracts. Commercial production of CBM 2009. The current gas production from the KG-D6
in India has now become a reality with current CBM field is about 53 MMSCMD, of which about 45
gas production at about one lakh cu. mper day. The MMSCMD is being produced from D1 and D3 fields
CBM gas produced in the country is being utilized and about 8 MMSCMD from MA field. The approved
by nearby industries in and around Raniganj block Field Development Plan of D1 and D3 envisages
in West Bengal. gas production to the tune of 80 MMSCMD from the
third year of commercial production, i.e. with effect
Underground Coal Gasification (UCG) from 2012-13.
11.36 The Oil and Natural Gas Commission
(ONGC) has entered into an Agreement of Crude Oil Production from Rajasthan
Collaboration (AOC-MOU) with the National Mining 11.40 Crude oil production by the Rajasthan Cairn
Research Centre-Skochinsky Institute of Mining Energy India Pvt. Ltd has started in block RJ-ON-
(NMRC-SIM) in Russia. In the selected Vastan mine 90/1 with effect from 29 August 2009 at the initial
block, seismic survey was carried out and 18 production rate of 3500 barrels per day. Current crude
boreholes drilled for detailed UCG site oil production from this block is about 1,25,000 bopd.
characterization. Based on geological, hydrological, The Government has designated Indian Oil
and geo-mechanical data analysis, Vastan in Gujarat Corporation Limited (IOC), Mangalore Refinery and
and Hodu Sindri in Rajasthan have been found suitable Petrochemicals Ltd (MRPL), and Hindustan
for UCG stations. Pilot production of UCG at Vastan Petroleum Corporation Ltd (HPCL) for lifting part of
by the ONGC is expected to commence by the end the crude oil production from this block after
of the Eleventh Five Year Plan period. ascertaining the capacity of receiving refineries of
the nominees. The oil production from this
Gas Hydrate block during 2009-10 was about 0.447 MMT and
11.37 Gas hydrate is at research and development during 2010-11, up to 30 November 2010 about
(R&D) stage world over. A cooperation programme 3.12 MMT.
Development of Marginal Fields and Hazira LNG Private Ltd. (HLPL). During 2009-
10, about 8.91 mmtpa LNG was imported. This is
11.41 Concerted efforts have been made to put
equivalent to about 31 million standard cubic metre
new and marginal fields in production through in-
per day (mmscmd) of regasified LNG (RLNG). During
house resources as well as through service
April-November 2010, 4.91 mmtpa of LNG has been
contracts. The ONGC has an inventory of 165
imported.
marginal fields and 131 have either been monetized
or are under various stages of development through 11.44 As part of the concerted efforts to augment
in-house efforts. So far, 10 fields have been awarded the country's supply of LNG, PLL has tied up 1.44
on service contract. mmtpa for its Kochi LNG terminal from Exxon Mobil
from its share in the Gorgon project, Australia, for
Equity Oil and Gas from Abroad 20 years . The sale and purchase agreement (SPA)
11.42 In view of unfavourable demand-supply for it was executed in August 2009. In addition, GAIL
balance of hydrocarbons in India, acquiring equity and PLL are exploring the possibility of import of
oil and gas assets overseas is one of the important LNG from various potential suppliers.
components of enhancing energy security. The 11.45 In order to handle increased LNG imports,
Government is encouraging national oil companies additional infrastructure is being created in the
to aggressively pursue equity oil and gas country. Capacity at PLL's Dahej LNG terminal has
opportunities overseas. Apart from ONGC Videsh been expanded to 10 mmtpa in July 2009. Dabhol
Limited (OVL) (40 projects in 15 countries), the other LNG terminal is expected to be commissioned this
oil public-sector undertakings (PSUs), namely Indian year. The terminal will, however, become fully
Oil Corporation Limited (IOCL) (9 projects in 6 operational only after completion of breakwater
countries), Oil India Limited (IOL) (12 projects in 8 facilities in 2012. PLL is setting up an LNG terminal
countries), Bharat Petroleum Corporation Limited at Kochi which is planned to be commissioned in
(BPCL) (12 projects in 7 countries), GAIL (India) 2011-12.
Limited (4 projects in 2 countries), and Hindustan
Petroleum Corporation Limited (HPCL) (2 projects Refining Capacity
in 2 countries), have acquired overseas exploration
11.46 There had been increase in domestic refinery
acreages. The total investment by oil PSUs (OVL,
capacity by 19.46 per cent in 2009-10 to reach
OIL, GAIL, IOCL, BPCL, and HPCL) overseas is
more than US$ 13 billion (` 59,000 crore). OVL 177.97 MMT from 148.97 MMT in 2008-09 and it is
produced about 8.87 MMTOE oil and oil-equivalent further expected to reach 185.40 MMT by 1 April
gas in 2009-10 from its overseas assets in Sudan, 2011 and 238.96 MMT by the end of 2011-12.
Vietnam, Venezuela, Russia, Syria, Colombia, and Refinery production (crude throughput) during 2009-
Brazil. The latest acquisition in May 2010 by OVL 10 was160.03 MMT (excluding Jamnagar Refinery
(along with OIL and IOCL) is 11 per cent participating under special economic zone [SEZ ]by Reliance
interest of Carabobo-1 project in the hydrocarbon- Industry Ltd) showing an increase of 16 per cent
rich Orinoco belt of Venezuela, with proposed over 2008-09. During April-November 2010 it was
investment of US$ 1.3 billion. The projected 106.53 MMT.
production is 400,000 bopd and the first oil is
expected in 2013.
Pipeline Network and City Gas Distribution
Network
Import of Liquefied Natural Gas(LNG) 11.47 There has been substantial increase in the
11.43 Petronet LNG Limited (PLL), promoted by pipeline network in the country with current figures
ONGC, GAIL, IOCL, and BPCL, was formed to of 28 product pipelines of 11,037 km length and 67.2
import LNG and set up an LNG regasification plant MMT capacity. There are also 17 crude pipelines of
at Dahej. PLL signed a contract with RasGas, Qatar, 7,425 km and additional LPG pipelines of over 2,000
in July 1999 for import of 7.5 million metric tonnes km. With increased availability of gas in the country
per annum (mmtpa) LNG for a period of 25 years. the city gas distribution network has been enlarged
As per the contract, supply of 5 mmtpa commenced to cover compressed natural gas (CNG) in 19 cities
in 2004 and of the balance 2.5 mmtpa in January supplying gas for domestic consumers, public
2010. In addition to these term contracts, LNG is transport, and commercial/industrial entities. In
also being sourced from the spot market by PLL Vision-2015, provision of pressurized natural gas
(PNG) to more than 200 cities across the country of LPG connections released to BPL households
is envisaged. by each company. It is expected that the OMCs
will incur ` 6.00 crore during the current financial
Rajiv Gandhi Gramin LPG Vitaran Yojana year.
(RGGLVY)
11.48 The 'Vision-2015' adopted for the liquefied
Special Efforts for Energy Conservation
petroleum gas (LPG) sector, inter-alia, focuses on 11.51 The Petroleum Conservation Research
raising the population coverage of LPG in rural areas Association (PCRA) is a national government agency
and areas where coverage is low. The RGGLVY for engaged in promoting energy efficiency in various
small-size LPG distribution agencies was launched sectors of the economy. It has been providing
on 16 October 2009. This scheme targets coverage services leading to improvement in energy utilization
of 75 per cent of the population by 2015 by release in the industrial, transport, agriculture and domestic
of 5.5 crore new LPG connections. Oil marketing sectors of the economy. The PCRA conducts a
companies (OMCs) have issued advertisements to number of activities leading to energy conservation
set up 2329 LPG distributors in 22 States, namely through a mix of direct and indirect services to
Andhra Pradesh, Arunachal Pradesh, Assam, Bihar, various sectors of the economy. During 2010-11, a
Chattisgarh, Gujarat, Himachal Pradesh, Jharkhand, total of 3420 field activities were carried out up to
Karnataka, Madhya Pradesh, Maharashtra, Manipur, November 2010 against 5122 activities during
Mizoram, Meghalaya, Nagaland, Orissa, Rajasthan, 2009-10.
Tamil Nadu, Tripura, Uttar Pradesh, West Bengal,
and Pondicherry. Out of this, 75 LPG distributors Coal
have already been commissioned. Selection for the 11.52 More than 90 per cent of the coal production
rest of the locations is in progress as per policy. in India is of non-coking coal. The production of raw
The price of administered pricing mechanism (APM) coal during April to November 2010 was 319.80 million
gas produced by ONGC and OIL has been increased tonne (MT), against 317.79 MT in the same period
from June 2010 to the level of US$ 4.2/mmbtu, less of the previous year. Coking coal production during
royalty, which is equal to the price of gas produced this period was 28.72 MT against 25.64 MT during
by NELP operators. the same period last year, registering a growth of
12.01 per cent. The growth rate in the production of
Free LPG Connections to BPL Rural House- raw coal increased from 5.85 per cent during 2006-
holds 07 to 7.98 per cent in 2009-10, due to enhanced
11.49 A proposal for providing one-time financial production by all the stakeholders, especially captive
assistance to BPL households for acquiring new blocks and large PSUs like Coal India Ltd. (CIL) and
LPG connections is under consideration of the Singareni Collieries Company Ltd. (SCCL). The lower
Government. Under the proposed scheme, the growth in production during the current year is
Government and Oil Marketing Companies would primarily due to environmental restrictions,
provide one-time assistance of ` 1400 for acquiring particularly application of the comprehensive
a new LPG connection to a BPL family. The scheme environmental pollution index (CEPI), non-availability
would cover all eligible households in the BPL list of of forestry clearance against some of the projects,
the State Government/Union Territory. About 32-40 poor law and order situation in the States of Jharkhand
lakh new LPG connections are to be released and Orissa, and excessive rainfall in the western
annually under this scheme. parts of the Country. During 2009-10 the import and
export of coal was about 67.744 MT and 2.171 MT
11.50 The annual financial implication of the
respectively.
scheme is estimated to be ` 490 crore. The
proposed budgetary support has been restricted to 11.53 Under the scheme of e-auction, CIL and
the extent of 50 per cent of the total funds required. SCCL have been carrying out e-auction of coal.
The remaining 50 per cent would be partly drawn During 2009-10, CIL sold 56.28 MT and SCCL 1.29
from the Corporate Social Responsibility Funds MT of coal through e-auction. During April-
(CSRFs) of the six major oil companies, namely December 2010 CIL has offered 37.73MT and sold
ONGC, IOCL, BPCL, HPCL, OIL, and GAIL and 32.36MT of coal through e-auction, with an increase
partly borne by the three oil marketing companies of 81 per cent in the notified price. Similarly SCCL
(OMCs) namely IOCL, HPCL, and BPCL in the ratio has also offered 1.95MT and sold 1.66MT of coal
through e-auction, with a 48 per cent increase on RAILWAYS

notified price up to December 2010.
11.54 The Government has formed a special Rationalization of railway freight rates and
purpose vehicle (SPV), namely International Coal passenger fares
Venture Limited (ICVL), comprising leading PSUs 11.58 Freight structure has been rationalized by
including CIL for securing metallurgical coal and the Indian railways. There has been continuous thrust
thermal coal assets overseas. Aspects like the on bringing in transparency and simplification while
functioning of ICVL and strength of personnel are introducing measures to make rail tariff more
being finalized. The Empowered Committee of competitive so as to attract additional traffic. A
Secretaries constituted for considering ICVL's
dynamic pricing policy has been introduced in
proposals for acquiring coal properties abroad will
recent years, wherein tariff measures are modulated
also consider CIL's proposals for investing in coal
in response to the market scenario for better
assets abroad which are worth more than ` 1,000
management of regional and seasonal skew in
crore.
demand with the objective of maximizing revenues
11.55 For increasing the output of washed coking through optimal utilization of transport capacities.
and non-coking coal, CIL has envisaged setting up Iron ore for export has also been brought under the
of 20 new coal washeries for an ultimate raw coal ambit of the dynamic pricing policy. An inflation
throughput capacity of 111.10 MT per annum with an
concession of ` 100 per wagon is being granted on
estimated capital investment of about ` 2,500 crore.
foodgrains for domestic use and kerosene oil.
These include seven coking coal washeries and
13 non-coking coal washeries. 11.59 To increase revenue from the freight
business, a slew of freight incentive schemes have
11.56 For increasing production from underground
mines, initiatives like identification of high-capacity been launched. Based on the feedback of the
underground mines for development with latest Railways and customers, these schemes are made
technology, restarting mining in abandoned mines more attractive for better utilization of railway assets
forming JVs with reputed mining companies, in traditional empty flow directions, encouraging
introduction of continuous miners and power freight forwarders, incremental traffic in lean season,
supported long wall (PSLW) as a mass production loading of bagged consignment in open wagons,
technology in more mines, introduction of high wall etc.
mining, and upgradation of equipment size are being
taken. Freight performance of the Indian railways
11.57 As of now, 216 coal blocks with geological 11.60 Freight loading on Indian Railways in the
reserves of about 50 billion tonnes have been period April-November, 2010 was 593.43 MT as
allocated to public/private companies. Out of these, compared to 574.40 MT in April-November 2009—
10 blocks have been de-allocated and out of the an increase of 3.31 per cent. (Table 11.7) This was
de-allocated blocks, 2 reallocated to eligible short of the proportionate target of 605.11 MT by
companies. At present, there are thus 208 coal 11.68 MT. The low growth was primarily on account
blocks allocated to various public/private companies, of negative growth in iron ore. Iron ore loading has
of which, (a) 96 with geological reserves of about been primarily affected in the current year due to
27,941.94 MT have been allotted to the government the restrictions imposed by the State Governments
companies, (b) 100 with geological reserves of about
of Orissa and Karnataka. Frequent bandhs by
17,269.01 MT to private companies, and (c) 12 with
Naxalites adversely affected loading, particularly in
geological reserve of about 4,846.26 MT allotted for
the Bailadila sector on East Coast Railway.
ultra mega power projects (UMPPs)/ tariff power
projects based on bidding. Out of the total allocated
Upgradation of passenger amenities
blocks, 26 (14 private and 12 public) have
commenced production. The production from these 11.61 Indian Railways has decided to add 206 more
coal blocks for the year 2009-10 was 35.31 MT and railway stations to the existing list of 378 Adarsh
was 23.90MT (provisional) during April-November Stations. Railways will develop Adarsh Stations with
2010-11. basic facilities such as drinking water, adequate
Table 11.7 : Performance of Indian Railways.
(April – November)
Change (per cent)
Particulars 2008-09* 2009-10*(P) 2009-10 (P) 2010-11(P) 2009-10 2010-11
1. Total Revenue-earning
Freight Traffic (MT) 833.39 887.79 574.4 593.43 6.53 3.31
i) Coal 369.63 396.15 252.77 270.38 7.17 6.97
ii) Raw Materials for Steel
Plants(except iron ore) 10.85 11.6 7.77 8.33 6.91 7.21
iii) Pig Iron & Finished Steel-
i) from Steel Plants 21.96 24.17 15.56 16.01 10.06 2.89
ii) from Other Points 6.62 7.68 4.53 4.57 16.01 0.88
iii) Total 28.58 31.85 20.09 20.58 11.44 2.44
iv) Iron Ore
i) for Export 45.75 43.64 30.07 17.22 -4.61 -42.73
ii) for Steel Plants 42.9 44.33 29.74 28.73 3.33 -3.4
iii) for Other Domestic Users 41.93 44.77 28.74 30.58 6.77 6.4
iv) Total 130.58 132.74 88.55 76.53 1.65 -13.57
v) Cement 86.24 93.15 59.62 63.11 8.01 5.85
vi) Foodgrains 35.51 38.69 22.74 26.2 8.96 15.22
vii) Fertilizers 41.35 43.68 30.2 33.17 5.63 9.83
viii) POL 38.08 38.88 26.19 26.43 2.1 0.92
ix) Container Service-
i) Domestic Containers 7.05 9.63 5.5 6.66 36.6 21.09
ii) EXIM Containers 23.29 25.32 17.06 17.68 8.72 3.63
iii) Total 30.34 34.95 22.56 24.34 15.19 7.89
x) Balance (other goods) 62.23 66.1 43.91 44.36 6.22 1.02
2. Net tonne kilometres (billion) 551.45 600.55 378.38 393.11 8.9 3.89
3. Net tonne km/Wagon/Day (BG) ** 8687 9270 8929 9086 6.71 1.76
4. Passenger Traffic Org. (million) E 6920.4 7245.8 4939.7 5235.84 4.7 6
5. Passenger kilometres (billion) 838 903.5 616 653 7.82 6.01
Notes: * Excluding Konkan Railway loading, E – Excluding Metro Kolkata,
** calculated in terms of 8 wheelers, P= provisional
Source: Ministry of Railways.
toilets, catering services, waiting rooms, and 11.63 The computerized unreserved ticketing
dormitories especially for lady passengers. Work system(UTS), initiated to provide a fast, flexible, and
has started at various stations. secure method of issuing unreserved tickets, enables
passengers to get unreserved tickets up to three
11.62 The computerized passenger reservation
days in advance from any counter and any station
system (PRS) of Indian Railways is the largest
to any station in a defined cluster. Computerized
passenger reservation network in the world, available
UTS is available at 4,468 locations with approximately
at 2,222 locations with more than 8,074 terminals.
8,080 counters provided till end of November 2010.
On an average 4.28 crore passengers per month are
Automatic ticket vending machines have been
booked through the PRS with an average earning of
installed at 375 locations.
` 1,722.01 crore per month. Indian Railways has
tied up with India Post for providing the PRS facility 11.64 The freight operations information system
through post offices and is functional at 112 such (FOIS) gives an account of all demands, number of
post offices. loads/rakes/trains and their pipeline, freight locos,
stock at aggregate level, etc. FOIS phase I (rake provided with data loggers. Automatic block signalling
management system--RMS) module, implemented to improve line capacity has been provided on 77
at 243 locations, covers all major yards/ lobbies and RKM.
control offices in divisions and zones. FOIS phase II
(terminal management system— TMS) has been Investment in capacity
commissioned at 678 locations.
11.68 During the Eleventh Five Year Plan period,
11.65 RailTel was set up for creating optical fibre electrification of 3,500 RKM was planned with an
cable (OFC)-based communication infrastructure for outlay of ` 3,000 crore. In the Mid-Term review of the
modernizing the communications system for train Eleventh Plan, a revised target of 4,500 RKM has
control, operation, and safety and to generate revenue been approved. In all 2,416 RKM has been electrified
through commercial exploitation of surplus capacity. in the first three years of the Eleventh Plan and 1,000
RailTel has set up an OFC network of 39,000 route RKM and 1,084 RKM targeted for electrification
km (RKM) of which 27,982 is of high bandwidth during 2010-11 and 2011-12 respectively. During April-
capacity. Till date 234 important stations and about
November 2010, 216 RKM has been electrified. An
3,575 other stations have been connected to the
additional requirement of ` 1,000 crore was projected
OFC network. RailTel has also set up a country-
in the Mid-Term Review while increasing the target
wide Next Generation Network and it has been put
from 3,500 to 4,500 RKM.
to use to carry railway voice traffic.
Rail safety Infrastructure improvement

11.66 Safety is the prime concern of Indian 11.69 To optimize the operational expenditure by
Railways and all possible steps are undertaken on obtaining electricity at economical tariffs, Indian
a continuing basis to prevent accidents. As a result, Railways has planned to set up its own captive
the number of consequential train accidents including thermal power plants. To avail of electric power supply
cases of trespassing at unmanned level crossings at economical rates, Railways, in partnership with
came down from 415 in 2001-02 to 165 in 2009-10. the National Thermal Power Corporation (NTPC), is
During 2010-11 (April to November) also, a similar setting up a 1000 MW Thermal Power Plant at Nabi
declining trend has been observed as the number of Nagar. The power supply from this plant is likely to
consequential train accidents including cases of be available during 2012. Railways is planning to
trespassing at unmanned level crossings came down set up a coal-based thermal power plant at Adra in
from 106 to 93 in comparison to the corresponding Purulia district of West Bengal. An MoU has been
period of the preceding year. Accidents per million signed between the NTPC and Railways to set up
train kilometres, an important index of rail safety, the proposed plant by a JV between the NTPC and
also came down from 0.55 in 2001-02 to 0.17 in Railways.
2009-10. This is expected to fall further during
2010-11. 11.70 A greenfield electric loco manufacturing unit
is being set up at Madhepura, Bihar, to manufacture
Initiatives taken during April-November 12,000 hp locomotives on the basis of a long-term
2010 to modernize and improve signalling procurement-cum-maintenance contract through
system PPP on build, own, and operate (BOO) basis, by
selecting a JV partner through international
11.67 In order to increase efficiency and enhance
safety in train operations, electrical/electronic competitive bidding (ICB). The cost of the project is
interlocking along with multi-aspect colour light ` 1,293 crore and equity contribution of Indian
signalling system replaced the outdated mechanical/ Railways and its JV partner will be in the ratio of
multi cabin system at 227 stations. To improve 26:74. The Cabinet has approved setting up of a
reliability and visibility of signals, outdated filament- greenfield rail coach factory at Kanchrapara, West
type signals have been replaced with long life, highly Bengal to manufacture and supply 500 railcars per
durable light emitting diode (LED) signals at 506 annum over a period of 10 years.
stations. A centralized online monitoring/diagnostic
system with the provision of data loggers has been Dedicated Freight Corridor project (DFC)
introduced in Indian Railways for predictive 11.71 The DFC project envisaging a Western DFC
maintenance and intensive supervision of the (1534 km) from Mumbai to Rewari/TKD to cater
signalling system and 337 stations have been largely to the container transport requirement and
an Eastern DFC (1839 km) from Ludhiana to Dankuni NHDP as in November 2010 is shown in Table 11.8.
largely to serve coal and steel traffic is being
11.73 Steps taken to expedite the progress of the
implemented by the Dedicated Freight Corridor
NHDP include regular monitoring of contracts and
Corporation of India Ltd. (DFCCIL). The base project
progress reviews, appointment of senior officials by
cost is estimated at about ` 50,761 crore (excluding
State Governments as nodal officers for resolving
escalation, contingencies, taxes/duties, and interest
problems associated with implementation of the
during construction). The project is being funded
NHDP, setting up of a Committee of Secretaries
through a debt to equity ratio of 2:1 with major debt
under the Cabinet Secretary to address inter-
expected from bilateral/multilateral funding agencies
ministerial and Centre-State issues such as land
like the Japan International Cooperative Agency and
acquisition, utility shifting, environment approvals
World Bank. Along the Western DFC alignment,
and clearances of railway over-bridges (ROBs),
the Delhi-Mumbai industrial corridor is also coming
simplification of the procedure of issue of land
up. Considering the need for DFCs on other important
acquisition (LA) notifications, and posting of a
routes, a preliminary engineering cum traffic survey
Railways officer to the (NHAI) to coordinate with the
(PETS) is being undertaken on the following routes-
Ministry of Railways in expediting the construction
--north-south (Delhi to Chennai), east-west (Kolkata
of ROBs. The NHAI has also set up Regional Offices
to Mumbai), east-south (Kharagpur to Vijayawada),
headed by Chief General Managers for close
and south (Goa to Chennai) monitoring of projects. So far 14 Regional Offices
have been set up.
ROADS
National Highways Development Project Revised strategy for implementation of
(NHDP) NHDP
11.72 About 25 per cent of the total length of 11.74 The NHAI formulated Work Plans (Work
National Highways (NHs) is single lane / intermediate Plans I and II) for awarding of about 12,000 km each
lane, about 52 per cent is two lane standard, and during the years 2009-10 and 2010-11. These plans
the balance 23 per cent is four lane standard or lay down a specific time frame for various activities
more. In 2010-11, the achievement under various and are being monitored very closely at various
phases of the NHDP up to November 2010 has been levels. Under Work Plan I so far 73 projects of 6,426
about 1,007 km and projects have been awarded for km length have been awarded and bids for a further
a total length of about 3,780 km. The status of the nine are at various stages. Under Work Plan II, one
Table 11.8 : NHDP Projects as on November 2010

Sl. NHDP Total Completed Under Balance for
No. components Length 4/6 Lane implementation Award of
km) (km) Civil Work (km)
Length No. of
(km) Contracts
1 GQ 5,846 5,809 37 10 -
2 NS-EW 7,142 5385 1,332 106 425
3 Port Connectivity 380 291 83 6 6
4 Other NHs 1,383 926 437 7 20
5 SARDP-NE 388 - 112 2 276
6 NHDP Phase III 12,109 1922 5,207 73 4,980
7 NHDP Phase IV 20,000 - 486 4 19,514
8 NHDP Phase V 6,500 407 1,893 16 4,200
9 NHDP Phase VI 1,000 - - - 1,000
10 NHDP Phase VII 700 - 41 2 659
Total 55,448 14,740 9,628 226 31,080
Notes: GQ—Golden Quadrilateral connecting Delhi, Mumbai, Chennai, and Kolkata; NS-EW—north-south and
east-west corridor; SARDP-NE—Special Accelerated Road Development Programme in the North-eastern Region.
Source : Ministry of Road Transport and Highways (MoRT&H).
project of 170 km length was awarded and bids for Financing of the NHDP
five more projects are under various stages of
11.79 A part of the fuel cess imposed on petrol
process.
and diesel is allocated to the NHAI to fund the
11.75 A committee under the Chairmanship of Shri implementation of the NHDP. The NHAI, whenever
B. K. Chaturvedi, Member Planning Commission, required, leverages the said cess flow to borrow
submitted a report containing the recommendations additional funds from the debt market. Till date such
on the urgent issues for key changes in the borrowings have been limited to funds raised through
implementation framework and modified financing 54 EC (capital gains exemption) bonds and the
plan of the NHDP. The Government considered and short-term overdraft facility.
accepted the recommendations contained in the 11.80 The Government of India has also taken loans
report of the Committee in November 2009 with the for financing various projects under the NHDP from
proviso that the financing plan from 2010-11onwards the World Bank (US$ 1965 million), Asian
would be considered by the Empowered Group of Development Bank(ADB) (US$ 1605 million), and
Ministers (EGoM) for further action. Japan Bank for International Cooperation (32,060
11.76 The EGoM has since given the in-principle million yen) which are passed on to the NHAI partly
approval for Work Plan II for 2010-11 for award of in the form of grants and partly as loan. The NHAI
projects covering a length of about 12,000 km and had also availed a direct loan of US $ 149.78 million
also has approved additional budgetary support for from the ADB for the Surat Manor Expressway
the SARDP-NE and J&K projects. The EGoM has Project (Table 11.9)
also approved the Work Plan for 2010-11 onwards
with the stipulation that of the total NH length to be
Table 11.9 : Financial Structure of NHAI
developed, broadly 60 per cent would be taken up
on build, operate, and transfer (BOT) (Toll) basis, ` crore)
(`
25 per cent on BOT (Annuity) basis, and the Year Cess External Borrow- Budge
Fund Assistance ings 54-EC tary
remaining 15 per cent on engineering procurement Bonds Support
contract (EPC) basis.
Grant Loan
11.77 The NHAI is setting up 192 special land 2005-06 3269.70 2350.00 600.00 1289.00 802.00
acquisition units (SLAUs) in various States for 2006-07 6407.45 1582.50 395.50 1500.00 570.67
expediting the LA process, which is identified as a 2007-08 6541.06 1776.00 444.00 305.18 559.00
major bottleneck in the implementation of the 2008-09 6972.47 1515.00 378.80 1630.74 159.00
projects, and 122 such units have already been set 2009-10 7404.70 272.00 68.00 1153.63 200.00
up. Besides, Chief Ministers have been requested
to set up High Level Coordination Committees under Source: Department of Road Transport & Highways.
Chief Secretaries to sort out issues involving

