INDIAN ECONOMY

India's diverse economy encompasses traditional village farming,

modern agriculture, handicrafts, a ide range of modern industries, and
a multitude of services! "ervices are the ma#or source of economic
groth, accounting for more than half of India's output ith less than
one third of its la$or force! A$out three%fifths of the or& force is in
agriculture, leading the 'nited (rogressive Alliance )'(A* government
to articulate an economic reform program that includes developing
$asic infrastructure to improve the lives of the rural poor and $oost
economic performance! +he government has reduced controls on
foreign trade and investment! ,igher limits on foreign direct
investment ere permitted in a fe &ey sectors, such as
telecommunications! ,oever, tariff spi&es in sensitive categories,
including agriculture, and incremental progress on economic reforms
still hinder foreign access to India's vast and groing mar&et!
(rivati-ation of government%oned industries remains stalled and
continues to generate political de$ate. populist pressure from ithin the
'(A government and from its /eft 0ront allies continues to restrain
needed initiatives! +he economy has posted an average groth rate of
more than 12 in the decade since 3441, reducing poverty $y a$out 35
percentage points! India achieved 6!72 8D( groth in 955:, and again
in 9551, significantly e;panding production of manufactures! India is
capitali-ing on its large num$ers of ell%educated people s&illed in the
English language to $ecome a ma#or e;porter of softare services and
softare or&ers! Economic e;pansion has helped Ne Delhi continue
to ma&e progress in reducing its federal fiscal deficit! ,oever, strong
groth com$ined ith easy consumer credit and a real estate $oom
fueled inflation concerns in 955: and 9551, leading to a series of
central $an& interest rate hi&es that have sloed credit groth and
eased inflation concerns! +he huge and groing population is the
fundamental social, economic, and environmental pro$lem!
GDP (purchasing power parity):
<9!4:: trillion )9551 est!*
GDP (official exchange rate):
<3!544 trillion )9551 est!*
GDP - real growth rate:
42 )9551 est!*
GDP - per capita (PPP):
<9,:55 )9551 est!*
GDP - composition by sector:
agriculture: 31!62
industry: 94!=2
services: 79!62 )9551 est!*
Labor force:
73:!= million )9551 est!*
Labor force - by occupation:
agriculture: :52
industry: 392
services: 962 )955>*
Unemployment rate:
1!92 )9551 est!*
Population below poverty line:
972 )9551 est!*
ousehol! income or consumption by
percentage share:

lowest 10%: >!:2
highest 10%: >3!32 )955=*
Distribution of family income - Gini in!ex:
>:!6 )955=*
"nvestment (gross fixe!):
>>!42 of 8D( )9551 est!*
#u!get:
revenues: <3=3!9 $illion
expenditures: <319!: $illion )9551 est!*
$iscal year:
3 April % >3 March
Public !ebt:
76!92 of 8D( )federal and state de$t
com$ined* )9551 est!*
"nflation rate (consumer prices):
:!=2 )9551 est!*
%griculture - pro!ucts:
rice, heat, oilseed, cotton, #ute, tea,
sugarcane, potatoes. cattle, ater
$uffalo, sheep, goats, poultry. fish
"n!ustries:
te;tiles, chemicals, food processing,
steel, transportation e?uipment, cement,
mining, petroleum, machinery, softare
"n!ustrial pro!uction growth rate:
6!72 )9551 est!*
&lectricity - pro!uction:
::3!: $illion &@h )9557*
&lectricity - consumption:
=66!7 $illion &@h )9557*
&lectricity - exports:
:1 million &@h )9557*
&lectricity - imports:
3!1:= $illion &@h )9557*
'il - pro!uction:
635,555 $$lAday )9551 est!*
'il - consumption:
9!=>6 million $$lAday )9557 est!*
'il - exports:
>75,555 $$lAday )9557 est!*
'il - imports:
9!546 million $$lAday )955= est!*
'il - prove! reserves:
7!1 $illion $$l )3 Banuary 9551 est!*
(atural gas - pro!uction:
96!:6 $illion cu m )9557 est!*
(atural gas - consumption:
>=!=1 $illion cu m )9557 est!*
(atural gas - exports:
5 cu m )9557 est!*
(atural gas - imports:
7!14> $illion cu m )9557*
(atural gas - prove! reserves:
3!57: trillion cu m )3 Banuary 955: est!*
)urrent account balance:
%<39!33 $illion )9551 est!*
&xports:
<373!> $illion f!o!$! )9551 est!*
&xports - commo!ities:
petroleum products, te;tile goods, gems
and #eellery, engineering goods,
chemicals, leather manufactures
&xports - partners:
'" 372, China 6!62, 'AE 6!12, 'C
=!=2 )9551*
"mports:
<9>5!7 $illion f!o!$! )9551 est!*
"mports - commo!ities:
crude oil, machinery, gems, fertili-er,
chemicals
"mports - partners:
China 35!12, '" 1!62, 8ermany
=!72, "ingapore =!=2 )9551*
&conomic ai! - recipient:
<3!19= $illion )9557*
*eserves of foreign exchange an! gol!:
<917 $illion )>3 Decem$er 9551 est!*
Debt - external:
<3=4!9 $illion )>3 Decem$er 9551*
+toc, of !irect foreign investment - at home:
<47!4: $illion )9551 est!*
+toc, of !irect foreign investment - abroa!:
<>1!7 $illion )9551 est!*
-ar,et value of publicly tra!e! shares:
<636!4 $illion )955:*
)urrency (co!e):
Indian rupee )IND*
&xchange rates:
Indian rupees per '" dollar % =3!=61
)9551*, =7!> )955:*, ==!353 )9557*,
=7!>31 )955=*, =:!76> )955>*




"(D"%( &)'('-. #%+")+
Decades of protectionist barriers that kept foreign businesses out, and private investors
at bay, are crumbling under Indias new economic reform policies. But the future
remains as uncertain as tomorrows value of the rupee.
If variety is the spice of life, then India is a gourmet's delight! +his young "outh Asian
giant is home to more than 455 million people, a cacophony of languages, e;tremes of
lavish ealth and grinding poverty, untouched natural $eauty and landscapes devastated
$y overpopulation! %bout /0 1 of the worl!2s population lives in "n!ia3
In Eom$ay, the capital of India's financial mar&ets, vast slums sit on some of the most
e;pensive real estate in the orld! If necomers can foot the rent $ill, they are ell on
their ay to a seat on the Eom$ay "toc& E;change )E"E*! In 3443, India had an
estimated slum population of 73!9> million ! +his formed 4/3/ 1 of the total urban
population!

