COUNTRY REPORT ON INDIA:

ECONOMIC PERFORMANCE IN 2002-2004

AND OUTLOOK FOR 2005-2007

For

THE ECONOMIC AND SOCIAL SURVEY OF ASIA

AND THE PACIFIC 2005

______________________________________________________________________

Dr. Tarun Das*

Economic Adviser
Ministry of Finance
Government of India
New Delhi-110001.

10 November 2004
______________________________________________________________________

* The paper expresses personal views of the author and should not be attributed to the
views of the Ministry of Finance or the Government of India. Author would like to
express his gratitude to the Poverty and Development Division, ESCAP, United Nations,
Bangkok for providing an opportunity to prepare this paper, and the Ministry of Finance,
Government of India for granting him necessary permission for accepting this work.

1
CONTENTS __ PAGES

ACRONYMS 4

A Macroeconomic Performance, Issues and Policies 5-15

1. Overview 5

2. Growth performance 7
(a) Overall GDP outcome in 2001-2002 and outlook for 2003-2005 7
(b) Determinants of GDP performance by major sectors 8
(c) Determinants of GDP performance by major industries 11
(d) Demand factors- Savings and investment 12
(e) Employment and unemployment situation 13

3. Inflation 15-18
(a) Movements in WPI and CPI 15
(b)Price movements of major categories 16
(c) Determinants of inflation 16
(d)Inflation outlook 18

4. Trade and Exchange Rates 18-23

(a) Exports and imports in 2001 and 2002 18
(b) Composition of trade 19
(c) Direction of trade 20
(d) Trade policies and performance 22
(e) Exchange rate policies 23

5. Capital inflows and outflows 24-27

(a) Balance of payments 24
(b) Foreign investment 24
(c) Foreign exchange reserves 25
(d) External debt and debt service 26
(e) Outlook for external sector for 2003-2005 27

6. Fiscal developments 28-34

(a) Overall fiscal situation in 2001 and 2002 28
(b) Fiscal deficit and financing 30
(c) Contingent liabilities 32
(d) Public debt 33

7. Money and Finance 34-36

(a) Monetary policies 34
(b) Financial sector performance and policies 36

2
8. Key policy issues and responses 37-39
(a) Development policies 37
(b) Fiscal policies 37
(c) Unfinished agenda of reforms 38

Statistical Tables: 40-42

Table-1: Selected Economic Indicators 40-42

Part-B: Dynamics of population ageing: how India can respond? 43-59

1. Introduction 43
2. Social security system in India 43
3. Pension reforms in India 45
4. Social health insurance in India 47
5. Caring for the elderly people 50
6. Migration 51

Statistical Tables: 52-59

Table-2: Trend of major macro-economic indicators 1999-2007 52-59

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 ACRONYMS
ADB Asian Development Bank
BOP Balance of Payments
CPI Consumer Price Index
CRR Cash Reserve Ratio
ECB External Commercial Borrowing
EHTP Electronic Hardware Technology Park
EOU Export Oriented Unit
EPCG Export Promotion Capital Goods
EPZ Export Processing Zone
EXIM Export Import Policy
FCCB Foreign Currency Convertible Bond
FDI Foreign Direct Investment
FERA Foreign Exchange Regulation Act
FIIs Foreign Institutional Investors
FTZ Free Trade Zone
GDP Gross Domestic Product
GDR Global Depository Receipt
ICOR Incremental Capital-Output Ratio
IDA Industrial Disputes Act
IDBI Industrial Development Bank of India
IFCI Industrial Finance Corporation of India
MIGA Multilateral Investment Guarantee Agency
MODVAT Modified Value Added Tax
NEER Nominal Effective Exchange Rate
NPA Non performing assets
NRI Non-Resident Indian
OCB Overseas Corporate Body
OGL Open general license
PIO Person of Indian Origin
POL Petroleum, Oil and Lubricants
PPP Purchasing Power Parity
RBI Reserve Bank of India
REER Real Effective Exchange Rate
SEBI Securities and Exchange Board of India
SEZ Special Economic Zone
SIL Special import license
SLR Statutory Liquidity Ratio
SSI Small Scale Industry
UTI Unit Trust of India
WPI Wholesale Price Index

NOTES:
1. Years mentioned in the Report refer to fiscal years starting with April and ending with March of the
next calendar year. Thus the year 2004 implies April 2004 to March 2005.
2. Currency unit Dollar ($) in the Report refers to US dollar, unless mentioned otherwise.
3. The following numerical units are used in the report:
Thousand = 1000
Lakh = 100 Thousand
Million = 1000 Thousand = 10 Lakh
Crore = 10 Million = 100 Lakh
Billion = 1000 Million = 100 Crore
Trillion = 1000 Billion = 100000 Crore

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 COUNTRY REPORT ON INDIA:
ECONOMIC PERFORMANCE IN 2002-2004
AND OUTLOOK FOR 2005-2007

DR. TARUN DAS, Economic Adviser, Ministry of Finance, India.

Part-I: Recent Economic and Social Developments

A. Macroeconomic Performance, Issues and Policies

1 Overview

The economy experienced a significant recovery in GDP growth rate from 4 per cent in
2003 to 8.1 per cent in 2003 mainly driven by the rebound of agriculture with a growth
rate of 8.1 per cent aided by a bumper food grains production. Industry sustained its
growth at 6.5 per cent, while services growth improved to 8.4 per cent in 2003.

The high growth could not be sustained in 2004 due to both internal and external shocks.
Internal factors included monsoon failures and infrastructure constraints, while external
factors included hardening of international prices of oil, metals and minerals induced by
global economic recovery and rising demand in USA, EU and China.

The average annual rate of inflation in terms of the Wholesale Price Index (WPI)
increased significantly from 5.4 per cent in 2003 to 6.8 per cent in 2004 mainly driver by
higher prices of minerals, petroleum products, metals, metal products, particularly iron
and steel. Average inflation based on the Consumer Price Index (CPI) also increased
from 3.9 per cent in 2003 to 5 per cent in 2004 reflecting higher prices of food items
which account for 57 per cent weights in the CPI.

India’s external position remained comfortable in 2004, notwithstanding the pick-up of

imports by 21 per cent. Merchandised exports recorded an excellent increase by 20 per
cent and net invisibles by 18 per cent. The current account recorded a surplus amounting
to 1.3 per cent of GDP in 2004, almost the same as 1.4 per cent of GDP recorded in 2003.

Transfers from Indians working abroad continued to remain buoyant. On the capital
account, direct foreign investment showed some improvement, while portfolio
investment flows declined significantly from $11.4 billion in 2003 to only $1 billion in
2004 reflecting bearish stock markets and change in disinvestment policies of the
government due to ideological influence of the left parties on the new coalition
government. Commercial borrowings by the corporates picked up due to lower interest
rates in international markets. The combined result was an increase of foreign exchange
reserves by US$20 billion in 2004 on top of an increase by $31 billion in 2003. The total
foreign exchange reserves (including gold and SDR) stand at more than US$122 billion
equivalent to 15 months of imports and 25 times the short-term external debt.

5
Central Government faced fiscal strain in 2004 due to revenue shortfalls caused by
delayed budget and lower realisation of government disinvestment in public enterprises.
While nominal spending was kept within the budgeted amounts, there were expenditure
overruns on subsidies. The gross fiscal deficit of the Central government declined from
4.7 per cent of GDP in 2003 to 4.3 per cent of GDP (due to higher growth of nominal
GDP caused by high inflation).

The fiscal situation of the State governments also remained under pressure due to rising
current expenditure and constraints on resource mobilization. The combined gross fiscal
deficit of the States increased from 4.1 per cent of GDP in 2002 to 5 per cent of GDP in
2003 and is budgeted at 3.5 per cent of GDP. As a result of fiscal incentives provided by
the Centre to the states for conditional fiscal reforms to reduce state deficits, the
consolidated deficit of the Central and State governments remained around 9.5 per cent of
GDP in both 2002 and 2003 and is expected to decline to 7.9 per cent of GDP in 2004.

Outstanding debt (including both domestic and external debt) of the general government,
excluding guarantees and other contingent liabilities, is likely to reach 95 per cent of
GDP (comprising outstanding Central government debt at 66 per cent and State
government debt at 29 per cent) at the end of March 2005. Including the public sector
enterprises, the consolidated public sector deficit is estimated to have exceeded 11.5 per
cent of GDP and public sector debt over 100 per cent of GDP.

The budget for 2004-05 aimed at reducing the central government fiscal deficit to 4.4 per
cent of GDP from 4.8 per cent in 2003, with revenue deficit targeted at 2.5 per cent and
primary deficit targeted at 0.3 per cent of GDP. On the revenue side, key initiatives
included introduction of a new tax system for textiles, increase of service tax from 8 to 10
per cent and widening its scope, introduction of 2 per cent education cess on all taxes, no
income tax for assesses having income up to Rupees one lakh, introduction of the Value
Added Tax at the state levels from April 1, 2005, replacement of long term capital gains
tax by transactions tax, reduction of peak customs duty from 25 to 20 per cent, reductions
of customs duties on steel, minerals, meat and fish, and exemption of customs duties on t
ractors and agricultural implements and aids for physically handicapped persons.

On the expenditure side, the main initiatives included passing of a Fiscal responsibility
and Budget Management Act by the Parliament, prepayment of high cost external debt,
buy back of bank’s holding of central government debt, a debt swap scheme for the
states, reduction of interest rates for public provident fund and small savings and
expansion of the scope of conditional fiscal and structural reforms by the states.

Reforms in agriculture and industry continued with introducing farm income insurance
scheme, removal of restrictions on exports of food grains, encouraging agri-business, and
de-reservation of more items from the reservation list of the Small Scale Industries (SSI).
In the area of infrastructure, progress was achieved in road construction and metro rail
and public-private partnership was extended for development of seaports and airports.

6
In the financial sector, regulations were tightened particularly for non-banking financial
corporations (NBFCs), foreign entry to the banking system was further liberalized, and
limits were raised on overseas investment by Indian companies.

Share market was volatile in 2004 reflecting development in political economy, erratic
monsoon and high inflation at home and hardening of international prices of crude oil,
metals and minerals. After falling in the first quarter of 2004, the stock market staged a
rally since the second quarter, reflecting political stability and continuity of economic
reforms. International credit rating agencies upgraded Indian scrips and maintained
positive outlooks on the basis of significant build up of foreign exchange reserves along
with containment of fiscal deficit.

For providing adequate liquidity to meet credit growth and support investment demand
with price stability, the RBI continued with its policy of active liquidity management
with additional tool of Market Stabilisation Scheme. The cash reserve ratio and the repo
rate (overnight lending rate) were increased to tackle rising prices. The exchange rate of
rupee against the US dollar had a tendency to appreciate in 2004 due to weakening dollar
against major currencies, but ended with a marginal depreciation due to acceleration of
imports. The RBI took advantage of the favorable balance of payments to accumulate
reserves through partially sterilized intervention.

Despite significant reduction of the RBI bank rate in recent years, lending rates of the
banks did not fall commensurately. Bank lending and deposit rates fell by only 50-150
basis points in 2003-2004. The prime lending rate (PLR) virtually remained unchanged,
reflecting high transactions cost of banking operations and the rigidities in administered
rates on small savings. Banks continued to provide credits to profitable corporates at
below PLR and reduced the maximum spread over PLR and so the effective lending rates
declined by 50-100 basis points. Sanctions and disbursements of the long-term credit by
the financial institutions accelerated in 2004 due to rise in investment demand. Lendings
by commercial banks, which generally consist of working capital and trade finances, also
recorded significant growth due to acceleration of both food and non-food credits.

1. Growth Performance
(a) Overall GDP outcome in 2003-2004 and Outlook for 2005-2007

Overall GDP growth rate decelerated from 8.1 per cent in 2003 to 6 per cent in 2004
mainly due to decline in agricultural value added by 2 per cent caused by deficient
rainfall (Table-2.1). However, there was improvement in the growth of industry from 6.5
per cent in 2003 to 7.1 per cent in 2004, and of services from 8.4 per cent to 8.8 per cent
due to pick up of both consumer and investment demands and acceleration of exports.

Assuming that there would be no major internal or external shocks, which might have
destabilizing effects on the Indian economy, no monsoon failures and no political
instability, India would be able to sustain real GDP growth rates in the range of 7-7.5 per
cent in 2005-2007 supported by a growth rate of 2 to 4 per cent in agricultural value
added, 7.5 to 8 per cent in industry and 8.5 per cent in services. Industrial production is

7
expected to show modest upturn largely driven by cyclical factors and induced by a rise
in rural income and increased public spending on physical and social infrastructure.