coordination between departments. Most States
have constituted these High Level Coordination SARDP-NE
Committees.
11.81 The SARDP-NE aims at improving road
11.78 To expedite the progress of the NHDP, the connectivity to State capitals, district headquarters,
MoRT&H has taken up implementation of about 4700 and remote places of the north-east region. It
km under NHDP IV through State Public Works envisages two / four laning of about 4798 km of NHs
Departments (PWDs)/Corporations. It consists of and two laning / improvement of about 5343 km of
implementation of about 1800 km under NHDP IVA State roads. This will ensure connectivity of 88
(approved by the Government in July 2008) and district headquarters in the north-eastern States to
about 2900 km under NHDPIVB (yet to be approved two- lane NHs / two-lane State roads. The
by the Government). Of the 1800 km under NHDPIVA programme has been divided into Phases 'A' and 'B'
taken up through State PWDs / Corporation, one
and the Arunachal Pradesh Package of Roads &
project of 108 km has been awarded up to November
Highways.
2010 and another of 670 km is at an advanced stage
of award. Advance action has also been taken for 11.82 With the approval of the Cabinet Committee
project preparation work for about 2900 km under on infrastructure (CCI) on 8 April 2010 for transfer/
NHDP IVB. addition of 1503 km roads to Phase 'A' of the SARDP-
NE, Phase 'A' now consists of improvement of 4099 standards in order to have better facility in long
km of roads consisting of 2041 km of NHs and 2058 continuous stretches.
km of State roads at an estimated cost of ` 21,769 11.85 In general, the larger stretches costing more
crore. Out of the 4099 km, the Border Roads than ` 150 crore have been taken up with loan
Organization (BRO) and State PWDs have been assistance from the World Bank under the National
assigned the development of 3213 km. The Highways Interconnectivity Improvement Programme
remaining length of 886 km will be built by the NHAI, (NHIIP). DPR consultants have been engaged for
Ministry / Arunachal Pradesh PWD, and BRO after preparation of a DPR for about 3800 km. The smaller
investment approval is received from the CCI. Out of stretches costing less than ` 150 crore have been
the 3213 km, projects covering a length of 2219 km taken up through budgetary support. In this category,
have been approved till December 2010 and work is a 2200 km length (51 projects) with an estimated
in different stages of progress. Phase 'B' has now cost of ` 5800 crore has been taken up. Provision
been modified to cover two laning of 1285 km of of these projects has been made in the Annual Plan
NHs. Further approval for preparation of DPRs 2010-11 and Demands for Grants 2010-11. DPRs
for two laning / improvement of 2438 km of State are prepared by State PWDs and the estimates are
roads has also been given. Till December 2010, a directly submitted by them to the Ministry for
DPR was prepared for 450 km. sanction.
11.83 The Arunachal Package covering a 2319 km
stretch of road was approved by the Government as Development of Roads in Left Wing Extrem-
part of the SARDP-NE on 9 January 2009. Of this, ism (LWE)-affected areas
776 km has been approved for execution on BOT 11.86 The project covering 1126 km of NHs and
(annuity) basis and the remaining for tendering on 4351 km of State roads in LWE-affected areas is
EPC basis. Two projects under BOT (annuity) for spread over 34 district in eight States, namely
58 km length have been awarded and the award for Andhra Pradesh, Bihar, Chhattisgarh, Jharkhand,
the remaining two covering 718 km is under process. Madhya Pradesh, Maharashtra, Orissa, and Uttar
For other stretches to be taken up on EPC basis, Pradesh. An allocation of ` 1000 crore has been
estimates have been sanctioned/ DPR is under made for the project from the gross budgetary
process. support (GBS) under the Annual Plan for 2010-11.
As against the total target till December 2010,
Initiatives for development of the entire NH projects for a total length of 4897 km at an estimated
network to minimum acceptable two-lane cost of ` 5998 crore have been sanctioned /
standard processed till November 2010. Of these, projects
11.84 Keeping in view the targets stipulated in the for a length of 3012 km at an estimated cost of
Eleventh Plan for accelerated efforts to bring the ` 3537 crore have been awarded till November 2010
NH network up to a minimum two-lane standard and an expenditure of ` 256 crore incurred.
within the next 10 years (i.e. by the end of the Twelfth
Plan) and also for removing existing deficiencies, Construction of rural roads under the
the Ministry has proposed a World Bank loan as Pradhan Mantri Gram Sadak Yojna
well as budgetary allocations to reach this goal by (PMGSY)
December 2014. DPR consultants have been
11.87 The PMGSY was launched to provide single
engaged for preparation of a DPR for about 3800
all-weather connectivity to eligible unconnected
km proposed to be developed under World Bank
habitations having population of 500 persons and
Assistance. The MoRT&H has also initiated action
for improvement of the remaining 2500 km of single above in plain areas and 250 persons and above in
/ intermediate lane NHs through budgetary hill States, the tribal (Schedule-V) areas, desert (as
resources. In order to make a visible impact, the identified in the Desert Development Programme)
work would be taken up for upgradation on corridor areas, and LWE-affected districts as identified by
concept. Therefore, corridors would include the Ministry of Home Affairs.
strengthening (in adjoining reaches) in addition to 11.88 Under the programme, up to November 2010
widening to two lane/ two lane with paved shoulder about 4.19 lakh km roads to benefit 1,07,974
Box 11.2 : Auction for an efficient, cost effective and transparent system of award of PPP projects
for National Highways Development
Highways are a critically important infrastructure for an emerging nation. And the design of appropriate contracts is the
critical instrument for meeting the challenge of highways. What are these challenges? To put it in one sentence, the objective
or the challenge is to maximize the difference between:
(a) the additional welfare that our citizens get from having more and better roads and,
(b) the present value of the cost of building (henceforth, building should be taken to mean building or renovating) those
roads.
The broad principles above translate into these following general rules.
(1) We have to have a cut off rule to decide which projects are worthwhile and which not.
(2) Between two identical roads if one can be done at a lower cost, we should choose the one with the lower cost, subject
to that being viable in the sense of (1), above.
(3) All costs do not take the form of brick and mortar. A build up of fiscal deficit is also a form of cost. This may be
difficult to reduce to the equivalent of brick and mortar cost but must not be omitted for that reason.
Some of the problems can be overcome if projects are awarded on the basis of a transparent and hands-off auction system.
The heart of an efficient, cost effective and transparent system of PPP partnership whereby the Government gives out the
task of developing new highways to the private sector is the system of auction. Auctions work best when the product is
being sold lock, stock and barrel to a bidder. Hence, systems such as BOT (toll) and annuitized BOT (toll) are better suited
to being given out through competitive auction than the BOT (annuity). In the case of BOT (toll) and annuitized BOT (toll)
the developer basically gets to own the road for the next 20 years. Hence, this comes close to a lock, stock and barrel sale.
Auctions are, however, highly specialized objects and their detailed good design require specialist input. The details of the
auction should therefore be worked out with inputs from specialists. No attempt should be made to apportion in advance
different groups of bidders to different projects. All private bidders willing to bid, subject to their meeting the qualification
requirement, should have the right to bid.
The current practice in the case of BOT (toll), is to allow for a viability gap funding (VGF) of up to 40% of the project cost.
However, it has been seen that some developers make so much profit at the start of the project because of the 40% VGF that
they do not, after that, take adequate interest in maintaining the highways. And, knowing this, they will not even have the
incentive to build the road properly in the first place. To make good-quality road building incentive compatible with the
developer's interest and at the same time serve the national interest it is recommended that we allow for up to 10% VGF
upfront. Then for any VGF over and above 10% and limited to a maximum of 40%, the balance should be converted into an
annuity to be paid in equal installments each year for the next 20 years. Unlike under the BOT (annuity) system, the toll will
still be managed and collected by the private developer who wins the bid and therefore the incentives are aligned.
Given that the developer would continue to receive "annuitized" payments from the Government it will be in the interest of
the developer to maintain the road as he is obligated to do to the Government. Further, since the developer will be collecting
toll, he or she will have a direct interest in maintaining the road. And since he himself will be maintaining the road, by the
argument of backward induction it follows that the developer will have an interest in building good-quality roads, for
which the maintenance cost is not excessive.
Source: Report on Methodology for PPP (Public Private Partnership) project for National Highways Development under
the chairmanship of Dr. Kaushik Basu, Chief Economic Adviser.
habitations have been cleared with an estimated of hilly or tribal areas). In effect, Bharat Nirman
cost of ` 1,18,298 crore. A sum of ` 75,404 crore proposes to provide new connectivity to a total of
has been released to the States/UTs and about 54,648 habitations. This would involve construction
` 74,345 crore has been spent. So far, 2,98,809.72 of 1,46,184 km of rural roads. In addition to new
km road length has been completed and new connectivity, Bharat Nirman envisages upgradation/
connectivity has been provided to over 73,651 renewal of 1,94,130 km of existing rural roads. Under
habitations. Work on a road length of about 1,20,181 the rural roads component of Bharat Nirman, 38,144
km is in full swing. habitations have been provided all-weather road
11.89 Rural roads has been identified as one of connectivity up to November 2010 and projects for
the six components of Bharat Nirman and has the connecting 15,426 habitations are at different stages.
goal to provide all-weather road connectivity to all During 2010-11, up to November 2010 over 24,411
villages with a population of 1000 (500 in the case km all-weather road has been completed under the
programme. New connectivity has been provided to disclosure and to suggest improvements in the
nearly 3271 habitations with an expenditure of ` 8705 system of monitoring. Another Working Group on
crore. Air Cargo/Express Service Industry has been set up
on 17 January 2011 to look into issues of long-term
CIVIL AVIATION significance for the industry and advise the Ministry
11. 90 The Civil Aviation Sector witnessed a strong on policy initiatives required in this regard.
recovery during 2010 from the adverse impact of the
recent global financial crisis. The scheduled domestic
Protection of interest of Air Travellers
passenger traffic at 51.53 million clocked a growth 11.94 In order to ensure appropriate protection for
rate of 19 per cent during January-December 2010 air travellers in the event of flight disruptions, i.e.
as compared to 43.3 million during the corresponding cancellations and delays without due notice to
period in 2009. Domestic cargo transported by air passengers, airlines have been directed to provide
increased from 3.4 million tonnes in 2009 to 4.7 million compensation in addition to the refunding of ticket
tonnes in 2010 registering a growth rate of 30 per prices for the inconvenience caused. Additionally,
cent. At present 12 scheduled airlines are operational airlines have been mandated to compensate
(10 passenger and 2 cargo). The total number of passengers with confirmed bookings who are denied
aircraft in their fleet has risen by one to 419 at the boarding against their will in addition to refund of air
end of December 2010. The non-scheduled operators ticket in accordance with the Civil Aviation
as on December 2010 have 360 air-craft in their fleet. Requirements dated 6 August 2010. The Tariff
11.91 The civil aviation sector in India has resumed Monitoring Unit set up in the DGCA continues to
a higher trajectory of growth after emerging from monitor the passenger fares offered by scheduled
adverse impact of global financial crisis. India's air domestic Airlines to ensure that the competition in
traffic has grown by about 18 per cent per year since the market is fair.
2004. The potential for higher levels of growth in the
future is also very high. Industry forecasts suggest Air India Ltd
that India will be the fastest growing civil aviation 11.95 With effect from November 2010, the name
market in the world by 2020 with about 420 million of the Company has been changed from National
passengers being handled by the Indian airport Aviation Company of India Ltd to Air India Ltd. In
system as against 140 million in 2010. Such growth view of its critical financial position, it was decided
prospects pose a number of challenges on many that Air India would come up with a revised business
fronts. plan along with a financial restructuring plan, after
11.92 Keeping in view the pace of developments in consultation with professional financial/management
this area and to draw upon expertise available outside consultants, indicating the operational measures as
the system to address issues that are predominantly also financial restructuring measures required to
economic in content, the Civil Aviation Economic improve the financials of the company. Air India has
Advisory Council (CAEAC) has been set up under reported that a number of measures were taken for
the Chairmanship of the Secretary, Civil Aviation, with cost reduction and improved revenue generation as
experts drawn from different sub-segments of the a result of which it is confident of turning around its
industry and from other related fields. The CAEAC performance during the next 18 to 24 months subject
met once in December 2010 and once in January to other factors remaining favourable. With a view to
2011 and is scheduled to meet periodically at regular addressing the debt-equity ratio, ` 800 crore was
intervals and advise the Ministry in charting out a infused as equity into the company in 2009-10 and
framework of analysis for addressing issues facing ` 1200 crore in 2010-11. This would give the company
the sector that are predominantly economic in flexibility in its financial restructuring.
content.
11.93 In pursuance of the decision taken in the
Airport development
first meeting of the CAEAC, a Working Group on 11.96 As part of the restructuring and modernization
Regulatory Framework to protect consumer interests of metro airports, Delhi and Mumbai airports are being
including disclosure of passenger tariffs and restructured and modernized PPPs. Phase-1 of the
conditions of service by domestic airlines has been development work of the Indira Gandhi International
set up on 20 December 2010 with the mandate to Airport (IGIA), Delhi, has already been completed
recommend measures to enhance transparency and with the operationalization of Termial-3 at an
estimated cost of ` 12,857 crore. Development work constituted. The process of corporatization of ATC
at Chhatrapati Shivaji International Airport (CSIA), services has already been set in motion. This is one
Mumbai, will be completed by 31 December 2012 of the major developments in the area of
with an estimated cost of ` 9802 crore. Similarly, infrastructure for the aviation sector in the country.
the Airport Authority of India (AAI) has undertaken
development work at Kolkata and Chennai airports Outstanding Issues
with an estimated cost of ` 1942 crore and ` 1808 11.100 Indian carriers operate in an exceptionally
crore respectively, subsequently revised to ` 2325 high-cost environment. The single largest element
crore and ` 2015 crore respectively. The revision in contributing to airline costs is aviation turbine fuel
cost is under consideration. As per the revised (ATF) which accounts for 40 per cent of the operating
schedule, the Kolkata project is to be completed by cost of Indian carriers, as against a figure of only 20
October 2011 and the Chennai project by May 2011 per cent for international carriers. ATF in India is
(domestic terminal ) and July 2011 (international priced, on an average, almost 60 per cent higher
terminal). than internationally. The widening differential in ATF
prices and its huge negative impact on airline balance
Modernization of non-metro airports sheets are eroding its competitiveness. In the back-
11.97 The Committee on Infrastructure(COI) in its drop of higher oil-crude prices, there is severe risk
12th meeting held on 8 June 2006 had approved the of dampening of passenger market growth by
modernization of 35 non-metro airports.Of these 35, quickly making air travel out of reach for a significant
the cost of development work on 30 is less than ` portion of the market, which was fuelling its growth.
150 crore. The development work on 11 such projects The losses being registered by Indian carriers may
has already been completed and on 19 is either at result in reduced connectivity thereby affecting
planning stage or in progress. The cost of growth in this sector.
development work on the remaining five projects, is
more than ` 150 crore. The work on one such project, TELECOMMUNICATIONS
namely Thiruvananthapuram, has been completed
and work is in progress on the remaining four. Growth
11.101 The opening of the sector has not only led
GAGAN Project:
to rapid growth but also helped a great deal towards
11.98 Implementation of the GPS-aided GEO- maximization of consumer benefits as tariff have
augmented Navigation (GAGAN) project over Indian been falling across the board. From only 76.54
Airspace for seamless navigation of civil aircraft is in million telephone subscribers in 2004, the number
progress.. The total cost of the project is ` 774 crore, increased to 764.77 million at the end of November
out of which ` 148 crore has been spent on the 2010. Wireless telephone connections have
GAGAN-Technology Demonstration System (TDS) contributed to this growth as their number rose from
Phase with the AAI's contributing ` 108 crore and 35.62 million in March 2004 to 729.58 million at the
the Indian Space Research Organization (ISRO) `
end of November 2010. The wire-line has shown a
40 crore. An amount of ` 626 crore has been
decline from 40.92 million in 2004 to 35.19 million
earmarked for GAGAN-Final Operational Phase
in November 2010(Table 11.10).
(FOP) out of which the AAI is required to contribute
` 496 crore and ISRO the balance.
Table 11. 10 : Growth of telephone connections
Corporatization of Air Traffic Control
(ATC)services (in millions)
March March March Nov.
11.99 The Government had constituted a committee 2008 2009 2010 2010
headed by Shri Naresh Chandra, former Cabinet
Wireline 39.41 37.96 36.96 35.19
Secretary, to suggest a road map for the civil aviation
sector in India. The committee had recommended Wireless 261.08 391.76 584.32 729.58
that keeping in view the efficiency required in many Gross Total 300.49 429.73 621.28 764.77
functional areas and international trends, ATC Annual 46 43 45 19
services should be hived off from the current Growth (%)
jurisdiction of the AAI and a separate corporate entity Source: Department of Telecommunications.
Teledensity has been successfully conducted. This will
encourage further expansion of wireless services
11.102 With increasing private-sector participation,
the share of the private sector in total telephone 11.106 Mobile number portability (MNP): MNP
connections has increased to 84.5 per cent in allows any subscriber to change his service provider
November 2010 from a meager 5 per cent in 1999. without changing his mobile phone number. The
Teledensity, an important indicator or telecom much-awaited MNP was launched on 25 November
penetration, rose from 7.02 per cent in March 2004 2010 in Haryana and is now available to more than
to 64.34 per cent in November 2010. Thus there 700 million subscribers across the country from
has been continuous improvement in the overall 20January, 2011.
teledensity of the country. Rural teledensity which 11.107 Manufacturing: Indian telecom industry
was above 1.57 per cent in March 2004 has manufactures a complete range of wireline telecom
increased to 30.18 per cent at the end of November equipment using state-of-the-art technology.
2010. Urban teledensity has increased from 20.74 Considering the growth of wireless, there are
per cent in March 2004 to 143.95 per cent at the excellent opportunities for domestic and foreign
end of November 2010. investors in manufacturing sector. Presently most
of the wireless core equipment is being imported
11.103 With the penetration of mobile services and
and there is great potential to manufacture these
flourishing of private service providers, rural
items in the country. The last five years saw many
telephone connections have gone up from 12.3
renowned telecom companies setting up their
million in March 2004 to 250.94 million in November
manufacturing bases in India. The production of
2010. The share of rural telephones in total
telecom equipments in value terms increased from
telephones has steadily increased from around 16
` 48,800 crore during 2008-09 to ` 51,000 crore
per cent in 2004 to 32.81 per cent as on 30 November during 2009-10. The worth of telecom equipment
2010. During 2009-10, the growth rate of rural including customer premises equipment (CPE)
telephones was 62.6 per cent as against 37.32 per produced during 2010-11 is expected to be about `
cent for urban telephones. The private sector has 53,500 crore . There are favourable factors such as
contributed crucially to the growth of rural telephones policy moves taken by the Government, incentives
by providing about 84.5 per cent of telephones as in offered, large talent pool in R&D, and low labour
November 2010. cost which can provide an impetus to the industry.
Exports of telecom equipment have also increased
Internet / Broadband from ` 11,000 crore in 2008-09 to ` 13,500 crore
11.104 With supportive policies, broadband during 2009-10 and are expected to increase to `
subscribers grew from 8.77 million as in March 2010 14,000 crore in 2010-11.
to about 10.71 million up to November 2010. A target
of 20 million by 2010 has been set. in broadband Activities under Universal Service
policy. The auction of BWA spectrum has been Obligation Fund (USOF)
successfully conducted. Newer Access 11.108 The USOF continues to be used to
technologies like Broad Band Wireless Access subsidize the development of the telecom sector in
(BWA) can significantly transform the character of rural areas. Support is provided from the USOF for
internet/broadband scenario in India. This will operation and maintenance of village public
encourage further expansion of wireless service with telephones (VPT) in revenue villages identified as
a vision of providing 'Broadband for all'. per Census 2001. There are still about 62,443
uncovered villages which would also be provided with
New horizons for further growth VPT facility with subsidy support from the USOF.
11.105 Third-generation (3G ) telecom services: Agreements were signed with Bharati Sanchar
The explosive growth of the telecom industry in India Nigam Limited (BSNL) whereby 40,101 villages have
is being followed by the urge to move towards better been covered under VPTs. As on 31December 2010,
technology and the next level of service delivery. 61,985 VPTs have been provided by BSNL. In order
While the last five years have been transformational to provide broadband connectivity to rural areas under
for Indian telecom industry, the next few years look the purview of the USOF, out of a total of 8,88,832
even more exciting. One of the key new frontiers is wireline broadband connections, 2,32,852 have been
3G technology. The auction of 3G/WBA spectrum provided till 30 November 2010.
POST associated with mail transmission to and from this

region.
11.109 India Post has the largest postal network
in the world with 1,54,979 post offices across the
Computerization and Networking of Post
length and breadth of the country. As on 31 March
2010, out of this total, 1, 39,182 were in rural areas
Offices
and 15,797 in urban areas. On an average each 11.113 Under the Plan project of computerization
post office serves 7176 people and covers an area and networking of post offices, the Department of
of approximately 21.21 sq. km. India Post has so Posts has supplied computer hardware, peripherals,
far introduced 1082 franchisee outlets to cater to and power back-up equipment to 14,324 post offices
the demand for postal services where it is not till date in the Eleventh Plan period Upgraded
possible to open departmental post offices. computer hardware, namely servers, desktops and
peripherals, and power back-up equipment like
Project Arrow UPSs and gensets have been supplied to 1939 post
offices computerized during earlier five year plans.
11.110 The Department has launched Project
Wide Area Network (WAN) connects1308 sites/
Arrow, to lay the foundation for a comprehensive,
locations including all head post offices,
long-term transformation of India Post. Project Arrow
administrative offices, major speed post centres and
aims at comprehensive improvement of the core post
accounts offices. Broadband facilities have been
office operations as well as the ambience in which
provided to 10,530 offices. The IT Modernization
postal transactions are undertaken. The response
Project Phase II of India Post under the Eleventh
of the general public and the staff of the Department
Plan envisages computerization of all the non-
to the initiative have been overwhelmingly positive
computerized post offices in the country
and Project Arrow offices have shown significant
(Departmental single-handed post offices) and all
increase in revenue earnings. The initiative 'Project
extra-departmental post offices phased over the
Arrow--Transforming India Post' has also won the
financial years 2010-11 and 2011-12.
Prime Minister's award for Excellence in Public
Administration for the year 2008-09. So far 1530
Banking and insurance services
post offices have been covered under this project.
11.114 India Post is pursuing the objective of
Mail Operations financial inclusion through its 1,39,182 post offices
in rural areas and 15,797 post offices in urban areas.
11.111 The Mail Network Optimization Project has
The total number of post office savings bank
been launched to optimize the existing mail network
accounts has increased from 14.23 crore in 2003-
of Department of Posts and streamline core mail
04 to 24.10 crore in 2009-10 The outstanding
operations. It also seeks to bring in greater
balance in them in 2009-10 was ` 5,83,789 crore.
standardization and improvement in the operational
India Post has already computerized its savings
processes relating to mail processing, transmission,
bank operations in 11,000 post offices. The post
and delivery. The Department has undertaken a
offices also provide insurance services to the
project to set up Automated Mail Processing Centres
Government and semi-Government employees and
(AMPCs) in Delhi, Mumbai, Kolkata, Chennai,
the rural populace under the banner of Postal Life
Bangalore, and Hyderabad with a view to automating Insurance (PLI) and Rural Postal Life Insurance
mail sorting. This automated sorting of mail, which (RPLI). The number of RPLIs has increased from
would help the Department increase productivity at 26.66 lakh in 2003-04 to 70 lakh in 2008-09 and
post offices in these cities. more than 99 lakh in 2009-10. There were more than
11.112 The Department of Posts has inducted a 44 lakh PLI policies as on 31March 2010.
dedicated cargo aircraft for carriage of mail, parcels,
and logistics in the north-east region in order to bring Leveraging of the postal network
in consistency in mail transmission. The India Post 11.115 The Department of Posts has been given
aircraft operates on the Kolkata-Guwahati-Imphal- the responsibility of disbursing wages to Mahatma
Agartala-Kolkata route on a regular basis. This Gandhi National Employment Guarantee Scheme
initiative has provided a vital communication link for (MGNREGS) beneficiaries through post office
the north-east region with the rest of the country savings bank accounts. Starting with Andhra
and helped the Department resolve the problems Pradesh postal circle in 2006, the payment of wages
under the MGNREGS is currently operational in will rise to constitute 38 per cent of total population
19 postal circles comprising 26 States and 5 UTs. by 2026.
The scheme is operational through 96,895 post
11.120 Urbanization has increased the demand for
offices. Nearly 4.67 crore NREGS accounts have
urban services. In this context, improving the urban
been opened up to October 2010 and the amount
infrastructure covering basic civic services like
disbursed in this financial year (April-October 2010)
drinking water supply, sewerage, solid waste
amounts to more than ` 7113 crore.
management, and urban transport assumes great
11 .116 The Department of Posts in collaboration significance. Municipal institutions responsible for
with the National Bank for Agriculture and rural providing these civic services are facing acute
Development (NABARD) provides micro-credit shortage of capacity and resources.
facility to self-help groups (SHGs) through identified
11.121 The Eleventh Five Year Plan had estimated
post offices on agency basis. The corpus fund for
the total fund requirement for implementation of the
implementation of this project is given by NABARD.
target for urban water supply, sewerage and
The pilot is in operation in five districts involving seven
sanitation , drainage, and solid waste management
divisions of Tamil Nadu circle. So for, 1207 SHGs
to be ` 129,237 crore and that for urban transport to
have been provided more than ` 3.29 crore in loan.
be ` 132,590 crore. According to estimates based
11.117 The Department has designated 4707 on the City Development Plans(CDPs) prepared by
Central Assistant Public Information Officers the States under the Jawaharlal Nehru National
(CAPIOs) at least one in each tehsil across the Urban Renewal Mission (JNNURM) launched in
country. Officers in charge of the computerized 2005-06, the requirements for both urban
customer care centres have been identified to act infrastructure services and urban transport were
as CAPIOs for the Department and to receive Right estimated to be as high as ` 8,00,000 crore.
to Information (RTI) requests and appeals on behalf
of other Central public authorities who have agreed
to avail of this facility in post offices in pursuance of JNNURM
Section 5 (2) and 19 of the RTI Act 2005. The 11.122 The JNNURM was launched in 2005-06 to
designated CAPIO at a post office receives RTI encourage cities to initiate steps to bring about
requests and appeals for forwarding to the Central improvement in existing civic service levels in a
Public Information Officer or senior officer specified sustainable manner in Mission mode over a seven-
under sub-section (1) of section 19 of the RTI Act year Mission period. The components under the
2005 or the Central Information Commission (CIC), Sub-Mission Urban Infrastructure and Governance
as the case may be. (UIG) include urban renewal, water supply (including
desalination plants), sanitation and sewerage, solid
International Operations of India Post waste management, urban transport, development
11.118 India Post has also launched a premium of heritage areas, and preservation of water bodies.
express service called WorldNet Express in a The allocation for the JNNURM (UIG) was increased
unique collaboration with Duetsche Post, the from ` 25,500 crore to ` 31,500 crore in February
national postal carrier of Germany. This service 2009. On 3 December 2010, the Mission has
enables customers to despatch express parcels to completed five years.
over 200 countries and has advanced features like 11.123 All the selected 65 cities under the UIG
tracking of parcels through internet, telephone, and component of the JNNURM have prepared
SMS. This service is also supported by a 24-hour comprehensive CDPs, charting out their long-term
telephone help line. vision and goals in urban governance and
development. These plans also include investment
URBAN INFRASTRUCTURE plans, with a focus on provision of city-wide urban
infrastructure services such as water supply,
11.119 In 2001, just 27.8 per cent of India's total
sanitation, drainage, and provision of basic services
population lived in urban areas. Yet, in absolute
to the urban poor.
terms, with about 285 million persons living in urban
areas, India has the second largest urban population 11.124 With the launching of the JNNURM, the
in the world. It is expected that the urban population reform of urban local bodies (ULBs) has begun.
Memorandums of Agreement (MoAs) in respect of E-Governance

the reforms agenda to be undertaken by States and
11.129 A Mission mode project on e-Governance
cities has been negotiated and signed with 65
in municipalities was conceptualized as part of the
Mission cities and six ULBs falling under urban
Eleventh Five Year Plan for making urban Governance
agglomeration of cities. There is now better
more efficient and effective. It was decided
appreciation at State level of the importance of
subsequently that initially the e-Governance project
developing and sustaining infrastructure through
would be a part of the JNNURM for 35 cities with
appropriate user charges. Further, States and ULBs
population of over 10 lakh and a new Centrally
have started meeting timelines committed for
sponsored scheme (CSS) for other cities and towns
implementation of the reforms under the MoAs.
would be taken up after watching the implementation
11.125 The JNNURM is a reforms-driven under the JNNURM. Accordingly, the guidelines for
programme. As against commitments to achieve the National Mission Mode Project (NMMP) on e-
reforms by the fifth year in accordance with their Governance in municipalities was prepared and
respective MoAs, 29 out of 29 States/UTs have circulated to the States/ULBs for submission of
repealed the Urban Land Ceilings Act, 21 out of 29 DPRs The DPRs with State-level solutions from
have constituted District Planning Committees, 15 Jharkhand and Uttar Pradesh have already been
out of 15 have rationalized stamp duties to 5 per approved. This is in addition to seven DPRs already
cent, and 17 out of 26 States have transferred / approved for Nagpur, Vijayawada, Cochin, Pimpri-
integrated water supply and sanitation functions. Chinchwad, Navi Mumbai, Ulhasnagar, and Chennai.
Also 42 out of 62 ULBs have shifted to double-entry- The DPR for Jharkhand covers e-Governance in
based accounting system.
Dhanbad ULB and the Uttar Pradesh DPR covers
11.126 A Community Participation Fund (CPF) was e-Governance in Kanpur ULB.
established on 4 June 2007 with an initial corpus of
` 100 crore with the provision of an additional ` 90 Urban Infrastructure Development Scheme
crore for the remaining years of the Mission period. for Small and Medium Towns (UIDSSMT)
So far 45 proposals have been approved under the
11.130 The UIDSSMT is a sub-component of the
CPF.
JNNURM for development of infrastructure facilities
11.127 For 2010-11 ` 6556.12 crore has been in all towns and cities other than the 65 Mission
provided for the UIG. A total number of 526 projects, cities. For obtaining assistance under the UIDSSMT,
as on 31December 2010, have been sanctioned at States and ULBsneed to sign MoAs committing to
an approved cost totalling ` 60,215.44 crore for 62 implement reforms. From its inception in December
cities out of the listed 65 Mission cities across 31 2005 till December 2010 as many as 764 projects
States/UTs. Additional Central Assistance (ACA) across 641 towns and cities at a cost of ` 12,928.93
admissible for these projects is ` 27,878.44 crore. crore were sanctioned under the UIDSSMT,
As on 31December 2010, ` 12,978.93 crore has comprising inter alia 418 water supply projects, 96
been released as ACA to various States and UTs for
sewerage projects, 65 storm water drainage projects,
the projects, financing of buses, CPF and e-
56 solid waste management projects, and 108 road
Governance projects approved under the JNNURM
projects. So far, the committed ACA under the
and also for reimbursement cost of CDPs and DPRs.
UIDSSMT for approved projects is ` 10,435.93 crore,
11.128 While sanctioning projects under the against which ` 7110.29 crore has been released
JNNURM, highest priority has been accorded to till 31 December 2010.
sectors that directly benefit the common man and
the urban poor, namely water supply, sanitation, and Other Urban Infrastructure Schemes and
storm water drainage. Cumulatively, more than 95 initiatives in Urban Governance
per cent of the seven-year ACA allocation of ` 31,500
crore under the UIG Sub-Mission has already been 11.131 Under the pilot scheme for Urban
committed. During 2010-11, up to 31 December Infrastructure Development in Satellite Towns around
2010, 10 projects have been approved with project Seven Mega-Cities (UIDSST), i.e. Mumbai, Kolkata,
cost of ` 2706.99 crore. The ACA admissible for Delhi, Chennai, Hyderabad, Bangalore, and
these projects is ` 996.52 crore of which ` 557.46 Ahmedabad, a total of six projects worth
crore has been released. ` 234.08 crore were sanctioned for Pilkhuwa, Vasai-
Box 11.3 : Cities and Growth, Land Markets and Urban Development
Cities may hold the key to our future. India is entering what we term as "Three Great Transformations": (1)
growth of cities; (2) jobs to meet rising aspirations of a young adult population; and (3) doubling household
incomes. Some 200 million new entrants to the labour force will migrate from rural to urban areas, and lift
India's economy-wide (including rural) productivity, growth and average incomes. Urbanisation is pulling
people out of rural poverty. But the process is knife-edge: failure will lead to chaotic cities, unfulfilled
aspirations, and slower growth.
...As a Demographic Bulge Looms (millions in age-group)
Urban population (per cent total)

55
50 India
Per cent population
45
40 Indonesia
35
China
30
25
Nigeria
20
15
Thailand
1960
1963
1969
1975
1981
1984
1990
1993
1999
2002
2005
2008
Year
Patterns : India's urban population is underestimated, partly because of definitional reasons, and will approach
some 45% of the population (495 million), compared to 30% (295 million) in 2009. This is equivalent to
building 1 additional Greater Mumbai or Greater Delhi every year. Growth is taking place in peripheries of
major agglomerations: Greater Mumbai, Delhi, Kolkata, Chennai, Bangalore, Hyderabad, Ahmedabad. The
number of 1 million plus cities grew from 9 in 1971 to 35 in 2001, and may rise shortly to 47 such cities
(including our second-tier faster growing cities, such as Kanpur, Surat, Jaipur, and Lucknow). Below them are
still smaller but bourgeoning towns. Satellite imagery of night-time lights shows the growing urban "hot-
spots".
Urbanisation Lags....
China falling India rising

