ECONOMIC
SURVEY 2001-2002
1.1
Macroeconomic Overview for 2001-2002
The
Indian economy is passing through a difficult phase caused
by several unfavourable domestic and external developments.
Domestic output and demand conditions were adversely affected
by poor performance in agriculture in the previous two
years. The global economy experienced an overall deceleration
and is estimated to record an output growth of 2.4 per
cent during the past year. These tendencies were exacerbated
in the aftermath of the terrorist attacks in United States
in September 2001. Consequently export growth has suffered
and industrial profitability has also been affected by
the prevailing low commodity and product prices globally.
Despite these constraints, growth in real GDP in 2001-02
is expected to be 5.4 per cent as estimated by the Central
Statistical Organisation. This growth rate marks some
recovery over the low growth of 4 per cent in 2000-01.
It will also be one of the highest growth rates in the
world in the current year.
1.2
The average annual growth rate during the Ninth Five Year
Plan (1997-2002) is now estimated at 5.4 per cent which
is lower than the plan target of 6.5 per cent. Although
this raises new challenges for reinvigorating growth in
the Tenth Five-Year Plan, the Indian growth record is
one of the highest among the major economies in the world
in recent years. The Indian economy has been resilient
in the face of several external shocks during this period
such as the East Asian crisis of 1997-98, the oil price
increase of 2000-01, and the most recent world economic
slowdown. Domestic shocks in the shape of an adverse security
environment, natural disasters like the Orissa cyclone
and Gujarat earthquake, and two consecutive years of poor
agricultural performance, have also been faced successfully
by the economy.
1.3
The overall growth of 5.4 percent in 2001-02 is supported
by a growth rate of 5.7 percent in agriculture and allied
sectors, 3.3 percent in industry and 6.5 percent in services.
The acceleration of the overall GDP growth rate is basically
due to a significant improvement in value added in the
agriculture and allied sectors from a negative growth
rate of (-) 0.2 percent in 2000-01 to 5.7 per cent in
2001-2002. There has been significant deceleration in
the growth rate of industry. However, the performance
of the services sector has improved moderately.
1.4
Real GDP growth rate from mining and quarrying is estimated
to have declined from 3.3 per cent in 2000-01 to 1.4 per
cent in 2001-02. The growth of manufacturing has reduced
from 6.7 to 3.3 per cent, while that of electricity, gas
and water supply has fallen from 6.2 to 5.2 per cent and
that of construction from 6.8 to 2.9 per cent over the
same period. The deceleration in industrial growth may
be attributable to various factors such as normal business
and investment cycles, inherent adjustment lags of corporate
restructuring and lack of both consumer and investment
demand. Continued high real interest rates, infrastructure
constraints in power and transport and delays in establishing
credible institutional and regulatory framework for private
participation in some key sectors might have also dampened
private investment and industrial production.
1.5
Prospects of agricultural production in 2001-02 are considered
to be bright as a result of normal monsoon and relatively
favourable distribution of rainfall over time and regions.
Overall agricultural output is estimated to increase by
nearly 7 per cent in 2001-02. Foodgrains production is
expected to rise to 209 million tonnes compared with 196
million tonnes in 2000-01.
1.6
Financial and other services are doing well in the current
year. However, performance of certain service sectors
like transport (other than railways), tourism, business
and social services have been adversely affected by slowdown
in both domestic and external demand.
1.7
The average annual rate of inflation in terms of the
Wholesale Price Index (WPI) increased significantly from
3.3 per cent in 1999-2000 to 7.1 per cent in 2000-01 due
to a substantial rise in administered prices of petroleum
products. During 2001-02, the inflation rate declined
in terms of the WPI. The 52-week average inflation rate
declined from 7 per cent at the beginning of 2001-02 to
4.7 per cent for the week ended January 19, 2002. The
point-to-point inflation rate reached a low of 1.3 per
cent by the end of January, 2002 which was the lowest
in over two decades.
1.8
The inflation rate in terms of the Consumer Price Index
for Industrial Workers (CPI-IW) remained below 4 per cent
until July 2001 and increased to 5.2 per cent in August
2001. The Index displayed a downward trend during September-October,
2001. However, it increased again to 4.9 per cent in November
and further to 5.2 per cent in December 2001.
1.9
The Union Budget envisaged a reduction of gross fiscal
deficit as a proportion of GDP from 5.1 per cent in 2000-01
(RE) to 4.7 per cent in 2001-02 (BE). With the availability
of quick estimates of national income and provisional
accounts for 2000-01 and advance estimates of national
income for 2001-02, revised estimates of fiscal deficit
for 2000-01 and budget estimates for 2001-02 have undergone
change. The gross fiscal deficit as a proportion of GDP
is now estimated at 5.5 per cent for 2000-01 and 5.1 per
cent for 2001-02. As regards revenues, there are significant
shortfalls in indirect taxes due to slowdown in industrial
production and significant deceleration of both oil and
non-oil imports. Direct tax collections are likely to
be below target for the current year. There is also a
shortfall in revenues from disinvestment. Disinvestment
proceeds are now expected to pick up in the coming months
due to a much smoother working of the disinvestment process.
Various economy measures taken by the government for reducing
non-plan and non-capital expenditure have helped to keep
the overall expenditure under control. Despite these measures,
the gross fiscal deficit of the Central government at
the end of the year is likely to exceed the budgeted target.
1.10
Indias balance of payments remained reasonably comfortable
in both 2000-01 and 2001-02. The current account deficit
as a percentage of GDP declined from 1.1 per cent in 1999-2000
to about 0.5 per cent in 2000-01 due to a dynamic export
performance and sustained buoyancy in invisible receipts.
However, in the current year, exports have been almost
stagnant and have recorded a growth of only 0.6 per cent
in April-December 2001. An assessment of the Balance of
Payments (BOP) outlook conducted jointly by the Reserve
Bank of India (RBI) and the Ministry of Finance for the
current year indicates that the current account deficit
as percentage of GDP may widen to some extent, though
it will remain within 1 per cent of GDP which is quite
manageable.
1.11
The exchange rate of the rupee in terms of the major currencies
of the world remained reasonably stable during the year,
despite occasional fluctuations caused by normal market
forces of supply and demand. Foreign exchange reserves
(including gold and SDR) reached a record level of nearly
US$50 billion at the end of January 2002, which is equivalent
to almost 10 months of estimated imports for the current
year.
1.12
Indias external debt situation has improved significantly
in recent years as a result of effective external debt
management by the Government. The external debt-GDP ratio
decreased from 28.7 per cent at the end of March 1991
to 22.3 per cent at end-March 2001 and further to 21 per
cent at the end of September 2001. The debt service ratio
declined from a peak level of 35.3 per cent of current
receipts in 1990-91 to 16.3 per cent in 2000-01. It is
particularly noteworthy that for the first time, the World
Bank has classified India as a less-indebted country.
Trends
in GDP
1.13
According to the Quick Estimates of National income for
2000-01 provided by the Central Statistical Organisation
on January 31, 2002, the overall GDP growth rate decelerated
significantly from 6.1 per cent in 1999-2000 to 4 per
cent in 2000-01. The gross value added in agriculture
and allied sectors declined by 0.2 per cent in 2000-01
compared with an increase of 1.3 per cent in 1999-2000.
1.14
The GDP from agriculture alone declined by 0.4 per cent
in 2000-01 compared with an increase of 1 per cent in
1999-2000. The negative growth rate of agriculture in
2000-01 was primarily due to a decline in rice production
by 5.4 per cent, wheat by 10 per cent, pulses by 20.4
per cent, oilseeds by 11.2 per cent and cotton by 16.3
per cent. However, livestock, which accounts for over
26 per cent of the total value of agriculture sector,
increased by 3.5 per cent and coarse cereals by 4.2 per
cent in 2000-2001.
1.15
Within the industry sector, while construction showed
a lower growth in 2000-01, there was marked improvement
in the growth rates of manufacturing (from 4.2 per cent
in 1999-00 to 6.7 per cent in 2000-01) and mining and
quarrying (from 2 per cent to 3.3 per cent during the
same period). The growth rate of electricity, gas and
water supply remained almost invariant at around 6.2 per
cent for both 1999-2000 and 2000-01.
1.16
Growth rates of services sector decelerated significantly
in 2000-01. In particular, the growth rate of trade, hotels
and restaurants reduced considerably from 7.3 per cent
in 1999-2000 to 3.8 per cent in 2000-01, while the growth
of transport, storage and communications remained almost
unchanged at around 8.2 per cent during 1999-00 and 2000-01.
Financial, real estate and business services performed
poorly with growth rate of only 2.9 per cent in 2000-01
compared with a growth rate of 10.6 per cent in 1999-00.
The unsatisfactory performance of the financial and real
estate sector was due to a negative growth rate of (-)
2.2 per cent in banking and insurance, which was in turn
due to decline in the output of the non-banking financial
institutions. Community, social and personal services
also grew at a much lower rate of 6 per cent in 2000-01
compared with 11.6 per cent achieved in 1999-2000.
1.17
The advance estimates of GDP for 2001-02, made available
by the CSO, indicate a higher GDP growth rate of 5.4 per
cent in the current year. The higher growth in 2001-02
is attributable to significant improvement of growth rates
in agriculture and allied, and financial, real estate
and business services sectors. However the core industry
and infrastructure sectors are expected to record much
lower growth than in the previous year.
Demand
Factors
Consumption, savings and investment
1.18
On the demand side, real consumption growth declined from
6.5 per cent in 1999-2000 to 2.9 per cent in 2000-01.
In real terms, the growth rate of private consumption
reduced from 5.5 per cent in 1999-2000 to 2.2 per cent
in 2000-01, that of government consumption expenditure
fell from 12 per cent to 6.5 per cent during the same
period. In recent years growth in real gross domestic
capital formation (GDCF) has shown instability. The growth
rate of real GDCF recorded a significant deceleration
from 15.7 per cent in 1999-2000 to 2.0 per cent in 2000-01.
This to a large extent reflects volatility in the behaviour
of stocks/inventories. Growth in real gross fixed capital
formation (GFCF) has been more stable, but it also slackened
from 8.6 per cent in 1999-2000 to 4.7 per cent in 2000-01.
The change in stocks measured as percentage of GDP at
1993-94 prices fell from 1.8 per cent in 1999-2000 to
1.1 per cent in 2000-01.
1.19
The saving and investment rates in India are high as judged
by the country's level of economic development. Gross
domestic savings improved marginally from 23.2 per cent
of GDP in 1999-2000 to 23.4 per cent of GDP in 2000-2001
as a result of better performance by household savings
and private corporate savings. However, there was a steep
fall in public sector savings due to an increase in the
dis-savings of government administrative departments.
In fact, public sector savings were negative in 1998-99,
1999-2000 and 2000-01. As a percentage of GDP, public
sector savings declined from (-) 0.9 per cent in 1999-2000
to (-) 1.7 per cent in 2000-01.
1.20
Gross domestic investment at current prices declined marginally
from 24.3 per cent of GDP in 1999-2000 to 24 per cent
of GDP in 2000-01 mainly due to a fall in private sector
investment. The rate of gross capital formation in real
terms also declined from 26.7 per cent of GDP in 1999-2000
to 26.3 per cent of GDP in 2000-01 due to deceleration
in the growth rates of real gross domestic capital formation
in both public and private sectors. While the real gross
fixed capital formation by the public sector increased
by 10.9 per cent in 2000-01, that by the private sector
increased by only 2.4 per cent in the same year.
1.21
The change in stocks of inventories decreased substantially
in 2000-01 indicating better management of supply and
demand for output. As in earlier years, the rates of domestic
investment were higher than the rates of domestic savings
in both 1999-2000 and 2000-01. The investment-savings
gap was financed by the positive net capital inflow from
abroad, which amounted to 1.1 per cent and 0.6 per cent
of GDP respectively in 1999-2000 and 2000-01.
1.22
Due to unavailability of data on investment for the year
2001-02, the investment trends have to be assessed by
analysing the trends in various leading indicators of
investment and growth. These trends present a mixed picture.
Both domestic production and imports of capital goods
have declined considerably in the current year. Sanctions
and disbursements made by the All India Financial Institutions
(AIFIs) have also reduced significantly. On the other
hand, foreign investment inflows have recorded distinct
improvement in the current year. But, most of these inflows
are possibly yet to be absorbed as fresh investments due
to a build up of record level of foreign exchange reserves.
The available trends, therefore, may not indicate any
significant recovery of investment in 2001-02.
1.23
Sustained high economic growth would require considerable
improvement in investment. Given the country's limited
domestic resources, it is essential to enhance further
the inflows of foreign direct and portfolio investment.