Higher growth would be feasible through a sustained pace of fiscal reforms in both the
Centre and States combined with second-generation reforms in labor markets, sectoral
levels and local governments. Increased public and private sector savings will boost
India’s investment rate and provide necessary resources for upgrading critical areas of
infrastructure. While some increased use of foreign capital, particularly of direct foreign
investment and portfolio investment, is consistent with external sector viability, the bulk
of the savings will be generated domestically.

2.1 Real GDP Growth by Sectors and the Inflation Rate (Per Cent)
Items 2002 2003 2004 2005 2006 2007
Actual Actual Estimate Forecast Forecast Forecast
Real GDP growth 4.0 8.1 6.0 6.8 7.2 7.5
- Agriculture -5.2 9.1 -2.0 2.0 3.0 4.0
- Industry 6.4 6.5 7.1 7.3 7.5 8.0
- Services 7.1 8.4 8.8 8.5 8.5 8.5
Inflation rate (CPI) 4.0 3.9 5.0 4.0 4.0 4.0
Inflation rate (WPI) 3.5 5.4 6.8 4.0 4.0 4.0
Source: National Accounts Statistics 2004, Central Statistical Organisation (CSO) for
2002-2003 and author’s estimates/ projections for 2004-2007.

(b) Determination of GDP performance by major sectors

In 2004 agriculture and allied sectors registered negative growth due to erratic monsoon
and loss of agricultural crops. However, there was some improvement in the growth rates
in secondary and tertiary sectors (Table 2.2).

Table 2.2 Growth rates of GDP in selected sectors (in per cent)
Sectors 2000 2001 2002 2003 2004Q1 2004
Actual Estimate
1. Agriculture & allied sectors -0.1 6.5 -5.2 9.1 3.4 -2.0
2. Mining & quarrying 2.4 2.2 8.8 4.0 6.1 6.0
3. Manufacturing 7.4 3.6 6.2 7.1 8.0 7.2
4. Electricity, gas, water 4.3 3.6 3.8 5.4 6.3 6.0
5. Construction 6.7 3.1 7.3 6.0 3.6 4.0
6. Trade,hotels,transport,commc 6.9 8.7 7.0 10.9 11.0 10.5
7.Financial ser. & real estate 3.5 4.5 8.8 6.4 7.0 7.0
8. Social and personal services 5.2 5.6 5.8 5.9 9.3 9.0
Total GDP 4.4 5.8 4.0 8.1 7.4 6.0
Source: National Accounts Statistics 2004, Central Statistical Organisation (CSO) for 2002-
2003 and author’s estimates/ projections for 2004-2007.

8
Agriculture and Allied Sectors

Prospects of agricultural production in 2004 are not considered to be bright due to erratic
rainfall caused by prolonged breaks of monsoon over time and uneven distribution over
regions. The seasonal rainfall in 2004 for the country as a whole was 13
per cent below the long period average and 18 per cent area
experienced drought conditions.

Poor monsoon affected adversely the production of kharif crops (sown

in June-July and grown mainly under unirrigated conditions), which
account for 55 per cent of the total crop output and 75 per cent of
agricultural production. Coarse grains, pulses, oilseeds, cotton and
plantation are affected most, while impact is less on the production of
rice, wheat and sugarcane where access to irrigation is the greatest.
Total foodgrains production is estimated to decline by 4.7 per cent
from 212 million tonnes in 2003 to 202 million tonnes in 2004 (Table
2.3).

Productions of commercial crops like jute, tea, coffee, oilseeds and

sugarcane are also expected to decline, although by lower per
centage. However, fruits and vegetables, horticulture and floriculture
and allied sectors like fishery, poultry and animal husbandry, which
account for 30 per cent production in agriculture and allied sectors, are
expected to perform well and achieve a growth rate of 6 per cent.
Consequently, overall value added in the primary sector is estimated to decline by 2
per cent in 2004, compared to a growth of 9.1 per cent in 2003.

Table 2.3: Agricultural production in 1999-2003 (million tonnes)

Crop 2000 2001 2002 2003 2004-Proj
1.Total food grains (a+b) 197 213 174 212 202
(a) Cereals 186 199 163 197 189
Rice 85 93 73 87 84
Wheat 70 73 65 72 71
Coarse grains 31 33 25 38 34
(b) Pulses 11 13 11 15 13
2. Non-food grains
(a) Oilseeds 18 21 15 25 20
(b) Sugarcane 296 297 282 236 235
(c) Cotton (million bales) 10 10 9 14 14
(d) Jute / Mesta (mln bales) 11 12 11 11 11
(e) Tea (million kilogram) 848 847 838 850 845
(f) Coffee (million kg.) 301 301 275 275 270
4. Annual growth rate (%)
(a) All crops -6.3 7.6 -15.5 19.3 -3.3
(b) Food grains -6.2 8.2 -18.2 22.0 -4.7
(c) Non food grains -5.7 6.1 -11.2 14.5 -1.0
Source: Min. of Agriculture for the years 2000-2003, and author's estimate for 2004.

9
10
The share of agriculture in real GDP declined from around 24 per cent in 2000-2001 to
22 per cent in 2002-2003 and further to 20 per cent in 2004. The enhanced availability of
bank credits through priority lending to agriculture and agro-based industries, favorable
terms of trade, liberalized domestic and external trade for agricultural products attracted
private investment in agriculture in recent years. The Budget for 2004 stepped up public
investment significantly for rural roads and rural employment programs. Major measures
taken for agriculture development included the following:

• Government funding for restructuring Regional Rural Banks.

• Rural Infrastructure Development Fund revived with corpus of Rs.8000 crore.
• Priority for Accelerated Irrigation Benefit Program,
• Launching of National Water Resources Development Project, and Nationwide
Water Harvesting Scheme.
• Launching of National Horticulture Mission.
• Introduction of National Agricultural Insurance Scheme.
• Emphasis on agri-business and R&D.
• Introduction of Food stamps scheme on pilot basis.
• Tax holiday extended to rural hospitals and agro processing industries

Industry

Despite fall of agricultural production, both industry and services performed well in 2004
induced by external demand and investment demand at home. Government announced
several monetary and fiscal incentives in the Union Budget for 2004 to boost industrial
production and infrastructure development. These policies included simplification and
rationalization of both direct and indirect taxes, reduction of peak customs duty to 20 per
cent. Latest available information until August 2004 indicate that cumulative industrial
growth improved from 5.9 per cent in April-August 2003 to 7.9 per cent in April- August
2004 aided by a growth rate of 5.2 per cent in mining, 8.2 per cent in manufacturing and
7.7 per cent in electricity generation. Given these trends, the year-end industrial growth
would be around 7.2 per cent. Consequently, the share of industrial value added in GDP
is expected to increase to 27.1 per cent in 2004 from 26.9 per cent in 2003.

Service sector

The good performance of agriculture and industry in recent years generated demand for
transport and communications, trade-related activities and financial services. A rapid
increase in expenditure on public administration, social services, rural extension services
and defense also had a favorable impact on the growth of service sector. As a result, the
share of the service sector in GDP increased continuously from a level of 28 per cent in
the early 1950’s to 36 per cent in early 1980’s and further to 52 per cent in 2004. The
service sector is expected to grow at 8.8 per cent in 2004 induced by sustained industrial
growth, substantial public investment on roads, and sustained growth in financial services
and real estate.

11
 (c) Determination of GDP performance by major industries

As per the index of industrial production (IIP), overall industrial growth at 7.9% in April-
Aug 2004 is significantly higher than 5.9% achieved in April-Aug 2003 and is aided by a
growth of 5.2% in mining (4.1% last year), 8.2% in manufacturing (6.5% last year) and
7.7% in electricity (2.5% last year). As per use-based classification, there is improvement
across the board except for consumer non-durables. Capital goods (14.3%), intermediate
(8.8%) and consumer durables (13%) performed well indicating rise of investment
demand. Among 17 broad manufacturing sub-groups, five subgroups with weights of
30.8% in the IIP achieved growth rates exceeding 8% in April-Aug 2004. These are
beverages & tobacco (8.5%), wool, silk & man-made fibre textiles (9.1%), chemicals &
products (19.2%), machinery other than transport equipment (27.7%) and miscellaneous
manufacturing group (12.4%).

Given these trends, the end-year industrial growth in terms of physical production is
expected to be 7.2 per cent aided by a growth rate of 7.5 per cent in manufacturing
(weight 79.4 per cent), 7per cent in electricity generation (weight 10.4%) and 5.5 per cent
in mining and quarrying (weight 10.2%).

Table 2.4 Growth of industrial production by broad sectors (per cent)

Sectors Weights 2001 2002 2003 April-Aug 2004

(%) 2004 Estimate
1.Overall industrial growth 100.0 2.7 5.7 6.9 7.9 7.2
 Manufacturing 79.4 2.9 6.0 3.2 8.2 7.5
 Mining/ quarrying 10.4 1.2 5.8 5.2 5.2 5.5
 Electricity 10.2 3.1 3.2 5.1 7.7 7.0
1. Use-based classification 100.0 2.7 5.7 6.9 7.9 7.2
 Basic goods 35.5 2.6 4.8 5.4 4.9 5.0
 Capital goods 9.7 -3.4 10.5 13.1 14.3 14.5
 Intermediate goods 26.4 1.5 3.9 6.3 8.8 8.0
 Consumer goods 28.4 6.0 7.1 7.1 8.4 8.5
-- Consumer durable 5.2 11.5 -6.3 11.5 13.0 12.5
-- Non-durable goods 23.2 4.1 12.0 5.7 6.8 6.5
3.Overall industrial growth 100 2.7 5.7 6.9 7.9 7.2
• IIP stands for the Index of Industrial Production.
Source: Central Statistical Organisation for the years 2001-2003 and author’s estimate for the year 2004.

Six core and infrastructure industries (viz. Electricity, coal, steel, cement, crude oil and
petroleum products) having total weight of 26.7 per cent in the Index of Industrial
Production (IIP) performed well in 2004 with an average growth rate of 5.7 per cent in
the first half of 2004 and is expected to maintain the same growth rate for the full year
compared with a growth rate of 5.4 per cent in 2003 (Table 2.5). Other infrastructure
sectors such as new mobile telephone connections, goods traffic on railways, cargo
handled at both sea ports and air ports, and air passenger traffic at both domestic and
international airports also performed well in 2004 due to sustained industrial growth and
significant pick up of services activities.

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 Table 2.5 Growth rates of major core and infrastructure industries (per cent)

Core Industries and Weights 2001 2002 2003 April-Sept 2004

infrastructure in IIP* 2004 Estimate
1. Electricity 10.2 3.1 3.6 4.5 7.8 7.0
2. Coal 3.2 4.2 4.6 3.6 6.6 6.5
3. Steel 5.1 3.6 10.1 6.9 3.0 3.5
4. Crude oil 4.2 -1.2 3.2 1.0 4.2 4.5
5. Petroleum products 2.0 3.7 4.9 8.2 7.4 8.0
6. Cement 2.0 7.4 8.8 6.1 4.8 5.0
Sub-Total 26.7 3.5 5.6 5.4 5.7 5.6
Other infrastructure:
7. Cargo handled at major ports 2.3 9.0 9.9 10.1 9.0
8. Landline phone connections -4.7 -40 2.9 -34.2 -30.0
9. Mobile phone connections 60 119 159 24.6 25.0
10. Revenue traffic on railways 4.0 5.3 7.5 6.3 6.5
11. Civil aviation
 Export cargo 4.1 13.3 1.0 8.1 7.5
 Import cargo -1.0 18.6 13.8 35.6 35.0
 International passengers -5.0 4.8 6.5 17.4 19.0
 Domestic passengers -5.7 9.6 13.1 25.9 27.0
12. Upgradation of highways -13.2 53.5 40 12.3 10.0
• IIP stands for the Index of Industrial Production.
Source: Dept of Programme Implementation for 2001-2003 and author’s estimate for the year 2004.

(d) Demand factors: Savings and Investment

The rates of investment and saving in India are high as judged by its level of economic
development. Gross domestic savings as per cent of GDP improved from 23.5 per cent in
2001 to 24.2 per cent in 2002 and 25 per cent in 2003-2004 due to reduction of dissaving
in the public sector. Gross domestic investment as per centage of GDP improved
marginally from 23.1 per cent in 2001 to 23.3 per cent in 2002 and 23.6 per cent in 2003-
2004 due to improvement in both private and public sectors (Table 2.6).