1.2 1.2
1.0 1.0
Population
Population
(millions)
(millions)
0.8 0.8
0.6 0.6
0.4 0.4
0.2 0.2
0 0
1950
1970
1990
2010
2030
2050
1950
1970
1990
2010
2030
2050
Year Year
<15 15-64 64+ <15 15-64 64+
Managing Land Markets : Land prices are climbing across India. Once conversion from agricultural to urban
use is permitted---a difficult regulatory process---land prices can jump twenty-fold. The reason: land values
reflect the capitalisation of future expected income stream in urban settings (than in farming). As land prices
rise, they drive cost-push inflation. The answer does not lie in tightening land conversion regulations, but to
act counter-intuitively to: (1) improve land conversion processes; (2) sell publicly acquired lands in auctions;
and (3) lean with markets and improve the supply of accessible land through better transport. Land is
abundant (urban land area is only some 2% of total arable land); it is accessible land that is scarce.
Cities On the Brink : A recent rating on sanitation (19 indicators) by the Ministry of Urban Development
reveals that 190 out of 423 municipalities in India are on the brink of environmental disaster (coded red)--
-many in the poorest states of UP and Bihar, but also Andhra Pradesh. Another 229 are judged in need of
major improvement, many in the richest states. The sanitation standards in Gaya and Aligarh make up the
median of India's 423 cities. Only 4 make it to safe levels, and none to the highest standard.
Institutions : Institutional reforms are urgent. Absent reform, it can undermine public trust: from master
planning, to regulatory improvements, basic local services (water, sanitation, roads, public transport,
safety, low-cost housing), and greater independence and accountability of locally elected city managers, as
intended under the 74th Constitutional Amendment Act for urban local bodies. While the Jawaharlal
Nehru National Urban Renewal Mission (JNNURM) launched in 2005 is funding infrastructure projects in
65 cities (requirements include an urban plan, project report, and an MOU which commits to a set of
reforms, including implementation of the 74th Amendment, community involvement, municipal reforms,
and earmarking funds and lands for the poor), the project remains limited. Local capacity is also severely
limited. Financial management and procurement systems are weak and PPPs to fund investments limited.
Financing Urban Investments : The scale of funding needs is enormous. A recent study estimated that some
US$1.2 trillion would be required over two decades, and annually an average of about US$95 per capita,
versus one-fifth that currently. An alternative estimate: some 7-8 percent of GDP annually, versus the 0.6
percent currently. Lessons from elsewhere, especially in East Asia, adapted to India's setting, could be
useful. Possible elements:
 Urban Land Value Capture. Public land sales by transparent auctions are essential, instead of being
captured by others. In China, while originally unregulated and non-transparent, a constitutional change
in 1988 required all public land transactions (land use rights) to be auctioned under open, competitive
bidding, similar to Singapore and Hong Kong, with proceeds flowing to the municipalities. Between
1990-2002, the speed and extent of such transactions is what permitted much of new urban landscape in
China to emerge (from Guangdong to Shanghai). Mumbai auction of public lands (Bandra-Kurla) have
raised large sums.
 Enforcement and Dispute Settlement: Improving Land Administration and Courts. Land administration
needs to be improved. Specialized courts to handle contract disputes are needed to restrain opportunistic
behavior by developers or local authorities.
 Public Redistributive Uses. Some part of land value has to be transparently provided to the community,
especially low-cost public housing, which has long dominated successful East Asian urbanization; and
improved connectivity in rural areas and communities, including rehabilitation and resettlement.
 Public Land, Densification, Land taxes, and user charges. Publicly owned land has to be fully listed,
encroachments removed, and managed transparently---including regular sales to manage land markets.
Similarly, eased floor-area-ratios can expand the supply of buildable space (density). Land taxes and user
charges need to brought to economic levels.
 State governments to improve area planning and wider connectivity. Local municipalities should handle
local needs. But larger urbanization strategy will need state government master plans for overlapping
jurisdictions and area-wide planning, including new cities and transport corridors. Tamil Nadu, Andhra
Pradesh and Gujarat are testing new ways.
 Increased Central government funding. JNNURM will need redesign, expansion and deepening, addressing
much larger funding needs---for critical public needs, such as low-cost housing, urban transport, slum re-
development, and water and sanitation. A programmatic transfer, rather than project-by-project sanctions,
may be needed, benchmarked against front-loaded reforms and results.
Sources: (1) Isher Judge Ahluwalia and others, 2011. Urbanisation and Economic Growth in India, mimeo.
(2) McKinsey Global Institute, April, 2010. India's Urban Awakening: Building Inclusive Cities, Sustaining
Economic Growth. (3) IDFC, 2009. India Infrastructure Report-Land A Critical Resource for Infrastructure
(4) Dowall David, and Paavo Monkkonen, 2008. Urban Development and Land Markets in Chennai, India.
International Real Estate Review, Vol. 11 No. 2, pp 142-165
Vihar, and Vikarabad during 2010-11. These projects Metro Rail Projects
will contribute towards amelioration of basic services
in these towns. Approved in 2009, the scheme is 11.137 In order to give proper legal cover to metro
perceived as co-terminus with the Eleventh Five Year projects, the Metro Railways Amendment Act 2009
Plan, i.e. operational till 2012. was brought into effect in September 2009, providing
an umbrella 'statutory' safety cover for metro rail
11.132 The North Eastern Region Urban
work in all the metro cities of India. The Act was
Development Programme (NERUDP) was launched
extended to the National Capital Region, Bangalore,
in November 2009 with ADB assistance. The project
Mumbai, and Chennai metropolitan areas with effect
aims to assist the States of Tripura, Mizoram,
from 16October 2009.
Sikkim, Meghalaya, and Nagaland to address
challenges of urban development in their capital 11.138 The Government of India had approved the
cities. During 2010-11, the States worked on implementation of the Bangalore Metro Rail Project
preparing projects related to water supply and solid of 42.3 km length by Bangalore Metro Rail
waste management. Corporation Ltd. (BMRCL). The project commenced
on 20 January 2007 and is targeted for completion
Urban transport by 31March 2013.The Government of India had
11.133 Urban transport is one of the key elements approved implementation of the east-west metro
of urban infrastructure. As compared to private corridor of 14.67 km length in Kolkata by Kolkata
modes of transport, public transport is energy Metro Rail Corporation Ltd (KMRCL). The project is
efficient and less polluting. The public transport targeted for completion by 31January 2015.The
system also helps improve urban-rural linkage and Government of India had also approved the
improves access of the rural/semi-urban population implementation of the Chennai Metro Rail Project
in the periphery to city centres for the purpose of of 46.5 km length by Chennai Metro Rail Ltd.
labour supply without proliferation of slums within (CMRL). The project is targeted for completion by
and around cities. 31March 2015.
11.134 In this background, the major objective of 11.139 In addition, metro rail projects have been
urban transport initiatives is to provide efficient and taken up on PPP basis in Mumbai for Versova-
affordable public transport. A National Urban
Andheri-Ghatkopar (11.07 km), Charkop to
Transport Policy (NUTP) was laid down in 2006,
Mankhurd via Bandra (31.87 KM) and Hyderabad
with the objectives of ensuring easily accessible,
Metro (71.16 KM) with viability gap funding (VGF)
safe, affordable, quick, comfortable, reliable, and
support from the Government of India.
sustainable mobility for all.
11.135 In order to provide better transport,
proposals for bus rapid transit system (BRTS) were FINANCING
approved for Ahmedabad, Bhopal, Indore, Jaipur, INFRASTRUCTURE
Pune, Rajkot, Surat, Vijayawada, and
Vishakhapatnam cities under the JNNURM. During Debt financing
the current financial year, one more proposal for a
11.140 Net bank credit to infrastructure in 2009-
BRTS in Kolkata has been approved under the
10 defined as the difference between outstanding
JNNURM taking the number of cities supported for
gross deployment of bank credit to infrastructure in
BRTS to 10, covering a total length of 452.20 km at
a total estimated cost of ` 5203.79 crore. March 2009 and March 2010, increased
Admissible Central financial assistance out of this substantially in the current fiscal (Table 11.11). As
amount is about ` 2374.45 crore. compared to net bank credit increase of ` 64,322
crore during April-November 2009-10 there has been
11.136 Purchase of 15,260 buses at a total cost of an increase of ` 1,02,301 crore during April-
` 4723.97 crore has been approved under the November 2010, showing 59 per cent rise.
scheme, out of which ACA admissible is ` 2088.84
crore. Till December 2010, more than 10,000 modern 11.141 The total FDI inflows during April-November
intelligent transport system(ITS)-enabled, low floor 2010 have been low compared to the inflows during
and semi-low floor buses have been delivered to the same period in the previous year. FDI inflows
States/Cities. into the petroleum and natural gas and air transport
Table 11.11 : Increment Flow of Bank Credit 11.143 With the objective of stimulating and
to Infrastructure mobilizing increased private-sector investments,
either from domestic sources or foreign avenues,
(` crore)
the Government has offered various incentives for
Period Infra- Power Tele- Roads Other the infrastructure sector for sustained economic
struc- com & Infra-
ture Ports struc-
growth. These include: allowing 100 per cent
(Total) ture FDI(under the automatic route) in all infrastructure
sectors including the roads, power, ports, and airport
2006-07 30,286 12,994 1,164 5,352 10,776
sectors; 74 per cent in telecom services and 100
2007-08 62,220 21,947 18,663 9,429 12,179 per cent in telephone equipment; 49 per cent to100
2008-09 64,636 29,372 12,044 12,584 10,658 per cent for various services in the aviation sector;
2009-10 1,09,916 63,394 9,036 26,509 10,956 extended tax holiday periods up to ten-year tax
2009 64,322 37,806 761 18,408 7,326 holidays (under section 80-IA of the Income Tax Act
(April-Nov.) 1961) to enterprises engaged in the business of
2010 1,02,301 52,502 38,367 8,790 2,643 development, operation, and maintenance of
(April-Nov.) infrastructure facilities; and emphasis on PPP as
Source: RBI. one of the preferred modes for project
implementation.
sectors have been comparatively higher during the 11.144 The Government of India is actively
current financial year. FDI inflows into the power, encouraging PPPs through several initiatives. The
telecommunications, and information and appraisal mechanism for PPP projects has been
broadcasting sectors have been comparatively lower streamlined to ensure speed, eliminate delays, adopt
during 2010-11 (Table 11.12) international best practices, and have uniformity in
appraisal mechanism and guidelines. The appraisal
Infrastructure development and PPPs mechanism notified includes setting up of the Public
11.142 Given the enormity of the investment Private Partnership Appraisal Committee (PPPAC)
requirements and limited availability of public responsible for the appraisal of PPP projects in the
resources for investment in physical infrastructure, Central sector. The Committee has mandated
it is imperative to explore avenues for increasing detailed guidelines for submitting proposals and
investment in infrastructure through a combination follows a predetermined time frame for according
of public investment, PPPs and, occasionally, approval to proposals submitted in a time-bound
exclusive private investment wherever feasible. manner. Standardized bidding and contractual
Table 11.12 : FDI flows to infrastructure (US$ million)

Sector 2007-08 2008-09 2009-10 April-Nov.- April-Nov.-
2009 2010
Power 968 984.8 1,437.3 1237.8 984.0
Non-conventional Energy 43.2 85.3 497.9 67.0 44.1
Petroleum & Natural gas 1426.8 412.3 272.1 218.7 529.4
Telecommunications 1261.5 2558.4 2554.0 2223.3 1092.8
Information & Broadcasting * 299.2 748.7 491.2 419.9 272.4
Air Transport ** 99.1 35.2 22.6 15.7 115.6
Sea Transport 128.4 50.2 284.9 279.8 288.6
Ports 918.2 493.2 65.4 65.4 10.9
Railway-related Components 12.4 18 34.2 25.1 0.4
Total (of above) 5156.8 5386.1 5659.6 4552.7 3338.2
Source: Department of Industrial Policy & Promotion.
Notes: * Information & broadcasting including print media;
** Air transport including air freight.Variation in data is due to reclassification of some sectors.
documents have been notified. Further, project Ministries have been identified and are being thus
sponsors are encouraged to award projects through developed, encompassing sectors such as rural
a transparent open competitive bidding process, secondary education, elementary education,
which leads to greater transparency and greenfield hospitals and diagnostic centres, water
consistency. supply and sanitation, affordable housing, training
centres, and rural infrastructure.
11.145 PPP projects that are economically
essential but commercially unviable are provided 11.148 As part of a wide-ranging effort to create
financial assistance in the form of Viability Gap an enabling environment for PPPs, the DEA has
Funding(VGF) and long tenor loans through the India developed the National PPP Capacity Building
Infrastructure Finance Company (IIFC) Limited. IIFC Programme, in collaboration with the World Bank
(UK) Ltd., a subsidiary of the IIFCL at London, has and the German KfW. The strategy is essentially
been established with the objective of borrowing funds aimed at enhancing the capacities of public
from the RBI and lending to Indian companies functionaries engaged in identification,
implementing infrastructure projects in India solely conceptualizing, structuring, and management of
for meeting capital expenditure outside India. In order the PPP project development cycle. It also
to ensure quality project development activities by enhances awareness of key decision makers
the States and Central Ministries, the India regarding the critical issues and choices in a PPP
Infrastructure Project Development Fund (IIPDF) context. The nation-wide programme comprises four
supports up to 75 per cent of the project development building blocks, namely training needs assessment,
expenses in the form of interest-free loans. The curriculum development, training of trainers, and roll-
projects, sponsored by State Governments and out. The training needs assessment and curriculum
municipalities represent various sectors where development have been completed and the National
PPPs are increasingly being adopted, namely urban PPP Capacity Building Programme has been
sector, health and education, civil aviation, and launched by the Finance Minister on 22 December
roads. 2010. The Programme will be implemented through
11.146 PPP cells have been established in twenty- State Administrative Training Institutes (ATIs) and
four State Governments/UT Administrations and Central Training Institutes (CTIs). Two level of training
thirteen Central Infrastructure Ministries, which have would be imparted through the training institutes,
become the central core to catalyse PPPs in an namely PPP sensitization courses and specialized
efficient and effective manner in their respective modules on managing PPPs. Sector-specific PPP
sectors/States. The Government is providing toolkits covering four sectors (highways, ports, solid
assistance in the form of professional assistance waste management, and urban transport) have been
(PPP and MIS Experts) to the PPP cells of the launched by the Finance Minister on 22 December
selected States and Central Ministries. An online 2010. Risk and contingent liability frameworks and
database on PPP projects in the country communication strategy for greater advocacy of
www.pppindiadatabase.com and the website PPPs is being developed.
www.pppinindia.com have been developed. The 11.149 Many State Governments have
purpose of the website is to provide comprehensive institutionalized measures to encourage private-
and current information on the status and extent of sector engagement in creation of infrastructure and
PPP initiatives in India at the Central, State, and delivery of services. Infrastructure Development and
sectoral levels. A panel of transaction advisers for Enabling Acts have been developed by Andhra
PPPs has been notified for use by the States and Pradesh, Bihar, Gujarat, and Punjab. PPP policies
other entities who are undertaking PPP transactions. and guidelines to facilitate PPP projects have been
11.147 The Department of Economic Affairs (DEA), notified by Karnataka, Haryana, Orissa, Assam,
in collaboration with the ADB initiated the PPP Pilot Goa, Madhya Pradesh, and West Bengal. Other
Projects Initiatives where the process of structuring measures include development of sectoral policies
of PPP projects is closely watched over by the for promoting PPPs, establishing nodal departments/
Central Government to develop demonstrable PPP PPP cells, establishing VGFs (to supplement the
projects in challenging sectors. Sixty PPP projects VGF provided by the Central Government),
in various States, municipalities, and Central establishing Project Development Fund (to
Table 11.13 : State-wise and Sector-wise PPP Projects

State Total Number Up to ` 100 Between ` 251 More than Value of
of Projects crore and 500 crore ` 500 crore Contracts
` crore)
(`
Andhra Pradesh 71 2691.2 5147.4 36,748.7 44,587.3

Bihar 6 77.55 769.58 1246.7 2093.83
Chandigarh 1 15 0 0 15
Chhattisgarh 4 374 464 0 838
Delhi 9 95 408.2 10,374 10,877.2
Goa 2 250 0 0 250
Gujarat 31 407.28 3360.9 18496.98 22265.16
Haryana 4 0 270 2043.05 2313.05
Jammu and Kashmir 3 0 0 6319.76 6319.76
Jharkhand 8 681 398 625.07 1704.07
Karnataka 102 2672.94 13,136.31 28,499.6 44,308.85
Kerala 16 226 615.5 16351.5 17193
Madhya Pradesh 36 2026.6 2694.95 2949 7670.55
Maharashtra 30 887.85 1099.84 31,213.59 33,201.28
Meghalaya 2 226.12 0 536 762.12
Orissa 20 235.1 500 9930.63 10665.73
Puducherry 2 0 419 2947.8 3366.8
Punjab 21 1174.98 572 705 2451.98
Rajasthan 52 1307.71 1100.81 4497.76 6906.28
Sikkim 24 733.59 2669 13,708 17,110.59
Tamil Nadu 43 623.48 8902.16 9100 18,625.64
Uttar Pradesh 8 0 1458.57 4103.21 5561.78
Uttarakhand 1 0 478 0 478
West Bengal 8 200 1214.4 3299.06 4713.46
Inter-State 14 355.45 2474.37 6738 9567.82
Total 518 15,260.85 48,152.99 21,0433.41 27,3847.25
Sector Total Number Up to ` 100 Between ` 251 More than Value of
of Projects crore and 500 crore ` 500 crore Contracts
` crore)
(`
Airports 5 0 303 18808 19111
Education 1 93.32 0 0 93.32
Energy 24 733.59 2669 13,708 17,110.59
Health Care 2 217 0 0 217
Ports 47 866 4070.29 64,777.09 69,713.38
Railways 4 102.22 905 594.34 1601.56
Roads 324 8760.51 36,721.42 1,01,363.98 1,46,845.91
Tourism 30 1492.08 0 1050 2542.08
Urban Development 81 2996.13 3484.28 10132 16612.41
Total 518 15,260.85 48,152.99 2,10,433.41 2,73,847.25

Source: I&I Division, DEA, Ministry of Finance.
supplement GOI grant under IIPDF), establishing 11.152 Apart from the need for substantial financial
panels of transaction advisers, and developing outlays for infrastructure, there are several non-
standardized bid documents, sectoral templates, financing constraints that need to be addressed to
and handbooks on PPPs. Awareness of schemes, avoid time and cost overruns. Urgent action is called
guidelines, initiatives, and resource materials for in addressing the problems of (i) tendering of
prepared is being created through PPP websites of unviable projects; (ii) bad quality of engineering and
Central and State Governments. These measures planning at DPR stage; (iii) lack of standardized and
have resulted in a robust pipeline of over 518 projects sub-optimal contracts; (iii) land acquisition delays
(at different stages, i.e. bidding, construction, and and slow approval processes, especially
operational ) in diverse sectors with an estimated environmental and forest clearances; (iv) insufficient
project cost of over ` 2,73,847.25 crore. (Table optimization of procurement costs (of PSUs);
11.13). (v) weak performance management in nodal agencies
and PSUs and; (vi) inadequate availability of skilled
and semi-skilled manpower.
CHALLENGES AND OUTLOOK
11.153 It is important that priority should also be
11.150 The level of investment and capacity addition
accorded to the physical outcomes from
made in the key infrastructure sectors during the
infrastructure development in India. There is urgent
first three years of the Eleventh Plan vis a vis the
need to streamline land acquisition and environment
financial and physical performance achieved in the
Tenth Plan indicates an optimistic outlook for clearance for infrastructure projects. There is a
infrastructure sector as a whole. Yet, to accelerate strong case for bringing in parity between the
the pace of infrastructure development further, certain compensation package admissible under the Land
challenges need to be overcome. The foremost is to Acquisition Act 1894 and that applicable to land
make huge capacity addition in a time-bound manner acquisition under the National Highways Act 1956
while ensuring that projects embody value for money to enable faster acquisition. The price discovery
and investment results in world class infrastructure. issues could perhaps be circumvented by allowing
Infrastructure should at the same time be affordable private parties to bid for supply of the land involved.
and sustainable. It is also important that the 80 per cent minimum
norm for physical acquisition of land before
11.151 The Planning Commission has carried out tendering should be strictly enforced through
a preliminary assessment of the investment in suitable disincentives. In case of road expansion
infrastructure during the Twelfth Plan(2012-17). The projects, there may also be a case for excluding
projected investment requirement would be of the the land which is part of the original lanes from
order of ` 40,99,240 crore(about US$1025 billion). It being counted as part of the acquired land. A
is projected that at least 50 per cent of this national forest land bank, with clear paperwork and
investment would have to come from the private sector titles, could significantly reduce the approval time
against about the 36 per cent anticipated in the for forest clearances.
Eleventh Plan. The public-sector investment would
have to increase from ` 13,11,293 crore in the 11.154 To overcome execution issues during the
Eleventh Plan to about ` 20,49,620 crore. Thus construction/building stage, the best available
financing infrastructure would be a big challenge in talent/skilled manpower, for the planning process
the coming years and to meet the challenge some and at project document preparation stage, needs
innovative ideas and new models of financing would to be hired. Significant upfront investment in
be required. Channelling domestic and foreign engineering and planning (for example project
financial savings of this scale into infrastructure creation, contracting, tendering, project scheduling)
requires a judicious mix of policy interventions which is required. Cost overruns may also be mitigated
balances the growth and stability objectives. The by moving away from item rates to lump sum EPC
Deepak Parikh Committee has recommended contracts for large projects and creation of greater
developing the domestic debt capital market, tapping capacity for project management and monitoring
the potential of the insurance sector, and enhancing through a multidisciplinary agency. Investment in
the participation of banks, financial institutions, and building managerial and technical capabilities of
large non-banking financial companies (NBFCs) executing agencies on a par with the private sector
specializing in infrastructure financing. (for example procurement, DPR, and monitoring)
is crucial. A way forward would be to kick-start a account the growing need for peaking power rather
construction-focused vocational training programme than the base load capacity in the power sector,
through a commercially viable PPP. greater focus on rail and water transport, more
demand-side measures in water rather than making
11.155 There is also need to reassess the huge investments in water supply augmentation. All
existing criteria and priorities used for allocation of this will require a macro-level approach and greater
funds to different sectors, for example, taking into inter-Ministerial coordination.
Human Development, Equity
and Environment
12
CHAPTER
The ultimate objective of development planning is human development or increased

social welfare and well-being of the people. Increased social welfare of the people
requires a more equitable distribution of development benefits along with better
living environment. Development process therefore needs to continuously strive for
broad-based improvement in the standard of living and quality of life of the people
through an inclusive development strategy that focuses on both income and non-
income dimensions. The challenge is to formulate inclusive plans to bridge regional,
social and economic disparities. The Eleventh Five Year Plan sought to address this
challenge by providing a comprehensive strategy for inclusive development, building
on the growing strength of the economy.
12.2 This chapter focuses on issues related to a long and healthy life, to be educated and
'inclusive development' in India and uses both knowledgeable, and to enjoy a decent economic
international as well as inter-State comparisons to standard of life. According to HDR 2010, the HDI
shed light on the subject. Apart from highlighting for India was 0.519 in 2010 with an overall global
the international position of India vis-à-vis other ranking of 119 (out of the 169 countries) compared
emerging market economies and similarly placed to 134 (out of 182 countries) in 2007 (HDR, 2009).
countries in terms of the human development index However, a comparable analysis of the trends during
(HDI), an attempt has been made to examine the 1980-2010 (Table12.1) shows that although lower
interrelations between different parameters of the in HDI ranking, India has performed better than most
HDI. From the domestic angle, the chapter focuses (including very high and high human development)
on trends in social-sector spending both at the countries in terms of average annual HDI growth
centre and the state levels. It looks at social-sector rate. India with an HDI improvement rank of 6 (1980-
policies implemented by the Government, particularly 2010) has performed much better than most
poverty alleviation and employment generation, comparable countries except China (Table12.1).
health, education, rural infrastructure, development
of the weaker sections of society, women and child 12.4 However, there should be no room for
development, and social security. It also discusses complacency as India is still in the medium human
climate change and its impact on development in development category with countries like China, Sri
the context of intergenerational equity. Lanka, Thailand, Philippines, Egypt, Indonesia, and
South Africa having better overall HDI ranking within
the same category. The existing gap in health and
HUMAN DEVELOPMENT AND GENDER education indicators as compared to developed
12.3 The HDI reported in the Human Development countries and also many of the developing countries
Report (HDR) published by the United Nations indicates a need for much faster and wider spread
Development Programme (UNDP) is an alternative of basic health and education. Life expectancy at
to the more standard method of measuring growth birth in India was 64.4 years in 2010 as against 81
using gross domestic product (GDP). It captures years in Norway, 81.9 years in Australia, 74.4 years
progress in terms of three basic capabilities: to live in Sri Lanka, and 73.5 years in China (Table 12.2).
Table 12.1 : Trends in the HDI 1980-2010

Avg. Annual HDI HDI
Growth Rate (percent) Improv-
ment Rank
HDI Country 1980 1990 1995 2000 2005 2009 2010 1980- 1990- 2000- 1980-
2010 2010 2010 2010*
1 Norway 0.788 0.838 0.869 0.906 0.932 0.937 0.938 0.58 0.56 0.34 34
2. Australia 0.791 0.819 0.887 0.914 0.925 0.935 0.937 0.57 0.67 0.25 35
41 Poland — 0.683 0.710 0.753 0.775 0.791 0.795 — 0.76 0.54 —
57 Malaysia 0.541 0.616 0.659 0.691 0.726 0.739 0.744 1.06 0.94 0.73 19
65 Russia — 0.692 0.644 0.662 0.693 0.714 0.719 — 0.19 0.82 —
73 Brazil — — — 0.649 0.678 0.693 0.699 — — 0.73 —
83 Turkey 0.467 0.552 0.583 0.629 0.656 0.674 0.679 1.24 1.03 0.76 14
89 China 0.368 0.460 0.518 0.567 0.616 0.655 0.663 1.96 1.83 1.57 2
91 Sri Lanka 0.513 0.558 0.584 — 0.635 0.653 0.658 0.83 0.82 — 51
92 Thailand 0.483 0.546 0.581 0.600 0.631 0.648 0.654 1.01 0.90 0.86 29
97 Philippines 0.523 0.552 0.569 0.597 0.619 0.635 0.638 0.66 0.72 0.67 78
101 Egypt 0.393 0.484 0.523 0.566 0.587 0.614 0.620 1.52 1.23 0.90 8
108 Indonesia 0.390 0.458 0.508 0.500 0.561 0.593 0.600 1.43 1.35 1.82 12
110 South Africa — 0.601 0.634 — 0.587 0.594 0.597 — -0.03 — —
113 Vietnam 0.407 0.457 0.505 0.540 0.566 0.572 — 1.70 1.24 —
119 India 0.320 0.389 0.415 0.440 0.482 0.512 0.519 1.61 1.44 1.66 6
125 Pakistan 0.311 0.359 0.389 0.416 0.468 0.487 0.490 1.52 1.55 1.64 10
128 Kenya 0.404 0.437 0.435 0.424 0.443 0.464 0.470 0.50 0.37 1.03 87
129 Bangladesh 0.259 0.313 0.350 0.390 0.432 0.463 0.469 1.99 2.03 1.86 3
World 0.455 0.526 0.554 0.570 0.598 0.619 0.624 1.05 0.85 0.89
Source : HDR 2010.
* Measured using deviation from fit. Lower the number, faster the improvement.
Table 12.2 : India’s Global Position in Human Development 2010