Enhancement of domestic investment would depend upon structural
reduction in inflationary expectations and real interest
rates, reduction in the fiscal deficit and further liberalisation
of the domestic debt and capital markets.
1.24
Indias private savings rate (comprising household
and private corporate savings) is more or less comparable
to those achieved by the high performing East Asian economies.
However, its public savings are very low and are a major
constraint on domestic resource mobilisation. Government
is restructuring public expenditure to foster domestic
savings, release resources for physical and social infrastructure
development and to reduce crowding out effect on private
investment.
1.25
Major fiscal reforms have been undertaken for broadening
the income tax base and streamlining the excise and customs
duty structures. There have also been enabling reforms
in the spheres of trade and foreign investment. Reforms
in public sector enterprises are underway to reduce pressures
on public finances, increase the efficiency of public
sector and reduce the incremental capital output ratio
(ICOR). Legal, institutional and regulatory frameworks
in insurance, banking, capital markets, power, ports and
telecommunications, are also being strengthened to induce
private investment in infrastructure. The Central Government
Budgets for 2000-01 and 2001-02 announced various measures
for further deepening of the capital markets and the financial
sector and allowing private entry in insurance. It is
expected that these measures would enhance both the savings
and investment rates for the economy.
Supply
Factors: Production
Agriculture
and allied sectors
1.26
After near stagnation in 1999-2000 and negative growth
of 0.2 percent in 2000-01, the agriculture sector is likely
to attain a growth rate of nearly 6 percent in 2001-02.
One of the reasons for this is that spatial distribution
of the monsoon rainfall in 2001 was one of the best in
recent years. This is reflected in the adequate rainfall
received by seventeen districts belonging to the states
of Madhya Pradesh, Rajasthan, Gujarat, Uttar Pradesh,
Haryana, Kerala, Orissa, Punjab, Tamil Nadu, Chhatisgarh
and Himachal Pradesh, which had suffered from deficient
rainfall in the previous two years.
1.27
The foodgrains output in 2001-02 is likely to be 209.2
million tonnes, an increase of more than 13 million tonnes
over the previous year. Late winter rainfall in the North-West
India in February together with a long cold spell may
help raise foodgrains production even to 212 million tonnes
in the current year.
1.28
The downtrend in oilseeds, particularly groundnut during
the preceding two years has been reversed this year and
the country is likely to harvest over 21 million tonnes
of oilseeds - higher by over 2 million tonnes compared
with the previous year. Cotton production is expected
to be higher by over 2 million bales and production of
jute and mesta at 10.7 million bales is also likely to
be higher than the previous year.
1.29
With early estimate of foodgrains growth at 6.8 per cent,
together with commercial crops exhibiting an improved
performance and other sub-sectors of agriculture like
animal husbandry, fisheries etc. maintaining steady rates
of growth, the overall growth rate for agriculture production
in the current year is likely to be close to 6 per cent.
Management
of the Food Economy
1.30
During 2001-02, procurement of wheat shot up to the record
level of 20.63 million tonnes, despite a decline in wheat
production to 68.46 million tonnes (a drop of 7 million
tonnes) in 2000-01. Rice procurement also reached a record
high of 19.10 million tonnes during the current marketing
year (October-September 2000-01). Fresh procurement for
the marketing year 2001-02 has so far fetched about 13.33
million tonnes of rice (till January 29, 2002).
1.31 The unusually
high procurement of rice and wheat during the last two
years has led to accumulation of huge surplus stocks much
above the minimum buffer stock norms. As compared with
the minimum norm of 8.4 million tonnes of wheat on January
1, the country had a stock of 32.4 million tonnes on January
1, 2002. Similarly, as compared with the minimum buffer
norm of 8.4 million tonnes for January 1, the rice stock
on January 1, 2002 was estimated at 25.6 million tonnes,
with fresh procurement of 13.33 million tonnes up to January
adding further to the existing stock. In January 2002,
the FCI was holding 58.1 million tonnes of rice and wheat
stock, against the minimum buffer norm of 16.8 million
tonnes for January.
1.32
The primary reason behind the heavy increase in procurement
volumes can be traced to the sharp increase in Minimum
Support Prices (MSP) in recent years. While there has
been excessive procurement of rice and wheat, offtake
of foodgrains under the public distribution system has
been low, essentially due to the narrowing differential
between the Above Poverty Line (APL) issue prices for
PDS and the open market prices. Excess procurement by
the FCI due to higher MSP, mounting stocks of foodgrains
much above the levels required for food security and declining
share of procurement by private traders, have led to higher
commitments for Government subsidy. The food subsidy bill
increased from Rs.2,850 crore in 1991-92 to Rs.12,010
crore in 2000-01. For 2001-02, the food subsidy is estimated
at Rs.13,670 crore, out of which Rs.5,680 crore accounts
for buffer stock subsidy or the carrying cost of the public
stock of foodgrains.
1.33
Some steps to liquidate excess stocks with FCI like open
market sale of foodgrains at prices much below the economic
cost, export of foodgrains at prices below economic cost,
increased BPL allocation of foodgrains under the Targeted
Public Distribution System (TPDS) and lowering of issue
prices under the TPDS for APL families, have been taken
on Government account in an attempt to reduce the carrying
cost of surplus stocks. One of the long-term measures
for reducing the food subsidy bill and the carrying cost
of public stocks, taken up by some states, is decentralised
procurement of foodgrains and encouraging greater role
by private traders. The system has been introduced in
the states of Uttar Pradesh, Madhya Pradesh and West Bengal
while other states are being encouraged to take it up.
Industry
1.34
The significant slowdown of industrial growth witnessed
in 2000-01, as measured by the Index of Industrial Production
(IIP), continued with greater intensity in 2001-02. There
was a distinct deceleration in growth of manufactured
exports and slowdown in growth rates of core and infrastructure
industries. The overall industrial growth in terms of
the IIP during April-December 2001-02 was only 2.3 per
cent compared to 5.8 per cent during the corresponding
period of the previous year. In fact, the industrial growth
during the first nine months of the current year is the
lowest recorded during the last ten years. The sharp deceleration
in overall industrial growth is due to a number of structural
and cyclical factors such as normal business and investment
cycles and lack of both domestic and external demand.
Continued high real interest rates, infrastructure constraints,
and lack of reforms in land and labour markets, might
have also dampened private investment and industrial production.
1.35
Industrial slowdown has been observed across all major
sectors. The manufacturing sector grew by only 2.4 percent
during April-December 2001, much lower than the 6.0 percent
growth registered during the same period in 2000. Similarly,
electricity generation grew by only 2.7 percent during
April-December 2001 (compared with 4.8 percent in April-December
2000) and mining and quarrying posted a growth of only
1.1 percent during April-December 2001 (compared with
4.4 percent in April-December 2000).
1.36
The broad-based nature of the industrial slowdown is also
evident from the disaggregated sub-sectoral growth rates
as reflected in the use-based classification of industrial
production. Capital goods are suffering an absolute decline
in production (-4.8 per cent growth in April-December
2001). Basic, intermediate, and consumer goods also have
had much lower growth rates in the current year than in
the previous year. The only silver lining lies in the
performance of consumer durables, which are growing at
a double-digit rate (12.5 per cent in April-December 2001),
despite having a lower growth than the previous year (17.8
per cent in April-December 2000).
1.37
During the current year, the Government announced several
fiscal and other policy incentives for engineering a revival
in the industrial sector. The major fiscal measures included
rationalisation of excise duty structureto a single rate
of 16 per cent CENVAT; reduction of peak level of customs
duty to 35 per cent; reduction of customs duties on specified
products used for information technology, telecommunications
and entertainment industry; and abolition of surcharges
on personal and corporate income tax rates. Other fiscal
incentives included exemption of goods imported by 100
per cent EOUs and units in FTZs and SEZs from anti-dumping
and safeguard duties; extension of Five-year Tax holiday
facility to enterprises engaged in integrated handling,
transportation and storage of food-grains; and an increase
of development allowance for tea from 40 per cent to 20
per cent.
1.38
Several far-reaching structural reform initiatives were
also announced during the year. As part of the on-going
process of dereservation in the small-scale sector, fourteen
more items were dereserved from the list of items reserved
for exclusive manufacture by the small-scale sector. A
Bill for abolition of the Sick Industrial Companies (Special
Provision) Act was introduced in Parliament. The Union
Budget (2001-02) proposed amendments in the Industrial
Disputes Act and Contract Labour Act for removing the
existing structural rigidities in the labour market. The
Budget also proposed setting up of a National Companies
Law Tribunal by amending the Companies Act. The Bill in
this regard has been introduced in Parliament.
Infrastructure
1.39
The unsatisfactory performance of the infrastructure industries
during the current year is reflective of the overall slowdown
prevailing in the economy. Six core and infrastructure
industries viz. electricity, crude oil, petroleum refinery
products, coal, steel and cement, having a weight of 26.7
per cent in overall Index of Industrial Production (IIP)
achieved an average growth rate of only 2 per cent during
the first three quarters of the current year (i.e. April-December
2001) compared with 6.8 per cent during the corresponding
period of the previous year. Crude oil and steel exhibited
absolute decline in growth rate, while growth rates of
other industries except cement, decelerated significantly
during the current year. Among other infrastructure sectors,
goods traffic on railways, cargo handled at major ports
and new telephone connections had positive, but comparatively
lower growths in the current year.
1.40
Several fiscal incentives were announced during the year
for boosting investment in infrastructure projects. Ten-year
tax holiday offered to projects in core sectors like roads,
highways, water-ways, water supply, sanitation and solid
waste management systems can now be availed of during
the initial twenty years. Projects in airports, ports,
inland ports, industrial parks and generation and distribution
of power can now avail of ten-year tax holidays during
the initial fifteen years. The facility of five-year tax
holiday available to the telecommunication sector till
March 31, 2000 was reintroduced for units commencing their
operations on or before March 31, 2003. The concessions
were extended to internet service providers and broadband
networks. Tax incentives were made available to investors
providing long-term finance to enterprises engaged in
infrastructure. The Electricity Bill 2001 and the Communication
Convergence Bill 2001 were introduced in Parliament. Budgetary
allocation was enhanced for the Pradhan Mantri Gram Sadak
Yojana (PMGSY) and the scheme was extended to cover rural
electrification. A Special Railway Safety Fund was created
to be funded by surcharge on passenger fares and budgetary
support for supporting safety related investment of Rs.
17, 000 crore over six years. An amount of Rs. 1,000 crore
as contribution from General Revenues were allotted to
the Special Railway Safety Fund during the year. An additional
amount of Rs. 898 crore were also allotted during the
current year for completion of "last mile" projects
of the Railways.
Services
1.41
During 1993-94 to 1999-2000 the service sector had achieved
consistently high growth rates in the range of 7.1 per
cent to 10.5 per cent. But for the first time in 2000-01,
the growth rate of the service sector declined to 4.8
per cent due to poor performance by financial sector,
trade hotels & restaurants, and community and social
services.
1.42
The share of the services sector in overall GDP has increased
over the years. It may be mentioned here that although
the service sector presently accounts for 49 per cent
of GDP, there is no regular reporting system for the growth
rate of the services sector because of lack of reliable
data and methodology for measuring production of most
of the services sectors. The Ministry of Finance in association
with the Central Statistical Organisation have initiated
steps to improve the data base for the services sectors
and to proceed towards construction of an Index of Services
Production on the pattern of the Index of Industrial Production
(IIP).
1.43
One of the key services that has assumed considerable
significance in recent times is insurance. The Insurance
Regulatory and Development Authority (IRDA), which was
constituted on April 19, 2000, has granted certificates
of registration to ten life insurance companies and six
general insurance companies, in addition to the existing
public sector Life Insurance Corporation and general insurance
companies. The IRDA has also introduced solvency margin
requirements on line with the Insurance Regulatory and
Development Authority (Assets, Liabilities and Solvency
Margins of Insurers) Regulations, 2000.
1.44
The insurance sector continues to extend social security
cover to deserving groups in the economy. The Janshree
Bima Yojana scheme was launched by the LIC in June 2000
for providing social security to groups largely comprising
of persons below the poverty line. Till the end of January
2002, 763,436 lives have been covered under the programme.
The LIC has also launched a new scheme called Krishi Shramik
Samajik Suraksha Yojana on July 1, 2001 for the benefit
of landless agricultural labourers in the age group of
18-50 years. The Scheme has covered 24,936 beneficiaries
in 16 districts between July 1, 2001 to February 7, 2002.
The public sector general insurance companies launched
a new policy, Ashray Bima Yojana, on October 10, 2001,
for extending social security coverage to workers retrenched
due to implementation of economic restructuring measures.
The public sector general insurance companies have also
introduced a scheme of personal accident insurance coverage
for the Kisan Credit Card (KCC) holders.