India’s private saving rate is comparable to those achieved by the high performing East
Asian economies, but its public saving is very low and is a major constraint on domestic
resource mobilization. Government is restructuring public expenditures to foster domestic
savings, release resources for infrastructure development and to reduce crowding out
effect on private investment. Reforms in public sector are under-way to rationalize prices
of public goods and services, to increase efficiency of public sector operations and to
reduce the capital output ratio. Strengthening legal, institutional and regulatory
frameworks in insurance, provident and pension funds, banking, capital markets,
petroleum products, power, ports and telecom is also being undertaken to induce private
investment in infrastructure. The successive Central government Budgets for 2003-2004
announced various measures for deepening the capital markets and liberalizing further
the non-debt creating financial flows.

There are signs that both public and private investment have started to revive and the new
investment is more efficient and productive. Gross domestic investment as per cent of
GDP is expected to improve steadily from 23.7 per cent in 2004 to 27.8 per cent in 2007

13
and gross domestic savings as per cent of GDP is also expected to improve from 25 per
cent in 2004 to 28 per cent in 2007 as a result of better performance by both public and
private sectors.

Table 2.6 Gross Domestic Savings and Investment (in Per cent of GDP at current mp)

As per cent of GDP 2001 2002 2003 2004 2007

Estimate Estimate Forecast
Gross domestic savings (GDS) 23.5 24.2 25.0 25.0 28.0
 Private sector 26.2 26.0 26.0 25.5 27.0
 Public sector -2.7 -1.9 -1.0 -0.5 1.0
Gross domestic Investment (GDI) 23.1 23.3 23.6 23.7 27.8
 Private sector 17.3 17.6 17.7 17.8 20.8
 Public sector 5.8 5.7 5.9 5.9 7.0
Resource gap = (GDS-GDI) 0.3 0.9 1.4 1.3 0.2
Source: National Accounts Statistics 2004, Central Statistical Organisation (CSO) for 2001-2002
and author’s estimates/ projections for 2003-2007.

(a) Employment and un-employment

(i) Employment Situation

Comprehensive data on employment and unemployment are collected by the National

Sample Survey Organisation (NSSO) through quinquennial surveys. As per the results of
the 55th Round (1999-2000) of the NSSO Survey, employment growth rate declined from
2.43 per cent per annum in 1987-1994 to 1.07 per cent per annum in 1994-2000 (Table-
2.7). The decline in the rate of growth of employment in the 1990s was associated with a
comparatively higher growth in GDP, indicating a decline in the labour intensity of
production. It was also associated with a sharp decline in the growth rate of labor force
from 2.29 per cent in 1987-1994 to 1.03 per cent in 1993-2000.

Table-2.7: Employment growth rates in 1972-2000 (per cent)

Period Rate of growth of Rate of growth of labor Rate of growth of

population force employment
(% per annum) (% per annum) (% per annum)
1972-1978 2.27 2.94 2.73
1977-1983 2.19 2.04 2.17
1983-1988 2.14 1.74 1.54
1987-1994 2.10 2.29 2.43
1994-2000 1.93 1.03 1.07
Source: Planning Commission, Government of India.

Some estimates of employment available from the Annual Rounds of NSSO for the
July-December 2002 indicate that employment increased at the rate of 2.07 per cent
per annum in 2000-2002 as compared to 1.02 per cent per annum in 1994-2000. In
2000-2002 in absolute terms, employment increased by 8.4 million per year on an

14
average, as against the target of creating approximately 50 million employment
opportunities over the Tenth Five-Year.

A major shift in the work force structure in 1977-2000 was an increase in the proportion
of casual labor from 27.2% to 33.2%, and a decrease in self-employment from 58.9% to
52.9%, while the proportion of regular salaried employment in total employment
remained stationary around 13.9 per cent. The decline of self-employment in rural areas
reflects the decline in proportion of farmers cultivating their own land owing to
fragmentation of holdings. The increase in casual employment reflects the displacement
of marginal cultivators and their conversion into agricultural labor.

In 1983-2000 the share of agriculture in total employment declined from 63 per cent to
57 per cent and that of manufacturing increased from 11.6 to 12.1 per cent. In 2000, the
share of construction in total employment increased to 4.4%, that of trade and transport to
15.2% and that of community services to 9.2%. In 1994-2000, trade has the highest
growth rate (5.7%), followed by transport and communications (5.5%), financial services
(5.4%), and construction (5.2%), whereas agriculture, mining and quarrying, and public
utilities registered negative growth rates in employment.

Organised sector accounted for only 9 per cent of the total employment in 1978-1994,
and its share declined to 7 per cent in 1999-2000. This was entirely due to slowing down
of employment in the public sector from 1.52 per cent per annum in 1983-1994 to a
negative growth rate of (-) 0.03 per cent in 1994-2000. The decline of employment in the
public sector could be attributed to restructuring programs of the public sector and
imposition of ban on new recruitment in government departments as a part of the
“economy drive” to reduce expenditure. Employment in the public sector is unlikely to
expand rapidly as government is reducing its scope and many public undertakings have
surplus labour.
Table-2.8 Sectoral Employment in 1983 to 2000

Employment (per cent to total) Annual growth rate (%)

Sector 1983 1987- 1993- 1999- 1983 to 1987- 1983 to 1993-

1988 1994 2000 1987- 1988 to 1993- 1994 to
1988 1993- 1994 1999-
1994 2000
Agriculture 63.2 60.1 60.4 56.7 1.8 2.6 2.2 0.02
Mining & quarrying 0.7 0.9 0.8 0.7 7.4 1.0 3.7 -1.9
Manufacturing 11.6 11.9 11.1 12.1 3.6 1.2 2.3 2.6
Electricity, gas, water 0.3 0.3 0.5 0.3 2.9 7.2 5.3 -3.6
Construction 3.0 4.4 3.5 4.4 12.1 -1.4 4.2 5.2
Trade, hotels, restaurant 7.6 8.3 8.5 11.1 4.9 3.0 3.8 5.7
Transport, communication 2.9 3.0 3.1 4.1 3.2 3.5 3.4 5.5
Financial, real estate 0.9 1.0 1.1 1.4 4.7 4.5 4.6 5.4
Community/social services 9.8 10.1 11.1 9.2 3.6 4.1 3.6 -2.1
All Sector 100 100 100 100 2.9 2.5 2.7 1.1

15
Growth rate of organized private sector employment accelerated from 0.45 per cent per
annum in 1983-1994 to 1.87 per cent in 1994-2000. However, this was not enough to
offset the employment slowdown in the public sector, as private sector accounted for only
one third of total organized employment.

The employment elasticity with respect to GDP declined continuously in 1980s and 1990s.
Rapid growth of employment in the organized sector depends on employment growth in
the private sector. Since the potential growth of organized employment is limited, bulk of
the employment growth has to come from unorganized sector.

(ii) Unemployment Situation

There are various concepts of unemployment viz. Usual Principal Status (UPS), Usual
Principal and Subsidiary Status (UPSS), Current Weekly Status (CWS) and Current Daily
Status (CDS). All these concepts of unemployment indicate that unemployment rates
differ widely for rural and urban areas and for males and females. Generally, urban areas
have higher unemployment rates for both males and females than rural areas.

The rate of unemployment on the basis of CDS increased from 6.03 per cent in 1993-94 to
7.32 per cent in 1999-2000. Unemployment rates varied sharply across the states and
inter-state variations were consistent over time. States where wages are kept higher than
neighboring regions by strengthening bargaining power of labor or by provision of social
security have generally high incidence of unemployment.

The differentials of rural and urban unemployment rates narrowed in 1999-2000, due to
sharp increase in unemployment rates for both rural males and females. One factor for this
development was a shift from self-employment to casual labor.

3. Inflation
(a) Movements in WPI and CPI

Annual point-to-point inflation rate in terms of Wholesale Price Index (WPI) declined
from 6.5% in 2002-03 to 4.6% in 2003-04. The current year 2004-05 started with an
inflation rate of 4.5% on 3 April 2004 and declined to 4.3% on 24 April 2004. Since then
it had generally an upward trend and stood at 7.4% on 23 October 2004 compared to
5.1% a year ago. The 52-week average inflation rate at 6.3% on 23 October 2004 is also
higher than 4.9% registered a year ago.

According to some economists, WPI inflation is not an appropriate index to determine the
impact of price rise on the cost of living of common man. Rather, the Consumer Price
Index for Industrial Workers (CPI-IW), which includes selected services and is measured
on the basis of retail prices and used to determine the dearness allowance of employees in
both the public and private sectors, would be an appropriate indicator of general inflation.
In sharp contrast to the WPI, the CPI inflation had been stable and moderate. This is
because food items constitute higher weights in CPI than in WPI and in general the price
increases of these items have been moderate in the current year.

16
Annual point-to-point inflation in terms of the CPI-IW declined significantly from 5.1 per
cent in April 2003-04 to 3.5 per cent in March 2003-04 and further to 2.2 per cent in
April 2004. The CPI inflation rate had an increasing trend since then and reached 4.8% in
September 2004, compared to 2.9 per cent a year ago, but it is substantially lower than
the average WPI inflation at 7.7% in September 2004. Given these trends, year end
average inflation is estimated to be 6.8 per cent in terms of WPI and 5 per cent in terms
of CPI in 2004.

(b) Price movements of major categories

At the end of 30th week of the current fiscal year, on the 23rd October 2004, for which
latest information are available, point-to-point annual WPI inflation was running at 7.4
per cent and the average inflation at 6.3 per cent. High inflation was basically due to
substantial price rise for minerals, petroleum products, metals and metal products induced
by international prices. The annual rate of WPI inflation for primary articles (weights of
22 per cent) was 4.9 per cent caused by an inflation of 2.7 per cent for food articles, 2.9
per cent for non-food agricultural articles and 157 per cent for minerals. Prices of fuel,
power, light and lubricants (with weights of 14.2 per cent), which are mostly
administered, increased by 11.2 per cent, and prices of manufactured items (with weights
of 63.8 per cent) increased by 7 per cent mainly due to an increase of sugar prices by 14.2
per cent, basic metals and metal products by 20.3 per cent, particularly iron and steel
prices by 26.1 per cent. Prices of other manufactured items remained moderate.

Given these trends, the annual average rate of WPI inflation in 2004 is expected to
remain in the range of 6.8 per cent, up from 5.4 per cent in 2003, mainly due to sharp
increase in prices of minerals, petroleum products, metals and iron and steel induced by
rise of domestic production cost and hardening of international prices of these goods.

The CPI inflation rate ranged between low to moderate in 2004 and reached 4.8 per cent
in September 2004. The average CPI inflation is expected to remain around 5 per cent in
2004 compared to around 4 per cent in 2002 and 2003.

(c)Determinants of inflation

Decomposition of inflation rates indicates that minerals in the primary group, petroleum
products, and sugar, metals, metal products, particularly iron and steel under the
manufactured prices witnessed relatively higher price increases and contributed most to
the inflation in 2004. Inflation for the non-food manufactured items (except for iron and
steel) was moderate showing considerable correlation with global prices and was the
result of complete removal of quantitative restrictions (QRs) and other non-tariff barriers
on imports and continual reduction of import duties in India to fulfill requirements under
the general agreements with the World Trade Organisation.

Thus, high inflation was not wide spread and was concentrated in a few commodities
related to minerals and metals. Prices of these commodities are influenced not only by

17
domestic supply and demand but also by international prices. In general, there had been
hardening of international commodity prices due to revival of world growth.

There were neither supply constraints nor demand-pull in the domestic market. Inflation
in petroleum products, minerals, metals and their products appear to be cost-pushed and
driven by international prices. Broad money supply growth was around RBI target rate of
14% and did not pose any problems, as it was accompanied by significant improvement
in industrial and infrastructure production. Government fiscal deficit was under control
and within budget targets. Ministry of Finance reduced customs and excise duties of
selected petroleum products and reduced customs duties of non-alloy steel and ships for
breaking. Given the fact that there was no demand-pull, and the high inflation was mainly
cost-pushed, RBI did not adopt a restricted or contractionary monetary policy. It made
marginal upward revision of cash reserve ratio and repo rate (overnight lending of cash)
without any change of the bank rate.