+he political scene is as uncertain as tomorro's value of the rupee, $ut this has not
stopped foreign investors from flooding in!

0or decades folloing the departure of the English, India &ept the door closed to foreign
investors, striving for a &ind of 8andhian self%sufficiency or FsadeshiF that had inspired
the Independence movement!

Policy-ma,ers favore! socialist economic planning ith limited free%mar&eteering!
+he infrastructure, utilities, $an&ing and other &ey industries remained under state
control, hile private companies moved into agriculture, industry and the production of
consumer goods!

As 0ive Year (lans came and ent, India's economy stagnated at a groth rate of three
percent per year! +he government $orroed and spent heavily to &eep the olf from the
door!
+he @orld Ean& and the IM0 agreed to $ail India out of its financial mess on the
condition that India #oin the groing roster of nations on "tructural Ad#ustment
(rogrammes!

(olicy reforms encouraging foreign investment have since opened the doors to glo$al
play! +lowly but surely5 a vital economy is brea,ing through "n!ia6s ossifie!
bureaucracy3 In a mere five years India has leapt from a mere curiosity on the glo$al
economic map to one of the orld's top ten emerging mar&ets!



"(D"%( &)'('-. #%+")+: Deregulation an! *eform
Without a major injection of funds into Indias infrastructure, the economy could be
on the edge of a financial crisis. In an effort to promote investment, the government
has tried to do away with comple licensing and opened the doors to the private sector.
++he private sector is sloly $eing alloed into previously reserved infrastructure
sectors li&e poer, telecommunications and petroleum! Comple; licensing has $een
a$olished for industrial underta&ings e;cept in nuclear poer and defence! (rice
restrictions have $een done aay ith! Import tariffs have $een loered, $ut remain
relatively high at :7 percent!

In the deregulated financial sector, companies are no alloed to raise funds overseas!
+hey can freely price pu$lic offerings of e?uity! 0oreign (ortfolio Investments have $een
permitted into the "toc& Mar&ets!

(rivate $an&s have $een invited in! 0oreign companies ith 355 percent participation
have also $een permitted!

+he rupee is a freely floating currency ith full converti$ility on the current account!

Deforms have infused fresh $lood into India's economy! Commerce and industry have
gron! Although the country still runs a hefty trade deficit, its foreign e;change reserves
are healthy! Inflation has stayed $elo five percent! 0iscal deficit has $een &ept in chec&!
"(D"%( &)'('-. #%+")+: &conomic +trengths an! 7ea,nesses
!ike its "sian neighbors, India has a large skilled workforce, the engine of prosperity,
but corruption and a lack of capital have put the brakes on growth.
"n!ustrial an! &conomic +trengths333
G A large pool of s&illed or&ers )go to 'la$or' lin&*
G A rapidly groing middle class ith a strong desire to consume!
G A rich natural resource $ase, especially coal, iron ore, ater, limestone and granite!


7ea,nesses333
G /ac& of Capital
G /ac& of ade?uate infrastructure
G Eureaucracy and corruption
G 0oreign currency ris&

@ithout capital India cannot invest in education, develop its natural resources, or
improve roads, ports, telecommunications, electricity generation, etc! Although the
government is in desperate need of funds, the dou$le deuce of corruption and
$ureaucracy has daunted potential investors! Meanhile the rupee remains unsta$le
against other foreign currencies!
"(D"%( &)'('-. #%+")+: Labor

/i&e its Asian neigh$ors, India has a large s&illed or& force, hich, unli&e other Asian
nations, is protected $y politically poerful unions! ,oever it also has an a$undance of
hite collar or&ers!

Industry has gron enormously than&s to a large, s&illed or& force, hile salaries
remain relatively lo! In Eangalore, the high%technology capital, a computer
programmer, ith s&ills matching those of his peer in the 'nited "tates, receives one
third the salary!

(arado;ically, the government has heavily su$sidi-ed higher education hile neglecting
primary education! +his accounts for the proportionally large num$er of professionals
li&e doctors, layers and engineers and the millions of child la$orers!

"ince education is not mandatory, parents often choose to send only one child to school
hile the others are sent to or& to help support the family!

One third of the or& force is under the age of fourteen! /egislators have $een reluctant
to criminali-e child la$or, primarily, the reasoning goes, $ecause a child's ages are a
necessary contri$ution to the family's meager income!

Dather than $an child la$or outright, the government has regulated it through las that
prohi$it the employment of children in so%called ha-ardous industries!

+he government and trade unions, recogni-ing that child la$or marginali-es adult
or&ers, is ta&ing steps to gradually convince parents that a minimal education ill
improve a child's #o$ prospects!
"(D"%( &)'('-. #%+")+: igh +avings *ate


+raditionally careful ith their money, Indians have contri$uted to a high savings rate. a
fact that may change ith a $oom in ne consumer goods and the introduction of credit
cards!

+he Indian middle%class is as much a social and cultural elite as it is a product of
economic reform! @ith the flood of ne consumer goods, flooding the Indian mar&et
place, has come a hole ne class of consumers hich is transcending traditional caste
and community!

Even the hum$lest households proudly display an array of previously unattaina$le goods
li&e televisions, $icycles, refrigerators and other home appliances! At the other end of the
consumer spectrum, the nouveau riche sport the latest status sym$ols, including cellular
telephones, ne cars, and a taste for estern style fast food and fashions!