1.45
Public sector banks have decided to introduce the Laghu
Udhyami Credit Card (LUCC) scheme to provide simplified
and borrower friendly credit facilities to small borrowers.
This scheme would provide hassle- free credit facility
to small businessmen, retail traders, artisans, professionals,
self-employed persons and small industrial units. Interest
under the scheme will be charged at the Prime Lending
Rate of the banks.
1.46
Software and IT enabled services have emerged as a niche
sector for India in the global context. The software industry
was one of the fastest growing sectors in the last decade
with a compound annual growth rate exceeding 50 per cent.
Software service exports increased from US $ 4.02 billion
in 1999-2000 to US $ 6.3 billion in 2000-01, thereby registering
a growth of 57 per cent. Indias success in the software
sector can be largely attributed to the industrys
ability to cultivate superior knowledge through intensive
R&D efforts and the expertise in applying the knowledge
in commercially viable technologies.
Social
sector
1.47
Development of the country's vast human resource potential
is essential for sustaining higher levels of economic
growth and ensuring better living conditions for people.
The Central support for human resource and social sector
development in the country has progressively increased
throughout the 1990s. The Central Government expenditure
(plan and non-plan) on education, health, family welfare,
nutrition, sanitation, rural development, housing, social
welfare etc. has increased from Rs 9,608 crore in 1992-93
to Rs 40,205 crore in 2001-02 (BE). As a proportion of
total expenditure, the combined plan and non-plan Central
expenditure on these areas increased from 8.1 per cent
in 1992-93 to 10.7 per cent in 2001-02 (BE). Similarly,
as a proportion of GDP at current market prices, the Central
Government expenditure on social services increased from
1.3 per cent in 1992-93 to 1.8 per cent in 2001-02 (BE).
Population:
Census 2001
1.48
India accounts for 2.4 per cent of the world surface area
but it supports 16.7 per cent of the world population.
According to the provisional results of Census of India
2001, the population of India as on March 1, 2001 crossed
one billion and was enumerated at 1.027 billion. The decadal
growth of population at 21.34 per cent between 1991-2001
was the sharpest decline in the rate of growth of population
witnessed since independence, with the average exponential
growth rate declining from 2.14 per cent per annum during
the previous decade to 1.93 per cent per annum. The declining
trends indicate that the country is entering a phase of
rapidly declining fertility in its process of demographic
transition. The National Population Policy (NPP) 2000
outlines the long-term objective of achieving a stable
population by 2045, at a level consistent with the requirements
of sustainable economic growth and development.
1.49
The percentage decadal growth of population in rural and
urban areas in the decade ending 2001 was 17.9 per cent
and 31.2 per cent respectively. Urban population constitutes
27.8 per cent of the total population of the country,
which is higher by 2.1 percentage points as compared to
the situation in 1991. The density of population has increased
steadily from 117 persons per sq. km. in 1951 to 324 persons
per sq. km. in 2001. The sex ratio for the country as
a whole has improved from 927 females per 1000 males in
1991 to 933 females per 1000 males in 2001.
Employment
1.50
According to the Planning Commission, overall employment
is estimated to have grown by about 1 per cent per annum
during the period 1993-94 to 1999-2000, compared with
a growth of 2.43 per cent per annum during the period
1987-88 to 1993-94. The decline in employment growth is
associated with the lower growth of population (1.93 per
cent per annum during 1993-94 to 1999-2000 as compared
with 2.10 per cent per annum during 1987-88 to 1993-94)
and labour force (1.03 per cent per annum during 1993-94
to 1999-2000 as compared with 2.29 per cent per annum
during 1987-88 to 1993-94) witnessed during this period.
Organised sector (both public and private) employment
grew by 0.53 per cent per annum during 1993-94 to 1999-2000.
While public sector employment experienced an absolute
decline of 0.03 per cent during 1994-2000, employment
in the private sector grew by 1.87 per cent during the
period. The decline in the rate of growth of public sector
employment can be attributed to the on-going process of
restructuring in various public sector enterprises, as
well as the ban on recruitment being implemented by various
state departments/organisations for reducing non-plan
Government expenditure.
1.51
In the younger age groups, the decline in labour force
participation rates is a part of a longer-term trend reflecting
a shift in activity status towards education. Employment
in the agricultural sector also witnessed a slow growth
with the absolute number of persons employed in agriculture
showing a decline for the first time. However, employment
in sectors like trade, construction, financial services,
and transport, storage and communication had growth rates
between 5-7 per cent per annum during 1994-2000, which
were much higher than the average rate of growth of total
employment during the period. Thus, employment generation
in the 1990s can be said to have undergone a structural
transformation with jobs being increasingly generated
in the non-government sector.
Employment
generation and poverty alleviation programmes
1.52
The Government has continued its emphasis upon specifically
designed programmes in rural and urban areas for employment
generation and poverty alleviation. In the year 2001-02
(BE), a budgetary outlay of Rs. 9,765 crore was provided
under Plan provisions for Ministry of Rural Development
for rural development, rural employment and poverty alleviation
programmes, compared to Rs. 9,270 crore in 2000-01(RE)
(excluding Pradhan Mantri Gram Sadak Yojana for which
Rs. 2,500 crore was separately allotted in 2000-01 and
2001-02). The Food for Work programme was launched in
February 2001 for five months and was further extended.
The programme aims at augmenting food security through
wage employment in drought affected rural areas in selected
states. A quantity of 3.01 million tonnes of foodgrains
(1.90 million tonnes of rice and 1.11 million tonnes of
wheat) has been allotted to 11 States under the Food for
Work Programme upto December 5, 2001. The offtake of foodgrains
upto November 23, 2001 has been 2.25 million tonnes. In
addition to the various on-going self-employment programmes,
the Sampoorna Grameen Rozgar Yojana (SGRY) was launched
in September 2001 for providing food security and wage
employment in rural areas. The scheme is being implemented
on a 75:25 cost-sharing basis by the Centre and the States.
The Shiksha Sahyog Yojana has been finalised for providing
educational allowance of Rs 100 per month to the children
of BPL families for obtaining education from the 9th-12th
standard. The Pradhan Mantri Gramodaya Yojana (PMGY) launched
in 2000-01 is a major initiative, which focuses on village
level development in five critical areas i.e. health,
primary education, drinking water, housing, and rural
roads, with the objective of improving the quality of
life of people living in rural areas. The Pradhan Mantri
Gram Sadak Yojana (PMGSY) was launched in December 2000
for providing road connectivity through good all-weather
roads to rural habitations with a population of more than
1000 persons by 2003 and those with a population of more
than 500 persons by 2007.
Education
1.53
The total Central Plan allocation for education has been
increased to Rs. 5,920 crore in 2001-02 (BE) from Rs.
5,450 crore in 2000-01 (BE). Elementary education has
received the highest outlay of Rs. 3,800 crore in 2001-02
(BE). The Gross Enrolment Ratio (GER) in the country at
primary level has improved significantly from 42.6 per
cent (1950-51) to 94.90 per cent (1999-2000) and that
for upper primary level from 12.7 per cent (1950-51) to
58.79 per cent (1999-2000). As per the Census 2001, overall
literacy rate in the country has increased to 65 per cent
from 52 per cent in 1991. There have been appreciable
improvements in both male and female literacy in rural
as well as urban areas.
Health
1.54
The Plan Outlay for the Central Health Sector Schemes
during 2001-02 was Rs. 1,450 crore. This constituted an
increase of 11.5 per cent over the outlay of Rs. 1,300
crore in 2000-01. About 54 per cent of the Central Plan
Outlay is devoted to centrally sponsored disease control
programmes for control of malaria, tuberculosis, leprosy,
aids, blindness etc. Substantial external assistance has
also been mobilised from various bilateral and multilateral
agencies for disease control programmes. For both the
health and education sectors, an element of cost recovery
through imposition of user charges and attaining improvement
in the mechanism of service delivery, are prime concerns.
Rural
water supply
1.55
The Central allocation for the Accelerated Rural Water
Supply Programme (ARWSP) was enhanced from Rs. 1,960 crore
in 2000-01 to Rs. 1,975 crore in 2001-02. Till end January
2002, Rs 1,637 crore has been released by the Centre and
Rs 1,496 crore by the States. A total of 26,803 habitations
have been covered under the programme so far, involving
a population of 10.5 million. The Pradhan Mantri Gramodaya
Yojana (Rural Drinking Water Project) is another initiative
for achievement of sustainable human development at the
village level.
Fiscal
Developments
1.56
The lower real GDP growth of 4.0 per cent in 2000-01 led
to the shortfall in revenue collection during 2000-01.
As per the provisional accounts released by the Controller
General of Accounts (CGA), actual tax receipts (net to
Centre) for 2000-01 at Rs.1, 35,193 crore, were lower
by Rs.9, 210 crore compared with the revised estimate
of Rs.1, 44,403 crore. Non-tax receipts at Rs.55, 795
crore for 2000-01 also fell short of the revised estimates
by Rs.5, 968 crore. The savings realised on the expenditure
front however, considerably cushioned the impact of lower
revenue realisation. Consequently, actual gross fiscal
deficit for 2000-01 at Rs.1, 14,369 crore exceeded the
revised estimate by Rs.2, 397 crore. Gross fiscal deficit,
as a proportion of GDP at current market prices for 2000-01
placed at 5.1 per cent in the revised estimates, is now
estimated to be 5.5 per cent on the basis of provisional
unaudited figures. Similarly, revenue deficit as a proportion
of GDP estimated at 3.6 per cent in the revised estimates,
is now estimated to be 3.9 per cent of GDP for 2000-01.
For 2001-02, the Centres gross fiscal deficit and
revenue deficit budgeted at 4.7 per cent and 3.2 per cent
of GDP respectively, are now estimated at 5.1 per cent
and 3.4 per cent of GDP respectively as per revised GDP
estimates.
Fiscal
Policies
Direct
Taxes
1.57
The basic principles guiding the tax proposals in the
Union Budget 2001-02 were the need for revenue buoyancy
further simplification of the tax regime and more effective
tax compliance. In the area of direct taxes, the emphasis
was on retention of stability in tax rates, widening of
the tax base and rationalisation and simplification of
the tax structure. All surcharges were abolished except
the Gujarat earthquake surcharge of 2 per cent leviable
on all non-corporate and corporate assesses except foreign
companies.
1.58
Fiscal incentives in the form of tax holidays for development
of infrastructure were rationalized and enlarged for core
sectors like roads, highways, railway systems, water treatment
and supply, irrigation, sanitation and solid waste management
system, airports, ports, inland ports and waterways, industrial
parks and generation and distribution of power. Besides,
concessions by way of 10-year tax holiday were made available
for infrastructure activities for developers in Special
Economic Zones. Fiscal incentives by way of tax holiday
for five years and 30 per cent deduction of profits for
the next five years were provided to enterprises engaged
in the integrated business of handling, transportation
and storage of foodgrains. Income earned by way of interest,
dividends and long-term capital gains from investments
in infrastructure was made fully tax exempt and the exemption
was extended to cover guarantee commission and credit
enhancement fees earned from this sector.
1.59
For providing stimulus to the growth of the capital market,
the tax payable on the distribution of dividends of domestic
companies and income in respect of units of Mutual Funds
and UTI was reduced from 20 per cent to 10 per cent. Further
measures to widen the tax base and enlarge the scope of
deduction at source included making income tax at source
deductible at the rate of 10 per cent for income earned
through commission or brokerage exceeding Rs.2, 500 (barring
transaction relating to shares and securities). Besides,
income tax at the rate of 30 per cent is to be deducted
at source from winnings from games. The One-by-Six scheme
for identifying potential taxpayers was extended to all
urban areas in the country as defined by the 1991 census.
Indirect
Taxes
1.60
The ongoing process of reducing rates, rationalising
the tax regime, and simplifying procedures, was carried
forward in the sphere of indirect taxes. The important
initiatives adopted during the year are mentioned below:
Customs
Duties
1.61
The peak level of customs tariff was reduced to 35 per
cent with abolition of the 10 per cent surcharge. The
Union Budget reiterated the Governments resolve
to move progressively within three years to reduce the
number of rates to the minimum with a peak rate of 20
per cent. Customs duties were reduced on imported inputs
for information technology and telecom sectors. Basic
customs duty was raised to 70 per cent on tea, coffee,
copra and coconut, and to 75 and 85 per cent on crude
edible oils and refined oils respectively. With the abolition
of quantitative restrictions on imports, the customs duty
on import of used cars, multi-utility vehicles and two
wheelers was raised to 105 per cent. In a move intended
to discourage gold smuggling, customs duty for gold was
scaled down from Rs.400 per ten grams to Rs.250 per ten
grams.