Table 3.1 Average Inflation Rate in terms of Wholesale Price Index (per cent)
Major Groups Weights 2002 2003 Annual 2004
(per cent) Average Average Inflation Average
Point-to- Estimate
point on
23-10-2004
Actual
All commodities 100.0 3.4 5.5 7.4 6.8
1. Primary articles 22.0 3.4 4.3 4.9 4.2
 Food items 15.4 1.7 1.2 2.7 2.0
 Non-food items 6.1 8.3 12.6 2.9 3.0
 Minerals 0.5 -0.4 2.1 157.2 150
2. Fuel, power & lubricants 14.2 5.6 6.4 11.2 11.5
3. Manufactured products 63.8 2.8 5.7 7.0 6.8
 Sugar group 3.9 -7.9 3.5 14.2 14.0
 Edible oils 2.8 22.3 14.4 1.0 1.0
 Cotton textiles 9.8 -1.1 7.7 6.5 6.0
 Leather products 1.0 -2.0 12.9 4.4 4.5
 Chemicals & products 11.9 2.9 1.9 3.4 3.5
1.7 -2.2 1.2 5.0 5.0
 Cement
8.3 1.5 15.6 20.3 20.0
 Basic metal & alloys 3.6 5.1 26.3 26.0 25.0
 Iron and steel 8.4 0.9 1.8 6.7 6.0
 Machinery and tools 4.3 0.5 -0.1 5.7 6.0
 Transport equipment

Table 3.2 Average Inflation Rate in terms of Consumer Price Index (per cent)
Major Groups Weights 2002 2003 Annual 2004
(per cent) Actual Actual Inflation Estimate
At end
Sept 2003
General 100.0 4.0 3.9 4.8 5.0
1. Food 57.0 2.1 4.1 1.8 2.0
2. Tobacco & intoxicants 3.2 1.7 3.9 2.0 2.5
3. Fuel and light 6.3 8.6 8.0 11.0 11.5
4. Housing 8.7 6.2 6.7 10.0 10.0
5. Clothing and footwear 8.5 1.7 2.3 5.0 5.0

18
6. Miscellaneous group 16.4 4.7 4.6 5.0 5.0

The Government’s anti-inflationary policies in recent years included a strict monetary

and fiscal discipline, an effective management of supply and demand for essential
consumer goods and raw materials through liberal imports, and strengthening of the
public distribution system for food grains, sugar and kerosene oil. Successive budgets
provided various fiscal concessions and extended the value added tax to ensure that
indirect taxes do not unduly add to the prices of essential items. There was also a distinct
improvement in the supply of manufactured items by sustained industrial growth and of
stocks of food grains due to continued government procurement.

(d) Inflation Outlook

The medium-term inflation risks are manageable. Given government’s commitment to

economic reforms, strict fiscal prudence, monetary discipline, orderly movement of the
exchange rate of rupee, continued reduction of import duties and other indirect taxes, and
removal of all quantitative restrictions on the imports of consumer goods, the annual
inflation rate in terms of both wholesale and consumer price indices is likely to have a
declining trend in the medium term and to remain around 4 per cent in 2005-2007.

4. Trade and Exchange Rates

(a) Exports and Imports in 2000 and 2001

Indian exports remained buoyant with a growth of 19.9 per cent in 2003 due to an
increase of exports of both primary and manufactured products. India emerged as the
fastest growing exporter after China among the leading exporting countries. Imports
increased by 21.8 per cent in 2003 driven by pick up industrial activities and investment
demand. The net result was a decline in the trade deficit from 2.5 per cent of GDP in
2002 to 2.7 per cent of GDP in 2003 (Table 4.2). The net invisible surplus improved
from 3.3 per cent of GDP in 2002 and to 4.2 per cent in 2003 with buoyant private
transfers and software exports commensurate with global recovery. Consequently, the
current account balance (including official transfer) was in surplus for the third
consecutive year in 2003 and amounted to 1.4 per cent of GDP.

Export growth in terms of US dollar accelerated from 8.8 per cent in April-September
2003 to 24.4 per cent in April-September 2004, while imports growth accelerated from
21.4 per cent in April-September 2003 to 34.3 per cent in April-September 2004
contributed by a growth of oil imports by 57.8 per cent and that of non-oil imports by
25.8 per cent. As a result, trade deficit increased from $7.4 billion in April-September
2003 to $12.7 billion in April-September 2004.

Given these trends, exports are expected to achieve a growth of 20 per cent in 2004
(Table 4.1) due to buoyancy in world demand, resurgence in world trade and
improvements in world commodity prices. In addition, various export facilitating
measures, good performance in key manufacturing sectors like engineering goods,
chemicals, automobiles, ore and minerals, basic metals and petroleum products also
contributed to the growth of exports. Imports also recorded a substantial growth by 21 per

19
cent in 2004 mainly due to higher imports of crude oil, export related products, and
capital goods imports. As a result, trade deficit as a per centage of GDP is expected to
increase from 2.7 per cent in 2003 to 3 per cent in 2004.

Net invisible earnings are expected to have a robust growth of 18 per cent in 2004 and
amount to 4.3 per cent of GDP in 2004. The overall current account balance is once again
expected to have a surplus amounting to 1.3 per cent of GDP in 2004, almost the same
level as in 2003.

Table 4.1 Trends of Foreign Trade

Foreign trade Value in Value in Growth rate Growth rate Est. GR

US$ million US$ million 2002 2003 2004
2003 2004 Est. (Per cent) (Per cent) (Per cent)
Merchandised exports 62952 75542 16.9 19.9 20.0
Merchandised imports 79658 96386 13.5 21.8 21.0
Services exports 51939 58635 18.2 19.7 12.9
Services imports 26514 28635 13.4 0.7 8.0
Source: RBI Annual Report 2003-2004 for the years 2002-2003, and author’s estimate
for 2004.

Table 4.2 Trade and Current Account Balance

Items 2002 2002 2003 2003 2004Est 2004Est

US$ As % US$ As % US$ As %
Million Of GDP Million of GDP Million of GDP
Merchandised trade balance -12910 -2.5 -16706 -2.7 -20844 -3.0
Net invisible balance 17047 3.3 25425 4.2 30000 4.3
Current account balance 4137 0.8 8719 1.4 9156 1.3
Net capital inflows 12843 2.5 22703 3.7 10650 1.5
Overall balance of payments 16980 3.3 31421 5.1 19806 2.9
Source: RBI Annual Report 2003-04for the years 2002-2003 and author's estimate
for 2004.

(b) Composition of Trade

The share of primary products in total exports declined continuously from 24 per cent in
1996 to 16 per cent in 2000 and further to 15 per cent in 2003-2004 due to continual
decline of share of agricultural exports from 20 per cent in 1996 to 11 per cent in 2004.
The share of minerals in total imports increased marginally from 3 per cent in 1999-2001
to 4 per cent in 2002-2004. The share of manufactured items in exports decreased from
81 per cent in 1999 to 77 per cent in 2004. The major exports of manufactured goods
consisted of engineering goods, chemicals and chemical products, iron and steel, drugs
and pharmaceuticals, labor intensive products such as gems and jewellery, textile
products, readymade garments and handicrafts, and also traditional categories of leather
and leather products. In recent years, software exports and petroleum products have
emerged as major export earners and accounted for 12 per cent of total exports in 2004.

20
There was significant change in the composition of imports in 1997-2000, but the
composition remained more or less unchanged in 2000-2004. Share of bulk imports,
which consist of crude oil, petroleum products and other consumption goods and some
key raw materials and intermediate goods, declined significantly from 41 per cent in 1997
to 31 per cent in 1998, but it continuously increased and regained its share around 40 per
cent in 2004 due to substantial increase in imports of petroleum, oil and lubricants (POL)
from 17 per cent in 1998 to 31 per cent in 2004. Share of bulk consumer goods declined
from 7 per cent in 1998 to 4 per cent in 2004. Share of other bulk imports which consist
of fertilizers, non-ferrous metals, paper, rubber, pulps, ores, iron and steel declined
continuously from 12 per cent in 1998 to 7 to 8 per cent in 2002-2004.

Non-bulk items, which consist of capital goods, precious stones, export related products,
chemicals and chemical products, textiles, plastics, scientific instruments and medicines
constituted 62 per cent of total imports in 2004 compared with 61 per cent in 2001. Share
of capital goods declined continuously from 25 per cent in 1996 to 12 per cent in 1999,
followed by an increasing trend thereafter and reached 22 per cent in 2002-2004 driven
by investment demand. Share of export related products remained stable around 17-18
per cent in 1996-1999 but declined to 16 per cent in 2001-2004. Share of other non-bulk
items which consist of gold and silver, plastics, scientific instruments, coal and coke,
medicines and drugs, chemicals and non-metallic mineral products increased
continuously from 17 per cent in 1996 to 38 per cent in 2004.

(c) Direction of Trade

There were significant changes of direction of trade in 2000-2004 compared with that in
1990s. Destination of exports changed with lower shares of OECD countries and higher
shares of African and Asian developing countries. Asia and Oceania has now emerged as
major partners of Indian trade.

The sources of imports have also undergone significant changes in recent years. Imports
from the USA and EEC declined marginally, that of OPEC countries declined
significantly from 23 per cent in 1999 to 6 per cent in 2004, while imports from
developing Asian and African countries increased substantially and those from of Japan
and East Europe remained more or less unchanged.

Another major feature of the Indian direction of trade was that India’s trade with the
South East Asian region, particularly with China, Hong Kong, Indonesia, Korea,
Malaysia, Thailand and Singapore increased significantly in 2000-2004, as these
countries recovered from the exchange rate, financial and economic crisis of 1997-1999.

21
 Table-4.3: Composition of India’s Exports (per cent)

Commodity Groups 1999 2000 2001 2002 2003 2004

1. Primary products 18 16 16 17 15 15
1.1 Agriculture/ allied 15 14 13 13 12 11
1.2 Ores and minerals 3 3 3 4 4 4
2.Manufactured products 81 77 76 76 75 77
2.1 Leather & products 4 4 4 4 3 3
2.2 Chemicals & prod. 13 13 14 14 15 15
2.3 Engineering goods 14 15 16 17 19 19
2.4 Textiles 25 24 22 21 19 20
2.5 Gems and jewelry 21 17 17 17 17 17
2.6 Handicrafts 2 2 1 1 1 1
2.7 Carpets 2 1 1 1 1 1
2.8 Others 9 2 1 1 0 1
3. Petroleum & lubricants 0 4 5 5 6 6
4. Others as unclassified 2 3 3 2 4 2
Total exports 100 100 100 100 100 100

Table-4.4: Composition of India’s Imports (per cent)

Commodity Groups 1999 2000 2001 2002 2003 2004
1. Food and allied products 6 4 5 4 4 4
2. Fuels- Coal and POL 27 34 30 31 28 31
3. Fertilizers 3 2 1 1 1 1
4. Paper and newsprint 1 1 1 1 1 1
5. Capital goods 12 18 19 22 22 21
6. Chemicals 8 7 8 7 6 7
7. Precious metals 11 10 9 10 9 10
8. Iron and steel 2 1 2 2 2 2
9. Non-ferrous metals 1 1 1 1 1 1
10. Professional instruments 2 2 2 2 2 2
11. Gold and silver 10 9 9 7 9 8
12. Ores 2 2 2 2 2 2
13. Textile yarn & fabric 1 1 1 1 2 2
14. Others as unclassified 15 8 10 8 11 8
Total exports 100 100 100 100 100 100

Table-4.5 Direction of India’s Foreign Trade 1990-1999 (per cent)

Region/ Country Destination of exports: Sources of Imports:

2002 2003 2004 2002 2003 2004

1. West Europe 24 24 24 25 24 24
2. East Europe 3 3 3 2 2 3
3. Asia and Oceania 43 46 44 29 35 36
4. Africa 6 6 6 6 4 4
5. America 25 21 23 10 9 10
6. Non-specified countries 0 0 0 28 26 23
Total 100 100 100 100 100 100

22
 (d) Trade and Tariff Policies

The Medium Term export Strategy (MTES) announced in 2002 set out a road map for the
Indian exports in the Tenth Five Year Plan (2002-2007). The MTES aims at increasing
India’s share in world trade from the present level at 0.8 per cent to one per cent by 2006-
07. This implies doubling of India’s exports in this period. Export market diversification
is a major objective of MTES and the Export-Import (EXIM) Policy with special focus
on sub-Saharan Africa and the Commonwealth of Independent Nations.

The modified Five Year EXIM policy for the period 2002-2007 announced in January
2004 aimed at consolidation and acceleration of exports growth so as to make India a
manufacturing hub for producing quality goods and services. Measures focused on
simplification of operational procedures and imparting greater transparency with for
reduction of transaction costs for exports. Some restrictions on imports of gold and silver,
electrical energy and air guns were removed. Under the duty free replenishment
certificate (DFRC) scheme, duty free import of fuel was allowed with actual user
conditionality. Procedures for Export Promotion Capital Goods (EPCG) scheme were
simplified. Deemed exports benefits were granted for fertilizers, refinery products and
items attracting zero per cent customs duty. Various measures were announced to boost
exports. Facilities for special Economic Zones (SEZs) were widened.