Country HDI GNI per capita Life Expectancy Mean Yrs of Expected Yrs of
2010 (PPP2008 US $) 2010 at birth(yrs) 2010 Schooling 2010 Schooling 2010*
Norway 0.938(1) 58,810 81.0 12.6 17.3
Australia 0.937(2) 38,692 81.9 12.0 20.5
Poland 0.795 (41) 17,803 76 10.0 15.2
Malaysia 0.744 (57) 13,927 74.7 9.5 12.5
Russia 0.719 (65) 15,258 67.2 8.8 14.1
Brazil 0.699 (73) 10,607 72.9 7.2 13.8
Turkey 0.679 (83) 13,359 72.2 6.5 11.8
China 0.663 (89) 7258 73.5 7.5 11.4
Sri Lanka 0.658 (91) 4486 74.4 8.2 12.0
Thailand 0.654 (92) 8001 69.3 6.6 13.5
Philippines 0.638 (97) 4002 72.3 8.7 11.5
Egypt 0.620 (101) 5889 70.5 6.5 11.0
Indonesia 0.600 (108) 3957 71.5 5.7 12.7
South Africa 0.597 (110) 9812 52.0 8.2 13.4
Vietnam 0.572 (113) 2995 74.9 5.5 10.4
India 0.519 (119) 3337 64.4 4.4 10.3
Pakistan 0.490(125) 2678 67.2 4.9 6.8
Kenya 0.470(128) 1,628 55.6 7.0 9.6
Bangladesh 0.469(129) 1587 66.9 4.8 8.1
World 0.624 10,631 69.3 7.4 12.3
Source: HDR 2010
Note: * Refers to an earlier year than specified.
Figures in parentheses in Column 2 give ranking among 169 countries.
Human Development, Equity and Environemnt 293
It is less than the global average of 69.3 years. the purview of the States. Major programme-specific
Similarly, the performance of India in terms of mean funding is available to the States through Centrally
years of schooling is not only much below that of Sponsored Schemes.
countries like Sri Lanka, China, Egypt, and Vietnam, 12.7 Expenditure on social services (which include
but also lower than the global average. education, medical and public health, family welfare,
12.5 In terms of gender equality index (GEI), India water supply and sanitation, welfare of Scheduled
with an index value of 0.748 ranks 122 out of a total Castes (SCs), Scheduled Tribes (STs) and Other
of 168 countries in 2008. The GEI captures the loss Backward Classes (OBCs), labour and labour
in achievement due to gender disparities in the areas welfare, social security, nutrition, and relief for natural
of reproductive health, empowerment, and labour calamities, etc.) by the General Government (Centre
force participation with values ranging from 0 (perfect and States combined) has also shown increase in
equality) to 1 (total inequality). The GEI index value recent years (Table 12.4) reflecting the higher priority
of 0.748 indicates a higher degree of gender given to this sector. Expenditure on social services
discrimination in India compared to countries like as a proportion of total expenditure increased from
China (0.405) and Sri Lanka (0.599). 21.1 per cent in 2005-06 to 23.8 per cent in 2008-09
and further to 25.2 per cent in 2010-11 (BE). As a
Trends in India's social-sector expenditures proportion of GDP, its share increased from 5.49 per
cent in 2005-06 to 6.63 per cent in 2010-11 (BE).
12.6 The Central Government expenditure on social Expenditure on education as a proportion of total
services and rural development (Plan and non-Plan) expenditure has increased marginally from 10 per
which contributes to human development has gone cent in 2005-06 to 11.3 per cent in 2010-11 (BE).
up consistently over the years (Table 12.3). It has While the expenditure on health as a proportion of
increased from 13.75 per cent in 2005-06 to 19.27 the GDP has increased from 1.23 per cent in 2005-
per cent in 2010-11. The Central support for social 06 to 1.27 per cent in 2010-11 (BE), its share in total
programmes has continued to expand in various expenditure has increased marginally from 4.7 per
forms although most social-sector subjects fall within cent in 2005-06 to 4.8 per cent in 2010-11 (BE).
Table 12.3 : Central Government Expenditure (Plan and non-Plan) on Social Services and
Development
(as Per Cent of total expenditure)
ITEM 2005-06 2006-07 2007-08 2008-09* 2009-10 2010-11
Actual Actual Actual Actual RE BE
1. Social Service
a. Education, Sports, Youth Affairs 3.71 4.28 4.02 4.04 3.96 4.46
b. Health & Family Welfare 1.89 1.87 2.05 1.91 1.90 2.03
c. Water Supply, Housing, etc. 2.08 1.72 2.02 2.31 2.20 2.27
d. Information & Broadcasting 0.30 0.25 0.22 0.22 0.20 0.22
e. Welfare of SC/STand OBC 0.33 0.34 0.36 0.35 0.41 0.63
f. Labour & Employment 0.25 0.32 0.27 0.27 0.22 0.25
g. Social Welfare & Nutrition 0.84 0.85 0.82 0.72 0.79 1.06
h. North-eastern Areas 0.00 0.00 0.00 1.56 1.50 1.75
i. Other Social Services 0.40 -0.17 1.29 1.55 1.87 1.34
Total 9.79 9.47 11.06 12.94 13.06 14.02
2. Rural Development 3.12 2.84 2.80 4.50 4.27 4.17
3. Pradhan Mantri Gram Sadak Yojana (PMGSY) 0.83 1.08 0.91 0.88 1.11 1.08
4. Social Services, Rural Development, and PMGSY 13.75 13.38 14.77 18.32 18.44 19.27
5. Total Central Government Expenditure 100.00 100.00 100.00 100.00 100.00 100.00
Source : Budget Documents and Ministry of Rural Development

Note: SC-Scheduled Caste; ST-Scheduled Tribe; OBC-Other Backward Class; PMGSY-Pradhan Mantri Gram Sadak
Yojana; RE-revised estimate.
* Provisional.
Table 12.4 : Trends in Social Services Expenditure by General Government

(Central and State Governments combined)
(` crore)
Items 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
Actual Actual Actual Actual (RE) (BE)
Total Expenditure 9,59,855 11,09,174 13,16,246 15,95,110 19,09,380 20,71,147
2,02,672 2,39,340 2,94,584 3,80,269 4,76,351 5,22,492
Expenditure on Social Services
of which:
i) Education 96,365 1,14,744 1,29,366 1,61,360 2,04,986 2,35,035
ii) Health 45,428 52,126 63,226 73,898 90,700 99,738
iii) Others 60,879 72,470 1,01,992 1,45,011 1,80,665 1,87,719
As Per Cent of GDP
Total Expenditure 25.99 25.83 26.40 28.57 29.15 26.29
Expenditure on
Social Services 5.49 5.57 5.91 6.81 7.27 6.63
of which:
i) Education 2.61 2.67 2.59 2.89 3.13 2.98
ii) Health 1.23 1.21 1.27 1.32 1.38 1.27
iii) Others 1.65 1.69 2.05 2.60 2.76 2.38
As Per Cent of Total Expenditure
Expenditure on Social Services 21.1 21.6 22.4 23.8 24.9 25.2
of which:
i) Education 10.0 10.3 9.8 10.1 10.7 11.3
ii) Health 4.7 4.7 4.8 4.6 4.8 4.8
iii) Others 6.3 6.5 7.7 9.1 9.5 9.1
As Per Cent of Social Services Expenditure
i) Education 47.5 47.9 43.9 42.4 43.0 45.0
ii) Health 22.4 21.8 21.5 19.4 19.0 19.1
iii) Others 30.0 30.3 34.6 38.1 37.9 35.9
Source : RBI as obtained from Budget Documents of Union and State Governments.
BE: budget estimates; RE: revised estimates.
Inclusive Development 12.10 There is a close connection between social

12.8 This section and the one that follows on social inclusion and financial inclusion. Accordingly, the
sector initiatives, examines the major dimensions Government has devised many schemes for financial
of inclusive development like poverty alleviation, inclusion of the socially excluded like SCs, STs,
employment generation, health, education, and OBCs, and the disabled. The details of some of these
social welfare besides giving the progress of are given in Table 12.5. A major financial inclusion
important Government programmes in those sectors. intiative was formally launched as “Swabhimaan” on
12.9 Inclusive development can be seen in terms of 10 February, 2011 which aims at providing branchless
progress in social inclusion and financial inclusion. banking through the use of technology. Banks will
Despite more than six decades of planned economic provide basic services like deposits, withdrawal and
development, a large part of the population, particularly remittances using the services of Business
segments like landless agricultural labourers, marginal Correspondents (Banks Saathi). The initiative
farmers, SCs, STs, and OBCs, suffers social and enables Government subsidies and social security
financial exclusion. Accordingly, the Government's benefits to be directly credited to the accounts of
policies are directed towards economic and social the beneficiaries, enabling them to draw the money
upliftment of these segments so as to enable everyone from the Business correspondents in their village
to reap the benefits of growth. itself.
Table 12.5 : Details of the Loan Disbursed/Beneficiaries covered under the NSCFDC, NSKFDC,
NBCFDC, and NHFDC
` crore)
Amount of Loan Disbursed (` No. of Beneficiaries
Sl. Corporation Te r m Micro- Others Total Te r m Micro- Others Total
No. Loan finance Loan finance
1 NSFDC 79.94 41.12 - 121.06 9,597 21,897 2,165 33,659

2 NSKFDC 36.67 10.53 17.79 64.99 3,525 4,525 7,371 15,421
3 NBCFDC 62.27 44.50 - 106.77 31,489 49,171 - 80,660
4 NHFDC 17.63 2.15 0.08 19.86 3,438 1,070 3 4,511*
Total 196.51 98.3 17.87 312.68 48,049 76,663 9,539 1,34,251
Source: Ministry of Social Justice & Empowerment.
Notes: * including estimated number of beneficiaries on average loan basis against released advance funds
to State Channalising Agencies (SCAs).
NSCFDC—National Scheduled Caste Finance and Development Corporation;
NSKFDC-National Safai Karamcharis Finance Development Corporation;
NBCFDC—National Backward Classes Finance Development Corporation;
NHFDC—National Handicapped Finance and Development Corporation.
12.11 Special efforts are being made by the states are doing comparatively better, they are still
Government of India for the social and economic lagging behind in terms of financial inclusion. The
upliftment of the north-east region. While in terms of tribal population which constitutes a major chunk of
some parameters like gross state domestic product the population is very much distanced from the
(GSDP) growth and literacy rate the north-eastern socio-economic development visible in the rest of
Box 12.1 : North-Eastern States and Financial Inclusion

In terms of financial inclusion the north-east region lags behind the rest of the nation. Banks have entered the north-eastern
states very late. Among north eastern states, only Assam, Meghalaya, Tripura and Sikkim have had local banks operating
for the last few decades. Private-sector banks are conspicuous by their low presence in these states. If the gross inadequacy
of the branch network is one of the factors hindering financial inclusion, political disturbances resulting in the non-
functioning of some of the existing branches is another. For extending credit, some banks have liberally issued Kisan Credit
Cards to farmers. Self-help groups are also being promoted in large numbers for providing micro-finance to the poor. Yet,
the number of those who remain beyond the reach of banks is more than those who have been covered by bank branches.
The banking penetration ratio (defined as the proportion of the households availing banking facilities) is very low in the
north-east region. According to the Analytical Report on Household Assets, Census of India 2001, the banking penetration
ratio in almost all states except Arunachal Pradesh is lower than the national average, with Manipur having the lowest ratio
(see Table).
Table
(in per cent)
State Banking Penetration Ratio State Banking Penetration Ratio
Manipur 8.7 Nagaland 15.9
Assam 20.5 Meghalaya 20.8
Tripura 26.5 Sikkim 29.7
Mizoram 31.8 Arunachal Pradesh 37.5
National Average 35.8
The National Sample Survey (NSS) data of 59th Round (2003), reveal that the proportion of farm households excluded
from accessing credit from institutional sources to total farm households is as high as 96 in the north eastern States. Thus
banking development indicators show the poor state of banking and resultant low level of financial outreach in these states.
The Central Government's "New Initiatives for North Eastern Regions" announced in 1996 proposed a number of measures
including setting up of the North Eastern Development Finance Corporation Ltd. for integrated development of the region.
The RBI has also set up a committee for a financial-sector plan for the north-east region in 2006. To improve banking
penetration in the north-east, the RBI has asked the state governments in the region as well as banks to identify centres
where there is a need for setting up branches or banking facilities. RBI would bear the one time capital cost and recurring
cost per annum for a limited period of 5 years under the Viability Gap Funding scheme for the north-east region. RBI has
also permitted banks to open branches in rural, semi urban and urban centers in north-eastern states without its permission
subject to reporting. Awareness programme for educating the uninitiated rural population are being organized by all banks
with the active support of the RBI. However, a lot more needs to be done for financial inclusion of the north-east region.
the country. Moreover, each of the eight north- (HPI) used since 1997. The MPI indicates the share
eastern states has its own ethnic and socio- of the population that is multidimensionally poor
economic problems for which there is no uniform adjusted by the intensity of deprivation in terms of
solution, making the implementation of policy living standards, health, and education. According
measures difficult. Added to this are inherent to this parameter, India with a poverty index of 0.296
problems of lower growth rate, low population and poverty ratios of 41.6 per cent (in terms of PPP
density, lack of infrastructure development, and $ 1.25 a day ) and 28.6 per cent (national poverty
insurgency. Social inclusion in the north-east is line) is not favourably placed when compared with
closely linked to financial inclusion and corrective
countries like China and Sri Lanka. In fact, the
steps are needed in this direction (Box 12.1).
difference in population below the poverty line (BPL)
Recognizing this reality, the Eleventh Five Year Plan
widens substantially in case of India when this
aimed at faster and more inclusive growth by
indicator is used instead of the national poverty line
restructuring policies with special focus on this
indicator, while for other countries, there is less of a
region. Within this policy paradigm, the Reserve
Bank of India (RBI) has also launched a difference and in some cases even a fall (Table 12.6).
comprehensive programme with financial inclusion 12.13 The Planning Commission which is the nodal
as a goal of the banking system. agency for estimating the number and proportion
of people living below the poverty line at national
POVERTY AND INCLUSIVE GROWTH and State levels, separately for rural and urban
12.12 The HDR 2010 measures poverty in terms areas, makes poverty estimates based on a large
of a new parameter, namely multidimensional poverty sample survey of household consumption
index (MPI), which replaced the human poverty index expenditure carried out by the National Sample
Survey Organization (NSSO) after an interval of
Table 12.6 : Multidimensional Poverty Index
Population below Income Poverty Line
Country Multidimensional PPP $1.25 National Poverty
Poverty Index* a day Line
2000-2008** 2000-2008** 2000-2008**
Poland — (41) Less than 2 14.8

Malaysia ——(57) Less than 2 12.8
Russia 0.005 (65) Less than 2 19.6
Brazil 0.039 (73) 5.2 21.5
Turkey 0.039 (83) 2.6 27
China 0.056 (89) 15.9 2.8
Sri Lanka 0.021 (91) 14 22.7
Thailand 0.006 (92) Less than 2 —-
Philippines 0.067 (97) 22.6 ——
Egypt 0.026 (101) Less than 2 16.7
Indonesia 0.095 (108) 29.4 16.7
South Africa 0.014(110) 26.2 22.0
Vietnam 0.075(113) 21.5 28.9
India 0.296 (119) 41.6 28.6
Pakistan 0.275(125) 22.6 —
Kenya 0.302(128) 19.7 46.6
Bangladesh 0.291(129) 49.6 40.0
Source: HDR 2010.
Note: * Not all indicators were available for all countries; Caution should thus be used in cross-country
comparisons.
** Data refer to the most recent year available during the period specified.
Figures in parentheses in Column 2 give ranking among 169 countries.
Table 12.7: Poverty Ratios by URP and MRP poverty line in rural areas while ensuring that the
total number of such households corresponds to
(per cent)
the Planning Commission estimates. The
Sl. No. Category Years methodology of estimating poverty and the
By URP Method 1993-94 2004-05 identification of BPL households have been a matter
1. Rural 37.3 28.3 of debate. Two committees under the chairmanship
of Prof. Suresh D. Tendulkar and Dr. N.C. Saxena
2. Urban 32.4 25.7
have submitted their reports on methodology for
3. All India 36.0 27.5 estimation of poverty and methodology for
By MRP Method 1999-2000 2004-05 conducting BPL census in Rural areas, respectively.
4. Rural 27.1 21.8 Further, an expert Group under the chairmanship
of Prof. S.R. Hasim has been set up to recommend
5. Urban 23.6 21.7
methodology for identification of BPL families in
6. All India 26.1 21.8 urban areas (Box.12.2).
Source: Planning Commission.
Inequality
approximately five years. The Commission has been 12.15 According to HDR 2010, inequality in India
estimating the poverty line and poverty ratio since for the period 2000-10 in terms of the income Gini
1997 on the basis of the methodology spelt out in coefficient was 36.8. India's Gini index was more
the report of the Expert Group on 'Estimation of favourable than those of comparable countries like
Number and Proportion of Poor' (known as South Africa (57.8), Brazil (55), Thailand (42.5),
Lakdawala Committee Report). On the basis of NSS
Turkey (41.2), China (41.5), Sri Lanka (41.1),
61st Round (July 2004 to June 2005) consumer
Malaysia (37.9), Vietnam (37.8), Indonesia (37.6),
expenditure data, the poverty ratio is estimated at
and even the USA (40.8), Singapore (42.5), Hong
28.3 per cent in rural areas, 25.7 per cent in urban
Kong (43.4), Portugal (38.5), and Poland (34.9) which
areas, and 27.5 per cent for the country as a whole
are otherwise ranked very high in human development.
in 2004-05 using uniform recall period (URP). In
URP, consumer expenditure data for all the items 12.16 Inter-State inequality as reflected in the
are collected for a 30-day recall period. Based on Lorenz ratio, estimated by the NSSO based on
mixed recall period (MRP) for the same period, the household consumer expenditure for 2004-05, for rural
poverty ratios are 21.8 per cent in rural areas, 21.7 India and urban India for total consumption
per cent in urban areas, and 21.8 per cent for the expenditure was 0.30 and 0.37 respectively. This
country as a whole. In MRP, consumer expenditure indicates, higher relative inequality in urban areas.
data for five non-food items, namely clothing, Lower inequality was seen in rural areas of Assam
footwear, durable goods, education, and institutional (0.197), Meghalaya (0.155), and Manipur (0.158) than
medical expenses, are collected for a 365-day recall in Kerala (0.341), Haryana (0.323), Tamil Nadu
period and the consumption data for the remaining (0.315), and Maharashtra (0.310). Similarly, lower
items are collected for a 30-day recall period. The inequality was seen in urban areas of Arunachal
poverty estimate in 2004-05 based on URP Pradesh (0.243), Jammu & Kashmir (0.244),
consumption (27.5) is comparable to that of 1993- Meghalaya (0.258), and Manipur (0.175) than in
94 (36). The poverty estimates in 2004-05 based Chattisgarh (0.439), Goa (0.405), Kerala (0.400), and
on MRP consumption (about 21.8) is roughly (but Madhya Pradesh (0.397). Disparities in cereal
not strictly) comparable to that of 1999-2000 (26.1). consumption are less marked than disparities in total
Table 12.7 shows the comparable poverty estimates consumption expenditure, whereas greater
based on the URP and MRP methods. disparities exist in consumption of durable goods
than in total consumption.
Methodology for Estimation of Poverty and
BPL Households Employment
12.14 While the estimation of poverty at national 12.17 The key strategy for achieving inclusive
and State levels, separately for rural and urban areas, growth in the Eleventh Plan has been generation of
is done by the Planning Commission, the Ministry productive and gainful employment, with decent
of Rural Development has been conducting the BPL working conditions, on a sufficient scale to absorb
census to identify individual households below the the growing labour force. The Eleventh Plan
Box 12.2 : Expert Groups for Estimating Poverty and BPL Families
I. Tendulkar Committee Report to Review the Methodology for Estimation of Poverty
The Planning Commission constituted an Expert Group in December 2005 under the chairmanship of Professor Suresh D.
Tendulkar to review the methodology for estimation of poverty. The Expert Group submitted its report in December 2009.
While acknowledging the multidimensional nature of poverty, the Expert Group recommended moving away from anchoring
poverty lines to the calorie - intake norm to adopting MRP based estimates of consumption expenditure as the basis for
future poverty lines and MRP equivalent of the urban poverty line basket (PLB) corresponding to 25.7per cent urban
headcount ratio as the new reference PLB for rural areas. On the basis of the above methodology, the all-India rural poverty
headcount ratio for 2004-05 was estimated at 41.8 per cent, urban at 25.7 per cent, and all-India at 37.2 per cent. It may,
however, be mentioned that the Tendulkar Committee's estimates are not strictly comparable to the official poverty
estimates because of different methodologies. The relevant estimates for 1993-94 and 2004-05 are shown in the Table.
Poverty Ratios
1993-94 2004-05
Year Rural Urban Total Rural Urban Total
Planning Commission (URP) 37.3 32.4 36.0 28.3 25.7 27.5
Tendulkar Estimates
(2004-05) (MRP) 50.1 31.8 45.3 41.8 25.7 37.2
As has been indicated in the Mid Term Appraisal of the Eleventh Five Year Plan, the revised poverty lines for 2004-05 as
recommended by the Tendulkar Committee have been accepted by the Planning Commission. The Tendulkar Committee
has specifically pointed out that the upward revision in the percentage of rural poverty in 2004-05, resulting from the
application of a new rural poverty line should not be interpreted as implying that the extent of poverty has increased over
time. These estimates, as reported by the Committee, clearly show that whether we use the old method or the new, the
percentage of BPL population has declined by about the same magnitude.
II. Saxena Committee Report to Review the Methodology for Conducting BPL Census in Rural Areas
An Expert Group headed by Dr N.C. Saxena was constituted by the Ministry of Rural Development to recommend a
suitable methodology for identification of BPL families in rural areas. The Expert Group submitted its report in August
2009 and recommended doing away with score-based ranking of rural households followed for the BPL census 2002. The
Committee has recommended automatic exclusion of some privileged sections and automatic inclusion of certain deprived
and vulnerable sections of society, and a survey for the remaining population to rank them on a scale of 10.
Automatic Exclusion
Households that fulfil any of the following conditions will not be surveyed for BPL census:
 Families who own double the land of the district average of agricultural land per agricultural household if partially or
wholly irrigated (three times if completely unirrigated).
 Families that have three or four wheeled motorized vehicles, such as, jeeps and SUVs.
 Families that have at least one mechanized farm equipment, such as, tractors, power tillers, threshers, and harvesters.
 Families that have any person who is drawing a salary of over ` 10,000 per month in a non-government/ private
organization or is employed in government on a regular basis with pensionary or equivalent benefits.
 Income tax payers.
Automatic Inclusion
The following would be compulsorily included in the BPL list:
 Designated primitive tribal groups.
 Designated most discriminated against SC groups, called Maha Dalit groups.
 Single women-headed households.
 Households with a disabled person as breadwinner.
 Households headed by a minor.
 Destitute households which are dependent predominantly on alms for survival.
 Homeless households.
 Households that have a bonded labourer as member.
Survey of the remaining rural households is to be conducted and scores given depending upon the different socio-economic
parameters recommended by the committee. The Ministry of Rural Development is in the process of conducting the pilot
studies and participatory rural appraisal (PRA) exercises to fine tune the methodology.
III. Expert Group (S.R. Hashim Committee) on the Methodology for Identification of BPL Families in Urban Areas.
The Ministry of Housing and Urban Poverty Alleviation (HUPA) is the nodal Ministry for issue of guidelines to identify
BPL families in urban areas. Till now, no uniform methodology was being followed by the States/UTs to identify the urban
poor. An Expert Group under the Chairmanship of Professor S.R. Hashim has been constituted by the Planning Commission
to recommend the methodology for identification of BPL families in urban areas. The Expert Group is expected to submit
its report shortly.
(2007-12) aims at generation of 58 million work The CDS captures the unemployed days of the
opportunities in twenty-one high growth sectors so chronically unemployed, the unemployed days of
that the unemployment rate falls to 4.83 per cent by the usually employed who become intermittently
the end of the Plan. The 64th round (2007-08) of unemployed during the reference week, and
NSSO survey on employment-unemployment unemployed days of those classified as employed
indicates creation of 4 million work opportunities according to the current weekly status criterion.
between 2004-05 and 2007-08.
Employment in the Organized Sector
12.18 As highlighted in Economic Surveys of
previous years based on NSSO data, employment 12.20 Employment growth in the organized sector,
on a current daily status (CDS) basis during 1999- public and private combined, increased during the
2000 to 2004-05 had accelerated significantly as period 1994- 2008. This has primarily been due to
compared to the growth witnessed during 1993-94 employment growth in the private sector.
to 1999-2000. During 1999-2000 to 2004-05, about Employment in establishments covered by the
47 million work opportunities were created compared Employment Market Information System of the
to only 24 million in the period between 1993-94 and Ministry of Labour and Employment grew at 1.20
1999-2000 and employment growth accelerated from per cent per annum during 1983-94 but the growth
1.25 per cent per annum to 2.62 per cent per annum. decelerated to 0.05 per cent per annum during 1994-
However, since the labour force grew at a faster rate 2008. This decline was mainly due to a decrease in
of 2.84 per cent than the workforce, unemployment employment growth in public-sector establishments
also rose. The incidence of unemployment on CDS from 1.53 per cent per annum in the earlier period to
basis increased from 7.31 per cent in 1999-2000 to (-)0.65 per cent per annum in the later period. The
8.28 per cent in 2004-05. private sector, on the other hand, showed accelerated
growth from 0.44 per cent to 1.75 per cent per
Unemployment annum (Table12.9).
12.19 The next quinquennial round of survey i.e.
the 66th NSS round for estimating unemployment Table 12.9 : Rate of Growth of Employment
rates is under way with fieldwork undertaken during in the Organized Sector
2009-10. The updated information based on this (per cent per annum)
round is awaited. However, an estimate of 1983-94 1994-2008
unemployment rates based on the 64th round is Public Sector 1.53 -0.65
shown in Table 12.8. A comparative study of different
Private Sector 0.44 1.75
estimates of unemployment during 2007-08 indicates
Total Organized 1.20 0.05
that the CDS estimate of unemployment rate being
the broadest is the highest. The higher Source: Planning Commission and Directorate
General of Employment and Training (DGET), Ministry
unemployment rates according to the CDS approach
of Labour and Employment.
vis-a-vis weekly and usual status approaches
indicate a high degree of intermittent unemployment.
Table 12.8 : All-India Rural and Urban Effect of Global Financial Crisis and Eco-
Unemployment Rates* from the NSS nomic Slowdown
64th Round 2007-08: Different Estimates
12.21 The global financial crisis of 2008 lowered
Sl. No. Estimate Rural Urban the growth rate for 2008-09 to 6.8 per cent from over
9.0 per cent during each of the previous three years.
1 UPS 2.2 4.5
As the Government was concerned about the
2 US(adj.) 1.6 4.1 possible fallouts of the global slowdown on the Indian
3 CWS 3.9 5.0 economy, including job loss and on creation of
4 CDS 8.4 7.4 additional employment, financial and fiscal stimulus
Notes:* As per cent of labour force.
packages were announced. As a result, the Indian
UPS– usual principal status; US (adj.)–usually economy started to recover robustly, climbing back
unemployed excluding subsidiary status workers; to near pre-crisis levels, and recording one of the
CWS–current weekly status. fastest growth rates in the world. The Government
Source: NSS Report No. 531(64/10.2/1). has been continuously monitoring the effect of the
(Box 12.4). However, a word of caution is needed as

Box 12.3 : Eighth Quarterly Survey Report on
the latest data for many of the important indicators
Effect of Economic Slowdown on Employment
are not available at national level.
in India July to September 2010
12.23 The socio-economic performance of States
The Labour Bureau conducted eight quarterly quick
has been varied. While developed states like Gujarat,
employment surveys to assess the impact of the economic
Maharashtra, Karnataka, Haryana, Kerala, and Tamil
slowdown on employment in India. The results for selected
Nadu have performed well in terms of many
sectors, i.e. textiles including apparel, leather, metals,
indicators, many hitherto backward states like Bihar,
automobiles, gems and jewellery, transport, information
technology (IT)/business process outsourcing (BPO) and
Orissa, and Uttarakhand are showing good growth
handloom / powerloom are briefly summarized as performance and many of the backward states like
follows:- Rajasthan, Uttar Pradesh, Madhya Pradesh, and
 While comparing the results of the last four quarterly Bihar are benefiting from poverty-alleviation
surveys, i.e. September 2010 over September 2009,
employment schemes like the MGNREGS and
overall employment has increased by 12.96 lakh, with NRHM.
the highest increase of 9.36 lakh in IT/BPO followed by
0.79 lakh in textiles, 0.99 lakh in metals, 1.15 lakh in Poverty-alleviation and employment-genera-
automobiles, and 0.39 lakh in gems and jewellery. tion programmes
 An upward trend in employment has been continuously 12.24 With a view to achieving inclusive
observed since July 2009. During the quarter July to development, several poverty-alleviation and
September 2010, employment has increased in respect employment-generation programmes are being
of all eight sectors and overall employment by 4.35 implemented by the Government of India. Some of
lakh. At sectoral level, the maximum increase of 2.45 the important schemes are as follows:
lakh during the period is in textiles including apparel,
followed by 1.08 lakh in IT/BPO, 0.29 lakh in (i) The Mahatma Gandhi National Rural
automobiles, and 0.27 lakh in metals. Employment Guarantee Scheme
(MGNREGS):
 In export-oriented units, overall employment has
increased by 3.05 lakh whereas in non-exporting units, 12.25 This flagship programme of the Government
it has increased by 1.30 lakh during the period of India touches the lives of the rural poor and
September 2010 over June 2010. promotes inclusive growth. The MGNREGS aims at
enhancing livelihood security of households in rural
areas of the country by providing at least one hundred
global financial crisis and economic slowdown on
days of guaranteed wage employment in a financial
employment in India. The Quarterly Quick
year to every household whose adult members
Employment Surveys conducted by the Labour
volunteer to do unskilled manual work. It also
Bureau indicate that the upward trend in employment
mandates 33 per cent participation for women. The
since July 2009 has been maintained (Box.12.3).
primary objective of the Scheme is to augment wage
Socio- Economic Development: Inter State employment. This is to be done while also focussing
on strengthening natural resource management
comparison
through works that address causes of chronic poverty
12.22 Inclusive development also includes the like drought, deforestation, and soil erosion and thus
objective of reduction of inter-State and inter-regional encourage sustainable development. The MGNREG
disparities. The national Human Development Report Act was notified in 200 districts in the first phase
2001 of the Planning Commission had made detailed with effect from 2 February 2006 and then extended
comparisons in this respect using development to an additional 130 districts in the financial year
indicators. No such major official exercise has since 2007-08. The Act has been notified throughout the
been carried out , though there are many studies by country with effect from 1 April 2008. During 2009-
different organizations. The Economic Survey 2007- 10, 5.26 crore households were provided
08 had also made inter-State comparisons based employment under this scheme as against more
on socio-economic indicators. The inter-State than 4.51crore during 2008-09. During 2010-11,
comparisons of socio-economic development of the budget estimate for the MGNREGS is ` 40,100
selected states based on the available indicators crore out of which ` 29,822.59 crore have been
given in Table 12.10 show some interesting results released to the States/ UTs till February 10, 2010.
Box 12.4 : Socio-economic Development in Indian States
Growth related
 The best performer in terms of growth during 2002-03 to 2008-09 was Gujarat, followed by Bihar, Orissa, Haryana,
and Uttarakhand. States like Madhya Pradesh, Assam, Punjab, and Uttar Pradesh registred a relatively lower
growth rate. Interestingly, the best performer in 2008-09 was Bihar with a growth rate of 16.59 per cent. While the
good growth performance of some of the hitherto backward states like Bihar and Orissa is a welcome sign, this may
also be partially due to the low base effect because of the growth deficit in earlier years. In fact, many states like
Bihar, Chattisgarh, Orissa, and Uttarakhand that showed high growth in 2002-03 to 2008-09, had witnessed low
growth in 1994-95 to 2001-02.
Poverty Related
 The percentage of people below the poverty line is very high in states like Orissa, Bihar, Chhattisgarh, Jharkhand,
Uttarakhand, and Madhya Pradesh, both in terms of URP and MRP. Punjab is the best performing state in terms of this
indicator.
 Income inequality measured by the Gini coefficient (in rural areas) is highest in Haryana followed by Kerala, Maharashtra,
Punjab, Tamil Nadu, and West Bengal. Though inequality is lowest in rural areas of Bihar and Assam, this may mean
greater equality at low levels of income.
 In urban areas, income inequality is highest in Madhya Pradesh followed by West Bengal, Haryana, Karnataka, Kerala,
Maharashtra, and Chhattisgarh.
Health Related
 Infant mortality rates (IMR) i.e. the number of infant deaths (one year of age or younger) per 1000 live births, for which
relatively recent data are available, were highest in Madhya Pradesh, Orissa, Uttar Pradesh, Assam, Rajasthan,
Chhattisgarh, and Bihar. Kerala was by far the best performing State, way above Tamil Nadu and Maharashtra.
 Birth rates in 2008 were lowest in Kerala, while UP had the highest rates, followed by Bihar, Madhya Pradesh, and
Rajasthan.
 While death rates do not show large variation across States, the worst performer in this regard was Orissa, followed by
Madhya Pradesh, Assam, and Uttar Pradesh.
Education Related
 Interestingly, the best performer in terms of gross enrolment ratio (GER) for elementary education was Jharkhand,
followed by Madhya Pradesh, Chhattisgarh, and Gujarat and the worst performers were Haryana, Kerala, and Punjab
which were the best performers in many other areas. This may be due to overage children studying in primary schools
in backwards states and double entry of data in some states. GER for secondary education was highest in Himachal
Pradesh, Tamil Nadu, Kerala, and Madhya Pradesh while Bihar was the worst performing State.
MGNREGS
 Under the Mahatma Gandhi National Rural Employment Guarantee Schemes (MGNREGS), maximum employment
during 2009-10 was provided in Rajasthan followed by Andhra Pradesh, Uttar Pradesh, Madhya Pradesh, Tamil
Nadu and Bihar.
 In terms of share in person days under the MGNERGS, the share of SCs was highest in Punjab followed by Tamil
Nadu, Uttar Pradesh, Haryana, and Bihar, while the share of STs was highest in Madhya Pradesh followed by
Jharkhand, Gujarat, and Chhattisgarh. The share of women was highest in Kerala followed by Tamil Nadu, Rajasthan,
and Andhra Pradesh.
NRHM
 Under the National Rural Health Mission (NRHM), the maximum number of primary health centres were operating
in Tamil Nadu, followed by Karnataka, Andhra Pradesh, Maharashtra, Uttar Pradesh and Bihar.
About 4.10 crore households have been provided infrastructure building activities, reducing transaction
employment during 2010-11 till December 2010. Out costs, better monitoring, and extension to urban
of the 145 crore person days created under the areas.
scheme during this period, 23 per cent and 17 per
(ii) Swarnjayanti Gram Swarojgar Yojana
cent were accounted for by SC and ST population
(SGSY)
respectively and 50 per cent by women. Many
initiatives are being taken for better and more 12.26 The SGSY is a major ongoing scheme
effective implementation of the MGNREGS (Box launched in April 1999 to help poor rural families
12.5). However, there is scope for improvements (Swarozgaris) cross the poverty line by assisting
like shifting to permanent asset creation and them to take up income- generating economic
Table 12.10 : Socio Economic Profile of Major States of India
Socio Economic Indicators / Items Andhra Assam Bihar Chhattis- Gujarat Haryana H.P.
Pradesh garh
Projected Population as on 01.10. 2010