Excise
Duties
1.62
The excise duty structure which was rationalised to a
single rate of 16 per cent CENVAT (Central Value Added
tax) in 2000-01 was further improved by replacing the
three special excise duty rates of 8 per cent, 16 per
cent and 24 per cent by a single rate of 16 per cent.
An additional levy (National Calamity Contingency Duty)
was imposed on cigarettes, pan masala, biris etc. to garner
resources for the National Calamity Contingency Fund.
Food preparations based on fruits and vegetables were
completely exempted from excise duty, while duty on aerated
soft drink was reduced to 32 per cent. Compressed natural
gas, hitherto exempted from excise, was brought under
the purview of excise at the rate of 8 per cent. Excise
Duty on petrol was raised from 16 per cent to 32 per cent
and on high-speed diesel oil from 12 per cent to 16 per
cent. Further, the duties on petrol and diesel were increased
to 90 per cent and 20 per cent respectively from the midnight
of January 11/12, 2002 (the new rates of excise duty will
not remain in force beyond March 31, 2002). The coverage
of service tax at the rate of 5 per cent on the value
of taxable service was expanded by including fifteen new
services.
1.63
Inadequate fiscal adjustment continues to remain a major
problem for the Indian economy. The Central Governments
fiscal situation has become more constrained in recent
years due to growing interest payments, increasing level
of subsidies and long term impact of Fifth Pay Commission
recommendations, including surge in pension payments.
All these have manifested in mounting revenue deficit
and erosion in public sector savings thereby severely
restraining the Governments ability to invest in
infrastructure and social sectors.
Fiscal
and Budgetary Developments
in 2001-02
1.64
The fiscal deficit as a proportion of GDP budgeted
at 4.7 per cent in 2001-2002, now stands at 5.1 per cent
of GDP due to revision in the GDP estimates, compared
with 5.5 per cent in 2000-01 (on the basis of provisional
unaudited figures). The revenue deficit, which reflects
the excess of current expenditure over current receipts,
budgeted at 3.2 percent of GDP in 2001-02, is now re-estimated
at 3.4 per cent of GDP, compared with 3.9 per cent in
2000-01. The primary deficit, (i.e. fiscal deficit net
of interest payments), is budgeted at 0.2 per cent of
GDP in 2001-02 as against 0.8 per cent in 2000-01.
Revenue
Performance
1.65
The data for gross collections of major direct and indirect
taxes for the first nine months (April-December 2001)
of the current year shows an unsatisfactory performance.
In case of direct taxes, collections from personal income
tax and corporation tax at Rs.44, 021 crore were lower
by 1.2 per cent, compared with the robust increase of
30.8 per cent in the corresponding period of the previous
year. Collections from excise and custom duties at Rs.77,
224 crore during April-December 2001 posted a decline
of 3.6 per cent compared with an increase of 4.9 per cent
in April-December 2000.
1.66
The fiscal parameters for the first three-quarters of
the current year (i.e. April-December 2001) reveal that
there has been lower growth in revenue receipts and higher
growth in expenditure as compared to the corresponding
period of the previous year. Revenue receipts (net to
the centre) is almost at the same level of Rs.1, 32,690
crore compared with Rs.1, 32,691 crore in the corresponding
period of last year. Other receipts (mainly disinvestment
receipts), estimated at Rs.280 crore against the full
year budgeted target of Rs.12, 000 crore, are expected
to improve significantly during the remaining months of
the current year due to smoother working of the disinvestment
process. Borrowings and other liabilities at Rs.89, 014
crore indicate an increase of 37.7 per cent over Rs.64,
628 crore in the comparable period of the previous year.
Aggregate expenditure at Rs.2, 33,718 crore reflects an
increase of about 14 per cent over the corresponding period
of the previous year. However, on account of the general
slowdown in the economy and the deceleration in industrial
growth in particular, the tax revenue (net to Centre)
had declined by about 7 per cent during April-December2001.
Expenditure
Management
1.67
The Union Budget (2001-02) announced specific proposals
for bringing about changes in the composition of the Central
Governments expenditure and for effecting economy
in non-plan expenditure. The Budget announced revision
of user charges for certain services provided by the Government
and its agencies, moderate revision of postal rates for
containing the rising postal deficit, scrutiny of recruitment
requirements with a view to limit fresh recruitment to
1 per cent of total civilian staff strength, enhancement
of license fee for various categories of Central Government
residential accommodation, temporary suspension of LTC
facility for Central Government employees and greater
use of information technology in Governments activities
involving large public interface for promoting efficiency.
The Budget also announced that all existing schemes would
be subjected to zero-based budgeting and only those schemes
that were found demonstrably efficient and essential would
be retained. Besides, centrally sponsored schemes that
could be transferred to States would be identified and
the resource flows will be sought to be linked to their
performance.
Inflation
Wholesale
Price Index (WPI)
1.68
The point to point inflation rate according to the Wholesale
Price Index (WPI) for the week ending January 19, 2002
was 1.3 per cent, which was the lowest in the last two
decades. The 52-week average inflation rate declined from
7.0 per cent at the beginning of the year to 4.7 per cent
for the week ending January 19, 2002.
1.69
The price situation remained under control during 2001-02.
The impact of the fuel price increases announced first
during 1999-2000, and subsequently twice during 2000-01,
bottomed out during the current year, reducing inflation
to below 5 per cent by September 2001. The deceleration
in prices continued through the months of October and
November 2001. Inflation was recorded at 2.21 per cent
at the beginning of December 2001 (the lowest since December
1999) and reduced further to 1.3 at the end of January
2002.
1.70
Prices for the primary products group, comprising of essential
commodities for daily use, remained moderate for much
of the year and are presently estimated to have risen
by 3.0 percent for the week ending January 19, 2002. The
manufactured products group registered negligible price
rise during 2001-02 reflecting the subdued demand for
manufactured products. The fuel, power, light & lubricants
subgroup, comprising mainly of energy products much of
which are imported, had experienced sharp increase in
prices last year on account of the successive hikes in
administered energy prices. In contrast, during the current
year, inflation for the group remained stable and is presently
3.2 percent, as against 31.0 percent in the previous year.
Consumer
Price Index-Industrial Workers (CPI-IW)
1.71
The inflation rate, as estimated by the CPI (IW), ranged
between moderate to low during the current year. The Index
remained below 4 per cent till July 2001 and rose thereafter
to 5.2 per cent in August 2001. It decelerated further
during September and October and was estimated at 4.9
per cent during November 2001. The year 2001 ended with
a marginally higher inflation of 5.2 per cent in December
2001.
Money
Supply
1.72
The year-on-year growth in broad money (M3) as on January
11, 2002 was 14.4 per cent compared with 16.6 per cent
a year ago. The sharp decline in money supply since November
16, 2001 reflects the sudden expansion in volume of broad
money resulting from India Millenium Deposits with effect
from the corresponding date in the previous year. Among
the various components of money supply, only currency
with the public registered a higher rate of growth in
the current year (till January 11, 2002) compared to the
corresponding period of the previous year. As far as sources
of broad money are concerned, growth in banks investment
in Government securities and the expansion in net foreign
exchange assets of RBI contributed significantly to the
broad money growth in the current year. The current financial
year witnessed a deceleration in the growth of net domestic
assets of RBI as compared to the corresponding previous
period. This was partly offset by the pronounced acceleration
in the growth of net foreign exchange assets of RBI. Reserve
money registered a growth of 2.6 per cent during the current
financial year (till January 11, 2002) as compared with
5 per cent during the corresponding previous period.
Financial
Developments
1.73
The process of financial sector reforms has been carried
forward in the current year with particular focus on banking
and financial institutions. The specific reforms undertaken
include allowing banks to lend at interest rates below
their respective PLRs, permission to formulate fixed rate
deposit schemes offering higher interest rates to senior
citizens, flexibility in the composition of working capital
between cash credit and loan components, reduction in
exposure limits for borrowers, revised guidelines for
exposure of banks to capital market and guidelines for
investment in non-SLR securities through the private placement
route. The initiatives specially aimed at strengthening
the operational efficiency of banks relate to the Voluntary
Retirement Scheme, abolition of the Banking Service Recruitment
Boards and enlargement of the reach and scope of the electronic
funds transfer facility (EFT). The measures pertaining
to financial institutions included operational and regulatory
issues concerning transition to universal banking, a transparent
mechanism for corporate debt restructuring, coordination
between banks and financial institutions, amended guidelines
for Asset-Liability Management and classification and
valuation of investments. As regards the non-banking financial
companies (NBFCs), the major policy initiative related
to reduction in the maximum interest rates on public deposits
from 14 per cent to 12.5 per cent.
1.74
The current year has been characterised by measures designed
to move towards a flexible interest rate regime. The reduction
in the administered interest rates on contractual savings
has made the interest rate regime more flexible. Reduction
in the Bank Rate to 6.5 per cent (the lowest since May
1973) has been supplemented by reduction in the Cash Reserve
Ratio to 5.5 per cent, which has further improved liquidity
in the banking system. The PLRs of five major public sector
banks softened from 12.00 - 12.50 per cent in December
2000 to 11.00 - 12.00 per cent by December 2001. Interest
rates charged by SCBs on pre-shipment and post-shipment
rupee export credit were reduced by 1.0 percentage point
for six months ending on March 31, 2002. The short-term
interest rate represented by the yield on 91-day Treasury
Bills declined by 125 basis points to 7.25 per cent between
April and December 2001. At the long end of the yield
curve, the secondary market yields on Government paper
in the range of 10-12 years have declined from 10.05-10.41
per cent to 8.15-8.35 per cent during this period.
1.75
Bank credit, comprising food credit and non-food credit,
increased at a lower rate of 10.6 per cent till January
11, 2002 compared to 14.3 per cent in the corresponding
period of the previous year. Recent years have witnessed
strong growth of food credit in response to the increase
in the quantum as well as price of food grains procured
in support of the twin objectives of food security and
price support. The deceleration in the growth of non-food
credit to 8.7 per cent till January 11, 2002 from 12.1
per cent during the corresponding period in the previous
year mirrored the weak demand for commercial credit owing
to economic slowdown, which has been aggravated by the
global downturn in economic activity.
1.76
During April-December 2001, sanctions by All-India Financial
Institutions (AIFIs) declined by 32.1 per cent compared
to an increase of 18.3 per cent in the corresponding period
of the previous year. Disbursements by AIFIs also declined
by 16.9 per cent during the same period in contrast to
an increase of 16.1 per cent last year. An analysis of
financial performance of public sector banks on the basis
of key parameters shows wide inter-bank variations. For
nationalised banks, the return on assets varied from zero
in the case of Dena Bank and Indian Bank to 1.55 per cent
for Corporation Bank. It was more than 0.5 per cent for
six other nationalised banks. The ratio of net NPAs to
net advances ranged from 1.98 per cent for Corporation
Bank to 18.37 per cent for Dena Bank. Excluding Indian
Bank with negative Capital to risk weighted asset ratio
(CRAR), the CRAR ranged from 7.73 per cent for Dena Bank
to 13.40 per cent for Andhra Bank. As regards the SBI
Group, return on assets was 0.50 per cent or more for
all the banks except the State Bank of Saurashtra and
the State Bank of Mysore with return on assets at 0.18
per cent and 0.27 per cent respectively.
1.77
The RBI had introduced the One Time Settlement Scheme
in July, 2000 for all sectors, including the small scale
sector, for providing a simplified, non-discretionary
and non-discriminatory mechanism for recovery of NPAs
with outstanding balances of up to Rs. 5 crore. The scheme
expired on June 30, 2001. Under the revised guidelines,
27 public sector banks recovered Rs. 2,600 crore from
365,000 accounts.
1.78
A total of 20.4 million Kisan Credit Cards (KCCs) have
been issued till the end of November 2001 involving a
sanctioned amount of Rs.43, 390 crore. Cooperative banks
accounted for the maximum share in the cumulative issue
of KCCs (66.2 per cent), followed by SCBs (27.0 per cent)
and RRBs (6.8 per cent).
Capital
and Money Markets
1.79
The developments in the stock market on the eve of the
current financial year brought to the fore the need for
further measures aimed at promoting safety, transparency
and efficiency of the capital market. Accordingly, the
following measures were announced in March 2001:
- Intention
to corporatise stock exchanges involving segregation
of ownership, management and trading membership from
each other.
- Extension
of rolling settlement to two hundred A category
stocks in Modified Carry Forward Scheme (MCFS), Automated
Lending and Borrowing Mechanism (ALBM) and Borrowing
and Lending Securities Scheme (BLESS) by July 2, 2001.
- The
formulation of legislative changes aimed at further
strengthening the provisions in the SEBI Act, 1992 for
ensuring investor protection.