A new trade policy called the National Foreign Trade Policy 2004-09 was announced on
August 31, 2004 with an objective of doubling India’s share in global trade by 2009 and
to act as an effective instrument of economic growth by giving thrust to employment
generation, particularly in semi-urban and rural areas. Key strategies included removal of
all controls, simplification of rules and procedures and identification of focus areas with
potentials for both employment generation and exports. Special package for agriculture
included duty free imports of capital goods and seeds, special funds for Agri Export
Zones and incentives for exports of fruits, vegetables, flowers and forest products.
Special incentives were announced for exports of gems and jewellery, handlooms and
handicrafts and leather products. To encourage service exports, existing scheme of
utilizing a part of export earnings for importing related items was revamped and hotels
were allowed to use their duty credit entitlement for import of food items and alcoholic
beverages. Other important measures included the following:

 EPCG scheme was liberalized for service providers.

 Import of fuel under DFRC entitlement was allowed to be transferred to marketing
agencies.
 Export Oriented Units (EOUs) were exempted from service tax.
 A new scheme was announced to establish Free Trade and Warehousing Zones and
FDI to the extent of 100% was allowed for establishment of such zones.
 Imports of second hand capital goods were allowed without any age restrictions.
 A Service Exports Promotion Council was established.

23
 (e) Exchange rate policies

In international categorizations by the International Monetary Fund (IMF), India is

regarded as one of the countries having independent floating exchange rate arrangement.
The day to day fluctuations in the exchange rate of Indian rupee are determined by free
market forces for supply and demand for foreign exchange; such fluctuations reflect both
economic fundamentals and short term speculation. The rupee is also fully convertible on
current account and almost fully convertible on capital account for the non-residents. The
year 2004 posed several challenges for the exchange rate management in the face of the
continued increase in international prices of crude oil and petroleum products and
substantial rise of Indian oil import bill.

The broad principles that guided India’s exchange rate policy include the following:

• Careful monitoring and management of exchange rates without a fixed target or a

pre-announced target or a band. Flexibility in the exchange rate together with ability
to intervene, if and when necessary;
• A policy to build a higher level of foreign exchange reserves which takes into
account not only anticipated current account deficits but also ‘liquidity at risk’
arising from unanticipated capital movements;
• A judicious policy for management of capital account.

In 2004 government further liberalized the movement of cross-border capital flows,

especially in the area of outward foreign direct investment, inward direct and portfolio
investment, non-resident deposits and external commercial borrowings. Other policies
include the following:
 FDI limit was raised from 40% to 49% in civil aviation.
 Tax was imposed on interest earned on the deposits by the Non-Resident Indians.
 Interest rates on public provident funds and small savings were maintained at 8%.
• Prepayment of External Commercial Borrowing by the corporates was allowed
without any limit.

Rupee depreciated by 6.3 per cent in April-July 2004. But these interventions along with
huge foreign exchange reserves and continual depreciation of US dollar vis-à-vis major
international currencies led to an appreciation of the Indian rupee by 2 per cent in terms of
US dollar in August-November 2004. Given these trends, rupee is expected to depreciate
marginally in terms of US dollar in 2004.

The nominal effective exchange rate of rupee (NEER) depreciated by 8 per cent in 2002-
2003 followed by an depreciation by 1.8 per cent in 2004. The real effective exchange rate
(REER) of the rupee depreciated by only 2.4 per cent in 2002-2003 and appreciated in
2004 due to widening price differentials between India and its major trading partners. The
high level of REER has become an issue of some concern as the authorities try to find
ways to promote exports, and the recent appreciation of the rupee in both nominal and real
terms had reduced the competitiveness of the Indian exports in international markets.

24
 5. Capital inflows and outflows
(a) Balance of Payments

Despite difficult international environment and hardening of international prices of crude

oil, India’s external trade and payments situation in recent years was marked by a
noticeable structural change towards a more stable and sustainable balance of payments.
There was continual improvement in the invisible account and in the coverage of import
payments through export earnings. The current account earned surplus every year since
2001, and the surplus as a percentage of GDP increased from 0.2 per cent in 2001 to 1.4
per cent in 2003-2004. In the capital account, there was a major shift in favor of long-term
and non-debt creating financial flows such as FDI and portfolio investment.

Table 5.1 Net Capital inflows (in US$ million)

Net capital inflows 2001 2002 2003 2004 Est.
External assistance, net 1117 -2480 -2661 1900
Foreign direct investment (FDI), net 4741 3611 3137 3500
Portfolio investment, net 1951 944 11355 1000
Commercial bank credits, net -1576 -2344 -1853 850
Other capital inflows, net 4743 13112 12725 3700
Total capital inflows, net 10976 12843 22703 10950
Official grants 384 410 559 500
Capital inflows including grants 11360 13253 23262 11450
Source: RBI Annual Report 2003-2004 for the years 2002-2003, and author’s estimate for 2004.

(b) Foreign investment

Foreign investment inflows (as per balance of payments definition) increased two and
half times from $4.5 billion in 2002 to $14.5 billion in 2003 attracted by the sound macro
economic environment in India, the stability of the exchange rate of rupee, further
liberalization of foreign investment policies, and relatively high return of investment in
India compared to other host countries. The increase was attributable to increases in both
direct foreign investment and portfolio investment as a result of upgrading of Indian scrip
by some international credit rating organizations and bullish stock exchange markets at
home. Foreign investment inflows declined to $4.5 billion in 2004 due to decline of
portfolio investment mainly influenced by political economy and bearish stock markets in
the first half of 2004.

The source and direction of foreign direct investment flows remained by and large
unchanged in the 1990s. Companies registered in Mauritius and the USA were the
principal source of foreign direct investment in India in 2000-2003 followed by United
Kingdom, Japan and Germany (Table 5.3). The bulk of foreign investment went into
computers (both hardware and software), engineering industries, services, electronics and
electrical equipment, chemicals and allied products, food and diary products (Table 5.4).

25
 Table 5.2 Foreign Investment Inflows (in US$ million)
Items 2000 2001 2002 2003 2004-Est.
A. Foreign Direct Investment (FDI) 4029 6131 4660 4675 3500
 Through govt. approval 1456 2221 919 928 800
 RBI automatic route 454 767 739 534 500
 NRI investments 67 35 - - -
 Acquisition of shares 423 1072 1042 735 600
 Reinvested earnings 1629 2036 1960 1800 1600
B. Portfolio investment 2760 2021 979 11377 1000
 GDRs/ ADRs 831 477 600 459 200
 FIIs 1847 1505 377 10918 800
 Off-shore funds 82 39 2 - -
C. Total Foreign Investment 6789 8152 5639 16052 4500
Note: Data in this table donot tally those in the balance of payments table due to differences in definitions.

Table 5.3: Country wise inflows of foreign Direct Investment (US $ million)
Home country 1999 2000 2001 2002 2003
Germany 31 113 74 103 69
United Kingdom 112 61 45 224 157
Japan 142 156 143 66 67
Mauritius 501 843 1863 534 381
Netherlands 82 76 68 94 197
South Korea 8 24 3 15 22
USA 355 320 364 268 297
Others 350 317 428 354 272
Total 1581 1910 2988 1658 1462
Note: FDI inflows in this table include only those through government approval and RBI automatic route.

Table 5.4: industry-wise inflows of foreign Direct Investment (US$ million)

Sectors 1999 2000 2001 2002 2003
Chemical & allied 120 137 67 53 46
Computers 99 306 368 297 151
Engineering 326 273 231 262 274
Electronics & electricals 172 213 659 95 103
Finance 20 40 22 54 5
Food & diary products 121 75 49 35 63
Pharmaceuticals 54 62 69 44 79
Services 116 226 1128 509 431
Others 553 578 398 309 311
Total 1581 1910 2988 1658 1462
Note: FDI inflows in this table include only those through government approval and RBI automatic route.

(c) Foreign Exchange Reserves

After a build up of foreign exchange reserves (including gold and SDR) by $17 billion in
2002, there was a substantial build up of the foreign exchange reserves by $31.4 billion in
2003, and further by $19.8 billion in 2004. This was mainly due to improvement in current
account balance. The stock of foreign exchange reserves (including gold and SDR) stood
at $121 billion at the end of October 2004 and is estimated to increase to $122 billion
equivalent to 15.2 months of imports at the end of March 2005, from $102 billion
equivalent to 15.4 months of imports at the end of March 2004.

26
The policy for reserve management is judiciously built upon a host of identifiable factors
and other contingencies. Such factors include the size of the current account deficit; the
size of short-term liabilities; the possible variability in portfolio investment and other
types of capital flows; the unanticipated pressures on the balance of payments arising out
of external shocks; and movements in the repatriable foreign currency deposits of Non-
Resident Indians (NRIs). Taking these factors into account, India’s foreign exchange
reserves are at present comfortable and consistent with the rate of growth, the share of the
external sector in the economy and the size of risk-adjusted capital flows.

It may also be mentioned that most of the increase in reserves in recent years is through
net purchases by RBI in the domestic forex market, for which an equivalent amount of
domestic currency has been released to the concerned domestic entities, including public
sector units, corporate bodies and individuals. The decision on the use of this counterpart
domestic currency released by RBI (i.e., for investment, deposits or as liquid assets, etc.)
is the responsibility of the entities. Needless to add that to the extent this counterpart local
currency is used by recipient entities for further investment in the economy, the impact
on industrial demand and growth would be favorable.

(d) External debt and debt-service

Trends of various debt indicators such as debt/GDP and debt/service ratios indicate a
marked improvement in India’s external indebtedness. India’s external debt consisting of
both short-term and long-term liabilities on Government and non-Government accounts
increased from $104.9 billion at the end of March 2003 to $112.6 billion at the end of
March 2004, and is expected to increase to $114.5 billion at the end of March 2005.
Multilateral and bilateral debt constituted 44 per cent of total debt stock and the share of
concessionary debt was 36 per cent of the total debt stock in 2004. The share of short-term
debt declined continuously in recent years, and stood at 2.5 per cent of total external debt
in 2004. India improved its rank among the top 15 debtor countries from third in 1991 to
eighth in 2002. Importantly, among the top 15 debtor countries, India’s short-term debt to
foreign exchange reserve ratio are the lowest.

The changing composition of capital account in favor of non-debt financial flows led to an
impressive improvement in debt indicators. The debt-to-GDP ratio declined continuously
from 38 per cent in 1991 to 18.4 per cent in 2003 and further to 16.6 per cent in 2004. The
debt-service ratio (i.e. the ratio of total debt services to gross receipts on the current
account of the external sector) also declined continuously from 35 per cent in 1990 to 18.3
per cent in 2003 and further to 13.5 per cent in 2004. The World Bank now classifies India
as a “low indebted country”.

On considering high transactions cost and stringent conditionalities, and the present level
of foreign exchange, previous government took a policy decision in 2003 to borrow only
from 5 bilateral countries viz. Japan, UK, Germany, USA and Russian Federation.
However, the new government after taking charge in June 2004 removed conditionalities
of country origin for borrowing. India is also participating actively in the international

27
initiative for economic development of HIPC (Heavily Indebted Poor Countries) and
other developing countries. Under the HIPC, India is providing credit lines to seven
eligible HIPC countries viz. Mozambique, Tanzania, Zambia, Ghana, Guyana, Nicaragua
and Uganda. The government has waived the outstanding dues from these countries. In
addition India provides credit lines to a number of developing countries.

5.5 Outstanding External Debt (millions of US dollars)

Items March 2002 March 2003 March 2004 March 2005
Proj.
External debt 98757 104869 112593 114507
Long term 96012 100300 107857 109507
Public 43619 43716 44303 46103
Private 52393 56584 63554 63404
Short term 2745 4569 4736 5000
Debt services
In US dollars 10863 14407 20949 17000
As % of gross exports 13.4 15.1 18.3 13.5
As % of GDP 2.3 2.8 3.4 2.5
Source: Status Report on India’s External Debt, June 2004, Ministry of Finance and Reserve
Bank of India Annual Report 2003-04 for the years 2002-2004, and author's estimate for 2005.

(e) Outlook for the External Sector for 2004-2006

Assuming a moderate depreciation of the real effective exchange rate for Indian rupee in
2005-2007, India’s trade performance is expected to improve in response to a recovery in
international economic activity, trade deepening, and further integration of the country
into the global economy. Exports in terms of US dollar are projected to grow by 16 per
cent on an average per annum in 2005-2007 while imports are likely to grow by 17 per
cent in the period. The trade deficit as per centage to GDP is expected to remain in the
range of 3.4 to 4 per cent of GDP and the invisible surplus is expected to remain around
4.3 per cent of GDP in 2005-2007 due to sustained growth in remittances from abroad.
Consequently, the current account balance is expected to generate marginal surplus in the
range of 0.2 per cent to 0.5 per cent of GDP in 2005-2007.