+&)8'*%L )'-P'+"8"'(
Agriculture and animal hus$andry made it possi$le for humans to live a settled life!
Conse?uently, they too& to agriculture and allied activities for sustenance and in due
course of tine, agriculture evolved into a commercial activity herein it could $e used to
pay ta;es and generate surpluses! "uch agriculture is referred to as surplus agriculture! As
agriculture develops and $ecomes more profita$le, manufacturing starts groing, hich
is the second $iggest pillar of a sound economy! +o support all these economic activities,
e re?uire different &inds of services e!g!, $an&ing, transportation, telecom, insurance
etc! +his gives rise to the tertiary or the services sector! (ut together, these three ma&e up
the $road divisions $ased on the &ind of economic activities underta&en in the economy!
3! (rimary H farming, a?uaculture, fisheries, forestry, animal hus$andry and allied
activities! In fact anything done ith the help of nature! )e;cept mining*
9! "econdary% all those activities that involve the mechani-ed production of tangi$le
goods H$oth consumer and industrial and also involve value%addition along the
production chain H cars, cement, computers, +Is etc
>! +ertiary H all those economic activities hich involve the e;change of intangi$le
services ith money H education, healthcare, $an&ing, insurance etc!
@ith 155 million people dependent on agriculture for sustenance, India truly ?ualifies to
$e called a farm%dominated economy! +raditionally, such pre%dominance of agriculture as
a contri$utor to national income has $een the norm in all economies across the ould!
"loly, such dominance comes to $e challenged $y the other to types of activities and
manufacturing and services start groing in importance as to support the groing mass
of the primary activities and to derive more value from their produce, e re?uire suita$le
services! +his is ho the secondary and the tertiary sectors evolve into significant
contri$utors to total national income! +ypically, as an economy develops, the share of
the manufacturing and the services sector continues to gro along ith a simultaneous
fall in the agricultural pie and thus the shift in sectoral composition typically moves along
these lines
Agriculture %%%% manufacturing %%%services
Eut in a uni?ue case, India and Dussia have practically $ypassed the industrial revolution
and have straightay moved from $eing a farm%dominated economy to $eing a services%
dominated economy! In fact, never as the manufacturing sector even a significant
component of India's total groth story in the past! +his fact has got its on uni?ue
implications, hich ill $e discussed later!
Gross Domestic Pro!uctJ +he moneti-ed orth of the goods and services produced $y
all these three sectors ithin the domestic confines of an economy! 0or instance, IndiaKs
8D( for the year 955:%9551 is estimated to $e around De! =9 la&h crore! "imply
spea&ing, it implies that India generated this much orth of goods and services in all the
sectors ithin the territorial limits of India! +he monies received from a$road in the form
of factor income D' ('8 form a part of this figure!
Gross (ational Pro!uct J Is simply 8D(L net factor income from a$road
(et (ational "ncome J 8N( H Depreciation charges
If e divide the net national income of a country $y its population i!e!
Net National Income
%%%%%%%%%%%%%%%%%%%%%
(opulation
@e get (er Capita Income, hich represents nothing $ut the average income earned $y
each citi-en of that particular country in the specified year! Eut as e all &no, averages
can $e highly misleading figures $ecause they fail to capture disparities, hich are of a
huge character in our conte;t! 'ne?ual distri$ution of income and ealth reflects the fact
that the fruits of economic groth and development have not $een re%distri$uted properly
and such disparities have, in fact, multiplied over time!
#*")sJ Demem$er the EDICs reportM +he orld sat up and too& notice three years ago
hen 8oldman "achs turned out its path $rea&ing report Dreaming With BRICs,
audaciously predicting that India, China, Dussia and $ra-il ould $e giant economic
forces in the coming century! More surprisingly, India is cruising along on the groth
superhighay at a pace hich ma&es the EDIC estimates ):!72 per annum* loo&
conservative! +here ill $e more of everything H "ENs, orld%class $uildings,
supermar&ets, shopping malls, cars etc!
"ample this
Ey 9535,
India ill produce 95 la&h cars as compared to 33 la&h today )As per auto analysts, car
purchases #ump dramatically hen per capita income touches < 3555, a figure li&ely to $e
achieved around 9535*! Eesides, India is slated to $ecome the glo$al manufacturing hu$
for auto%components, going $y the investment planed $y glo$al auto%ma&ers in India
operations
India ill produce 395 la&h to%heelers in comparison ith todayKs figure of 15 la&hs
India ill roll out 955 colour +Is vis a vis todayKs figure of 335 sets
Outsourcing, currently valued at < 9> $illion, is groing at a$out >52 per annum and
ill generate < :5 $illion $y 9535 employing 9> la&h people
Organi-ed retail in India ill gro at a$out >12 this year alone
India ill $ecome the second $iggest manufacturer of mo$ile handsets $y 9554!
"hould e pop the $u$$ly right noM @ell, no! India is a country of e;traordinary
contradictions! E;perts $elieve that several speed $rea&ers could put paid to the grandiose
vision envisaged a$ove! (ro$lems areas include agriculture )groing at a meagre 9!1 2
annually as a against a target of =2*, poer )huge shortfall%adding only =555 M@
against the Chinese adding a mind%$oggling 96555 M@ each year*, ports )e need to
dou$le our handling capacity in the ne;t four years to cope ith the import%e;port traffic
groing at 972 annually*, roads )92 of total road length in India handles =52 traffic*,
literacy )a$out :52*, teledensity )a$out 952* etc!
D*"9&*+ '$ G*'78
Agriculture CANNO+ ait O
@ith almost P of the population dependent on this single sector and yet a turnout of only
around 952 of the 8D(, this is a $eleaguered sector!
(lagued $y pro$lems of heavy dependence on monsoons, lac& of credit, marginal
infrastructure etc! , it is a sector that may ell apply the $ra&es on the Indian groth
story!
Agriculture ill contri$ute even lesser in the years to come, compounding the pro$lem
further for the simple reason that more num$er of dependents ill fight for a falling pie
of the national income! It ill accelerate the trend of rural%ur$an migration, hich
already records a figure of around 6 crore annually, putting further pressure on the
already crippling ur$an infrastructure!
In ma#or farm crops, India is among the top producers across the glo$e i!e! tea, heat,
pulses, rice, vegeta$les, suagrcane etc!!An estimated 97%=5 of farm produce orth < 39
$illion)re 75=55 crore* rots every year oing to lac& of proper storage space!
+he entry of private cos ill result in greater investment in farm technology!
Against having #ust 36!72 share in India's 8D(, the agriculture sector is the 'ay of life'
for over :52 of the country's populations! +his spea&s of the scale of impact that
grothAde%groth in this sector has on the 'masses' in this country! And considering that
the sector is estimated to gro $y a mere 9!12 in 0Y51 ):2 in 0Y5:*, should sound
alarming $ells for policyma&ers % not #ust from the demand perspective )as loer groth
leaves lesser disposa$le income in hands of the 'agri%dependents'* $ut also from the
supply side, as seen from the rise in consumer price inflation due to rising prices of
primary food articles li&e heat, pulses, edi$le oils, fruits and vegeta$les, and condiments
and spices!
GDP : agriculture: 8he growing !ivergence;
+he Economic "urvey for 0Y51 )955:%51* lays the responsi$ility of the slac&
performance of the agriculture sector on Flo investment, im$alance in fertiliser use, lo
seeds replacement rate, a distorted incentive system and lo post%harvest value addition!F
"imply put, ith every three out of five Indians directly depending on this sector, lo
agricultural groth has serious implications for the 'inclusiveness' of groth, as has $een
harped upon $y policyma&ers and groth 'strategists'! 0urthermore, as indicated a$ove,
poor agricultural performance can complicate maintenance of price sta$ility )inflation*
ith supply%side pro$lems in essential commodities of day%to%day consumption! 0or
instance, as reported $y the DEI, including manufactured products such as sugar and
edi$le oils, food articles contri$uted as much as 91!92 to overall inflation of :!12 as
reported on 0e$ruary >, 9551!
-onsoon !epen!ence5 yiel!s an! investment
+he agriculture sector has not $een a$le to distance itself from the vagaries of monsoons!
In fact, the survey states that deficient rainfall in the monsoon in 9559, 955= and 955:
during the +enth 0ive Year (lan has led to poor agricultural groth, reduction in the
share of agriculture in 8D(, creation of inflationary pressure in some primary products,
and reduction the potential groth of other sectors $y dampening demand! @e vie these
as serious hindrances for the sustaina$le groth of the Indian economy, hich is loo&ing
to gro more internally and through increased investment and consumption in rural
areas!
/o yield per unit area across almost all crops has also $ecome a regular feature of
Indian agriculture! 0or e;ample, as the survey states, though India accounted for 93!62
of glo$al rice production, the estimated yield per hectare in 955=%57 as less than that in
Corea and Bapan, and only a$out a third of that in Egypt, hich had the highest yield
level in the reference year! "imilarly, in heat, India, hich accounted for 392 of glo$al
production, had average yield slightly loer than the glo$al average!
@hile the survey also tal&s of the potential of redressing some of the root causes such as
lo investment, poor ?uality seeds, and little post%harvest processing through greater
focus on food processing and integration of the supply chain from the farm gate to the
consumer's plate, e see little happening on ground! If one ere to ta&e a loo& at the
ad#acent graph, hich indicates the cumulative investment of pu$lic and private sectors
in agriculture as a percentage of 8D(, there emerges a clear picture of the discrimination
that the sector )and its dependents* has suffered over the years! +he share of agriculture
sector's capital formation in 8D( has declined from 9!92 in 3444%55 to 3!42 in 9557%5:!
As reported $y the survey, this decline has $een partly due to stagnationAfall in pu$lic
investment in irrigation!
*eflections an! outloo,
As reported $y the Deserve Ean& of India )DEI*, the agriculture sector in the recent years
has $een mar&ed $y lo and volatile groth % real 8D( groth in the agricultural sector
during the first four years of the +enth 0ive Year (lan has averaged only 92 per annum
as against =2 envisaged in the (lan period )9559%51*! A &ey factor underlying this lo
and volatile groth is the stagnation in domestic production in the case of ma#or crops
li&e heat, sugar and pulses! Illustratively, the production of heat, after touching a pea&
of 1: million tonnes )M+* in 3444%9555 has since then $een range%$ound at around 15
M+! "imilarly, the production of pulses has not $een a$le to e;ceed the pea& of 3=!4 M+
reached in 3446%44! In fact, the production of pulses at 3>!3 M+ in 9557%5: as even
loer than the levels achieved more than 37 years $ac& )3=!> M+ in 3445%43*! +he
stagnation in production, in turn, can $e partly attri$uted to stagnancy in investment in
the agricultural sector )see chart a$ove*!
@e $elieve that for the Indian economy to attain groth rates of 62 )or 42 as estimated
$y the government for the Eleventh 0ive Year (lan % 9551%39*, the stagnation in
production of ma#or crops and agricultural investment needs to $e reversed! +his could $e
done $yJ
"tepping up investment outlays on irrigation facilities along ith focus on efficient use of
ater resources
(utting in place proper ris& mitigation policies given the several ris&s that farmers face
such as future price and monsoon conditions
,aving greater focus on rural infrastructure to enhance the productivity of physical
resources, and improve supply chain management and value addition in agriculture! In
this conte;t, the focus on rural infrastructure development under Eharat Nirman ill $e a
elcome step
Increasing diversification and value addition in Indian agriculture considering the shift in
consumption pattern on the $ac& of ur$anisation and rising income levels
Effectively lin&ing agricultural production ith mar&eting, agro%processing and other
value added activities
8reater focus on agricultural research and
Intensive efforts from the financial system in terms of revitalising the rural cooperative
credit system, strengthening regional rural $an&s, providing incentives to commercial
$an&s for investments in rural economy and ensuring an ade?uate and timely delivery of
credit at an appropriate price! )+he government has decided that from &harif 955:%51,
farmers ould receive crop loans up to a principal amount of Ds > la&h at 12 rate of
interest! As reported $y the survey, this year, the government of India is providing
interest su$sidy of 92 to pu$lic sector $an&s, regional rural $an&s and cooperative $an&s
on amount of short%term agriculture credit dis$ursed out of their on resources! 0urther,
in order to provide relief to the farmers ho have availed of crop loans from commercial
$an&s, regional rural $an&s and primary agriculture cooperatives for &harif and ra$i 9557%
5:, an amount e?ual to 92 of the $orroer's interest lia$ility on principal amount up to
Ds 3 la&h has $een credited to hisAher $an& account*!
+he economic survey has stated that Fin the short%term outloo& for agricultural sector
appears $right! @ith a elcome rainfall in early 0e$ruary 9551, prospects of heat and
other ra$i crops have $rightened! +here has $een a sharp increase in the area under heat
ith high domestic and international prices providing incentives to the farmers! +ogether
ith $etter crop prospects, this augurs ell for farm income! In the medium%term, the
prospects for agriculture ill $e determined $y the pace and ?uality of reforms in this
sector, the a$ility to increase investment in surface irrigation, ground ater recharge of
a?uifers and restoration of ater $odies, and developing high%yielding varieties of non
cereal food and cash crops!F
All said and done, e $elieve that higher groth and long%term sta$ility in the
agricultural sector ill $e a factor of greater investment in irrigation )alongith
application of user charges for utilities li&e electricity and ater supply* and development
of high%yielding variety of crops! ,oever, the policyma&ers' short%sightedness of
consistently $laming the 'rain gods' for the sector's performance ill ta&e us nohere! In
this conte;t, imagine the plight of the :52 of Indians, ho are really unli&e usO @ell, did
someone say 'inclusiveness'M