1.80
The SEBI subsequently extended rolling settlement to all
scrips included in the ALBM/BLESS/or MCFS in any stock
exchange or in the BSE 200 list with effect from July
2, 2001. From December 31, 2001, all stocks are under
rolling settlement in all stock exchanges. This constitutes
one of the most far-reaching reforms in the history of
Indias capital market. Equally important were the
widening of the spectrum of equity derivatives to trading
in options on both indices and stocks, and to stock futures,
which can perform hedging functions hitherto performed
by the deferral products.
1.81
The Union Budget (2001-02) emphasised the need for further
development of the debt market and spelt out the main
measures for this purpose, which related to setting up
of the Clearing Corporation of India Ltd. (CCIL) and the
Negotiated Dealing System (NDS). Other related initiatives
included extension of uniform price auction to the auction
of selected dated Central Government securities and reintroduction
of floating rate Government bonds. Measures were also
announced for moving closer to a pure inter-bank call
money market by gradually phasing out non-bank participation.
1.82
Reforms in the insurance sector commenced with the enactment
of the Insurance Regulatory and Development Authority
Act 1999, which facilitated the entry of private insurance
companies into the Indian insurance market. The Insurance
Regulatory and Development Authority (IRDA) was set up
on April 19, 2000 to protect the interest of the holders
of insurance policies, and to regulate, promote and ensure
orderly growth of the insurance industry. Ten life insurance
companies and six general insurance companies have been
granted certificate of registration, out of which 12 companies
have commenced business.
1.83
The pronounced bearish sentiments in the stock market
saw the Sensex falling to 3184 on April 12, 2001, which
implied a cumulative fall of 36.3 per cent from 5001 at
the end of March 2000. The National Stock Exchange (NSE)
Index (S&P CNX Nifty) also suffered a similar slump
during this period. The decline in equity prices in leading
stock markets abroad following the terrorist attacks on
the USA on September 11, 2001 led to further squeezing
of the stock indices at home. The Sensex dropped to 2600
on September 21, 2001, registering a fall of more than
one thousand points from 3604 on the eve of the current
financial year. The measures taken by both the Government
and the regulatory authorities in the wake of the September
11 crisis, backed by improvement in investor sentiment
abroad, facilitated significant recovery in the stock
market. The Sensex regained more than 800 points to close
at 3443 on December10, 2001. However, the market again
came under selling pressure, precipitated by developments
following the terrorist attack on the Indian Parliament
(December 13, 2001) and the Sensex lost around 180 points
by the end of December, 2001. Stock market prospects improved
in the new year (2002) and the Sensex regained 232 points
to close at 3494 on February 8, 2002.
1.84
The adverse sentiments in the secondary market also affected
the mobilisation of resources from the primary market.
The amount raised through public and rights issues during
the first nine months of the current year (Rs.3, 777 crore),
constituted around 90 per cent of the relatively modest
amount of Rs 4,240 crore raised during the corresponding
period of the previous year. Resource mobilisation through
IPOs (Rs. 208 crore) accounted for only 5.5 per cent of
the total resource mobilisation during this period, compared
to about 56.7 per cent in the corresponding period of
the previous year. The low level of resource mobilisation
may be attributed to the prevailing economic slowdown
and preference for private placement. The performance
of UTI was badly affected by the downtrend in stock market.
During April-December 2001, the outflow of funds from
UTI exceeded inflows by Rs 5,151 crore whereas during
the corresponding period of the previous year, inflows
exceeded outflows by Rs. 480 crore. During April-December
2001, gross purchase of equity by mutual funds amounted
to Rs.7, 489 crore, while gross sales amounted to Rs.8,
762 crore thereby making net equity investment negative.
1.85
Except for September 2001, the net FII investment was
positive during the first ten months of the current year.
Net FII investment amounted to US$1,295 million during
April 2001-January 2002 compared to US$1,379 million during
the corresponding previous period. The uncertainty and
panic resulting from the terrorist attacks on the USA
led to sudden increase in sales, which exceeded purchases
by about 16 per cent. As a result net investment by FIIs
declined by US$113 million in September 2001.
External
Sector
International
economic environment
1.86
The year 2001 experienced the deepening and reinforcing
of the global economic slowdown that had begun to set
in from the end of 2000. The latest projections made by
the World Economic Outlook of the International Monetary
Fund point to a mere 2.4 per cent growth in world output
during 2001, compared to 4.7 per cent during 2000. The
growth in world trade volume is projected to decline sharply
to 1 per cent during 2001, as against 12.4 per cent in
2000. Absolute declines are projected for both energy
and non-fuel prices in 2001 with the decline in energy
prices expected to aggravate further in 2002.
1.87
The prevailing global slowdown was accentuated further
by the terrorist attacks in the United States on September
11, 2001. The attacks resulted in further downward growth
projections for almost all-major economic regions of the
world. Growth rates for the US economy have been pegged
down to 1 per cent and 0.7 per cent for 2001 and 2002
respectively. Japan is likely to encounter its fourth
economic recession in a decade, while economic activity
is showing little signs of recovery in the Euro area.
The broad-based nature of the global slowdown, the most
marked in recent times, has worsened the outlook for emerging
market economies, in terms of reduced capital inflows
and restricted access to funds from international capital
markets. Among the economies of developing Asia however,
China and India are expected to remain relatively insulated
from the global slowdown due to the relatively less significance
of the external sector in their overall GDP.
Balance
of Payments
Current
account
1.88
Indias Balance of Payments (BOP) remained reasonably
comfortable in 2000-01 and the external sector marked
distinct improvements. The first half of the year witnessed
some pressures on the BOP due to significant hardening
of international oil prices, sharp downturn in international
equity prices and successive increases in interest rates
in the United States and Europe. However, the situation
eased with the mobilisation of funds under the India Millennium
Deposits, which reversed the declining trend in foreign
exchange reserves. As a result, the BOP situation marked
a turnaround during the second half of 2000-01. Overall,
the current account deficit in 2000-01 narrowed to about
0.5 per cent of GDP from 1.1 per cent of GDP in 1999-00.
The improvement in the current account was largely due
to a more dynamic export performance, sustained buoyancy
in invisible receipts reflecting sharp increases in software
service exports and private transfers and the subdued
non-oil import demand.
Trade
deficit
1.89
Exports, on the BOP basis, grew by 19.6 per cent in US
dollar terms in 2000-01, accelerating sharply from the
9.5 percent growth in the previous year. Total imports
recorded a moderate growth of 7.0 per cent during 2000-01,
much lower than the sharp increase of 16.5 per cent in
1999-2000. The moderate growth in imports during 2000-01
was essentially attributable to a 24.1 per cent increase
in the oil import bill. Non-oil import growth, on BOP
basis, remained subdued at only 2.0 per cent.
1.90
Reflecting the trends in exports and imports, the deficit
on the trade account of BOP narrowed to US $14.37 billion
or 3.1 per cent of GDP in 2000-01 from US $17.84 billion
(4.0 per cent of GDP) in 1999-2000. Net inflow of invisibles
earnings at US $11.79 billion covered about 82 per cent
of the deficit on the trade account in 2000-01, leaving
a financing gap of US $2.58 billion on the current account.
This deficit on the current account represented about
0.5 per cent of GDP, compared with the deficit of 1.1
per cent of GDP (US $4.70 billion) in 1999-2000.
Capital
account
1.91
The recovery in capital flows witnessed in 1999-2000,
after the setback in 1998-99 caused by the East-Asian
crisis and the economic sanctions imposed upon India,
was broadly maintained during 2000-01. Net capital inflows
(excluding IMF) in the BOP account amounted to US $9.02
billion in 2000-01, which were lower than similar inflows
of US $10.44 billion in the previous year. The reduction
in net capital inflows was mainly due to the bunching
of repayments of commercial borrowings and significant
net outflows under banking capital. At the same time,
capital inflows were bolstered by the mobilisation of
US $5.51 billion under the India Millennium Deposits (IMD)
Scheme in October- November 2000. Fresh inflow of funds
for portfolio investments in India by FIIs in 2000-01
amounted to about US $1.85 billion, which was only slightly
lower than the US $2.14 billion in 1999-2000. Net accretions
to non-resident deposits during 2000-01 rose by over 50
per cent to US $2.32 billion. Gross disbursement of external
assistance at US $2.94 billion was comparable with the
normal trends in recent years. Gross borrowing on commercial
terms (excluding IMD) at US $3.81 billion in 2000-01 was
higher than such normal borrowings of US $3.19 billion
in the previous year.
Foreign
exchange reserves
1.92
The sharp reduction in current account deficit and the
funds raised under the IMD Scheme resulted in large accumulation
of official foreign exchange reserves for the fifth year
in succession during 2000-01. On BOP basis, the reserves
increased by a substantial US $5.83 billion. This was
on top of an increase of US $6.14 billion in 1999-2000
and an increase of US $4.51 billion per year, on an average,
during the previous three years, i.e.1996-97 to 1998-99.
BOP
Projections for 2001-02
1.93
Official BOP statistics, as compiled by the RBI for the
year 2001-02, are available only for the first half of
the current year. A tentative assessment of the BOP outlook
for the current year indicates that though the current
account deficit in 2001-02 might widen to some extent,
it is expected to remain within 1 per cent of GDP. The
widening of the current account deficit is mainly due
to poor export performance. Merchandise exports (in US
dollar terms) remained almost stagnant with export growth
of only 0.6 per cent recorded by the DGCI&S data for
the first nine months of 2001-02. On the other hand, the
pressure on trade account eased significantly due to moderation
in oil import bill following softening of international
oil prices after September 2001.
1.94
Net inflow of invisibles, despite larger outflows on account
of interest and dividend payments, is expected to remain
broadly at last years level, supported by the continued
buoyancy in software service exports and private transfers.
The widening of the current account deficit will, however,
be more than matched by the expected net capital inflows
from normal sources, resulting in large accretions to
reserves.
1.95
During the current financial year (2001-02) so far, the
foreign currency assets of the RBI have increased by about
US $7.01 billion from US $39.55 billion at end-March 2001
to US $46.56 billion at end January, 2002. Total foreign
exchange reserves (including gold and SDRs) at end January
2002 amounted to US $49.48 billion, providing cover for
about 10 months of estimated imports in 2001-02.
Exchange
rate developments
1.96
The exchange rate of the rupee against the US dollar continued
to be broadly market determined. During 1999-2000, the
exchange rate market displayed reasonable stability, with
the rupee depreciating by about 2.9 per cent from the
annual average of Rs.42.07 per US dollar in 1998-99 to
Rs.43.33 in 1999-2000. In contrast, the year 2000-01 witnessed
significant downward pressure on the rupee-dollar rate
from middle of May 2000. The foreign exchange markets
were affected by considerable uncertainty with the rupee
depreciating by 6.7 per cent between end-April and end-October
2000 from Rs. 43.655 per US dollar to Rs. 46.775. Since
November 2000, the situation showed large improvements
with the forex markets becoming relatively stable. Overall,
the rupee depreciated against the US dollar by 5.15 per
cent to Rs. 45.68 per US dollar during 2000-01.
1.97
The world economy experienced one of its worst shocks
in recent times in the aftermath of the September 11,
2001 events in the United States. Foreign exchange markets
in India also became volatile with the rupee depreciating
by 1.3 per cent vis-a-vis the US dollar during September
10-20, 2001. Adverse external developments after September
11, 2001 and their effect on Indias financial markets,
necessitated quick response for injecting liquidity and
providing overall comfort to the markets. The RBI announced
several measures for stabilizing domestic financial markets
during the period September 15-25, 2001. These measures
had the desired effect of moderating possible panic reactions
and reducing volatility in financial markets, particularly
in money, foreign exchange and Government securities markets.
As at the end of January 2002, the exchange rate of the
rupee was Rs.48.58 per US dollar, showing a depreciation
of 4.0 per cent, compared with the rate of Rs.46.64 at
the end of March 2001.
Reform
initiatives in the external sector
1.98
Several measures were announced during the year as part
of the on-going reform process in the external sector.
Trade
Removal
of Quantitative Restrictions (QRs)
1.99
The EXIM Policy announced in March 2001 has completed
the process of removal of QRs on BOP grounds by dismantling
restrictions on the remaining 715 items. Out of these
715 items, 342 are textile products, 147 are agricultural
products including alcoholic beverages and 226 are other
manufactured products including automobiles. The Policy
has, however, put in place necessary mechanisms to provide
a level playing field to domestic players vis-à-vis
imports. These mechanisms include shifting of imports
of certain products under the state trading category,
making imports subject to various existing domestic regulations
on health and hygiene and environment, and need for bio-security
and sanitary & phyto-sanitary permit for imports of
primary products of plant and animal origin. The policy
has also established a monitoring mechanism to monitor
imports of 300 sensitive items on a regular basis.