On capital account, access to commercial markets would be renewed as international

credit ratings improve, and the composition of capital inflows would continue to shift in
favor of non-debt creating financial flows in response to the sustained reforms in
industry, infrastructure and factor markets. Total capital flows are expected to increase
from 1.5 per cent in 2004 to 1.7 per cent of GDP in 2007 and flows of foreign investment
to remain at 1 per cent of GDP in the period. The stock of foreign exchange reserves is
expected to increase from $122 billion equivalent to 15.2 months’ imports at the end of
2004 to $178 billion equivalent to 14 months’ imports at the end of 2007.

The stock of external debt is expected to increase to $120 billion amounting to 13.3 per
cent of GDP at the end of 2007. The debt-service ratio would remain at its normal level
around 10 per cent in 2005 (despite maturing of the India Millennium Bonds in 2005,

28
which were issued to non-residents in 2000 and generated $5.5 billion) and decline to 9.3
per cent of current receipts (exports and gross invisibles) in 2007.

6. Fiscal Developments
(a) Fiscal situation in 2003 and 2004

Tax revenues of the Central government in 2003-04 RE exceeded BE by 1.8% (due to

higher realisation of corporate tax), and non-tax revenues also exceeded BE by 8.2%
(due to higher realisation of dividends and grants). Total expenditure exceeded BE by
8%. While revenue expenditure was short of BE by 0.9%, capital exp exceeded BE by
53.5%. Defense, interest payments and subsidies lower than BE by Rs.12, 946 crore.
Consequently, there was an improvement in fiscal deficit to 4.8% of GDP in 2003-04 RE
from BE at 5.6% of GDP, and improvement in revenue deficit to 3.6% of GDP in 2003-
04 RE from BE at 4.1% of GDP.

The Union Budget for 2004 continued the on-going fiscal adjustment by targeting the
fiscal deficit at 4.4 per cent of GDP and attempted to stimulate balanced growth of
agriculture, industry and services. Fiscal policies included rationalization of customs and
excise duties and reduction of the maximum tariff rate from 30 per cent to 25 per cent.
The Budget attempted to stimulate the economy by leaving direct taxes unchanged and
increasing public expenditure on agriculture, infrastructure and rural development.
Policies were announced to promote agri-business, small enterprises and rural
development. Budget had also a strong commitment to the development of social sectors
for achieving distributive justice, strengthening the public distribution system and poverty
alleviation programs, improving rural infrastructure and generation of employment.
Welfare schemes for the poor included the following:
• Additional plan outlay of Rs.10, 000 crore for Food for Work Program, sarva Shiksha Abhiyan,
Mid-day Meal scheme, basic health care, drinking water etc.
• Antyodaya Anna Yojana expanded to 2 crore families.
• Strengthening of public distribution system.
• A new Food for Work Program in 150 backward districts.
• Allocation of Rs.1180 crore for programs concerning SCs, Rs.1146 crore for STs, additional Rs.50
crore for minorities.
• A special Group Insurance Scheme of Rs.10, 000 at a premium of only Rs.120 per person.
• A new Universal Health Insurance Scheme for poor.
• An education cess of 2% on taxes.
• No tax for individuals with taxable income up to Rs.1 lakh.
• Tax holiday extended to rural hospitals and agro processing industries

Major fiscal measures announced in the budget for 2004 include the following:
Fiscal consolidation:
• Fiscal deficit targeted at 4.4% of GDP in 2004-05 BE compared to 4.8% in 2003-04RE.
• Revenue deficit targeted at 2.5% compared to 3.6% in 2003-04 RE.
• Primary deficit kept at the same level at 0.3% of GDP in 2004-05 BE as in 2003-04 RE.
• Blue print to target subsidies to be prepared.
• Rate of interest on central government loans to states reduced from 10.5% to 9%.
• States would be allowed to raise fresh loans and repay high cost loans.
• Passing on external loans to States on a back-to-back basis.

29
30
Tax reforms:
• Value Added Tax will be introduced at the state levels w.e.f. April 1, 2005.
• No one with a taxable income up to Rs.1 lakh is required to pay income tax.
• Acquisition of agricultural land is exempted from capital gains tax.
• Tax on long-term capital gains abolished. Instead, a tax on transactions in securities on stocks to
be levied at the rate of 0.15%.
• Service tax rate increased to 10% and more services brought under the tax net.
• Tax exemptions on NRE accounts abolished.
• Gifts from unrelated persons to be taxed.
• Customs duty on non-alloy steel reduced from 15 to 10%,
• Peak rate on alloy steel, copper, zinc and base metals reduced to 15% and customs duty on raw
materials and minerals reduced to 15%.
• Tractors and agricultural implements are fully exempted from import duties.
• Import duty on refined palm oil raised to 75%, that on crude palm oil retained at 65%.
• Excise duty reduced from 16 to 8% on meat, poultry, and fish preparations.
• Aids for physically handicapped persons fully exempt from import duty..
• Full excise duty exemptions for computers

New tax regime for textiles:

• Mandatory CENVAT chain abolished.
• No mandatory excise duty on pure cotton, wool, silk, whether it is fiber, yarn, fabric or garment.
• Blended textiles and pure non-cotton to have different tax regime.
• Mandatory excise duty on man-made fiber at 16%, polyester filament yarn at 24% and other man-
made filament yarn at 16%.

The tax-GDP ratios of the Centre suffered a steady deterioration in 1990s (Table-6.1)
reflecting a decline in tax buoyancy. The restructuring of both direct and indirect taxes
effected since 1991 coupled with a structural shift in the composition of GDP towards the
less taxed services sectors affected adversely the growth of tax revenues. However there
has been some increase in the ratios of non-tax revenues to GDP due to restructuring of
public sector enterprises and rationalization of user charges for public utilities such as
power, water and transport.

For medium term management of the fiscal deficit, the government passed a Fiscal
Responsibility Bill in the parliament. The Bill proposes limit on fiscal deficit, limit on
government borrowing, limit on total stock of public debt and complete elimination of
deficit on the current account of the Budget within next five years.

Table-6.1 Gross Revenue Receipts of the Central government (as % of GDP)

Year Major Taxes Gross tax Non-tax Total

Income Corporatio Excise Customs revenue revenue revenue
tax n tax duties duties receipts
1990-91 0.9 0.9 4.3 3.6 10.1 2.1 12.2
1995-96 1.3 1.4 3.4 3.0 9.4 2.4 11.8
2000-01 1.5 1.7 3.3 2.3 9.0 2.7 11.7
2001-02 1.4 1.6 3.2 1.8 8.1 3.0 11.1
2002-03 1.5 1.8 3.5 1.8 8.8 3.0 11.7
2003-04 1.5 2.3 3.6 1.8 9.3 2.7 12.0
2004-05 1.6 2.4 3.7 1.9 9.8 2.3 12.1

31
In the first half of 2004 i.e. April-Sept 2004 tax revenues amounted to only 33.3 per cent
of the budget estimates (BE) for the year, while non-tax revenues amounted to 38 per cent
of BE. However, personal income taxes increased by 73 per cent and service tax by 69 per
cent in April-Sept 2004 over April-Sept 2003. Due to various economy measures, total
expenditure was generally under control and amounted to 41 per cent of BE (Table 6.2)
and the fiscal deficit amounted to 39 per cent of the budget estimate.

Table 6.2 Union Government Account in April-September 2004

BE Actual As % BE As % RE As %
Items Rs.billion Rs.billion of BE of GDP of GDP
1.Revenue receipts (2+3) 3093 1065 34.4 9.7 3.3
2.Tax revenue 2339 779 33.3 7.3 2.4
3.Non-tax revenue 754 286 38.0 2.4 0.9
4.Capital receipts 1685 891 52.9 5.3 2.8
5.Non-debt cap.receipts 311 358 115.2 1.0 1.1
Interest payments 1295 554 42.8 4.1 1.7
6.Other capital receipts 1374 532 38.7 4.3 1.7
7.Total receipts (1+4) 4778 1956 40.9 15.0 6.1
8.Total expenditure (9+10) 4778 1956 40.9 15.0 6.1
9.Revenue expenditure 3855 1665 43.2 12.1 5.2
10.Capital expenditure 923 291 31.5 2.9 0.9
11.Revenue deficit 761 600 78.7 2.4 1.9
12.Fiscal deficit 1374 532 38.7 4.3 1.7
13.Primary deficit 79 -22 -27.4 0.2 -0.1
14.GDP at current mp 31825 31825 100.0 100.0

Fiscal deficit in the first half of the year accounted for 39% of the government's estimate
for the year. The revenue deficit reached 78% of its end of year target, largely as a result
of slow growth. This has increased concerns that the government's plans to bolster public
spending in infrastructure, education, and rural development may increase fiscal deficit.
An expected rise in interest rates could further harm the fiscal position and the
government may feel more pressure to press ahead with its plans to strengthen the tax
system and its divestment programme.

Given these developments, the actual fiscal deficit of the Central Government in 2004 is
likely to be contained at 3.6 per cent of GDP compared with the budget estimate at 4.3 per
cent of GDP (Table 6.3). Although both non-tax receipts and personal income taxes were
buoyant, the performance of indirect taxes was poor due to weaker growth of excise duties
than expected. There was also a shortfall in realization of disinvestment targets due to the
lack of agreement regarding the mode of disinvestment among the political parties.

(b) Fiscal Deficit and Financing

Combined fiscal deficit of the Centre and State governments decreased from 9.9 per cent
of GDP in 2001 to 9.5 per cent of GDP in 2002 and further to 9.4 per cent of GDP in
2003 and is budgeted to decrease to 7.9 per cent of GDP in 2004 (Table 6.4). However,

32
given the present trends of expenditures and revenues, actual fiscal deficit of the general
government might reach 9.6 per cent of GDP in 2004, almost the same level as in 2003.

Market borrowings emerged as the major financing item of the fiscal deficit of the central
government since the mid 1990s with a corresponding decline in the shares of other
liabilities and external finance (Table-6.5). There was net outgo in external finance in
2002-03 due to pre-payment of a part of external debt borrowed from the multilateral and
bilateral organizations. Among domestic sources, amounts mobilized through small
savings and provident funds have generally been at higher costs than the market
borrowings. The share of market borrowing in financing fiscal deficit of the states also
increased in 1990s with a corresponding decline in that of loans from the central
government (Table-6.6). However, the receipts of small savings remained the major
source of financing.

6.3 Fiscal Situation of the Central Government (As % of GDP)

Central government budget 2001 2002 2003 2004 2004
as per cent of GDP Rev.Est. (BE) Est.
1. Tax revenue 5.9 6.5 6.7 7.3 8.1
2. Total non-debt revenue 9.7 10.9 12.2 10.7 11.1
3. Current expenditure 13.2 13.8 12.9 12.1 11.2
4. Total expenditure & net lending 15.9 16.8 16.9 15.0 14.7
5. Overall budget balance (2-4) -6.2 -5.9 -4.7 -4.3 -3.6
Source: Central Government Budget 2004-2005, Ministry of Finance for the years 2001-2004
and author’s estimates for 2004.

6.4 Fiscal Deficit of Centre and States combined (as per centage of GDP)
Items 2001 2002 2003 2004 2004
Rev.Est. (BE) Est.
1. Gross fiscal balance [Deficit ( -)] 9.9 9.5 9.4 7.9 9.6
2. Revenue balance [Deficit ( -)] 7.0 6.6 6.2 4.0 6.2
3. Primary balance [Deficit ( -)] 3.7 3.3 2.9 1.7 3.2

Table-6.5 Financing of gross fiscal deficit of the central government (in per centage)
Sources of financing 1990-91 1995-96 2002-03 2003-04 2004-05
RE BE
1. Domestic finance (a+b+c) 92.9 99.5 108.2 108.9 94.1
(a) Market borrowings 17.9 54.9 71.8 64.9 65.8
(b) Other liabilities 49.5 28.3 35.2 51.8 18.5
(c) Use of cash with RBI 25.4 16.3 1.3 -7.8 9.9
2. External finance 7.1 0.5 -8.2 -8.9 5.9
3. Total (1+2) 100 100 100 100 100
Note: Other liabilities comprise small savings raised from the people, state provident
funds, reserve funds, treasury bills issued.