As can $e seen, the share of the services sector has $een consistently going up at the
e;pense of agriculture! In the past 37 years, e have seen an e;ponential rise in the
num$er and e;tent of services contri$uting significant income to the national &itty! "ome
of these services hich are coming to the fore include I+ and I+e", E(Os, Detail,
Ean&ing, Insurance etc! Normally, such strong groth in services presumes an e?ually
strong manufacturing sector, hich as not the case ith India! India has practically
$ypassed the industrial revolution of any &ind and has straightay moved from a farm%
dominated economy to a services Hdominated economy! +his &ind of trend has great
implications for the sustaina$ility of such groth and its conse?uences for the
employment situation in India!
As per a research study spanning the past 97 years of glo$al economic history, all
countries hich had consistently got a 352L groth rate necessarily had a strong
industrial sector! In India's case, this is hardly the scenario! "o at least historically
spearing, e seem to $e on the rong foot! "econdly, a groing services sector does
create #o$s, $ut to put the things in perspective, it does so only for the highly educated
and trained people! 0or instance, the much%hyped I+AI+e" sector, despite contri$uting =2
of India's annual 8D( and putting India on the orld map, is employing #ust 3: la&h
people as on date! All these #o$s have to $e necessarily manned $y highly s&illed people!
India, hich is facing a huge unemployment pro$lem, needs #o$s hich can offer succour
to half%s&illed and illiterate people, hich is possi$le only in case of manufacturing
industries! Conse?uently, to ensure suita$le groth ith #o$ creation and poverty
elimination, it is imperative that necessary steps are ta&en to ensure a vi$rant industrial
sector! A case in point is China, hich is generating around half of its total 8D( from
manufacturing only! "uch an economy is sufficiently ell%e?uipped to sustain this &ind
of groth on a sustaina$le $asis, along ith creating meaningful #o$s for its populace!
Eusiness (rocess Outsourcing )E(O* is one of the fastest groing segments of the
Information +echnology Ena$led "ervices )I+E"* industry in India! Eusiness (rocess
Outsourcing refers to the delegation of one or more I+%intensive $usiness processes to an
e;ternal provider that in turn ons, administers and manages the selected process $ased
on defined and measura$le performance criteria!