(persons in ‘000) 84,426 30,413 97,192 24,124 58,702 25,270 6,767
Growth Related
(real growth rates of States-GSDP percentage at
constant prices as on 26 April 2010)
2008-09 5.04 6.17 16.59 6.81 7.21*** 7.92 7.44
Average 1994-95 to 2001-02 5.70 2.21 4.94 3.16 6.45 6.47 6.81
Average 2002-03 to 2008-09 8.20 5.51 9.80 9.28 11.19 9.28 7.77
Poverty Related (% of population below poverty line)

*URP(2004-05) 15.8 19.7 41.4 40.9 16.8 14 10.0
*MRP(2004-05) 11.1 15 32.5 32.0 12.5 9.9 6.7
Gini Coefficient(MRP-2004-05)*
Rural 0.24 0.17 0.17 0.24 0.25 0.31 0.26
Urban 0.34 0.30 0.31 0.35 0.32 0.36 0.26
Health Related (Life Expectancy at Birth) (2002-06)**

Male 62.9 58.6 62.2 ** 62.9 65.9 66.5
Female 65.5 59.3 60.4 ** 65.2 66.3 67.3
Infant Mortality Rates (per 1000 live births) 2009 49.0 61.0 52.0 54.0 48.0 51.0 45.0
Birth Rate (per 1000) 2009 18.3 23.6 28.5 25.7 22.3 22.7 17.2
Death Rate (per 1000) 2009 7.6 8.4 7.0 8.1 6.9 6.6 7.2
Education Related
GER(6-10 years) (2007-08) Total 95.5 106.1 104.4 125.5 123.0 90.4 111.7
GER(11-13 years) (2007-08) Total 77.3 91.3 46.2 89.8 78.2 75.7 114.3
GER(6-13 years) (2007-08) Total 88.3 100.4 82.6 112.2 106.0 84.8 112.7
Pupil-Teacher Ratio (2007-08) (6-10 years) 32 38 68 43 30 53 18
Basic Amenities:
Percentage Share in Total Energy Consumption (GWh) by 9.73 0.51 0.88 2.11 8.81 3.64 1.00
Ultimate Consumers in 2007-2008
Progress under NRHM 24 x 7 800 343 533 418 331 318 95
(Primary Health Centres as on 31.01.2010)
Social Sector Schemes Related

Percentage Share in HH Provided Employment 11.71 4.06 7.85 3.85 3.04 0.30 0.95
during 2009-10
Percentage Share in Employment during 2009-10

under MGNREGS of
SCs 24.68 12.15 45.3 15.32 14.87 53.59 33.36
STs 14.71 31.02 2.16 38.2 39.46 0.01 8.70
Women 58.10 27.70 30.04 49.21 47.55 34.81 46.09
Source : Planning Commission, Office of Registrar General of India (RGI), Ministry of Human Resource Development (HRD), Ministry
of Health and Family Welfare
* MRP–Mixed recall period, *URP-Uniform recall period, HH—household.
**Data relating to Bihar, MP, and UP include Jharkhand, Chattisgarh, and Uttrakhand respectively.
activities through a mix of bank credit and government per cent and women 40 per cent of the swarozgaris.
subsidy. The scheme involves selection of key The share of minorities and disabled persons will be
activities, planning of activity clusters, organization 15 per cent and 3 per cent respectively. Also, 15 per
of the poor into self-help groups (SHGs), and building cent of the SGSY allocation is set apart for special
of their capacities through training and skill projects that are implemented with different models
development, creation of infrastructure, and of self-employment generation and to enhance the
technological and marketing support. The SGSY income-generating capacity of the rural poor. Since
specially focuses on vulnerable sections among the its inception, up to December 2010, 40.04 lakh SHGs
rural poor with SCs/STs to account for at least 50 have been formed under the SGSY, with women
Jhark- Karna- Kerala Madhya Mahara- Orissa Punjab Rajas- Tamil Uttar Uttar- West All-
hand taka Pradesh shtra than Nadu Pradesh khand Bengal India
31,293 59,170 34,467 71,732 112,042 40,603 27,556 67,401 67,273 1,99,347 9,885 89,158 1,186,146
5.52 5.08 6.98 NA NA 6.65 6.40 6.57 4.55 6.46 8.67 6.34 6.7
3.62 6.27 5.33 4.73 4.97 3.90 4.23 7.36 5.54 4.09 4.61 6.73 6.16
7.54 8.10 8.73 4.51 8.70 9.34 5.56 7.60 7.33 5.78 9.15 6.66 7.83
40.3 25 15 38.3 30.7 46.4 8.4 22.1 22.5 32.8 39.6 24.7 27.5
34.8 17.4 11.4 32.4 25.2 39.9 5.2 17.5 17.8 25.5 31.8 20.6 21.8
0.20 0.23 0.29 0.24 0.27 0.25 0.26 0.20 0.26 0.23 0.22 0.24 0.25
0.33 0.36 0.35 0.37 0.35 0.33 0.32 0.30 0.34 0.34 0.30 0.36 0.35
** 63.6 71.4 58.1 66 59.5 68.4 61.5 65.0 60.3 ** 64.1 62.6
** 67.1 76.3 57.9 68.4 59.6 70.4 62.3 67.4 59.5 ** 65.8 64.2
44.0 41.0 12.0 67.0 31.0 65.0 38.0 59.0 28.0 63.0 41.0 33.0 50.0
25.6 19.5 14.7 27.7 17.6 21.0 17.0 27.2 16.3 28.7 19.7 17.2 22.5
7.0 7.2 6.8 8.5 6.7 8.8 7.0 6.6 7.6 8.2 6.5 6.2 7.3
153.9 106.1 92.3 153.4 101.8 117.0 92.8 118.3 116.1 113.7 119.4 112.9 114.0
62.2 90.2 100.1 100 86.8 80.1 69.1 81.4 112.7 67.8 92.8 71.2 78.1
119.1 100 95.2 133.5 96.1 102.7 83.6 104.4 114.8 96.4 109.3 96.7 100.3
73 23 28 41 34 42 53 43 44 76 25 51 47
2.27 6.82 2.35 4.70 13.53 2.25 5.95 4.71 10.55 7.48 0.94 5.23 100
194 940 178 212 663 64 182 500 1215 648 94 168 8324
3.24 6.72 1.82 8.97 1.12 2.66 0.52 12.40 8.32 10.43 0.99 6.62 100
16.04 16.70 16.77 18.48 25.61 19.16 78.92 26.53 59.07 56.41 26.04 36.86 30.48
42.99 8.57 5.33 45.34 33.16 36.26 0.00 22.50 2.50 1.48 4.04 14.38 20.71
34.25 36.79 88.19 44.23 39.65 36.25 26.28 66.89 82.91 21.67 40.28 33.42 48.10
*** Quick estimates given in Key Statistics of Gujarat State, 2009-10, Directorate of Economics and Statistics, Government of Gujarat.
SHGs accounting for about 68 per cent of the total. families cross the poverty line through regular wage
During this period, a total of about 154.87 lakh employment. About 9.00 lakh rural BPL beneficiaries
swarojgaris have been assisted with bank credit and are to be covered through 116 projects sanctioned /
subsidy. The total investment under the SGSY is ` approved so far with an outlay of about ` 1200 crore.
37,927 crore, including ` 25,743.29 crore credit and About 2.25 lakh youth have already been trained /
` 12,183.58 crore subsidy. Under the Special Project are under training and 1.75 lakh placed so far. A
component of the SGSY, a placement-linked skill new initiative has also been taken up for setting up
development programme has been taken up with a Rural Self Employment Training Institute(RSETI)
in each district of the country for basic and skill
the objective of helping a specific number of BPL
Box 12.5 : MGNREGS : Major Initiatives for Effective Implementation

Major initiatives for effective implementation of the MGNREGS are as follows:
(a) Increasing Transparency and Public Accountability:
 Social Audits: States have reported that social audits have been conducted in 93 per cent of the Districts . Around 2.41
lakh social audit reports have been uploaded on the MGNREGS website indicating verification of 45,428 lakh documents
in 2009-10.
 A new scheme for monitoring by eminent citizens has been introduced whereby 61 eminent citizens have been engaged.
Each has been assigned one district to provide first- hand feed-back on the implementation of the MGNREGS.
 An ombudsman has been instituted in each district for effective grievance redressal.
(b) Effective Administrative and Financial Management of the MGNREGS:
 Labour Budget: Under Section 14(6) of the NREGA, District Programme Coordinators are required to prepare labour
budgets in the month of December for the next financial year containing the details of anticipated demand of unskilled
manual work. The procedures and principles for labour budget have been put in place and operationalized in 2010-11.
The labour budget principle ensures smooth fund flow on rational basis to the districts for implementation of the
MGNREGS scheme.
 State Employment Guarantee Fund: Under Section 21(1) of the NREGA, States have been instructed to establish State
Employment Guarantee Funds. The State Funds will give greater flexibility to the States in fund management for
implementation of the MGNREGS. State Funds have been set up in eleven States, namely Rajasthan, Andhra Pradesh,
Karnataka, Himachal Pradesh, Orissa, West Bengal, Madhya Pradesh, Uttar Pradesh,Tamil Nadu, Punjab, and Gujarat.
The Central fund for the MGNREGS has been directly released to State Fund accounts of the respective States.
 Strengthening administrative support systems: Permission is given for the use of 6 per cent of the budget available for
administrative expenses by the State. The Central Government has recommended for the recruitment of one Gram
Rozgar Sewak Sahayak in every panchayat, one technical assistant for every five gram panchayats, at least one
computer assistant per block, and one full-time dedicated programme officer in every block. This issue has been
constantly monitored with States.
 Pilot Initiatives: To build on the current programme implementation and to leverage the MGNREGS for sustainable
development, the Central Government has started pilot projects in Rajasthan. These initiatives include training and skill
building for MGNREGS workers, basic literacy, computer and financial literacy, and facilitating wage payment through
the business correspondent mode.
 Convergence: In view of the inter-sectoral linkages of the MGNREGS, the need to create durable assets, improve
livelihood security, facilitate more flexibility in choice of works to suit the specific conditions of States and serve better
the common target groups of certain development programmes with the MGNREGS, the Central Government has
developed and disseminated convergence guidelines with different schemes and specific programmes, namely the
Indian Council of Agricultural Research, National Aforestation Programme, and other schemes of the Ministry of Forest
and Environment, Schemes of the Ministry of Water Resources, the PMGSY (Department of Rural Development),
Swarnjayanti Gram Swarozgar Yojana (SGSY) (Department of Rural Development), Watershed Development
Programmes (Department of Land Resources, Ministry of Rural Development) , Ministry of Agriculture and Fisheries,
and schemes of the Ministry of Agriculture. Convergence pilot projects have been taken up in 115 districts and 23 States
across India. State-level reviews and field visits are being undertaken to monitor these initiatives. The National Institute
of Rural Development (NIRD) and independent agencies are closely monitoring the convergence projects.
development training of rural BPL youth to enable employment to the urban unemployed and
them to undertake micro-enterprises and wage underemployed through encouraging the setting up
employment. The Government has approved 215 of self-employment ventures or provision of wage
RSETIs out of which funds have been released to employment, The revamped scheme has the following
149. During 2009-10, approximately 77,000 rural five components: (i) Urban Self Employment
youth (including 54,000 BPL youth) were trained in Programme (USEP) (II) Urban Women Self-help
99 RSETIs functioning in the country Programme (UWSP) (iii) Skill Training for
Employment Promotion amongst Urban Poor (STEP-
(iii) Swarna Jayanti Shahari Rozgar Yojana UP) (iv) Urban Wage Employment Programme
(SJSRY) (UWEP), and (v) Urban Community Development
12.27 The SJSRY launched by the Government of Network (UCDN). The annual budgetary provision
India in December 1997 has been revamped with under the SJSRY for the year 2010-11 is ` 589.68
effect from April 2009. The scheme provides gainful crore of which ` 427.91 crore had been released by
31 December 2010. A total of 6,80,325 beneficiaries areas, has six components, namely rural housing,
have been benefited upto 31 December 2010. irrigation potential, drinking water, rural roads,
electrification, and rural telephony. It is an important
Social Protection Programmes initiative for reducing the gap between rural and urban
12.28 Keeping in view the importance of the informal areas and improving the quality of life of people in
sector's share in the total work-force, the Government rural areas.
has been focusing on expanding the coverage of
social security schemes so as to provide a minimum 12.31 Rural Roads have been identified as one of
level of social protection to workers in the the six components of Bharat Nirman and a goal
unorganized sector and to ensure inclusive has been set to provide connectivity to all villages
development (Box. 12.6). with a population of 1000 (500 in hilly or tribal areas)
with all-weather roads. New connectivity is proposed
Rural Infrastructure and Development to be provided to a total of 54,648 habitations under
12.29 The Government of India has accorded Bharat Nirman. This will involve construction of
highest priority to building rural infrastructure with 1,46,184 km of rural roads. In addition to new
the objective of facilitating a higher degree of rural- connectivity, Bharat Nirman envisages upgradation
urban integration and for achieving an even pattern /renewal of 1,94,130 km of existing rural roads.
of growth for the poor and disadvantaged sections of
Under the rural roads component of Bharat Nirman,
society. Some of the initiatives taken by the
38,575 habitations have been provided all-weather
Government to facilitate building of rural
road connectivity up to December 2010 and projects
infrastructure and development include the PMGSY,
Bharat Nirman, Total Sanitation Campaign, and for connecting 14,995 habitations are at different
NRHM. stages of implementation. During 2010-11, over
28,963 km of all-weather roads has been completed
Bharat Nirman up to December 2010. New connectivity has been
12.30 This programme, launched in 2005-06 for provided to nearly 3949 habitations with an
building infrastructure and basic amenities in rural expenditure of ` 9677 crore under PMGSY.
Box 12.6 : Some Important Social Protection measures taken by the Government
Aam Admi Bima Yojana (AABY) : Under this scheme launched on 2 October 2007, insurance is provided against natural
as well as accidental and partial /permanent disability of the head of the family of rural landless households in the
country. Up to July 2010, the scheme has covered 1.45 crore lives.
Rashtriya Swasthya Bima Yojana (RSBY): The RSBY was launched on 1 October 2007 to provide smart card-based
cashless health insurance cover of ` 30, 000 per family per annum to BPL families (a unit of five) in the unorganized
sector. The scheme became operational from 1 April 2008. The premium is shared on 75:25 basis by the Centre and State
Governments. In the case of States of the north-east region and Jammu and Kashmir, the premium is shared on 90:10
basis. The scheme provides for smart card portability by splitting the card value for migrant workers. Till 31 January
2011, 27 States and Union Territories have initiated the process of implementing the scheme. Out of these 27 States/UTs,
25 States/UTs have started issuing smart cards and more than 2.26 crore smart cards have been issued.
The Unorganized Workers' Social Security Act 2008: The Act came into force from 16 May 2009 with the objective of
providing social security to unorganized workers. The Unorganized Workers' Social Security Rules, 2009 have also been
framed. The Act provides for constitution of the National Social Security Board and State Social Security Boards which
will recommend social security schemes for unorganized workers. The National Social Security Board has since been
constituted. As part of its mandate, the National Social Security Board constituted a Sub-Committee of the Board to
explore the extension of social security schemes to unorganized workers. Subsequently, the Board recommended that
social security schemes, namely the RSBY providing health insurance, Janashree Bima Yojana (JBY) providing death and
disability cover, and Indira Gandhi National Old Age Pension Scheme (IGNOAPS) providing old age pension, may be
extended to building and other construction workers, MGNREGA workers, Asha workers, Anganwadi workers and
helpers, porters/coolies/gangmen, and casual and daily wagers.
Bilateral Social Security Agreements: Bilateral social security agreements have been signed with Belgium, Switzerland,
the Netherlands, and Denmark to protect the interests of expatriate workers and companies on a reciprocal basis.
Negotiations for a similar agreement have been completed with Norway. These agreements help workers by providing
exemption from social security contribution in case of posting, totalization of contribution period, and exportability of
pension in case of relocation to the home country or any third country.
Rural Drinking Water for changing the behaviour of people from a young
age. The components of the TSC include start-up
12.32 Supply of safe drinking water in uncovered,
activities, IEC, individual household latrines (IHHL),
slipped back and quality-affected habitations is one
community sanitary complexes (CSC), SSHE,
of the components of Bharat Nirman. Habitations
Anganwadi toilets, alternate delivery mechanism, in
with arsenic and fluoride content in water have been
the form of rural sanitary marts (RSMs) and
accorded highest priority followed by those with iron,
production centres (PCs), and administrative
salt, and nitrate content. Expenditure for drinking
charges. The component of solid/liquid waste
water supply during the Bharat Nirman period
disposal in villages was included in TSC projects in
increased considerably from ` 4098 crore in 2005-
2006, providing up to 10 per cent of each district
06 to ` 7989.72 crore in 2009-10. In order to give
project cost. A total of 607 TSC projects have been
effect to the policy initiatives mentioned in the
sanctioned so far in rural districts of the country at a
Eleventh Five Year Plan document, the guidelines
total outlay of ` 20,024 crore, with a Central share
for the rural water supply programme have been
of ` 13,026 crore. The annual budgetary support for
revised. The revised programme called the National
the TSC has gradually been increased from ` 202
Rural Drinking Water Programme (NRDWP) has a
budgetary provision of ` 9000 crore for 2010-11 crore in 2003-04 to ` 1580 crore in 2010-11. With
against which ` 7103.56 crore has been utilized so the scaling up of the TSC, combined with higher
far. Considering the importance of the Bharat Nirman resource allocation, the implementation of the
Programme and its implementation status at the end programme has resulted in substantial increase in
of 2008-09, the Government has extended Phase II rural sanitation coverage from 21.9 per cent in 2001
of the programme up to 2012. The implementation to about 67.86 per cent as on November 2010.
status of the NRDWP under Bharat Nirman Phase II 12.34 The Nirmal Gram Puraskar (NGP) incentive
shows that against a physical target of 76,316 scheme has been launched to encourage
habitations to be covered up to 2010-11, a total of Panchayati Raj institutions (PRIs) to take up
43,193 habitations have been covered as on 31 sanitation promotion. The award is given to those
December 2010 (Table 12.11). All the uncovered and PRIs which attain 100 per cent open-defecation-free
quality- affected habitations that may still be environment. The concept of Nirmal Gram Puraskar
uncovered by the end of 2010-11 are targeted to be has been acclaimed internationally as a unique tool
covered during 2011-12. of social engineering and community mobilization
and has helped a difficult programme like sanitation
Rural Sanitation: Total Sanitation Campaign to pick up. Each gram panchayat getting the NGP
(TSC) has a ripple effect on the surrounding villages, a
12.33 The TSC is one of the flagship programmes movement sustained by active people's participation.
of the Government of India. The TSC follows a The Nirmal Gram Puraskar has ignited the
community-led and people-centred approach. It imagination of Panchayat leaders throughout the
places emphasis on information, education, and country and made them champions of sanitation.
communication (IEC) for demand generation for Under the NGP, a total of 22,443 gram panchayats,
sanitation facilities. It also places emphasis on 165 intermediate panchayats, and 10 district
school sanitation and hygiene education (SSHE) panchayats have received the award in the last five
12.11 : Status of NRDWP under Bharat Nirman Phase II as on December 31, 2010
Components Total Balance Target Cumulative
Rural Remaining (2009-10 Achievement
Habitations as on 1 April and 2010-11) during Bharat
Nirman Phase II
(2009-10 and
2010-11 (till
31 Dec. 2010)
Uncovered habitations 627 627 544