Doha
Conference
1.100
The fourth WTO Ministerial Conference was held at
Doha, Qatar from 9-14 November 2001 to decide upon the
future work programme of the WTO. While there were strong
pressures to launch a comprehensive round of negotiations
including multilateral regimes on investment, competition
policy, trade facilitation, government procurement and
environment, India was opposed to overburdening of the
multilateral trading system with non-trade or new issues
in the agenda. It felt that WTO already had a sufficiently
large agenda consisting of mandated negotiations and mandated
reviews and, therefore, India underlined the need for
resolving the implementation issues, arising from the
current agreements in a time bound manner before addressing
new issues for negotiations.
1.101
India played a proactive role in the deliberations at
the fourth Ministerial Conference at Doha. It wanted a
genuine resolution of implementation related concerns,
increased market access in agriculture, sufficient flexibility
and clarity under TRIPS for public health policies and
was strongly opposed to introduction of non-trade issues
like labour in the agenda. It was able to ensure adoption
of an agenda that emphasised not only trade but also the
developmental goals and priorities of developing countries.
The outcome of the Conference takes into account a number
of concerns expressed by India. With the Doha Declaration
laying down the agenda for the forthcoming trade talks,
the focus will now shift to the work programme in WTO.
India, along with other developing countries, would work
to ensure that their interests and concerns are adequately
taken care of in the work programme.
Tariff
and EXIM Policy
1.102
The existing 10 per cent surcharge on customs duties was
taken off thereby bringing down the peak level of customs
duties to 35 per cent. Exporters were allowed partial
backloading of withdrawal of tax benefits under Section
80-HHC of the Income Tax Act. Concessions available for
infrastructure by way of 10-year tax holiday were extended
to the developers of Special Economic Zones (SEZs). Specific
thrust was put on agricultural exports by announcing establishment
of Agri-Economic Zones. A Market Access Initiative (MAI)
scheme was introduced for boosting exports, under which
the Government would assist the industry in research &
development, market research, specific market and product
studies, warehousing and retail marketing infrastructure
in select countries and direct market promotion activities
through media advertising and buyer- seller meets. Interest
rates on export credit were rationalised by indicating
them as PLR linked ceiling rates (as against specific
rates). To boost exports, duty drawback rates were revised
upwards and value caps under DEPB abolished for a number
of export products. A special financial package was also
announced for large value exports (annual exports of over
Rs 100 crore) of selected products. Besides these short
term measures Government also unveiled a medium term export
strategy to achieve a quantum jump in exports over the
next five years.
Capital
account
1.103
A host of measures were undertaken for further liberalising
the FDI regime. The defence industry has been permitted
FDI up to 26 per cent, subject to licensing. The dividend
balancing condition for 22 consumer items was withdrawn,
as was the cap on foreign investment in the power sector.
International Financial Institutions like ADB, IFC, CDC
etc. were allowed to invest in domestic companies through
the automatic route, subject to SEBI/RBI guidelines and
sector specific caps on FDI.
1.104
The Non-Banking Financial Companies (NBFCs) have been
permitted to hold foreign equity up to 100 per cent in
holding companies. Foreign investors have been allowed
to set up 100 per cent operating subsidiaries (without
any restriction on number of subsidiaries) without the
condition of disinvesting a minimum of 25 per cent equity
to Indian entities, subject to specified investment obligations.
Joint venture NBFCs having 75 per cent, or less than75
per cent foreign investment, have also been permitted
to set up subsidiaries for undertaking other NBFC activities.
The automatic route has been made available to the information
technology sector, even when the applicant company has
a previous joint venture or technology transfer agreement
in the same field. Offshore venture capital funds/companies
have been allowed to invest in domestic venture capital
undertakings as well as other companies through the automatic
route, subject to SEBI regulations and sector specific
caps on FDI. Payment of royalty upto 2 per cent on exports
and 1 per cent on domestic sales have been allowed under
the automatic route on use of trademarks and brand name
of the foreign collaborator without technology transfer.
External
Debt
1.105
The external debt-GDP ratio has been declining continuously
over the years. The ratio improved from 38.7 per cent
at end-March 1992 to 22.3 per cent at end-march 2001 and
further to 21 per cent at the end of September 2001. The
absolute level of external debt rose marginally from US
$ 99.61 billion at end March, 2001 to US $ 100.38 billion
at end September 2001. The share of short-term debt to
total debt declined from 10.2 per cent at end March 1991
to 2.8 per cent at end September 2001. The debt service
ratio declined from a peak level of 35.3 per cent of current
receipts in 1990-91 to 16.3 per cent in 2000-01. The improvement
has been the result of concerted and continued efforts
of prudent external debt management strategy undertaken
by the Government. It is particularly noteworthy that
for the first time, the World Bank has classified India
as a less-indebted country.
Issues
and Priorities
1.106
India has now gone through more than a decade of economic
reforms. Beginning in 1991, the thrust of reforms was
fiscal stabilisation and the initiation of major structural
reforms aimed at de-regulation of the economy to induce
accelerated investment, growth, employment, and hence
reduction in poverty. A good number of these original
objectives have been realised. GDP growth in the 1990s,
after the initial year of reforms in 1991-92, was higher
than that obtained in the 1980s. The external sector has
been brought into balance with a comfortable balance of
payments that is sustainable; foreign currency assets
have risen from less than US $1 billion in 1991 to over
US $45 billion today; and debt service has been brought
to very comfortable levels, so that India is now internationally
regarded as a less indebted country. Average
inflation has been brought down from 10.6 per cent in
1990-91 to 1995-96 to 5 per cent in the last five years.
Poverty has fallen from 36 per cent in 1993-94 to 23 to
26 per cent in 1999-2000 according to alternative estimates;
and literacy has risen substantially from 52 per cent
in 1991 to 65 per cent in 2001. Despite all these achievements,
however, there are major challenges with respect to the
sustenance of high economic growth in the years to come.
1.107
After the initial exuberance of GDP growth in the initial
period of the reform process there has been an unmistakable
slow down in subsequent years. Growth in industrial value
added averaged 8.5 per cent per year from 1993-94 to 1996-97.
This has fallen to about 4.8 per cent per year in the
last four years, 1997-98 to 2000-01. Similarly, annual
growth in value added in agriculture and allied sector
from 1993-94 to 1996-97 averaged 4.5 per cent whereas
the annual growth in the last four years has averaged
only 1.2 per cent. The agricultural slowdown has taken
place at least partly because of irregular and unevenly
distributed monsoons during the latter period. Growth
in infrastructure has also been slow, particularly in
the power sector. Hence the key problem facing the economy
today is the reinvigoration of economic growth in the
current decade. The momentum achieved in the 1990s must
not be lost. Policy initiatives and deepening of reforms
are needed in each of these areas to unleash competitive
forces and stimulate growth.
1.108
The slow down in economic growth has been exacerbated
by the intractability of high fiscal deficits. Despite
the efforts made to curtail expenditure and increase revenues,
it has proved difficult to reduce the fiscal deficit below
5 per cent of GDP. The deleterious impact of such a high
deficit on the economy has been made worse by similar
levels of deficits being recorded by State Governments,
resulting in total fiscal deficit of the central and state
Governments amounting to around 10 per cent of GDP, a
situation not dissimilar to that prevailing in the early
1990s. The persistence of such high fiscal deficits and
the ever increasing debt service payments constrain the
ability of Government at any level to undertake the necessary
expenditures for productive investment for the provision
of essential public services and also crowd out the more
efficient private sector. Furthermore, the pressure of
market borrowing by the Government has served to increase
real interest rates in the economy at the cost of all
other economic actors. The restoration of high economic
growth would be difficult to achieve without a significant
and sustained reduction in the fiscal deficit.
1.109
The Indian financial sector and capital market has served
the economy well over the last few decades. While spread
of banking in the country was helped greatly by the nationalisation
of banks in 1969, it also stifled the competitive forces
in the sector. Similarly, safe insurance products have
been available to the public since the nationalisation
of insurance but the deepening of the sector was slowed
down. These arrangements functioned well in the controlled
economy of the 1970s and the 1980s. The financial sector
reforms of the 1990s, the deregulation of interest rates
and the tightening of prudential regulation of banks and
financial institutions have done much to impart efficiency,
transparency and competition on the banking industry.
The introduction of new private sector banks and insurance
companies has injected a degree of competition and new
dynamism into the financial sector. The time is now ripe
for carrying forward further financial sector reforms
so that the real economy can benefit from a modernised
financial sector that exhibits high productivity levels,
greater diversification of the financial sector and provides
a greater variety of instruments that serve more efficiently
the emerging needs of the economy and the real sector
for investment and production.
1.110
The key disappointment of the 1990s has been inadequate
employment generation. Employment growth has slowed significantly
in the 1990s relative to that in the previous decade.
However, this has been accompanied by a similar slowdown
in the growth of the labour force. This has resulted from
the increase in the average years of schooling of new
labour force entrants over the years. With the containment
of expansion of the Government and the public sector as
a whole, growth in organised public sector employment
has been expectedly low. Higher private sector growth
has indeed resulted in higher organised private sector
employment growth also, but this has not been adequate
in volume to compensate for the slowdown in public sector
employment. A significant structural change in the Indian
economy is indicated by the absolute fall in agricultural
employment that has occurred for the first time. Non-farm
employment growth has, however, not compensated adequately
for the lack of growth in agriculture.
1.111
The recent slowdown in agricultural growth has led to
a new policy focus, which places greater emphasis on agricultural
diversification through various reforms like removal of
licensing, stock limits and movement restrictions. This
would provide a fresh impetus for value addition in agricultural
products and generate additional demand for agricultural
workers. A key issue for focus therefore, is the achievement
of a higher growth path, which would be employment-intensive,
particularly in the rural areas.
Policy
Reforms For Growth
Fiscal Issues
Revenue
Enhancement
1.112
The Economic Survey has laid stress on the issue of fiscal
stabilisation and reforms for many years. This continues
to remain the most difficult of the problems facing economic
management in the country. In recognition of this problem
the Government introduced the Fiscal Responsibility and
Budget Management Bill in Parliament in December 2000.
The Bill mandates the Government to reduce its fiscal
and revenue deficits over the next 5 years to specified
sustainable levels.
1.113
The combined fiscal deficit of the Central and State Governments
amounted to 9.6 per cent of GDP in 2000-01, causing the
combined public debt of general Government to reach 85
per cent of GDP in 2001. Considerable progress has been
made over the past 10 years in the reform of the Indian
tax system in all its aspects, but tax revenue receipts
have remained below 10 per cent of GDP throughout the
period.
1.114
As might be expected, collections from custom duties
have fallen significantly as a result of the ongoing tariff
reform aimed at bringing customs tariffs in line with
ASEAN levels. Excise duty receipts have also not increased
with the extension of the MODVAT/CENVAT system to more
and more sectors, along with the slowdown in industrial
growth in the past five years. Recovery in industrial
growth would inject some buoyancy into excise receipts.
The other source of buoyancy in excise could be the removal
of exemptions that still continue and the curbing of leakages
arising from the exemptions extended to small-scale industries.
Thus the potential for increase in tax/GDP ratio from
indirect taxes is limited. Indirect taxes in the country
are excessively dependent on the industrial sector. As
the growth of the industrial sector has slowed, so has
the collection of indirect taxes. With structural change
in the economy resulting in greater growth in the tertiary
sector the importance of extending indirect taxes through
the service tax to this sector assumes great importance.
The state level Value Added Tax (VAT) is now to be introduced
in April 2003. The much needed policy reform to extend
service tax to all tertiary sector activities can then
be taken up. An inter linked full scale VAT system can
then be thought of. With the increasing weight of the
tertiary sector in GDP its effective taxation is essential
to improving the tax/GDP ratio.
1.115
Direct taxes have indeed increased over the decade from
about 1.9 per cent of GDP in 1990-91 to about 3.3 per
cent of GDP in 2000-01, so that their share in gross tax
revenue has increased from 19 per cent to 36 per cent
over the same period. The main potential for improvement
in the tax/GDP ratio continues to be in the area of direct
taxes, particularly that in personal income tax. An examination
of the available data on income distribution in the country
suggests that despite the substantial reduction in income
tax rates that has taken place, compliance among non-salaried
income tax payers remains low. The key tax policy and
governance issue therefore relates to the enforcement
of greater compliance in the personal income tax area.
The introduction of the One-by-Six scheme has done much
to bring increasing numbers of people with taxable incomes
into the tax net. But better systems are needed to ensure
improved compliance of higher income tax payers. The probability
of improving the fiscal health of the country depends
crucially on much greater acceleration in the collection
of direct taxes.