+he trend to outsource or& is on rise in today's competitive environment! +here are
num$er of reasons $ehind the increasing trend of outsourcing! 0irstly, companies ant to
focus on mission%critical issues and are not interested in frittering aay time and energy
on non%core functions! "econdly, as $usinesses gro e;ponentially, the companies do not
have resources have resources to cope ith the groth and as a result they outsource part
of their $usiness processes! +hirdly, companies may not have the $est talent and s&ills to
do the #o$ themselves! /astly, converging technologies of telecommunication,
information technology and media have redefined the ay e do $usiness and have made
outsourcing possi$le!
+here are a num$er of advantages of outsourcing! Ma#or among them areJ )3* Deduce
overheads and free up resources, )9* Improves Efficiency, )>* Offloads non%core
functions, )=* 8ives access to speciali-ed s&ills, )7* "aves on manpoer and training
costs, ):* Deduces operating costs, )1* Enhances tactical and strategic advantages, )6*
"preads ris&s, )4* (rovides the $est ?uality services, products and people, and )35* ,elps
to focus scarce resources on time%critical pro#ects!

"ome of typical services and processes that are outsourced includeJ +echnical "upport
"ervices, +elemar&eting "ervices, Insurance (rocessing, Data Entry "ervices A Data
(rocessing "ervices, Data Conversion "ervices, Eoo& Ceeping and Accounting "ervices
et al!

+he Indian E(O industry is constantly groing and a lot of 0ortune 755 companies are
outsourcing services to India! +here are several reasons for India's emergence as one of
leading outsourcing destinations! India is very rich in educated and talented human
resource! India is one of the pioneers in softare development! India has a mature
industrial set up ith orld class systems! India has e;cellent technical facilities and
infrastructure for setting up call centers! +ime -one difference $eteen India and
America has also or&ed to the advantage of Indian E(O industry! India has an 6%39
hour time -one difference ith respect to the '" and other developed mar&ets! Most of
the Indian call centers servicing American customers have timings $eteen 7J>5 p!m! to
4J>5 a!m! +his time -one difference allos Indian companies E(Os to service American
clients $y or&ing in the nights! /ast, $ut not the least, India has a huge pool of English
spea&ing or&force that provides e;cellent voice $ased services at e;tremely competitive
costs resulting in huge savings for companies! "ome of the leading E(O companies in
India areJ 8E Capital, Convergys, @ipro "pectramind, @N", Dell, Da&sh e%"ervices,
ICICI One"ource, and Mphasi"


"ome of the pro$lems afflicting Indian E(O industry are high attrition rate, and $ac&lash
in developed countries against perceived #o$ losses due to outsourcing to India! +o tac&le
the pro$lem of attrition companies are adopting measures such as good reards, $onding
programme, fle;i$le or&ing hours and stronger career path! As regards $ac&lash against
outsourcing, the $ac&lash is mainly political! +here is compelling economic logic for
companies to outsource to India and also Indian E(O companies have ta&en initiatives
allay fears of #o$ loss!