Quality affected habitations 1,79,999 75,689 43,193
Total 16,61,073 1,80,626 76,316 43,737
years. Sikkim has become the first 'Nirmal State' in Affordable Housing in Partnership (AHIP)
the country.
12.37 The Government has launched the AHIP
Urban Infrastructure, Housing, and Sanita- scheme with an outlay of ` 5000 crore for
tion construction of one million houses for the EWS/LIG/
middle income group (MIG) with at least 25 per cent
12.35 The Government of India is playing an for the EWS category. The scheme aims at
important role in shaping policies and programmes partnership between various agencies/ Government/
related to urban infrastructure, housing, and parastatals/ ULBs/ developers for realizing the goal
sanitation in the country as a whole. Apart from of affordable housing for all.
deciding national policy issues, the Central
Government is also allocating resources to State Rajiv Awas Yojana (RAY)
Governments through various centrally sponsored
schemes and providing finances through national 12.38 The Government has announced the vision
financial institutions in the country as a whole. Some of a 'slum-free India' through a new scheme, the Rajiv
of the initiatives taken by the Government in this Awas Yojana. Subsequent to this announcement,
area are as follows: extensive consultations have been held with various
Ministries, experts, state Governments, non-
Jawahar Lal Nehru National Urban Renewal governmental organizations (NGOs), financial and
Mission (JNNURM) urban experts, and private industry to frame the
12.36 The JNNURM, a seven year programme guidelines. These draft guidelines have been critically
launched in December 2005, provides financial appraised by an expert committee. The preparatory
assistance to cities for infrastructure, housing phase of RAY, called the Slum Free City Planning
development, and capacity development. Two of its Scheme has been implemented. Under this scheme
four components-Basic Services to the Urban Poor an amount of ` 60 crore has been released to States
(BSUP) for 65 select cities and Integrated Housing for undertaking slum surveys, mapping of slums,
and Slum Development Programme (IHSDP) for other developing slum information systems, undertaking
cities and towns--are devoted to shelter and basic community mobilization, preparation of slum-free city/
service needs of the poor. The JNNURM also State plans, etc. before seeking support under RAY.
emphasizes the implementation of the following three A budgetary allocation of ` 1270 crore has been
mandatory pro-poor key reforms to enhance the made for the preparatory phase of RAY for the year
capacity of urban local bodies (ULBs) - (i) internal 2010-11.
earmarking within local body budgets for basic
Skill Development
services to the urban poor;(ii) earmarking at least
20-25 per cent of developed land in all housing 12.39 As mentioned in the Economic Survey 2009-
projects (both public and private agencies) for 10, a three-tier structure for coordinated action on
the economically weaker section (EWS)/lower skill development has been set up. The three-tier
income group (LIG) category; (iii) implementation of structure consists of (i) the Prime Minister's National
seven-point charter for provision of seven basic Council on Skill Development, (ii) the National Skill
entitlements/services. As the first national flagship Development Coordination Board (NSDCB), and (iii)
programme for urbanization, the JNNURM has the National Skill Development Corporation (NSDC).
significantly triggered the creation of many innovative The Prime Minister's National Council has outlined
ideas in States that will increase their ability to the core operating principles which, inter alia,
maintain the momentum of the urban transformation advocate the need for co-created solutions for skill
they have initiated. More than 1.5 million houses development based on partnerships between States,
have been sanctioned by 8 February 2011 and 1456 civil society, and community leaders. The emphasis
projects with an outlay of more than ` 37,771.30 is on making skills bankable for all sections of society
crore have been approved with a committed Central including the poorest of the poor. The issue of
share of ` 20,787.90 crore (89.6 per cent of seven- optimum utilization of existing infrastructure available
year allocation for 2005-12). Additional Central in the States and using the same for skill training is
assistance of ` 10,013.37 crore has been released. also emphasized. By the end December 2010, 28
While all States are covered under the BSUP, all States and five Union Territories had set up Skill
States and UTs except Goa and UT of Lakshadweep Development Missions. As a next step, all these
have been covered under the IHSDP. States/UTs need to assess the skill gaps in the major
sectors and formulate action plans for bridging them. about 80 per cent of residents have given consent
The NSDC, set up on 31July 2008 as a non-profit for opening bank accounts during enrolment. In order
public-private partnership (PPP) in skill development to simplify the process of opening Aadhaar-enabled
for co-coordinating/ stimulating private-sector bank accounts for the marginalized population, the
initiatives, has been mandated to achieve the target Aadhaar-based Know Your Resident (KYR) leading
of creation of skilled workforce of 150 million persons to issue of Aadhaar numbers has been accepted as
by 2022 under the National Skill Development Policy. equivalent to banks' Know Your Customer (KYC)
As a first step towards achieving the target, a norms. Further, the Aadhaar letter has been declared
comprehensive skill gap study for 21 high-growth an officially valid document for opening of bank
sectors has been completed in order to build a accounts by the Government in December 2010. The
baseline for formulation of a comprehensive strategy. UIDAI is also working towards linking MNREGS
This has generated a lot of interest in private sector payments with the Aadhaar number of the resident
in investing in skill development. The corporation has and routing the payments through his/her Aadhaar-
developed a strong governance structure for the enabled bank account. The stage is now set for
disbursal of funds. So far 22 projects have been realizing the service-delivery potential of Aadhaar. In
approved by the NSDC. This will result in creation of addition to help in cleaning up databases by ensuring
38.59 million skilled workforce over a period of 10 that there are no duplicates and fakes, Aadhaar can
years. The contribution of the NSDC in the form of help in better targeting and delivery of services and
equity/loan/grant for the 22 projects is ` 607.56 reducing the cost of delivery. Transformation in the
crore. Out of the 22 projects, two that had the delivery of services is expected through the use of
mandate to create a skilled workforce of 1.018 million Aadhaar authentication services.
over 10 years were approved in 2009-10 with a total
Education
contribution of ` 35.68 crore from the NSDC.
12.42 India is a nation of young people. Out of a
Unique Identification Authority of India population of above 1.1 billion, 672 million people
(UIDAI) are in the age group 15 to 59 years, which is usually
treated as the 'working-age population'. It is predicted
12.40 Significant progress has been made since that India will see a sharp decline in the dependency
the UIDAI was created through a notification issued ratio over the next 30 years, which will constitute a
by the Government in January 2009. Phase II of the major 'demographic dividend' for India. But this
UIDAI now referred to as the Aadhaar programme advantage can only be realized if it is supplemented
has commenced with an allocation of ` 3023.01 with skill enhancement of the young through the
crore in July 2010 for enrolling 10 crore residents medium of education. In the year 2001, 11 per cent
through multiple registrars and for setting up of other of the population of the country was in age group 18-
infrastructural requirements for the project phase of 24 years and this is expected to rise to 12 per cent
five years ending March 2014. The scheme was by the end of the Eleventh Five Year Plan. This young
formally launched on 29 September 2010 at Thembali population should be considered as a valuable asset
village of Nandurbar district in Maharashtra when all which, if well equipped with education and skills,
the residents in the village were enrolled making it can contribute effectively to the development of the
the first 'Aadhaar Gaon'. All the 35 States and UTs national as well as global economy.
have signed a memorandum of understanding (MoU)
with the UIDAI. MoUs have also been signed with Right of Children to Free and Compulsory
the Ministry of Human Resource Development, Education Act 2009 (RTE Act)
Ministry of Rural Development, Ministry of Petroleum 12.43 Free education for all children between the
and Natural Gas, Department of Posts, 23 public- age of 6 and 14 years has been made a fundamental
sector banks, the Life Insurance Corporation of right under the RTE Act 2009. While the RTE Act
India, Indira Gandhi National Open University, and was notified on 27 August 2009 for general
the National Coalition of Organizations for Security information, the notification for enforcing the
of Migrant workers. provisions of the Act with effect from 1 April 2010
12.41 The UIDAI is partnering with financial was issued on 16 February 2010. The Ministry of
institutions to both augment enrolments through them HRD had set up a committee to identify Sarva
and to provide bank accounts to residents during Shiksha Abhiyan(SSA) norms that require to be
Aadhaar enrolment. Enrolment statistics indicate that brought in conformity with RTE norms and standards,
including, for example, pupil-teacher ratio and down from 134.6 lakh in 2005 to 81.5 lakh in
teacher-classroom ratio. On the basis of the 2009.
recommendation of this committee, SSA norms have
 Kasturba Gandhi Balika Vidyalayas (KGBVs):
been modified to align them with the requirement of
The KGBV is a scheme for setting up residential
the RTE Act 2009. The main changes made in the
schools at upper primary level for girls belonging
norms relate to opening of new primary and upper
predominantly to the SC/ ST, OBC, and minority
primary schools as per neighborhood norms ,
communities. The scheme is being implemented
upgradation of all alternate schooling facilities provided
in the EBBs where rural female literacy is below
through centres under the Education Guarantee
30 per cent and in select urban areas where
Scheme (EGS), revised pupil-teacher ratio (PTR)
female literacy is below the national average.
norms, provision of special training for out-of-school
The KGBV scheme was merged with the (SSA)
and drop-out children to facilitate age-appropriate
with effect from 1 April 2007. The scheme
admission, provision of grant and teaching learning
provides for minimum reservation of 75 per cent
equipment to facilitate States to merge Classes V
of the seats for girls belonging to SCs, STs,
and VIII in primary and upper primary cycle stage
OBCs or minority communities and priority for
and approval of additional 1073 Kasturba Gandhi
the remaining 25 per cent to girls from BPL
Balika Vidyalayas (KGBVs) for educationally
families. The scheme is being implemented in
backward blocks (EBBs) .
27 States. The Government of India has
sanctioned 2573 KGBVs up to 31 March 2010
Elementary and Secondary Education
and 2565 KGBVs are reported to be functional
Schemes in the states. A total of 2,38,600 girls were
12.44 Several initiatives have been undertaken by enrolled in KGBVs with SC and ST girls
the Government in the field of elementary and accounting for 27.14 per cent and 28.67 per cent
secondary education in recent years. Some of the respectively. While the shares of OBC girls and
important schemes are as follows: BPL girls stood at 26.84 per cent and 9.19 per
cent respectively, minority girls accounted for
 The Sarva Shiksha Abhiyan SSA : The
8.17 per cent.
programme is being implemented in partnership
with the States to address the needs of children  National Programme for Education of Girls at
in the age group of 6-14. The goals of the SSA Elementary Level (NPEGEL): The NPEGEL, is
inter alia include enrolment of all children in a focused intervention of the Government of
school, education guarantee centres (EGCs), India to reach the 'Hardest to Reach' girls. It is
alternate schools, 'back-to-school' camp, an important component of the SSA, which
retention of all children till the upper primary provides additional support for enhancing girl's
stage by 2010, bridging of gender and social education over and above the normal SSA
category gaps in enrolment with retention and interventions. The programme provides for
learning, and ensuring that there is significant setting up of a 'model school' in every cluster
enhancement in the learning achievement levels with more intense community mobilization and
of children at the primary and upper primary supervision of girls' enrolment in schools.
stages. The achievements under the SSA till Gender sensitisation of teachers, development
September 2010 include opening of 309,727 new of gender-sensitive learning materials, and
schools, construction of 254,935 school provision of need-based incentives like escorts,
buildings, construction of 1,166,868 additional stationery, workbooks, and uniforms are some
classrooms, 190,961 drinking water facilities, of the endeavours under the programme. The
construction of 347,857 toilets, supply of free scheme is being implemented in the EBBs
textbooks to 8.70 crore children, and where the level of rural female literacy is less
appointment of 11.13 lakh teachers. Moreover, than the national average and gender gap is
around 14.02 lakh teachers have received in- above the national average; in blocks of districts
service training under this programme. There has which are not covered under EBBs but where
been significant reduction in the number of out- at least 5 per cent of population is SC/ST and
of-school children on account of SSA where SC/ST female literacy is below 10 per
interventions. An independent study states that cent; and also in select urban slums. About
the number of out-of-school children has come 3286 educationally backward blocks are
covered under the scheme in 25 eligible States. scheme of Integrated Education for Disabled
Children (IEDC). It provides 100 per cent Central
 National Programme of Midday Meals in
assistance for inclusive education of disabled
schools: Under the National Programme of
children studying in Classes IX-XII in
Midday Meals in schools, cooked mid-day meal
Government, local body, and Government-aided
is provided to all the children attending Classes
schools. The aim of the scheme is to facilitate
I-VIII in Government, local body, Government-
continuation of education of children with
aided and National Child Labour Project
special needs up to higher secondary level. The
schools. EGCs/alternate and innovative
scheme provides for personal requirements of
education centres including madarsas/maqtabs
the children in the form of assistive devices,
supported under the SSA across the country
helpers, transport, hostel, learning material,
are also covered under this programme. At
scholarship for the girl child, etc up to ` 3000
present the cooked midday meal provides an
per disabled child per annum. A budget of
energy content of 450 calories and protein
` 70.00 crore was allocated for this scheme
content of 12 grams at primary stage and an
during 2010-11. Over 1.30 lakh disabled children
energy content of 700 calories and protein
are proposed to be covered with the assistance
content of 20 grams at upper primary stage.
of 3000 teachers in 20,000 Government
Adequate quantity of micro-nutrients like iron, secondary and higher secondary schools in
folic acid and vitamin A are also recommended 2010-11.The scheme is extremely important as
for convergence with the NRHM. During 2009- a natural corollary to the success achieved in
10, the budget allocation under this program enrolment and retention of children at
was ` 7359.15 crore against which the total elementary stage (SSA).
expenditure incurred was ` 6937.79 crore. A
total number of 11.04 crore children (7.85 crore  Saakshar Bharat : In the context of the
in primary and 3.19 crore in upper primary Government's overall policy aimed at
stages) have been benefitted under the empowerment of women and in recognition of
programme during 2009-10. the fact that literacy is a prerequisite for socio-
economic development, the National Literacy
 Rashtriya Madhyamik Shiksha Abhiyan Mission has been recast as 'Saakshar Bharat'
(RMSA): The RMSA was launched in March with prime focus on female literacy. This
2009 with the objective of enhancing access to flagship programme of the Government will cover
secondary education and improving its quality. all adults in the age group of 15 and above
The implementation of the scheme started from though its primary focus will be on women.
2009-10. It envisages raising the enrolment rate Several new features have been added to the
at secondary stage from 52.26 per cent in 2005- scheme and basic literacy, post literacy, and
06 to 75 per cent within five years by providing continuing education programmes, will now
a secondary school within reasonable distance form a continuum, rather than sequential
of any habitation. The other objectives include segments under this programme. Besides the
improving quality of education imparted at volunteer-based mass campaign approach,
secondary level by ensuring that all secondary provision has been made for alternative
schools conform to prescribed norms, removing approaches to adult education. The Jan Shiksha
gender, socio-economic and disability barriers, Kendras (adult education centres-AECs) will be
providing universal access to secondary-level set up to coordinate and manage all
education by 2017, i.e. by the end of the Twelfth programmes within their territorial jurisdiction.
Five Year Plan, and achieving universal retention The state governments, as against the districts
by 2020. The Central Government and State in the earlier versions, and Panchyati Raj
Government bear 75 per cent and 25 per cent institutions, along with communities, will be the
of the project expenditure respectively during valued stakeholders. The budgetary support has
the Eleventh Five Year Plan. The funding pattern also been substantially enhanced. To minimize
is in the ratio of 90:10 for the north-eastern regional, social, and gender disparities, the
States. programme in its first phase, that is during the
 Inclusive Education for the Disabled at Eleventh Plan period will remain confined to
Secondary Stage (IEDSS): The IEDSS scheme 365 districts with female adult literacy rates of
was launched in 2009-10 replacing the earlier 50 per cent or below as per the 2001 census.
Box 12.7 : Main Findings of ASER 2010
 Enrolment : In 2010, 96.5 per cent of children in the 6 to 14 age group in rural India are enrolled in school. While 71.1
per cent of these children are enrolled in government schools, 24.3 per cent are enrolled in private schools.
 Out of school girls: In 2010, 5.9 per cent of girls in the 11-14 age group are still out of school. However, this percentage
has gone down as compared to 6.8 per cent in 2009. In states like Rajasthan and Uttar Pradesh this percentage remains
high and shows little change since 2009 whereas in Bihar, the percentage of out of school girls and boys in all age groups
has been declining steadily since 2005.
 Rise in private school enrolment: Enrolment in private schools in rural India increased from 21.8 per cent in 2009 to
24.3 per cent in 2010. This number has risen steadily since 2005 when it was 16.3 per cent nationally. Between 2009 and
2010, the southern states have shown a substantial increase in private school enrolments. While the percentage of
children in private schools increased in southern states like Andhra Pradesh , Tamil Nadu, Karnataka and Kerala and
in northern states like Punjab, enrolment remained low in Bihar, West Bengal, Jharkhand , Orissa and Tripura.
 Increasing numbers of five year olds enrolled in school: The percentage of five year olds enrolled in schools increased
from 54.6 per cent in 2009 to 62.8 per cent in 2010. The highest increase was observed in Karnataka. Enrolment of five
year olds increased substantially between 2009 and 2010 in several other states such as Punjab, Haryana, Rajasthan ,
Uttar Pradesh and Assam.
 Nationally, not much change in reading ability, except in some states: Even after five years in school, close to half
of all children are not even at the level expected of them after two years in school. Only 53.4 per cent children in Std V
could read a Std II level text. However, Andhra Pradesh, Gujarat, Haryana and Rajasthan saw an increase in the
proportion of children in Std I who were able to recognize letters. There was also an increase in the proportion of children
in Std V who could read Std II level text in Andhra Pradesh, Gujarat, Assam, Himachal Pradesh, Punjab, Uttar Pradesh
and West Bengal.
 Maths ability shows a declining trend: On an average, there has been a decrease in children's ability to do simple
mathematics. The proportion of Std I children who could recognize numbers from 1-9 declined from 69.3 per cent in
2009 to 65.8 per cent in 2010. Similarly, the proportion of children in Std III who could solve two digit subtraction
problems decreased from 39 per cent to 36.5 per cent in the same period. Children in Std V who could do simple division
problems also dropped from 38 per cent in 2009 to 35.9 per cent in 2010. Contrary to this trend, Punjab's performance
in basic arithmetic has improved over the last few years.
 Middle school children weak in everyday calculations: About two thirds of all children could answer questions
based on a calendar and only half could do the calculations related to area. The questions related to area seemed to be
the most difficult for children to solve, even though such problems are usually found in textbooks in Std IV or V.
Children in Std VIII in Kerala and Bihar solved the area related questions the best.
 Tuition going down for private school children: A clear decrease is seen in the incidence of tuition among children
enrolled in private schools across all classes up to Std VIII. This proportion has not changed much among children
enrolled in government schools, although in states like Bihar, West Bengal and Orissa, where private school enrolment
is low, the proportion of children in Std V enrolled in government schools who take tuition classes is high.
 RTE compliance: Over 60 per cent of the 13,000 schools visited satisfied the infrastructure norms specified by the RTE.
However, more than half of these schools will need more teachers. A third will need more classrooms. The all India
percentage of primary schools (Std 1-4/5) with all teachers present on the day of the visit shows a consistent decrease
over three years, falling from 73.7 per cent in 2007 to 69.2 per cent in 2009 and 63.4 per cent in 2010. For rural India as
a whole, children's attendance shows no change over the period 2007- 2010. Attendance remained at around 73 per cent
during this period. But there is considerable variation across states.
Source: ASER 2010, Press Release Dated 14 January 2010, website http://images2.asercentre.org/aserreports/
ASER_2010_PRESS_RELEASE.pdf
Besides, 33 districts affected by left wing 700,000 children. Over six years, the ASER has
extremism will also be covered, irrespective of observed a clear rise in enrolment (Box 12.7).
the existing literacy rate in those districts.
Higher and Technical Education
12.45 The Annual Status of Education Report
(ASER) by Pratham, an NGO, is an annual survey 12.46 Higher Education is of vital importance for
of rural children since 2005. In 2010, which is its the country, as it is a powerful tool to build a
sixth year, the ASER was conducted in 522 districts, knowledge-based twenty-first century society.
over 14,000 villages, 300,000 households, and almost Improvement of access along with equity and
excellence, adoption of State-specific strategies, During the current financial year, 14 proposals
enhancement of the relevance of higher education have so far been approved and 18 are in the
through curriculum reforms, vocationalization, pipeline.
networking and information technology (IT), and
 Setting up of new Indian Institutes of Information
distance education are some of the main policy
Technology (IIITs): To address the increasing skill
initiatives in the higher education sector. The other
challenges of the Indian IT industry, the
important policy initiatives in higher education are
Government has approved setting up of twenty
programmes for general development of universities
new IIITs on a PPP basis. The partners in setting
and colleges; special grants for the construction of
up the IIITs would be the HRD Ministry,
hostels for women; scholarships to students;
Governments of the respective States where each
scheme to provide interest subsidy on educational IIIT will be established, and industry, with the
loans for professional courses to ensure that nobody capital cost of `128 crore for each IIIT to be
is denied professional education because he or she contributed in the ratio of 50:35:15 by the three
is poor; and making interventions to attract and partners respectively. In the north-eastern States,
retain teaching talent in higher and technical industry participation for capital expenditure will
education. Emphasis has been laid on expansion be kept at 7.5 per cent whereas Central and
with equity, use of information and communication State Government participation will be 57.50 per
technology (ICT), and promotion of quality cent and 35 per cent respectively. During the
education. Some of the major initiatives taken first four years of setting up of each IIIT, the
during the Eleventh Plan for promoting higher and Central Government will provide assistance
technical education are as follows: towards recurring expenditure to the extent of
 Scheme for incentivising States for establishing ` 10 crore, year-wise requirement of which will
new higher educational institutions/expanding vary depending on the growth of institutes and
existing ones: A new Scheme has been requirement of funds. The project is targeted to
envisaged in the Eleventh Plan for providing be completed in nine years from 2011-12 to
Central assistance to State Governments in the 2019-20. In the first year, 5-10 new IIITs would
ratio of 1:2 (1:1 for special category States) for be set up depending upon the response of the
establishing new higher educational institutions/ State Governments and private partners.
expanding existing ones. The scheme will be  Establishment of institutions : The Government
taken up on a pilot basis for the remaining has approved setting up of ten new National
duration the Eleventh Plan. The physical targets Institutes of Technologies (NITs) in Arunachal
for this scheme are (i) 8 new universities Pradesh, Sikkim, Meghalaya, Nagaland,
(including 2 in special category States), (ii) 83 Manipur, Mizoram, Goa, Delhi, Uttarakhand, and
new colleges, (iii) 10 new engineering colleges, Pudduchhery. The Government of India has set
and (iv) Expansion of colleges so as to achieve up five Indian Institute of Science Education and
additional enrolment of 100,000 (one lakh) Research (IISERs) at Pune, Kolkata, Mohali,
students. Priority will be given for setting up of Bhopal, and Thiruvananthapuram. The IISERs are
institutions in locations predominantly inhabited envisaged to carry out research in frontier areas
by SCs/STs/ educationally backward minorities of science and to provide quality science
so as to address equity concerns. education at undergraduate and postgraduate
 Scheme of setting up of 374 Model Colleges: In levels. All the five new IISERs have become
order to remove regional imbalance, the functional. During the first four years of the
Government has planned to set up 374 Model Eleventh Plan, five new Indian Institutes of
Degree Colleges one each in identified Management (IIMs) have already become
educationally backward districts where the GER operational and the remaining two will become
is less than the national average. Under this operational in 2011-12. Eight new Indian Institute
scheme, the Central Government shall provide of Technology (IITs) and two new School of
assistance to the extent of one-third of the Planning and Architecture (SPAs) have also
capital cost for establishment of each college, been opened in the first four years of the Eleventh
with a limit of ` 2.67 crore. For special category Plan.
States, the Centre's share shall be 50 per cent  Reform measures in the higher and technical
of the capital cost, with a limit of ` 4.00 crore. education Sector: The Department of Higher
Box : 12.8 Reform Initiatives in the Higher and Technical Education Sector
An important challenge in the higher education sector is to bring about reforms not only in the institutions of higher
learning but also in the regulatory structures of the higher education system. There are also the challenges of maintaining
quality and excellence while ensuring rapid expansion and attracting and retaining good faculty in adequate numbers
to meet the demands of the rapidly expanding sector. The Government has accordingly taken a number of steps for
reforms in the regulatory and governance structures of the higher education system. A few of these reform initiatives are
as under:
 Proposal to establish an autonomous overarching authority for prescribing standards and laying down policy for
higher education and research to subsume the University Grants Commission (UGC), All India Council for Technical
Education (AICTE), National Council for Teacher Education (NCTE), and academic functions of other regulatory
bodies in higher education.
 Proposal for prohibition and punishment of unfair practices in technical educational institutions, medical educational
institutions and universities.
 Proposal for mandatory assessment and accreditation in higher education including institutions and programmes
and creation of an institutional structure for the same.
 Qualifying the National Eligibility Test (NET) has been made mandatory for appointment as teacher in universities
and colleges with exemption provided to those who have obtained PhD degree in accordance with the standards
specified by the regulation.
 Review of performance of deserving institutions like research councils, deemed universities.
Education has initiated a number of steps for suggests that significant progress has been made
educational reforms including in regulatory and over the last three decades (Table 12.12).
governance structures in the higher education 12.48 However, despite this progress, as per HDR
system (Box. 12.8). 2010, India fares poorly when compared to
countries like China and Sri Lanka in terms of
Health parameters like per capita expenditure on health,
number of physicians/hospital beds (per 10,000
12.47 An analysis of the performance of health persons), and IMR. In addition, within the country,
delivery facilities in terms of selected indicators the improvement has been quite uneven across
Table 12.12 : India — Selected health indicators