33
 Table-6.6 Financing of gross fiscal deficit of the state governments (in per centage)
Sources of financing 1990-91 1995-96 2002-03 2003-04 2004-05
RE BE
1. Loans from central govt. 53.1 47.1 -1.8 -15.1 -6.5
2. Market borrowings 13.6 18.7 27.9 32.1 23.0
3. Other liabilities 33.3 34.2 73.9 83/0 83.6
4. Total (1+2+3) 100 100 100 100 100
Note: Other liabilities comprise small savings raised from the people, state provident funds, reserve
funds, deposits and advances, and loans from Financial Institutions. With the change in the system of
accounting with effect from 1999-2000, state share in small savings, which were hitherto included
under loans from the central government, is included under other liabilities.

(c) Contingent liabilities of the government

In 1990s there was a steady decline of the contingent liabilities of the central government,
but an increase in the liabilities of the states (Table-6.7). Many states have now initiated
measures to contain the growth of guarantees such as discretion and selectivity for the
provision of guarantees, disclosing comprehensive information in budget documents,
setting up of guarantee redemption funds, fixing statutory and administrative limits on
guarantees and charging guarantee commissions on outstanding guaranteed amounts.

A Group to Assess the Fiscal Risk of State Government Guarantees (2002) made the
following suggestions to contain state guarantees and fiscal risk:
• Guarantees to be met out of budgetary resources should be identified and treated
as equivalent to debt.
• For other guarantees, projects and associated costs need to be identified..
• Guarantees need to be mapped for future devolvement.
• Data need to be published for generating public debate.
• A State level centralized unit should be set up to track and monitor guarantees.
• At least one per cent of outstanding guarantees to be transferred to the Guarantee
Redemption Fund every year.

Table 6.7 Outstanding Government Guarantees (as per centage of GDP)

Year Centre States Total

1992-93 7.8 5.7 13.4
1993-94 7.3 5.7 13.0
1994-95 6.2 4.8 11.0
1995-96 5.5 4.4 9.9
1996-97 5.1 4.6 9.7
1997-98 4.9 4.8 9.7
1998-99 4.3 5.6 9.9
1999-2000 4.3 6.8 11.2
2000-01 4.1 8.1 12.2
2001-02 4.2 7.2 11.4
2002-03 3.7 7.5 11.2

34
 (d) Public Debt

The high level of fiscal deficit of the Central Government has led to steady accumulation
of debt by the Central Government, as indicated by rise in debt-GDP ratio from 92 per
cent (comprising domestic debt at 82 per cent and external debt at 9 per cent) at the end
of March 2002 to 97 per cent (comprising domestic debt at 88 per cent and external debt
at 8 per cent) at the end of March 2004 (Table 6.8). The debt-GDP ratio of the Central
government is estimated to be 66 per cent (comprising domestic debt at 60 per cent and
external debt at 6 per cent) at the end of March 2005.
Table-6.8 Domestic Debt of the centre and state combined at end March
Items 2000 2001 2002 2003 2004 2005
Domestic debt combined (Rs.billion) 13827 16007 18815 21857 24828 28420
Centre 9626 11026 12949 14996 16771 19311
State 4201 4981 5867 6861 8057 9109
External debt combined (Rs.billion) 2044 2052 2130 2019 1834 1735
Centre 2044 2052 2130 2019 1834 1735
State 0 0 0 0 0 0
Total govt. debt combined (Rs.billion) 15871 18059 20946 23876 26662 30155
Centre 11670 13078 15079 17015 18605 21046
State 4201 4981 5867 6861 8057 9109
Domestic debt as % of GDP (combined) 71.4 76.6 82.4 88.5 88.3 89.6
Centre 49.7 52.8 56.7 60.7 59.6 60.9
State 21.7 23.8 25.7 27.8 28.6 28.7
External debt as % of GDP (combined) 10.6 9.8 9.3 8.2 6.5 5.5
Centre 10.6 9.8 9.3 8.2 6.5 5.5
State 0.0 0.0 0.0 0.0 0.0 0.0
Total govt.debt as % of GDP (comb) 81.9 86.4 91.8 96.7 94.8 95.1
Centre 60.3 62.6 66.1 68.9 66.2 66.3
State 21.7 23.8 25.7 27.8 28.6 28.7
Interest payments combined (Rs.billion) 1105 1247 1424 1584 1800 1917
Centre 902 993 1075 1178 1246 1295
State 202 254 349 406 554 622
Revenue receipts combined (Rs.billion) 3437 3788 4002 4505 5292 6054
Centre 1815 1926 2014 2317 2630 3093
State 1623 1862 1987 2187 2662 2961
Interest payment as % GDP 5.7 6.0 6.2 6.4 6.4 6.0
Centre 4.7 4.8 4.7 4.8 4.4 4.1
State 1.0 1.2 1.5 1.6 2.0 2.0
Interest payment as % revenue 32.1 32.9 35.6 35.2 34.0 31.7
Centre 49.7 51.6 53.3 50.8 47.4 41.9
State 12.5 13.6 17.6 18.6 20.8 21.0

Notes: (1) States are not allowed to borrow directly from external sources. Centre government borrows externally on
behalf of the state governments and lends it to the state governments as domestic debt. Therefore, all external debt is
shown on the central government account. (2) General government public debt may not add up to the respective public
debt of the Centre and States on account of inter-government transfers.

35
 The combined domestic debt of the general government is expected to increase from 88
per cent of GDP in 2003 (comprising domestic debt of the centre at 60 per cent and state
government debt at 29 per cent) to 90 per cent in 2004 (comprising central government
domestic debt at 61 per cent and state government debt at 29 per cent) (Table-6.8).

The combined public debt stock (comprising both internal and external debt) of the
general government (comprising central government and state governments) is expected
to remain at 95 per cent of GDP (comprising central government debt at 66 per cent and
state government debt at 29 per cent) at the end of March 2005 (Table-6.8).

A high overhang of domestic debt poses significant challenges for debt management as it
puts pressure on interest rates, crowds out private investment and creates problems for
future debt servicing. In order to avoid the problem of bunching of redemption and
rollovers, the central government is concentrating on medium term and long term
borrowings. The weighted average maturity of market loans in 2002-2004 increased to
13.5 years from 7.7 years in 1998. Nevertheless, the overall maturity of the marketable
debt remained skewed towards the shorter and medium end of the market.

7. Money and Finance

(a) Monetary policies

Broad money supply (M3) increased by 16.6 per cent in 2003 compared with an
expansion by 14.7 per cent in 2002 mainly due to higher growth of aggregate deposits of
the scheduled commercial banks (16.6 per cent in 2003 compared with 12.7 per cent in
2002) and substantial growth of net foreign exchange assets by 33.7 per cent in 2003
compared with 26.6 per cent in 2002.

The basic objective of monetary policies announced by RBI in 2004 was to contain
inflation around 5 per cent and to sustain overall GDP growth rate in the range of 6.5 to 7
per cent. In the face of a distinct acceleration of the inflation rate, the thrust of the
monetary policy in 2004 was to check liquidity but to ensure adequate flow of credits to
the productive sectors of the economy and to support revival of investment demand.
Inflation target was later revised upwards to 6.5 per cent.

As per the monetary and credit policy announced in May 2004, the cash reserve ratio
(CRR) was kept unchanged at 4.5 per cent, the bank rate at 6 per cent and the repo rate at
4.5 per cent. Banks were advised to put in place comprehensive and rigorous risk
assessment methods. Other policies announced included the following:

 Micro finance institutions would not be permitted to accept public deposits until they
comply with extant regulatory framework of the RBI.
 Development of mechanism for debt restructuring of medium enterprises.
 Scope of infrastructure was widened.
 A Gold card scheme was introduced for exporters.
 ECB limit was enhanced to $500 million under automatic route.
 Resident individuals are permitted to remit freely up to $25, 000.

36
 Indian corporate and partnership firms were allowed investing overseas up to 100 per
cent of their net worth.
 Banks were allowed to raise long term bonds for financing infrastructure.
 Banks to draw a road map for movement towards Bassel-II by December 31, 2004.
 Banks to make higher provisioning for older NPAs.
 Risk based supervision is extended to more banks.

The mid-year monetary policy announced by the RBI in October 2004 did not
change the bank rate, but increased CRR and repo rate. To discourage inflationary
expectations, RBI announced upward revision of cash reserve ratio (CRR) by 50 basis
points on September 11, 2004 to be effected in two stages, and a hike in the repo rate by
25 basis points to 4.75 per cent. The RBI refrained from enhancing the lending rates,
despite speculations to the contrary, because of its perception, also shared by the
Government, that the inflationary pressure starting with mid-May 2004, is commodity
price driven rather than the result of excess liquidity, Therefore, any attempt to increase
the interest rate to curb the liquidity would be counter-productive, as it would adversely
affect investment and growth, thereby reinforcing the inflationary pressures.

In 2004 there was strong growth in bank deposits despite low real interest rates,
particularly longer-term rates. There was abundant liquidity in the system and low off-
take of commercial credits. There was a substantial increase of investments by
commercial banks in government securities and bonds.

As on the 15th October 2004, the annual growth of the broad money supply was 14.5 per
cent supported by an increase of net bank credit to the government by 5.1 per cent, bank
credits to the commercial sector by 23.5 per cent, net foreign exchange assets by 30.8 per
cent and government’s currency liabilities to the public by 1.5 per cent. Total bank credits
of the commercial banks increased by 28.8 per cent aided by a substantial increase of
both food and non-food credits. Aggregate deposits of the banks increased by 15.9 per
cent, while investments by the banks in government securities declined significantly. .

Composition of bank credits by industry groups reveals that there was significant increase
in credits to tea, jute textiles, sugar, food processing, gems and jewellery, computer
software and hardware. On the other hand, there was a decline of credits to cotton
textiles, drugs and pharmaceuticals as these sectors had in general surplus funds.

Given these trends and expecting real GDP growth rate around 6 per cent and the rate of
inflation around 6 per cent in terms of WPI, broad money supply is expected to grow by
14.5 per cent as compared to target at 4 per cent in 2004 for creating a favorable
environment for investment.

37
 (b) Financial sector performance and policies

Several measures were announced in 2004 to strengthen the capital market. These
measures included the following:

• FDI limit raised from 40% to 49% in civil aviation and limits are being raised in
insurance and telecommunications.
• Interest rates on public provident funds and small savings kept unchanged at 8%
while introducing a Senior Citizens Deposit Scheme with interest rate of 9%.
• An Investment Commission and a National Manufacturing Competitiveness
Council set up.
• A Board for Reconstruction of Public Sector Enterprises is established.
• Fund for Regeneration of Traditional Industries to be set up.
• Ceiling for loans under the Capital Subsidy Scheme raised for SSIs.
• Securitisation Act amended to take care of borrower’s interest.
• Legislation for defined contribution pension scheme is introduced.
• Bank credits to agriculture are liberalized.

Scheduled commercial banks (SCBs) improved their performance in 2003. The ratio of
net profits to total assets improved from 1 per cent in 2002 to 1.2 per cent in 2003. There
was also a decrease of net non-performing assets (NPAs) of the commercial banks, which
amounted to 3 per cent of net advances at the end of March 2004 compared with 4.5 per
cent at the end of March 2003. All commercial banks out of 90 banks with the exception
of only two attained the minimum capital adequacy ratio (CAR) of 10 per cent by end
March 2004.

Stock market remained volatile but bullish in general in major parts of 2003 as a result of
sustained industrial growth, bumper agricultural production, substantial build up of
foreign exchange reserves, strong Indian rupee, sound macro economic environment and
favorable credit rating by all credit rating organizations. BSE Sensitive Index, which
maintained an average value of 4492 in the range of 2924-6194 in 2003, started with the
average value of 5167. The up trend witnessed in 2003-04 was broad-based and covered
almost all the sectors. Indian stock markets outperformed many other emerging markets
in Asia.

Stock prices had fluctuating trends in 2004 influenced by general elections and political
uncertainty in the first quarter followed by acceleration of inflation, delayed monsoon
and deficient rainfall, and hardening of international prices of petroleum products,
minerals, metals and metal products. However, prices showed upward trends due to
sound economic environment, strong rupee, substantial build-up of foreign exchange,
sustained industrial growth and moderate fiscal deficit.

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 8. Key policy issues
(a) Development policies

The Tenth five-year Plan (2002-2007) has set a target of 10 per cent for industrial growth
and 8 per cent for overall GDP growth. The Plan has highlighted that the overwhelming
priority is to speed up second-generation reforms to regain the growth momentum and
boost domestic and foreign investment.

There is need for greater co-ordination, co-operation and partnership between private and
public sectors. Both well-governed state and well functioning markets are essential for
high growth and sustainability. Government and free markets should supplement and
complement each other. Government should withdraw from sectors where private
participation is more productive and more efficient. But the scope of government is to
remain large in social sectors and physical infrastructure.