G*'78 v<s D&9&L'P-&(8
Economic 8roth Is! Economic DevelopmentJ Distinction can $e made $eteen
economic groth and economic development! Economic groth is a narro concept,
hile economic development is ?uite a $roader one! Economic groth reveals the
material attainments of an economy e;pressed in terms of groth in national income!
Economic groth means larger output of goods and services! It does not consider the
nature of goods produced, the distri$ution of national income, standard of living of the
people, development of various social and economic institutions etc!
Economic development implies not only larger output $ut also variety in output, as ell
as changes in the technical and institutional arrangements $y hich output is produced
and distri$uted! 8roth involves changes in overall aggregates such as national income,
domestic savings, capital formation, etc!, hile development includes changes in
functional capacities, physical coordination, learning a$ility, or a$ility to adapt to
changing, physical coordination, learning a$ility, or a$ility to adapt to changing
circumstances!
Eesides rise in real national income, economic development ta&es into consideration the
folloingJ
+he living conditions and the general price level! It helps to assess the real purchasing
poer of the households!
+he ?uality of life hich includes education, life e;pectancy, calorie inta&e, consumption
of energy and consumption of consumer dura$les etc!
+he changes in the institutional set%up, technology etc!
Determinants of Economic 8rothJ Economic groth of a country is determined $y a
num$er of factors, among them the more important are as felloJ
)i* Natural Desources )ii* Capital 0ormation )iii* Capital%Output Datio
)iv* +echnological (rogress )v* Infrastructure )vi* ,uman Desources DevelopmentJ
Development is the process of improving the ?uality of all human lives! +hree e?ually
important aspects of the development are
)3* raising their incomes and consumption levels of food, medical services, education,
etc! through QrelevantK economic groth
)9* creating conditions suita$le to the groth of peopleKs self%esteem through the
esta$lishment of systems and institutions to promote human dignity and respect. and
)>* increasing people freedom to choose $y enlarging the choices varia$le e!g! increasing
varieties of consumer goods and services!
Demographic +ransitionJ A population cycle that is associated ith the economic
development of a country! In underdeveloped countries )i!e! su$sistence agrarian
economies*, $irth rates and death rates are $oth high, so there is very little change in the
overall population! @ith economic development )i!e! Industriali-ation*, Income (er ,ead
$egins to rise and there is a fall in the death rate )through $etter nutrition, sanitation,
medical care, etc!*, hich $rings a$out a period of rapid population groth! +ermed as
the (opulation Eoom or Eom$, this stage is prevailing in most of the developing
countries, including India! Most of the population increase has $een $rought a$out $y a
steep fall in death rate, hile the $irth rate still continues at a relatively higher level! In
the later stages, provided economic groth is consistently greater than the increase in
population, income per head continues to e;pand and eventually serves to reduce the
$irth rate )small families $ecome the QnormK in society as people see& to preserve their
groing affluence*! At this point, population groth slos don and may eventually
level off!
Most advanced industrial countries have gone through a demographic transition of the
&ind descri$ed a$ove and are today characteri-ed $y $oth lo $irth and death rates and
slo groing populations!
Developed CountryJ An economically advanced country hose economy is characteri-ed
$y large industrial and service sectors, high levels of gross national product and Income
(er ,ead!

What is poverty line#
(overty line is a construct essential to measure ho poor a country is, hich is useful in
ma&ing policies for development! Eehind statements li&e F=5 2 Indians are poorF there is
an implicit poverty line! A common ay to define the poverty line is a $road income%
$ased level, say, :5 per cent of a countryKs average income per head!

+he average Indian earns a$out < ==5, or De 34655 per year! 8oing $y the :5 2 of
income rule, a poor Indian has an annual income of Ds 33655 or Ds 445 a month! @e
dra a poverty line $y calculating the RminimumK cost of living that can sustain people!
0or very poor countries li&e ours, this $oils don to a nutritional re?uirementJ the cost of
minimum calories needed to &eep people alive! +his loo&s li&e a fairly foolproof method,
$ut has some $uilt in glitches! 0or e;ample, calorie needs vary across genders and age! A
rough average is >,555 calories daily for or&ing men. a$out 9,455 for or&ing omen!
+he national norms of a min! of 9=55 CalAday and 9355 CCalAday for rural and ur$an
areas respectively, are not ar$itrary figures, $ut have $een derived from age%se;%
occupation specific nutritional norms $y using the demographic data from the 3413
Census!

Is a roll call enough to count the poor#
+he simplest measure of poverty is the head count ratioJ people $elo the poverty line,
divided $y the total population! +his is simply the proportion of the poor in total
population! +he ,CD is easy to understand, $ut ma&ing policy on its $asis leads to
trou$le! +hatKs $ecause the ,CD ma&es no distinction $eteen people #ust $elo the
poverty line, and those poorer $y a longer margin!

Conse?uently, the government can sho large poverty declines $y spending #ust enough
on the least%poor to drag them a$ove the poverty line, spending nothing on the poorer
fol&! Despite that, the ,CD is IndiaKs official method to estimate poverty!
$an we go beyond the roll call#
Certainly! Another inde;, the Income 8ap Datio )I8D*, gives a $etter idea of ho deep
poverty is entrenched! I8D measures ho far $elo the poverty line poor people actually
are, divided $y the total e;penditure $y them! +hat shos ho poor the average poor
person is, ith respect to all poor people! A government that goes $y this measure to
ma&e policy ill target the Raverage poorK person, not the Rleast poorK one, as is the
danger ith the ,CD!
+hatKs hy the I8D is a more useful measure than a simple roll call! No, if you too&
something aay from someone ho is acutely poor and gave it to someone less poor, it is
o$vious that the degree of poverty ill rise! Eut neither ,CD nor I8D can account for
this! Neither reflects changes in poverty $rought a$out $y transfers $eteen the poor and
middle class Indians! A high proportion of India's citi-ens are in need of the $enefits of
development! +he National "ample "urvey Organi-ation )N""O* estimated that 99!372
of the population as living $elo the poverty line in 955=H9557! 172 of the poor are in
rural areas )91!32 of the total rural population* ith most of them comprising daily
agers, self%employed households and landless la$ourers! >=!12 of India's poorest
population live on less than '" < 3 a day and 14!42 live on '" < 9 per day!
"ince the early 3475s, successive governments have implemented various schemes, under
planning, to alleviate poverty, that have met ith partial success! (rogrammes li&e ood
!or wor" and #ational Rural $mployment %rogramme have attempted to use the
unemployed to generate productive assets and $uild rural infrastructure! In August 9557,
the Indian parliament passed the Rural $mployment &uarantee Bill, the largest
programme of this type, in terms of cost and coverage, hich promises 355 days of
minimum age employment to every rural household in 955 of India's :55 districts! +he
?uestion of hether economic reforms have reduced poverty or not has fuelled de$ates
ithout generating any clear cut ansers and has also put political pressure on further
economic reforms, especially those involving donsi-ing of la$our and cutting don
agricultural su$sidiary
/= million >obs a year; Possible?