1.116
With the essential components of tax reforms in place,
the potential for increased tax revenues lies mainly in
instituting more efficient tax collection methods in the
country. What is required is wholesale modernisation of
the tax administration which relies more on improved systems
to enforce compliance rather than the traditional police
methods of search, seizure and the like. This will become
feasible as greater emphasis is placed on extensive use
of information technology, data warehousing, data mining
and analysis, and use of economic research. With the introduction
of unique tax identification numbers, better coordination
between different taxes would also help in enforcement.
Expenditure
Management
1.117
The continuous attention that has been paid to expenditure
management has kept total Central Government expenditure
in the range of 14 to 15.8 per cent of GDP over the past
decade. General Government expenditures have indeed been
restrained though further reduction is possible through
the implementation of the recommendations of the Expenditure
Reforms Commission. The main components of expenditure
that have been increasing are interest payments, subsidies,
and pensions (after the Fifth Pay Commission implementation).
The fall in inflation unaccompanied by a compensating
fall in nominal interest rates has also subjected the
government to higher real interest rates along with the
rest of the economy. The cut of 1.5 per cent points in
administered interest rates in the last budget redressed
some of these imbalances. However, the problem of high
administered real interest rates remains with us. Making
contractual savings subject to market related interest
rates is therefore essential for containing the interest
payments of the Government, as also for reducing interest
rates for the economy.
1.118
Subsidies remain a continuing problem in the expenditure
structure of the Central Government. The elimination of
export subsidies in 1991 has not been followed up by elimination
of other existing subsidies. The continuation of the food
subsidy will always be essential for alleviating the needs
of poor households. It stands to reason, however, that
with falling rates of poverty the magnitude of justifiable
food subsidy should also fall proportionately on a continuous
basis. This has not happened because of the existing system
of food management and public distribution in the country.
The continued high Minimum Support Prices (MSP) applied
to wheat and rice and near monopoly procurement by FCI
have led to an unsustainable situation where food stocks
with FCI have risen to levels that have little probability
of being used. Despite the extension of low prices for
people below the poverty line the offtake of PDS (Public
Distribution System) food grains has not increased. It
is essential, therefore, to reform the existing food management
system in a direction that ensures food security and availability
of affordable foodgrains to the poor on the one hand,
and more efficiency and greater investment of private
trade on the other. Little purpose is served in carrying
food stocks with Government beyond these requirements.
The expenditure on food subsidy is effectively crowding
out more effective expenditure on essential infrastructure
and social needs. Concurrently, Government guaranteed
bank credit for food stocks also crowds out other bank
lending. Hence it is now time to find more innovative
ways of providing food subsidies to the poor, without
affecting the whole food economy and marketing systems.
Simpler systems like food stamps or their variants can
be considered.
1.119
The fertiliser subsidy has long been an area of concern
and different high level committees have recommended possible
courses of action. As announced in the Budget Speech of
2001-02, the implementation of the report of the Expenditure
Reforms Commission on reform of the retention price system
in fertiliser along with fertiliser price revisions will
help in gradually bringing down fertiliser subsidy over
the next five years. The existing retention price system
in fertiliser provides no incentives for improvement in
productivity of investment or for energy efficiency in
fertiliser plants. A substantial portion of the fertiliser
subsidy actually goes to inefficient high cost production
rather than farmers. Accelerated implementation of fertiliser
price reform is essential to reduce fertiliser subsidy
to sustainable levels and also make the subsidy better
targeted and more transparent.
1.120
The other key reason for the stubbornness of the fiscal
deficit is the indirect effect on the exchequer of the
levy of inadequate user charges for most public services
in both the central and state levels. Uneconomic and low
user charges in sectors such as power, road transport,
irrigation and the like at the state level impair state
budgets. They impact on the central budget as well, through
non-payment or inadequate payment to Central Government
utilities. Similarly, unbalanced tariffs in central services
such as the railways lead to financial losses, which then
have to be compensated for by the central budget. With
the deteriorating financial condition of the railways
they have not been able to make adequate dividend payments
to the Central Government in the last two years. Effectively,
higher budgetary allocations have to be made than would
otherwise be the case. Most such subsidies are poorly
directed and do not necessarily benefit the poor. The
levy of appropriate user charges on most services is essential
for restoring fiscal health. As economic user charges
are levied on such services, operational efficiency also
has to be ensured through appropriate management reform
so that prices are kept at affordable levels.
1.121
The high fiscal deficit is often felt to be of only academic
interest. It is also argued that high revenue deficits
are the cause for concern, and not fiscal deficits. This
would be true if the non-revenue fiscal deficit would
result in investment, which provides adequate returns
commensurate with the cost of borrowing. This has so far
not been the case, with the result that todays fiscal
deficit results in tomorrows revenue deficit. Equal
attention therefore has to be paid to containing both
the revenue and fiscal deficits. Public borrowing for
public investment is indeed justified, and should be undertaken.
What is necessary is to ensure that investment is done
effectively so that the Government receives adequate returns.
This can be done if appropriate user charges are levied
on public services.
1.122
In summary, the problem of fiscal deficit has to be addressed
both on the revenue side and the expenditure side. There
has been a popular tendency to focus excessively on expenditure
reduction, but this has proved difficult with the rigidity
in the structure of Government expenditure. Revenue enhancement
now lies more in enforcing compliance in direct taxes
and in extending the service tax.
Agriculture
1.123
The current state of agriculture in the economy provides
a contrasting picture of low growth amid plenty. Despite
the slowdown in the growth of foodgrains production and
in productivity, foodgrains stocks at 60 million tonnes
are now at unprecedented and unsustainable levels. Capital
formation in agriculture has been slowing throughout the
1980s and 1990s with public investment showing a particular
downtrend. Public expenditure in agriculture has exhibited
some substitution from investment to consumption expenditure
in the form of increasing subsidies and in various transfer
payments made through a variety of poverty alleviation
schemes.
1.124
The response to the food crisis of the late 1960s was
to promote the green revolution in rice and wheat through
the provision of a package providing research and extension
services, inputs like improved seeds, fertiliser, and
irrigation and assured offtake through MSP based public
procurement. This has been implemented successfully over
the past 30 years. However, with mounting foodstocks this
strategy for agricultural growth has now played itself
out. The attainment of a high GDP growth rate in excess
of 7 per cent will be difficult unless there is an accompanying
acceleration in agricultural growth. It has become increasingly
evident that this calls for a paradigm shift in policy
of the last 30 years which had mainly concentrated on
improving the production of foodgrains to provide for
essential food security to the economy.
1.125
The National Sample Surveys show that, as might be
expected, with continuing income growth in both urban
and rural areas over the last two decades, the proportion
of household expenditure on items other than food has
been increasing. Conversely, household expenditure on
food has fallen as a proportion of their total expenditure
from 60 per cent in 1977-78 to 48.1 per cent in 1999-2000
in urban areas and from 64.3 per cent to 59.4 per cent
in rural areas. With rising incomes, peoples diets
are becoming more diversified. The share of cereals in
their diet has been falling, being substituted by other
foods as their food preferences have been changing. Expenditure
on cereals in total household food expenditure has fallen
from 40.8 per cent in 1977-78 to 31.8 per cent in 1999-2000
in urban areas and from 58 per cent to 44.1 per cent in
rural areas. Correspondingly, substantial increases have
taken place in the proportion of food expenditure on other
foods such as fruits, vegetables, meat, eggs, fish and
milk. Hence, although it is essential to ensure food security
through adequate production of foodgrains in the country,
the thrust of agricultural policy now must shift to accelerating
the growth of non-cereal food products in recognition
of the changing diet composition and, to other non-food
agricultural products. The growth experienced in the production
and consumption of milk, poultry, fish and meat suggests
that there is great potential for further growth in these
products. Similarly, increasing incomes and urbanisation
are also providing the demand stimulus for greater production
and consumption of fruits and vegetables. As urbanisation
proceeds there will be an accelerating need for basic
processed foods as well.
1.126
Policies for stimulating production in non-cereals and
non-food crops are inherently more complex than the policies
required for accelerating foodgrains production. This
set of products is far more heterogeneous than foodgrains
and policies therefore have to be much more responsive
to the different requirements of different products and
different regions. The procurement, preservation, transportation
and marketing of these products are also much more complex
than that of foodgrains. Policy measures to tackle each
of these problems would have to be much more decentralised.
1.127
The agriculture sector has continued to be constrained
by a number of controls and regulations that impose limits
on storage and restrict free movement of agricultural
products. States has issued most of these control orders
under the provisions of the Essential Commodities Act
(ECA). As announced in the Finance Ministers Budget
speech of 2001-2002, the provisions of the ECA have been
reviewed and the provisions allowing the States to issue
such orders have been withdrawn. Implementation of this
and removal of other state control orders should help
greatly in freeing up the storage and movement of agricultural
products in the country. There are other legislations
like Agriculture Produce Marketing Act that prohibit farmers
from selling directly to buyers for food processing and
which make contract farming difficult. There are other
regulations such as the Milk and Milk Products Order (MMPO),
which constrains the growth of milk processing by restricting
the entry of large processors. The net effect of many
of these regulations is to increase the distance between
the farmers and the market and inhibit development of
food processing on a large scale in the country. Consequently,
the price realization by the farmers is a small fraction
of the final retail price of agricultural products. The
removal of such regulations would do much to promote higher
growth in the production of marketable agricultural commodities,
and in food processing. These are the activities that
will induce much needed acceleration in employment growth
in rural areas - both farm and non-farm - and in small
and medium towns.
1.128
Bringing the farmer closer to the market requires much
better rural infrastructure. Accordingly, the Government
has launched a focussed programme of investment in rural
infrastructure concentrating particularly on improving
the connectivity of all villages in the country through
the provision of all weather roads, telecommunications
and rural electrification.
1.129
The shift of farm production from cereals to other agricultural
products is also being constrained by the availability
of relatively high Minimum Support Prices for wheat and
rice. A new focus on food management necessitates a review
of the current MSP system, so that there are adequate
signals to the farmers to shift to other activities that
provide greater scope for improvement in income realisation
through value addition.
Industry
1.130
The industrial sector has been the focus of much of the
economic reforms carried out over the last decade. The
slowdown in industrial production over the past five years
is therefore of particular concern. The reforms of the
1990s, which had removed entry barriers to investments,
opened trade, provided free access to foreign technology,
opened up foreign direct investment, and removed barriers
inhibiting access to capital markets were expected to
result in sustained high growth in industrial production.
It was expected that, in keeping with the countrys
comparative advantage, the structure of investment in
industry would shift from more capital intensive industries
to more labour intensive ones. It was also expected that
such a shift would provide for greater profitability and
earnings growth, more export-oriented production and greater
employment opportunities in industry. However, progress
in this direction has been limited after the initial growth
episode.
1.131
With such far reaching economic reform and the changing
international environment, Indian industry must be enabled
to compete through the provision of an economic regulatory
structure, which allows for restructuring on a continuous
basis. This requires efficient bankruptcy procedures,
development of a market for distressed assets, provisions
for easy transfer of assets from one owner to another,
and a flexible labour market. The Government has recognised
the need for such flexibility. The Bill to establish National
Company Law Tribunals to address issues of sickness and
bankruptcy has been introduced in Parliament, along with
that for the abolition of the Sick Industrial Companies
Act (SICA) and the dissolution of the Board for Industrial
and Financial Restructuring (BIFR). As these Bills get
enacted the process of industrial restructuring should
become easier and faster. Similarly, Government has initiated
the process for amending labour laws to provide for greater
flexibility in employing labour, and for out sourcing
of services so that labour use becomes more flexible and
efficient. Progress in the implementation of these initiatives
is essential to enable Indian industry to restructure
itself to cope with the more competitive domestic and
international environment, and to induce employment-generating
industrialisation.
1.132
The key rigidity inhibiting Indian industry from investing
in labour using activities that are export oriented is
the continuation of small-scale industry reservations.
With the removal of quantitative restrictions on almost
all imports, this rigidity has become even more anomalous.
Whereas large foreign enterprises can produce all these
products and now also export them to India, large Indian
enterprises are not permitted to manufacture these products.
A beginning has been made with the de-reservation of a
number of items connected with garments, toys, shoes and
leather goods. It is essential now that this process be
accelerated so that Indian industry can invest freely
in these activities and compete with the rest of the world.
Greater investment in these areas will be a key ingredient
of employment oriented policies that are essential for
generating greater industrial employment in the country.
Available data suggest that organised sector industrial
employment in India is less than a fifth of that in China.
The rigidities in labour legislation and small-scale industry
reservations have contributed to this huge imbalance.
1.133
High interest rates have persisted in the Indian economy
throughout the last five years. Studies suggest that the
share of interest in costs of Indian industry is perhaps
among the highest in comparable developing countries.