Sl. No. Parameter 1981 1991 Current level
1. Crude Birth Rate (CBR) (per 1000 population) 33.9 29.5 22.5 (2009*)
2. Crude Death Rate (CDR)(per 1000 population) 12.5 9.8 7.3 (2009*)
3. Total Fertility Rate (TFR)(per woman) 4.5 3.6 2.6 (2008*)
4. Maternal Mortality Rate (MMR) (per 100,000 live births) NA NA 254 (2004-06*)
5. Infant Mortality Rate (IMR)(per 1000 live births): 110 80 50 (2009*)
Male 49
Female 52
6. Child (0-4 years) Mortality Rate ( per 1000 children) 41.2 26.5 15.2 (2008*)
7. Life Expectancy at Birth: (1981-85) (1989-93) (2002-06)**
Total 55.4 59.4 63.5
Male 55.4 59.0 62.6
Female 55.7 59.7 64.2
Source: Ministry of Health and Family Welfare.
*Sample Registration Survey (SRS).
** Abridged Life Table 2002-06, RGI India.
regions/States, gender, rural/urban areas, etc. The hygiene, nutrition, and safe drinking water as the
health system in India is a mix of the public and basic determinants of good health. Keeping this
private sectors, with the NGO sector playing a small in view, it seeks greater convergence among the
role. Over the last six decades, a large number of related social-sector departments, namely
health institutions catering to the health needs of AYUSH (Ayurveda, Yoga and Naturopathy,
the people at primary, secondary, and tertiary levels Unani, Siddha, and Homoeopathy), Women &
have been set up. The country has developed a Child Development, Sanitation, Elementary
well-structured three-tier public health infrastructure, Education, Panchayati Raj, and Rural
comprising community health centres (CHCs), Development. The achievements under the NRHM
primary health centres (PHCs), and sub-centres as on September 2010 are as follows:
spread across rural and semi-urban areas as well  ASHAs/Link Workers: So far 8.33 lakh accredited
as tertiary medical care comprising multispecialty social health activists (ASHAs) have been
hospitals and medical colleges located almost selected. Of these, 7.82 lakh have received
exclusively in the urban areas. However, the training in at least the first module and 5.7 lakh
inadequate health-related infrastructure, including have been provided with drug kits in their respective
shortages of doctors and paramedical professionals villages.
has severely restricted the delivery of health
 Addition of Human Resources: Under the NRHM
services, particularly in rural areas. In order to
bridge the gap in existing health infrastructure and 1572 specialists, 8284 MBBS doctors, 26,734
to provide accessible, affordable, and equitable staff nurses, 53,552 auxiliary nurse midwives
health care, the Government of India has launched (ANMs), 18,272 paramedics have been employed
a large number of programmes and schemes as on contract.
follows:  Conversion of Health Facilities into 24 X 7: A total
of 16,338 additional primary health centres
 National Rural Health Mission (NRHM): The
(APHCs), PHCs, CHCs, and other sub-district
NRHM was launched in 2005 to provide
facilities are functional on 24 x 7 basis.
accessible, affordable, and accountable quality
health services to rural areas with emphasis on  Janani Suraksha Yojana (JSY) Beneficiaries: Over
poor persons and remote areas. It is being 3.4 crore women have so far been covered under
operationalized throughout the country, with the JSY.
special focus on 18 states, which include 8  Rogi Kalyan Samitis (RKSs): Around 599 district
empowered action group States (Bihar, hospitals (DHs), 4210 CHCs, 1136 other than CHC
Jharkhand, Madhya Pradesh, Chhattisgarh, Uttar hospitals, and 17,097 PHCs have their own RKSs
Pradesh, Uttarakhand, Orissa, and Rajasthan), with untied funds for improving quality of health
8 north-eastern States, Himachal Pradesh, and services.
Jammu and Kashmir. The NRHM aims to provide
 Village Health and Sanitation Committees: So far,
an overarching umbrella to the existing
4.98 lakh villages (78 per cent) have their own
programmes of Health and Family Welfare
Village Health and Sanitation Committees and
including the Reproductive Child Health Project
each of them has been provided `10,000 as untied
(RCH-II) and Malaria, Blindness, Iodine Deficiency,
grant per year.
Filaria, Kala Azar, T.B., Leprosy and Integrated
Disease Surveillance programmes by  Village Health and Nutrition Days (VH& NDs):
strengthening the public health delivery system Thirty-five lakh VH& NDs in 2006-07, 49 lakh in
at all levels. The Sub-centres, PHCs, and CHCs 2007-08, 58 lakh in 2008-09, 58.7 lakh in 2009-
are being revitalized through better human 10, and 34.6 lakh so far in 2010-11 have been
resource management, including provision of observed to reach basic health services to rural
additional manpower, clear quality standards, areas.
revamping of existing medical infrastructure,
 Mobile Medical Units (MMUs): About 381 MMUs
better community support, and through untied
are functional under the NRHM so far.
funds to facilitate local planning and action.
Flexible, decentralized planning is the pivot on  AYUSH: AYUSH services have been co-located
which the Mission rotates. Further, the Mission in 14,766 health facilities and 9578 AYUSH
addresses the issue of health in the context of a doctors and 3911 AYUSH paramedics have been
sector-wide approach addressing sanitation and added to the system.
 Pradhan Mantri Swasthya Suraksha Yojana
Table 12.13: Health Care Infrastructure
(PMSSY): The PMSSY has been launched with
Facilities No. the objectives of correcting regional imbalances
Sub-centre /PHC/CHC*(2009) 1,73,795 in the availability of affordable/reliable tertiary
healthcare services and augmenting facilities for
Dispensaries and Hospitals (all) ** 35,071 quality medical education in the country. The
Nursing personnel (2009)** 16,52,161 PMSSY has two components in its first phase.
Doctors (modern system) (2009)** 7,57,377 The first is the setting up of six All India Institute
of Medical Sciences (AIIMS)-like institutions. The
Sources:* RHS: Rural Health Statistics in India 2009. civil works related to the construction of medical
** National Health Profile, 2009. colleges and hostels have commenced in all sites.
The construction of residential complexes in
Rishikesh and Patna is expected to be completed
 Programme Management Units: Under the by March 2011 whereas in Bhopal and
NRHM, 627 district programme managers, 618 Bhubaneswar, it is likely to be completed by June
district accounts managers, 539 district data 2011 and August 2011 respectively. As regards
managers, 635 district programme management the work on hospital complexes, lay-out work is
units (DPMUs), 3529 block managers, 3261 under way for all the institutions. The second
accountants, and 3529 Block PMUs have been component of the PMSSY is the upgradation of
added. 13 existing Government medical college
 Strengthening of primary health infrastructure and institutions. Civil works under this component have
improving service delivery: There has been a been completed in the medical colleges in
steady increase in health care infrastructure Trivandrum, Salem, Bangalore, and Lucknow, are
available over the Plan period ( Table12.13). on the verge of completion in Hyderabad, Kolkata,
However, there is still shortage of 20,486 sub- Jammu, Tirupati, and Mumbai, and in Varanasi,
centres, 4477 PHCs, and 2337 CHCs as per 2001 Srinagar, Ahmadabad, and Ranchi are likely to
population norms. Further, almost 40 per cent of be completed by mid-2011. In the second phase
the existing health infrastructure is in rented of the PMSSY, two more AIIMS-like institutions
buildings or rent-free panchayat /voluntary society will be set up and upgradation of six more medical
buildings. Poor upkeep and maintenance and high colleges is being taken up.
absenteeism in rural areas are the main problems  National AIDS Control: According to recent HIV
in the public-sector health delivery system. The estimates based on HIV Sentinel Surveillance
NRHM seeks to strengthen the public health 2008-09, the number of people living with HIV in
delivery system at all levels. India in 2009 was 23.9 lakh, with an adult HIV
 Janani Suraksha Yojana (JSY): The JSY was prevalence of 0.31 per cent. The estimates
launched with focus on demand promotion for highlight an overall reduction in adult HIV
institutional deliveries in States and regions where prevalence and HIV incidence (new infections) in
these are low and integrates cash assistance with India. Adult HIV prevalence at national level has
delivery and post-delivery care. It targets lowering declined from 0.41 per cent in 2000 to 0.31 per
of the maternal mortality rate (MMR) by ensuring cent in 2009. The estimated number of new annual
that deliveries are conducted by skilled birth HIV infections has declined by more than 50 per
attendants. The JSY scheme has shown rapid cent over the past decade from 2.7 lakh in 2000
growth in the last three years, with the number of to 1.2 lakh in 2009. The epidemic is concentrated
beneficiaries reaching 100.78 lakh in 2009-10. The with high prevalence among the high risk groups
strengthening of infrastructure, coupled with (HRGs), injecting drug users (IDUs) (9.2 per cent),
improvement in manpower and training, has men who have sex with men (MSMs) (7.3 per
resulted in significant improvement of institutional cent), females sex workers (FSWs) (4.9 per cent),
deliveries in all major states. A mid-term evaluation and sexually transmitted infection (STI) clinic
of the RCH II programme also confirmed the attendees (2.5 per cent). Based on sentinel
increase in the number of JSY beneficiaries. The surveillance, 156 districts have been identified as
issues of governance, transparency, and category 'A' districts where prevalence of HIV
grievance redressal mechanisms are now the among antenatal clinic attendees (proxy for
thrust areas for the JSY. general population) is more than 1 per cent; and
39 districts as category 'B' districts where linkages for post-harvest management, marketing,
prevalence amongst high risk population is greater infrastructure, certification, and crop insurance in
than 5 per cent. These districts are given high a Mission mode. During the current financial year,
priority in the implementation of the programme. 26 States have been covered and financial support
The National AIDS Control Programme Phase-III of ` 46.41 crore was released for undertaking
(NACP-III) is being implemented for the period different activities under the scheme including
2007-12 with a total outlay of ` 11,585 crore. cultivation of important medicinal plant species
in over 24,214 hectare of land.
 Others : Others programmes like the Revised
National TB Control Programme (RNTCP), 12.49 The demand for health services is likely to
National Vector Borne Diseases Control rise considerably in the future with increase in
Programme (NVBDCP), National Programme for health-seeking behaviour resulting from better levels
Control of Blindness (NPCB), and National of education, income status, and urbanization. The
Leprosy Eradication Programme have also been role of the Government is critical for meeting the
strengthened and are being implementation in a health-care needs of major sections of the
time-bound and focused manner. The Integrated population and to control escalation of cost of health
Disease Surveillance Project (IDSP) has been care, while private-sector investment is crucial for
launched with the objective of detecting and satisfying the increasing demand for health services.
responding to early warning signals of disease The private sector plays a dominant role the delivery
outbreaks. Surveillance units have been of health services in the country. The sector is
established at all State and district headquarters. predominant in medical education, training,
The Central Surveillance Unit of the IDSP presently diagnostics and technology, manufacture of
receives weekly disease surveillance data from pharmaceuticals, hospitals design, and construction
85 per cent districts in the country, Of these, 55 and management of ancillary services. As per the
per cent districts report data through portal also National Commission on Macroeconomics and
which is for data entry, view reports, outbreak Health (NCMH) 2005, around 70 per cent of all
reporting, data analysis, training modules, and hospitals and 37 per cent of total beds in the country
resources related to disease surveillance. A total are in the private sector.
of 553 outbreaks were reported and responded to
12.50 Another important development in the Indian
by States in 2008, 799 in 2009 and 938 in 2010
health-care sector has been the growing use of
(up to December 2010).
telemedicine. In 2001, the Indian Space Research
 Ayurveda, Yoga & Naturopathy, Unani, Siddha and Organization (ISRO) launched a pilot project that
Homeopathy (AYUSH): Mainstreaming of AYUSH connects 78 hospitals in remote areas to super
in national health care delivery is an important specialty hospitals in the cities. Telemedicine has
goal under the NRHM, for which the Government opened up possibilities of professionals providing
has sanctioned ` 165.70 crore in the current expert healthcare service in remote rural areas
financial year upto 31 January, 2011. In September from their locations in cities. It has also opened up
2009 a new component ‘Upgradation of AYUSH the possibility of patients in India availing of
Hospitals’ in the States was incorporated in the professional advice from physicians in the developed
existing Centrally Sponsored Scheme of countries.
Development of AYUSH Hospitals and
Dispensaries. Further, in July 2010 ‘Upgradation 12.51 Human resources are the critical variable for
of AYUSH Dispensaries’ in the States has been effective provision of health care to the population.
incorporated as a new component in the existing To increase human resources in medical education,
Centrally Sponsored Scheme of development of the Central Government has revised the teacher-
AYUSH Hospitals and Dispensaries. The student ratio from 1:1 to 1:2 which has resulted in
Government has already recognized Ayurveda, approximately 4000 additional postgraduate seats
Yoga and Naturopathy, Unani, and Siddha as in various disciplines in Government medical
official Indian Systems of medicine. It is colleges from the academic year 2010-11. Further,
implementing the National Mission on Medicinal in order to increase the number of medical colleges
Plants which is aimed at supporting market-driven and specialists, the Central Government has also
medicinal plant cultivation on private land with relaxed the norms in respect of land requirement,
backward linkages for establishment of nurseries bed strength, bed occupancy, maximum admission
and supply of quality planting material, and forward capacity, and age of teaching faculty . Besides, the
Central Government also provides financial up to 31December 2010. Of the total 7073
assistance to State Government medical colleges sanctioned ICDS projects, 6719 were operational
for increasing the postgraduate seats to strengthen as on 31 December 2010. Of the total 13.67 lakh
the existing public health delivery system. Thirty- sanctioned AWCs, 12.42 lakh were operational
four Government medical colleges have been as on 31 December 2010.
approved for Central assistance during 2010-11.
 Rajiv Gandhi Scheme for Empowerment of
With the implementation of the scheme by 2011-
Adolescent Girls (RGSEAG): This scheme was
12, approximately 4000 additional postgraduate
launched on 19 November 2010 with the objective
seats would be available.
of empowering adolescent girls in the age group
11-18 years by bringing improvement in their
Women and Child Development
nutritional and health status and upgrading various
12.52 The Government has started several skills like home skills, life skills, and vocational
schemes and initiated many new policy initiatives skills. To start with, it will be implemented in 200
for the welfare and development of women and selected districts across the country on a pilot
children. These include initiatives for economic and basis. RGSEAG would be implemented through
social empowerment of women and for securing State Governments / UT Administrations with 100
gender equality in various aspects of social, per cent financial assistance from the Central
economic, and political life. The scope and coverage Government for all inputs other than nutrition
of the schemes for women and child development provision for which 50 per cent Central assistance
has been expanding, as is reflected in the progressive to states/UTs would be provided. Anganwadi
increase of expenditure incurred under various plan centres will be the focal points for delivery of
schemes by the Government. Some of the important services. Nearly 100 lakh adolescent girls in 200
schemes of the Ministry are as follows: districts are expected to be benefited per annum
under the scheme. In these 200 districts, Kishori
 Integrated Child Development Services (ICDS)
Shakti Yojna (KSY) and the Nutrition Programme
Scheme: This was launched in 1975 for holistic
for Adolescent Girls (NPAG) have been merged
development of children below 6 years of age and
in the RGSEAG. In the remaining districts, the
for proper nutrition and health education of
KSY will continue as before.
pregnant and lactating mothers with 33 projects
and 4891 anganwadi centres (AWCs). It has been  The Rajiv Gandhi National Creche Scheme for
continuously expanded to uncovered areas and Children of Working Mothers: This scheme
has now been universalized with the Government provides for day-care facilities to 0-6 year-old
of India cumulatively approving 7076 projects and children of working mothers by opening crèches
14 lakh AWCs including 20,000 anganwadis 'on- and development services, i.e., supplementary
demand'. Apart from universalizing the ICDS nutrition, health-care inputs like immunization,
Scheme, the Government has taken various polio drops, basic health monitoring, and
steps, such as revision in financial norms of recreation. The combined monthly income of both
existing interventions including the Supplementary the parents should not exceed ` 12000 for availing
Nutrition Programme (SNP), revision in nutritional of the facilities. The scheme is presently being
and feeding norms of supplementary nutrition, and implemented through the Central Social Welfare
introduction of new WHO growth standards. In Board (CSWB) and Indian Council for Child
addition, the Government of India also introduced Welfare (ICCW). As of now 22,599 crèches are
cost-sharing between the Centre and States from functional and the number of beneficiary children
2009-10 in the ratio of 90:10 for all components is 5,64,975. Under the revised scheme, an amount
including the SNP for the north-east. This ratio of ` 1.70 lakh per annum per crèche has been
will be 50:50 for the SNP and 90:10 for all other proposed against ` 42,384 per annum per crèche
components for all States other than north-east. in the existing scheme. This will provide for better
Alongside gradual expansion of the scheme, its nutritional support as well as better services for
budgetary allocation has also increased. The children.
Annual Plan outlay for 2010-11 for the ICDS was  Integrated Child Protection Scheme (ICPS): This
` 8700 crore against which an amount of scheme was launched in 2009-10 with the
` 6988.88 crore has been released to States/ UTs objective of providing a safe and secure
environment for comprehensive development of  Other Schemes : Some of the other schemes
children in the country who are in need of care implemented by the Ministry of Women and Child
and protection as well as children in conflict with Development, include: (i) Dhanlakshmi, which is
the law. The ICPS provides preventive and a conditional cash transfer scheme for the girl
statutory care and rehabilitation services to any child which was launched as a pilot project in
vulnerable child including, but not limited to, March 2008. The objective is to encourage families
children of potentially vulnerable families and to educate girl children and to prevent child
families at risk, children of socially excluded marriage. The scheme provides for cash transfers
groups like migrant families, families living in to the family of a girl child on fulfilling certain
extreme poverty, families subjected to or affected specific conditionalities relating to birth and
by discrimination and minorities, children infected registration, immunization, and enrolment and
and / or affected by HIV / AIDS, orphans, child retention in school up to Class VIII. The Scheme
drug abusers, children of substance abusers, child is being implemented in 11 blocks of seven States
beggars, trafficked or sexually exploited children, on pilot basis. The entire approved outlay of
children of prisoners, and street and working ` 5 crore for 2009-10 was released, benefiting
children. The allocation of funds under this scheme 42,077 girls. During 2010-11, 10,384 families
for 2010-11 is ` 300 crore. The Scheme is Centrally had been supported up to 30 September 2010.
Sponsored and is being mainly implemented (ii) Scheme for the Welfare of Working Children
through State Governments / UT Administrations in Need of Care and Protection providing for non-
from 2009-10 and 33 states/UTs have signed the formal education, vocational training, etc. to
MOUs for implementation of this scheme. During working children to facilitate their entry/re-entry
2010-11, ` 82.37 crore have been released under into mainstream education. There are 120 projects
the scheme upto 11 February, 2011. Thirteen more
of 100 children each currently being funded under
States/ UTs have agreed to implement this it and
the Scheme. (iii) Bal Bandhu Scheme for
are at various stage of preparation of plans
protection of children in areas of civil unrest is
including financial proposals.
being implemented through the National
 Support to Training and Employment Programme Commission for Protection of Child Rights
for Women (STEP) Scheme : This scheme seeks (NCPCR) with the grant sanctioned from the Prime
to provide updated skills and new knowledge to Minister's National Relief Fund. (iv) Swadhar
poor women in 10 traditional sectors for enhancing scheme for providing temporary accommodation,
their productivity and income generation. It is being maintenance, and rehabilitative services to women
implemented through public-sector organizations, and girls rendered homeless and women in difficult
State corporations, cooperatives, federations, and circumstances (v) Short Stay Home (SSH)
registered voluntary organizations with minimum scheme being implemented by the Central Social
existence of three years. With a view to expanding Welfare Board with similar objectives/target group
the reach of the programme and further as in case of the Swadhar scheme. (vi) Ujjawala,
strengthening implementation and monitoring, the a comprehensive scheme for prevention of
norms and parameters of this scheme have been trafficking with five specific components–
revised in November 2009. The major changes in prevention, rescue, rehabilitation, reintegration,
the norms relate to the number of beneficiaries to
and repatriation of victims–was launched on 4
be covered, project duration, and per capita cost
December 2007. Under this scheme, 134 projects
and the scheme now provides for introduction of
including 73 rehabilitation homes, spread over 16
locally appropriate sectors in consultation with
States, have been sanctioned.
State governments. The number of beneficiaries
in each project may now vary from 200 to 10,000  Scheme for Gender Budgeting : This has been
with the funding ceiling at ` 16,000 per beneficiary included in the Eleventh Plan. At present, 56
up to a period of five years. During 2010-11, a Ministries / Departments have set up gender
total number of 91 STEP projects were ongoing budget cells and a number of Ministries /
and 196 more were under consideration at Departments have reflected allocation for women
various stages as on 30 November 2010. A sum in the Gender Budget Statement of the Union
of ` 25 crore has been allocated in the financial Budget.
year 2010-11 to achieve a target of 35,000  National Mission for Empowerment of Women
beneficiaries. (NMEW) : This has been set up with a view to
empowering women socially, economically, and amount of ` 51.26 crore has already been released
educationally. The Mission aims to achieve to State Governments/UT Administrations for
empowerment of women on all these fronts by providing scholarships to an estimated 6.30 lakh
securing convergence of schemes / programmes beneficiaries up to 31 December 2010. The scheme
of different Ministries / Departments of the of Post-Matric Scholarships for students belonging
Government of India as well as State to SCs for studying in India has been revised with
Governments. Alongside, the Mission shall effect from 1 July 2010 so as to (i) raise the parental
monitor and review gender budgeting by Ministries annual income ceiling for eligibility from ` one lakh
/ Departments as well as effective implementation to ` two lakh, (ii) rationalize the grouping of courses,
of various laws concerning women. and (iii) upwardly revise maintenance and other
allowances by 60 per cent . Consequent upon the
 Rashtriya Mahila Kosh (RMK) : This was created
revision in the Scheme, an ad hoc Central
in 1993 with a corpus fund of ` 31crore. Since,
assistance of ` 378 crore was released to nine
its creation, the RMK has established itself as
States that had fulfilled the eligibility criteria up to
a premier micro-credit agency of the country,
December 2010. The number of beneficiaries during
with its focus on poor women and their
2010-11 is estimated at 45 lakh. The Rajiv Gandhi
empowerment through the provision of credit for
National Fellowship Scheme was launched in 2006
livelihood-related activities. The RMK provides
to provide financial assistance to SC students
micro-credit in a quasi-informal manner, lending
pursuing M Phil and Ph D courses. The number of
to intermediate micro-credit organizations (IMOs)
scholarships under the Scheme has been increased
(for example NGOs/voluntary organizations,
from 1333 to 2000 with effect from 1 April 2010.
women development corporations, women's
During 2010-11, an amount of ` 113 crore was
cooperative societies, and suitable Government
released up to December 2010 against the revised
/ local bodies). The IMOs in turn lend to self-help
allocation of ` 160 crore for 2000 new fellowships
groups (SHGs), which, in turn, lend to individual
and 5332 renewals. The specified subjects under
members at a rate not above the ceiling
National Overseas Scholarships have been revised
prescribed by the RMK, i.e. 18 per cent per
for the selection year 2010-11 and subjects, namely
annum on reducing balance method.
medicine, pure sciences, engineering, agricultural
Welfare and Development of SCs, STs, sciences and management, have been specified
OBCs, and other weaker sections for providing financial assistance to pursue Masters-
level courses and PhD/post-doctoral courses
12.53 As part of the strategy to achieve inclusive abroad. Thirty awards are given per year. During
development, the Government is committed towards 2010-11, the amount released up to December 2010
the economic and social empowerment and was ` 1.92 crore against an allocation of ` 6 crore.
educational upliftment of socially disadvantaged The earlier Centrally sponsored scheme for hostels
groups and marginalized sections of society. for SC boys and girls was revised and renamed
Accordingly, a number of schemes and Babu Jagjiwan Ram Chhatrawas Yojna with effect
programmes are implemented by the Central from 1 January 2008. As part of this revision, Central
Government through State Governments, UT assistance for the construction of girls hostels was
Administrations, and NGOs. The PPP approach is raised from 50 per cent to 100 per cent. During
also being explored for effective delivery of services 2010-11, the physical target is to construct 49
with more accountability and transparency. hostels for girls and 59 for boys and `11.74 crore
was released up to December 2010 against an
Scheduled Castes (SCs) allocation of ` 121 crore for construction of 12
12.54 A number of schemes are being hostels. Special Central assistance is given to the
implemented to encourage SC students to continue Scheduled Castes Sub Plan, a major scheme for
their studies from school to higher education level. economic advancement of SCs. During 2010-11,
During the year 2010-11, the physical target under the physical target is to cover over 6 lakh
the Scheme of Pre-Matric Scholarship for those beneficiaries. An amount of ` 518.69 crore was
students whose parents are engaged in unclean released to State Governments/UT Administrations
occupations was eight lakh beneficiaries/students. against a revised allocation of ` 600 crore up to
Against an allocation of ` 80 crore for 2010-11, an December 2010. During 2010-11, the National
Scheduled Castes Finance and Development pursuing higher studies abroad in specified fields at
Corporation (NSCFDC) has given concessional Masters and Ph D level under the National Overseas
loans amounting to ` 121 crore to 33,659 Scholarship Scheme.
beneficiaries as on 31December 2010.
12.57 The economic empowerment of STs by
12.55 The Scheme of Top Class Education for SCs means of extension of financial support through the
provides financial assistance for quality education National Scheduled Tribes Finance and Development
to SC students up to degree/post-degree level. SC Corporation (NSTFDC) continued. Financial support
students, who secure admission in the notified is extended to ST beneficiaries/entrepreneurs in the
institutions, are awarded scholarships. During 2010- form of loans and micro-credit at concessional rates
11, the amount released up to December 2010 was of interest for income-generating activities. The Tribal
` 9.64 crore to assist 1036 SC students studying Cooperative Marketing Development Federation of
in institutions like IITs and IIMs against a budget India Limited (TRIFED) is engaged in marketing
allocation of ` 25 crore. Two new IITs (Indore and development of tribal products and their retail
Mandi) and three new IIMs (Ranchi, Raipur, and marketing through its sales outlets. As per
Rohtak) have been added in the notified list of information collected from the States till 31
premier institutions under the Scheme with 12 December 2010, more than 30,31,624 claims have
scholarship slots per annum per institute, with been filed under the Scheduled Tribes and Other
effect from the current financial year. Traditional Forest Dwellers (Recognition of Forest
Rights) Act and more than 11,06,541 titles have been
Scheduled Tribes (STs) distributed. Around 32,000 titles are ready for
12.56 For the welfare and development of the STs, distribution. A scheme for Strengthening of Education
an outlay of ` 3206.50 crore has been provided in among ST Girls in Low Literacy Districts to bridge
the Annual Plan for 2010-11. During 2010-11, ` 960.50 the gap in literacy levels between the general female
crore has been provided as Special Central population and tribal women is being implemented.
Assistance (SCA) to the Tribal Sub-Plan (TSP),
Minorities
which includes ` 60.50 crore for development of
forest villages. The SCA to TSP is a 100 per cent 12.58 Five communities-Muslims, Christians,
grant extended to States as additional funding to Sikhs, Buddhists, and Parsis-were notified by the
their TSP for family-oriented income-generating Government as minority communities under Section
schemes, creation of incidental infrastructure, 2 (c) of the National Commission for Minorities Act
extending financial assistance to SHGs, community- 1992. As per the 2001 Census, minority communities
based activities, and development of forest villages. constitute 18.42 per cent of total population. For the
The outlay for grants-in-aid under Article 275(1) during development of minorities, the plan outlay was raised
2010-11 is ` 1046.00 crore. The funds are provided from ` 1740 crore in 2009-10 to ` 2600 crore in 2010-
to States with the objectives of promoting the welfare 11. Three scholarship schemes, namely Pre-Matric,
of STs and improving administration to bring them Post-Matric, and Merit-cum-means-based, are being
on a par with the rest of the States and to enable implemented exclusively for the minorities with the
them take up such special welfare and development total provision enhanced from ` 450 crore in 2009-
programmes which are otherwise not included in the 10 to ` 850 crore in 2010-11. A Multi-sectoral
Plan programmes. Under the Scheme for Post-Matric Development Programme to address the
Scholarships, 100 per cent financial assistance is 'development deficits', especially in education, skill
provided to ST students whose family income is less development, employment, health and sanitation,
than or equal to ` 1.45 lakh per annum to pursue housing, and drinking water, in 90 minority
post-matric-level education including professional concentration districts (MCDs) was launched in 2008-
and graduate and postgraduate courses in 09. The outlay for this programme was enhanced
recognized institutions. The Scheme of Top Class from ` 990 crore in 2009-10 to ` 1400 crore in 2010-
Education for STs provides financial assistance for 11. Work on implementation of this programme to
quality education to 625 ST students per annum to improve the selected development indices in the
pursue studies at degree and post-degree level in MCDs has picked up momentum. The corpus of the
any of 125 identified Institutes. The family income of Maulana Azad Education Foundation (MAEF) has
the beneficiary ST student from all sources should been enhanced from ` 100 crore in 2005-06 to
not exceed ` 2 lakh per annum. Financial assistance ` 550 crore in 2010-11 to expand its activities for
is also provided to 15 eligible ST students for implementation of educational schemes for
educationally backward minorities. The authorized enable them to pursue higher studies, an amount of
share capital of the National Minorities Development ` 7.83 crore was released up to December 2010
and Finance Corporation (NMDFC) has been raised against an allocation of ` 45 crore for 5000 additional
from ` 650 crore in 2006-07 to ` 1500 crore in hostel seats. During 2010-11, the National Backward
2010-11 for expanding its loan and micro-finance Class Finance and Development Corporation
operations to promote self-employment and other (NBCFDC) has given concessional loans amounting
economic ventures among backward sections of to ` 106 crore to 80,660 beneficiaries as on 31
the minority communities. The progress of the Prime December 2010.
Minister's New 15 Point Programme for Welfare of
Minorities is being reviewed once in six months by 12.60 The Central lists of backward classes have
the Government. The programme has been enlarged been amended vide Gazette Notification dated 18
by covering more schemes and its monitoring August 2010:
mechanism has been strengthened by including  No lists had so far been notified for the States of
elected representatives of State Assemblies and Chhattisgarh and Jharkhand, which have been
Parliament. Two schemes, namely the (i) Maulana created in the year 2000. Lists have been notified
Azad National Fellowship for Minority Students with for these two States for the first time, comprising
an allocation of ` 30 crore in 2010-11 and (ii) 64 and 119 entries respectively.
'Computerization of Records of State Wakf Boards'
with an allocation of ` 13 crore in 2010-11, has  Twenty-six new entries have been added in the
been under implementation since 2009-10. Another existing lists of Himachal Pradesh (2 entries) and
scheme, namely 'Leadership Development of Minority Daman and Diu (24 entries), and
Women' launched in 2009-10 is also being  Modifications/corrections in 26 existing entries
implemented with an allocation of `15 crore for pertaining to four States (Haryana, Himachal
2010-11. National Level Monitors have been deputed Pradesh, Karnataka, and Rajasthan) and one UT
to monitor the progress of the schemes of the (Daman and Diu).
Ministry. Efforts are being made to improve the
management of wakf properties and a scheme for Persons with Disabilities
the computerization of records of the Wakf Board is
12.61 A large number of programmes are
a step in this direction. The Wakf Amendment Bill
implemented through national and apex institutes
2010 was passed by the Lok Sabha on 7 May 2010.
dealing with various categories of disabilities. These
The Bill was referred to the Rajya Sabha on 18 May
institutes conduct short- and long-term courses for
2010. The Rajya Sabha has referred the matter to
various categories of personnel for providing
the Select Committee on 31 August 2010 to examine
rehabilitation services to those needing them. Under
the Bill.
the Scheme of Assistance to the Disabled for
Purchase/Fitting of Aids and Appliances (ADIP),
Other Backward Classes (OBCs)
approximately 2 lakh persons with disabilities are
12.59 The Government provides Central Assistance provided assistive devices every year. During 2010-
to State Governments /UT Administrations for 11, ` 27.71 crore was released to implementing
educational development of OBCs. During 2010-11, agencies up to December 2010 against a revised
the Scheme of Pre-Matric Scholarships for OBC, allocation of ` 90 crore under the scheme. The target
proposes to provide scholarships to 14 lakh OBC is to cover 2 lakh persons with disabilities. Under
students. An amount of ` 38.17 crore was released the Deen Dayal Disabled Rehabilitation Scheme
against an allocation of ` 50 crore to State (DDRS), ` 37.64 crore has been released up to
Governments/UT Administrations up to December, December 2010 against a revised allocation of
2010 during the year 2010-11. Under the Scheme of ` 90 crore during 2010-11 to voluntary organizations
Post-Matric Scholarships for OBCs, it is proposed for running special schools for children with hearing,
to provide scholarships to 15 lakh OBC students. visual, and mental disability and vocational
An amount of ` 238.78 crore was released to State rehabilitation centres for persons with various
Governments/UT Administrations up to December disabilities and for manpower development in the field
2010 against an allocation of ` 350 crore during the of mental retardation and cerebral palsy. The targeted
financial year 2010-11. In order to provide hostel number of beneficiaries is 76,000. During 2010-
facilities to OBC students studying in middle and 11, the National Handicapped Finance and
secondary schools, colleges, and universities to Development Corporation (NHFDC), has given
concessional loans amounting to ` 19.86 crore to 4 Regional Resource and Training Centres, and other
511 beneficiaries as on 31December 2010. projects. During 2010-11, ` 13.50 crore has been
released up to December 2010 against a revised
12.62 The Scheme of Incentives to Employers in
allocation of ` 31 crore. The scheme aims to benefit
the Private Sector for Providing Employment to
1.2 lakh persons. For effective implementation of
Persons with Disabilities was launched with effect
social defence schemes, personnel engaged in
from 1 April 2008. Under the Scheme, the
delivery of services in this area are being trained
Government will bear as an incentive the employer's under various programmes being organized by the
contribution to the Employees Provident Fund and National Institute of Social Defence (NISD). During
Employees State Insurance for the first three years 2010-11, an amount of ` 5 crore was released up to
for every employee with disabilities appointed on or December 2010 to the NISD against a revised
after 1 April 2008 with monthly emoluments up to allocation of ` 7.50 crore.
` 25,000.
Environment and Climate change
Social Defence Sector
12.65 Economic Development without
12.63 Under the Integrated Programme for Older environmental considerations can cause serious
Persons (IPOP) scheme, grants-in-aid are given to environmental damage, in turn impairing the quality
NGOs for running old age homes (OAH), day care of life of present and future generations. Such
centres (DCCs), and mobile medical units (MMUs. environmental degradation imposes a cost on the
The Scheme has been revised with effect from 1 society and needs to be explicitly factored into
April 2008. Besides an increase in the amount of economic planning, with necessary remedial
financial assistance for existing projects, several new measures incorporated. The challenge of sustainable
projects have been made eligible for financial development thus requires integration of the country's
assistance under the scheme. During 2010-11, quest for economic development with its
` 10.18 crore was released up to December 2010 environmental concerns. Environment management
against the revised allocation of ` 30 crore. The in India has, over the years, recognized these
scheme targets support to 0.45 lakh beneficiaries sustainable development concerns. The National
during the year. The Maintenance and Welfare of Environment Policy 2006 has attempted to
Parents and Senior Citizens Act 2007 was enacted mainstream environmental concerns in all our
in order to ensure need-based maintenance for developmental activities. It underlines that 'while
parents and welfare measures for senior citizens. conservation of environmental resources is
The Act has been notified by 22 States and all the necessary to secure livelihoods and well being of
UTs so far. all, the most secure basis for conservation is to
ensure that people dependant on particular resources
12.64 Grants-in-aid are provided to NGOs for obtain better livelihoods from the fact of conservation,
running Integrated Rehabilitation Centres for Addicts, than from degradation of the resource'. The
Box : 12.9 Why Environment Matters to Achieve Sustainable Development in the Specific Context
of India.
Our environmental standards are set through Government policies aimed at a development process that is environmentally
sustainable and foregrounds well-being of the people. The broad objectives of our environmental policies and programmes
are:
 Conservation of flora, fauna, forests, and wildlife;
 Prevention and control of pollution;
 Afforestation and regeneration of degraded areas;
 Protection of the environment.
As a country, India has been in the forefront of preserving biodiversity, sustainable management of forests, reducing
emissions intensity of the economy, and following sustainable consumption and production patterns. Specifically, India
has been following a development path that takes into consideration the needs of the present generation without compromising
the ability of future generations to meet their needs. Suitable attention has been given to protecting and conserving critical
ecological systems and resources and invaluable natural and man-made heritage, which are essential for life-support,
livelihoods, economic growth, and a broad conception of human well-being. Moreover, the effort has been to ensure
equitable access to environmental resources and quality for all sections of society, in particular to ensure that poor
communities which are most dependent on environmental resources for their livelihoods are assured secure access to these
resources.
Government of India, through its various policies, has is for a period of five years and it is estimated that it
been factoring ecological concerns into the will benefit 3.56 crore people directly 6.30 crore
development process so that economic development indirectly. India has always maintained that economic
can be achieved without critically damaging the and social development is its prime objective. At the
environment. The strong sustainable development same time, it has promoted clean energy solutions
agenda followed by India incorporates rigorous which include activities aimed at promotion of energy
environmental safeguards for infrastructure projects, efficiency in industrial, residential and commercial
strengthening of the environmental governance use, solar power and projects that build fuel efficient
system, revitalizing of regulatory institutions, focusing transport infrastructure, clean energy hydro power
on river conservation, and efforts for improvements plants, and efficient water supply and waste water
in air and water quality, on a continuous basis (Box systems. India also has programmes aimed at
12.9). building a climate-resilient economy especially for
helping farmers, fishing communities, and other
A few recent initiatives vulnerable communities safeguard their livelihoods
12.66 The Ministry of Environment and Forests has against the vagaries of a changing climate.
notified the Wetlands (Conservation and
Climate Change
Management) Rules 2010 in order to ensure that
there is no further degradation of wetlands. The rules 12.67 Climate Change, as a global environmental
specify activities which are harmful to wetlands such problem has been receiving intense political attention
as industrialization, construction, dumping of at domestic and international levels. 'Climate change'
untreated waste and reclamation and prohibit these means a change of climate which is attributed
activities in the wetlands. Other activities such as directly or indirectly to human activity that alters the
harvesting and dredging may be carried out in the composition of the global atmosphere and which is
wetlands but only with prior permission from the in addition to natural climate variability observed over
concerned authorities. The National Green Tribunal comparable time periods. Increasing levels of fossil
(NGT) Act, 2010 came into force on 18th October, fuel burning and land use changes have emitted,
2010. As per the provisions of the NGT Act 2010, and are continuing to emit, greenhouse gases (mainly
the National Environment Appellate Authority carbon dioxide [CO2], methane, and nitrous oxide)
(NEAA), established under the NEAA Act, 1997 into the earth's atmosphere. This increasing level of
stands dissolved and the cases pending before NEAA emissions of greenhouse gases has caused a rise
stand transferred to the NGT. The Act provides for in the amount of heat from the sun trapped in the
the establishment of a NGT for the effective and earth's atmosphere, heat that would normally be
expenditious disposal of cases relating to radiated back into space. This has led to the
environmental protection and conservation of forests greenhouse effect, resulting in climate change. The
and other natural resources including enforcement major characteristics of climate change are rise in
of any legal right relating to environment and giving average global temperature, ice cap melting,
relief and compensation for damages to persons and changes in precipitation, and increase in ocean
property and for matters connected therewith or temperature. The efforts needed to address the
incidental thereto. Coastal ecosystems are a critical climate change problem include mitigation of
reservoir of our biodiversity and provide protection greenhouse gas emissions on the one hand and
from natural disasters such as floods and tsunamis building of capacities to cope with the adverse
and are a source of livelihood to hundreds of millions impacts of climate change on various sectors of the
of families. Hence, as a major national initiative in society and economy on the other.
this direction, the Coastal Regulation Zone
Notification has been published in the gazette of India Assessing the scale of the problem
on 6th January, 2011. The Government of India and 12.68 According to the Fourth Assessment Report
World Bank have signed a loan agreement for the of the Intergovernmental Panel on Climate Change
implementation of an Integrated Coastal Zone (IPCC 2007), over the century, atmospheric
Management Project, which will be implemented at concentrations of carbon dioxide increased from a
a total cost of ` 1156 crore. The World Bank will pre-industrial value of 278 parts per million to 379
contribute an amount of ` 897 crore (77.7 per cent), parts per million in 2005, and the average global
the Government of India ` 177 Crore (15.4 per cent), temperature rose by 0.740C. Projections indicate
and the States ` 80 Crore (6.9 per cent). This project that global warming will continue and accelerate.
and sector (Box 12.10). Total global emissions grew

Box 12.10 : World Greenhouse Gas Emissions
by 12.7 per cent between 2000 and 2005, an annual
While the worldwide emissions of GHGs have increased average of 2.4 per cent. CO2 is the predominant
since 1945, with the largest increases taking place in carbon gas accounting for 77 per cent of world GHG
dioxide (CO2) emissions, scientists attribute the global
emissions in 2005 followed by methane (15 per
problem of climate change not to the current GHG emissions
but to the stock of historical GHG emissions. cent) and nitrous oxide (7 per cent). North America
accounted for 18 per cent of world GHG emissions,
Most of the countries, particularly the industrialized
countries, having large current emissions, are also the largest China for 16 per cent, and the EU for 12 per cent
historic emitters and the principal contributors to climate in 2005. India's share stood at 4 per cent in 2005.
change. Per capita CO2 emissions of major countries are
A relatively small number of such countries are responsible illustrated in Figure 12.1.
for the largest chunk of the stock of global GHG emissions.
The industrialized countries with the largest total emissions International Response
also rank among those with the highest per capita
12.70 The issue of climate change is now placed
emissions. Per capita emissions are generally higher in
wealthier countries. firmly on national and international agendas, subject
to scrutiny by public and media, and is even shaping
the strategies of a number of businesses.
Thus climate change represents additional stress Internationally, the United Nations Framework
on ecological and socio-economic systems that are Convention on Climate Change (the Convention) was
already facing tremendous pressure due to rapid set up in 1992 and entered into force in 1994. This
economic development. With climate change, the was a crucial step in putting in place the institutions
type, frequency, and intensity of extreme events, and processes for the world's Governments to take
floods, and droughts are expected to increase. coordinated and effective action. The Convention
Hence addressing climate change is a major enjoins near universal membership. As on date, 194
challenge in terms of policies and resources needed countries are Parties to the Convention. The ultimate
to address it at domestic and international levels. objective of the Convention is to stabilize the
concentrations of GHGs in the atmosphere at a level
Global Greenhouse Gas Emissions Trends that would prevent dangerous anthropogenic
12.69 Global Greenhouse Gas (GHG) emissions interference with the climate system. Such a level
have risen sharply since 1945. As per a working should be achieved within a time frame sufficient to
paper published by the World Resources Institute, allow ecosystems to adapt naturally to climate
total GHGs were estimated at 44,153 MtCo2 change to ensure that food production is not
equivalents (million metric tons) in 2005. This is the threatened and to enable economic development to
most recent year for which comprehensive proceed in a sustainable manner. Although global
emissions data are available for every major gas in scope, it differentiated the commitments/
Figure 12.1 CO2 emissions