+here is no optionO +o provide #o$s to a population of 35 million educated youths every
year re?uires our 8D( to gro $y 6 per cent per annum! +here is no 'other' optionO
And the government seems to $e outlining its policies in order to achieve its o$#ective of
groing the economy at a faster clip to $e a$le to provide gainful employment to a large
num$er of people! India has $een a 'different' story over the past years %% different in the
sense that unli&e a general evolution of an economy from $eing agriculture%dependent, to
$ecoming a manufacturing economy and then to $ecoming a services%led economy, India
has moved straight from $eing an agriculture%led economy to $eing services%led!
+his is indicated in the ad#oining graph that shos the relative contri$utions of
agriculture, industries services to the 8D(! 0rom the levels of =: per cent and >6 per cent
of 8D(, share of agriculture and services have moved to 99 per cent and 7: per cent,
respectively, in 955>%5=!
+he industrial sector's contri$ution has increased marginally from 3: per cent in 3415%13
to 99 per cent in 955>%5=! And this, pro$a$ly, has $een the reason hy India's per capita
8D( has $een lying lo as compared to its developing peers in Asia and /atin America!
As a matter of fact, hile India's 8D( has gron at a CA8D )Compounded Annual
8roth Date* of =!1 per cent during the period 3415%13 to 955>%5=, the CA8D of per
capita 8D( has $een almost half at 9!1 per cent!

Apart from an a$ove average groth in population )around 9 per cent CA8D*, lac&lustre
performance of the manufacturing sector has $een the other ma#or culprit $ehind this
slo groth in per capita 8D(! +his is $ecause a large part of the 'not involved in
agriculture' population is employed in the manufacturing sector here productivity
groth has $een lagging the services sector!
If one ere to ta&e a loo& at the ad#oining graph, one ould notice that the volatility in
per capita 8D( trend reduced ay $ac& in the early 3465s!
+his is e;actly the time hen the Indian government laid ay for a 'pro%$usiness' policy
that focused on raising the profita$ility of the esta$lished industrial and commercial
esta$lishments! +his policy involved easing restrictions on capacity e;pansion for
esta$lished companies, partially removing price controls and reducing corporate ta;es
)"ourceJ NEED*!
,oever, this policy did not encourage investments into 'innovative' techni?ues of
production! Not much importance as given to the opening up of the economy and
alloing foreign technology and capital! And that as one of the $iggest reasons hy
Indian industries did not develop into glo$al corporations! Moreover, the 'license ra#'
made sure that there as not enough competition to government ("'s that ere lo on
the productivity radar!
8he /@@=s change! it all

+he thrust in the form of opening up the economy and dissolving the 'license ra#' came in
the early 3445s hen India as on the verge of defaulting on its foreign lia$ilities!
+his as the time the then government initiated the 'pro%mar&et' policies of removing
impediments to mar&et access and li$erali-ing the economy!
+he license ra# as dismantled, $arriers to trade ere slashed, foreign capital as
elcomed and privatisation $egan! @hat's more, the services sector, $enefiting from the
lo cost of operations and ?uality manpoer, $enefited from the easy flo of capital and
la$our!
+he result %% rapidly rising proportion of services to 8D( and faster than average
improvement in per capita 8D(! As a matter of fact, hile CA8D of per capita 8D( as
5!7 per cent during the period 3415%13 to 3414%65, it rose to >!= per cent during 3414%65
to 3443%49 and to =!5 per cent during 3443%49 to 955>%5=!
+o5 what next?

@hile India has managed to gro strongly in the services sector, the same )services*
cannot $e relied on to provide #o$s to around 35 million people every year! @e need a
clear policy on the agriculture and manufacturing fronts!
@hile Indian manufacturing companies li&e +isco, +elco, MSM, Dan$a;y and Dr
Deddy's have made their mar& in the glo$al arena through their deployment of cutting%
edge technologies, and competitive and high ?uality products, e need to have more of
such corporations if e are to come even close to China in terms of economic
development!
On the agriculture front as ell, hile the government has announced certain &ey
measures li&e credit flo and improvement of irrigation facilities, a lot remains to $e
seen in terms of the actual implementation! In a recent intervie, Mahesh Iyas of the
CMIE saidJ F+he corporate sector is gearing itself up after 35 to 39 odious years ith a
reality of li$eralisation! +he reality of li$eralisation means more intense competition,
hich mean loer margins, hich can only $e offset $y higher volumes!F +his statement
clearly indicates that the Indian groth story seems to $e moving on the right trac&, al$eit
still aiting to attain significant momentum!
Investors in the same, i!e!, the Indian groth story, have to stay invested for the long%term
to garner ade?uate returns! @hile mar&ets may have priced%in the near term groth of
India Inc, a staggered and selective approach to investing may still $e of great help for
you, the long%term investor!
+he mindset, actually, needs refinementO


+here is no optionO +o provide #o$s to a population of 35 million educated youths every
year re?uires our 8D( to gro $y 6 per cent per annum! +here is no 'other' optionO
And the government seems to $e outlining its policies in order to achieve its o$#ective of
groing the economy at a faster clip to $e a$le to provide gainful employment to a large
num$er of people! India has $een a 'different' story over the past years %% different in the
sense that unli&e a general evolution of an economy from $eing agriculture%dependent, to
$ecoming a manufacturing economy and then to $ecoming a services%led economy, India
has moved straight from $eing an agriculture%led economy to $eing services%led!
+his is indicated in the ad#oining graph that shos the relative contri$utions of
agriculture, industries services to the 8D(! 0rom the levels of =: per cent and >6 per cent
of 8D(, share of agriculture and services have moved to 99 per cent and 7: per cent,
respectively, in 955>%5=!
+he industrial sector's contri$ution has increased marginally from 3: per cent in 3415%13
to 99 per cent in 955>%5=! And this, pro$a$ly, has $een the reason hy India's per capita
8D( has $een lying lo as compared to its developing peers in Asia and /atin America!
As a matter of fact, hile India's 8D( has gron at a CA8D )Compounded Annual
8roth Date* of =!1 per cent during the period 3415%13 to 955>%5=, the CA8D of per
capita 8D( has $een almost half at 9!1 per cent!