A particular problem faced by some industries is that
heavy investments were made during the exuberant 1994
to 1997 period, when nominal interest rates were particularly
high. With the reduction in both inflation and nominal
interest rates these legacy interest rates have now resulted
in significant debt overhang for these industries. Proactive
restructuring policy would also need to address this issue
of corporate debt restructuring. This, however, must be
done carefully so that moral hazard issues do not arise.
The write down in value of impaired assets would enable
the take over of such industries by others who can then
run them profitably. This reiterates the need for a liquid
market for impaired assets. This requires various legislative
actions to do with foreclosure and securitisation, which
have already been announced.
1.134
In the presence of increased competition and some uncertainty
in the international environment there is an even greater
need to provide for stable and predictable tax policies.
Considerable progress has been made in this area over
the last few years with the tremendous simplification
and rationalisation that has been carried out in all areas
of taxation: corporate tax, excise and customs. In the
area of customs, the Government has announced the reduction
of maximum custom duties from the current level of 35
per cent to 20 per cent in three years. This should provide
adequate advance information for industry to act accordingly.
1.135
All of these measures should help in reviving industrial
investment and growth in the country, which is essential
for the acceleration of overall GDP growth and for employment
generation.
Infrastructure
1.136
Infrastructure being among the most cited impediments
to the achievement of higher growth, it has received the
highest policy attention on a continuous basis since the
early 1990s. Considerable success has been achieved over
these years in some sectors.
1.137
After the imposition of the fuel cess of Re. 1 per litre
on diesel and petrol, the financing of the National Highways
Development Programme (NHDP) became feasible. Proceeds
from the cess are also being used to provide financing
for state and rural roads. Implementation of the National
Highways Development Programme for the golden quadrilateral
is well underway and is expected to be implemented within
the stipulated time period. The Golden Quadrilateral is
expected to be largely completed by the end of 2003 and
the North SouthEast West Highway by 2007. The rural roads
programme has also taken off. The fuel cess, seen as a
very effective user charge for the financing of roads,
illustrates how it is quite possible to invest in infrastructure,
as long as there is the levy of adequate user charges
and financing is therefore assured. As progress in the
implementation of the NHDP proceeds, the fuel cess can
be leveraged further by the consistent application of
affordable toll on all four-lane highways. The limited
experiments with innovations such as annuity based projects
can be extended effectively, particularly if they are
leveraged further with levy of tolls. This would help
in providing for adequate finance for the completion of
the NHDP and for maintenance and operation of the highways
once they are in operation.
1.138
The second sector in which relative success has been
achieved is the telecommunications sector. Growth in telecommunications
has been impressive right through the past decade with
both the public and private sectors growing rapidly. Significant
progress has been made through the Telecommunications
Regulatory Authority of India (TRAI) in clearing up a
number of regulatory hurdles in the opening up of all
segments of the telecommunication sectors to competition.
The success of this programme is particularly indicated
by falling prices in long distance and mobile services
with the introduction of competition. Once again, the
success achieved in the telecommunications sector also
reflects the levy of adequate user charges for the financing
of investments and for operation and maintenance. On the
regulatory side, greater attention needs to be given to
all the issues that will arise as a result of increasing
convergence between different kinds of services. The Government
has already introduced the Convergence Bill in Parliament
in order to provide for an appropriate regulatory environment.
1.139
The port sector has also achieved some degree of success
with new private investments coming in new container terminals
and in new private minor ports. Corporatisation of port
trusts has also begun. The tariff regulatory mechanism
has also performed relatively well under the Tariff Authority
for Major Ports (TAMP). Although there is still some progress
to be made in the regulatory structure for ports for the
facilitation of greater private sector investment, here
also the availability of adequate user charges has enabled
appropriate new investments, which are remunerative.
1.140
The other infrastructure sectors such as railways, power,
urban infrastructure and civil aviation need to see much
greater reform before investments can be made for inducing
further growth. In each case the regulatory mechanism
is still inadequate, as is the provision of user charges.
A great amount of effort has been made to reform the power
sector and progress has been made in a number of states
in the restructuring of State Electricity Boards and the
formation of State Electricity Regulatory Commissions
(SERCs). The key issue inhibiting investments in this
sector is the presence of large transmission and distribution
losses, a high proportion of which is essentially theft,
and the levy of inadequate user charges on different consumer
segments. The net result of these inadequacies is an average
loss of almost one rupee for every unit of electricity
generated in the country. It is naturally difficult for
any commercial investment to be made, unless the revenue
generated is at least equal to the cost of supply. Reform
in this sector must therefore concentrate exclusively
on the curbing of theft, and the restructuring of user
charges, so that investment in this sector can again become
viable in both the public and private sectors. These measures
must now be taken with some degree of urgency if adequate
power investment is to take place in the next 5 years,
in both the public and private sectors. The Central Government
will have to induce state level reforms with a combination
of incentives and penalties.
1.141
Similarly, problems exist in the Railways, which have
suffered from non-remunerative investments over the past
decade. With the implementation of the NHDP over the next
5 to 10 years the railways will face much greater competition
from road transport. In view of the higher fuel efficiency
of railway transport and other positive externalities,
it is of the utmost importance that a bold reform programme
is launched with urgency so that appropriate investments
are made for achieving higher growth through technological
upgradation, modernisation, efficiency and commercial
orientation in the railways in the years to come. This
will be helped greatly if the Indian Railways goes through
a far reaching reform in orientation, making it more commercially
oriented and customer focussed.
1.142
The benefit of introducing competition in domestic civil
aviation has already been seen, through the upgradation
of standards that came with the entry of new private airlines.
However, progress in the improvement of airports has been
grossly inadequate. The upgradation of Indias international
airports is essential to attract greater tourism interest
in India, the growth in which has slowed down significantly.
The current structure of air traffic and forecasts indicates
that unless the major international airports in Delhi
and Mumbai are significantly upgraded, capacity constraints
will inhibit the growth of air traffic in the near future
and hence of tourism. As these airports are privatised,
the regulatory system will also need restructuring for
overseeing monopoly airports and ensuring continued upgradation
in air services.
Urban
Development
1.143
The 2001 census shows that the level of urbanisation in
India has increased from 25.7 per cent in 1990-91 to 27.8
per cent in 2001. Some states such as Tamil Nadu and Maharashtra
are now more than 40 per cent urban. There are now 35
cities with a population of above 1 million, as compared
with 23 in 1991. As the proportion of the urban population
continue to grow, investments in urban infrastructure
for the provision of services such as roads, water supply
and sewerage, urban transportation and the like will need
to be much higher than they then have been in the past.
Recent studies also suggest that large productivity gains
can be obtained, if regulatory impediments to land assembly,
development and construction in urban areas are removed.
Among these, the Urban Land Ceiling Act has already been
repealed by the Central Government, but most State Governments
are still to follow. Similarly most states have Rent Control
Acts, which inhibit the construction and maintenance of
rental housing. Furthermore the municipal tax system and
levy of user charges continues to be grossly inadequate
to finance sustained infrastructure investments in a viable
fashion. New initiatives are essential at the city, state
and central levels to introduce reforms in this area.
The strengthening of municipal authorities in all their
aspects is now an urgent need.
1.144
Much therefore remains to be done in the area of infrastructure.
That successes have been achieved in some sectors suggests
that the problems that exist are amenable to solution.
The provision of efficient and affordable infrastructure
is essential for inducing investment in competitive activities
in all other sectors.
Financial
Sector and Capital Market
1.145
Until late 1980s, the Indian financial system was dominated
by the banking sector, with the then unsophisticated securities
market playing a very small role. Ever since the bank
nationalisation of 1969, the banking sector had been dominated
by the public sector along with a high degree of financial
repression characterized by administered interest rates
and allocated credit. Regulatory standards had also not
been developed adequately.
1.146
Each of these features has been the focus of substantial
policy change over the last decade. The financial system
has experienced tremendous growth in the sophistication
and size of non-bank intermediation. Although the stock
markets have undergone a number of shocks and irregularities
over the past decade, they have over time developed sophisticated
institutional mechanisms, harnessing modern computer technology
and improving the incentives of the administrators of
market infrastructure. The mutual fund and insurance industries
have also been opened to new private sector entry: the
private sector market share in the mutual fund industry
is now 50 per cent.
1.147
Financial repression has eased substantially with the
deregulation of interest rates and substantial removal
of credit allocation except for the priority sector quota.
The regulatory framework of banking has developed through
improved regulations regarding asset classification, provisioning,
income recognition and a quest for lower leverage. New
competition in banking has been introduced through the
limited entry of 8 new private banks.
1.148
As a result of the policy changes made during the 1990s,
the private sector has made significant progress in finance.
It has a dominant position in securities intermediation,
a 50 per cent market share of mutual funds, just under
20 per cent market share in banking, and a new presence
in the insurance market. However, the public sector continues
to dominate the financial system through public sector
banks and financial institutions.
1.149
With the considerable progress made over the last decade,
the time is now ripe for further development of the Indian
financial sector. The reduction of Government holding
in public sector banks up to 33 per cent will become possible
once the amendment to the Bank Nationalisation Act is
passed in the Parliament. The dominance of public sector
finance firms has important consequences for the allocative
efficiency of the financial system and for corporate governance
in the country. With the domination of public sector finance
firms, a controlling interest in many listed companies
is effectively held indirectly by the Government through
Government owned or sponsored institutions. This inhibits
the market for corporate control and the development of
widely held, board managed professionally run companies.
The disinvestment and privatisation programme has also
been inhibited by the lack of institutional investors
in the private sector. The introduction of private sector
insurance companies and pension funds will help in removing
some of these difficulties in the capital market. The
international trend in the past decade or two has been
the convergence of different segments of the financial
and capital markets to result in the emergence of financial
conglomerates. The Indian regulatory system also needs
to evolve to enable the development of such conglomerates,
which will be necessary for Indian institutions to be
able to compete efficiently with the much larger international
financial sector companies.
1.150
Difficulties in the enforcement of creditors rights has
also been handicapping the industrial restructuring process.
Industrial restructuring is a natural consequence of the
changing economic policy environment of the kind experienced
in India since 1991. The health of the financial institutions
and banks who are creditors of impaired assets have difficulties
in recovering their dues. Hence, the enforcement of foreclosure
and other procedures for up holding the rights of creditors
need to be put in place. Such a policy regime would make
it easier for banks and financial institutions to extend
credit for higher investment in order to generate growth
in all sectors of the economy.
1.151
The securities markets have experienced a steady stream
of episodes of market irregularities in the decade of
the 1990s. Even though the market design on the stock
markets has made major progress, there are continuing
concerns about the speed and effectiveness with which
fraudulent activities are detected and punished. This
should be the major focus of the development of the stock
markets. In contrast, on the fixed income market, the
market design continues to exhibit important weaknesses.
The stock market can be an important role model, and a
source of vibrant institutions, using which the market
design of the debt market can be improved. The transformation
of the US-64 Scheme of the UTI into a NAV-based Scheme
has been a welcome and long overdue step. This step needs
to be carried forward for undertaking other needed reforms
in UTI.
1.152
The equity derivatives market is an important new milestone
- in offering a new set of vehicles for risk management
and for speculation to all economic agents in the country.
The rapid takeoff of liquidity on the equity derivatives
market, by world standards, is a reminder of the vitality
and sophistication of the financial sector. The successful
market design can now be extended to other areas of the
economy, ranging from interest rates and currencies to
commodities and bullion.
Summing
Up
1.153
The Indian economy responded to the economic reforms of
the 1990s with a higher growth performance than in previous
decades. The economy has, therefore, shown that it is
capable of achieving high growth rates in response to
the implementation of appropriate economic reform policies.
Consequently, higher growth rates in the rest of the decade
can indeed be achieved through further deepening of the
economic reform process. Second generation reforms have
been initiated already and, as their implementation proceeds,
acceleration in economic growth can be expected in the
coming years. However, the crucial issue of fiscal imbalance
at both the Central and State levels needs to be addressed
with some urgency in order to improve the overall health
of the economy.
1.154 Economic reforms are a continuous process,
which need to be adjusted as the economic environment
changes, both domestically and internationally. The year
2001 has been a difficult year for almost all economies
of the world. World economic growth slowed down as did
trade growth. The current signals are that recovery is
expected in 2002. This should help in the expansion of
international trade and in the rejuvenating of Indian
export growth. As the world economy picks up, the deflationary
trend experienced in the prices of commodities and manufactured
products would also begin to be reversed enabling improved
profitability in the Indian manufacturing sector as well.
The continued implementation of reforms along with this
upturn in the economic environment is likely to help in
regeneration of economic activity in the months and years
to come.
List
of reports on economic survey 2001-2002
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