Momentum of reform needs to be maintained for sustaining higher growth and rapid
progress toward poverty alleviation. In particular, ambitious fiscal consolidation and broad
based structural reforms are needed to allow resources to be redirected from servicing
public debt towards economic development and social programs and to create enabling
environment for private investment.

(b) Agriculture Policy

Prospects of agricultural production in the current year 2004-05 are not considered to be
bright due to erratic monsoon. Agriculture accounts for 20 per cent of the GDP and
provides livelihoods to 66 per cent of the country's population. Over the years, the
agriculture sector has not received as much attention as other sectors in services and
manufacturing. The emerging areas in agriculture like horticulture, floriculture, organic
farming, genetic engineering, food processing, branding and packaging and financial
derivatives have high potentials of growth. Development of rural infrastructure, rural
extension services, agro-based and food processing industries are essential for generating
employment and reducing poverty.

Indian agriculture suffers from a mis-match between food crops and cash crops, low
yields per hectare except for wheat, volatility in production and wide disparities of
productivity over regions and crops. Domestic production of pulses and oilseeds are still
below the domestic requirements and India imports pulses and edible oils to satisfy
domestic demand. India is the second largest producer of rice and wheat in the world,
first in pulses production and fourth in coarse grains. A distinct bias in agricultural price
support policies in favor of rice and wheat distorted cropping pattern and input usage.
Market for farm output continues to be subject to heavy procurement interventions. A
shift from minimum support price system and developing alternative product markets are
essential for crop diversification and broad based agricultural development.

39
In recent years there has been considerable emphasis on the development of horticulture
and floriculture through the creation of critical infrastructure for cold storage, refrigerated
transportation, processing, packaging and quality control. India is the largest producer of
coconut, cashew nuts, ginger, turmeric, and black pepper, and the second largest producer
of groundnut, fruits and vegetables. India accounts for 10 per cent of the world fruit
production with first rank in the production of bananas, sapota and acid lime. India is also
the largest producer of milk, the fifth largest producer of egg and the seventh largest in
meat. It is necessary to improve cold storage and transportation facilities and developing
efficient marketing and export networks.

Food management is inefficient with unsustainable level of food subsidies imposing

heavy burden on government finance. The rural economy and the private sector lack the
basic infrastructure to build up sufficient buffer stocks, and the country remains
vulnerable to weather shocks. In recent years, the central government has provided
various fiscal incentives for improving rural storage facilities. The government is also
providing financial assistance to the State governments for procurement and distribution
of food grains at subsidized rates particularly to the families below the poverty line.

The enhanced availability of bank credits through priority lending to agriculture and
agro-based industries, favorable terms of trade, liberalized domestic and external trade
for agricultural products attracted private investment in agriculture in recent years. It is
likely that with the appropriate policy initiatives, this process will accelerate in the future.

(c ) Fiscal Policy

The government is committed to fiscal consolidation but the results to date are not
encouraging. Large revenue and primary deficits with nearly 50 per cent of revenues
going toward interest payments on government debt, high and growing amounts of public
debt held by financial system, poor physical and social infrastructure, and high levels of
poverty are not conducive to sustained high growth. Moreover, such a situation limits the
scope for use of fiscal policies to support economic activity, complicates the conduct of
monetary policy, and erodes the government's credibility with investors.

The government needs to formulate a medium-term strategy to put the fiscal balances on
a sustainable path. Fiscal consolidation and debt reduction have to be an integral part of a
more comprehensive, coherent and multipronged strategy consisting of tax and
expenditure reforms. Revenues need to be raised through broadening of tax base, further
rationalization of rate structures, removal of exemptions, continued improvement in tax
administration, introduction of a comprehensive Value Added Tax (VAT) and further
widening the service tax base.

In addition, expenditure needs to be rationalized by reducing subsidies and the wage bill.
Disinvestment of government equity in public enterprises needs to be expedited and a
part of the privatization receipts is earmarked for pre-payment of more expensive public
debt, restructuring weak public enterprises and for high priority social expenditures. The

40
effective implementation of the newly enacted Fiscal Responsibility and Budget
Management Act would be important as a signal for fiscal reforms.

The deteriorating fiscal situation of the states needs to be tackled urgently. Although
encouraging steps are being taken in some states (e.g., the passage of fiscal responsibility
legislation and measures to curb borrowing and contingent liabilities), much more needs
to be done for reversing the sharp deterioration in states' finances. Key steps include
accelerating power sector reforms, increasing user charges for public utilities, closely
monitoring irrigation projects, restructuring state financial and transport companies,
disinvestments of state level PSUs, implementing the VAT, and introducing more
stringent ways to prevent the build up of state debt and contingent liabilities.

(d)Unfinished Agenda on Reforms

Areas where further reforms would promote greater efficiency include the following:
(a) Privatization of public enterprises at a faster speed,
(b) Liberalization in land and labor markets,
(c) Formulation of an effective exit policy for bankrupt firms,
(d) Coordinating state level reforms
(e) Reforms in local governments (i.e. municipalities and corporations)
(f) Strengthening regulatory bodies in infrastructure
(g) Reforms in insurance, provident and pension funds, and
(h) Thrust on state provision of basic needs.

The following structural reforms need to be given priority:

 Although major reforms were taken at the macro level and in production sectors,
credible reforms need to be taken at local bodies particularly with regard to sale,
acquisition and transfer of land and property.
 Indian labor is highly protected. Reforms are necessary in labor markets for
enhancing employment.
 Regaining the momentum of the disinvestment program is critical for fiscal
sustainability and improving efficiency in the public sector.
 Further liberalization of the non-debt creating financial flows including FDI is
required for petroleum, real estate, telecom, civil aviation, banking and insurance.
There are synergies between disinvestment and the FDI strategy, and serious
consideration may be given to use disinvestment as a magnet for foreign investment.
 There is significant scope for increasing Indian exports by encouraging both labor-
intensive and high technology products.
 India will have to face and surmount the challenges posed by new technologies and
market places, such as Internet and e-commerce.
 It is important to lock in recent gains on the inflation front. Management of inflation
and protecting the interest of the vulnerable and weaker sections of the society should
remain a priority agenda for the government.
 Another priority of the government is to reduce inter-state disparities and
interregional inequality.

41
42
 Statistical Tables

Table-1 Selected Economic Indicators

(a) GDP growth rates (per cent)

Items 2002 2003 2004 2005 2006 2007
Estimate Forecast Forecast Forecast
Real GDP growth 4.0 8.1 6.0 6.8 7.2 7.5
- Agriculture -5.2 9.1 -2.0 2.0 3.0 4.0
- Industry 6.4 6.5 7.1 7.3 7.5 8.0
- Services 7.1 8.4 8.8 8.5 8.5 8.5
Inflation rate (CPI) 4.0 3.9 5.0 4.0 4.0 4.0
Inflation rate (WPI) 3.5 5.4 6.8 4.0 4.0 4.0
Source: National Accounts Statistics 2004, Central Statistical Organisation (CSO) for 2002-
2003 and author’s estimates/ projections for 2004-2007.

(b) Gross Domestic Savings and Investment (in Per cent of GDP at current mp)
As per cent of GDP 2001 2002 2003 2004 2007
Estimate Estimate Forecast
Gross domestic savings (GDS) 23.5 24.2 25.0 25.0 28.0
 Private sector 26.2 26.0 26.0 25.5 27.0
 Public sector -2.7 -1.9 -1.0 -0.5 1.0
Gross domestic Investment (GDI) 23.1 23.3 23.6 23.7 27.8
 Private sector 17.3 17.6 17.7 17.8 20.8
 Public sector 5.8 5.7 5.9 5.9 7.0
Resource gap = (GDS-GDI) 0.3 0.9 1.4 1.3 0.2
Source: As for Table (a).

(c) Fiscal Situation of the Central Government

Central government budget 2001 2002 2003 2004 2004
as per cent of GDP Rev.Est. (BE) Est.
6. Tax revenue 5.9 6.5 6.7 7.3 8.1
7. Total non-debt revenue 9.7 10.9 12.2 10.7 11.1
8. Current expenditure 13.2 13.8 12.9 12.1 11.2
9. Total expenditure & net lending 15.9 16.8 16.9 15.0 14.7
10. Overall budget balance (2-4) -6.2 -5.9 -4.7 -4.3 -3.6
Source: Central Government Budget 2004-2005, Ministry of Finance for the years 2001-2004
and author’s estimates for 2004.

(d) Finances of Cetre and States combined (as per centage of GDP)
Items 2001 2002 2003 2004 2004
Rev.Est. (BE) Est.
1. Gross fiscal balance [Deficit ( -)] 9.9 9.5 9.4 7.9 9.6
2. Revenue balance [Deficit ( -)] 7.0 6.6 6.2 4.0 6.2
3. Primary balance [Deficit ( -)] 3.7 3.3 2.9 1.7 3.2
Source: As for Table (c).

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 (e) Trends of Foreign Trade

Foreign trade Value in Value in Growth rate Growth rate Est. GR

US$ million US$ million 2002 2003 2004
2003 2004 Est. (Per cent) (Per cent) (Per cent)
Merchandised exports 62952 75542 16.9 19.9 20.0
Merchandised imports 79658 96386 13.5 21.8 21.0
Services exports 51939 58635 18.2 19.7 12.9
Services imports 26514 28635 13.4 0.7 8.0
Source: Reserve Bank of India Annual Report 2003-2004, RBI, Mumbai, August 2004 for the
years 2002-2003, and author’s estimate for 2004.

(f) Trade and Current Account Balance

Items 2002 2002 2003 2003 2004Est 2004Est

US$ As % US$ As % US$ As %
Million Of GDP Million of GDP Million of GDP
Merchandised trade balance -12910 -2.5 -16706 -2.7 -20844 -3.0
Net invisible balance 17047 3.3 25425 4.2 30000 4.3
Current account balance 4137 0.8 8719 1.4 9156 1.3
Net capital inflows 12843 2.5 22703 3.7 10650 1.5
Overall balance of payments 16980 3.3 31421 5.1 19806 2.9
Source: As for Table (e).

(g) Net Capital inflows (in US$ million)

Net capital inflows 2001 2002 2003 2004

Estimate
External assistance, net 1117 -2480 -2661 1900
Foreign direct investment (FDI), net 4741 3611 3137 3500
Portfolio investment, net 1951 944 11355 1000
Commercial bank credits, net -1576 -2344 -1853 850
Other capital inflows, net 4743 13112 12725 3700
Total capital inflows, net 10976 12843 22703 10950
Official grants 384 410 559 500
Capital inflows including grants 11360 13253 23262 11450
Source: As for Table (e).

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 (h) Outstanding External Debt in millions of US dollar
Items March 2002 March 2003 March 2004 March 2005
Proj.
External debt 98757 104869 112593 114507
Long term 96012 100300 107857 109507
Public 43619 43716 44303 46103
Private 52393 56584 63554 63404
Short term 2745 4569 4736 5000
Debt services
In US dollars 10863 14407 20949 17000
As % of gross exports 13.4 15.1 18.3 13.5
As % of GDP 2.3 2.8 3.4 2.5
Source: Ministry of Finance and Reserve Bank of India.

(j) Bank deposit and lending rates (in per cent)

Items 2001 2002 2003 2004

Bank term deposit rates *
- Nominal 5 to 7.25 4.25 to 6.5 4 to 6 4 to 6.25
- Real 1.4 to 3.65 0.85 to 3.1

Bank lending rates*

- Nominal 11 to 12.5 10.75 to 12.0 10.25 to 11 10.50 to 11.50
- Real 7.6 to 9.1 7.35 to 8.6
Bank rate (latest)
(RBI Refinance rate for 6.5 6.25 6.0 6.25
the commercial banks)
* Nominal deposit rate refers to interest rate on time deposit of 12 months and above. Nominal lending
rate is the prime lending rate (PLR) on short or medium term borrowings by the private sector.

(i) Stock Exchange Indices

Stock exchange index 2002 2003 2004 2004 2004 2004

Q1 Q2 Q3 Q4
Bombay Stock Index
(BSE) Sensitive Index
Base: 1978-79 = 100
Average 3206 4492 5167 5300 5640
High 3513 6194 5926 5617 5843
Low 2834 2924 4505 4848 5641
S&P CNX Nifty*
Base: 1995= 100
Average 1037 1428 1331 1622 1795
High 1147 1982 1892 1754 1837
Low 923 924 1389 1523 1780
• NSE-50 i.e. Nifty has been rechristened as “S&P CNX Nifty” with effect from July 28, 1998.
Sources: 1. The Stock Exchange, Mumbai.
2. National Stock Exchange of India Lt.

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