Apart from an a$ove average groth in population )around 9 per cent CA8D*, lac&lustre
performance of the manufacturing sector has $een the other ma#or culprit $ehind this
slo groth in per capita 8D(! +his is $ecause a large part of the 'not involved in
agriculture' population is employed in the manufacturing sector here productivity
groth has $een lagging the services sector!
If one ere to ta&e a loo& at the ad#oining graph, one ould notice that the volatility in
per capita 8D( trend reduced ay $ac& in the early 3465s!
+his is e;actly the time hen the Indian government laid ay for a 'pro%$usiness' policy
that focused on raising the profita$ility of the esta$lished industrial and commercial
esta$lishments! +his policy involved easing restrictions on capacity e;pansion for
esta$lished companies, partially removing price controls and reducing corporate ta;es
)"ourceJ NEED*!
,oever, this policy did not encourage investments into 'innovative' techni?ues of
production! Not much importance as given to the opening up of the economy and
alloing foreign technology and capital! And that as one of the $iggest reasons hy
Indian industries did not develop into glo$al corporations!
Moreover, the 'license ra#' made sure that there as not enough competition to
government ("'s that ere lo on the productivity radar!
8he /@@=s change! it all
+he thrust in the form of opening up the economy and dissolving the 'license ra#' came in
the early 3445s hen India as on the verge of defaulting on its foreign lia$ilities! +his
as the time the then government initiated the 'pro%mar&et' policies of removing
impediments to mar&et access and li$erali-ing the economy!
+he license ra# as dismantled, $arriers to trade ere slashed, foreign capital as
elcomed and privatisation $egan! @hat's more, the services sector, $enefiting from the
lo cost of operations and ?uality manpoer, $enefited from the easy flo of capital and
la$our!
+he result %% rapidly rising proportion of services to 8D( and faster than average
improvement in per capita 8D(! As a matter of fact, hile CA8D of per capita 8D( as
5!7 per cent during the period 3415%13 to 3414%65, it rose to >!= per cent during 3414%65
to 3443%49 and to =!5 per cent during 3443%49 to 955>%5=!
+o5 what next?
@hile India has managed to gro strongly in the services sector, the same )services*
cannot $e relied on to provide #o$s to around 35 million people every year! @e need a
clear policy on the agriculture and manufacturing fronts!
@hile Indian manufacturing companies li&e +isco, +elco, MSM, Dan$a;y and Dr
Deddy's have made their mar& in the glo$al arena through their deployment of cutting%
edge technologies, and competitive and high ?uality products, e need to have more of
such corporations if e are to come even close to China in terms of economic
development!
On the agriculture front as ell, hile the government has announced certain &ey
measures li&e credit flo and improvement of irrigation facilities, a lot remains to $e
seen in terms of the actual implementation!
In a recent intervie, Mahesh Iyas of the CMIE saidJ F+he corporate sector is gearing
itself up after 35 to 39 odious years ith a reality of li$eralisation! +he reality of
li$eralisation means more intense competition, hich mean loer margins, hich can
only $e offset $y higher volumes!F
+his statement clearly indicates that the Indian groth story seems to $e moving on the
right trac&, al$eit still aiting to attain significant momentum!
Investors in the same, i!e!, the Indian groth story, have to stay invested for the long%term
to garner ade?uate returns! @hile mar&ets may have priced%in the near term groth of
India Inc, a staggered and selective approach to investing may still $e of great help for
you, the long%term investor! +he mindset, actually, needs refinementO

'r$ani-ation levels as per 9553 census %962
(ro#ected in 9595 %>92
Annual influ; into cities %6 crore people per year
+he stan!ar! of living in "n!ia is modest and is constantly improving! India suffers
from su$stantial poverty ith 91!72 of the population living $elo the poverty line in
955=H9557! +he single most common indicator used to ?uantify the standard of living is
the per capita purchasing poer parity )(((* ad#usted gross domestic product )8D(*! In
955:, the per capita (((%ad#usted 8D( for India as '"< >,1>1! +hese figures can $e
compared to <1,745 for neigh$ouring China!
@ith one of the fastest groing economies in the orld, cloc&ing an average groth rate
of 62 $eteen 955=%9557, India is fast on the ay to $ecoming a large and glo$ally
important consumer economy! +he Indian middle class, touted to $e anyhere $eteen
955 and >55 million, is fast $ecoming used to @estern culture! If current trends continue,
Indian per capita purchasing poer parity ill gro to $e appro;imately one third that of
the developed orld $y the middle of the 93st century! In 955:, 99 percent of Indians
lived under the poverty line! India aims to eradicate poverty $y 9595!
+he standard of living in India shos large disparity! 0or e;ample, rural areas of India
e;ist ith very $asic )or even non%e;istent* medical facilities, hile cities $oast of orld
class medical esta$lishments! "imilarly, +he very latest machinery may $e used in some
construction pro#ects, $ut many construction or&ers or& ithout mechani-ation in
most pro#ects!
Disguise! Unemployment: A situation in hich more people are availa$le for or& than
is shon in the unemployment statistics! Married omen, some students or prematurely
retired persons may register for or& only if they $elieve opportunities are availa$le to
them! Also referred to as concealed unemployment and the Qdiscouraged wor"er e!!ect'!
+his &ind of unemployment is ?uite common in rural areas and forms a significant part of
the total unemployment statistics in India!
Disinvestment: Negative investment, hich occurs here part of the capital stoc& is
diluted $y selling it off to the general pu$licA private companies! India has em$ar&ed
upon a massive disinvestment e;ercise in its ("'s and of late, there appears to $e a ring
of sincerity to the governmentKs efforts to get rid of unprofita$le ("'s and focus more on
economic facilitation functions! "everal prominent ("'s including I"N/, I+DC, I(C/,
ON8C, IOC, ,(C/, M'/, Modern Ereads have already $een disinvested and more such
e;ercises are in the offing!
$rictional Unemployment: 0rictional unemployment arises $ecause of time lags in the
functioning of la$our mar&ets hich are inevita$le in a free%mar&et economy. there are
search delays involved, for e;ample in moving from one #o$ to another! 0rictional
unemployment is conceptually distinct from structural unemployment, hich results in
heavy local concentration of unemployment, and of course, from unemployment arising
from a deficiency of demand