20
18
1992
Metric tons per capita
16
14
12 2007
10
8
6
4
2
0
United States
Australia
Canada
Finland
Russian Federation
The Netherlands
Japan
Germany
Denmark
Norway
Spain
China
Brazil
India
responsibilities of Parties on the basis of respective now, up to, and beyond 2012 was launched.
capabilities, economic structures, and resource Currently, international actions for addressing climate
bases and on the basis of the principle of 'equity' change are being pursued under the Bali Action Plan
which is at the core of the climate change debate. and the mandate of the Kyoto Protocol. The 15th
Hence, any discussion on stabilization of the CoP held at Copenhagen in December 2009 made
concentrations of GHGs in the atmosphere should some advance in the form of the 'Copenhagen
be preceded by a paradigm for equitable access to Accord', which reflects the political understanding
global atmospheric resources that determines the
development space of nations. The Convention lays Box 12.11 : Elements of the Cancun Agreements
down legally binding commitments for the developed (i) Industrialized country targets are officially
countries, taking into account their historical recognized under the multilateral process and these
responsibilities. These commitments are to be countries are to develop low-carbon development
implemented in the form of reduction of GHG plans and strategies and assess how best to meet
them, including through market mechanisms, and
emissions by the developed countries with reference to report their inventories annually.
to 1990 levels and provision of support to developing
(ii) Developing country actions to reduce emissions are
countries in terms of finance and technology so as officially recognized under the multilateral process.
to enable them to take voluntary mitigation and A registry is to be set up to record and match
adaptation measures. The Convention recognizes developing country mitigation actions to finance
that economic and social development and poverty and technology support from by industrialized
eradiation are the 'first and overriding priorities' of countries. Developing countries are to publish
progress reports every two years.
the developing countries.
(iii) Parties meeting under the Kyoto Protocol agree to
12.71 The Convention laid the groundwork for continue negotiations with the aim of completing
concerted international action, which in 1997 led to their work and ensuring there is no gap between the
the adoption of the Kyoto Protocol containing a first and second commitment periods of the treaty.
legally binding quantitative time-bound target for (iv) The Kyoto Protocol's CDM has been strengthened
to drive more major investments and technology
developed countries. The Kyoto Protocol set a target
into environmentally sound and sustainable emission
for developed countries (individually or jointly) to reduction projects in the developing world.
reduce overall emissions by at least 5 per cent below (v) Parties launched a set of initiatives and institutions
1990 levels in the first commitment period, 2008 to to protect the vulnerable from climate change and
2012. Recognizing that relying on domestic to deploy the money and technology that developing
measures alone to meet the target could be onerous, countries need to plan and build their own
the Kyoto Protocol offers considerable flexibility sustainable futures.
through three mechanisms: Clean Development (vi) A total of $30 billion in fast start finance from
Mechanism (CDM), Joint Implementation (JI), and industrialized countries to support climate action
in the developing world up to 2012 and the intention
Emissions Trading (ET). Through the CDM,
to raise $100 billion in long-term funds by 2020 are
industrial countries can finance mitigation projects included in the decisions.
in developing countries contributing to their (vii) In the field of climate finance, a process to design a
sustainable development. Credits received from such 'Green Climate Fund' under the Conference of the
projects can be used to meet commitments under Parties, with a Board with equal representation from
the Kyoto Protocol. Through JI, industrialized developed and developing countries, is established.
countries acquire emissions credit by financially (viii)A new Cancun Adaptation Framework is established
supporting projects in other industrialized countries. to allow better planning and implementation of
ET allows countries that expect their emissions to adaptation projects in developing countries through
increased financial and technical support, including
be above target to buy unused quotas from other a clear process for continuing work on loss and
countries. All major countries except the USA have damage.
ratified the Kyoto Protocol. (ix) Governments agree to boost action to curb emissions
12.72 The Conference of Parties (CoP), which is from deforestation and forest degradation in
developing countries with technological and financial
the supreme body of the Convention, meets support.
annually. During the 13th CoP held at Bali,
(x) Parties have established a technology mechanism
Indonesia, in December 2007, a comprehensive with a Technology Executive Committee and Climate
process called the Bali Action Plan to enable the Technology Centre and Network to increase
full, effective, and sustained implementation of the technology cooperation to support action on
Convention through Long Term Cooperative Action, adaptation and mitigation.
reached by a select group of countries. However, India's Greenhouse Emissions

this was only 'noted' and not adopted by the Parties
12.73 Although India ranks in the top five in terms
to the Convention. The recent negotiations held at
of GHG emissions, the per capita emissions are
Cancun during 29 November - 11 December 2010
much lower compared to those of the developed
have resulted in a set of decisions that cover various
countries, even if the historical emissions are
areas of action, for example mitigation, adaptation,
technology and finance as outlined in the Bali Action excluded. Its high level of emissions is due to large
Plan, while agreeing to work towards an ambitious populace, geographical size and large economy.
target of emissions reduction under the Kyoto The most recent data available for India are the
Protocol. The Cancun Agreements include decisions assessment carried out by the Indian Network for
under both the Convention and Kyoto protocol Climate Change Assessment (INCCA) in May 2010.
negotiating tracks (Box 12.11). They are widely The key results of the assessment are that the total
perceived as a modest, small step forward and a net GHG emissions from India in 2007 were 1727.71
reaffirmation of faith in the multilateral process. As million tons of CO2 equivalent (eq.), of which carbon
per the Cancun Agreements, all Parties to the dioxide emissions were 1221.76 million tons;
Convention (including the developed and developing methane 20.56 million tons; and nitrous oxide 0.24
countries) have agreed to report their voluntary million tons. In 1994, the total net GHG emissions
mitigation goals for implementation. These will be for India were 1228.54 million tons of CO2 eq. This
subject to measurement and verification or represents a compounded annual growth rate of
international consultation, as appropriate, in 2.9 per cent during the period 1994 to 2007
accordance with agreed international guidelines. (Table 12.14).GHG emissions from the energy,
Decisions were taken at Cancun to set up a Green industry, agriculture, and waste sectors in 2007
Climate Fund, a Technology Mechanism, and an constituted 58 per cent, 22 per cent, 17 per cent,
Adaptation Committee at global level to support and 3 per cent of the net CO2 eq. emissions
developing country actions for adaptation and respectively. India's per capita CO2 eq. emissions
mitigation. These decisions are significant because including land use, land use change, and forestry
they reflect, to a large degree, the political (LULUCF) were 1.5 tons per capita in 2007.
understanding that was reached by a select group
of countries in the form of the Copenhagen Accord Impacts of Climate Change in India
in December 2009. 12.74 Climate change has enormous implications
for the natural resources and livelihoods of the
Table 12.14 : A Comparison of GHG Emissions people. It will have wide-ranging effects on the
by Sector between 1994 and 2007 environmental and socio-economic and related
(in million tons of CO2 equivalent) sectors. Various studies indicate that the key sectors
1994 2007 CAGR
(per Box 12.12 : Why India is concerned about
cent)
climate change.
Electricity 355.03 (28.4) 719.30 (37.8) 5.6
Transport 80.28 (6.4) 142.04 (7.5) 4.5 India is a country which will be severely impacted by
climate change. This puts additional hurdles in its
Residential 78.89 (6.3) 137.84 (7.2) 4.4
developmental path in addition to the challenges of
Other Energy 78.93 (6.3) 100.87 (5.3) 1.9 poverty eradication and growing population. The
Cement 60.87 (4.9) 129.92 (6.8) 6.0 projected impacts of climate change cut across various
Iron & Steel 90.53 (7.2) 117.32 (6.2) 2.0
sectors, natural systems such as coastal areas, water
resources, forests, agriculture, and health. With a large
Other Industry 125.41 (10.0) 165.31 (8.7) 2.2 agrarian population, India is vulnerable to changes in
Agriculture 344.48 (27.6) 334.41 (17.6) -0.2 weather parameters. Further, rainfall, variability and
Waste 23.23 (1.9) 57.73 (3.0) 7.3 melting of glaciers will impact replenishment of rivers,
thereby affecting availability of water in river basins
Total without LULUCF 1251.95 1904.73 3.3
and watersheds. In India, most of the rivers flowing in
LULUCF 14.29 -177.03 the northern regions are dependent on snow and glacial
Total with LULUCF 1228.54 1727.71 2.9 melt, thus climate change threatens the perennial nature
of these rivers. This has huge implications for agriculture
Note: Figures in brackets indicate percentage
and allied activities and resultant livelihoods. This is a
emissions from each sector with respect to
total GHG emissions without LULUCF in 1994
serious concern for an economy that is tied to its natural
and 2007 respectively. resource base along its developmental path.
in India such as the agriculture, water, natural 2022, doubling the present share of 3 per cent of
ecosystem, biodiversity, and health are vulnerable nuclear power in the energy mix over the next
to climate change (Box 12.12). This is happening decade, putting in place a major market-based
precisely at a time when it is confronted with huge programme to stimulate energy efficiency, imposing
development imperatives. The Indian Network for clean energy cess on coal for funding research and
Climate Change Assessment (INCCA) released a development (R&D) of clean energy technologies
report in November 2010 on assessment of the even though coal will continue to play a key role in
impact of climate change on key sectors and regions our future energy strategy, and aggressively
of India in the 2030s. The assessment covers four expanding the use of natural gas in power
key sectors of the Indian economy, namely production. Third, India has been pursuing
agriculture, water, natural ecosystems and aggressive strategies for forestry and coastal
biodiversity, and health in four climate sensitive management to increase the quality and quantity of
regions, namely the Himalayan region, the Western forest cover and has launched a major new
Ghats, the Coastal Area, and the North-east region. programme on coastal zone management to address
The report warns of impacts such as sea-level rise, the adaptation challenges facing over 300 million
increase in cyclonic intensity, reduced crop yield people in our country who live in vulnerable areas
in rainfed crops, stress on livestock, reduction in near our coast.
milk productivity, increased flooding, and spread of 12.76 As part of its international obligations under
malaria. This calls for urgency of action in reducing the United Nations Framework Convention on Climate
vulnerability to adverse impacts of climate change Change (UNFCCC) India periodically prepares the
and enhancing adaptive capacity through sector- National Communication (NATCOM) that gives an
specific interventions and efforts. inventory of the GHG emissions in India, assesses
the vulnerability and impacts, and makes appropriate
India's Strategies recommendations regarding social, economic and
12.75 India's total CO2 emissions are about 4 per technological measures for addressing climate
cent of total global CO2 emissions and the energy change. The First NATCOM was presented to the
intensity of India's output has been falling with UNFCCC in 2004. The Government is now engaged
improvements in energy efficiency, autonomous in preparing NATCOM II, which will be presented to
technological changes, and economical use of the UNFCCC in 2011. Preparation of NATCOM is an
energy. India's climate modeling studies show that exercise of high scientific rigour based on an
even with 8-9 per cent gross domestic product (GDP) extensive network of research and scientific
growth every year for the next decade or two, its per institutions in India and draws upon expertise and
capita emissions will be around 3-3.5 tonnes of excellence from different institutions. India has set
CO2eq. by 2030, as compared to the present 1-1.2 up an elaborate Indian Network for Comprehensive
tonnes. These are well below developed country Climate Change Assessment of some 250 scientists
averages by any estimation. India's determination in and 120 research institutions to assist in this work.
addressing climate change is evident from the fact This Network has already published India's GHG
that an indicative target of increasing energy inventory for the year 2007 and a 4x4 assessment
efficiency by 20 per cent by 2016-17 is already of climate change impacts on four key sectors and
included in the Eleventh Five Year Plan. This has four key regions of the country for the 2030s, a time
now been supplemented with the domestic mitigation frame for which decisive interventions can be made
goal of reducing emissions intensity of the GDP by now. This network is expected to put in place a
20-25 per cent of the 2005 level by 2020 through programme for measuring, monitoring, and modeling
proactive policies. The resources for the measures the impact of black carbon which could have climate
required to achieve this objective will need to be change and public health impacts.
mobilized from various sources including the national 12.77 India's strategy for enhancing its adaptive
planning process. Studies in respect of a low carbon capacity to climate variability is reflected in many of
strategy for development aimed at ensuring inclusive its social and economic development programmes.
growth are being conducted with the aim of including For developing countries like India, adaptation
this as one of the key pillars in the Twelfth Five Year ultimately boils down to assisting the vulnerable
Plan. Second, India is taking conscious steps to population during exigencies and empowering them
diversify the energy fuel mix such as setting up of to build their lives and cope with uncertainties in the
20,000 MW of solar power-generating capacity by long run. Several of India's social-sector schemes,
Figure 12.2 Total expenditure on adaptation oriented schemes

14
12 Expenditure
as per cent
10 of total govt
8 expenditure
Per cent
6
Expenditure
4 as per cent
2 of GDP
0
2000-01
2003-04
2005-06
2008-09
2009-10
Year
with their emphases on livelihood security and welfare programmes under implementation in India (Table
of the weaker sections, aim to do just that. India 12.15).
implements a series of Central sector and centrally
12.78 India has announced a National Action
sponsored schemes under different Ministries/
Plan on Climate Change (NAPCC) in June, 2008
Departments aimed at achieving social and
which incorporates its vision of sustainable
economic development. Many of these schemes
contain elements (objectives and targets) that are development and the steps it must take to realize it.
decidedly geared to adaptation. In other words, there The NAPCC is coordinated by the Ministry of
is substantial adaptation orientation in many of the Environment and Forests and implemented through
sectoral schemes currently under operation. An the nodal Ministries and is aimed at advancing
exercise has been carried out to measure the relevant actions in specific sectors/areas. Eight
expenditure on adaptation-related programmes with national missions in the areas of solar energy,
critical adaptation components: (a) crop improvement enhanced energy efficiency, sustainable agriculture,
and research, (b) poverty alleviation and livelihood sustainable habitat, water, Himalayan ecosystem,
preservation, (c) drought proofing and flood control, increasing the forest cover, and strategic knowledge
(d) risk financing, (e) forest conservation, (f) health, for climate change form the core of NAPCC (Box
and (g) rural education and infrastructure. It has been 12.13). State Governments are also preparing, under
found that India's expenditure on these adaptation- the advice of the Central Government, State Action
oriented schemes has increased from 1.45 per cent Plans aimed at creating institutional and programme-
of GDP in the year 2000-01 to 2.84 per cent during oriented capacities to address climate change.
2009-10 (Figure12.2). This is a fairly impressive level These, together with the National Missions, will
of spending and is an obvious reflection of the enhance climate change-related actions in the public
multiplicity of economic and social welfare and private domains.
Table 12.15 : Total Expenditure on Adaptation-oriented Schemes

Year GDP Grand Total of Expenditure on Expenditure on Expenditure on
(Rs. crore) Expenditure Adaptation- Adaptation Adaptation
Budget oriented oriented oriented
(Rs. Crore) Programmes Programmes Programmes
(Rs. Crore) as per cent as per cent
of total of GDP
Expenditure
Budget
2000-01 1,864,301 335,523 27,028 8.06 1.45

2003-04 2,222,758 474,254 39,792 8.39 1.79
2005-06 3,254,216 508,705 62,071 12.20 1.91
2008-09 4,162,509 900,953 106,463 11.82 2.56
2009-10 4,493,743 1,021,546 126,028 12.34 2.84
Box 12.13 : Eight National Missions
Jawaharlal Nehru National Solar Mission (JNNSM)
The government has launched the JNNSM in January 2010 with a target of 20,000 MW grid solar power (based on solar
thermal power- generating systems and solar photovoltaic [SPV] technologies), 2000 MW of off-grid capacity by 2022.
The Mission will be implemented in three phases. The first phase will last three years (up to March 2013), the second till
March 2017, and the third till March 2022. The Government has also approved the implementation of the first phase of the
Mission (up to March 2013) and the target to set up 1100 MW grid-connected solar plants including 100 MW of rooftop
and small solar plants and 200 MW capacity-equivalent off-grid solar applications and a 7 million sq.m solar thermal
collector area in the first phase of the Mission, till 2012-13.
Energy Conservation and Efficiency
The objective of the National Mission for Enhanced Energy Efficiency (NMEEE) is to achieve growth with ecological
sustainability by devising cost-effective strategies for end- use demand-side management. The Ministry of Power and
Bureau of Energy Efficiency have been entrusted with the task of preparing the implementation plan for the NMEEE and
upscaling the efforts to create and sustain market for energy efficiency to unlock investment of around Rs 74,000 crore.
The Mission is likely to achieve about 23 million tons oil-equivalent of fuel savings--in coal, gas, and petroleum products-
-by 2014-15, along with an expected avoided capacity addition of over 19,000 MW. The carbon dioxide emission
reduction is estimated to be 98.55 million tons annually.
National Mission on Strategic Knowledge for Climate Change (NMSKCC)
The NMSKCC has been launched with the broad objectives of mapping of the knowledge and data resources relevant to
climate change and positioning of a data-sharing policy framework for building strategic knowledge among the various
arms of the Government, identification of knowledge gaps, networking of knowledge institutions after investing critical
mass of physical, intellectual, and policy infrastructure resources, creation of new dedicated centres within the existing
institutional framework, building of international cooperation on science and technology for climate change agenda
through strategic alliances and assistance for the formulation of policies for a sustained developmental agenda.
National Mission for Sustaining Himalayan Ecosystem (NMSHE)
The broad objectives of the NMSHE include: understanding the complex processes affecting the Himalayan ecosystem
and evolving suitable management and policy measures for sustaining and safeguarding it, creating and building
capacities in different domains, networking of knowledge institutions engaged in research and development of a coherent
data base on the Himalayan ecosystem, detecting and decoupling natural and anthropogenic-induced signals of global
environmental changes in mountain ecosystems, studying traditional knowledge systems for community participation in
adaptation, mitigation, and coping mechanisms inclusive of farming and traditional health care systems, and developing
regional cooperation with neighbouring countries, to generate a strong data base through monitoring and analysis so as
to eventually create a knowledge base for policy interventions.
National Water Mission
The objectives of the National Water Mission are 'conservation of water, minimizing wastage and ensuring its more
equitable distribution both across and within States through integrated water resources management'. The goals of the
Mission are a comprehensive water data base in the public domain, assessment of the impact of climate change on water
resources, promotion of citizen and State actions for water conservation, augmentation and preservation, focused
attention to overexploited areas, increasing water use efficiency by 20 per cent, and promotion of basin-level integrated
water resources management.
Green India Mission
The Mission aims at responding to climate change through a combination of adaptation and mitigation measures. These
measures include enhancing carbon sinks in sustainably managed forests and other ecosystems, adaption of vulnerable
species/ecosystems to the changing climate, and adaptation of forest-dependent communities. The objectives of the
Mission are increased forest/tree cover on 5 million ha of forest/non-forest lands and improved quality of forest cover on
another 5 million ha (a total of 10 million ha), improved ecosystem services including biodiversity, hydrological services,
carbon sequestration as a result of treatment of 10 million ha), increased forest-based livelihood income for about 3
million households living in and around the forest, and enhanced annual CO2 sequestration by 55 million tonnes in the
year 2020.
National Mission on Sustainable Habitat (NMSH)
The NMSH seeks to promote sustainability of habitats through improvements in energy efficiency in building and urban
planning, improved management of solid and liquid waste including recycling and power generation, modal shift
towards public transport, and conservation. It also seeks to improve ability of habitats to adapt to climate change by
improving resilience of infrastructure, community- based disaster management, and measures for improving advance
warning systems for extreme weather events.
National Mission for Sustainable Agriculture
The National Mission for Sustainable Agriculture (NMSA) seeks to address issues regarding 'sustainable agriculture' in
the context of risks associated with climate change by devising appropriate adaptation and mitigation strategies for
ensuring food security, enhancing livelihood opportunities, and contributing to economic stability at national level. Under
this Mission, the adaptation and mitigation measures would be mainstreamed in research and development activities,
absorption of improved technology and best practices, creation of physical and financial infrastructure and institutional
framework, facilitating access to information and promoting capacity building. While promotion of dryland agriculture
would receive prime importance by way of developing suitable drought- and pest-resistant crop varieties and ensuring
adequacy of institutional support, the Mission would also expand its coverage to rainfed areas for integrating farming
systems with livestock and fisheries so that agriculture continues to grow in a sustainable manner.
Climate Change Financing to set up a 'Green Climate Fund', to be designated

as an operating entity of the Financial Mechanism
12.79 Climate change is a complex policy issue of the Convention under Article 11. The Green Climate
with major implications in terms of finances for Fund is accountable to and functions under the
addressing mitigation of GHG emissions on the one guidance of the CoP. The Fund will be governed by a
hand and coping with the adverse impacts of climate Board of 24 members chosen evenly from developed
change on the community and population, and developing nations. The Fund will support
ecosystem, economy and livelihood on the other. environment-related projects, programmes, policies,
All actions to address climate change ultimately and other activities in developing countries. The
involve costs. Funding is vital in order for countries concerns of different regions of the world need to be
like India to design and implement adaptation and addressed by the Board having balanced
mitigation plans and projects. The problem is more representation from different UN regional groups. The
severe for developing countries like India, which Green Climate Fund will have a 'trustee' accountable
would be one of the hardest hit by climate change to the Board for the performance of its fiduciary
and with very little capacity to adapt. Most countries responsibilities. The World Bank has been invited to
do indeed treat climate change as a real threat and serve as the 'interim' trustee subject to a review three
are striving to address it in a more comprehensive years after operationalization of the Fund. The
and integrated manner with the limited resources at operation of the Fund will be supported by an
their disposal. But financial ways and means must independent Secretariat and designed by a
be found to enable developing countries to enhance Transitional Committee with 40 members--15 from
their efforts to address climate change, especially developed countries and 25 from developing
enhancing their adaptive capacity. Thus climate countries. Further, a Standing Committee under the
change is both an environmental issue and an CoP was established for improving coherence and
economic costs and development issue. coordination in the delivery of climate change
12.80 Lack of funding is a large impediment to financing. In addition, the Cancun Agreement called
implementing adaptation plans. Article 4 of the upon developed countries to submit information on
Convention states that developed countries shall the resources provided to fulfil the commitment to
provide financial resources to assist developing 'fast start finance' approaching US$30 billion for the
country Parties in addressing climate change. The period 2010-12. It also recognized the goal of jointly
funds that are currently available under the mobilizing US$ 100 billion per year by 2020 as 'long-
Convention and the Kyoto Protocol are small term finance' to address the needs of developing
compared to the magnitude of the need assessed countries. The goal of US$100 billion falls short of
by many studies. The UNFCCC has estimated a developing countries' call for assessed contributions
requirement of US$ 200-210 billion in additional of 1.5 per cent of developed countries' GDP. Further,
investment in 2030 to return GHG emissions to developing countries had been insisting on public
current level. Further, additional investment needed funds as the major source, whereas, the Cancun
worldwide for adaptation is estimated to be US$ 60- Agreement does not specify how the finances would
182 billion in 2030 by UNFCCC, inclusive of an be mobilized by the developed countries.
expenditure of US$ 28-67 billion in developing 12.82 India's initiatives will succeed if the global
countries. As various estimates point to the enormity framework of actions is effective and supportive.
of funds to address climate change, developing While the outcomes in Cancun on Climate Fund,
countries including India have been arguing that a Technology Mechanism, and Adaptation Framework
global mechanism for generating and accounting for and Forestry (REDD+) are welcome, further work
additional resources, mainly from public sources, is is needed on strengthening of weak mitigation
essential for meeting the long-term finance pledges by developed countries, preventing unilateral
requirements for adaptation and mitigation. There trade actions in the name of climate change, and
should be a multilateral financial mechanism under continuing a dialogue on intellectual property rights
the Convention that should be set up with resources as part of technology development and transfer
provided by developed countries on the basis of efforts. Moreover, a successful global effort for
assessed contributions. addressing climate change must be built on sound
12.81 One of the important outcomes of the Cancun principles of equity and common but differentiated
Agreements from the finance point of view is the responsibilities. Equity in terms of equitable access
decisions on 'fast start finance, long-term finance, to global atmospheric resources should define the
and Green Climate Fund'. At Cancun, it was decided pathway to attainment of a long-term goal in line
with the broad findings of science. In future and employment- generation schemes, policy
negotiations, developing countries need to ensure a structures need to be firmed up to facilitate effective
space for them for equitable access to atmospheric implementation of these programmes and to ensure
resources. The continuation of the Kyoto Protocol that allocation results in outputs and outputs in
in its second commitment period and adoption of outcomes. Initiatives like the outcome budget and
robust mitigation commitments by developed the setting up of the Unique Identification Authority
country Parties in accordance with the principle of of India by the Government are some steps in this
'common but differentiated responsibilities' will be direction.
essential for maintaining the credibility of the 12.84 Given the advantage of a young population,
multilateral process and for a science-based and the realization of the democratic dividend is another
adequate response of the global community to factor that calls for some more reforms in the
climate change. In other words, any solution to education system and health sector. While a skilled,
climate change, as a global problem, must be based trained and healthy young population with the right
on the participation of all countries, with type of education is an asset, an uneducated or ill
reorganization of ‘common but differentiated educated, unskilled, less healthy, and unemployed
responsibilities’ and the principle of 'equity'. population could lead to a demographic disaster.
Reaping the demographic dividend needs a vision, a
OUTLOOK AND CHALLENGES long-term plan, and bold decisions. While the
12.83 Post global crisis of 2008, the Indian National Skill Development Mission is a step in the
economy has continued to recover robustly helped right direction, much more is required both in terms
by the Government policies to counter the adverse of achievements and speed. The RTE Act must face
impact of the crisis. On the employment front also, no implementation deficit for it to work towards
the Country has been able to withstand the adverse realizing the demographic dividend. Similar reforms
impact of the global crisis and generate employment are needed in university and higher education and
since July 2009, as reported in the quarterly surveys the demand-supply mismatch in the job market
conducted by the Labour Bureau. Unlike other needs to be corrected. Mobilization of funds for higher
developed countries, where the measures to counter education is indeed a challenge for the Government.
job losses were ad hoc and contained elements of The gap in available resources could possibly be
protectionism, in the Indian case, the programmes met by a tailor-made Public-Private Partnership (PPP)
of employment generation were planned with a long- mode of funding without diluting the regulatory
term outlook free of any elements of protectionism. oversight of the Government. Private-sector
The employment generation programmes of the participation in social sectors, such as health and
Government like the MGNREGS have been education, sometimes referred to as public-social-
instrumental in creating employment opportunities private partnership (PSPP), could be one of the
and placing additional income in the hands of the possible alternatives for supplementing the ongoing
poor and the disadvantaged sections of society. efforts of the Government. However, in order to put in
Further improvements in the scheme like shifting to place such mechanisms, crucial issues such as
permanent asset building and infrastructure risks and returns associated with such high cost
development activities, reducing transaction costs, projects need to be suitably addressed to ensure
better monitoring, and extension of the MGNREGS that there are enough takers for such PSPP projects
to urban areas can yield better results. It also needs in the market on a self-sustainable basis. While
to be ensured that implementation of the programme the potential of the demographic dividend is high,
doesn't result in shortage of labour during the peak the effort to realize it also has to be in similar
agricultural season. Since a number of programmes proportions.
are being run concurrently by the Government to 12.85 Another challenge for the Government is
address the twin issues of unemployment and poverty proper balancing of the climate challenge and the
alleviation, there is need for better convergence of growth challenge. The increasing importance of
the schemes to avoid duplication and leakages and climate-related issues should not shake the
to ensure that the fruits of the schemes reach the foundations of our inclusive growth strategy. Careful
targeted beneficiaries. While the Government has planning and customized policies are needed to
consciously undertaken a large increase in ensure that the green growth strategies do not result
budgetary allocations for anti-poverty programmes in a slow growth strategy.

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Micro-foundations of

Figure 2.1 Prefered form of cash savings

Interestingly, there is a strong positive correlation between 4

relationship between the two variables but is of descriptive

the market at market price. This will improve targeting

Box 2.6 : Pro-Social Behaviour and Economic Development

Figure 3.1 Point contribution to GDP at current market prices

Figure 3.2 Trends in deficits of Central Government

CENTRAL GOVERNMENT FINANCES initiatives in expenditure. First, below-the-line

Figure 3.3 Receipts and expenditure of the Central Government

Source: Union Budget documents.

Source: Union Budget documents.

Figure 3.4 Composition of gross tax revenue

Box 3.1 : Direct Taxes Code (DTC)

Figure 3.5 Collection rates for selected import groups

 Amendments were made in the definition

Figure 3.6 Trends in Centre's revenue expenditure

28.4 29.9 31.9 33.9 32.5 Others

60 13.4 14.0 Grants to states

16.8 16.5 18.2 15.6 and UTs

Per cent per annum

Figure 3.9 Subsidies as per cent of GDP

Box 3.2 : Government Debt Report

Figure 3.10 Debt GDP ratios

Table 3.7B : Incremental Net Liabilities of the Central Government*

2005-06 2006-07 2007-08 2008-09 2009-10 (RE) 2010-11 (BE)

Table 3.9 : Central Government Finances

Department of posts 3.37 India Post is the largest Postal network in

State-level Reforms 3.42 Though considerable progress has been

Figure 3.11 Revenue and fiscal deficit of states

Table 3.12 : Receipts and Disbursements of Consolidated General Government

Discretionary Fiscal Policy Action

Box 3.3 Contd....)

1990-91 8.0 -0.4 7.6 2000-01 5.4 0.1 5.5

Decomposition of gross fiscal deficit into structural and cyclical components

PRICES 4.3 Some of the important items included in the

Figure 4.1 Inflationary trend in major subgroups of WPI

Box 4.1: An Unexpected Surge in Food Inflation

FAO Annual Real Food Price Index

300 real food

Food Commodity Price Indices FAO Food Price Index

Meat Dairy Cereals Oils Sugar

& Chittivalasa Rajahmundry Miryalguda

Tirupathi & Nizamabad & Kothagudem & Weeks

(Box 4.1 Continued)

Daily trading value futures surge for spices

Table 4.3 : Monthly Break-up of WPI Food Inflation

Apr. 0.89 11.00 8.69 20.49 8.86 9.09 8.76 16.09

May 1.21 10.60 8.91 21.37 10.12 7.09 9.37 15.85

Jun. -0.71 10.28 11.28 20.97 9.05 6.13 10.42 15.30

Jul. -0.62 10.02 12.74 18.48 8.46 7.34 11.10 14.31

Aug. 0.31 8.82 14.36 14.96 10.73 4.58 12.97 11.06

Sep. 1.09 8.93 13.92 16.29 12.08 3.62 13.21 11.49

Oct. 1.48 9.12 12.47 14.64 12.97 3.75 12.66 10.56

Nov. 4.50 7.48P 16.73 9.41P 17.94 0.57P 17.17 6.11P

Dec. 6.92 8.43P 20.76 13.55P 19.30 0.35P 20.21 8.59P

Jan. 8.53 20.19 19.16 19.80

Feb. 9.68 21.85 17.68 20.22

Mar. 10.23 20.65 15.11 18.50

Table 4.5 : Movement in WPI Non-food Inflation during 2010-11

Figure 4.2 Movement of non-food WPI during 2010

Y-o-Y inflation (per cent)

Jammu & Kashmir